CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER

INTRADEPARTMENTAL CORRESPONDENCE

Date: May 8, 2013

To: Retirement Board Members

FrOm~angeeta Bhatia, Retirement Plan Manager

Subject: Board Agenda Item 14: Discussion of Organizational Watch Status for Pyramis Global Advisors; and Possible Action (May 15, 2013, Special Retirement Board Meeting)

Recommendation

That the Retirement Board place Pyramis Global Advisors (Pyramis) on organizational watch due to significant organizational change.

Summary

The Retirement Board hired Pyramis Global Advisors (Pyramis) to manage an international developed growth equity mandate for the Retirement Fund (RF) in November 2004 and for the Retiree Health Benefits Fund (RHBF) in September 2009. As of March 31, 2013, the market value of the RF account was $482.6 million and the market value of the RHBF was $71.9 million. The funds managed by Pyramis represent approximately 5.87% of the Plan's total assets, which is consistent with its target of 5.33%.

On March 8, 2013, Pyramis representatives notified Staff of a significant organizational change affecting the international growth portfolio management team. Michael Strong, Pyramis' Lead Portfolio Manager, announced his intention to retire effective September 30, 2013. Mr. Strong has managed the international developed growth portfolio since 1999. He currently manages the portfolio with the assistance of two Institutional Portfolio Managers, Brian Hoesly and Chris Steward, who both began working on the international growth portfolio in 2006. These three portfolio managers collectively oversee the asset allocation, risk management, and compliance for the portfolio. Four regional portfolio managers covering Europe, Japan, Pacific Basin Ex­Japan, and Canada report directly to Messrs. Strong, Hoesly, and Steward, and they each are responsible for individual security selection within their respective regions. The composition of the regional portfolio management team remains unchanged. Messrs. Hoesly and Steward will jointly assume the lead portfolio manager role being vacated by Mr. Strong.

Staff spoke with Pyramis representatives regarding this organizational change and were informed that Mr. Strong's retirement and the subsequent backfilling of his position with Messrs. Hoesly and Steward are part of a succession plan already in place. Pyramis representatives assured Staff that Messrs. Hoesly and Steward will continue to manage the international growth strategy effectively despite the loss of Mr. Strong's leadership and expertise.

As seen in the following chart, Pyramis has added value for the Plan relative to its benchmark, the MSCI EAFE+Canada plus World Ex-US Net IMI, for the since-inception period ending March 31, 2013.

14.1

1.96

Pyramis IntI. Developed Equity Inception to March 31,2013

Growth of a Unit Value

1.32

1.00

0.84

0.76

o.n 0.70 '-rr..-rT",..,..,...,..,.....,'TT"'~~~,..,..,~~......-r,.........,..,..,..,.......,..,...,.......,...,..T'TT'.......-r..,.,...y-T"T"',.,.......,..,.,..,.."...,.-rT",.,....,.,CT'T"'..,.......,rrr'~~...,...,..,.......-'

- RP Pyramis Developed Growth -_. EAFE+CN Net&W1d xUS IMI Blend

Source: BNY Mellon

The next table shows that Pyramis outperformed its benchmark for the one-year, three-year, five-year, and since-inception periods ending March 31, 2013, by 1.83%, 1.49%, 1.02%, and 0.50%, respectively.

Although Pyramis has outperformed its benchmark over the one-year, three-year, five-year, and since-inception periods ending March 31, 2013, on a gross and net basis, peA and Staff agree that the loss of Mr. Strong's valuable expertise in September 2013, and the transition period leading up to his departure, may directly impact management of the portfolio. The magnitude of

14.2

this type of organizational change warrants a higher level of scrutiny; therefore, PCA recommends, and Staff concurs, that the Board place Pyramis on organizational watch. Staff and PCA will continue to closely monitor Pyramis' performance.

The following documents are attached.

