2015-16 Investment Management Division Initiatives (IAC Meeting Supplement)

July 28, 2016

Good Progress on Major Initiatives

2

1.  ResearchanddevelopESGpoliciesandstrategies2.  Transi9onoversightofAncillaryFunds,includingestablishanewlong-termfixed

incomeproductforcertainclientsandfacilitatemovementofassets3.  Evaluaterestructuring/exi9ngFundofFundsandlegacylow-convic9onfunds/

managers4.  ImplementManagedAccountsProgramandini9alcomponentsofdirectHedged

Equityprogram5.  Developinternalequityindexfundimplementa9onplan6.  Updateasset-liabilitystudyandsupportreviewoftheNCRSdiscountrate/investment

returnassump9on7.  Ins9tute360degreefeedbackforseniormanagementandcareerdevelopment

programforteamleaders,porWoliomanagers,andanalysts8.  ImplementBNYMellonPrivateInvestmentAssetServiceprocesses9.  NewIMDrolewithunbundledSupplementalRe9rementPlan10.  ImplementVentureCapitalMul9plierFund

IACConsulta9ononPolicies

3

1.  Onatleastabiennialbasis,IPSshallbepresentedtotheIACforconsulta9on.NCGS§147-69.10(a)

2.  IndustrystandardporWolioguidelinesforinternallymanagedporWolioswithperiodicconsulta9onbytheIAC.NCGS§147-69.2(e)

3.  DSTshallconsultwiththeIACandadoptpoliciesonthefollowingtopics:*o  InvestmentManagementDivisionCodeofEthicso  DSTemployeeswithinvestmentresponsibilitytobeprovidedwithtrainingondu9es

andresponsibili9estothefundso  GicstoDSTwithinvestmentresponsibilityo  Imposinglimita9onsonexternalinvestmentmanagers'useofplacementagentsand

otherpersonsthatappearbeforeDSTo  Conflictchecksintheinvestmentduediligence,nego9a9ons,andcontrac9ngprocess.

NCGS§147-69.11

4.  TSERSandLGERSBoardsofTrusteesaskedstafftostudypoten9alconsensuslegisla9veproposalsorsupplementalpoliciesaddressingfutureStateTreasurers’commercialcorporateboardservice

*Note:DSTalreadyhaspoliciesorproceduresonthesetopics.ThisprocesswillgiveIACmemberstheopportunitytoreviewandsuggestimprovementstothesepoliciesandprocedures.TreasurerisrequiredtoadoptpoliciesonthesetopicsbyJanuary31,2017.

IAC Consultation on Policies

4

1.  SeptemberIAC2016mee9ngo  DracESGpolicyo  Dracethics,training,gics,conflicts,et.al.policieso  ProposalsrelatedtofutureTreasurers’corporateboardservice,reflec9ng

consulta9onwithBoardofTrusteemembersinAugust2.  November2016IACmee9ng

o  DracIPSo  DracinternalporWolioguidelines

Review of Governance, Operations, and Investment Practices

5

1.  Atleastonceeveryfouryears,theStateTreasurershallengageacommercialindependentexpertfirmtoevaluatethegovernance,opera9ons,andinvestmentprac9cesoftheStateTreasurerinordertodeveloprecommenda9onsforimprovement

2.  TheStateTreasurermustconsultwiththeInvestmentAdvisoryCommiieetodevelopthescopeoftheevalua9on

3.  ThereportoftheindependentexpertfirmshallbeprovidedtotheJointLegisla9veCommissiononGovernmentalOpera9ons,theHouseofRepresenta9vesAppropria9onsCommiiee,theSenateAppropria9ons/BaseBudgetCommiiee,andtheFiscalResearchDivisionwithin30daysofreceipt

Goals

6

1.  Adoptna9onalbestprac9cesforgovernance,opera9ons,investmentprac9ces,andotherprogramma9cprac9cesatpeerorganiza9onswithsimilarprogramobjec9vesandlegalandregulatoryrequirements

