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2015-16 Investment Management Division Initiatives (IAC Meeting Supplement)
July 28, 2016
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Good Progress on Major Initiatives
2
1. ResearchanddevelopESGpoliciesandstrategies2. Transi9onoversightofAncillaryFunds,includingestablishanewlong-termfixed
incomeproductforcertainclientsandfacilitatemovementofassets3. Evaluaterestructuring/exi9ngFundofFundsandlegacylow-convic9onfunds/
managers4. ImplementManagedAccountsProgramandini9alcomponentsofdirectHedged
Equityprogram5. Developinternalequityindexfundimplementa9onplan6. Updateasset-liabilitystudyandsupportreviewoftheNCRSdiscountrate/investment
returnassump9on7. Ins9tute360degreefeedbackforseniormanagementandcareerdevelopment
programforteamleaders,porWoliomanagers,andanalysts8. ImplementBNYMellonPrivateInvestmentAssetServiceprocesses9. NewIMDrolewithunbundledSupplementalRe9rementPlan10. ImplementVentureCapitalMul9plierFund
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IACConsulta9ononPolicies
3
1. Onatleastabiennialbasis,IPSshallbepresentedtotheIACforconsulta9on.NCGS§147-69.10(a)
2. IndustrystandardporWolioguidelinesforinternallymanagedporWolioswithperiodicconsulta9onbytheIAC.NCGS§147-69.2(e)
3. DSTshallconsultwiththeIACandadoptpoliciesonthefollowingtopics:*o InvestmentManagementDivisionCodeofEthicso DSTemployeeswithinvestmentresponsibilitytobeprovidedwithtrainingondu9es
andresponsibili9estothefundso GicstoDSTwithinvestmentresponsibilityo Imposinglimita9onsonexternalinvestmentmanagers'useofplacementagentsand
otherpersonsthatappearbeforeDSTo Conflictchecksintheinvestmentduediligence,nego9a9ons,andcontrac9ngprocess.
NCGS§147-69.11
4. TSERSandLGERSBoardsofTrusteesaskedstafftostudypoten9alconsensuslegisla9veproposalsorsupplementalpoliciesaddressingfutureStateTreasurers’commercialcorporateboardservice
*Note:DSTalreadyhaspoliciesorproceduresonthesetopics.ThisprocesswillgiveIACmemberstheopportunitytoreviewandsuggestimprovementstothesepoliciesandprocedures.TreasurerisrequiredtoadoptpoliciesonthesetopicsbyJanuary31,2017.
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IAC Consultation on Policies
4
1. SeptemberIAC2016mee9ngo DracESGpolicyo Dracethics,training,gics,conflicts,et.al.policieso ProposalsrelatedtofutureTreasurers’corporateboardservice,reflec9ng
consulta9onwithBoardofTrusteemembersinAugust2. November2016IACmee9ng
o DracIPSo DracinternalporWolioguidelines
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Review of Governance, Operations, and Investment Practices
5
1. Atleastonceeveryfouryears,theStateTreasurershallengageacommercialindependentexpertfirmtoevaluatethegovernance,opera9ons,andinvestmentprac9cesoftheStateTreasurerinordertodeveloprecommenda9onsforimprovement
2. TheStateTreasurermustconsultwiththeInvestmentAdvisoryCommiieetodevelopthescopeoftheevalua9on
3. ThereportoftheindependentexpertfirmshallbeprovidedtotheJointLegisla9veCommissiononGovernmentalOpera9ons,theHouseofRepresenta9vesAppropria9onsCommiiee,theSenateAppropria9ons/BaseBudgetCommiiee,andtheFiscalResearchDivisionwithin30daysofreceipt