• Resolution No. 13-76 • Correspondence from Pyramis • Correspondence from PCA

SB:JW:SV:DB

14.3

v

RESOLUTION NO. 13-76

RESOLUTION TO PLACE PYRAMIS GLOBAL ADVISORS ON ORGANIZATIONAL WATCH STATUS

WHEREAS, the Retirement Board hired Pyramis Global Advisors (Pyramis) to manage an international developed growth equity mandate for the Retirement Fund (RF) in November 2004 and for the Retiree Health Benefits Fund (RHBF) in September 2009; and

WHEREAS, as of March 31, 2013, the market value of the RF account was $482.6 million and the market value of the RHBF was $71.3 million; and

WHEREAS, the funds managed by Pyramis represent approximately 5.25% of the Plan's total assets, which is consistent with its target of 5.33%; and

WHEREAS, on March 8, 2013, Pyramis representatives notified Staff that Michael Strong, the international growth strategy lead portfolio manager, intends to retire effective September 30, 2012; and

WHEREAS, Mr. Strong currently manages the portfolio with the assistance of two institutional portfolio managers, Brian Hoesly and Chris Steward, who both began working on the international growth portfolio in 2006; and

WHEREAS, four regional portfolio managers covering Europe, Japan, Pacific Basin Ex­Japan, and Canada, report directly to Messrs. Strong, Hoesly, and Steward, and they are each responsible for individual security selection within their respective regions; and

WHEREAS, the composition of the regional portfolio management team remains unchanged; and

WHEREAS, Mr. Hoesly and Mr. Steward will jointly assume the lead portfolio manager role being vacated by Mr. Strong; and

WHEREAS, Pyramis representatives stated that Mr. Strong's retirement and the backfilling of his position are part of a succession plan already in place, and Mr. Hoesly and Mr. Steward will continue to manage the international growth strategy effectively despite the loss of Mr. Strong's leadership and expertise; and

WHEREAS, although Pyramis has outperformed its benchmark over the one-year, three-year, five-year, and since-inception periods ending March 31, 2013, on a gross and net basis, PCA and Staff agree that the loss of Mr. Strong's valuable expertise in September 2013, and the transition period leading up to his departure, may directly impact management of the portfolio; and

14.4

rr ...."

. Co h·

"..

1.J

c;

c WHEREAS, Pension Consulting Alliance recommends, and Staff concurs, that the n Board place Pyramis on organizational watch.

NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to place Pyramis on organizational watch status for a significant organizational change and to inform the investment manager accordingly.

I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution I.j

adopted by the Retirement Board of Administration, [created by Section 1102 (b) of the .~..

f-­Los Angeles City Charter], at its special meeting held on May 15, 2013. Ci

-~~ sanQeetiBhatia Retirement Plan Manager

14.5

f'pyramis GLOBAL ADVISORS~ A Fidelity In....estments Company

March 13,2013

Devin Billingsley Los Angeles Water & Power Retirement 111 North Hope Street, Suite 357 P.O. Box 5111 Los Angeles, CA 90012

Dear Devin:

I am writing to inform you about a transition in the portfolio management of your Pyramis International Growth strategy later this year. Lead portfolio manager, Michael Strong, has decided to retire, effective September 30,2013, after more than 25 years in the investment management industry. Chris Steward and Brian Hoesly, current International Growth institutional portfolio managers, will succeed Michael as co-lead managers of the strategy. There will be no change in the underlying regional portfolio managers, who are exclusively responsible for International Growth stock selection.

As existing members of the International Growth portfolio management team, Chris and Brian have worked closely with Michael and the regional portfolio managers for the past seven years. They oversee the asset allocation, risk management and compliance of the overall portfolio, in addition to their client service responsibilities. Both Chris and Brian bring several decades of investment experience to their role.

Prior to joining Pyramis in 2006, Chris was a vice president and portfolio advisor at Wellington Management. He also worked as a portfolio manager in the global asset allocation group at Putnam Investments as well as the global bond group at Scudder, Stevens & Clark. Prior to that, Chris held several analyst roles with the Federal Reserve Bank ofNew York. He earned a Bachelor ofArts degree from Vassar College and a Master of Arts degree in economics from Cambridge University in England. He is a Chartered Financial Analyst charterholder.