2.  Enhancetheabilitytoproducecost-efficientlong-termgrowthoftrustassetswithreasonableriskofnotachievinginvestmentobjec9ves

3.  Enhanceprograms’cost-effec9veness,fiscalcontrol,compliance,andriskenvironments

4.  Enhancetransparencyforbeneficiariesandstakeholdersregardingprogramperformance,funding,andbudge9ng

5.  Enhanceaccountabilityofthegoverningfiduciaryorgoverningboard,asapplicable

6.  Maintainahigh-performingorganiza9onwithaccesstonecessary,qualified,andprudentinternalresourcesandtheabilitytocontractasnecessaryandprudentwithqualifiedexternalbusinesspartners

7.  Iden9fyanyamendmentstocurrentlawneededtoachievethesegoals

Scope: Governance

7

1.  Thepowers,du9es,andrequiredapprovalsrelatedtotheinvestmentandotherprogramsexercisedbythe“Fiduciaries”(theStateTreasurer,BoardsofTrustees,and/ortheDepartmentofStateTreasurer,asapplicable),andbytheGeneralAssembly,OfficeofStateBudgetandManagement,theOfficeofStateController,andtheOfficeofStateHumanResources

2.  Thelawsandotherconstraintsuponuseofthetrustfundsandappropria9onsundertheNorthCarolinaCons9tu9on,statutes,andcommonlawand/orthefederalCons9tu9on,statutes,commonlaw,andregula9ons

3.  Thecurrentsoleinvestmenttrusteeandinvestmentadvisorycommiieemodelversusan“enhancedinvestmentadvisorycommiieemodel”,aninvestmentboardoftrusteesorothermodels

Scope: Operations

8

1.  Fiduciaryindependence,includingfederalandstatelaws,regula9ons,andprac9cethatareapplicabletopersonnel,procurement,andfundingandbudgetdecisions,includingbutnotlimitedtoauthorityfor:

o  Posi9oncrea9on,personnelhiring/termina9on,andestablishingandadministeringpersonnelcompensa9on

o  Informa9ontechnologyprocurement

o  Charging/appor9oningDepartmentexpendituresdirectlytothetrustfundsasacon9nuousreceipt-supportedprogramwhilenotrequiringaGeneralFundappropria9onorreimbursement

o  Determiningthemostcost-effec9veandtransparentmethodtorecordDepartmentexpendituresforfinancialstatementandbudgetrepor9ng

o  U9lizinginternalbudgettransferstopayforcoreserviceswithintheDepartment(i.e.,IT,HR,accoun9ng,internalaudit,etc.)

2.  Externalinvestmentandprogramoversight,repor9ng,andmonitoring,includingbutnotlimitedtothesufficiencyof:

o  TheDepartment’sexpertreviewsandauditsoftheinvestmentprograms’cost-effec9veness,fiscalcontrol,compliance,andriskenvironments

o  Transparencyandrepor9ngofprogramperformance,funding,andbudge9ngtobeneficiaries,theGeneralAssembly,OfficeofStateBudgetandManagement,andOfficeofStateController

Scope: Investment Practices

9

1.  Macrodriversofinvestmentperformanceandcost-effec9veness,includingbutnotlimitedto:

o  Assetalloca9on

o  Investmentperformance(netofinvestmentfees)

o  Assetclassstructureo  Feesandothercosts

o  Theuseoftradi9onalandvariousalterna9veinvestmentstrategiesandvehicles

o  Foreigncurrencyexposuremanagement

o  Theuseofinternalandexternalinvestmentstrategiesand/ormiddle-andback-officesupport

o  Theuseofconsultants

2.  Policies,procedures,andprocesses,includingbutnotlimitedtothesufficiencyof:

o  Duediligenceandinvestmentmanagerselec9on

o  PorWolioandmanagermonitoringo  Investmentrepor9ngagainstbenchmarks,peers,anduniverses

