presentation to: city of miami general employees ... capital.pdf · presentation to: city of miami...

Presentation To:

City of Miami General Employees’ & Sanitation

Employees’ Retirement Trust

Friday, March 21, 2014

Derik Coffey – Portfolio Specialist

Marc V. Reid – Director of Marketing & Client Services

Marc O. Sydnor – Senior VP, Marketing & Client Services

FIRM OVERVIEW

Legacy & Strategies

Assets Under Management

LARGE CAP VALUE STRATEGY

Manager Commentary

Philosophy & Process

Risk Management

Investment Results for City of Miami GE & SE Retirement Trust

APPENDIX

PERFORMANCE DISCLOSURES

T A B L E O F C O N T E N T S

2

O U R L E G A C Y

WHO WE ARE

Herndon Capital Management, LLC

Herndon Capital Management, LLC is an institutional investment management firm specializing in large and mid

capitalization equity strategies. Founded and registered with the SEC in 2001, the firm is an affiliate of the Atlanta

Life Financial Group, a 108 year old financial services firm. The three lead portfolio managers have an ownership

stake in the firm.

As of December 31, 2013, Herndon Capital Management managed approximately $10.21 billion* in institutional

client assets.

Our institutional products allow us to provide investment solutions to our clients in both the domestic and

international equity markets.

* Includes discretionary and non-discretionary assets

Large Cap Core

International

Equity

Large Cap

US Growth

Equity

Large Cap

US Value

Equity

Large Cap

US Core

Equity

Mid Cap

US Value

Equity

3

4

GROWTH IN AUM (in millions)

A S S E T S U N D E R M A N A G E M E N T

$52 $54 $156 $453

$665

$1,093 $884

$1,577

$2,484

$4,798

$7,562

$10,210

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013

Total Assets as of December 31, 2013: $10.21 billion (220 accounts)

by Client Type (in millions): by Strategy (in millions):

A S S E T S U N D E R M A N A G E M E N T

5

*All month-end assets are not available for the model accounts.

** Core assets represented in Large Cap Value & Large Cap Growth Strategies / Total Core AUM : $188,667,222

For one-on-one use only.

LCV $9,359.5

LCG $90.8 LCCI $551.3

MCV $193.9

Other $14.7

Public Funds $3,219.6

Mutual Funds $2,261.8

WRAP Platforms $1,401.8

Corporate Assets $584.8

UMA (Non-Discretionary

Models) $1,506.2

Endowment/ Foundations/Other/

Hospital Plans $903.8

Taft Hartley $172.0

Commingled Trusts $138.8

ALFG (Affiliates) Assets $21.5

Strategy # of Accounts % of Market Value

Large Cap Value* 178 92%

Large Cap Core International 15 5%

Large Cap Growth 12 1%

Mid Cap Value 12 2%

Other 3 0%

Large Cap Core** 11 2%

Client Type # of Accounts % of Market Value

Public Funds 87 32%

Mutual Funds 7 22%

WRAP Platforms 16 14%

Corporate Assets 12 6%

UMA (Non-Discretionary Models) 13 15%

Foundations 21 3%

Taft Hartley 18 2%

Commingled Trusts 8 1%

Other 18 2%

Endowments 6 0%

ALFG (Affiliates) Assets 8 0%

Hospital Plans 6 4%

SUB-ADVISORY

• Aston Funds’ Aston Herndon LCV Fund

• Delaware Investments’ Optimum LCV Fund

• HSBC Global Asset Management (Canada) Limited

• Principal Financial Group

• Scotia Asset Management

MANAGER OF MANAGERS PROGRAMS

• Attucks Asset Management

• FIS Funds Management

• Northern Trust Global Advisors

• North Point Advisors

• Progress Investment Management

DIRECT

• Blue Cross Blue Shield of Michigan

• Chicago Transit Authority

• City of Atlanta Firefighters Pension Fund

• Cook County Employees’ Annuity & Benefit Fund

• Dillard University

• Florida A&M University

• Illinois State Board of Investment

• Memphis Light Gas & Water Retirement & Pension

• Oklahoma Firefighters Pension and Retirement Board

• PepsiCo, Inc.

• Retirement Plan for CTA Employees

• Shelby County, Tennessee, Retirement System

• State Universities Retirement System of Illinois

• Teachers’ Retirement System of the State of Illinois

• Veterans of Foreign Wars

• Winthrop Rockefeller

The clients listed above were selected to demonstrate a sample of clients within our various strategies. These clients have provided permission to use

their names on a representative client list. Performance was not a criteria for inclusion on the provided client list.

For one-on-one use only.

