CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER

INTRADEPARTMENTAL CORRESPONDENCE

Date: February 18, 2016

To: Retirement Board Members

From: Linda P. Le, Retirement Plan Manager

Subject: Board Agenda Item No. 10: Discussion of Organizational Change at Pacific Asset Management; and Possible Action (February 24, 2016, Regular Retirement Board Meeting)

Recommendation

That the Board Administration (Retirement Board) of the Water and Power Employees' Retirement Plan (Plan) place Pacific Asset Management (PAM) on organizational watch status.

Summary

The Retirement Board hired PAM in December 2014, to manage U.S. Bank Loans strategy for the Retirement Fund (RF) and the Retiree Health Benefits Fund (RHBF). As of December 31, 2015, the market value for the RF and RHBF was $123.8 million and $20.3 million, respectively. PAM's allocation represents approximately 1.3% of the RF, which is slightly above the target allocation of 1.25%.

On February 3, 2016, representatives from PAM notified staff that Jason Rosiak, Senior Managing Director and member of the firm's Executive Investment Committee, would leave the firm on March 2, 2016. Mr. Rosiak is also one of the three portfolio managers responsible for managing the Plan's U.S. Bank Loans strategy. The other two portfolio managers are JP Leasure and Michael Marzouk.

Mr. Rosiak co-managed the bank loan strategy since PAM's inception in 2007, and has been part of the investment industry for two decades. The firm described Mr. Rosiak's departure as entirely his decision and personal in nature. He does not at this time have any plans to work for another firm.

During discussion with representatives from PAM, staff was informed that Mr. Rosiak's position was not being replaced by another portfolio manager. The bank loan strategy will be managed by Messrs. Leasure and Marzouk, who share similar portfolio management views to the departing manager. However, the firm seeks to add m·ore research analysts to support the portfolio managers.

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Staff currently does not anticipate any material impact on the Plan's portfolios as PAM maintains a team-approach to portfolio management. JP Leasure, portfolio manager for the bank loan strategy since the start of the firm, and Michael Marzouk have 20 and 17 years of investment experience, respectively, and are expected to manage the portfolio with the same investment philosophy as they have done in the past.

The departure of Jason Rosiak, however, is a key organizational change. As a result, staff and RVK, Inc., recommend the Retirement Board place PAM on organizational watch status. Both staff and RVK, Inc., will continue to closely monitor PAM's performance and investment process.

The following documents are attached:

• Resolution No. 16-68 • Correspondence from PAM • Correspondence from RVK, Inc.

Jeremy Wolfson Chief Investment Officer

LPL/JW/CM/FH:jq

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Wednesday, February 03, 2016

Mr. Fahad Haider Los Angeles Water & Power Employees' Retirement Plan 111 North Hope Street, Suite 357 Los Angeles, CA 90012

Dear Fahad:

Jason Rosiak, a Senior Managing Director and a member of the firm's Executive Investment Committee, will leave the firm at the close of business on March 02, 2016. The decision to separate from Pacific Asset Management was entirely Jason's and is personal in nature. Jason has been engaged in the investment management business for two decades. During that course of time, he has accomplished many goals and has now decided to take some time and reflect before embarking on the next chapter. Jason contributed significantly to the growth of the firm and we wish him continued success.

Jason will move off the Corporate (Bank) Loan Strategy effective February 29th. He has been one of three portfolio managers on the Strategy. JP Leasure and Michael Marzouk will continue to manage the Strategy. JP Leasure has been a portfolio manager on the Strategy since inception in 2007. Michael Marzouk joined the firm in 2007 and became a full portfolio manager on the Strategy in 2010. JP and Michael have 20 and 17 years of investment experience, respectively. The Strategy will continue to be managed with the same investment philosophy and process, consistent with your past experience.

Jason will re~ign from Pacific Asset Management's Executive Investment Committee effective February 29th. His organizational responsibilities will be assumed by other senior members of the firm.

We welcome the opportunity to discuss this development with you in greater detail should you so desire. Please let us know how we may be of service. As always, we appreciate the support and confidence you have placed in Pacific Asset Management.

Warmest Regards,

Senior Managing Director

0)~);/--~~~~ic Nolan, CFA

Semor Managing Director

Pacific Asset Management I 700 Newport Center Drive I Newport Beach, CA 92660

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Memorandum To Water and Power Employees' Retirement Plan ("The Plan")

From RVK, Inc. Subject Jason Rosiak Departure from Pacific Asset Management

Date February 16, 2016

Recommendation

4~RVK

RVK recommends that the Plan place the Pacific Asset Management Bank Loa·n Strategy "On Watch" as a result of the personnel changes discussed below.

Background On February 3, Pacific Asset Management (PAM) announced that Jason Rosiak, portfolio manager on the Corporate Loan Strategy, would be leaving the company at the end of February. Jason is one of three portfolio managers on the strategy along with JP Leasure and Michael Marzouk.

The strategy was incepted with the Plan in the third quarter of 2015 as a function of the fixed income structure changes. The Plan's total exposure to the PAM Corporate Loan Strategy was approximately $144 million as of December 31, 2015.