o  Riskmanagementandcompliance

o  Internalstaff,organiza9on,andgovernance

Tentative Next Steps

10

1.  ReceiveIACfeedbackonScope2.  DSTu9lizebothaninvestmentconsultantandexternallegalcounselthat

wouldworkjointlytodevelopdracworkproductandthefinaldeliverables

3.  InvestmentconsultantandexternallegalcounseldirectlyreceiveinputonfocusareasofinterestfromindividualIACmembers

4.  Investmentconsultantandexternallegalcounselprovideabriefingonwork-in-progressattheSeptember2016andNovember2016IACmee9ngs

5.  DST,investmentconsultant,andexternallegalcounselprovidefinalreporttoGeneralAssemblyandGovernor’sOfficeinDecember2016

Fiscal June 2016 Performance Update (IAC Meeting Supplement)

July 28, 2016

NCRS Asset Allocation As of June 30, 2016

12

MarketValue($000) % Target

RangeRela4ve% Rela4ve$

($000)Minimum MaximumGrowth $50,797,799 58.01% 58.0% 37.0% 71.0% 0.01% $7,151

PublicEquity 37,256,098 42.54% 42.0% 37.0% 47.0% 0.54% 476,663

NonCoreRealEstate 3,906,419 4.46% 3.0% 0.0% 8.0% 1.46% 1,279,317

Opportunis9cFixedIncome 5,259,505 6.01% 7.0% 0.0% 7.5% -0.99% (870,401)

PrivateEquity 4,375,777 5.00% 6.0% 0.0% 8.8% -1.00% (878,428)

Infla4onSensi4ve&Diversifiers 9,639,160 11.01% 11.0% 4.0% 16.0% 0.01% 6,451

CoreRealEstate 4,446,703 5.08% 5.0% 2.0% 10.0% 0.08% 68,199

Infla9onSensi9ve 5,192,457 5.93% 6.0% 2.0% 7.5% -0.07% (61,748)

Mul4-Strategy 1,617,323 1.85% 2.0% 0.0% 4.0% -0.15% (134,078)

Rates&Liquidity 25,515,800 29.14% 29.0% 24.0% 42.0% 0.14% 120,476

Cash 854,436 0.98% 1.0% 0.0% 10.0% -0.02% (21,265)

InvestmentGradeFixedIncome 24,661,364 28.16% 28.0% 24.0% 32.0% 0.16% 141,741

GrandTotal $87,570,083 100.00%

NCRS Unaudited Asset Allocation As of July 26, 2016

13

MarketValue($000) % Target

RangeRela4ve% Rela4ve$

($000)Minimum MaximumGrowth $51,838,504 58.47% 58.0% 37.0% 71.0% 0.47% $417,216

PublicEquity 38,491,352 43.42% 42.0% 37.0% 47.0% 1.42% 1,255,247

NonCoreRealEstate 3,866,215 4.36% 3.0% 0.0% 8.0% 1.36% 1,206,493

Opportunis9cFixedIncome 5,105,790 5.76% 7.0% 0.0% 7.5% -1.24% (1,100,228)

PrivateEquity 4,375,147 4.93% 6.0% 0.0% 8.8% -1.07% (944,296)

Infla4onSensi4ve&Diversifiers 9,481,568 10.69% 11.0% 4.0% 16.0% -0.31% (270,745)

CoreRealEstate 4,306,470 4.86% 5.0% 2.0% 10.0% -0.14% (126,400)

Infla9onSensi9ve 5,175,098 5.84% 6.0% 2.0% 7.5% -0.16% (144,345)

Mul4-Strategy 1,617,323 1.82% 2.0% 0.0% 4.0% -0.18% (155,824)

Rates&Liquidity 25,719,998 29.01% 29.0% 24.0% 42.0% 0.01% 9,354

Cash 978,720 1.10% 1.0% 0.0% 10.0% 0.10% 92,147

InvestmentGradeFixedIncome 24,741,277 27.91% 28.0% 24.0% 32.0% -0.09% (82,793)