R E P R E S E N T A T I V E C L I E N T L I S T

6

O R G A N I Z A T I O N A L S T R U C T U R E

Executive Committee

Investment

Management

&

Trading

Marketing &

Client

Services

Compliance Operations Financial

Analytics

Administrative

Services

7

I N V E S T M E N T M A N A G E M E N T T E A M

Lead Portfolio Managers

Randell Cain, CFA - Value Equity

Drake Craig, CFA - Growth Equity

Kenneth Holley, CFA - International Equity

Team Members

J. Keith Buchanan, CFA, Senior Investment Analyst

Derik Coffey, Portfolio Specialist

Loren Compton-Williams, Senior Investment Analyst

Kenneth Grimes, Deputy CIO

James Nelson, CFA, Associate Portfolio Manager

Arlene Pine, CFA, Investment Analyst

Khadir Richie, Senior Investment Analyst

Jazmin Williams, Investment Analyst

Romerro Williams, Investment Analyst

Sector

Assignments

Consumer

Discretionary

Consumer Staples

Energy

Financial Services

Healthcare

Industrials

Information Technology

Materials

Telecom

Utilities

Primary

Romerro Williams

James Nelson, CFA

Jazmin Williams

Loren Compton-

Williams

J. Keith Buchanan, CFA


Khadir Richie


Khadir Richie

Khadir Richie

Secondary

Khadir Richie

Khadir Richie

Loren Compton-

Williams

Jazmin Williams

Romerro Williams

Jazmin Williams

Arlene Pine, CFA

Romerro Williams

Loren Compton-

Williams

Arlene Pine, CFA


8

HERNDON CAPITAL MANAGEMENT US LARGE CAP VALUE

FOURTH QUARTER 2013 REVIEW

9 Annual Review

All good things must come to an end. After 6 consecutive years of outperforming the Russell 1000 Value, we missed the mark…by 79 basis points. Not much in

terms of a margin of coming up short but we came up short. For only the second time at Herndon Capital Management in our large cap value strategy, beginning in

2002, we failed to outperform in a calendar year. I just heard the violins stop playing and the mourners have wiped away their tears. Why? I invest for tomorrow

every day. In most years, the return we generated this year would have resulted in cheers not jeers. The questioners will wonder have we lost our way, has

something changed, has something gone awry. The answer is a resounding No. We simply came up a little short. What happened?

For the year, 4 out of 10 sectors outperformed the respective sector and/or the overall benchmark, the Russell 1000 Value. Stock selection contributed 100% of

the underperformance and sector allocation was slightly positive.

Performance for the Russell 1000 Value was quite broad with six sectors outperforming – Technology, Consumer Discretionary, Industrials, Health Care,

Financials, and Consumer Staples. With the absence of the more commodity cyclical sectors such as Energy and Materials, it appears that the market has begun to

believe again that the economy has turned the corner and growth is returning.

Throughout the year, our overweight sectors were Energy, Consumer Staples, Consumer Discretionary, Materials, and Technology. We were most significantly

underweight the aforementioned Financial and Health Care along with negligible exposure in Utilities that was not initiated until the latter half of the year. We had

no exposure to Telecom. We were close to market weight Industrials.

The three sectors with the highest contribution for the year were Health Care, Financials, and Utilities. Health Care was led by strong performances from Endo

Health Solutions and United Therapeutics which has transformational catalysts revealed via acquisitions and drug approvals, respectively. Market-related holdings

drove our Financials with Waddell & Reed nearly doubling for the year coupled with CBOE Holdings rising over 80%. In the case of Utilities, sometimes what you

don’t own can be as important as what you own. We had no exposure in this sector until the latter part of the year which helped derive a positive contribution as

Utilities battled Telecom as the worst performing sectors for the year. Telecom was actually our fourth highest contributor and we had no exposure whatsoever.

The sectors with the lowest level of contribution were Consumer Discretionary, Materials, and Industrials. Of the six holdings we had in Consumer Discretionary,

only 1, TJX Companies, was able to outperform the respective sector. Simply put, we were out of step with some holdings that had a very contrarian performance

experience such as Coach and Yum Brands. The lackluster performance in Materials was primarily attributable to two stocks – Southern Copper and Cliffs Natural

Resources – which suffered from a lack of confidence in China-related infrastructure spending. While China is clearly a swing factor, it is not the sole destination

for the mined metal products delivered by these companies.

10 Nevertheless, market sentiment won out for 2013. We are more optimistic than current valuations suggest. Industrials were held to some of the same concerns

regarding our Materials holdings as our mining equipment companies – Joy Global and Caterpillar – were held in less than high regard in 2013. We continue to think

we will be benefited by owning such firms over the full market cycle, especially if the recent upturn in economic growth continues.