RVK has discussed the details of the departure with the manager. Due to the investment team's small size and the important role that Jason has played since the inception of the fund, we recommend placing the PAM Corporate Loan Strategy "On Watch". We are not recommending termination at this time for the following reasons: 1) PAM employs a team-based approach which limits reliance on individual investment professionals. 2) There are two existing portfolio managers who have worked at PAM since the inception of the firm. 3) The existing portfolio managers have historically held similar views to Jason's in their risk budgeting and portfolio oversight.

RVK will closely monitor the developments at PAM over the following months and will be prepared to suggest alternative bank loan strategies should we choose to recommend termination. Specifically, RVK will monitor the performance of the Plan's portfolio, any further team turnover, the effectiveness of the new team, the total assets of the Corporate Loan Strategy, and the future endeavors of Jason Rosiak. Negative developments in these areas would likely indicate that the manager should be terminated.

RVK will be meeting with PAM again in mid-March to evaluate the transition.

Further Details PAM was founded in 2007 as an investment branch of Pacific Life. Jason was one of the

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/"•~ RVK

founding members. Jason and JP Leasure began as co-PMs on the strategy in 2007. Michael Marzouk joined the firm in 2007 and became a third PM on the Corporate Loan Strategy in 2010. The Corporate Loan Strategy is PAM's flagship strategy and has nearly $2 billion in AUM.

PAM has described the departure as entirely Jason's decision and personal in nature. The firm indicated that Jason was taking time to assess the next chapter and that he did not have immediate plans to go to another firm.

During a meeting in May 2015 as well as during a recent discussion, the PAM team described the investment process as a team-based approach. All three PMs are responsible for setting the risk targets, and all three individuals have veto power over any security that has been recommended by the team's research analysts. Veto power has been used eight times since the inception of the fund and only once has Jason vetoed a security that the other PMs were in consensus to maintain. The two remaining PMs noted that all three PMs tend to have similar views on risk parameters.

PAM does not intend to replace Jason or add another PM to the strategy. JP and Michael will operate as co-PMs going forward. PAM intends to add one or two research analysts in the coming year. The team will maintain a policy of always having at least one PM in the office.

Besides investment duties, Jason is one of four members of the Executive Investment Committee which oversees business operations. He will not be immediately replaced in that capacity. As a part of that role, Jason has contributed toward maintaining PAM's compliance standards since its founding. However, compliance also has been supported by Pacific Life, the parent company, and PAM has added dedicated resources and employees toward maintaining compliance standards. The firm believes it have sufficient coverage to maintain compliance standards.

Biographies

Jason Rosiak

Jason is a Senior Managing Director for Pacific Asset Management. He oversees Pacific Asset Management's portfolio management activities. Jason is a member of Pacific Asset Management's Executive Investment Committee. Previously, Jason held senior positions at UBS Investment Bank, from 2006 to 2007, and Pacific Investment Management Company (PIMCO) from 1996 to 2005. While at PIMCO, Jason was a Senior Vice President and served as a Portfolio Manager and Head of High-Yield Trading. Jason is an investment professional with over 20 years experience in corporate and asset backed securities on both the buy and sell-side. Jason holds a bachelor's degree in economics from the University of California, Los

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· 0~ RVK

Angeles and an MBA from the University of Southern California.

JP Leasure

JP is a Senior Managing Director for Pacific Asset Management. He serves as the firm's Head of Credit Research and is the Co-Portfolio Manager for the Corporate Loan Strategy. In addition, JP is a member of Pacific Asset Management's Executive Investment Committee. JP joined Pacific Life in 1997 and was formerly a senior member of Pacific Life's credit research team, responsible for overseeing approximately $10 billion of Pacific Life's portfolio of investment grade corporate public bonds and portfolio of leveraged loans. JP is a former member of Pacific Life's Workout Committee. Prior to joining Pacific Life, JP was a Senior Associate in Credit Lyonnais' Leveraged Finance Group. JP has over 16 years of investment and banking experience and holds a bachelor's degree from the University of California, Los Angeles and an MBA from Columbia University.

Michael Marzouk, CFA

Michael is a Managing Director for Pacific Asset Management and serves as a Co-Portfolio Manager for the Corporate Loan and Short Duration Strategies. In addition, Michael covers the Media Cable, Wireline, and Wireless sectors. Prior to joining Pacific Asset Management in 2007, Michael worked in the investment banking field most recently as Vice President in the Leveraged Finance Group at the Royal Bank of Scotland. Prior to the Royal Bank of Scotland, he worked at UBS Investment Bank, Prudentiat Financial and Deutsche Bank. During his tenure in investment banking, Michael's experience included leveraged buy-outs and mergers and acquisitions advisory work. Michael has over 16 years of investment experience. He received his B.A. summa cum laude in Business-Economics from UCLA and his M.B.A. from the Anderson School of Management at UCLA. Michael is a CFA Charterholder and member of the CFA Society of Los Angeles.

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