Public Equity Portfolio Overview - North CarolinaAgenda . 2 Equity Markets Overview Portfolio...

Public Equity Portfolio Overview May 29, 2013

Agenda

2

Equity Markets Overview

Portfolio Profile

Portfolio Structure

Activities/Accomplishments

Global Equity Initiatives

Hedged Equity Portfolio

General Market Performance Review

3 Sources: Russell, MSCI, Bloomberg

2.0%

8.6%

11.3%

11.0%

11.6%

14.0%

14.6%

-1.6%

3.6%

5.1%

6.9%

8.2%

10.6%

11.1%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

MSCI EM

MSCI ACWI Ex-USA IMI

MSCI EAFE

MSCI ACWI IMI

MSCI FRONTIER

S & P 500

RUSSELL 3000

1Q2013 1 Year

US Equity Market Performance Review

4

14.0%

13.2%

14.5%

10.1%

18.8%

17.3%

21.5%

12.8%

16.3%

14.5%

18.1%

11.0%

14.6%

10.6%

10.1%

11.0%

9.5%

12.3%

13.0%

14.2%

11.5%

12.4%

13.2%

11.6%

6.9%

11.1%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

S&P 500

Russell Top 200

Russell 1000

Russell 1000 Growth

Russell 1000 Value

Russell Mid Cap

Russell Mid Cap Value

Russell Mid Cap Growth

Russell 2000

Russell 2000 Growth

Russell 2000 Value

MSCI ACWI IMI

Russell 3000

1Q2013 1 Year

-3.8% 25.3%

20.8%

19.6%

10.2%

11.1%

16.7%

19.1%

20.3%

4.3%

15.9%

11.9%

15.2%

10.5%

5.6%

12.5%

12.1%

11.8%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Technology

Healthcare

Consr. Disc.

Consr. Staples

Energy

Materials

Producer Durables

Financials

Utilities

Source: Russell 3000 global sectors

• US stocks shrugged off European debtworries and posted the best returnsregionally for the quarter and 1 year.

• Markets reached new highs.• Strong housing related rebound in retail

sales, quantitative easing, and improvedemployment were contributors to marketperformance.

• Large cap stocks lagged small and mid capstocks.

• Value stocks outperformed growth stocks.• Defensive sectors such as health care,

consumer staples, and utilitiesoutperformed the broader market.

• Technology sector generated the weakestreturns in part due to Apple’s weaknessand large benchmark weight.

International Equities Performance Review

5

11.3% 13.3%

10.6% 13.7%

8.4% 10.4%

11.0% 8.6%

2.0% 9.2%

10.6% 8.5%

9.8% 3.4%

11.6%

5.1% 8.4%

6.5% 9.7%

3.2% 6.5% 6.9%

3.6% -1.6%

4.2% 2.7%

11.6% 2.5%

0.9% 8.2%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

MSCI EAFE

MSCI EAFE SC

MSCI ACWI

MSCI ACWI SC

MSCI ACWI Ex-USA

MSCI Ex-USA SC

MSCI ACWI IMI

MSCI ACWI Ex-USA IMI

MSCI EM

MSCI EM SC

MSCI Europe

MSCI Japan

MSCI UK

MSCI Canada

MSCI Frontier

1Q2013 Year

-7.4%

-6.1%

-1.7%

5.3%

4.6%

17.2% 8.1%

11.4%

18.9%

25.6%

-6.7%

-1.9%

-0.2%

2.7%

4.1%

4.5%

5.3%

6.5%

8.9%

11.9%

-20.0% -10.0% 0.0% 10.0% 20.0% 30.0%

Materials

Energy

Utilities

Telecom. Serv.

Info. Tech

Financials

Industrials

Cons. Discr

Consr. Staples

Healthcare

Source: MSCI ACWI Ex-USA IMI GICS Sector

• Mixed returns amongst internationalmarkets.

• Cyprus banking crisis and pooreconomic data suppressed returns inthe European regions.

• Emerging markets equities were theweakest due to slower growth ratesin some regions, concerns ofincreased regulation in China,pressures of inflation in Brazil, andlower commodities prices.

• Japanese stocks’ strong performancewas driven by Bank of Japan policiesto hit 2% inflation rate.

• International small cap stocksoutperformed internationaldeveloped large cap stocks.

• Health care, financials, and consumerstaples performed strongly duringthe year. Energy, utilities, andmaterials sectors were the laggards.