The three top positive individual stock contributors were Endo Health Solutions (+156.79%), Western Digital (+100.80%), and CBOE Holdings (+80.77%). Endo

Health Solutions has been maligned by the market due to the generic competition it faced with Lidoderm coming off-patent. In 2012, the stock was our third worst

contributor in the portfolio with a -23.92% return. Our patience and persistence were rewarded as the company has made acquisitions that are transforming the long-

term growth trajectory. Western Digital has continued to make the transition from being viewed as a commodity component maker in the technology area to one that

has value-added products in the transitioning world of cloud-computing. While the doubling of the stock validates the strategy, we still see further upside. CBOE

Holdings has benefited from the volatility in the market. Uncertainty still exists and we expect for the markets to continue to illustrate the value the company brings.

The stocks with the greatest negative contribution were Cliffs Natural Resources (-54.37%), Southern Copper (-22.58%), and American Capital Agency (-22.42%).

For the second consecutive year, Cliffs Natural Resources was our greatest negative contributor. Continued weakness in the iron ore market due to overcapacity for

the current level of demand has made it challenging to return to previous levels of profitability. While we still like the long-term fundamentals for a company

producing materials that are keys to the infrastructure building and maintenance that is world-wide, our process dictated that we remove our exposure to the

company; but, we could revisit the position in the future. Southern Copper has also been victimized by short-term concerns regarding overall growth, primarily in the

developing markets. American Capital Agency, an agency mortgage REIT, has been swept in concerns regarding the anticipated tapering moves of the Federal

Reserve as well as challenges in declining book value resulting in dividend cuts. While we agree with many of the concerns, we continue to believe a great deal of this

bad news has been discounted in the valuation. Of the two remaining holdings, if true to form, we would not be surprised to see one or both lead the portfolio in

gains in 2014.

Fourth Quarter Review

Dare we say it? Yes. We dare. It appears a new streak has begun. We have had two consecutive quarters of outperformance. The last quarter left us a whisper of

being able to outperform for the year after starting off the first half of the year more than a little behind. As we were being questioned about the underperformance in

terms of what was wrong, changed or gone off track, we can assure you that nothing changed. We simply became the beneficiaries of fortuitous timing with our

portfolio holdings of significantly undervalued assets.

For the quarter, 6 out of 10 sectors outperformed the respective sector and/or the overall benchmark, the Russell 1000 Value. Sector allocation and stock selection

was positive with the overwhelming amount of performance coming from stock selection.



11

Performance for the Russell 1000 Value was fairly broad with five sectors outperforming – Industrials, Technology, Consumer Staples, Consumer Discretionary,

and Materials. All of these sectors, with the exception of Consumer Staples, are typically thought of as having a pro-cyclical growth tilt. We were overweight each

of these sectors.

In addition to the previously mentioned sectors, we were also overweight Energy. We were most significantly underweight Financials, Utilities, Health Care, and

Telecom.

The three sectors with the highest contribution for the quarter were Health Care, Energy, and Technology. 3 out of 4 stocks outperformed in the Health Care

sector with 40%+ gains with Endo Health Solutions and United Therapeutics on the back of transformative acquisitions and product approvals, respectively.

Refiners led our Energy holdings to solid gains with Marathon Petroleum and HollyFrontier rising 43.39% and 20.05%, respectively. Frequently doubted and

questioned, three holdings in Technology yielded strong returns – Western Digital (+32.82%), Apple (+18.38%), and Microsoft (+13.23%).

The sectors with the lowest level of contribution were Consumer Staples, Consumer Discretionary, and Industrials. Our Consumer Staples holdings began to be a

bit out of sync as the market continued to embrace more domestic oriented holdings and not give as much attention to our multinational exposure. Only one of

our holdings outperformed the sector. Altria returned +13.27% and is our only purely domestic holding. Our expectation is that as ex-US growth eclipses that

starting to gain traction in the US, multinational staples will perform better. Our Industrials actually outperformed the Russell 1000 Value for the quarter but

lagged the sector as higher expectations correlated with a broader swath of holdings, airlines in particular.

The three top positive individual stock contributors were Endo Health Solutions (48.46%), Marathon Petroleum (+43.39%), and Western Digital (+32.82%).

These stocks represent holdings from the Health Care, Energy, and Technology sectors. As previously mentioned, Endo Health Solutions continues to revamp its

portfolio of holdings. The most recent acquisition of a Canadian pharmaceutical company was well-received by the market. Marathon Petroleum, along with other

refiners, are benefiting from the prospects of improved demand with a stronger economy. Finally, Western Digital continues to surprise on the upside as the

cyclicality typically associated with the hard disk drive makers is being muted by investments in a more diversified platform of offerings. Each of these stocks is still

a portfolio holding as we continue to view them as value creating opportunities.

