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HomeMy WebLinkAboutPR 19325: PORTFOLIO ALTERNATIVE (PARS) r, 1 City of Am,' i t ) IIInrt rthur Texas INTEROFFICE MEMORANDUM Office of the Finance Department Date: February 19, 2016 To: Brian McDougal, City Manager From: Jerry W. Dale, Interim Finance Director RE: Proposed Resolution No. 19325 Nature of the request: City Council at its January 19, 2016 Meeting approved adopting PARS Public Agencies Post- Retirement Health Care Plan Trust and appointing the City Manager as the City's Plan Administrator, as evidenced by Resolution 16-033. At that time it was noted that Andrew Brown, Highmark Capital Senior Portfolio Manager, would work with City staff to design a specific investment policy for the City of Port Arthur based on a discount rate, risk tolerance and asset allocation and would recommend a strategy to lower fees as much as possible and still achieve a target rate of return. Staff Analysis, Considerations: The City's trust assets have previously been held by ICMA in a low-yielding fund, which since 2011 has resulted in a balance in the fund less than the amount invested and has resulted in the latest valuation of the OPEB Plan reporting an UAAL of$27M with an ARC of$2.2M annually. Had the same funds been invested in a balance portfolio during the same time period, an additional $1M would have been accumulated in investment portfolio balance, the UAAL would have been $9M lower and the ARC would amount to $500K less per year. Attached are the alternative strategies available through the PARS Program, which are managed by High Mark Capital Management. In order to have the expectation of a higher rate of return, consistent with the risk normally accepted for OPEB Trust Funds—with a longer view than short-term—lower the UAAL by $9M and the ARC by $500 per year, we are recommending the balance portfolio alternative. Recommendation: For the reasons stated above we recommend that the City Council adopt Proposed Resolution No. 19325, adopting the balanced portfolio strategy for the City of Port Arthur's OPEB Trust Fund. If the City Council prefers another alternative, we stand ready to implement its wishes. "Remember we are here to serve the Citizens of Port Arthur" P.O BOX 1089 PORT ARTHUR,TEXAS 77641-1089 409/983-8100 www.portarthur.net Andrew Brown and/or another representative of Highmark Capital are expected to be present to answer any questions you may have. Budget Consideration: There are no budget considerations in adopting this resolution, however, according to the latest actuarial valuation of the City's OPEB, the Annual Required Cost (ARC) is expected to be reduced by $500K per year and the Unfunded Actuarial Accrued Liability is expected to drop by $9M by moving to a balanced portfolio. "Remember we are here to serve the Citizens of Port Arthur" P.0 BOX 1089•PORT ARTHUR,TEXAS 77641-1089•409/983-8100•www.portarthur.net 4j1HIGHMARK" CAPITAL MANAGEMENT PARS DIVERSIFIED PORTFOLIOS CAPITAL APPRECIATION 04 2015 WHY THE PARS DIVERSIFIED INVESTMENT OBJECTIVE Efficient Frontier CAPITAL APPRECIATION PORTFOLIO? The primary goal of the Capital Comprehensive Investment Solution Appreciation objective is growth a HighMark®Capital Management, Inc.'s(HighMark) of principal. The major portion ¢ Bata ced ital Appreciation diversified investment portfolios are designed to of the assets are invested in Moderate balance return expectations with risk tolerance. equity securities and market v Moderately Conservative Key features include:sophisticated asset allocation fluctuations are expected. and optimization techniques,four layers of cc Conservative diversification(asset class,style,manager, and Risk(Standard Deviation) security),access to rigorously screened,top tier money managers,flexible investment options,and ASSET ALLOCATION-CAPITAL APPRECIATION PORTFOLIO experienced investment management. Strategic Range Policy Tactical Rigorous Manager Due Diligence Equity 65 85% 75% 75% Our manager review committee utilizes a rigorous Fixed Income 10-30% 20% 22% screening process that searches for investment Cash 0-20% 5% 3% managers and styles that have not only produced (Gross of Investment Management Fees,but above-average returns within acceptable risk ANNUALIZED TOTAL RETURNS Net of Embedded Fund Fees) parameters, but have the resources and commitment to continue to deliver these results.We have set high Current Quarter 3.49% standards for our investment managers and funds. Blended Benchmark" 4.01% This is a highly specialized,time consuming Year To Date' -0.27% approach dedicated to one goal:competitive and Blended Benchmark' -0.62% consistent performance. 1 Year -0.27% Flexible Investment Options Blended Benchmark -0.62% In order to meet the unique needs of our clients, 3 Year 8.37% we offer access to flexible implementation strategies: Blended Benchmark 8.95% HighMark Plus utilizes actively managed mutual 5 Year 7.41% funds while Index Plus utilizes index-based Blended Benchmark 7.90% securities,including exchange-traded funds. Both Inception to Date(84-Mos.) 10.40% investment options leverage HighMark's active asset Blended Benchmark 11.25% allocation approach. •Returns less than 1-year are not annualized.**Breakdown for Blerded Benchmark 39.5%S&P500,2.5%Russet Mo Cap,10.5% Risk ManagementRussell 2000.525%MSCI EM FREE.1025%MSCI EAFE,16%BC USAgg.3%ML 1.3 Yr US CorrlGoVt,1%US High Yield Master II.2%wdshire REIT.and 5%Cal 1 Mth T-Bit The portfolio is constructed to control risk through four layers of diversification—asset classes(cash, ANNUAL RETURNS fixed income,equity),investment styles(large cap, small cap, international,value,growth),managers 2008 N/A% and securities.Disciplined mutual fund selection and 2009 23.77% monitoring process helps to drive return potential 2010 12.95% while reducing portfolio risk. 2011 -1.35% 2012 13.87% 2013 20.33% 2014 6.05% 2015 -0.27% PORTFOLIO FACTS HighMark Plus, i(i i•. I • Inception Data 01/2009 Inception Data N/A No of Funds in Portfolio 20 No of Funds in Portfolio 15 A newly funded account enters a composite after three full months of management and is removed from a composite at the end of the last full month that the account is consistentvnth the cele a of the composite.Temtnated accounts are included in the historical results of a composite through the last full month poor to closing.Composites may include accounts invested in domestic(U S.)or mtemational(non-U.S)individual securities,funds,or a combination thereof,Account exctusons based on equity security concentrations are applied quarterly.Employing a construction methodology different from the above could lead to ddferem results. SAMPLE HOLDINGS HIGHMARK CAPITAL MANAGEMENT HighMark Plus(Active) Index Plus(Passive) Columbia Contrarian Core Z iShares S&P 500 350 California Street T. Rowe Price Growth Stock iShares S&P 500Nalue Suite 1600 Columbia Small Cap Value II Z iShares S&P 500/Growth San Francesco,CA 94104 800-582-4734 T. Rowe Price New Horizons iShares Russell 2000 Value Nationwide Bailard International Equities iShares Russell 2000 Growth vvvrw.highmarkcapital.cpm Nationwide HighMark Bond iShares MSCI EAFE Vanguard Short-Term Invest-Grade Adm iShares Russell Midcap Value ABOUT THE ADVISER Loomis Sayles Value Y iShares Russell Midcap Growth HighMark,Capital Management,Inc.(HighMark)has over 90 years(including predecessor organizations)of PIMCO Total Return iShares Barclays Aggregate Bond institutional money management experience with more Dodge&Cox International Stock Vanguard Short-Term Invest-Grade Adm than S15.1 billion in assets under management. MFS International Growth I First American Prime Obligation Z HighMark has a long term disciplined approach to money management and currently manages assets for First American Prime Obligation Z SPDR Euro Stoxx 50 ETF a wide array of clients. TIAA-CREF Mid Cap Value SPDR Barclays High Yield Bond ETF Ivy Mid Cap Growth Vanguard FTSE Emerging Markets ETF ABOUT THE PORTFOLIO MANAGEMENT TEAM Andrew Brown,CFA- Harbor Capital Appreciation Vanguard REIT ETF Senior Portfolio Manager Schroder Emerging Market Equity Investment Experience:since 1994 Dodge&Cox Stock HighMark Tenure:since 1997 Education:MBA,University of Southern California: SPDR Euro Stoxx 50 ETF Holdings are subject to change at the BA,University of Southern California PIMCO High Yield discretion of the investment manager. Nuveen Real Estate Securities I Andrew Mates,CFA' Portfolio Manager STYLE Investment Experience:since 2008 HighMark Tenure:since 2015 Education:BS.University of Colorado Real Estate High Yield 1.3%_,I 1.0% Salvatore"Tory"Milazzo III,CFA- Sisal Cap Large Cap Value 11.7% Senior Portfolio Manager 178% Investment Experience:since 2004 HighMark Tenure:since 2014 Education:BA,Colgate University Cash . Inter 18.7% J. J.Keith Stribling,CFA' 2.8% Senior Portfolio Manager Investment Experience:since 1985 HighMark Tenure:since 1995 Education:BA,Stetson University '44., Short-Tenn Bond Intl Stocks 'y`i 2.61 Christiane Tsuda 18.4% t Senior Portfolio Manager 4t Investment Experience:since 1987 Large Cap Core 89% HighMark Tenure:since 2010 MidCap Education:BA,International Christian University,Tokyo 55% ILarge Cap Growth 10.4% Anne Wimmer,CFA Senior Portfolio Manager The performance records shown represent size-weighted composites of tax exempt accounts that meet the fotowng criteria Ins(m�nt Experience:since 1987 Composites are managed by HighMarkve s HighMark Capital Advisors(HCA)with full investment authority according to