Small Cap Value Review - Bay County, Michigan · T: 213-430-1000 F: 213-430-1001 725 S. Figueroa Street 39th Floor Los Angeles, CA 90017 Private and Confidential Presentation Small

T: 213-430-1000

F: 213-430-1001

725 S. Figueroa Street

39th Floor

Los Angeles, CA 90017

www.hwcm.com

Private and Confidential

Presentation

Small Cap Value Review

Bay County Employees' Retirement System

June 12, 2018

Pat McMenaminManaging Director

HOTCHKIS & WILEY Page 1

Competitive Advantages

Boutique organizational

structure

• 37-year history, $31 billion AUM, extensive resources, investment focus

• Employee ownership promotes stability, aligns interests; 20 investment professionals own equity

• Team structure, integrated research

Disciplined, experienced

investors

• Portfolio Coordinators have 20+ year tenure

• Exploit irrational market behavior

In-house research • 28-person research team with 20+ years experience

• Take advantage of limited research in small caps

Why Hotchkis & WileyAs of April 2018


People

Portfolio Manager Tenure – 20+ Years

Culture

The typical staff

member has 22

years industry

experience and

has spent two

thirds of their

career at H&W

As of April 2018

Small Cap Co – Portfolio Managers Industry Exp. H&W Tenure

Jim Miles Small Cap Co – Portfolio Manager 29 yrs 22 yrs

David Green, CFA Small Cap Co – Portfolio Manager 27 20

Senior Research Staff Focus

George Davis, Jr. – CEO Capital Goods, Financials 33 29

Ray Kennedy, CFA Credit Specialist 32 9

Sheldon Lieberman Energy, Technology 32 23

Patty McKenna, CFA Consumer, Healthcare 31 22

Mark Hudoff Credit Specialist 31 8

Patrick Meegan, CPA Financials, Healthcare 27 19

Stan Majcher, CFA Energy, Financials 24 21

J.P. Flagler, CFA Capital Goods, Healthcare 23 19

Hunter Doble, CFA Energy, Financials 22 12

Judd Peters, CFA Capital Goods, Energy, Technology 20 18

Scott McBride, CFA – President Consumer, Financials, Healthcare, Technology 19 16

Jason Chan, CFA Consumer, Healthcare, Technology 18 17

Scott Rosenthal Capital Goods, Energy, Financials 17 10

Noah Mayer, CFA Capital Goods, Consumer, Technology 17 10

Richard Mak, CFA Credit Specialist 17 4

Mark Schmidt Capital Goods, Healthcare 15 12

Ryan Thomes, CFA Small Cap, Generalist 15 10

Dan McKenzie, CFA Credit Specialist, Capital Goods, Financials 13 13

Doug Campbell Energy 10 <1

Marshall Cowden, CFA Energy, Technology 8 2

This team is supported by 6 members of our Research Associate Program


Investment Culture Facilitates Conviction

H&W has a rare combination of industry experience and tenure at the firm

Our experience working together has cultivated a healthy level of communication and trust across our team

This is important as it provides an environment that encourages non-consensus /high conviction views

As of March 2018

(latest available)

96 95 94 93 92

81 81 80

0

20

40

60

80

100

Active Share for H&W Equity Strategies

10-Year Average

Passive

Highly

Active

*Since inception (7/1/11)

**Since inception (1/1/16)

Representative H&W portfolios. Client portfolio holdings may vary due to different restrictions, cash flows, and other relevant considerations. Active share is the extent to which a portfolio differs from the benchmark. Small Cap Value & Small Cap

Diversified Value - Russell 2000 Value; Large Cap Fundamental Value & Large Cap Diversified Value - Russell 1000 Value; Mid-Cap Value - Russell Midcap Value; Global Value - Russell Developed; International Value - Russell Developed ex-

US; and Value Opportunities - S&P 500. Past performance is no guarantee of future performance.