The stocks with the greatest negative contribution were American Capital Agency (-11.64%), Apartment Investment and Management (-6.42%) and Ross Stores

(-1.36%).These stocks represent holdings from the Finance and Consumer Discretionary sectors. American Capital Agency and Apartment Investment and

Management are REITs which have been lumped together with other REITs. Unfortunately, guilt by association seems to be playing a role in the current levels of

underperformance as we discriminately see value in these stocks in contrast to the bulk of the stocks in this industry group. The concerns regarding tapering have

been overblown from our perspective and we think the stocks have a better than average chance of delivering superior returns as we move forward. Ross Stores

has been caught in the concerns regarding retail during the holiday season. All three stocks are still portfolio holdings.



12

Stocks eliminated due to sector adjustments and/or valuation/fundamental issues were Mastercard, Federated Investors, and Copa Holdings. These changes were

primarily driven by the dynamic interrelationships of the sectors as we position the portfolio to exploit value creating opportunities. As we share regarding our

investment philosophy, “We have a core process but no core holdings.”

The higher level of stocks being eliminated caused positions to be initiated in Kellogg, Ross Stores, AES Corporation, Herbalife, Oasis Petroleum, and SM Energy.

Each stock was purchased after first being identified as a value creating opportunity followed up with fundamental analysis to vet out the potential as a portfolio

holding.

The result of this and related activity during the quarter was that we increased our exposure to Energy, Consumer Staples, Utilities and Consumer Discretionary.

We decreased our exposure to Industrials, Health Care and Financials. All other sectors essentially remained the same with the exception of market appreciation

or depreciation.

All was related to our quest of seeking out value creating opportunities for our clients.

First Quarter Outlook

Entitlement reform. Talk about a flashpoint issue in Washington, DC politics. One side wants to provide for the continuation at a certain level of support. The

other side says we cannot afford to continue to do so. Who is right? Time will tell.

In investing, there is another type of entitlement reform that is taking place. It is the constant reevaluation of the proper price for individual stocks that make up

the stock market. As conditions change, the proper price should change as well. For some investors, certain stocks and sectors have reached a state that makes

entitlement a proper title to be accorded to them. For example, in spite of lagging returns, increased regulation, and more moderate business platforms, some

investors still compare pre-2008 valuations to current valuations for stocks in the Finance sector. We cry foul.

Coaching youth basketball for my youngest son, foul is the word I hear most often at his games. Sometimes, I agree (when it is in our team’s favor). Other times, I

disagree (when the referee clearly has it wrong).

For the largest sector in my benchmark dominated by diversified financials and banks, I cry foul when the fundamentals clearly do not support current valuations

and investors simply replay the same valuation tape of old. As a result, as some investors hearken for the good ole days, we gauge our weighting and exposure

based off of the current situation. Therefore, we are underweight Financials.



13

Financials is just one example of how we enact our own entitlement reform and try to wisely allocate capital to the sectors most undervalued and therefore truly

the most deserving.

Our entitlement reform has our allocation positioned for overweight positions in Energy, Materials, Technology, Consumer Staples and Consumer Discretionary.

Beyond Financials, we are also underweight Utilities, Telecom, and Health Care. Industrials continue to be near a market weight position.

This positioning continues to be skewed towards an economy that will strengthen, inflation will rise, and interest rates will increase. We believe that tapering will

continue on a measured pace as the economy allows; but, the pace will likely quicken. While some investors fear negative stock results as a consequence of the

tapering, we think that being positioned in undervalued stocks provides a measure of protection that makes us confident in our sector allocations and individual

stock positions.

Will 2014 mimic 2013? I don’t know. The question we constantly seek to answer in the affirmative is, “Are our portfolios populated with value creating

opportunities?” The answer is an unequivocal yes. There is always value in the market. Our quest, objective, and reason for being are to find it.

Randell A. Cain, Jr., CFA

Principal and Portfolio Manager

Herndon Capital Management

January 5, 2014



O U R I N V E S T M E N T P R O C E S S

Large Cap US Value Equity Investment Philosophy & Strategy

committed to excellence

“To everything there is a season…” (Ecclesiastes 3:1). True value is defined by companies that trade at

a discount to what their fundamentals merit. Identifying sound companies out of favor with

investors due to temporary conditions has historically proven to be a successful strategy as their

true value is ultimately recognized in the marketplace. We call these companies value creating

opportunities.