GrandTotal $88,657,393 100.00%

NCRS Total Net Portfolio Return vs. Benchmarks As of June 30, 2016

14

1.8

0.8

6.1 6.0

5.55.8

2.0

1.3

5.65.5

5.25.5

2.7

1.2

5.34.9

5.2

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

3Month 1Year 3Year 5Year 10Year 15Year

NCRS Implementa9onBenchmark Long-TermPolicyBenchmark

Growth of a Dollar As of June 30, 2016

15

0.90

1.10

1.30

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

3.30

3.50Jun-97

Dec-97

Jun-98

Dec-98

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Long-TermPolicyBenchmark NCRS

Growth of a Dollar 5 Years Ending June 30, 2016

16 Note:NCRSAlterna9vesincludesthefollowing:CoreRealEstate,Infla9onSensi9ve-PrivateNaturalResources,Infla9onSensi9ve–RealAssetsandOther,Mul9-StrategyInvestments,NonCoreRealEstate,Opportunis9cFixedIncome,PrivateEquity,EquityHedgeStrategiesandtheBlackstoneGraniteFund(ClassB).

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

Feb-14

Apr-14

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

Long-TermPolicyBenchmark NCRS NCRSAlterna9ves

NCRS Net Return Attribution Total Fund Performance vs. Implementation Benchmark 1 Year Ending June 30, 2016

17

0.81

1.34

-0.54

-1.00 -0.50 0.00 0.50 1.00 1.50

PorWolioReturn

PolicyReturn

ValueAdd

TotalFundPerformance

-0.17

-0.37

-0.54

-0.60 -0.50 -0.40 -0.30 -0.20 -0.10 0.00

Alloca9onEffect

Selec9onEffect

ValueAdd

AYribu4on

0.3

0.4

-0.2

-0.2

-0.4

-1.0

-1.0

1.3

0.7

-3.0 -2.0 -1.0 0.0 1.0 2.0

Cash

InvestmentGradeFI

Mul9-Strategy

Infla9onSensi9ve

CoreRealEstate

PrivateEquity

Opportunis9cFI

NonCoreRealEstate

PublicEquity

AvgAc4veWeight

-0.01

0.01

0.01

0.00

-0.06

-0.06

0.04

0.05

-0.14

-0.20 -0.10 0.00 0.10

Alloca4onEffect

0.01

-0.25

0.04

-0.16

-0.17

0.00

-0.05

0.24

-0.02

-0.40 -0.20 0.00 0.20 0.40

Selec4onEffect

NCRS Net Return Attribution Total Fund Performance vs. Implementation Benchmark 5 Years Ending June 30, 2016

18

5.98

5.45

0.53

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

PorWolioReturn

PolicyReturn

ValueAdd

TotalFundPerformance

0.01

0.51

0.53

0.00 0.10 0.20 0.30 0.40 0.50 0.60

Alloca9onEffect

Selec9onEffect

ValueAdd

AYribu4on

0.2

-0.2

-0.1

-0.7

-0.8

-0.6

-0.6

0.3

2.5

-3.0-2.0-1.00.0 1.0 2.0 3.0

Cash

InvestmentGradeFI

Mul9-Strategy

Infla9onSensi9ve

CoreRealEstate

PrivateEquity

Opportunis9cFI

NonCoreRealEstate

PublicEquity

AvgAc4veWeight

-0.02

0.09

0.01

0.06

-0.06

-0.04

0.03

0.01

-0.06

-0.10 -0.05 0.00 0.05 0.10

Alloca4onEffect

0.00

-0.09

0.03

-0.04

-0.08

-0.02

0.19

0.17

0.34

-0.20 0.00 0.20 0.40

Selec4onEffect

NCRS Gross of Fees Return and Risk BNY Mellon Universe: Public Funds > $1B As of June 30, 2016