16 Page 4HOTCHKIS & WILEY Page 4

See Endnotes for selection criteria

Representative Firm-wide Client List

We have a diverse array of clients

As of April 2018

Corporate/Partnership Government/Public Non-Profit

American Airlines Bay County Employees’ Retirement System Jewish Federation of Greater MetroWest N.J.

The Boeing Company Florida League of Cities, Inc. David X. Marks Foundation

Consolidated Rail Corporation Minnesota State Board of Investment MedStar Health, Inc.

Maersk Inc. Jackson County, Missouri Revised Pension Plan The Samuel Roberts Noble Foundation, Inc.

Minnesota Life Insurance Company Nebraska Public Power District Employee Ret. Plan Portico Benefit Services

Monsanto Company Oklahoma Law Enforcement Retirement System Rochester Regional Health

Salt River Project Oklahoma Teachers’ Retirement System University of Dayton

SKL Investment Group, LLC San Diego County Employees Ret. Association Wespath

Southern California Permanente Medical Grp Santa Barbara County Employees’ Ret. System

Square Deal Growth, LLC

Torstar Corporation

Sub-Advisory Taft-Hartley

Alma H&W US Large Cap Value Equity Fund Alaska Electrical Trust Funds

American Beacon Balanced Fund ILWU-PMA Benefit Plans

American Beacon Diversified Fund OR-WA Carpenters-Employers Pension Trust Fund

American Beacon Large Cap Value Fund

American Beacon Small Cap Value Fund

Aon Hewitt Investment Consulting

AST H&W Large-Cap Value Portfolio (Prudential)

Mercer Investment Fund 2

Momentum Global Investment Mgmt Ltd.

Nomura Multi Managers Fund III - US Equity

Vanguard Windsor II Fund


Disciplined purchase and sell criteria with rigorous adherence to value

Research team with tremendous depth and breadth to exploit market inefficiencies

Focus on long-term earnings potential

Investment Philosophy

Limited Wall Street Coverage

• Fewer analysts per company

• Stale, cursory reports

• Junior analysts

In-House Research Staff

28-person investment staff

Industry experts

Proprietary ideas

Over 1,200 Company files

Out-of-Favor Industries/Companies

• Excessive fear or optimism

• Temporary “issues”

Manager/Team Tenure

Over twenty years

Disciplined process

Focus on normal earnings

Avoid fads

Mean Reversion

Stars Fade, Laggards Improve

2 4 6 8 10 12 14

Laggards

Stars

High

Low

RO

E

Year……..

Avg

OPPORTUNITY H&W ADVANTAGE

22

6

S&P 500 R2000

72% Less

Coverage in

Small Caps

Median Number of Analysts per Company

Limited Wall Street Coverage


Disciplined Investment Process

Consistent, repeatable process

Small Cap Portfolio Coordinators

David Green

Jim Miles

Idea

GenerationIn-depth Evaluation Recommend

2,000

Stocks

400

Stocks

200

Stocks

150

Stocks

50-80 Stock

Portfolio

Portfolio

Construction

• Screens

• H&W Staff

• Contacts

• Initial Review

• Industry Evaluation

• Risk Factors

• Company Specifics

• Balance Sheet Review

• Cash Flow Analysis

• Normal Earnings Estimate

• Peer Review

• Challenge Assumptions

• Challenge Thesis

• Other Risks

• Buy, Monitor, Sell

• Return Potential

• Risk Profile

• Diversification

• Changes to Thesis

• Guidelines/Compliance


Investment Philosophy – Risk

We seek to maximize risk-adjusted returns by reducing the potential for permanent capital loss.

■ Purchase at significant discount to intrinsic value

■ Financial strength

■ Predictable business model

■ Capital allocation discipline by management

■ Liquidity


Must sell if stock reaches fair value target

Reasons for selling

• Valuation relative to opportunity set

• Portfolio diversification

• Deterioration of financial strength or other business

fundamentals

Considerations

• Can we replace it with a better idea?

• Can we improve the risk characteristics of the portfolio?

• Has our view of the company fundamentals changed for

the worse?

