State of New Mexico · 2015-10-29 · Defined Contribution Performance Evaluation Report State of New Mexico - Deferred Compensation Plan Mercer 3 Macro Environment: Currencies Performance

State of New MexicoDeferred Compensation Plan

Defined Contribution Performance EvaluationFourth Quarter 2014

Services provided by Mercer Investment Consulting, Inc.

Defined Contribution Performance Evaluation Report State of New Mexico - Deferred Compensation Plan

Mercer i

Contents

Market Environment ............................................................................................................................................................................................................ 1

Summary .......................................................................................................................................................................................................................... 11

Fund Profiles .................................................................................................................................................................................................................... 24

Appendix


Mercer 1

Mark et Envir onm ent

5.24.94.94.85.05.9

9.710.19.4

0.41.8

-3.9-3.6-2.3

-4.5

0.01.8

-0.51.91.8

-1.0-1.5

-5.7

12.98.1

0.8-12.1

-27.7

-40 -30 -20 -10 0 10 20 30 40

Russell 3000S&P 500

Russell 1000Russell 1000 Growth

Russell 1000 ValueRussell Midcap


Russell 2000 Value

MSCI ACWIMSCI ACWI Small CapMSCI AC World ex US

MSCI EAFEMSCI EAFE Small Cap

MSCI EM

Barclays T-Bill 1-3 monthsBarclays Aggregate

Barclays TIPS 5-10 yrsBarclays Treasury

Barclays CreditBarclays High Yield

Citi WGBIJP GBI-EM Global Div.

NAREIT Equity REITsNAREIT Global REITsHFRI FOF Composite

Bloomberg Commodity TRS&P GSCI Commodity

Returns (%)

12.613.713.213.013.513.2

4.95.6

4.2

4.21.8

-3.9-4.9-4.9

-2.2

0.06.0

2.85.0

7.52.5

-0.5-5.7

28.015.9

3.2-17.0

-33.1

-40 -30 -20 -10 0 10 20 30 40

Russell 3000S&P 500


Russell 1000 ValueRussell Midcap


Russell 2000 Value

MSCI ACWIMSCI ACWI Small CapMSCI AC World ex US

MSCI EAFEMSCI EAFE Small Cap

MSCI EM


Barclays TIPS 5-10 yrsBarclays Treasury

Barclays CreditBarclays High Yield

Citi WGBIJP GBI-EM Global Div.

NAREIT Equity REITsNAREIT Global REITsHFRI FOF Composite

Bloomberg Commodity TRS&P GSCI Commodity

Returns (%)

Performance Summary: Quarter in ReviewMarket PerformanceFourth Quarter 2014

Market PerformanceYTD

Source: Standard & Poor's, Russell, MSCI Barra, NAREIT, Bloomberg Source: Standard & Poor's, Russell, MSCI Barra, NAREIT, Bloomberg

DOMESTIC EQUITY

INTERNATIONAL EQUITY

FIXED INCOME

ALTERNATIVES

DOMESTIC EQUITY

INTERNATIONAL EQUITY

FIXED INCOME

ALTERNATIVES


Mercer 2

World Economic Growth(Projections as of December 2014)

Macro Environment: Economic Review

Source: Bureau of Economic Analysis

Annual GDP Growth

Source: Bloomberg

§ Developed world growth is likely to improve in 2015 due to lower energyprices and less fiscal tightening. However, growth will remain unevenacross regions. The expansion is likely to be the strongest in the US andthe UK, while the Eurozone and Japan are likely to struggle.

§ US GDP is forecast to expand by 3% in 2015, which would be the bestyear for growth since 2005. The unemployment rate has declined to 5.6%,which is in-line with historical averages, although broader measures stillsuggest some labor slack. While the Fed is likely to raise rates in 2015, weexpect that it will do so gradually as inflationary pressures remainsubdued.

§ The 2015 outlook for the Eurozone is modestly better than 2014 due toreduced fiscal tightening, a weaker euro, and a stronger global economy.However, the region is forecast to expand by only 1.1% in 2015. WhetherQE and structural reforms will be implemented and prove sufficient athelping the region avoid a prolonged period of weakness remains to beseen.

§ Consumption tax increases slowed growth more than expected in Japan in2014. While the weaker yen has improved the near-term outlook, furtherstructural reforms of the corporate sector and labor markets are needed toimprove the secular growth outlook.

§ The EM growth outlook is mixed. Stronger growth in developed marketsand weaker currencies should help exports. However, there is also a widedivergence across countries. Countries with a high potential for structuralreform (India, Mexico, Indonesia) are likely to enjoy better prospects thannon-reformers (Brazil, South Africa, Russia). The sharp fall in oil prices willalso have an uneven impact. Energy importers (Asia) will benefit at theexpense of energy exporters such as Russia and Middle Easterncountries.