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Goals
6
1. Adoptna9onalbestprac9cesforgovernance,opera9ons,investmentprac9ces,andotherprogramma9cprac9cesatpeerorganiza9onswithsimilarprogramobjec9vesandlegalandregulatoryrequirements
2. Enhancetheabilitytoproducecost-efficientlong-termgrowthoftrustassetswithreasonableriskofnotachievinginvestmentobjec9ves
3. Enhanceprograms’cost-effec9veness,fiscalcontrol,compliance,andriskenvironments
4. Enhancetransparencyforbeneficiariesandstakeholdersregardingprogramperformance,funding,andbudge9ng
5. Enhanceaccountabilityofthegoverningfiduciaryorgoverningboard,asapplicable
6. Maintainahigh-performingorganiza9onwithaccesstonecessary,qualified,andprudentinternalresourcesandtheabilitytocontractasnecessaryandprudentwithqualifiedexternalbusinesspartners
7. Iden9fyanyamendmentstocurrentlawneededtoachievethesegoals
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Scope: Governance
7
1. Thepowers,du9es,andrequiredapprovalsrelatedtotheinvestmentandotherprogramsexercisedbythe“Fiduciaries”(theStateTreasurer,BoardsofTrustees,and/ortheDepartmentofStateTreasurer,asapplicable),andbytheGeneralAssembly,OfficeofStateBudgetandManagement,theOfficeofStateController,andtheOfficeofStateHumanResources
2. Thelawsandotherconstraintsuponuseofthetrustfundsandappropria9onsundertheNorthCarolinaCons9tu9on,statutes,andcommonlawand/orthefederalCons9tu9on,statutes,commonlaw,andregula9ons
3. Thecurrentsoleinvestmenttrusteeandinvestmentadvisorycommiieemodelversusan“enhancedinvestmentadvisorycommiieemodel”,aninvestmentboardoftrusteesorothermodels
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Scope: Operations
8
1. Fiduciaryindependence,includingfederalandstatelaws,regula9ons,andprac9cethatareapplicabletopersonnel,procurement,andfundingandbudgetdecisions,includingbutnotlimitedtoauthorityfor:
o Posi9oncrea9on,personnelhiring/termina9on,andestablishingandadministeringpersonnelcompensa9on
o Informa9ontechnologyprocurement
o Charging/appor9oningDepartmentexpendituresdirectlytothetrustfundsasacon9nuousreceipt-supportedprogramwhilenotrequiringaGeneralFundappropria9onorreimbursement
o Determiningthemostcost-effec9veandtransparentmethodtorecordDepartmentexpendituresforfinancialstatementandbudgetrepor9ng
o U9lizinginternalbudgettransferstopayforcoreserviceswithintheDepartment(i.e.,IT,HR,accoun9ng,internalaudit,etc.)
2. Externalinvestmentandprogramoversight,repor9ng,andmonitoring,includingbutnotlimitedtothesufficiencyof:
o TheDepartment’sexpertreviewsandauditsoftheinvestmentprograms’cost-effec9veness,fiscalcontrol,compliance,andriskenvironments
o Transparencyandrepor9ngofprogramperformance,funding,andbudge9ngtobeneficiaries,theGeneralAssembly,OfficeofStateBudgetandManagement,andOfficeofStateController
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Scope: Investment Practices
9
1. Macrodriversofinvestmentperformanceandcost-effec9veness,includingbutnotlimitedto:
o Assetalloca9on
o Investmentperformance(netofinvestmentfees)
o Assetclassstructureo Feesandothercosts
o Theuseoftradi9onalandvariousalterna9veinvestmentstrategiesandvehicles
o Foreigncurrencyexposuremanagement