Universe-PublicFunds>$1BReturns 3Years 5Years 10Years 15Year25thpercen9le 7.19 7.08 6.06 6.46Median 6.72 6.51 5.78 6.1875thpercen9le 5.81 5.86 5.28 5.78NCRS 6.75 6.56 6.00 6.12Percen9leRank(1stpercen9le=highestperformance) 47 45 29 61

Risk 3Years 5Years 10Years 15Year25thpercen9le 7.32 7.92 10.43 9.91Median 6.15 7.23 9.81 9.4675thpercen9le 5.42 6.31 9.04 8.53NCRS 5.42 6.16 8.18 7.77Percen9leRank(99thpercen9le=lowestrisk) 75 78 90 94

19 BNYMellondatapresentedarebasedoncurrentlyavailableinforma9onat9meofpublica9onandmayberevisedsubsequently.

New and Incremental Investment Commitments Since April 2016 IAC Meeting

FundName FirmName Commitment ClosingDate

PublicEquity

BlackRockEAFELCGrowth BlackRock $672,230,334 06/01/16

OldNorthStateHedgedEquityMEN MentaCapital $200,000,000 07/01/16

PrivateEquity

ARCHVentureFundIX ARCHVenturePartners $60,000,000 04/26/16

ThomaBravoXII ThomaBravo $150,000,000 05/11/16

TCVIX TechnologyCrossoverVentures $150,000,000 07/13/16

Non-CoreRealEstate

HarrisonStreetHSREPVI HarrisonStreet $150,000,000 07/26/16

CoreRealEstate

RockpointGrowth&IncomeII Rockpoint $200,000,000 07/18/16

Opportunis4cFixedIncome

CenterbridgeSpecialCreditPartnersIII Centerbridge $150,000,000 07/26/16

Infla4onSensi4ve

DLBlueDiamondFund DoublelineCapital $300,000,000 05/31/16

GSOEnergySMA GSO $150,000,000 07/21/16

Mul4Strategy

None -- -- --20

NCRS Asset Class Net Performance As of June 30, 2016

MarketValue($MM) 1Year 3Years 5Years 10Years 15Years

Growth $50,798 (2.14) 7.28 6.77 4.65 4.95Benchmark1 (2.30) 6.19 5.74 4.24 4.47PublicEquity $37,256 (3.89) 6.65 6.21 4.59 4.90Benchmark2 (3.84) 6.14 5.43 4.11 4.22PrivateEquity $4,376 4.32 10.58 8.79 7.23 4.16Benchmark3 4.33 9.66 9.30 9.22 9.26Non-CoreRealEstate $3,906 12.39 15.73 13.56 3.76 5.09Benchmark4 6.48 9.66 9.52 2.84 6.69Opportunis4cFixedIncome $5,260 (4.40) 2.40 4.83 5.81 -Benchmark5 (3.59) 0.42 0.46 0.18 -

Rates&Liquidity $25,516 6.97 4.97 5.09 6.61 6.47Benchmark6 7.88 5.42 5.33 6.38 6.25IGFixedIncome $24,661 7.25 5.10 5.17 6.65 6.50Benchmark7 8.17 5.54 5.40 6.41 6.27Cash $854 0.84 0.59 - - -Benchmark8 0.15 0.07 0.06 - -

Infla4onSensi4ve&Diversifiers $9,639 0.24 2.00 1.38 0.88 3.37Benchmark9 3.72 4.27 3.17 0.71 3.76Infla4onSensi4ve $5,192 (5.75) (2.67) (3.60) (0.98) 2.48Benchmark10 (3.13) (1.71) (3.05) 2.08 -CoreRealEstate $4,447 8.53 8.64 9.25 4.63 5.92Benchmark11 12.37 11.89 11.57 5.39 6.94

Mul4-Strategy $1,617 (1.46) 5.92 8.53 4.98 -Benchmark12 (3.35) 4.73 6.60 5.69 - 21