We employ a disciplined, consistent sell discipline

Sell Criteria


Individual Holdings

• Overlooked stocks due to temporary/cyclical factors

• Undervalued stocks based on price to normal earnings

Small Cap Value Portfolio

• Generally 50-80 stocks that have been thoroughly

researched

• Top 10 holdings will represent 30% to 40% of portfolio

• Diversified (limit at purchase: 6% stock, 15% industry)

• Small cap exposure

• Value exposure

What to Expect


1As of March 31, 2018 - Representative Small Cap Value portfolio. Client portfolio holdings may vary due to different restrictions, cash flows, and other relevant considerations. Active share is the extent to which the portfolio differs from the

Russell 2000 Value Index. Certain information presented is based on proprietary or third-party estimates, which are subject to change and cannot be guaranteed.

CharacteristicsAs of April 2018

Characteristic Portfolio Rus 2000 Val Rus 2000

Price/Normal Earnings 7.1x 15.2x 17.4x

Projected P/E (FY2) 11.6x 13.7x 15.1x

Price/Book 1.3x 1.5x 2.2x

Dividend Yield 1.6% 2.1% 1.4%

Payout Yield 3.1% 2.8% 2.1%

Wtd Avg Market Capitalization (millions) $2,660 $2,085 $2,558

Median Market Capitalization (millions) $1,700 $761 $879

# of Holdings 59 1,391 1,974

Turnover (1 Yr / 5 Yr) 30% / 40%

Active Share (Current / 10-Year Avg)1 96 / 96

Bay County Employees' Retirement System Market Value: $9,994,966


Sector Weights

0

5

10

15

20

25

30

35

Financials Industrials EnergyReal

EstateConsumer

DiscInfo Tech

HealthCare

Utilities MaterialsTelecomServices

ConsumerStaples

Portfolio 30.7 20.0 16.5 8.2 8.1 5.5 4.6 3.5 0.1 0.0 0.0

Rus 2000 Val 31.3 12.1 7.3 9.9 10.8 8.6 6.6 6.3 4.3 0.5 2.2

Rus 2000 18.0 14.8 4.2 6.4 12.1 17.2 16.6 3.4 4.3 0.6 2.4

Sector Weights (%)

As of April 2018


Performance

Annualized Total Returns (%)

-2

0

2

4

6

8

10

12

14

YTD 1 Year 3 Year 5 Year 10 Year Since Inception

Portfolio 2.6 9.2 6.5 12.9 12.1 10.1

Rus 2000 Val -0.9 6.5 9.3 10.4 8.5 8.4

Rus 2000 0.8 11.5 9.6 11.7 9.5 8.9

As of April 2018

Commencement of portfolio: 12/1/03

Performance shown gross of fees. Periods over one year are average annual total returns. Past performance is no guarantee of future performance.


Year-to-Date Performance Attribution (%)

Portfolio – Equity Rus 2000 Val Attribution Analysis

SectorAverage

Weight Return

Average

Weight Return

Sector

Allocation

Stock

Selection

Total

Effect

Energy 14.82 17.79 6.69 1.85 0.34 2.28 2.62

Financials 31.31 7.07 31.23 1.46 -0.02 1.72 1.70

Information Technology 6.29 8.11 8.86 -4.39 0.12 0.82 0.94

Health Care 4.37 11.74 6.68 4.68 -0.13 0.33 0.20

Real Estate 8.37 -4.59 9.65 -5.93 0.12 0.06 0.18

Consumer Staples 0.00 0.00 2.53 -6.34 0.15 0.00 0.15

Materials 0.07 32.85 4.51 -2.88 0.08 0.02 0.10

Utilities 3.50 -1.24 6.15 -1.77 0.01 0.02 0.04

Telecommunication Services 0.00 0.00 0.48 -3.78 0.01 0.00 0.01

Consumer Discretionary 9.24 -12.78 10.94 -1.28 0.02 -1.17 -1.15

Industrials 22.02 -7.03 12.28 -2.27 -0.08 -1.12 -1.21

Total 0.63 2.96 3.59

Returns are calculated using daily holding information, gross of fees, within Bloomberg. Returns calculated using this buy-and-hold methodology can differ from actual portfolio returns due to intraday trades, cash flows, accrued/miscellaneous

income, corporate actions, and trade price and closing price difference of any given security. For the portfolio’s total performance attribution, interaction effect is combined with stock selection. Past performance is no guarantee of future performance.