Equity Markets Valuation Review

6

16.1

44.0

14.6 18.2

25.0

0.0 5.0

10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225

PE Ratio (Current vs. 10 Yr History)

Lower Quartile Median Upper Quartile Current

2.1 1.8

3.3 3.7

1.6

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50


Dividend Yield (Current vs. 10 Yr History)


105.0 101.6

175.4

134.0

79.1

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0


Debt / Equity (Current vs. 10 Yr History)


9.7 11.7

7.3 8.0

9.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


EV / EBITDA (Current vs. 10 Yr History)


Total Equity Profile – March 31, 2013

7

Portfolio Characteristics

Portfolio MSCI ACWI IMI

Price/Earnings 17.3 17.2

Dividend Yield (%) 2.41 2.56

Price/Book 1.88 1.87

Debt/Equity 0.82 0.86

Market Cap ($ Weighted Median) 27,937 30,157

Return on Equity – 1 Year 15.4 15.7

Source: BNY Mellon Note: Regional allocation, sector allocation and portfolio characteristics are calculated on Equity ex-cash. Sector Allocation is based on Russell Global Sectors.

7.1%

18.4%

11.5%

8.8%

3.7%

8.7% 6.9%

17.8%

11.5%

8.7%

3.1%

8.3%

0.0%

5.0%

10.0%

15.0%

20.0%

Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Benchmark

10.6%

9.6%

12.7%

9.1%

9.8%

7.9%

11.0%

22.2%

7.1%

11.9% 10.6%

14.3%

7.9%

9.5%

6.5%

12.1%

20.4%

6.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Technology

Health Care

Cons. Disc.

Cons. Staples

Energy

Materials

Producer Durables

Financials

Utilities


Performance Sector Allocation

50.1%

16.2% 12.2% 10.1% 7.6%

3.8%

47.8%

15.0% 13.2%

12.1% 7.9% 4.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

U.S. Europe Ex-UK

Asian /Pacific Basin

Emerging Mkts

UK Canada

Regional Allocation


U.S. Equity Portfolio Profile – March 31, 2013


Portfolio Russell

3000 Index





Market Cap ($ Weighted Median)

34,254 40,378

Return on Equity – 1 Year 16.2 17.1 Source: BNY Mellon. Note: Market Capitalization, sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors.

8

11.1%

18.7%

13.7% 12.8%

6.7%

9.4%

11.1%

18.3%

14.6% 13.0%

6.3%

9.2%

0.0%

5.0%

10.0%

15.0%

20.0%

Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Russell 3000 Index

14.9%

12.1%

14.2%

8.4%

9.9%

4.4%

11.5% 18.5%

6.0%

16.1%

12.9%

14.5%

7.5%

10.3%

3.6%

12.7%

17.4%

5.1%

0.0% 5.0% 10.0% 15.0% 20.0%

Technology

Health Care

Cons. Disc.

Cons. Staples

Energy

Materials

Producer Durables

Financials

Utilities

Portfolio Russell 3000 Index

Performance Sector Allocation

36.8%

23.6% 17.9%

13.2%

8.4%

39.3%

26.0%

17.7%

9.9% 7.1%

0.0%

10.0%

20.0%

30.0%

40.0%

Large Cap. Medium/Large Cap.

Medium Cap. Medium/Small Cap.

Small Cap.

Market Capitalization Allocation

Portfolio Russell 3000 Index

Non-U.S. Equity Profile – March 31, 2013


Portfolio MSCI ACWI Ex-US IMI





Market Cap ($ Weighted Median)

22,952 24,065

Return on Equity –1 Year 14.7 17.1 9

Performance

Source: BNY Mellon. Note: Sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors.

3.6%

18.4%

8.9%

4.2%

-0.5%

10.5%

3.6%

17.8%

8.6%

4.2%

-1.1%

9.6%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs.

Portfolio Benchmark

6.3%

7.4%

11.2%

9.7%

9.5%

11.1%

10.9%

25.8%

8.1%

7.8%

7.7%

13.5%

8.5%

9.4%

9.8%

11.8%

23.0%

8.6%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Technology

Health Care

Cons. Disc.

Cons. Staples

Energy

Materials

Producer Durables

Financials

Utilities

Portfolio MSCI ACWI ex- US

Sector Allocation

27.8% 24.6%

20.7%

13.8%

7.5% 5.6%

28.8% 25.3% 23.1%

15.1%

7.7%

0% 0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Europe Ex-UK

Asian /Pacific Basin

Emerging Mkts

UK Canada U.S.