Brian also joined Pyramis in 2006. Previously, he was a vice president at Wellington Management, working with clients invested in multiple strategies. Before joining Wellington, Brian served in the product and investment area of Mellon Trust as well as in global research functions with Interactive Data Corporation and Kidder, Peabody & Co. Inc. He earned a Bachelor of Science degree from the University of Wisconsin and a Master's degree in Business Administration from Boston University. Brian is a Chartered Financial Analyst charterholder and a member of the Boston Securities Analysts Society.

14.6

Devin Billingsley Page -2­March 13, 2013

I will be calling you to discuss this investment management transition. Additionally, Michael will be available in the coming months to meet with you and answer any questions you may have.

Should you have any questions in the interim, please do not hesitate to contact me.

Sincerely,

Sue M. Curran Senior Vice President Relationship Manager

SMC:lw

643752.1.0

FOR INSTITUTIONAL USE ONLY

© 2013 FMR LLC. All rights reserved.

14.7

1 APyramis GLOBAL ADVISORS-AFidality Investments Company

Q&A re: Michael Strong Retirement and Pyramis International Growth Portfolio Management

Transition

March 6, 201.3

Q: I heard there will be a change In the lead portfolio manager of the Pyramis International Growth

strategy. Can you tell me more?

A: After more than 25 years in the investment management industry, lead portfolio manager Michael

Strong has made the decision to retire, effective September 30,2013. Replacing Michael will be the

existing members of the Pyramis International Growth portfolio management team, institutional

portfolio managers Chris Steward and Brian Hoesly. Chris and Brian will be co-lead managers of the

strategy and Michael will be available in the coming months to assist in the transition.

Q: How much of a change In role Is this for Steward and Hoesly?

A: We view this as a natural progression in Chris and Brian's current role. Both have worked closely with

Michael and the regional portfolio managers for seven years overseeing the asset allocation, risk

management and compliance of the overall portfolio, in addition to their client service responsibilities.

They will oversee the same investment process that has helped the strategy deliver solid risk-adjusted

returns over the long term.

Q: Will there be any change in the assignments of the regional portfolio managers as a result of this

change In lead portfolio managers?

A: No. There will be no change in the regional portfolio managers' responsibilities. Managing the sub­

portfolios in the International Growth strategies is the European team of Peter Hadden and Steve Oler,

Henry Chan on Asia-Pacific and Eileen Dibb on Japan.

Q: What's Steward and Hoesly's background?

A: Prior to joining Pyramis in 2006, Chris Steward was a vice president and portfolio advisor at

Wellington Management. He also worked as a portfolio manager in the global asset allocation group at

Putnam Investments as well as the global bond group at Scudder, Stevens & Clark. Prior to that, Chris

held several analyst roles with the Federal Reserve Bank of New York. Chris earned a Bachelor of Arts

degree from Vassar College and a Master of Arts degree in economics from Cambridge University in

England. He is a Chartered Financial Analyst charterholder.

Brian Hoesly also joined Pyramis in 2006. Prior to that, he was a vice president at Wellington

Management, working with clients invested in multiple strategies. Before joining Wellington, Brian

served in the product and investment area of Mellon Trust as well as in global research functions with

Interactive Data Corporation and Kidder, Peabody & Co. Inc. He earned a Bachelor of Science degree

from the University of Wisconsin and a Master's degree in Business Administration from Boston

14.8

(" 2

University. Brian is a Chartered Financial Analyst charterholder and a member of the Boston Securities

Analysts Society.

Q: Steward and Hoesly have responsibilities on other PGA portfolio management teams. Will they be

able to be lead portfolio managers of International Growth and maintain those other responsibilities?

A: We are confident Chris and Brian have the capacity to fulfill their responsibilities on the International

Growth platform as well as maintain their institutional portfolio manager (IPM) duties on other Pyramis

strategies. Additionally, we have extensive IPM resources spread across investment disciplines and, in

the past, we haven't hesitated to add resources when necessary.