Our process identifies stocks based upon relative value versus the other stocks in the Russell 1000

universe. We combine fundamental analysis in a valuation-oriented framework with risk

assessment. We do not want to own stocks merely because they appear “cheap”. We screen our

value candidates for performance-based characteristics to avoid “value traps”. The stocks we own

tend to have low valuation metrics, but they also have sound fundamental characteristics, hopefully

leading to outperformance as their value is recognized in the market.

14

Herndon Capital Management Large Cap Value Investment Process

Value Creating Opportunities

Value Traps

15

Herndon Capital Management Large Cap Value Investment Process

Step 4: Fundamental Analysis - Analyze ranked companies

on 4 dimensions to answer 4 questions.

16

Large Cap US Value Equity Characteristics as of 12/31/2013

O U R I N V E S T M E N T R E S U L T S

17

Portfolio R1000 Value

Price/Earnings Ratio (TTM) 13.9x 15.6x

S&P Quality Ranking A- B+

Dividend Yield 2.1% 1.9%

Weighted Avg Market Cap $62.4b $114.2b

Avg Market Cap $54.8b $18.8b

Median Market Cap $16.2b $6.5b

Avg Return on Equity (5yr) 36.7% 21.9%

Earnings LT Future Growth 9.0% 9.0%

LT Debt/Capitalization 38.0% 39.0%

Number of Securities 51 662

Portfolio Fundamental Characteristics

Security Weight

WESTERN DIGITAL 3.6%

TJX COMPANIES INC 3.2%

MARATHON PETR CORP COM 3.0%

AFLAC INC 3.0%

APPLE INC 2.9%

CBOE HOLDINGS 2.8%

UNITED THERAPEUTICS 2.8%

WADDELL & REED FINANCIAL 2.8%

LOCKHEED MARTIN 2.7%

DISCOVER FINANCIAL SERVICES 2.5%

Total: 29.2%

Top Ten Largest Holdings

Portfolio

Rolling 3 Year Batting Average 97.0%

Upside Capture Ratio 113.0%

Downside Capture Ratio 84.4%

Tracking Error 6.0

Information Ratio 0.8

R-squared 0.9

Beta 1.0

Annualized Since Inception Turnover 66.6%

Portfolio Performance Characteristics*

*Performance Characteristics provided are since inception and represent the Large

Cap Value representative portfolio. Please see APPENDIX for GIPS presentation. The

Large Cap Value Equity Characteristics are shown as supplemental information only

and complements Large Cap Value Composite presentation which is located in the

APPENDIX. For one-on-one use only.

Large Cap US Value Characteristics as of 12/31/2013

*Relative to the Russell 1000 Value

Sector Allocation*


18

Cons. Disc. Cons. Stap. Energy Financials Healthcare Industrials Materials Technology Telecom Utilities

Portfolio 7.8% 10.2% 23.3% 19.3% 6.6% 10.2% 5.3% 13.4% 0.0% 1.0%

Benchmark 6.4% 5.9% 15.0% 29.0% 12.9% 10.5% 2.9% 8.9% 2.7% 5.7%

Relative Weight 1.4% 4.3% 8.3% -9.7% -6.3% -0.3% 2.4% 4.5% -2.7% -4.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

The Large Cap Value Equity Characteristics are shown as supplemental information only and complements the Large Cap Value

Composite presentation which is located in the APPENDIX. The Large Cap Value representative portfolio was utilized for these

characteristics. For one-on-one use only.

City of Miami GE & SE Retirement Trust: Equity Investment History as of 12/31/2013

*Since inception annualized 5/23/2012. Past performance is not indicative of future results.


19

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

QTD 6 Months 1 Year Inception*

Gross 12.48% 18.08% 31.48% 24.87%

Net 12.31% 17.73% 30.89% 24.24%

Russell 1000 Value 10.01% 14.34% 32.53% 28.72%

Large Cap US Value Equity Investment History as of 12/31/2013

*Since inception annualized 6/30/2002. See APPENDIX for performance disclosures. Past performance is not

indicative of future results. Preliminary performance is shown above. For one-on-one use only.


20

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

QTD 1 Year 3 Year 5 Year 10 Year Inception*

Gross 12.61% 31.74% 16.29% 20.64% 12.67% 12.50%

Net 12.50% 31.24% 15.86% 20.21% 12.28% 12.14%

Russell 1000 Value 10.01% 32.53% 16.06% 16.67% 7.58% 7.89%

City of Miami GE & SE Retirement Trust: 09/30/2013 - 12/31/2013


21

Past performance is not indicative of future results. For one-on-one use only.