Regional Allocation

Portfolio MSCI ACWI Ex-US IMI

Portfolio Structure

10

56.9 43.1

Total Equity (%)

Active

Passive

45.2 54.8

Domestic

62.5 37.5

Intl

100

Global

Active-Passive Allocation

Level I 97.3%

Level II 2.7%

Liquidity of Assets

# of Managers in Segments

Note: Calculations do not include cash, rebalancing & hedged strategy

• 25 managers/46 strategies• 5 Historically Under-utilized Businesses

(“HUB”)• 3 NC based firms

Domestic Equity

Foreign Equity

Global Equity

Passive 3 1 0

Active

Long 10 7 2

Long FoF's 1 (10) 1 (8) 0

Long-Short 1 (2) 0 0

Portfolio Risk Profile

11

REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR

Portfolio Active Risk Evolution

12

Domestic Equity

International Equity

Source: BlackRock

13

Funded Emerging Manager Program Leading Edge (Russell 1000 strategy) - $150 million FIS Group (MSCI ACWI ex-U.S. strategy) - $150 million

Rebalanced portfolio $1.0 billion increase in international exposure $1.8 billion benefits, Emerging Manager and passive funding Included terminating an international portfolio

SAS implementation Finalized equity reports and performed user acceptance testing

Continue to renegotiate fees with managers

Searches: emerging markets, global and international

Updated portfolio structure review with BlackRock

Hedged equity discussions with fund of funds providers

Review of FY2013 Activities

Global Equity – FY2014 Work Plan and Initiatives

14

Consolidate passive mandates Leverage economies of scale Mitigate operational risk and transition costs Simplification

Emphasize high conviction managers Address potential over-diversification Simplification Evaluate Non-US, Global and Emerging Markets short lists currently under

review

Evaluate differentiated active strategies Activists Low volatility Hedged equity

Historical Hedged Equity Risk/Return Profile REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR

16

Strategic Hedged Equity Beta Target REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR

1

Historical Hedged Equity Risk REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR

1

Historical Hedged Equity Returns REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR

19

Additional Hedged Equity Goals

Maximize transparency

Minimize absolute and relative correlations

Evaluate monetizing longer investment horizon with lower fees

Focus on creative fee structures that maximize alignment of interests

Preference for managed account or fund of one structure

Hedge Fund Investment Structures

20

Fund of Funds Commingled Fund of One

Managed Account Infrastructure

Investment Considerations

Maximum manager universe

Minimum tracking error ?

Ability to exclude illiquid or undesired exposure ?

Maximum fee/term flexibility ? ?

Additional fees +45-100bps None +20-40bps +20-35bps

Risk Considerations

Treasurer controls assets

Reduces hedge fund operational risk ?

Not affected by actions of other LPs ?

Full transparency ? ? ?

Minimum investor operational burden ?

Maximum loss is invested capital

Note: Additional fees are estimates based on discussions.

Yes

? Uncertain

No

Forms of “Strategic Partnership”

21

Customized Fund of Funds

Hybrid (Class A and Class B)

Hybrid (Joint Investment Committee) Advisory

Fiduciary liability Partner Partner (A)/NCRS (B) NCRS NCRS

Discretionary portfolio Yes Yes (A), No (B) No No

Housed in legal entity Yes Yes Yes No

NCRS invests directly No No (A), Yes (B) Yes Yes

Benefit from partner’s scale Yes Yes Yes No

Source investments Partner Partner (A)/Both (B) Both Both

Portfolio management Partner Partner (A)/Both (B) Both NCRS

Manage liquidations Partner Partner Partner NCRS

Investment/ODD monitoring

Operational support

Legal support

Portfolio and risk analytics

Reporting

NCRS operational burden Low Low Low High

NCRS legal burden Low Low Low High

Portability Low Low High High

Cost High Medium Medium Medium

Provided by Strategic Partner

Note: Information is indicative and to be confirmed during strategic partner evaluation.

“Strategic Partner” Considerations

22

Strengths Potentially increased odds of selecting top quartile managers and avoiding underperforming

managers Extension of staff resources Access to best practices in portfolio construction, manager selection, ongoing monitoring and

operational due diligence Access to industry leading portfolio and risk analytics Experienced fiduciary Access to pre-negotiated fee discounts and advantageous terms for both discretionary and direct

portfolios Strategic partner portfolio could be complementary to direct portfolio (e.g. emerging, esoteric)Issues to Consider Double layer of fees Overlap in capabilities with Albourne Overlap between managers in discretionary and direct portfolios Importance of travel budget in achieving knowledge transfer Variability in expected vs. realized knowledge transfer Uncertain alignment of interests in customized vehicle Incremental burden of managing relationship on staff

Hedge Fund and Fund of Funds Fee Ratios

23

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

Underlying fee ratio

FoF fee ratio (% of net underlying return)

Total fee ratio (% of gross return)

Gross Return

Fee

Rat

io

Note: Assumes 1.5% management fee, 20% performance fee, and 0.75% fund of funds fee.

•Below 6% gross return, underlying fees absorb over 40% of returns and double layer fees absorb over half of returns.

Hedged Equity Discussion Topics

24

Portfolio goals: Beta, risk, return, transparency, liquidity, etc.

Pace of implementation: Managing equity market risk versus cost of implementation

Implementation

Direct driven by staff and consultant

Strategic Partner versus Traditional Fund of Funds

Mix of larger/mature hedge funds versus emerging/smaller/niche managers

Preference for managed accounts and funds of one versus commingled

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