the fv� PARS Capital Appreciation active and passive objectives and do not have equity concentration of 25%or more in one High rk Tenure:since 2007 cowman stock ses.unty. Education:BA,University of California,Santa Barbara The ad,oer to the PARS portfolios is US Bank,and Hi hMark serves as sub-adviser to US Bank to manage these portfolios US Bank may charge clients as much as 0 60%arnual management fee based os a sliding scale.As of December 31,2015 . the blended rate is 0.58%.US Bark pays HighMark 60%of the annual management fee for assets sub-advised by HighMark AsSet-Allocation Comp,lttee. under its sub-advisory agreement with US Bank.The 36 basis points paid to HighMark.as well as other expenses that may --Number of Membef5:`1.6 - be incurred in the management of the portfolio.will reduce the portfolio returns Assuming an investment for five years,a 5% annual total return.and an annual sub-advisory fee rate of 0.36 io deducted from the assets at market at the end of each year. Average Years'of Experience:24 a 10 million initial value would grow to 512 54 Wen atter fees(Net-of-Fees)and 512 76 million before fees(Gross-of-Fees) Tenure(Years):�I'2 • ' Additional information regarding the firmAverage's polices and procedures for calculating and reporting performarce results is available upon request.In 01 2010.the PARS Composite definition was changed from 5750.000 minimum to no minimum. Performance results are calculated and presented in U S dears and do not reflect the deduction of investment advisory Manager Review Group fees,custody fees,or taxes but do reflect the de&ction of tradr,g expenses.Returns are calculated based on trade-date g accounting Number of Members:8 • Blended benchmarle represent HighMark's strateg:c allocations between equity,fixed income,and cash and are rebalanced Average Years of Experience:20 monthly.Benchmark retums do not retied the deduction of advisory fees or other expenses of investing but assumes the Average Tenure(Years):7 n reinvestment of dividends and other earnings An investor cannot: est directly in an index.The unmanaged S&P 500 Index 9 is representative of the performance of large compaties in the U S stock market The MSCI EAFE Index is a free float- adjusted market capitalization index designed to measure developed market equty performance,excluding the U.S and Canada The MSCI Emergng Markets Free Index is a free float-adjusted market capitalization index that is designed to . measure equity market perrormarce in the global emergng markets The Russell Midcap Index measures the performarce of . the and-cap segment of the U.S equt i universe.The Russell 2000 Index measures the performance of the sniall•cap i, .- segmen seamenof the U.S easily universe.Tne US High Yield Master II Index tracks the performance of below investment grade U S dcear-denomnated corporate bonds publicly issued in the U S domestic market.Wilshire REIT index measures U.S. - publicly traded Real Estate Investment Trusts.The unmanaged Barclays Capital(BC)U.S Aggregate Bond Index is generally representative of the U S.taxable bond market asa whale.The Mernll Lynch(ML)1-3 Year U.S.Corporate& Goverrmert Index tracks the bond performance of The ML U.S.Corporate&Govemrrent Index,with a remaning term to final maturity less than 3 years.The unmanaged Citigroup 1-Month Treasury Bill Index tracks the yield of the 1-montt U S Treasury all. HighMark Capital Management.Inc. (HighMark),an SEC-registered investment adviser.is a wimpy owned subsidiary of MUFG Union Bank,N A(MUB) HghM ark manages institutional separate account portfolios for a wide variety of for-profit and ncnprofit organizations.public agencies,public and pnvate retirement plans,and personal trusts of all sizes It may also serve as sub-adviser for mutual tunes,common trust funds,and collective investment funds MUB.a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services.Past performance does not guarantee future results.Individual account management and construction wil vary depending on each client's investment needs and objectives Investments employing HighMark strategies are NOT Insured by the .. FDIC or b any other Federal Government Agency,are NOT Bank deposits,are NOT guaranteed by the Bank or any Bank affiliate,and MAY lose value,including possible loss of principal. A.A. H I G CAPITAL MANAGEMENT PARS DIVERSIFIED PORTFOLIOS BALANCED 04 2015 WHY THE PARS DIVERSIFIED INVESTMENT OBJECTIVE Efficient Frontier BALANCED PORTFOLIO? To provide growth of principal ? and income.While dividend and a Comprehensive Investment Solution interest income are an important o BalancedCapital Appreciation HighMark®Capital Management, Inc.'s(HighMark) component of the objective's A Moderate diversified investment portfolios are designed to total return, it is expected that I Moderately Conservative balance return expectations with risk tolerance. capital appreciation will 3 Key features include:sophisticated asset allocation comprise a larger portion of the cc Conservative and optimization techniques,four layers of total return. diversification(asset class,style,manager, and Risk(Standard Deviation) security),access to rigorously screened,top tier ASSET ALLOCATION-BALANCED PORTFOLIO money managers,flexible investment options,and experienced investment management. Strategic Range Policy Tactical Equity 50-70% 60% 60% Rigorous Manager Due Diligence Fixed Income 30-50% 35% 37% Our manager review committee utilizes a rigorous Cash 0-20% 5% 3% screening process that searches for investment (Gross of Investment Management Fees,but managers and styles that have not only produced ANNUALIZED TOTAL RETURNS Net of Embedded Fund Fees) above-average returns within acceptable risk parameters,but have the resources and commitment i ilt3hrl,it'-.PH-,,,,,.,:,_„ to continue to deliver these results.We have set high Current Quarter' 2.64% Current Quarter 2.67% standards for our investment managers and funds. Blended Benchmark" 3.13% Blended Benchmark" 3.13% This is a highly specialized,time consuming Year To Date' 0.04% Year To Date' -0.81% approach dedicated to one goal:competitive and Blended Benchmark" -0.29% Blended Benchmark' -0.29% consistent performance. 1 Year 0.04% 1 Year -0.81% Flexible Investment Options Blended Benchmark -0.29% Blended Benchmark -0.29% In order to meet the unique needs of our clients, 3 Year 6.90% 3 Year 6.75% we offer access to flexible implementation strategies: Blended Benchmark 7.55% Blended Benchmark 7.55% HighMark Plus utilizes actively managed mutual 5 Year 6.61% 5 Year 6.71% funds while Index Plus utilizes index-based Blended Benchmark 7 45% Blended Benchmark 7.45% securities,including exchange-traded funds. Both Inception to Date(111-Mos.) 4.76% Inception to Date(99-Mos.) 4.04% investment options leverage HighMark's active asset Blended Benchmark 5.36% Blended Benchmark 4.62% allocation approach. • 'Returns less than 1-year are not annualized."Breakdown for Blended Benchmark 32%S&P500.6%Russell Mid Cap,9%Russell 2000,4%MSCI EM FREE,7%MSCI EAFE,27%BC US Agg,6.75%ML 1-3 Yr US CorplGov'1,1.25%US High Yield Master II. Risk Management 2%Wilshire REIT,and 5%Cil.1 Mth Tall Prior to October 2012,the blended benchmarks were 51%S&P 500;3%Russell 2000. 6%MSCI EAFE,5%ML 1-3 Year Corp/Govt.30%BC Agg,5%Cdi 1 Mth T-Bill.Prior to Apnl 2007,the blended benchmarks were 60%58P 500.5%ML 1-3Yr Corp'Gov,30!BC Agg,and b%CN1 Mth T-Belt The portfolio is constructed to control risk through four layers of diversification-asset ciasses(cash, ANNUAL RETURNS fixed income,equity),investment styles(large cap, gl,t.iplk[l,ls tactivieindex Plus(Passive) small cap,international,value,growth),managers 2008 -25.72% 2008 -23.22% and securities.Disciplined mutual fund selection and monitoring process helps to drive return potential 2009 21.36% 2009 17.62% while reducing portfolio risk. 2010 14.11% 2010 12.76% 2011 -0.46% 2011 1.60% 2012 13.25% 2012 11.93% 2013 16.61% 2013 15.63% 2014 4.70% 2014 6.08% 2015 0.04% 2015 -0.81% PORTFOLIO FACTS ti;rlil(slait.Li...,,i,,.hy,.I in,).hi I i,,, 1'L15SIvti. Inception Data 10/2006 Inception Data 10/2007 No of Funds in Portfolio 20 No of Funds in Portfolio 15 A newly funded account enters a composite after three full months of management end is remcved from a composite at the end of the last full month that the account is consistent with the criteria of the composite.Termnated accounts are included in the hisloncal results et a composite through the last full month prior to closing Composites may include accounts invested in domestic(U.S.)or international(non-U.S.)individual securities,funds,ora combination thereof.Account exclusions based on equity security concentrations are applied quarterly Employing a construction methodology different from the above could lead to different results. SAMPLE HOLDINGS HIGHMARK CAPITAL MANAGEMENT HighMark Plus(Active) Index Plus(Passive) Columbia Contrarian Core Z iShares S&P 500 350 California Street T.Rowe Price Growth Stock iShares S&P 500Nalue Suite 1600 Columbia Small Cap Value II Z iShares S&P 500/Growth SF4isco,CA 94104 80on 0-588an2-4734 T.Rowe Price New Horizons iShares Russell 2000 Value Nationwide Bailard International Equities iShares Russell 2000 Growth www highmarkcapital.corn Nationwide HighMark Bond iShares MSCI EAFE Vanguard Short-Term Invest-Grade Adm Shares Russell Midcap Value ABOUT THE ADVISER Loomis Sayles Value Y iShares Russell Midcap Growth HighMark`'Capital Management, Inc.