o Theuseofinternalandexternalinvestmentstrategiesand/ormiddle-andback-officesupport
o Theuseofconsultants
2. Policies,procedures,andprocesses,includingbutnotlimitedtothesufficiencyof:
o Duediligenceandinvestmentmanagerselec9on
o PorWolioandmanagermonitoringo Investmentrepor9ngagainstbenchmarks,peers,anduniverses
o Riskmanagementandcompliance
o Internalstaff,organiza9on,andgovernance
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Tentative Next Steps
10
1. ReceiveIACfeedbackonScope2. DSTu9lizebothaninvestmentconsultantandexternallegalcounselthat
wouldworkjointlytodevelopdracworkproductandthefinaldeliverables
3. InvestmentconsultantandexternallegalcounseldirectlyreceiveinputonfocusareasofinterestfromindividualIACmembers
4. Investmentconsultantandexternallegalcounselprovideabriefingonwork-in-progressattheSeptember2016andNovember2016IACmee9ngs
5. DST,investmentconsultant,andexternallegalcounselprovidefinalreporttoGeneralAssemblyandGovernor’sOfficeinDecember2016
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Fiscal June 2016 Performance Update (IAC Meeting Supplement)
July 28, 2016
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NCRS Asset Allocation As of June 30, 2016
12
MarketValue($000) % Target
RangeRela4ve% Rela4ve$
($000)Minimum MaximumGrowth $50,797,799 58.01% 58.0% 37.0% 71.0% 0.01% $7,151
PublicEquity 37,256,098 42.54% 42.0% 37.0% 47.0% 0.54% 476,663
NonCoreRealEstate 3,906,419 4.46% 3.0% 0.0% 8.0% 1.46% 1,279,317
Opportunis9cFixedIncome 5,259,505 6.01% 7.0% 0.0% 7.5% -0.99% (870,401)
PrivateEquity 4,375,777 5.00% 6.0% 0.0% 8.8% -1.00% (878,428)
Infla4onSensi4ve&Diversifiers 9,639,160 11.01% 11.0% 4.0% 16.0% 0.01% 6,451
CoreRealEstate 4,446,703 5.08% 5.0% 2.0% 10.0% 0.08% 68,199
Infla9onSensi9ve 5,192,457 5.93% 6.0% 2.0% 7.5% -0.07% (61,748)
Mul4-Strategy 1,617,323 1.85% 2.0% 0.0% 4.0% -0.15% (134,078)
Rates&Liquidity 25,515,800 29.14% 29.0% 24.0% 42.0% 0.14% 120,476
Cash 854,436 0.98% 1.0% 0.0% 10.0% -0.02% (21,265)
InvestmentGradeFixedIncome 24,661,364 28.16% 28.0% 24.0% 32.0% 0.16% 141,741
GrandTotal $87,570,083 100.00%
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NCRS Unaudited Asset Allocation As of July 26, 2016
13
MarketValue($000) % Target
RangeRela4ve% Rela4ve$
($000)Minimum MaximumGrowth $51,838,504 58.47% 58.0% 37.0% 71.0% 0.47% $417,216
PublicEquity 38,491,352 43.42% 42.0% 37.0% 47.0% 1.42% 1,255,247
NonCoreRealEstate 3,866,215 4.36% 3.0% 0.0% 8.0% 1.36% 1,206,493
Opportunis9cFixedIncome 5,105,790 5.76% 7.0% 0.0% 7.5% -1.24% (1,100,228)
PrivateEquity 4,375,147 4.93% 6.0% 0.0% 8.8% -1.07% (944,296)
Infla4onSensi4ve&Diversifiers 9,481,568 10.69% 11.0% 4.0% 16.0% -0.31% (270,745)
CoreRealEstate 4,306,470 4.86% 5.0% 2.0% 10.0% -0.14% (126,400)
Infla9onSensi9ve 5,175,098 5.84% 6.0% 2.0% 7.5% -0.16% (144,345)
Mul4-Strategy 1,617,323 1.82% 2.0% 0.0% 4.0% -0.18% (155,824)
Rates&Liquidity 25,719,998 29.01% 29.0% 24.0% 42.0% 0.01% 9,354
Cash 978,720 1.10% 1.0% 0.0% 10.0% 0.10% 92,147
InvestmentGradeFixedIncome 24,741,277 27.91% 28.0% 24.0% 32.0% -0.09% (82,793)
GrandTotal $88,657,393 100.00%
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NCRS Total Net Portfolio Return vs. Benchmarks As of June 30, 2016
