1. Hiring, Managing, and Changing Managers Great Plains Public Employee Retirement System Forum November 14, 2008 Jon Forman Vice Chair, Board of Trustees Oklahoma Public Employees Retirement System (OPERS) & Professor, University of Oklahoma College of Law www.law.ou.edu/faculty/forman.shtml 1

2. ORGANIZATIONAL STRUCTURE Oklahoma Public Employees Retirement System 2 Advisors & Consultants Board of Trustees Director of Finance and CFO Director of Member Services Executive Director Director of Information Technology Chief Investment Officer Assistant CFO Financial Services Administrator Member Services Administrator Defined Contribution Plans Manager Communication & Counseling General Counsel

3. OPERS Traditional DB Plan 6/30/2006 Active OPERS Members 45,472 Retired OPERS Members 24,372 OPERS Plan Net Assets $5,817,165,538 OPERS Funded Ratio 71.4% 3

4. OPERS INVESTMENTS Board hires professional investment managers –Each allotted portion of the portfolio to manage –Managers decide what securities to buy and hold Board helped by staff, investment consultant –Goal: find firms with particular expertise –Staff prepares requests for proposal (RFPs) –Staff reviews and analyzes submitted proposals –Investment Committee interviews, recommends –Board makes selection 4

5. OPERS INVESTMENT MANAGERS (as of 6/30/2007) 5 Investment Manager Asset Class$ MM Northern TrustCash23.9 Metropolitan WestDomestic Fixed Income415.8 BlackRockDomestic Fixed Income1509.9 HoisingtonDomestic Fixed Income462.2 BarclaysInternational Equity426.7 MondrianInternational Equity429.2 BarclaysInternational Equity391.2 BarclaysInternational Equity65.9

6. OPERS INVESTMENT MANAGERS (continued) 6 Investment Management Firm Asset Class$ MM BarclaysLarge Cap Equity1727.6 BarclaysLarge Cap Equity197.6 Aronson Johnson OrtizLarge Cap Equity194.7 FranklinLarge Cap Equity315.0 State StreetLarge Cap Equity344.8 UBSSmall Cap Equity59.2 Barrow HanleySmall Cap Equity65.7 Total6,629.5

7. Statement of Investment Policy (August 2008) Investment philosophy Investment objectives Investment guidelines Administration Selection process guidelines 7

8. Investment Guidelines Full discretion granted to all investment managers Perform fiduciary duties as prudent people In general –Shall not purchase securities on margin –Be fully invested in the assigned asset class –Limits on options, puts, and calls; and derivatives 8

9. Investment Guidelines Domestic Equity Investment Managers International Equity Investment Managers Domestic Fixed Income Investment Managers –No more than 8% in the securities of a single issuer (except U.S. government and its agencies –Total portfolio minimum quality of A 9

10. Administration Investment Manager –Fiduciaries –Reporting Formal reviews annually with the Board Annual reports Quarterly reports Monthly reports Billing Executive Director & Chief Investment Officer 10

11. Administration Investment Consultant Investment Committee –Regular reports From Investment Consultant From Chief Investment Officer –Periodic reviews of investment managers –Annual reviews of funds –Recommendations to the board of trustees 11

12. Administration Board of Trustees –Regular reports From Investment Consultant From Chief Investment Officer From Investment managers –Actions 12

13. Selection Process Guidelines Request for Information Request for Proposals (RFP) –Analysis from staff and/or investment consultant –Selection criteria 13

14. Selection Criteria E.g., domestic large cap investment managers –10 years live data –History of successful performance –Must accept fiduciary status –“Most favored nation” fee clauses 14

15. Termination Issues Generally Termination takes time –Review –Place on watch –Terminate Transition takes time –Shift to another manager –Active or passive –Transition management 15

16. Remember: “Termination and selection of managers is fraught with risk” Amit Goyal & Sunil Wahal, The Selection and Termination of Investment Management Firms by Plan Sponsors (May 2006) –Plan sponsors hire investment managers after large returns up to 3 years prior to hiring –However, post-hiring returns ~ 0 –Plan sponsors terminate investment managers after underperformance But subsequent performance is frequently positive 16

17. Other Issues Asset Allocation Fees –Most favored nation –Performance fees Typically a base annual fee, say, 5 basis points Plus a performance fee, say, 8 to 10 basis points Investment Manager Roundtable 17