As of April 2018


Historical Performance

Source: H&W

Small Cap Value Composite, gross of fees. Returns on an annualized and/or cumulative basis for other periods not shown may result in underperformance or differ significantly; additional disclosures provided in Endnotes. Past performance is no

guarantee of future performance.

Small Cap Value

As of April 2018

3.2

1.9

2.1

5.64.5

2.9

2.4

2.1

2.1

1.6

2.0

2.7

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Last 20.8 Yrsthru 4/30

10 Y

ear

Ann

ualiz

ed R

etur

n

Outperformance Over Investment CycleRolling 10 Year Periods Beginning July 1997

Russell 2000 Value Excess Return

15.3

9.3

7.1

13.1

12.1

9.4

11.7

10.3

9.0

6.7

11.6

7.9


Historical Performance

Co-manager tenure: July 1, 1997 through April 30, 2018

For illustration purposes only. The “Growth of $50 million” chart reflects a hypothetical investment in the Small Cap Value (SCV) strategy using the SCV composite performance returns (gross of fees) and assumes reinvestment of dividends and

capital gains. Net of fee performance returns will reflect lower performance results; additional disclosures provided in Endnotes. Past performance is no guarantee of future performance.

As of April 2018

Small Cap Value

0

50

100

150

200

250

300

350

400

450

500

Small Cap Value Composite

Russell 2000 Value

Russell 2000

491

297

256

Growth of $50 million

Small Cap Value Composite (7/1/97 - 4/30/18)


Time horizon and market timing

For equity investors, the longer the time horizon the lower the risk of loss

Timing the market can be dangerous

Sources: S&P, BofA ML US Equity & Quant strategy

Past performance is no guarantee of future performance.

Decade Price Return (%) Ex 10 Best Days

Each Decade

1930s -42% -79%

1940s 35% -14%

1950s 257% 167%

1960s 54% 14%

1970s 17% -20%

1980s 227% 108%

1990s 316% 186%

2000s -24% -62%

2010s 121% 52%

Entire

Period11415% 49%

46%

37%

30%

20%

15%

10%

4%

0%

1 Day 1 Month 1 Qtr 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr

Probability of Investment Loss

S&P 500 1971-2017


Value spreads reflect interesting opportunity

Value stocks trade at a large discount to growth stocks based on P/B ratios

Sources: H&W, Bloomberg

Past performance is not indicative of future performance.

As of March 2018

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Russell 2000 Value

Price-to-Book Ratio

History

Russell 2000 Growth

Value spreads have widened

1.5x

4.3x


David Green, CFA Jim Miles

Portfolio Manager and Principal

20 Years with H&W

27 Years Industry Experience

Equity Owner

Portfolio Manager and Principal

22 Years with H&W

29 Years Industry Experience

Equity Owner

In his role as portfolio manager, Mr. Green plays

an integral part in the investment research review

and decision-making process. He coordinates the

day-to-day management of Small Cap Value,

Value Opportunities and International Value

portfolios, as well as represents these strategies to

current and prospective clients. He also provides

expertise and insight into consumer, healthcare,

special situations and technology sectors. Prior to

joining the firm, Mr. Green worked as a senior

equity analyst with Goldman Sachs Asset

Management on the Broad Market Value team.

Before joining Goldman Sachs, he worked as an

equity analyst with Prudential Investment

Corporation where he began his investment career

in 1990. Mr. Green's investment experience is

focused primarily on analysis of publicly traded

equities.

Mr. Green, a CFA charterholder, received his BA in

Economics with honors from the University of

California, Berkeley and is a member of Phi Beta

Kappa.