Sector NameAvg Port

Wt

Avg Bmrk

Wt

Port

Return

Bmrk

Return

Port

Contrib

Bmrk

Contrib

Alloc

Effect

Select

Effect

Total

Effect

Total Portfolio 100.00 100.00 12.45 10.00 12.45 10.00 0.64 1.82 2.46

Health Care 7.39 13.06 34.32 8.86 2.43 1.16 0.12 1.83 1.95

Energy 21.24 14.96 13.21 9.97 2.78 1.49 0.00 0.65 0.65

Information Technology 12.38 8.82 15.09 12.03 1.80 1.06 0.16 0.32 0.48

Utilities 0.52 6.04 -0.34 2.66 -0.04 0.17 0.41 -0.02 0.39

Financials 21.21 28.98 9.54 9.34 2.09 2.72 0.04 0.07 0.11

Materials 5.44 2.89 12.43 11.13 0.68 0.32 0.04 0.06 0.10

Telecomm Service 0.00 2.55 0.00 7.16 0.00 0.18 0.08 0.00 0.08

Industrials 11.60 10.23 12.56 14.87 1.46 1.49 0.08 -0.29 -0.21

Consumer Discretionary 7.98 6.50 6.03 11.25 0.50 0.73 0.00 -0.37 -0.37

Consumer Staples 9.95 5.95 7.28 11.63 0.75 0.68 0.03 -0.42 -0.39

Cash & Equivalents 2.28 0.00 0.02 0.00 0.00 0.00 -0.33 0.00 -0.33



22


Sector NameAvg Port

Wt

Avg Bmrk

Wt

Port

Return

Bmrk

Return

Port

Contrib

Bmrk

Contrib

Alloc

Effect

Select

Effect

Total

Effect

Total Portfolio 100.00 100.00 18.09 14.32 18.09 14.32 1.59 2.19 3.78

Health Care 7.91 13.04 53.32 13.68 3.66 1.78 0.11 2.81 2.92

Financials 21.56 29.12 15.25 11.93 3.29 3.52 0.15 0.79 0.94

Utilities 0.26 6.16 -0.34 2.57 -0.04 0.17 0.72 -0.02 0.70

Information Technology 12.29 8.88 21.03 17.93 2.48 1.56 0.24 0.25 0.50

Energy 20.92 14.98 15.98 13.67 3.35 2.06 -0.04 0.47 0.42

Materials 5.51 2.83 25.64 24.03 1.38 0.65 0.24 0.07 0.31

Telecomm Service 0.00 2.61 0.00 4.21 0.00 0.11 0.29 0.00 0.29

Industrials 11.51 10.00 20.17 24.78 2.21 2.37 0.20 -0.55 -0.35


Consumer Staples 9.48 5.97 5.87 13.82 0.70 0.82 -0.02 -0.80 -0.82




23


Sector NameAvg Port

Wt

Avg Bmrk

Wt

Port

Return

Bmrk

Return

Port

Contrib

Bmrk

Contrib

Alloc

Effect

Select

Effect

Total

Effect

Total Portfolio 100.00 100.00 31.40 32.47 31.40 32.47 0.40 -1.47 -1.07

Health Care 7.46 12.41 114.56 36.41 6.54 4.37 -0.22 4.56 4.34

Utilities 0.13 6.31 -0.34 14.03 -0.04 1.00 1.19 -0.03 1.16

Financials 20.36 28.51 40.23 33.53 7.58 9.44 -0.19 1.31 1.12

Telecomm Service 0.38 2.89 -14.73 12.65 -0.32 0.43 0.51 -0.45 0.06

Energy 22.25 15.36 25.29 24.17 6.06 3.87 -0.66 0.48 -0.18

Information Technology 11.16 7.77 36.66 48.32 3.93 3.42 0.58 -1.04 -0.46

Consumer Staples 9.88 6.62 22.25 33.08 2.32 2.20 0.00 -1.19 -1.19

Industrials 10.56 9.53 27.69 43.13 3.10 3.99 0.25 -1.59 -1.35

Materials 5.75 3.21 1.65 20.93 -0.04 0.61 -0.33 -1.36 -1.69



Shown as supplemental information only. See APPENDIX for fully compliant performance

disclosure. Past performance is not indicative of future results. For one-on-one use only.