NCRS Net of Fees Annual Performance vs. Implementation Benchmark For Fiscal Years Ending June 30

22

18.2

11.09.2

(2.4)(4.3)

7.6

12.0

9.9

7.2

14.8

(2.1)

(14.2)

12.0

18.5

2.2

9.5

15.9

2.30.8

21.7

11.1

7.8

(2.7)(4.5)

7.4

11.310.2

6.6

15.9

(2.8)

(15.1)

11.7

18.6

2.8

7.7

14.6

1.5 1.3

(20)

(15)

(10)

(5)

0

5

10

15

20

25

NCRS Implementa9onBenchmark ActuarialRate

NCRSannualreturnexceededtheactuarialrateofreturnof7.25%in11of19years.

NOTES:

1.TheGrowthBenchmarkisablendofthePublicEquityBenchmark,PrivateEquityBenchmark,Non-CoreRealEstateBenchmark,&Opportunis9cFIBenchmarkatpolicyweights.

2.ThePublicEquityBenchmarkisthedynamicallyweightedcombina9onoftheMSCIACWIIMINet(Long-Only)andabetaadjustedMSCIACWIIMINet(HedgedEquity).3.ThePrivateEquityBenchmarkiscomprisedofthefollowingBurgissGroupPrivateiQindices:50%Buyout,20%VentureCapital,and30%SpecialSitua9onsandDistressedSecuri9es.

4.TheNon-CoreRealEstateBenchmarkiscomprisedofthefollowingBurgissGroupPrivateiQindices:80%U.S.Non-CoreRealEstate(Opportunis9candValue-Added)and20%Non-U.S.Non-CoreRealEstate(Opportunis9candValue-Added).

5.TheOpportunis9cFixedIncomeBenchmarkisacomprisedof50%HFRXDistressedSecuri9esIndex,20%HFRXRela9veValueIndex,15%CreditSuisseLeveragedLoanIndex,and15%BOAMLHighYieldIndex*.

6.TheRates&LiquidityBenchmarkisablendoftheIGFixedIncomeBenchmarkandtheCashBenchmarkatpolicyweights.

7.TheIGFixedIncomeBenchmarkiscomprised10%iMoneyNetFirstTierIns9tu9onalMoneyMarketFundsNetIndexand90%customBOAMLCoreInvestmentGradeIndex*.ThecustomBOAMLcoreindexcomprisedofthefollowingweigh9ngs:30%BOAML5+YearsGovernments,35%BOAML5+YearsInvestmentGradeCorporates,and35%BOAMLMortgageMaster.

8.TheCashBenchmarkistheiMoneyNetFirstTierIns9tu9onalMoneyMarketFundsNetIndex.

9.TheInfla9onSensi9ve&DiversifiersBenchmarkisablendoftheInfla9onSensi9veBenchmarkandtheCoreRealEstateBenchmarkatpolicyweights.

10.TheInfla9onSensi9veBenchmarkisthedynamicallyweightedcombina9onoftheBankofAmericaMerrillLynch1-3YearsU.S.Infla9on-LinkedTreasuryIndex(TIPS)*,theBloombergCommodi9esIndex(Commodi9es),andacombina9onofthebenchmarksofinvestmentsclassifiedwithinPrivateNaturalResourcesorOtherRealAssetsandDiversifiers.

11.TheCoreRealEstateBenchmarkiscomprisedof80%NCREIFODCENetand20%FTSEEPRANAREiTGlobalIndex.

12.TheMul9-StrategyBenchmarkiscomprisedofadynamicallyweightedcombina9onoftheHFRXED:Mul9-StrategyIndex,netoffees,andthemarketvalueweightedbenchmarksforanyothertotalfundstrategieswithinthePorWolio.

23

Alldatapresentedarebasedoncurrentlyavailableinforma9onat9meofpublica9onandmayberevisedsubsequently.

Thank You!

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