§ Chinese growth is likely to slow further in 2015; however, a hard landingremains unlikely given China’s ability to provide stimulus and recapitalizethe banking sector. The secular outlook depends on the ability toimplement structural reforms in order to transition the economy towardconsumption.

2.33.0

0.3

1.5

-0.4

1.30.4

7.3

5.4

0.20.5

3.02.6

1.0 1.20.4

1.80.8

7.0

5.5

0.9

-1.2-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

US

UK

Japa

n

Ger

man

y

Italy

Spai

n

Fran

ce

Chi

na

Indi

a

Braz

il

Rus

sia

(%)

2014 (f)

2015 (f)

-4

-2

0

2

4

6

8

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

(F)

(%)


Mercer 3

Macro Environment: CurrenciesPerformance of Foreign Currencies versus the US Dollar

Currency Valuation versus US Dollar (Based on Relative PPP)

Source: Bloomberg

Source: Bloomberg

Undervalued relative to the dollar

Overvalued relative to the dollar

§ On a trade-weighted basis, the US dollar advanced 5.6% in the fourthquarter, taking its 2014 gain to 10.3% and marking the strongestcalendar year performance since 1982. The yen and euro were hitparticularly hard, tumbling 8.4% and 4.2% in the fourth quarter, and bothpushing 2014 losses to 12.0%. Commodity sensitive currencies andemerging market currencies were also pummeled. Speculators arepositioned very long the dollar, posing the risk of a short-term countertrend move. However, we believe the dollar is likely to continue toappreciate over the intermediate-term.

§ Monetary policy should continue to support the dollar. The Fed hasended QE3 and expected rate hikes will likely lead to a US yieldadvantage, making the dollar more attractive to foreign investors and adestination for carry trade flows.

§ Japan’s reflationary efforts largely hinge on a weaker yen, and in thefourth quarter the BOJ intensified its QE program. In Europe, weak GDPgrowth and deflationary fears may push the ECB to engage in QE. Ofcourse, an excessively strong dollar could hinder growth and inflationprompting the Fed to slow the pace of interest rate normalization.

§ The dollar does face a few headwinds. It now appears modestly richbased on purchasing power parity (PPP). Additionally, the US continuesto run a current account deficit. The US is also likely to experience higherinflation than most other developed markets over the long-term.

§ After the 2014 rally, we have less conviction in the strength of the dollarthan we did a year ago. However, we expect further, albeit more modest,appreciation going forward, fueled by a powerful monetary policytailwind.

-0.1-1.1

-1.7-3.6-3.8-3.9-3.9

-4.2-4.2

-6.3-8.0

-8.4-9.0

-5.0-2.5

-1.9-8.6

-5.7-10.2

-5.9-4.2

-12.0-8.3

-11.1-12.0-11.6

-15 -10 -5 0 5

New Zealand DollarChinese YuanIndian Rupee

Canadian DollarTaiwan Dollar

Swiss FrancGB Pound

Korean WonEuro

Australian DollarBrazilian RealJapanese YenMexican Peso

Returns (%)Quarter2014

-40

-20

0

20

40

60

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

(%)

Euro UK Pound

Yen Swiss Franc


Mercer 4

Asset Class: US Equities – Style, Sector, Cap PerformanceStyle and Capitalization Market Performance

Sector Performance

Source: Standard & Poor's, Russell, Bloomberg

Source: Russell 1000 GICs Sector

Broad MarketUS equities delivered strong returns for the quarter and the year. TheRussell 3000 Index advanced 5.2% in the fourth quarter and gained 12.6%in 2014. However, returns varied significantly by sector and capitalization.

Market Cap§ Large Caps: The S&P 500 rose by 4.9% during the fourth quarter and

returned 13.7% for the year. While large cap stocks lagged mid andsmall cap stocks in the fourth quarter, they outperformed by 50 basispoints and 880 basis points, respectively, in 2014.§ Mid Caps: The Russell Midcap Index gained 5.9% during the fourth

quarter and returned 13.2% for the year. Mid caps outpaced large capsby 100 basis points in the fourth quarter, but lagged small caps by 380basis points. For the year, mid caps trailed large caps by 50 basispoints, but outperformed small caps by 830 basis points.§ Small Caps: Small cap stocks surged in the fourth quarter, gaining 9.7%.

For the year, small cap stocks only advanced 4.9%, underperformingboth large caps and mid caps.

Style§ Value vs. Growth: While value outperformed growth within large and

mid caps in the fourth quarter, small cap growth stocks were the leaderfor the quarter, spiking 10.1%. For the year, mid cap value was the topperforming style gaining 14.7%, while small cap value stocks were thelaggard, returning only 4.2%.