GROSS PERFORMANCE


24

29

Glass Lewis

Proxy Voting Report

Oct. 31, 2013 – Dec. 31, 2013

30

Glass Lewis

Proxy Voting Report

Oct. 31, 2013 – Dec. 31, 2013

31

Glass Lewis

Proxy Voting Report

Oct. 31, 2013 – Dec. 31, 2013

32

Glass Lewis

Proxy Voting Report

Oct. 31, 2013 – Dec. 31, 2013

33

Glass Lewis

Proxy Voting Report

Oct. 31, 2013 – Dec. 31, 2013

Walter Lindsay, Jr. – Senior Vice President of Marketing & Client Services

Anthony Pinkston – Marketing & Client Services Associate

Marc V. Reid – Director of Marketing & Client Services

Antoinette Scroggins – Director of Marketing & Client Services

S. Dawn Swift – Vice President of Marketing & Client Services

Marc Sydnor – Senior Vice President of Marketing & Client Services

Leah Williams – Marketing & Client Services Associate

Shannon Barnes – Director of Operations

Lorraine Betts – Operations Analyst

David Collins – Senior Operations Analyst

Shantell Hall – Operations Analyst

Alexandria Jenkins – Operations Analyst

Kara Rainey – Operations Manager I – Settlements/Reconciliations

Rachel Roffman – Operations Manager I – Wrap

Christine Wizzard – Operations Manager II

Corey Beezhold – Junior Trader

Diane Bromfield – Senior Equity Trader

Adrian Chastain – Equity Trader

Kenneth Jackson – Head Trader

Shawn Ayton – Network Manager

Chanelle Belton – Administrative Assistant

Kathi Edwards – Director of Administrative Services

Lydia Hancock – Human Resources Manager

Tonya Lynch – Business Process Analyst

Matt Walker – Business Process Manager

Todd Campbell – Compliance Officer

Matt Carney – Senior Compliance Officer

Annette Marshall, CSCP – Chief Compliance Officer

Colette Ray – Compliance Specialist

Nino Chiappetta – Assistant Controller

Sandy Petty – Director of Financial Analytics

Jocelyn Smith – Accounting & Payroll Assistant

Varsha Telang – Senior Accountant

J. Keith Buchanan, CFA – Senior Investment Analyst

Randell Cain, Jr., CFA – Principal/Portfolio Manager

Derik Coffey – Portfolio Specialist

Loren Compton-Williams – Senior Investment Analyst

Drake Craig, CFA – Principal/Portfolio Manager/President

Kenneth Grimes – Deputy CIO

Kenneth Holley, CFA – Principal/Portfolio Manager/CIO

Audley Mackel IV – Junior Analyst, Portfolio Analytics

James Nelson III, CFA – Associate Portfolio Manager

Arlene Pine, CFA – Investment Analyst

Khadir Richie – Senior Investment Analyst

Jazmin Williams – Investment Analyst

Romerro Williams – Investment Analyst

H C M T E A M M E M B E R S

Executive Management Team

Investments

Compliance

Trading

Marketing & Client Services

Operations

Administrative Services

Financial Analytics

Randell Cain, Jr., CFA – Principal

Drake Craig, CFA – Principal/President

Kenneth Holley, CFA – Principal/CIO

35

36

RANDELL A. CAIN, JR., CFA Principal / Portfolio Manager 22 years experience

Randell (“Randy”) Cain is the portfolio manager responsible for managing Herndon Capital Management, LLC’s Large

Cap US Value Equity and Mid Cap US Value product. Randy is also one of the three portfolio managers responsible for

managing the Large Cap US Core Equity product.

Prior to joining Herndon Capital Management, LLC in 2002, Randy spent five years at NCM Capital managing large-cap

core equities while also analyzing the financial, basic material, energy and utility sectors. In addition, in his last two years

he managed a large-cap value portfolio. Randy’s experience includes equity and fixed income analysis at TradeStreet

Investment Associates, a former subsidiary of Bank of America, and Putnam Investments as well as a one-year fellowship

with JP Morgan to gain experience in international investing.

Mr. Cain received an MBA from Harvard Business School in 1994, a Bachelor of Industrial Engineering degree from the

Georgia Institute of Technology in 1991, and an interdisciplinary Bachelor of Science from Morehouse College in 1991.

He earned the Chartered Financial Analyst designation in 1997.

O U R M A N A G E M E N T T E A M

DRAKE CRAIG, CFA Principal / Portfolio Manager / 24 years experience

President

Drake Craig is the portfolio manager responsible for managing Herndon Capital Management, LLC‘s Large Cap US

Growth Equity product. Drake is also one of the three portfolio managers responsible for managing our Large Cap US

Core Equity product.

Prior to joining the company in January 2002, he spent 7 years at NCM Capital Management Group in Durham, N.C.

rising from senior equity analyst to Senior Vice President and Director of Equities where during that period, he oversaw a

9-member equity investment team that managed approximately $5 billion in equity assets. Drake managed one of the

firm's largest products, an approximate $1.5 billion broad growth portfolio which included a sub-advisory relationship

with the Calvert Group. Prior to that he was an equity analyst at Edward Jones & Co. responsible for making stock

recommendations in consumer oriented sectors.

