Investment Update Arizona PSPRS Trust

Investment Beliefs 1.Mandate to achieve assumed earnings rate of at least 7.85% over long- periods of time 2.Markets are difficult to time so diversification offers the best chance to achieve the assumed earnings rate 3.Investment universe should be as wide as possible so as to increase likelihood of accomplishing true diversification 4.Risk is defined as the potential for a loss of capital. It can be approximated using statistical conventions but will never be exact 5.The best results come from people who are empowered to make decisions. Human and cognitive diversity are the best tools for solving novel problems in complex systems 6.Making sound decisions requires not only robust quantitative models but sound human judgment. People make models better and models make people better 7.Success depends, in part, on recognizing the role that “randomness”, or chance, plays in any particular market

Benefits of Diversification Annualized Real Estate 20.6% Global Equities 26.7% Global Equities 16.7% Investment Grade Bonds 5.7% High Yield Bonds 46.1% U.S. Equities 16.9% Real Estate 14.3% Global Equities 16.8% Real Estate 10.1% Global Equities 16.6% Real Estate 16.6% Real Estate 15.8% Real Estate (6.5%) Global Equities 41.4% High Yield Bonds 14.3% Investment Grade Bonds 7.8% U.S. Equities 16.4% High Yield Bonds 10.0% Diversified 9.82% U.S. Equities 15.7% Diversified 9.6% Diversified (21.4%) U.S. Equities 28.3% Real Estate 13.1% High Yield Bonds 5.4% High Yield Bonds 14.6% Diversified 8.8% U.S. Equities 6.1% Diversified 14.4% Investment Grade Bonds 7.3% High Yield Bonds (23.3%) Diversified 20.7% Diversified 12.4% Diversified 2.1% Diversified 12.5% Investment Grade Bonds 6.4% High Yield Bonds 3.4% High Yield Bonds 9.3% U.S. Equities 5.1% U.S. Equities (37.3%) Investment Grade Bonds 4.9% Global Equities 11.2% U.S. Equities 1.0% Real Estate 10.5% Global Equities 6.1% Investment Grade Bonds 2.3% Investment Grade Bonds 3.8% High Yield Bonds 3.2% Global Equities (45.5%) Real Estate (16.9%) Investment Grade Bonds 6.6% Global Equities (13.7%) Investment Grade Bonds 4.2% U.S. Equities 5.4%

Diversification can be best achieved by identifying common economic landscapes

With this in mind, the Investment Team has pursued a path that better diversifies the portfolio against macro risks

While forecasts and simulations are far from certain we are at least able to say today’s portfolio is better insulated from known macro-economic shocks than has been the case historically. Today’s PortfolioPSPRS Trust Actual Stock Market Crash of %-21.1% Credit Crunch %-23.1% Crisis 2009 (Jan – Feb)-4.9%-12.9%

Investment Staff can add incremental return by making opportunistic allocations PSPRS Trust has negotiated strategic relationships with key research institutions and asset managers to build a best-in-class information network

Distinct Competitive Advantages 1.Size. Some of the best investment opportunities occur in parts of the market that are too small for many public pension funds.  Investment Staff invested $1mm in a late-stage enterprise security start-up. Position was held for about six years. Partially exited in 2014 with a 30x return. 2.Speed. Often opportunities occur with a counterparty that needs to transact quickly.  During the GFC, a well-branded Ivy Endowment needed to sell an interest in an illiquid Private Equity fund in order to raise cash by a specific deadline. Investment Staff negotiated with the seller, received approval from the asset manager, and closed the transaction by the deadline. To date, the investment has returned 2.5x the Trust’s cost, with an additional $6.5mm in remaining value. 3.Flexibility. Asset allocation models at other pension funds may be too restrictive.  In February of 2011 the U.S. Treasury announced it would sell the Government’s remaining interests in banks as part of the TARP program. TARP securities carried a 5% coupon, stepping up to 9% on the fifth anniversary. But these securities were too illiquid for fixed income portfolios and unrated. Moreover, they did not provide enough upside to justify allocating them to more “risky” portfolios like private equity. Investment Staff hypothesized turnout for the auctions would be weak given institutional portfolios and recognized the chance to purchase quality securities with current pay, at a significant discount. Ultimately committed $50mm and through 3/31/14, have realized a 17% net internal rate of return. Average “loan-to-value” is around 50%.

Gross Returns

Accolades 2013, Nominee, Innovator Award. Asset International Chief Investment Officers 2011, Recipient, Mid-Size Fund of the Year. Money Management Magazine 2011, Nominee, Small Public Fund of the Year. Institutional Investor Magazine