Sector§ There was a wide dispersion in sector returns in the fourth quarter and in

2014. Energy stocks plummeted by 12.2% during the quarter, whileutilities spiked by 12.7%. For the year, energy stocks fell by 8.6%. Theutilities, health care, and information technology sectors were the topperformers, earning 27.5%, 25.7%, and 18.7%, respectively.

5.2

4.9

4.9

4.8

5.0

5.9

5.8

6.1

9.7

10.1

9.4

12.6

13.7

13.2

13.0

13.5

13.2

11.9

14.7

4.9

5.6

4.20 5 10 15 20

Russell 3000

S&P 500

Russell 1000

Russell 1000 Growth

Russell 1000 Value

Russell Midcap

Russell Mid Growth

Russell Mid Value

Russell 2000

Russell 2000 Growth

Russell 2000 Value

Returns (%)

Quarter2014

12.7

8.4

8.3

7.8

7.4

6.7

4.9

-1.1

-4.2

-12.2

27.5

9.9

16.0

25.7

15.0

8.9

18.7

6.8

2.5

-8.6

-20 -15 -10 -5 0 5 10 15 20 25 30 35

Utilities

Consumer Discretionary

Consumer Staples

Health Care

Financials

Industrials

Info Tech

Materials

Telecomm Services

Energy

Returns (%)

Quarter

2014


Mercer 5

Asset Class: US Equities – Valuation ReviewS&P500 – P/E Ratio

S&P500 – Estimated Equity Risk Premium1

Versus Long-Term Treasuries

Source: S&P, Bloomberg, Mercer

1 Definitions:Shiller’s P/E= Current S&P 500 price/average 10-year real earningsNormalized P/E= Current S&P 500 price/(current trailing twelve month sales * 6.6% profit margin)Equity Risk Premium= Earnings yield (1/PE) minus the real yield on long-term Treasuries

Source: S&P, Bloomberg, Mercer

§ Valuations ticked higher in the fourth quarter as price gains outpacedearnings growth. The P/E ratio on trailing earnings moved from 19.1 to19.4, which is above the median of 17.4 since 1956. Valuations are muchhigher based on measures that adjust for record high profit margins. TheP/E ratio based on average 10-year real earnings (Shiller’s methodology)finished the quarter at 26.6, compared to a median of 19.2 since 1956.

§ The Shiller P/E for the S&P 500 is very high compared to historicalmeasures, but current values are negatively impacted by a 2001 changein GAAP accounting standards, which significantly reduced profits duringthe financial crisis. The ratio based on MSCI’s measure of earnings,which have been consistent throughout history, stands at a morereasonable 23.7.

§ The US has emerged as a global growth leader and current readings ofthe ISM Business Activity Composite suggest an improvement in revenuegrowth, which should support further earnings growth. Additionally, loweroil prices should improve profitability through lower input costs, andcorporations continue to reduce their share count through stockbuybacks.

§ However, the stronger dollar could prove a powerful headwind as S&P500 corporations generate over 40% of their sales abroad. Additionally,further improvement in the labor market could lead to higher labor costsand reduced margins.

§ On a relative basis, valuations remain fairly attractive against bonds. Aconservative estimate of the equity risk premium over long-termTreasuries finished the fourth quarter at 2.9%, which is near the long-term average. While we expect stocks to outperform bonds, currentvaluations suggest long-term returns will be below normal.

0

5

10

15

20

25

30

35

40

45

50

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

Shiller's (10-yr Avg. Real Earnings)

Normalized Earnings

Reported Earnings

-2

0

2

4

6

8

10

12

14

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

(%)


Mercer 6

Asset Class: International Equities – Performance Review§ Global equities were mixed for the quarter and the year. US equities

rose, while currency declines and economic concerns weighed on theperformance of international developed and emerging market equities.The MSCI ACWI Index gained 0.4% in the fourth quarter and 4.2% in2014, while the MSCI ACWI-ex US Index tumbled 3.9% for both periods.

§ Global small cap equities lagged large cap equities in 2014 due to theunderperformance of US small stocks.

§ International small cap equities performed in-line with internationallarge caps for the year.

§ International developed stocks fell by 3.6% in the fourth quarter. Thelosses were entirely attributable to currency declines. In local terms,EAFE returned 1.8%. For the year, EAFE fell 4.9% in $US terms, butrose 5.9% in local terms. EAFE underperformed the S&P 500 by 1860basis points in $US terms and 780 basis points in local terms during theyear. European stocks tumbled 4.4% in the fourth quarter as the euroexperienced further losses. In local terms, European stocks were flat asthe region experienced subpar economic growth. For the year, Europereturned 4.7% in local terms, but dropped 6.2% in $US terms. Japanesestocks contracted by 2.4% in $US terms in the fourth quarter as the yenfell relative to the US dollar. In local terms, Japanese stocks rose a solid6.7%, outperforming the S&P 500 by 180 basis points. For the year,Japanese stocks returned 9.5% in local currency terms, but stumbled4.0% in $US terms.