14
1.8
0.8
6.1 6.0
5.55.8
2.0
1.3
5.65.5
5.25.5
2.7
1.2
5.34.9
5.2
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
3Month 1Year 3Year 5Year 10Year 15Year
NCRS Implementa9onBenchmark Long-TermPolicyBenchmark
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Growth of a Dollar As of June 30, 2016
15
0.90
1.10
1.30
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3.10
3.30
3.50Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Long-TermPolicyBenchmark NCRS
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Growth of a Dollar 5 Years Ending June 30, 2016
16 Note:NCRSAlterna9vesincludesthefollowing:CoreRealEstate,Infla9onSensi9ve-PrivateNaturalResources,Infla9onSensi9ve–RealAssetsandOther,Mul9-StrategyInvestments,NonCoreRealEstate,Opportunis9cFixedIncome,PrivateEquity,EquityHedgeStrategiesandtheBlackstoneGraniteFund(ClassB).
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Long-TermPolicyBenchmark NCRS NCRSAlterna9ves
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NCRS Net Return Attribution Total Fund Performance vs. Implementation Benchmark 1 Year Ending June 30, 2016
17
0.81
1.34
-0.54
-1.00 -0.50 0.00 0.50 1.00 1.50
PorWolioReturn
PolicyReturn
ValueAdd
TotalFundPerformance
-0.17
-0.37
-0.54
-0.60 -0.50 -0.40 -0.30 -0.20 -0.10 0.00
Alloca9onEffect
Selec9onEffect
ValueAdd
AYribu4on
0.3
0.4
-0.2
-0.2
-0.4
-1.0
-1.0
1.3
0.7
-3.0 -2.0 -1.0 0.0 1.0 2.0
Cash
InvestmentGradeFI
Mul9-Strategy
Infla9onSensi9ve
CoreRealEstate
PrivateEquity
Opportunis9cFI
NonCoreRealEstate
PublicEquity
AvgAc4veWeight
-0.01
0.01
0.01
0.00
-0.06
-0.06
0.04
0.05
-0.14
-0.20 -0.10 0.00 0.10
Alloca4onEffect
0.01
-0.25
0.04
-0.16
-0.17
0.00
-0.05
0.24
-0.02
-0.40 -0.20 0.00 0.20 0.40
Selec4onEffect
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NCRS Net Return Attribution Total Fund Performance vs. Implementation Benchmark 5 Years Ending June 30, 2016
18
5.98
5.45
0.53
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00
PorWolioReturn
PolicyReturn
ValueAdd
TotalFundPerformance
0.01
0.51
0.53
0.00 0.10 0.20 0.30 0.40 0.50 0.60
Alloca9onEffect
Selec9onEffect
ValueAdd
AYribu4on
0.2
-0.2
-0.1
-0.7
-0.8
-0.6
-0.6
0.3
2.5
-3.0-2.0-1.00.0 1.0 2.0 3.0
Cash
InvestmentGradeFI
Mul9-Strategy
Infla9onSensi9ve
CoreRealEstate
PrivateEquity
Opportunis9cFI
NonCoreRealEstate
PublicEquity
AvgAc4veWeight
-0.02
0.09
0.01
0.06
-0.06
-0.04
0.03
0.01
-0.06
-0.10 -0.05 0.00 0.05 0.10
Alloca4onEffect
0.00
-0.09
0.03
-0.04
-0.08
-0.02
0.19
0.17
0.34
-0.20 0.00 0.20 0.40
Selec4onEffect
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NCRS Gross of Fees Return and Risk BNY Mellon Universe: Public Funds > $1B As of June 30, 2016
Universe-PublicFunds>$1BReturns 3Years 5Years 10Years 15Year25thpercen9le 7.19 7.08 6.06 6.46Median 6.72 6.51 5.78 6.1875thpercen9le 5.81 5.86 5.28 5.78NCRS 6.75 6.56 6.00 6.12Percen9leRank(1stpercen9le=highestperformance) 47 45 29 61
Risk 3Years 5Years 10Years 15Year25thpercen9le 7.32 7.92 10.43 9.91Median 6.15 7.23 9.81 9.4675thpercen9le 5.42 6.31 9.04 8.53NCRS 5.42 6.16 8.18 7.77Percen9leRank(99thpercen9le=lowestrisk) 75 78 90 94