(HighMark)has over 90 years(including predecessor organizations)of PIMCO Total Return iShares Barclays Aggregate Bond institutional money management experience with more Dodge&Cox International Stock Vanguard Short-Term Invest-Grade Adm than S15.1 billion in assets under management. MFS International Growth I First American Prime Obligation Z HighMark has a long term disciplined approach to money management and currently manages assets for First American Prime Obligation Z SPDR Euro Stoxx 50 ETF a wide array of clients. TIAA-CREF Mid Cap Value SPDR Barclays High Yield Bond ETF Ivy Mid Cap Growth Vanguard FTSE Emerging Markets ETF ABOUT THE PORTFOLIO MANAGEMENT TEAM Andrew Brown,CFA" Harbor Capital Appreciation Vanguard REIT ETF Senior Portfolio Manager Schroder Emerging Market Equity Investment Experience:since 1994 Dodge&Cox Stock HighMark Tenure:since 1997 Education:MBA,University of Southern California: SPDR Euro Stoxx 50 ETF Holdings are subject to change at the BA.University of Southern California PIMCO High Yield discretion of the investment manager. Nuveen Real Estate Securities I Andrew Bates,CFA') Portfolio Manager STYLE Investment Experience:since 2008 HighMark Tenure:since 2015 High Yield Education:BS,University of Colorado Large Cap Value 1.3% Sinal Cap 14.2% " \ r g.6% Salvatore"Tory"Milazzo III,CFA Real Estate Senior Portfolio Manager 1.0% Investment Experience:since 2004 HighMark Tenure:since 2014 Cash Education:BA.Colgate University 28% J.Keith Stribling,CFA" IntemFTern Bond Senior Portfolio Manager Intl Stocks...„, 31.5% Investment Experience:since 1985 151c< ` HighMark Tenure:since 1995 Education:BA.Stetson University Christiane Tsuda MidCap Senior Portfolio Manager 4.5% Investment Experience:since 1987 Short-TermBond HighMark Tenure:since 2010 • Large Cap Growth 4.5% Education:BA.International Christian University,Tokyo 8.4% Large CapCore 7.2% Anne Wimrner,CFA' The performance records snown represent size-weighted composites of tax exempt accounts that meet the following cntena. Seitior Portfohq Manager Composites are managed by HighMai1 s HighMark Capital Advisors(HCA)wth full investment authonty according to the Investment Expenertice:since 1987 PARS Balanced active and passive objectives and do not have equity concentration of 25%or more in one corrmon stock ` -- secunty. HighMark Tenure:since 2007 The composte name nes been changed from PARS BalancedModerately Aggressive to PARS Balanced on 5/1/2013 The Education:.BA,Universily,of California,Santa Barbara adviser to the PARS portfolios is US Bank,and HighMark serves as subedviser to US Bank to manage these portfolios US Bank may charge clients as much as 0.60%amual management fee based on a sliding scale As of December 31.2015.the '••- blended rate is 0.58%US Bark pays HighMark 60'/x of the annual management fee for assets sub-advised by HighMark Asset Allocation Committee under its sub-advisory agreement with US Bank.The 36 basis points paid to HighMark.as well as other expenses that may Number of Members:1'6;• be incurred in the management of the portfolio,will reduce the portfolio returns.Assung an investment for five years,a 5% ` ni annual total return,and an annual sub-advisory fee rate of 0.36%deducted from the assets at market at the end of each year, Average Years of Experienee.i..24• ' a 10 million initial value would grow to 512.54 million after fees(Net-of-Fees)and$12.76 million before fees(Gross-of-Fees). Average Tenure(Years): 12 • Additional information regarding the tan's policies and procedures for calculating and reponin..'rformarce results is available upon request In Q1 2010.the PARS Composite definition was changed from 5750,.r r rnnimum to no minimum. t Performance results are calculated and presented in U.S dollars and do not reflect the deduction of investment advisory Manager Review Group fees,custody fees,or taxes but do reflect the deduction of trading expenses.Returns are calculated based on trade-date accounting Nutuber of Members:8 . Blended benchmarlc represent HrghMark's strategic allocabons between egaty,fixed income.and cash and are rebalanced Average Years.of Experience:20 . monthly.Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the Average Tenure(Years):7 reinvestment of dividends and other earnings.An investor cannot invest directly in an index The unmanaged S&P 500 Index is representative of the performance of large companies in the U S stock market.The MSCI EAFE Index is a free float- adjusted market capitalization index designed to measure developed market equity performance.excluding the U.S and • Canada.The MSCI Emerging Markets Free Index in a free float-adjusted market capitalization index that is cesigned to measure equity market performer-co in the global emergng markets The Russell Midcap Index measures the performance of ' the mid-cap segment of the U S.equty universe.The Russell 2000 Index measures the performance of the small-cap /i - i segment of the U.S.equity universe The US High Yield Master II Index tracks the performance of below investment grade U S.dolar-denomnated corporate bonds publicly issued in the U.S.domestic market.Wilshire REIT index measures U.S. " publicly traded Real Estate Investment Trusts.The unmanaged Barclays Capital(BC)LLS Aggregate Bond Index is v• , , generally representative of the U S.taxable bond market as a whole.The Merrill Lynch(ML)1-3 Year U S.Corporate& Govemmert Index tracks the bond performance of The ML U.S.Corporate&Government Index with a remaining term to final maturity less than 3 years The unmanaged Citigroup 1-Mone Treasury Bill Index tracks the yield of the 1-month U S Treasury Bill HghMark Capital Management,Inc.(HighMark),an SEC-registered investment adviser,is a wholly owned subsidiary of MUFG Union Bark N A(MUB) HighMark rrenages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations.public agencies.public and private retirement plans.and personal trusts of as sizes.It may also serve as sub-adviser for mutual funds.common trust funds,and collective investment funds MUG,a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services Past performance does not guarantee future results.Individual account management and construction wit vary depending on each client's investment needs and objectives Investments employing HighMark strategies are NOT insured by the . FDIC or by any other Federal Government Agency,are NOT Bank deposits,are NOT guaranteed by the Bank or any Bark affiliate,and MAY lose value,including possible loss of principal. Ai H IGHM CAPITAL MANAGEMENT PARS DIVERSIFIED PORTFOLIOS MODERATE 04 2015 WHY THE PARS DIVERSIFIED INVESTMENT OBJECTIVE Efficient Frontier MODERATE PORTFOLIO? To provide growth of principal e and income. It is expected that d Comprehensive Investment Solution Captal Appreciation HighMark®Capital Management, Inc.'s(HighMark) dividend and interest income will s Balanced comprise a significant portion of m Moderate diversified investment portfolios are designed to total return,although growth o Moderately Conservative balance return expectations with risk tolerance. Key features include:sophisticated asset allocation through capital appreciation is and optimization techniques,four layers of equally important. Cauervabve diversification(asset class,style,manager, and Risk(Standard Deflation) security),access to rigorously screened,top tier ASSET ALLOCATION-MODERATE PORTFOLIO money managers,flexible investment options,and experienced investment management. Strategic Range Policy Tactical Equity 40-60% 50% 50% Rigorous Manager Due Diligence Fixed Income 40-60% 45% 47% Our manager review committee utilizes a rigorous Cash 0-20% 5% 3% screening process that searches for investment managers and styles that have not only produced ANNUALIZED TOTAL RETURNS (Gross of Investment Management Fees,but above-average returns within acceptable risk Net of Embedded Fund Fees) parameters,but have the resources and commitment HighMark Plus(Active) Index Plus(Passive) to continue to deliver these results.We have set high Current Quarter 2.23% Current Quarter` 2.11% standards for our investment managers and funds. Blended Benchmark** 2.52% Blended Benchmark" 2.52% This is a highly specialized,time consuming approach dedicated to one goal:competitive and Year To Date* 0-14% Year To Date* 0.52% Consistent performance. Blended Benchmark* -0.12% Blended Benchmark' -0.12% 1 Year 0.14% 1 Year -0.52% Flexible Investment Options Blended Benchmark -0.12% Blended Benchmark -0.12% In order to meet the unique needs of our clients, 3 Year 5.88% 3 Year 5.86% we offer access to flexible implementation strategies: Blended Benchmark 6.49% Blended Benchmark 6.49% HighMark Plus utilizes actively managed mutual 5 Year 6.02% 5 Year 6.12% funds while Index Plus utilizes index-based Blended Benchmark 6.53% Blended Benchmark 6.53% securities,including exchange-traded funds. Both 10 Year 4.98% Inception To Date(116-Mos.) 4.97% investment options leverage HighMark's active asset • allocation approach. Blended Benchmark 5.27% Blended Benchmark 5.17% •Returns less than 1.year are not annualized."Breakdown for Blended Benchmark 26 5%S&P500,5%Russell Mid Cap,7 5% Russell 2000,3.25%MSCI EM FREE,6%MSCI SAFE,33.50%8C US Agg,10%ML 1-3 Yr US Corp/Gov't.1.50%US High Yield Risk Management Master II,1 75%Wilshire REIT,and 5%Citi t Mgt T-Bi(.Pnor to October 2012.the blended benchmarks were 43%SBP 500.2% Russel12000,5%MSCI FIFE.15%ML 1.3 Year Corp!Govt.30%BC Agg.5%Cni t Mth T-Bill Pnor to Aped 2007.the blended • The portfolio is constructed to control risk through benchmarks were 50%S&P 500.15%ML 