§ Emerging market stocks struggled in the fourth quarter due to currencyweakness and a sharp decline in oil prices. In local terms, the MSCI EMIndex was flat; however, it fell 4.5% in $US terms. EM stocks lagged theS&P 500 by 1590 basis points in $US terms for the year. The sharp dropin oil prices, political tensions, and currency declines weighed on EasternEuropean stocks, which fell 28.8% for the year. The decline incommodity prices dragged Latin America down by 12.3%. Lowercommodity prices and prospects for reform helped push Asian stocks toa 4.9% gain.

Developed Country Performance

Global and International Equity Performance

Emerging Market Performance

Source: MSCI, Bloomberg



0.4

1.8

-3.9

-3.6

-2.3

-2.3

-4.9

4.2

1.8

-3.9

-4.9

-4.9

-4.4

-5.4-30 -25 -20 -15 -10 -5 0 5 10 15

MSCI ACWI

MSCI ACWI Small Cap

MSCI AC World ex US

MSCI EAFE

MSCI EAFE Small Cap

MSCI EAFE Growth

MSCI EAFE Value

Returns (%)

Quarter2014

4.04.6

-4.8-4.4-4.2

-0.4-6.1

-13.4-8.2

-2.4-3.6

11.912.7

1.5-6.2-5.4

-10.4-9.9-9.5

-4.7-4.0-3.4

-30 -25 -20 -15 -10 -5 0 5 10 15

North AmericaUSA

CanadaEurope

UKGermany

FranceItaly

SpainJapan

Australia

Returns (%)

Quarter2014

-4.5

-19.4

-0.3

-13.4

-2.2

-28.84.9

-12.3-30 -25 -20 -15 -10 -5 0 5 10 15

MSCI EM

EM Europe & M/East

EM Asia

EM Latin America

Returns (%)Quarter2014


Mercer 7

Asset Class: International Equities – Valuation ReviewGlobal Valuations

Valuation of MSCI Emerging Markets to MSCI World(Based on Average of P/E, P/B and P/CF)



§ The weak growth environment in Europe has continued to weigh on profitgrowth as EPS rose only an estimated 3.0% in 2014, and corporateprofitability remains depressed. A weaker euro should help profitability,and high operating leverage could lead to a rapid earnings reboundshould economic conditions improve. However, it remains to be seen iffirms can overcome domestic headwinds. Based on trailing earnings,Europe appears reasonably valued at a P/E of 16.8, and valuations lookmore compelling if margins return to historical averages. A potential QEprogram could provide a jolt to the stock market as it did in the US andJapan.

§ Supported by a weak yen, Japanese earnings spiked by 17% in 2014.Firms still have ample room to improve profitability as ROE remainsnearly 20% below the pre-financial crisis peak. While the slowdown inthe domestic economy is a concern, the drop in energy prices and alower yen should be supportive of earnings. From a structural standpoint,enacting corporate governance reforms could lead to further profit marginimprovements. Japanese stocks appear reasonably valued, trading at16.1x trailing earnings.

§ The drop in energy and other commodity prices has darkened theoutlook for emerging market equities. Additionally, tighter Fed policycould lead to capital outflows and further currency weakness. On thesurface EM valuations are compelling. They trade at a P/E of only 13.2, a11% discount to their historical average. They are also trading at a 28%discount to developed stocks. However, these discounts are drivenprimarily by commodity-sensitive sectors and Chinese financials. On asector-neutral basis, we estimate EM stocks are trading at P/E of 17 andonly a 12% discount to developed stocks. We continue to favor EMstocks on a strategic basis; however, the commodity exposure and othermacro pressures will provide headwinds over the short-term.

-60

-50

-40

-30

-20

-10

0

10

20

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(%)

Historical average for the longest period availableHistorical average since 2000

19.2

16.8 16.1

13.2

25.2

14.613.1 12.812.3

8.88.2 7.8

2.81.8 1.4 1.52.0

3.31.8

2.9

0

5

10

15

20

25

30

MSCI US MSCI Europe MSCI Japan MSCI EM

P/E TrailingP/E NormalizedP/CFP/BDividend Yield


Mercer 8

Asset Class: Fixed Income – Interest Rates and Yield Curve

Bond Performance by Duration

§ The yield curve continued to flatten in the fourth quarter and has leveledsignificantly since the end of 2013. During 2014, the 2-year yield rose by29 basis points, while the 10- and 30-year yields fell by 87 and 121 basispoints, respectively. While the yield curve has historically flattenedaround rate hikes, the large decline in long yields took many investors bysurprise.