19 BNYMellondatapresentedarebasedoncurrentlyavailableinforma9onat9meofpublica9onandmayberevisedsubsequently.
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New and Incremental Investment Commitments Since April 2016 IAC Meeting
FundName FirmName Commitment ClosingDate
PublicEquity
BlackRockEAFELCGrowth BlackRock $672,230,334 06/01/16
OldNorthStateHedgedEquityMEN MentaCapital $200,000,000 07/01/16
PrivateEquity
ARCHVentureFundIX ARCHVenturePartners $60,000,000 04/26/16
ThomaBravoXII ThomaBravo $150,000,000 05/11/16
TCVIX TechnologyCrossoverVentures $150,000,000 07/13/16
Non-CoreRealEstate
HarrisonStreetHSREPVI HarrisonStreet $150,000,000 07/26/16
CoreRealEstate
RockpointGrowth&IncomeII Rockpoint $200,000,000 07/18/16
Opportunis4cFixedIncome
CenterbridgeSpecialCreditPartnersIII Centerbridge $150,000,000 07/26/16
Infla4onSensi4ve
DLBlueDiamondFund DoublelineCapital $300,000,000 05/31/16
GSOEnergySMA GSO $150,000,000 07/21/16
Mul4Strategy
None -- -- --20
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NCRS Asset Class Net Performance As of June 30, 2016
MarketValue($MM) 1Year 3Years 5Years 10Years 15Years
Growth $50,798 (2.14) 7.28 6.77 4.65 4.95Benchmark1 (2.30) 6.19 5.74 4.24 4.47PublicEquity $37,256 (3.89) 6.65 6.21 4.59 4.90Benchmark2 (3.84) 6.14 5.43 4.11 4.22PrivateEquity $4,376 4.32 10.58 8.79 7.23 4.16Benchmark3 4.33 9.66 9.30 9.22 9.26Non-CoreRealEstate $3,906 12.39 15.73 13.56 3.76 5.09Benchmark4 6.48 9.66 9.52 2.84 6.69Opportunis4cFixedIncome $5,260 (4.40) 2.40 4.83 5.81 -Benchmark5 (3.59) 0.42 0.46 0.18 -
Rates&Liquidity $25,516 6.97 4.97 5.09 6.61 6.47Benchmark6 7.88 5.42 5.33 6.38 6.25IGFixedIncome $24,661 7.25 5.10 5.17 6.65 6.50Benchmark7 8.17 5.54 5.40 6.41 6.27Cash $854 0.84 0.59 - - -Benchmark8 0.15 0.07 0.06 - -
Infla4onSensi4ve&Diversifiers $9,639 0.24 2.00 1.38 0.88 3.37Benchmark9 3.72 4.27 3.17 0.71 3.76Infla4onSensi4ve $5,192 (5.75) (2.67) (3.60) (0.98) 2.48Benchmark10 (3.13) (1.71) (3.05) 2.08 -CoreRealEstate $4,447 8.53 8.64 9.25 4.63 5.92Benchmark11 12.37 11.89 11.57 5.39 6.94
Mul4-Strategy $1,617 (1.46) 5.92 8.53 4.98 -Benchmark12 (3.35) 4.73 6.60 5.69 - 21
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NCRS Net of Fees Annual Performance vs. Implementation Benchmark For Fiscal Years Ending June 30
22
18.2
11.09.2
(2.4)(4.3)
7.6
12.0
9.9
7.2
14.8
(2.1)
(14.2)
12.0
18.5
2.2
9.5
15.9
2.30.8
21.7
11.1
7.8
(2.7)(4.5)
7.4
11.310.2
6.6
15.9
(2.8)
(15.1)
11.7
18.6
2.8
7.7
14.6
1.5 1.3
(20)
(15)
(10)
(5)
0
5
10
15
20
25
NCRS Implementa9onBenchmark ActuarialRate
NCRSannualreturnexceededtheactuarialrateofreturnof7.25%in11of19years.