Q: I understand that PGA and FMR have been building out their non-U.S. equity research resource and

relying less on Fidelity Worldwide Investment (FWI) research resources. Is the change in lead portfolio

manager connected in any way to the change in research emphasis?

A: No. Again, Michael Strong has decided to retire after a nearly 40-year career (in finance and

investment management). We appreciate his service to Pyramis and our clients and we wish him well in

his future pursuits.

Q: Cedric de la Chaise is a Europe equity portfolio manager on certain client accounts. Do you expect

any changes to his responsibilities due to this change in lead portfolio managers or due to potential

changes from the Asset Management global build-out?

A: Cedric de la Chaise, a FWI associate, manages a European sub-portfolio in a few client accounts. His

responsibilities will not change for those clients where he has European equity responsibilities.

Q: I understand Michael Strong is a named portfolio manager on several Canadian global equity

mutual funds? Will he continue with those responsibilities?

A: No. Again, Michael has decided to retire completely from any investment management

responsibilities.

Q: Who will assume those responsibilities? What's the timing of the management change?

A: Michael will remain as a named portfolio manager on those Canadian global equity mutual funds until

September 30, 2013. We are in the process of hiring a replacement manager and will announce the new

manager in due course.

###

643757.1.0

FOR INSTITUTIONAL USE ONLY

FOR INTERNAL USE ONLY

© 2013 FMR LLC. All rights reserved.

14.9

Date: April 12, 2013

To: Water &Power Employees' Retirement Plan (WPERP)

From: Pension Consulting Alliance, Inc. (PCA) j:!c.", cc: Neil Rue, CFA - PCA David Sancewich - PCA Kay Ceserani - PCA Colin Bebee - PCA

RE: Pyramis Global Advisors (Pyramis) - Watch Recommendation

Recommendation

PCA recommends the Pyramis International Growth Equity portfolio be placed on Watch status beginning May 1, 2013, due to organizational issues resulting from the announced retirement of Lead Portfolio Manager, Michael Strong.

Summary

On March 13, 2013, Pyramis notified WPERP of Michael Strong's (Lead Portfolio Manager of the International Growth strategy) decision to retire effective September 30, 2013. Michael has been the lead/senior Portfolio Manager working alongside two other co-Portfolio Managers on this strategy for the past 6 years (Chris Steward and Brian Hoesly). Chris and Brian will succeed Michael as co-lead Portfolio Managers and assume his responsibilities, which include asset allocation, risk management, compliance of the overall portfolio, and client service. It is important to emphasize that there will be no change in the underlying regional portfolio managers, who are exclusively responsible for stock selection in the International Growth strategy. PCA views the retirement of Michael Strong as a material change as it directly impacts WPERP's portfolio.

As of March 31, 2013, the Pyramis portfolio has outperformed its benchmark across every reported trailing time period except the most recent quarter end on a gross- and net-of-fee basis.

14.10

Pyramis Global Advisors - International Growth Equity Watch Status Recommendation

Product and Organization Review Summary--"--­

Reason for Update

[J Failed Performance Criteria ~ Organizational Changes [J Scheduled Watch Update

Level of Concern A

Investment process (client

portfolio) Investment

Team Performance Track Record

TeamJ Firm

Culture Product

Key people changes (PM change) Low None Low None Low Changes to team structure/individual's roles None Product client gains/losses None Changes to the investment process None Personnel turnover

Organization

None

Ownership changes None Key people changes Low None None None Low Firm wide client gains/losses None

ANone, low or high

Review and Recommendation History

4/2010

Date 4/2013 9/2012 5/2012' 4/2011

6/2010 PCA recommended watch status due to performance

peA Findings and Recommendation PCA recommends watch status due to lead PM retirement PCA presented on-site due dilicence review findincs PCA recommended removal from watch status PCA recommended removal from watch status due to improved performance PCA recommended watch status due to orcanizational chances (new PM) PCA recommended contract extension

Approved

Board Pending Receive and File Approved Approved Approved Approved

3/2008 PCA recommended removal from watch status as regulatory issues were resolved .Approved 9/2007 7/2006 6/2006 7/2005