§ The timing and pace of interest rate increases as well as the ultimateendpoint for the target rate are likely to be the key drivers of yieldmovements. While the Fed is likely to raise rates in 2015, we expectthem to do so gradually given the subdued inflation outlook. However,the market may be pricing an overly dovish Fed policy. For example,while the Fed expects the target rate to reach 3.5% by the end of 2017,Fed funds futures are pricing only a 2.0% rate.

§ US Bonds rose as yields declined. The Barclays Aggregate indexreturned 1.8% in the fourth quarter and 6.0% in 2014. Credit laggedTreasuries in the fourth quarter, but outperformed for the year.

§ Long-Duration Bonds advanced in the fourth quarter as the yield on 30-year Treasury dropped by 46 basis points. The Barclays Long Treasury,and Long Credit Indexes returned 8.6% and 4.1%, respectively, in thefourth quarter and gained 25.1% and 16.4%, respectively, for the year.

§ TIPS underperformed Treasuries in the fourth quarter and for the year asinflation breakeven rates declined. The real yield on 5-year TIPS rose by32 basis points to 0.38% in 2014. The inflation breakeven rate on 10-Year TIPS fell from 2.24% to 1.68% during the year.

Treasury Yield Curve

Source: Federal Reserve

Source: Barclays, Bloomberg

0.01.8

1.91.0

8.6

1.80.8

4.1

1.80.8

4.00.0

-0.5

0.06.0

5.02.6

25.1

7.54.2

16.4

7.54.3

15.73.6

2.8-5 0 5 10 15 20 25 30


Barclays TreasuryBarclays Int Treasury

Barclays Long Treasury

Barclays CreditBarclays Credit Intermediate

Barclays Credit Long

Barclays CorporateBarclays Int Corporate

Barclays Long CorporateBarclays US TIPS

Barclays TIPS 5-10 yrs

Returns (%)

Quarter

2014

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.54.0

3 mo 6 mo 1 yr 2 Yr 3 Yr 5 yr 7 yr 10 yr 20 yr 30 yr

(%)

Treasuries at 12/31/13TIPS at 12/31/13Treasuries at 09/30/14TIPS at 09/30/14Treasuries at 12/31/14TIPS at 12/31/14


Mercer 9

Asset Class: Fixed Income – Credit and Non-US Bonds§ During the year, the yield on the Corporate index declined a modest 15

basis points to 3.1% while the option-adjusted spread to Treasuriesmoved up by 17 basis points to 1.3%, which is moderately above longterm norms. Given above average spreads and the favorable economicoutlook, the downside risk for corporates relative to Treasuries is limitedover the short-term.

§ The yield on the Barclays High Yield index rose from 6.1% to 6.6%during the fourth quarter. During 2014, the yield increased by 97 basispoints. The option adjusted spread widened by 59 basis points in thefourth quarter and 101 basis points in 2014, finishing the year at 4.8%,which is near long-term norms. The increase in spreads was drivenlargely by the energy sector, although the selloff has also spread to othersectors. While defaults could occur in the energy sector, a healthy USeconomy should keep defaults low outside of energy.

§ US Treasuries rose as Treasury yields declined. The Barclays TreasuryIndex returned 1.9% in the fourth quarter and 5.0% for the year.

§ US Corporate bonds lagged Treasuries by 10 basis points in the fourthquarter as spreads widened. For the year, I/G corporate bonds returned7.5%, outperforming Treasuries by 250 basis points.

§ US MBS, Agency, CMBS, and ABS bonds suffered from credit spreadwidening and a flatter yield curve, causing them to lag Treasuries in thefourth quarter.

§ High Yield bonds shed 1.0% in the fourth quarter as yields increasedand credit spreads widened. High yield bonds trailed Treasuries by 250basis points in 2014 due to the wider spreads and higher yields.

§ Local currency Emerging Market debt fell by 5.7% for the quarter andthe year due to currency declines. $US-denominated debt dropped 0.9%in the fourth quarter as spreads widened, but rose 6.2% for the year.

§ Global Bonds were hurt as the dollar appreciated relative to foreigncurrencies. The Citigroup World Government Bond Index fell 1.5% in thefourth quarter and finished 2014 down 0.5%.