Drake received a Bachelor of Arts in Business Administration from Morehouse College in 1989, the Chartered Financial

Analyst designation in 1997 and an Executive Master of Business Administration from the Kenan Flagler School of

Business at the University of North Carolina.

37


KENNETH R. HOLLEY, CFA Principal/ Portfolio Manager 27 years experience

CIO

Ken oversees the firm's investment activities: setting policy and directing the activities of the investment staff. He is the

portfolio manager responsible for Herndon Capital Management, LLC’s Large Cap Core International Equity product and

one of the three portfolio managers responsible for managing our Large Cap US Core Equity product.

Before coming to Herndon Capital Management, LLC, Ken spent more than 8 years at Morgan Stanley Asset Management.

In his first four years there he managed a domestic intermediate fixed-income portfolio. For the last four years at Morgan

Stanley he was the co-manager of an international equity portfolio. In addition, he served on Morgan Stanley's Asset

Allocation Committee which determined MSAM's investment policies and positions in the various asset classes. Prior to

that Ken spent almost three years at the African Development Bank in Abidjan, Cote d'Ivoire as the Senior Finance Officer

where he developed and implemented the investment philosophy and trading strategies for the Bank's portfolios in U.S.

dollars, Canadian dollars, French francs, Deutsche marks and Japanese yen. Before the ADB he managed the portfolios at

Ward & Associates Asset Management, a fixed-income asset management firm serving public and private pension plans.

Ken began his career in finance as a fixed-income salesman at Salomon Brothers in 1986.

Ken’s education includes a Bachelor of Science in Engineering from the University of Pennsylvania and an Master of

Business Administration from the Wharton School at the University of Pennsylvania. He also earned the Chartered

Financial Analyst designation in 1995.

38


39 DERIK D. COFFEY Portfolio Specialist 13 years experience

Derik Coffey is a Portfolio Specialist for Herndon Capital Management focused primarily on the Large Cap Value and

Mid Cap Value strategies.

Prior to joining Herndon Capital Management in 2013, Derik was an analyst at UBS Financial Services in the Investment

Manager Research Group responsible for conducting ongoing due diligence on investment managers and searches on

manager candidates. He was responsible for the strategies in the small and mid-cap space as well as general equity due

diligence for Institutional Consultants. Prior to working in the Manager Research Group, Derik was business manager

for the Investment Solutions at UBS business where he worked with senior management to coordinate financial and

business activities for alternative investments, mutual funds, managed accounts, retirement, ETFs, UITS and

institutional consulting businesses. Prior to joining UBS, Derik was an Assistant Vice President for Mergers &

Acquisitions at New York Life Insurance where he focused on Insurance and Asset Management M&A. He started his

career at Lehman Brothers as an analyst in the Global Mergers and Acquisitions group focused on technology and

healthcare M&A.

Derik has 13 years of experience in finance, including 11 years of investment management experience. He graduated

summa cum laude and earned a Bachelor of Arts in Political Science and Economics from Tuskegee University and a

Master of Science in International Finance degree from Georgetown University's Edmund M. Walsh School of Foreign

Service. He holds the Series 66.

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R E S E A R C H T E A M

40

MARC V. REID Director of Marketing & Client Services 19 years experience

Marc brings 19 years of experience in the financial services industry to the firm. Previously, Marc served as Director of

Client Services for NCM Capital Management Group where he managed client communication, reporting and requests

with a focus on client retention. Additionally, he assisted with new business development. He identified, researched and

qualified institutional investors for pipeline and oversaw the consultant database and RFP process. Prior to that he worked

as a broker for a boutique firm where he made investment recommendations for stocks, mutual funds and insurance

products.

Marc received a Bachelor of Arts in Economics from the University of North Carolina at Chapel Hill. He successfully

passed the FINRA licensing exams: Series 7, 65 and 63.

M A R K E T I N G & C L I E N T S E RV I C E S

41

MARC O. SYDNOR Senior VP, Marketing & Client Services 20 years experience

Marc is our Senior Vice President of Marketing & Client Services and brings his experience in the financial and asset

management industry to effectively meet our current and future client requirements. Having worked on the product /

portfolio side for many years he brings a tremendous amount of product knowledge to this position.

Prior to joining Herndon Capital Management, LLC Marc was a Senior Economist and Equity Portfolio Manager at MDL

Capital Management, where he created the MDL Economic Matrix, an economic forecasting product. His tenure also

includes serving as Investment Manager Search Consultant for Gray & Company. Sydnor began his career as a Broker for

Oppenheimer & Company.

Marc holds a Bachelor of Arts in Economics from the University of Delaware. Marc also currently holds the Series 65

registration.

M A R K E T I N G & C L I E N T S E RV I C E S

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