PCA recommended extending watch period PCA recommended extendinc watch period due to orcanizational chanaes PCA recommended extendina watch due to PM departure PCA recommended watch status due to reaulatorv issues

Approved Approved Approved Approved

Performance Results . _ Annualized, Ending 3/31/13 ~. I Calendar Years, Ending 12/31

Performance orR 1 Yr , I 3 Yr 5 Yr

Inception (11/30/04) 2008 2009 2010 2011 2012

Difference P ramis ­ Net"

Difference IRe

MSCI World ex US Growth IMI ND

P ram IS Gross MSCI World ex US IMI blend'

MSC/ World ex US IMI blend •

Source: BNY Mellon, MPI *MSCI EAFE ND through 12/31/08. and MSCI World ex US IMI ND 1/1/09 to the present -Net performance estImated by PCA based on combined portfolios' current mar1<et value

14.11

Background

WPERP approved the retention of Pyramis to manage an international equity mandate in July 2004 and subsequently funded the Retirement Plan in November 2004 and the Health Plan in September 2009. As of March 31, 2013, WPERP's total exposure to the Pyramis portfolio was approximately $554.5 million (Retirement Plan = $482.6 million and Health Plan = $71.9 million).

The Pyramis International Growth Equity portfolio was most recently on Watch status from May 2011 to May 2012, for organizational issues due to a sub-Portfolio Manager change. Pyramis was on Watch status previously due to performance concerns from April 2010 through April 2011.

Discussion

On March 13, 2013, Pyramis notified WPERP that Michael Strong, the Lead Portfolio Manager of the International Growth Strategy which WPERP is invested, will retire at the end of September 2013. Michael has been the Lead Portfolio Manager working alongside two other co­Portfolio Managers on this strategy for the past 6 years (Chris Steward and Brian Hoesly). Chris and Brian will succeed Michael as co-lead Portfolio Managers and assume his responsibilities, which include asset allocation, risk management, compliance of the overall portfolio, and client service. Both Chris and Brian joined Pyramis in 2006 from Wellington and have significant investment experience.

It is important to emphasize that there will be no change in the underlying regional portfolio managers, who are exclusively responsible for stock selection in the International Growth strategy. PCA views the retirement of Michael Strong as a material change as it directly impacts WPERP's portfolio and recommends the portfolio be placed on organizational Watch status.

Organizational Changes On February 16, 2012, Pyramis also notified WPERP of the hiring of a new President and CEO, and the movement of the current CEO to a newly created position within the firm focusing on the delivery of customized institutional solutions. PCA did not view this as a material change, as there were no changes to the individuals responsible for the management of the WPERP portfolio.

On March 25, 2011, Pyramis notified WPERP of a Portfolio Manager change for the Pacific Basin (ex-Japan) sub-portfolio of the Pyramis International Growth Equity Strategy in which WPERP is invested. The Pacific Basin (ex-Japan) regional sub-portfolio typically represents between 8-12% of the overall portfolio value and 20-50 stocks within the portfolio. PCA viewed the change in sub-portfolio managers as a material change as it directly impacts WPERP's portfolio and recommended the portfolio be placed on Watch status beginning in May 2011. In

---,

14.12

May 2012 PCA recommended the portfolio be removed from Watch status as the potential organizational issues had been resolved.

Performance Review PCA's analysis finds that the Pyramis International Growth Equity portfolio has produced performance results above its benchmark since inception. As of March 31, 2012, Pyramis outperformed its benchmark across every reported trailing time period except the most recent quarter, gross- and net-of-fees. On a calendar year basis the portfolio has exceeded the benchmark in four of the last five periods on both gross- and net-of-fee basis.

The following exhibit shows the growth of $100 for the Pyramis International Growth Equity portfolio, gross- and net-of-fees, and its benchmark since inception of the account, through March 31, 2013. Over this 100-month period, Pyramis has exceeded the benchmark annually by 80 basis points gross of fees and 50 basis points net of fees.