1-3Yr Corp/Gov,30%BC Agg,and 5%Cdi 1 MC 1-Bill four layers of diversification-asset classes(cash, ANNUAL RETURNS fixed income,equity),investment styles(large cap, )hr.ri,n Pius t,�.clll., Index Plus(Passive) small cap, international,value,growth),managers 2008 -22.88% 2008 -18.14% and securities.bisciplined mutual fund selection and ° 2009 16.05% monitoring process helps to drive return potential 2009 21.47/° 2010 12.42% 2010 11.77% while reducing portfolio risk. 2011 0.55% 2011 2.29% 2012 12.25% 2012 10.91% 2013 13.06% 2013 12.79% 2014 4.84% 2014 5.72% 2015 0.14% 2015 -0.52% PORTFOLIO FACTS Inception Data 10/2004 Inception Data 05/2006 No of Funds in Portfolio 20 No of Funds in Portfolio 15 A needy funded account enters a composde after three full months of management and is removed from a composite at the end of the last full month that the account is consistent AIM the criteria of the composite,Ten mnated accounts are included in the histoncal results of a composite through the last full month prior to Casing Composites may include accounts invested in domestic(U S)or intemabonal(non-U S.)individual securities,funds,or a combination thereof.Account exclusions based on equity secunty concentrations are applied quarterly.Employing a construction methodology different from the above could lead to different results SAMPLE HOLDINGS HIGHMARK CAPITAL MANAGEMENT HighMark Plus(Active) Index Plus(Passive) Columbia Contrarian Core Z iShares S&P 500 350 California Street T.Rowe Price Growth Stock iShares S&P 500Nalue Suite 1600 Columbia Small Cap Value II Z iShares S&P 500/Growth San Francisco.CA 94104 800-582-4734 T.Rowe Price New Horizons iShares Russell 2000 Value Nationwide Ballard International Equities iShares Russell 2000 Growth www.highlTTarkcapital.coin Nationwide HighMark Bond iShares MSCI EAFE Vanguard Short-Term Invest-Grade Adm iShares Russell Midcap Value ABOUT THE ADVISER HighMark Capital Management,Inc.(HighMark)has Loomis Sayles Value Y iShares Russell Midcap Growth over 90 years(including predecessor organizations)of PIMCO Total Return iShares Barclays Aggregate Bond institutional money management experience with more Dodge&Cox International Stock Vanguard Short-Term Invest-Grade Adm than S15 1 billion in assets under management. MFS International Growth I First American Prime Obligation Z HighMark has a long term disciplined approach to money management and currently manages assets for First American Prime Obligation Z SPDR Euro Stoxx 50 ETF a wide array of clients. TIAA-CREF Mid Cap Value SPDR Barclays High Yield Bond ETF Ivy Mid Cap Growth Vanguard FTSE Emerging Markets ETF ABOUT THE PORTFOLIO MANAGEMENT TEAM Andrew Brown,CFA" Harbor Capital Appreciation Vanguard REIT ETF Senior Portfolio Manager Schroder Emerging Market Equity Investment Experience:since 1994 Dodge&Cox Stock HighMark Tenure: since 1997 Education:MBA. University of Southern California: SPDR Euro Stoxx 50 ETF Holdings are subject to change at the BA.University of Southern California PIMCO High Yield discretion of the investment manager. Nuveen Real Estate Securities I Andrew Mates,CFA' Portfolio Manager STYLE Investment Experience:since 2008 HighMark Tenure:since 2015 Real Estate High Yield Education:BS.University of Colorado 08% 1 1.5% small Cap Salvatore"Tory"Milazzo III,CFA`' Large Cap Value / 8.1% 121% Senior Portfolio Manager Investment Experience:since 2004 Cash HighMark Tenure since 2014 28% Education:BA,Colgate University J.Keith Stribling,CFA" Intl Stocks 12.4% Senior Portfolio Manager Investment Experience:since 1985 ' Inteno-Term Bond HighMark Tenure. since 1995 39.9% Education:BA.Stetson University MidCap ..'. -'' 3.6% Christiane Tsuda Senior Portfolio Manager Large CapGrowth Investment Experience:since 1987 71% HighMark Tenure. since 2010 . large Cap Core.✓ I Education:BA.International Christian University,Tokyo 6.0% L Short-Term Bond 5.8% j\nne Wimmer,CFA" The erformancerecordsshownsize-we size-weightedS2niorPortfolioMal�eger p representg plass ofCA)withmpt investment that meet therordwmgcriteria Investment Ex ell ence:si ce 1987 Composites are managed by HighMaiKs HighMark Capital Ativisors(HCA)with full irnBstment authority according to the p PARS Moderate active and passive objectives and do not have equity concentration of 25%or more in one common stock HighMark Tenure since;2007 seamy Education:BA,'University'of California,Santa Barbara The adviser to the PARS portfolios is US Bank,and HighMark serves as sub-adviser to US Bank to manage these portfolios • US Bank errata charge clients as much as 0,60%ernmanagement fee based on a sliding scale. As of December 31.2015. ' '. ; the blended rate is 0 58% US Bark pays HighMark60oio of the annual management tee for assets sub-advised by HighMark Asset Allocation GO mttiee -" under its sub-advisory agreement with US Bank The 36 bans points paid to HighMark.as well as other expenses that may Number of Members:T6 be incurred in the management of the portfolio.will reduce the portfolio returns.Assuming an investment for five yeas,a 5% \ •annual total return.and an annual sub-advisory fee rate of 0 36%deducted from the assets at market at the end of each year. _Average Years of Experience:24' a 10 million initial value would grow to 512.54 million after fees(Net-of-Fees)and 512.76 million before fees(Gross-of-Fees) a - Additional informason regarding the firms policies and procedures for calculating and reportin••ertAverage TenureYears (Years): ormance results is 12 available upon request.In 01 2010.the PARS Composite definition was changed from 5750,0 I.minimum to no minimum. Performance results are calculated and presented in U.S.dollars and do not reflect the deduction of investment advisory Manager eV dewGroup •' fees,custody fees,or taxes but do reflect the deduction of trading expenses.Returns are calculated based on trade-date '• accounting Number of Members:8 Blended benchmarks represent HghMark's strategic allocations between eguty.fixed income,and cash and are rebalanced Average Years of Experience:20 monthly Benchmark returns do not reflect the deduction of advisory fees or other expenses of investing but assumes the Avera a Tenure YeafS 7 • reinvestment of dividends and other earnings.An investor cannot invest directly in an index.The unmanaged S&P 500 Index 9 ( . )I is representative of the performance of large companies in the U.S.stock market.The MSCI SAFE Index is a free float- adjusted market capitalization index designed to measure developed market equity performance,excluding the U S.and Canada The MSCI Emerging Markets Free Index is a free Boat-adjusts-d market capitalization index that*designed to - v performer=equity market performerin the gebal emergnq market-.The Russell Midcap Index measures the performance of the mid-cap segment of the U.S.equty urrverse The Russell 2000 index measures the performance of the small-cap segmert of the U.S.equity universe The US High Yield Master II Index tracks the performance of below investment grade ' . - U.S.dollar-denomnatod corporate bonds piblicty issued in the U.S.domestic market Wilshire REIT index measures U S. publicly traded Real Estate Investmert Trusts The unmanaged Barclays Capital(BC)U.S Aggregate Bond Index is generally representative of the U S taxable bond market as a whole.The Merrill Lynch(ML) 3 Year US.Corporate 8 Govemmerr Index tracks the bond performarce of The ML U S.Corporate 8 Government Index,with a remaining term to final matunry less than 3 years.The unmanaged Citigroup 1-Month Treasury BBI Index tracks the yield of the 1-monilh U.S. Treasury Bill HighMark Capital Management.Inc (HighMark),an SEC-registered investment adviser,is a wholly owned subsidiary of . MUFG Union Bank.N A(MUB).HighMark manages institutional separate account portfolios for a wide vanety of for-profit - and nonprofit organizations,public agencies,public and private retirement plans,and personal trusts of al sizes.It may also serve as sub-adviser for mutual funds,common trust funds,and collective investment funds MUB.a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services.Past performance does not guarantee future results.Individual account management and construction curl vary depending on each client's Investment needs and objectives investments employing HighMark strategies are NOT Insured by the FDIC or by any other Federal Government Agency,are NOT Bank deposits,are NOT guaranteed by the Bank or any . Bank affiliate,and MAY lose value,Including possible loss of principal. HIGHMARK® CAPITAL MANAGEMENT PARS DIVERSIFIED PORTFOLIOS MODERATELY CONSERVATIVE 04 2015 WHY THE PARS DIVERSIFIED INVESTMENT OBJECTIVE Efficient Frontier MODERATELY CONSERVATIVE PORTFOLIO? To provide current income and moderate capital appreciation. ``_ Comprehensive Investment Solution The major portion of the assets Balanced aptal Appredabon HighMark®Capital Management, Inc.'s(HighMark) is committed to income- v Moderate diversified investment portfolios are designed to producing securities.Market a Moderately Conse native balance return expectations with risk tolerance. fluctuations should be expected. Key features include:sophisticated asset allocation . conservative and optimization techniques,four layers of diversification(asset class,style,manager,and Risk(Standard Deviation) security),access to rigorously screened,top tier ASSET ALLOCATION-MODERATELY CONSERVATIVE PORTFOLIO money managers,flexible investment options, and experienced investment management. Strategic Range Policy Tactical Equity 