Sector, Credit, and Global Bond Performance

Credit Spreads

Source: Barclays

Source: Barclays, Citigroup, JP Morgan, Bloomberg

-1.0

1.4

0.0

1.8

1.8

1.9

1.8

1.2

0.5

-0.9

-1.5

2.5

3.9

3.6

7.5

7.5

5.0

6.1

3.6

1.9

6.2

-0.5

-5 0 5 10

Barclays High Yield

Barclays CMBS

Barclays US TIPS

Barclays Corporate

Barclays Credit

Barclays Treasury

Barclays MBS

Barclays Agency

Barclays ABS

JP Morgan EMBI

Citi WGBI

Returns (%)

Quarter

2014

02468101214161820

0

1

2

3

4

5

6

7

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(%)

OAS to Treasuries I/G Corporates - left scaleOAS to Treasuries MBS - left scaleHigh Yield Bond Credit Spread - right scale

Average


Mercer 10

Asset Class: Alternatives – Performance Review§ REITs – Global and US REITs moved 8.1% and 12.9% higher in the

fourth quarter. They returned 15.9% and 28.0%, respectively, in 2014,benefiting from the decline in interest rates and improving propertyprices.

§ Commodities suffered major losses as oil prices tumbled 41.5% duringthe quarter and 45.9% in 2014, which reflects the second largestcalendar year slide since 1983 (compared to -53.4% in 2008). The S&PNA Natural Resources Index declined 13.9% in the fourth quarter and9.8% for the year, while the Bloomberg Commodity Index lost 12.1% inthe fourth quarter and finished the year down 17.0%.

§ Hedge funds outperformed global equities in the fourth quarter, buttrailed them by 100 basis points for the year. The HFRI Fund of FundsComposite Index gained 0.8% in the fourth quarter and returned 3.2% in2014. Macro strategies were the top performer for the quarter and theyear, while distressed strategies were hurt by spread widening.

Real Asset Performance

Hedge Fund Performance

Source: HFR

Source: NAREIT, Dow-Jones, UBS, Goldman Sachs

12.9

8.1

-12.1

-27.7

-12.3

-13.9

28.0

15.9

-17.0

-33.1

4.8

-9.8

-50 -40 -30 -20 -10 0 10 20 30 40

NAREIT Equity REITs

NAREIT Global REITs

Bloomberg Commodity TR

S&P GSCI Commodity

Alerian Energy MLP TR

S&P NA Natural Resources

Returns (%)

Quarter2014

0.8

0.0

0.9

0.7

0.7

0.4

-1.4

-3.6

-0.4

3.1

3.2

2.8

3.2

2.8

3.6

2.3

1.1

-1.1

4.5

6.4

-10 -5 0 5 10

HFRI FOF Composite

HFRI FOF: Conservative

HFRI FOF: Diversified

HFRI FOF: Strategic

HFRI Fund Weighted Composite

HFRI Equity Hedge (Total)

HFRI Event-Driven (Total)

HFRI ED: Distressed/Restructuring

HFRI Relative Value (Total)

HFRI Macro (Total)

Returns (%)

Quarter

2014


Mercer 11

Summary – Investment Structure

Tier ILifeCycle Funds

Tier IICore Array (Passive)

Tier IIICore Array (Active)

Tier IVExtended Choice Array

Capital PreservationNew Mexico Stable Value (Galliard) TIPS

US Core Fixed Income US Core Fixed Income BlackRock Inflation Protected BondVanguard Total Bond Market Index

Diversified Inflation Hedge Global Fixed IncomePrincipal Diversified Real Asset Templeton Global Bond

BalancedOakmark Equity & Income

US Large Cap Core Equity US Large Cap EquityTarget Date Funds Vanguard Institutional Index Dodge & Cox Stock Fund

Custom LifeCycle Portfolios Fidelity Contrafund Global Real EstateNon-US Equity Non-US Equity Invesco Global Real Estate

Vanguard Total Intl Stock Index Fidelity Diversified InternationalAmerican Funds EuroPac Growth

US Mid Cap EquityPrincipal MidCap

US Small / Mid Cap Core Equity T. Rowe Price Mid Cap GrowthUS Small Cap Equity

Fidelity Low-Priced StockDFA US Small Cap Portfolio

Emerging Markets EquityAberdeen Emerging Markets EquitySelf-Directed Brokerage Account

Brokerage Link

Conservative

Aggressive


Mercer 12

Summary – Plan Assets§ On December 31, 2014, Plan assets totaled $491.7 million, which represents an increase of $11.1 million (2.3%) from the prior quarter

balance of $480.5 million.§ There were 18,066 participants with a balance at quarter-end. The average account balance was $26,732 (excluding the New Mexico

Loan Account). Contributions totaled $10.5 million for the quarter, compared to $11.1 million in withdrawals. Investment gainsrepresented $11.0 million over the quarter. Net brokerage window and loan account activity accounted for $0.7 million of inflows.