Cumulative Performance Since Inception: 11/30/04 - 3/31/13

- P,rIn1s. G'uss ----------------------------------------------------------------------·_~s·~

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _. _ MSClWd""USAIMIND(P,rIn1s)

Other Considerations

Investment Philosophy and Process The International Growth Equity product is a core, growth-oriented strategy that provides diversified exposure to the developed international markets. The strategy employs a fundamental, bottom-up stock selection process, focusing on companies with above average earnings growth combined with attractive relative valuations.

The portfolio construction process combines active stock selection and active regional asset allocation. The portfolio is comprised of three regional sub-portfolios, Europe managed by Peter Hadden out of London, Japan managed by Eileen Dibb out of Tokyo, and Pacific Basin ex­Japan managed by Henry Chan out of Hong Kong. Each regional Portfolio Manager selects stocks based on Fidelity analysts' fundamental research in concert with his or her own professional experience and judgment. The regional Portfolio Managers have full discretion over the selection and weighting of individual stocks in their portfolios. Industry group, country, and

14.13

c Li--------­

market capitalization weights within regional portfolios are a residual of the stock selection process.

The three regional portfolios are combined by Fidelity's Asset Allocation Group (AAG), which is comprised of senior investment professionals representing each region and asset class. The process is driven by macro-data derived from Portfolio Manager inputs, analysts' field research, and Fidelity's proprietary data on liquidity, market action, etc. The AAG meets formally on a quarterly basis and reviews asset allocation decisions monthly. The lead Portfolio Manager for the International Growth Equity strategy implements the asset allocation recommendations of the AAG and communicates regularly with the regional Portfolio Managers.

Investment Team In addition to the sub-portfolio portfolio managers, the International Growth Equity team includes three Portfolio Managers; Michael Strong (lead Portfolio Manager who will be retiring September 30, 2013), Brian Hoesly and Chris Steward, who oversee and determine the portfolio's asset allocation amongst the regional sub-portfolios that comprise the International Growth Strategy. As lead Portfolio Manager, Mr. Strong's responsibilities do not include stock selection. His focus is on the portfolio's asset allocation amongst the regional sub-portfolios that comprise the International Growth Strategy, as well as the people involved in the process. Stock selection is the responsibility of the regional sub-portfolio managers Peter Hadden, Eileen Dibb, and Henry Chan who are supported by Fidelity's global research team of over 400 analysts.

Fee Structure WPERP is currently invested in Pyramis' International Growth Equity Portfolio through a separate account, which has the following annual fee schedule. (Please note that the market values for both plans are aggregated for billing purposes.)

Pyramis International Growth Separate Account Annual Fee Schedule

First $25 million 80 basis points Next $25 million 60 basis points Next $50 million 40 basis points Next $100 million 30 basis points Over $200 million 25 basis oints

The annual eA Non-US Diversified Equity Universe of management fees on a $555 million mandate range from 5 - 150 basis points, with a median fee of 55 basis points. Pyramis' estimated fee (based on the portfolio's March 31, 2013, market value) of 31.3 basis points (or $1,737,500) placed in the top quartile, exhibiting favorable fees versus its peers.

-" r r-'.

(

(

14.14

Universe Name: eA Non-US Diversified Equity Mandate Size: $666 million

Annual Annual Separate Account

Separate Account Basis Points Fees (bps)

Low $262000 5 5th Percentile $1 185000 21

25th Percentile .. . $2495000

I III

45 I

75th Percentile $3807500 95th Percentile $5550000

Hich $8325000 # of Observations 518

69 100 150 518

Sou~:eVestmentAffience

Assets Under Management As of December 31,2012, Pyramis managed approximately $187.6 billion in assets, including $11.0 billion in the International Growth Equity strategy. Over the last year, assets have increased at the firm-wide and product levels, along with the total number of firm-wide clients and product clients.

2012·12 2011-12 2010·12 2009·12 2008·12

Accounts 1474 1269 1 311 1360 1282 1003

Accounts 62 55 55 58 62 67

14:.15