20-40% 30% 30% Rigorous Manager Due Diligence Fixed Income 50-80% 65% 67% Our manager review committee utilizes a rigorous Cash 0-20% 5% 3% screening process that searches for investment managers and styles that have not only produced (Gross of Investment Management Fees,but above-average returns within acceptable risk ANNUALIZED TOTAL RETURNS Net of Embedded Fund Fees) parameters, but have the resources and commitment iirtut.titir.i fi. ;.i,,.. r,If.;;i'it L 1': ,;Inc•; to continue to deliver these results.We have set high Current Quarter° 1.31% Current Quarter* 1.10% standards for our investment managers and funds. Blended Benchmark" 1.30% Blended Benchmark° 1.30% This is a highly specialized,time consuming Year To Date' 0.32% Year To Date' -0.18% approach dedicated to one goal:competitive and consistent performance. Blended Benchmark' 0.14% Blended Benchmark' 0.14% 1 Year 0.32% 1 Year -0.18% Flexible Investment Options Blended Benchmark 0.14% Blended Benchmark 0.14% In order to meet the unique needs of our clients, 3 Year 3.97% 3 Year 3.95% we offer access to flexible implementation strategies: Blended Benchmark 4.35% Blended Benchmark 4.35% HighMark Plus utilizes actively managed mutual 5 Year 4.86% 5 Year 4.65% funds while Index Plus utilizes index-based Blended Benchmark 4.83% Blended Benchmark 4.83% securities,including exchange-traded funds. Both 10 Year 4.92% 10 Year 4.63% investment options leverage HighMark's active asset ° allocation approach. Blended Benchmark 4.69% Blended Benchmark 4.69% • 'Returns less than 1-year are not annualized."Breakdown for Blended Benchmark 15-5%S&P500,3%Russell Mid Cap,4.5% Russell 2000,2%MSC!EM FREE,4%MSC I EAFE,49 25%BC US Agg,14%ML 1-3 Yr US Corp/Gov't,1.75%US High Yield Risk Management Master 11.1%Wilshire REIT,and 5%CM 1 Mar T-Bill.Pact to October 2012,the blended benchmarks were 25%SBP 500:1.5% Russell 2000,3.5%MSCI EAFE,25%ML 1-3 Year Corp./Govt.40%BC Agg,5%Cie 1 Mth T-Bill.Prior to April 2007,the blended •• The portfolio is constructed to control risk through benchmarks were 30%S&P 500,25%ML 1.3Yr CorplGcv,40%BC Agg,and 5%Citi1 MIS Tall. four layers of diversification-asset classes(cash, - ANNUAL RETURNS fixed income,equity),investment styles(large cap, small cap,international,value,growth),managers HighMark Plus(Active) Index Plus(Passive) and securities.Disciplined mutual fund selection and 2008 15.37% 2008 12-40% monitoring process helps to drive return potential 2009 18.71% 2009 11.92% while reducing portfolio risk. 2010 10.46% 2010 9.72% 2011 1.75% 2011 3.24% 2012 10.88% 2012 8.24% 2013 7.30% 2013 6.78% 2014 4.41% 2014 5.40% 2015 0.32% 2015 -0.18% PORTFOLIO FACTS III.;Ihr,.'iui. f'I,, IA•:bdei n;f•_x riil.; .Hv, ) Inception Data 08/2004 Inception Data 05/2005 No of Funds in Portfolio 20 No of Funds in Portfolio 15 A nemfy funded account enters a composite after three full months of management and is removed from a composite at the end of the last full month that the account is consistent wen the criteria of the composite.Terrnnated accounts are included in the historical results of a composite through the last full month prior to dosing Composites may include accounts invested in domestic(U S.)or international(non-U S.)individual securities,funds,or a combination thereof.Account exchnions based on equity security concentrations are applied quarterly.Employing a construction methodology different from the above could lead to different results. SAMPLE HOLDINGS HIGHMARK CAPITAL MANAGEMENT HighMark Plus(Active) Index Plus(Passive) Columbia Contrarian Core Z iShares S&P 500 350 California Street T.Rowe Price Growth Stock iShares S&P 500Nalue Suite 1600 Columbia Small Cap Value II Z iShares S&P 500/Growth SFCA 94104 80oSan Francisco,-4734 T.Rowe Price New Horizons iShares Russell 2000 Value Nationwide Bailard International Equities iShares Russell 2000 Growth vvww.highmarkcapital.com Nationwide HighMark Bond iShares MSCI EAFE Vanguard Short-Term Invest-Grade Adm iShares Russell Midcap Value ABOUT THE ADVISER Loomis Sayles Value Y iShares Russell Midcap Growth HighMark'Capital Management. Inc.(HighMark)has over 90 years(including predecessor organizations)of PIMCO Total Return iShares Barclays Aggregate Bond institutional money management experience with more Dodge&Cox International Stock Vanguard Short-Term Invest-Grade Adm than 515.1 billion in assets under management. MFS International Growth I First American Prime Obligation Z HighMark has a long term disciplined approach to money management and currently manages assets for First American Prime Obligation Z SPDR Euro Stoxx 50 ETF a wide array of clients. TIAA-CREF Mid Cap Value SPDR Barclays High Yield Bond ETF TE P Ivy Mid Cap Growth Vanguard FTSE Emerging Markets ETF ABOUAndreww Brown,CFFOLIO MANAGEMENT TEAM CFA Harbor Capital Appreciation Vanguard REIT ETF Senior Portfolio Manager Schroder Emerging Market Equity Investment Experience: since 1994 Dodge&Cox Stock HighMark Tenure:since 1997 Education:MBA,University of Southern California: SPDR Euro Stoxx 50 ETF Holdings are subject to change at the BA,University of Southern California PIMCO High Yield discretion of the investment manager. Nuveen Real Estate Securities I Andrew Bates,CFA,' Portfolio Manager Investment Experience:since 2008 STYLE HighMark Tenure:since 2015 Education:BS.University of Colorado Real Estate High Yield r 05% 1.8% Salvatore"Tory"Milazzo III,CFA- Large Cap Value \ Smal Cap 71% 4 y% Senior Portfolio Manager Cash Investment Experience:since 2004 2.8% , HighMark Tenure:since 2014 Intl Stocks . Education:BA,Colgate University 76% MidCap J.Keith Stribling,CFA' z.2% Senior Portfolio Manager : Investment Experience:since 1985 Large Cap Growth�p �. 4y 4.2% HighMark Tenure:since 1995 / Education:BA.Stetson University Large CapCore.. 3.5% Christiane Tsuda Inter m-Term Bond Senior Portfolio Manager Short-Term Bond./ 56.9% Investment Experience:since 1987 8.6% HighMark Tenure:since 2010 Education:BA,International Christian University,Tokyo Anne Witptner,CFA' Senior Portfolio Madager N. The performance records shown represent size-weighted composites of tax exempt accounts that meet the toiowctg criteria L. Composites aro managed by HighMarks HighMark Capital Advisors(HCA)wth full investment authority according to the Inve tment Experien'e:since 11387 PARS Moderately Conservative active and passive objectives and do not have equity concentration of 25%or more in one HighlDkrk Tenure:since 2007 comrron stock secunty The adviser to the PARS portfolios is US dark,and HighMark serves as sub-adviser to US Bank to menace these portfolios Educatio>a:•_BA.University of California, anta Barbara US Balk may charge clients as much as 0 60!amual management fee based on a slid ng scale As of becember 31.2015. ':' -�, the blended rate is 0.58%.US Bark pays HighMark 60%of the annual management tee for assets sub-advised by HighMark Asset Allocation Committee �` - under its sub-advisory agreement with US Bank.The 36 basis points paid to HighMark.as well as other expenses that may t �` • •` be incurred in the management of the portfolio.will reduce the portfolio returns.Assuming an investment for five years,a 5% Numbiiikol Members: 16 •.�: • annual total return,and an annual sub-advisory fee rate of 0 36%deducted from the assets at market at the end of each year, AVefage�.earS of Experience:24 �\-.\ a 10 million initial value wcub grow to 512.54 million after fees(Net-of-Fees)and 512.76 million before fees(Gross-of-Fees) - Additional informaton regading the firm's policies and procedures for calculating and reporting performartce results is Average Tenure(Years): 12 available upon request.In 01 2010,the PARS Compete definition was changed from 5750,000 minimum to no mnimum - • Performance results are calculated and presented in U.S.dollars and do not reflect the deduction of investment advisory fees,custody fees,or taxes but do reflect the deduction of trading expenses Returns are calculated based on trade-date Manager Review Group accountingNumber of Members`8_ Blended benchmarks represent HighMarks strategic allocations between equity.fixed income,and cash and are rebalanced Average Years of Experieoce:.zO monthly.Benchmark returns do not reflect the demotion of advisory fees or other expenses of investing but assumes the .. reinvestment of dividends and other earnings.An investor cannot invest directly in an index The unmarvged S&P 500 Index Average Tenure(Years):7 is representative of the performance of large companies in the U Sstock market.The MSCI EAFE Index is a free float- - ti adjusted market capitalization index designed to measure developed market equity performance,excluding the U.S and Canada.The MSCI Emergng Markets Free Index is a free float-adjusted market cap:lalization index that is designed to measure equity market pedonnarce in the global emergng markets The Russell Midcap Index measures the performarce of <' the and-cap segment of the U.S.equty universe The Russell 2CCJ Index measures the performance of the small-cap - // segmert of the U S equity universe.The US Hgh Yield Master d Index tracks the performance of below investment grade -,, ;� " U.S.doiar-denornnated corporate bonds publicly issued in the U.S.domestc market.Wilshire REIT index measures U.S. 4- publicly traded Real Estate Investment Trusts.The unmanaged Barclays Capital(BC)U.S Aggregate Bond Index is . generally representative of the U.S.taxable bond market as a whde.The Merrill Lynch(ML)1-3 Year U.S.Corporate& Govemmert Index tracks the bond performance of The ML U S Corporate&Government Index.with a remaining term to - - . final matuBty less than 3 years.The unmareged Citigroup 1-Month Treasury Bill Index tracks the yield of the 1-month U.S Treasury Bill - HighMark Capital Management,Inc (`HighMark).an SEC-registered investment adviser.is a wholly owned subsidiary of / MUFG Union Bank,N.A.