§ Plan assets were concentrated primarily in the following investment options:Rank Fund Percentage of Total

Assets1 New Mexico Stable Value 27.0%2 New Mexico LifeCycles 19.6%3 Vanguard Institutional Index Fund Institutional 14.5%4 Fidelity Contrafund 7.0%

Total 68.1%

Observations & Recommendations§ Five out of the fifteen of the Plan’s active funds either matched or outperformed their respective indices and universe medians during the

quarter. Three funds performed in between benchmarks and seven funds lagged both measures.§ For the quarter, all six LifeCycle Portfolios outperformed their respective benchmarks, but underperformed their respective peer

universes. Benchmark relative performance was helped by solid performance from T. Rowe Price Mid Cap Growth, DFA US Small Cap,and the active non-US developed equity managers. The New Mexico Stable Value fund also aided performance for the Conservative and2015 portfolios. Aberdeen Emerging Markets and Invesco Global Real Estate detracted from benchmark relative performance for thequarter. Greater exposure to emerging markets equity and an underweight to domestic equity relative to some peers proved a headwindfor the funds compared to their universe medians. For the trailing 3-year, 5-year and 7-year periods, all six portfolios generallyoutperformed their respective benchmarks, but lagged their respective universe medians.

§ Per the Board’s action, the Fidelity funds in the Plan have transitioned to lower cost K share classes. The transition to the K shares forthe Fidelity Contrafund and Diversified International Fund occurred in August 2014 and October 2014, respectively. On December 16,2014 the Low-Priced Stock fund transition to the K shares was completed.


Mercer 13

Summary – Key ObservationsPrincipal Diversified Real Asset Fund§ The fund trailed the Diversified Real Asset Custom Index for all time periods evaluated. Relative to the Mercer Mutual Fund Diversified

Inflation Hedge Universe, the fund ranked in the bottom quartile of the universe for the quarter, but ranked in the top quartile for the 1-and 3-year periods. Performance for the quarter was hampered by an overweight to the master limited partnership (MLP), as well asunderperformance by the infrastructure manager, as an emphasis on energy infrastructure weighed on results. Underperformance by thenatural resource manager also detracted. Shorter-term performance of the strategy will likely be driven by factors other than realizedinflation or market inflation expectations given the fund does not aim to directly track CPI. Rather, the strategy seeks exposure to assetclasses and investments that should benefit from, or protect against, inflation and perform relatively well during periods of rising inflation.We continue to appreciate the diversified asset mix and the use of external managers in this strategy, viewing it is a key source ofdifferentiation and value-add relative to their competitors, especially given that few managers have capabilities in each of the underlyingcategories. We recommend retention.

Fidelity Contrafund§ The fund trailed the S&P 500 Index for all time periods evaluated. Relative to the Mercer Mutual Fund US Equity Large Cap Core

Universe, the fund placed in the bottom quartile for the quarter and 1-year period, but outperformed the universe median for the 3-, 5-,and 7-year periods. For the quarter, an underweight allocation to the energy sector helped relative performance, but did not offset poorsecurity selection within the information technology and energy sectors. The fund is unconstrained with its allowable exposures and hasa persistent growth bias. The fund is hamstrung by its size, its over diversification, and Portfolio Manager Will Danoff's limited bandwidthas a stock picker given other responsibilities and an inefficiently large support structure. Additionally, the fund continues to exhibit a highlevel of realized tracking error despite a more moderate expected tracking error. However, Danoff has a long track record of success withthe Fidelity Contrafund. The fund has benefitted from Danoff's ability to gain access to company management (based on his reputationand his fund's size) and uncommon judgment in determining which ideas to emphasize. We recommend retention.

Invesco Global Real Estate Fund§ On a cumulative basis, the fund underperformed the FTSE NAREIT EPRA Developed Index but outperformed the universe median for all

periods evaluated. For the quarter, stock selection in Hong Kong, the US and UK contributed positively to relative results, as didunderweight allocations to a number of relatively weak performing European countries, including Switzerland, Spain and theNetherlands. Key detractors from performance were stock selection in Japan, Australia and Sweden. An underweight allocation to USREITs also hurt relative performance. The fund benefits from an experienced team with deep knowledge of the real estate securitiesmarket, which provides for a repeatable and consistent investment process. We view this strategy as a top global REIT offering and donot have concerns over the team or process; we recommend retention.