In his role as portfolio manager, Mr. Miles plays an

integral part in the investment research review and

decision-making process. He coordinates the day-

to-day management of Small Cap Value portfolios

and represents the firm’s investment strategies to

current and prospective clients. He also provides

expertise and insight into the consumer, healthcare

and technology sectors. Prior to joining the firm,

Mr. Miles was a vice president in corporate finance

at BT Securities Corporation, an affiliate of

Bankers Trust. He specialized in lending to and

arranging debt for highly leveraged companies.

Mr. Miles received his BS in Mechanical

Engineering and MS in Engineering from Stanford

University and MBA from the University of

California, Los Angeles.

Investment Team Biographies


Performance Schedule – Small Cap Value

Hotchkis and Wiley Capital Management, LLC (the “Firm” or “H&W”) claims compliance with the Global Investment

Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards.

H&W has been independently verified for the periods October 9, 2001 through December 31, 2016. Verification

assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on

a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in

compliance with the GIPS standards. The Small Cap Value Composite has been examined for the periods October 1,

1985 through December 31, 2016. The verification and performance examination reports are available upon request.

H&W is an independent investment management firm registered with the U.S. Securities and Exchange Commission

and manages value equity and high yield assets for institutional and mutual fund investors. Its predecessor firm was

established in 1980. The equity team of the predecessor firm established H&W in October 2001. The performance

history of Firm composites prior to October 9, 2001 is comprised of the performance history of the accounts managed

by the predecessor firm. There has been no material change in the investment strategy related to these products as a

result of the establishment of H&W.

H&W refers to itself as a “registered investment adviser” in materials distributed to current and prospective clients. As a

registered investment adviser with the SEC, H&W is subject to the rules and regulations adopted by the SEC under the

Investment Advisers Act of 1940, as amended (the “Advisers Act”). Registration as an investment adviser is not an

indication that H&W or its directors, officers, employees or representatives have attained a particular level of skill or

ability.

Valuations and returns are stated in U.S. dollars. Investment returns include reinvestment of dividends, interest, and

capital gains. Gross performance results are presented before management and custodial fees but after all trading

expenses. Net performance results are presented after actual management fees (including performance-based fees if

applicable) and all trading expenses but before custodial fees. H&W’s management fees are described in Part 2A of its

Form ADV. The standard Small Cap Value management fee schedule is 100 basis points on assets managed. Internal

dispersion is calculated using the equal-weighted standard deviation of all portfolios that were included in the

Composite for the entire year. A list of composite descriptions and policies for valuing portfolios, calculating

performance, and preparing compliant presentations are available upon request. Past performance is no guarantee of

future performance.

Composite: The Composite includes all Small Cap Value discretionary accounts. The Small Cap Value investment

strategy seeks capital appreciation primarily through investments in common stocks of small cap U.S. companies. The

typical market cap range is $100 million to $4 billion. Accounts with significant cash flows (> 10% of beginning of the

month assets for the periods January 1, 2006 through December 31, 2010, and > 25% effective January 1, 2011) are

excluded from the respective month’s composite calculation and included in the subsequent month. (Composite

creation: 1985)

Indexes: The Russell 2000 Index (“R2000”), an unmanaged index, measures the performance of the 2,000 smallest

companies in the Russell 3000 Index. The Russell 2000 Value Index (“R2000V”) measures the performance of

those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The indexes

assume reinvestment of dividends and capital gains, and assumes no management, custody, transaction or other

expenses. The value disciplines used in managing the accounts in the Composite may prevent or limit investment in

major stocks in the R2000 and R2000V and returns may not be correlated to the indexes. Benchmark returns are not

covered by the report of independent verifiers.

The 3-year annualized standard deviation measures the variability of the composite (using gross returns) and the

benchmark(s) returns over the preceding 36-month period ended:

% Total

Return

Gross of

Fees

% Total

Return

Net of

Fees

% Total

Return

R2000

% Total

Return

R2000V

# of

Accts

Internal

Dispersion

(%)

Comp.