(MUB) HghMark manages institutional separate account portfolios for a wide vanely of for-profit i and nonprofit organizations,public agencies,public and private retirement plans,and personal trusts of all sizes.It may also - - serve as sub-adviser for mutual funds,common trust funds,and collective investment funds.MUB,a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services.Past performance does not guarantee future results Individual account management and construction wil vary depending on each dient•s investment needs and objectives Investments employing HighMark strategies are NOT Insured by the FDIC or by any other Federal Government Agency,are NOT Bank deposits,are NOT guaranteed by the Bank or any Bank affiliate,and MAY lose value,Including possible loss of principal. Ai HIGHMARK® CAPITAL MANAGEMENT PARS DIVERSIFIED PORTFOLIOS CONSERVATIVE Q4 2015 WHY THE PARS DIVERSIFIED INVESTMENT OBJECTIVE Effiaent Frontier CONSERVATIVE PORTFOLIO? To provide a consistent level of F inflation-protected income over Capital Appreciation Comprehensive Investment Solution Appreciationthe long-term.The major portion o Balanced HighMark®Capital Management, Inc.'s(HighMark) of the assets will be fixed mon Moderate diversified investment portfolios are designed tocc income related. Equity securities n ModeratelyC°nserYative balance return expectations with risk tolerance. are utilized to provide inflation Key features include:sophisticated asset allocation protection. Conservative and optimization techniques,four layers of diversification(asset class,style,manager,and Risk(Standard Deflation) security),access to rigorously screened,top tier ASSET ALLOCATION-CONSERVATIVE PORTFOLIO money managers,flexible investment options,and experienced investment management. Strategic Range Policy Tactical Equity 5-20% 15% 15% Rigorous Manager Due Diligence Fixed Income 60-95% 80% 80% Our manager review committee utilizes a rigorous Cash 0-20% 5% 5% screening process that searches for investment managers and styles that have not only produced (Gross of Investment Management Fees,but above-average returns within acceptable risk ANNUALIZED TOTAL RETURNS Net of Embedded Fund Fees) parameters,but have the resources and commitment i I,. " l' iiidc,x!'i s P,s if- to ,sto continue to deliver these results.We have set high Current Quarter 0.39% Current Quarter* 0.32% standards for our investment managers and funds. Blended Benchmark" 0.39% Blended Benchmark" 0.39% This is a highly specialized,time consuming Year To Date' 0.29% Year To Date* 0.06% approach dedicated to one goal:competitive and Blended Benchmark' 0.31% Blended Benchmark* 0.31% consistent performance. 1 Year 0.29% 1 Year 0.06% Flexible Investment Options Blended Benchmark 0.31% Blended Benchmark 0.31% In order to meet the unique needs of our clients, 3 Year 2.61% 3 Year 2.58% we offer access to flexible implementation strategies: Blended Benchmark 2.73% Blended Benchmark 2.73% HighMark Plus utilizes actively managed mutual 5 Year 3.67% 5 Year 3.52% funds while Index Plus utilizes index-based Blended Benchmark 3.39% Blended Benchmark 3.39% securities,including exchange-traded funds. Both 10 Year 4.48% 10 Year 4.15% investment options leverage HighMark's active asset Blended Benchmark 4.08% Blended Benchmark 4.08% allocation approach. 'Returns less than 1-year are not annualized"Breakdown for Blended Benchmark 7.5%SEP500,1.5%Russell Md Cap.2 5% Russell 2000.1%MSCI EM FREE.2%MSCI EAFE.52 25%8C US Agg,25,75%ML 1.3 Yr US Corp'Gov't,2%US High Yield Risk Management Master II,0.5%Wilshire PET,and 5%Ca 1 Mth T-8r9.Prior to October 2012.the blended benchmarks were 12%SEP 500 1% Russell 2000.2%MSCI SAFE.40%ML 1-3 Year Corp!Govt.40%BC Agg.5%CM 1 Mth T-Bill.Pnor to Apnl 2007,the blended -The-portfolio is constructed to control risk through benchmarks were 15%SEP 500,40%ML 1.3Yr CorplGov.40%0C Agg.and 5%Citi 1 Mth T-Bal. four layers.of diversification-asset classes(cash, ANNUAL RETURNS fixed income,equity),investment styles(large cap, small cap, international,value,growth), managers I t!)Itr t<Ilk flus(Active) index Plus iPnssroel and securities.Disciplined mutual fund selection and 2008 9.04% 2008 6.70°h monitoring process helps to drive return potential 2009 15.59% 2009 10.49% while reducing portfolio risk. 2010 8.68% 2010 7.67% 2011 2.19% 2011 3.70% 2012 8.45% 2012 6.22% 2013 3.69% 2013 3.40% 2014 3.88% 2014 4.32% 2015 0.29% 2015 0.06% PORTFOLIO FACTS I IlcjIiP,l;u4 i'ilis iA'Ivb) i'ile.x Plus l,Passlvui Inception Data 07/2004 Inception Data 07/2004 No of Funds in Portfolio 20 No of Funds in Portfolio 15 A newly funded account enters a corrposne alter three full months of management and is removed from a composite at the end of the last full month that the account is consistent with the cntena of the composite.Terminated accounts are included in the historical results of a composde through the last fun month poor to closing Composites may include accounts invested in domestic(US)or international(non-U.S)individual securities,funds.ora combination thereof.Account exclusions based on equity secunty concentratons are applied quarterly.Employing a construction methodology different from the above could lead to different results. SAMPLE HOLDINGS HighMark Plus(Active) HIGHMARK CAPITAL MANAGEMENT Index Plus(Passive) Columbia Contrarian Core Z iShares S&P 500 350 California Street T.Rowe Price Growth Stock Suite 1600 iShares S&P 500Nalue Columbia Small Cap Value II Z iShares S&P 500/Growth San Francisco.CA 94104 T.Rowe Price New Horizons 800-582-4734 iShares Russell 2000 Value Nationwide Ballard International Equities iShares Russell 2000 Growth w w.highmarkcapital.com Nationwide HighMark Bond iShares MSCI EAFE Vanguard Short-Term Invest-Grade Adm iShares Russell Midcap Value ABOUT THE ADVISER Loomis Sayles Value Y iShares Russell Midcap Growth HighMark'Capital Management. Inc.(HighMark)has PIMCO Total Return over 90 years(including predecessor organizations)of iShares Barclays Aggregate Bond institutional money management experience with more Dodge&Cox International Stock Vanguard Short-Term Invest-Grade Adm than S15.1 billion in assets under management. MFS International Growth I HighMark has a long term disciplined approach to First American Prime Obligation Z First American Prime Obligation Z money management and currently manages assets for SPDR Euro Stoxx 50 ETF a wide array of clients. TIAA-CREF Mid Cap Value SPDR Barclays High Yield Bond ETF Ivy Mid Cap Growth Vanguard FTSE Emerging Markets ETF ABOUT THE PORTFOLIO MANAGEMENT TEAM Harbor Capital Appreciation Andrew Brown,CFA Vanguard REIT ETF Senior Portfolio Manager Schroder Emerging Market Equity Investment Experience:since 1994 Dodge&Cox Stock HighMark Tenure:since 1997 SPDR Euro Stoxx 50 ETF Education:MBA,University of Southern California: PIMCO High Yield BA.University of Southern California Holdings are subject to change at the Nuveen Real Estate Securities I discretion of the investment manager. Andrew Bates,CFA=s Portfolio Manager STYLE Investment Experience:since 2008 HighMark Tenure:since 2015 Education:BS,University of Colorado Large Cap Value Real Estate High Yield 3.6% 0.3% 2 0% Salvatore"Tory"Milazzo III,CFA' 50% Smatcap Senior Portfolio Manager inn stocks 2.5% Investment Experience:since 2004 Mid Cap.7% • HighMark Tenure:since 2014 1.1% Education:BA,Colgate University Large CapGrowth 2.1% • LergeCapC«eJ • J.Keith Stribling,CFA-' 1.7% Senior Portfolio Manager Investment Experience:since 1985 HighMark Tenure:since 1995 Education:BA,Stetson University Intern 4 %Bond 54.44Christiane Tsuda Short-Tenn Bond_/ 5 23.6% Senior Portfolio Manager Investment Experience:since 1987 HighMark Tenure:since 2010 Education:BA,International Christian University.Tokyo Anne Wimmer,CFA_ .