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NOTES:
1.TheGrowthBenchmarkisablendofthePublicEquityBenchmark,PrivateEquityBenchmark,Non-CoreRealEstateBenchmark,&Opportunis9cFIBenchmarkatpolicyweights.
2.ThePublicEquityBenchmarkisthedynamicallyweightedcombina9onoftheMSCIACWIIMINet(Long-Only)andabetaadjustedMSCIACWIIMINet(HedgedEquity).3.ThePrivateEquityBenchmarkiscomprisedofthefollowingBurgissGroupPrivateiQindices:50%Buyout,20%VentureCapital,and30%SpecialSitua9onsandDistressedSecuri9es.
4.TheNon-CoreRealEstateBenchmarkiscomprisedofthefollowingBurgissGroupPrivateiQindices:80%U.S.Non-CoreRealEstate(Opportunis9candValue-Added)and20%Non-U.S.Non-CoreRealEstate(Opportunis9candValue-Added).
5.TheOpportunis9cFixedIncomeBenchmarkisacomprisedof50%HFRXDistressedSecuri9esIndex,20%HFRXRela9veValueIndex,15%CreditSuisseLeveragedLoanIndex,and15%BOAMLHighYieldIndex*.
6.TheRates&LiquidityBenchmarkisablendoftheIGFixedIncomeBenchmarkandtheCashBenchmarkatpolicyweights.
7.TheIGFixedIncomeBenchmarkiscomprised10%iMoneyNetFirstTierIns9tu9onalMoneyMarketFundsNetIndexand90%customBOAMLCoreInvestmentGradeIndex*.ThecustomBOAMLcoreindexcomprisedofthefollowingweigh9ngs:30%BOAML5+YearsGovernments,35%BOAML5+YearsInvestmentGradeCorporates,and35%BOAMLMortgageMaster.
8.TheCashBenchmarkistheiMoneyNetFirstTierIns9tu9onalMoneyMarketFundsNetIndex.
9.TheInfla9onSensi9ve&DiversifiersBenchmarkisablendoftheInfla9onSensi9veBenchmarkandtheCoreRealEstateBenchmarkatpolicyweights.
10.TheInfla9onSensi9veBenchmarkisthedynamicallyweightedcombina9onoftheBankofAmericaMerrillLynch1-3YearsU.S.Infla9on-LinkedTreasuryIndex(TIPS)*,theBloombergCommodi9esIndex(Commodi9es),andacombina9onofthebenchmarksofinvestmentsclassifiedwithinPrivateNaturalResourcesorOtherRealAssetsandDiversifiers.
11.TheCoreRealEstateBenchmarkiscomprisedof80%NCREIFODCENetand20%FTSEEPRANAREiTGlobalIndex.
12.TheMul9-StrategyBenchmarkiscomprisedofadynamicallyweightedcombina9onoftheHFRXED:Mul9-StrategyIndex,netoffees,andthemarketvalueweightedbenchmarksforanyothertotalfundstrategieswithinthePorWolio.
23
Alldatapresentedarebasedoncurrentlyavailableinforma9onat9meofpublica9onandmayberevisedsubsequently.
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