Assets

($mm)

Total Firm

Assets

($mm)

2017 8.7 8.0 14.6 7.8 13 0.4 2,263 32,037

2016 21.5 20.7 21.3 31.7 17 0.6 2,286 29,952

2015 -7.5 -8.1 -4.4 -7.5 10 0.5 2,130 28,367

2014 13.2 12.4 4.9 4.2 8 0.6 2,265 32,190

2013 48.3 47.3 38.8 34.5 6 0.7 1,829 25,962

2012 24.4 23.6 16.4 18.1 6 1.0 1,092 18,781

2011 -10.1 -10.7 -4.2 -5.5 7 0.4 881 16,171

2010 44.3 43.4 26.9 24.5 8 0.5 926 18,148

2009 63.9 62.9 27.2 20.6 7 n/m 641 14,494

2008 -43.5 -43.9 -33.8 -28.9 8 0.3 305 10,807

n/m – not considered meaningful for composites with five accounts or less for the full year.

3-Year Annualized

Standard Deviation (%)

Composite R2000 R2000V

2017 16.2 13.9 14.0

2016 17.0 15.8 15.5

2015 14.4 14.0 13.5

2014 12.8 13.1 12.8

2013 18.3 16.5 15.8

2012 22.7 20.2 19.9

2011 29.4 25.0 26.0


Endnotes

Hotchkis & Wiley selected the representative firm-wide clients listed based on a variety of objective criteria including the type (Corporate/Partnership, Non-Profit, Government/Public, Taft-Hartley and Sub-Advisory), size and strategy of the account. It is

not known whether or not the listed clients approve or disapprove the services provided by Hotchkis & Wiley.

Investment returns include reinvestment of dividends, interest and capital gains. Valuation is based on trade-date information. The investment returns presented gross of fees do not reflect the deduction of investment advisory fees. Actual returns will

be reduced by the amount of investment advisory fees and any other expenses, such as custody fees, incurred in the management of the account.

Over a ten-year period, for example, if a client had experienced gross returns of 10% per year, its initial US$1,000 investment would have grown to US$2,594.

Small Cap Value: If the client paid an annual investment management fee of 100 basis points, its net compounded returns would have averaged 9.00% per year and its investment would have grown to US$2,367.

Standard fees are described in Part 2A of the Form ADV of H&W.

All investments contain risk and may lose value. Investing in foreign as well as emerging markets involves additional risk such as greater volatility, political, economic, and currency risks and differences in accounting methods.

Investing in smaller, medium-sized and/or newer companies involves greater risks not associated with investing in large company stocks, such as business risk, significant stock price fluctuations and illiquidity.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services, LLC (“S&P”) and is licensed for use by Hotchkis & Wiley

(“H&W”). All rights reserved. Neither S&P nor MSCI is liable for any errors or delays in this report, or for any actions taken in reliance on any information contained herein. Russell Investment Group is the source and owner of the Russell Index data

contained herein (and all trademarks related thereto), which may not be redistributed. The information herein is not approved by Russell. H&W and Russell sectors are based on the Global Industry Classification Standard by MSCI and Standard and

Poor’s.

©2018 Hotchkis & Wiley. All rights reserved. Any unauthorized use or disclosure is prohibited. This presentation is for general information only and should not be relied on for investment advice or recommendation of any particular security, strategy, or

investment product. Opinions expressed and data included in this presentation are subject to change without notice. Any forecasts made cannot be guaranteed. Information obtained from independent sources is considered reliable, but H&W cannot

guarantee its accuracy or completeness. Certain information presented is based on proprietary or third-party estimates, which cannot be guaranteed and are subject to change. Investing in value stocks presents the risk that value stocks may fall out of

favor with investors and underperform growth stocks during given periods. All investments contain risk and may lose value. Private meeting use only and not for public distribution.

Past performance is no guarantee of future performance.

Documents

Small Cap Value Review - Bay County, Michigan · T: 213-430-1000 F: 213-430-1001 725 S. Figueroa Street 39th Floor Los Angeles, CA 90017 Private and Confidential Presentation Small