�\ Senior Portfolio Manager The performance records shown represent size-weighted composites of tax exempt accounts that meet the retaining citena (nvestrment Ex erience:since 1987 Composites are managed by HighMarks HighMark Capital Advisors(HCA)wth full investment authonty according to the P 'V PARS Conservative active and passive objectives and do not have equity concentration of 25%or more in one common . HighMark Tenure:since 2007 . stock seventy. • Education:BA.University of California;,Santa Barbckre The adviser to the PARS portfolios is US Bank.aro HighMark serves as sub-adviser to US Bank to manage these portfolios ,N� , US Bank may charge chests as much as 0.60%amual management fee based m a sliding scale.As of December 31,2015. the blended rate is 0.58%.US Bark pays HighMark 60%of the annual management fee for assets sub-advised by HighMark Asset Allocation Committee - 5" � '- , - under its sub-advisory agreement with US Bank.The 36 basis points paid to HighMark.as wet as other expenses that may be incurred in the management cf the portfolio.will reduce the portfolio returns Assumng an investment for five years,a 5% Number of MetTtblits: 16 .. , annual total return,and an annual sub-advisory fee rate of 0.36%deducted from the assets at market at the end of each year. Average Years of E)I'perience:24 ..,, a 10 million initial value would grow to 512 54 rnillim after fees(Net-of-Fees)and 512 76 million before fees(Gross-of-Fees). Average Tenure Yeaf$-: 12 Addtional infomiaton regarding the firm's polices and procedures for calculating and reporting performance resuls is g ( ) available upon request In 01 2010.the PARS Composite definition was changed from 5750,000 minimum to no minimum. Performance results are calculated and presented in U.S dollars and do not reflect the deduction of investment advisory er Marta ROVieW Group fees,custody fees,or taxes but do reflect the deduction of trading expenses Returns are calculated based on trade-date 9 '•. accounting Number of Members:8 - • Blended benchmarta represent HighMark's strategic allocations between equity,fixed income,and cash and are rebalanced Average Years of Experience:-20 • - `a: . monthly.Benchmark returns do not reflect the deduction of advisory lees or other expenses of investing but assumes the Avera a TetlUfe(Year's):7 reinvestment of dividends and other earnings.An investor cannot invest directly in an index.The unmanaged S&P 500 index g . is representative of the performance of large companies in the U.S.stock market The MSCI EAFE Index is a free float- adusted market capitalization index designed to measure developed market equity performance,excluding the U.S.and Canada.The MSCI Emergng Markets Free Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emergng markets The Russell Midcap Index measures the performance of the mid-cap segment of the U.S.oqury universe.The Russell 2000 Index measures the performance of the small-cap . /F, - segmert of the 11.S.equity universe.The US High Yield Master II Index tracks the performance of below investment grade �f U S.dollar-denominated corporate bonds publicly issued in the U.S.domestic market Wilshire REIT index measures U.S. . publidy traded Real Estate Investment Trusts The unmanaged Barclays Capital(BC)U.S.Aggregate Bond Index is -,• ' -/ generally representative of the U.S.taxable bond market as a whole The Mernll Lynch(ML)1-3 Year U.S.Corporate& . • Govemmert Index tracks the bond performance of The ML U S.Corporate&Government Index,with a remaining term to , final matunty less than 3 years.The unmanaged Citigroup 1-Month Treasury Bili Index tracks the yield of the 1-month U.S - Treasury Biil • HighMark Capital Management,Inc. (HighMark),an SEC-registered investment adviser.is a wholly owned subsidiary of - MUFG Union Bank.N A.(MUB)).HighMark manages institutional separate account portfolios for a wide variety of for-profit . - and nonprofit organizations,public agencies,public and private retirement plans,and personal trusts of at sizes.It may also serve as sub-advisor for mutual funds,common trust funds,and collective investment funds.MUB.a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services.Past performance does not guarantee future results.Individual account management and construction wil vary depending on each client's investment needs and objectives Investments employing HighMark strategies are NOT Insured by the FDIC or by any other Federal Government Agency,are NOT Bank deposits,are NOT guaranteed by the Bank or any Bank affiliate,and MAY lose value,Including possible loss of principal. Jerry Dale From: Andrew Brown <Andrew.Brown@highmarkcapital.com> • Sent: Monday, February 29, 2016 1:46 PM To: Jerry Dale Cc: 'Mitch Barker';don@paschalconsulting.com;Andrew Bates Subject: Historical returns Attachments: City of Port Arthur Historical Returns.pdf Hi Jerry, Per your request, we generated some historical return data in Morningstar. You requested a 40-year horizon, and we calculated numbers for that specific horizon, as well as for a 5-year, 10-year,and 15-year period. Some of the investment categories that we invest in today,do not have a forty year time horizon (mid-cap equities, small cap equities, emerging market stocks,to name a few), so we utilized the following broad benchmarks,which I think are fairly representative of our balanced investment objective: Stocks- 50%S&P 5000 Index(Large cap domestic equities) 10% MSCI EAFE Index(International equities) Bonds- 35%Barclays US Aggregate Bond Index Cash— 5% US 30 day T Bill Index Over a 5-year horizon and a 40-year horizon,the return data is in excess of 7%. This is not the case for the 10-year and 15-year periods. Please be aware that there are no fees or transaction costs deducted from this analysis. I hope this analysis is useful. One word of caution. I would caution the City NOT to expect 9.96%from the Balanced objective over the long haul. While we are fond of saying "Past performance is no guarantee of future results" (and I think we even say this on the attachment), I think it is not realistic to expect returns of 9-10%for something like a 60% stock/40% bond-cash portfolio. Please let me know if there is anything else we can provide you. Best, Drew 1 Release Date 2/29/2016 I I of I Historical Lona-term Return Comparison • 5 Year 10 Year 15 Year Annualized Return Annualized Annualized Annualized 12/31/1975 to Investment return return return 12/31/2015 Balanced 5-35-S0-10* 7.99 6.18 5.25 9.96 S&P 500 Index 12.57 7.31 5.00 11.34 IA SBBI US 30 Day TBill Index 0.03 1.13 1.46 4.80 Barclays US Agg Bond Index 3.25 4.51 4.97 7.67 MSCI EAFE USD Index 3.60 3.03 3.54 9.29 *Balanced 5-35-50-10 return is a blended portfolio comprised of 5%IA SBBI US 30 Day Tbill index,35%Barclays US Agg Bond Index, 50%S&P 500 Index, and 10%MSCI EAFE Index. Information has been obtained from Morningstar,which is a third-party independent source believed to be reliable. Past /performance is no guarantee of future results.This information is provided exclusively to the City of Port Arthur. rt 2016 Menaptln.M RiM.R...md.M ort.and I forest an b 6atlwed Mem.met.save Out I.net.remnt.d m I»meat..nm5Mt..a.mute. Investment Guidelines Document Scope and Purpose The purpose of this Investment Guidelines Document is to: • Facilitate the process of ongoing communication between the Plan Sponsor and its plan fiduciaries; • Confirm the Plan's investment goals and objectives and management policies applicable to the investment portfolio identified below and obtained from the Plan Sponsor; • Provide a framework to construct a well-diversified asset mix that can potentially be expected to meet the account's short-and long-term needs that is consistent with the account's investment objectives, liquidity considerations and risk tolerance; • Identify any unique considerations that may restrict or limit the investment discretion of its designated investment managers; • Help maintain a long-term perspective when market volatility is caused by short-term market movements. Key Plan Sponsor Account Information as of February 2016 Plan Sponsor: City'of Port;Artfiur Governance: City Council for;the City of Port Arthur Plan Name("Plan"): City of Port Arthur Post-Retirement Healt Car�Plan Trustee: US Bank Contact: Susan Hughes, 949-224-7209 susan.hughes@usbank.com Type of Account: GASB 45/Other Post-Employment Benefits Trust ERISA Status: Not subject to ERISA Investment Manager: US Bank, as discretionary trustee, has delegated investment management responsibilities to HighMark Capital Management, Inc. ("Investment Manager"), an SEC-registered investment adviser Contact: Andrew Brown, CFA, 415-705-7605 Andrew.brown@highmarkcapital.com City of Port Arthur investment Guidelines Document—HighMark Capital Management,Inc. • (v.2/11//2016-ARB) 2 HIGHMARK® CAPITAL MANAGEMENT Investment Guidelines Document City of Port Arthur February 2016 investment Authority: Except as otherwise noted, the Trustee, US Bank, has delegated investment authority to HighMark Capital Management, an SEC-registered investment adviser. Investment Manager has full investment discretion over the managed assets in the account. Investment Manager is authorized to purchase, sell, exchange, invest, reinvest and manage the designated assets held in the account, all in accordance with account's investment objectives, without prior approval or subsequent approval of any other party(ies). Investment Objectives and Constraints The goal of the Plan's investment program is to generate adequate long-term returns that, when combined with contributions, will result in sufficient assets to pay the present and future obligations of the Plan. The following objectives are intended to assist in achieving this goal: • The Plan should earn, on a long-term average basis, a rate of return equal to or in excess of the target rate of return of 7.0%: • The Plan should seek to earn a return in excess of its policy benchmark over the long- term. • The Plan's assets will be managed on a total return basis which takes into consideration both investment income and capital appreciation.While the Plan Sponsor recognizes the importance of preservation of capital, it also adheres to the principle that varying degrees of investment risk are generally rewarded with compensating returns. To achieve these objectives, the Plan Sponsor allocates its assets(asset allocation)with a strategic, long- term perspective of the capital markets. Investment Time Horizon: Long-term Anticipated Cash Flows: Distributions are expected to be low in the early years of the Plan Target Rate of Return: 70%annual target Investment Objective: The primary objective is to maximize total Plan return, subject to the risk and quality constraints set forth herein. The investment objective the Plan Sponsor has selected is the Balanced Objective, which has a dual goal to seek growth of income and principal. Risk Tolerance: Balanced The account's risk tolerance has been rated moderate, which demonstrates that the account can accept price fluctuations to pursue its investment objectives. City of Port Arthur Investment Guidelines Document—HighMark Capital Management,Inc. (v.2/11//2016-ARB) 3 Strategic Asset Allocation: The asset allocation ranges for this objective are listed below: Strategic Asset Allocation Ranges Cash Fixed Income Equity 0-20% 30%-50% 50%-70% Policy: 5% Policy: 35% Policy: 60% Market conditions may cause the account's asset allocation to vary from the stated range from time to time. The Investment Manager will rebalance the portfolio no less than quarterly and/or when the actual weighting differs substantially from the strategic range, if appropriate and consistent with your objectives. Security Guidelines: Equities With the exception of limitations and constraints described above, Investment Manager may allocate assets of the equity portion of the account among various market capitalizations(large, mid, small) and investment styles (value, growth). Further, Investment Manager may allocate assets among domestic, international developed and emerging market equity securities. Total Equities 50%-70% Equity Style Range Domestic Large Cap Equity 20%-50% Domestic Mid Cap Equity 0%-15% Domestic Small Cap Equity 0%-20% • International Equity(incl. Emerging Markets) 0%-20% Real Estate Investment Trust(REIT) 0%-10% Fixed Income In the fixed income portion of the account, Investment Manager may allocate assets among various sectors and industries, as well as varying maturities and credit quality that are consistent with the overall goals and objectives of the portfolio. Total Fixed Income 30%-50% Fixed Income Style Range Long-term bonds(maturities>7 years) 0%-20% Intermediate-term bonds (maturities 3-7 years) 15%-50% Short-Term bonds (maturities <3 years) 0%-15% High Yield bonds 0%-8% • City of Port Arthur Investment Guidelines Document—HighMark Capital Management,Inc. (v.2/11//2016-ARB) 4 Performance Benchmarks: The performance of the total Plan shall be measured over a three and five-year periods. These periods are considered sufficient to accommodate the market cycles experienced with investments. The performance shall be compared to the return of the total portfolio blended benchmark shown below. Total Portfolio Blended Benchmark 32.00% S&P500 Index 6.00% Russell Mid Cap Index 9.00% Russell 2000 Index 4.00% MSCI Emerging Market Index • 7.00% MSCI EAFE Index 2.00% Wilshire REIT Index 27.00% Barclays Capital US Aggregate Index 6.75% ML 1-3 Year US Corp/Gov't Index 1.25% US High Yield Master II Index 5.00% Citi 1Mth T-Bill Index Asset Class/Style Benchmarks Over a market cycle, the long-term objective for each investment strategy is to add value to a market benchmark. The following are the benchmarks used to monitor each investment strategy: Large Cap Equity S&P 500 Index Growth S&P 500 Growth Value S&P 500 Value Mid Cap Equity Russell Mid Cap Index Growth Russell Mid Cap Growth Value Russell Mid Cap Value Small Cap Equity Russell 2000 Index Growth Russell 2000 Growth Value Russell 2000 Value REITs Wilshire REIT Index International Equity MSCI EAFE Index Investment Grade Bonds Barclays Capital US Aggregate Index High Yield US High Yield Master II Index Security Selection Investment Manager may utilize a full range of investment vehicles when constructing the investment portfolio, including but not limited to individual securities, mutual funds, and exchange- traded funds. In addition, to the extent permissible, Investment Manager is authorized to invest in shares of mutual funds in which the Investment Manager serves as advisor or sub-adviser. City of Port Arthur Investment Guidelines Document—t-lighMark Capital Management, Inc. (v.2/11//2016-ARB) 5 • Investment Limitations: The following investment transactions are prohibited: • Direct investments in precious metals(precious metals mutual funds and exchange-traded funds are permissible). • Venture Capital • Short sales* • Purchases of Letter Stock, Private Placements, or direct payments • Leveraged Transactions* • Commodities Transactions Puts, calls, straddles, or other option strategies* • Purchases of real estate, with the exception of REITs • Derivatives, with exception of ETFs* *Permissible in diversified mutual funds and exchange-traded funds Duties and Responsibilities Responsibilities of Plan Sponsor The Finance Committee of the City of PortArthur is responsible for • Confirming the accuracy of this Investment Guidelines Document, in writing. • Advising Trustee and Investment Manager of any change in the plan/account's financial situation, funding status, or cash flows, which could possibly necessitate a change to the account's overall risk tolerance, time horizon or liquidity requirements; and thus would dictate a change to the overall investment objective and goals for the account. • Monitoring and supervising all service vendors and investment options, including investment managers. • Avoiding prohibited transactions and conflicts of interest. Responsibilities of Trustee The plan Trustee is responsible for: • Valuing the holdings. • Collecting all income and dividends owed to the Plan. • Settling all transactions (buy-sell orders). Responsibilities of Investment Manager The Investment Manager is responsible for: • Assisting the Finance Committee with the development and maintenance of this Investment Policy Guideline document annually. • Meeting with the Finance Committee annually to review portfolio structure,holdings, and performance. • Designing, recommending and implementing an appropriate asset allocation consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. • Researching and monitoring investment advisers and investment vehicles. • Purchasing, selling, and reinvesting in securities held in the account. • Monitoring the performance of all selected assets. • Voting proxies, if applicable. • Recommending changes to any of the above. City of Port Arthur Investment Guidelines Document—HighMark Capital Management,Inc. (v.2/11//2016-ARB) 6 • Periodically reviewing the suitability of the investments, being available to meet with the committee at least once each year, and being available at such other times within reason at your request. • Preparing and presenting appropriate reports. • Informing the committee if changes occur in personnel that are responsible for portfolio management or research. Acknowledgement and Acceptance I/We being the Plan Sponsor with responsibility for the account(s) held on behalf of the Plan Sponsor specified below, designate Investment Manager as having the investment discretion and management responsibility indicated in relation to all assets of the Plan or specified Account. If such designation is set forth in the Plan/trust, I/We hereby confirm such designation as Investment Manager. I have read the Investment Guidelines Document, and confirm the accuracy of it, including the terms and conditions under which the assets in this account are to be held, managed, and disposed of by Investment Manager. This Investment Guidelines Document supersedes all previous versions of an Investment Guidelines Document or investment objective instructions that may have been executed for this account. Date: Plan Sponsor City ofPort Arthur Date: Investment Manager: Andrew Brown, CFA, Senior Portfolio Manager, (415) 705-7605 City of Port Arthur Investment Guidelines Document—HighMark Capital Management,Inc. (v.2/11//2016-ARB) 7 P.R. NO. 19325 02/19/16 JWD/GT RESOLUTION NO. A RESOLUTION AUTHORIZING THE ADOPTION OF A BALANCED PORTFOLIO ALTERNATIVE FOR THE TRUST PORTFOLIO WITH PUBLIC AGENCIES POST-RETIREMENT HEALTH INSURANCE TRUST (PARS) WHEREAS, at the January 12, 2016 City Council Workshop, the City Council was advised that the City would need to adopt an investment strategy for their Trust portfolio, in the event they adopted the Public Agencies Post-Retirement Health Insurance Plan Trust (PARS); and WHEREAS, per Resolution No. 16-033, the City Council adopted the PARS Public Agencies Post-Retirement Health Care Plan Trust, including the PARS Public Agencies Post- Retirement Health Care Plan, effective January 26, 2016, and appointed the City Manager as the City's Plan Administrator for the Program; and WHEREAS, the City Manager and Interim Finance Director have evaluated the alternatives submitted by PARS; and WHEREAS, it is their opinion that the strategy most advantageous for the Trust is the balance portfolio, consistent with risk/reward over the long-term, with a related decrease in the Unfunded Actuarial Accrued Liability (UAAL) and the Annual Required Cost (ARC). NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PORT ARTHUR: Section 1. That the facts and opinions in the preamble are true and correct. Section 2. That City Council hereby authorizes the adoption of the balanced portfolio alternative for the Public Agencies Post-Retirement Health Insurance Plan Trust (PARS) Fund. Section 3. That a copy of the caption of this Resolution shall be spread upon the Minutes of the City Council. READ,ADOPTED,AND APPROVED,this day of , 2016 AD, at a Regular Meeting of the City Council of the City of Port Arthur, Texas by the following vote: AYES: Mayor: Councilmembers: , NOES: Mayor ATTEST: Sherri Bellard, City Secretary APPROVED AS TO FORM: Valecia R. ' no, 0 Attorney APPROVED FOR ADMINISTRATION: Brian McDougal, City Manager APPROVED AS TO AVAILABILITY OF FUNDS: Jerry Zee, Interim Finance Director