Mercer 14

Summary – Organizational UpdatesVanguard Group (Vanguard Total Bond Market Index Fund)Josh Barrickman continues to lead Vanguard’s Bond Indexing Group. Barrickman has worked for Vanguard for fifteen years, eleven of whichwere in bond indexing portfolio management. Vanguard continues to monitor risk using Barclays POINT to follow tracking error variance(TEV) from a variety of sources, including curve, swap spread, volatility, and various spread sectors. Idiosyncratic risk is the largest sourceof TEV, which is to be expected given that the team does not seek to fully replicate all bonds in the index. As of 09/30/14, the Total BondMarket Index Fund had a portfolio of 7,584 bonds compared to the Barclays Aggregate Float Adjusted Index of over 8,900. In addition,deviations in the fund’s performance versus that of the benchmark index may occur given the fund’s sampling approach to approximate theindex and temporary pricing differences between the fund and the index. However specifically from mid-2011 to early 2013, tracking errorwas also attributed to MBS pricing differentials. The benchmark priced their MBS holdings at a generic level, even though bonds with pre-pay protection were at higher levels.

Principal Financial Group (Principal Diversified Real Asset Fund)Principal recently announced a change to the custom benchmark for their Diversified Real Asset (DRA) strategy. The composition of theoriginal custom benchmark changed over time to reflect the addition of new asset classes, changes to existing sub advisor allocations andthe occasional change from one benchmark to another for an existing asset class. Principal believes that while this process is effective atmeasuring the performance of each sub advisor versus their assigned benchmark, it did not provide a means to measure asset allocationdecisions. Thus, the Portfolio Managers decided to change the methodology and composition of the custom benchmark. Principal hasassured us that this change does not in any way impact portfolio management decisions regarding the strategy. The new custom benchmarkis designed to be static (if/when changes within the strategy occur the benchmarks weights will not change).

New DRA Benchmark Effective 12-31-14Weight

Barclays U.S. TIPS 40%MSCI ACWI 40%Bloomberg Commodity Total Return Index 20%

This new benchmark for the multi-manager and multi-asset class strategy should help management and fund investors better measureasset allocation and manager selection decisions. Each of the strategies will be measured relative to this composite of publicly availableindices. Importantly, the benchmark will better align with the Fund’s objective and risk constraints.

These indices were selected because they generally represent the opportunity set, as well as the inflation beta, return, risk characteristics,and volatility profile of DRA. US TIPS and floating rate debt combined have historically represented approximately 40% of the DRA Fundallocations, and has been used to dampen overall volatility while maintaining inflation beta. The Bloomberg Commodity index is a direct linkto the commodity sleeve managed by Credit Suisse. The MSCI ACWI is assumed to represent the remainder of the allocations across theinflation linked equities (MLP, REITs, Natural Resources, Agriculture, Timber, Infrastructure stocks), which have historically represented


Mercer 15

about 40% of the portfolio. This is in contrast to the dynamic nature of the original custom index, which was composed of the underlyingindices for each of the sleeves in the Fund and weighted according to the most current target allocations for each sleeve.

We understand the benefits of the benchmark change, providing a more consistent yardstick to compare performance and asset allocationagainst, given the outcome orientated objectives of the strategy (CPI-U +3-5%). The previous benchmark had to be updated on a consistentbasis, mirroring any asset allocation changes, which made it challenging and complex to keep track of. Underlying managers of the strategywill remain to be judged against their individual benchmarks. The previous benchmark is available for those clients who request it.

Dimensional Fund Advisors (DFA US Small Cap Portfolio)On November 27, 2014, Dimensional Fund Advisors (DFA) announced that Chairman of Dimensional Fund Advisors Limited, DavidSalisbury would retire at the end of 2014. Art Barlow, Managing Director of the London office, will assume the role of Chairman in addition tohis current responsibilities.

We do not recommend any rating changes as a result of this announcement. This news has not come as a surprise to us, as Salisbury’sretirement has been expected. Salisbury was not involved in day-to-day investment decisions and his responsibilities were centered on theLondon office. As such we do not anticipate this change to affect the investment products DFA offers.

Invesco (Invesco Global Real Estate Fund)Mercer recently met with Invesco for a Global and US REIT strategy update. We continue to have confidence in Invesco’s real estatesecurities capabilities. The team has proven the ability to apply its investment process in a consistent manner. The team is led by JoeRodriguez, who is highly respected and has been managing real estate securities for nearly two decades. The team has a deep knowledgeand understanding of the real estate securities market, and is effective in combining private real estate market research with its managementof publicly traded securities. The Invesco real estate securities team has remained incredibly stable over the years. There have been nonotable departures and the team has been able to attract talented investment professionals across the global. During 2014 the team addedthree analysts -- Dan Moran, Chris Rynn, and Lindsay Schroll

Invesco’s philosophy is based on two fundamental principles: 1) to maximize predictability and consistency of investment returns and 2) tominimize risk through strict attention to portfolio design. Invesco believes that long-term performance will be determined by property marketcycles, quality of real estate assets and expertise of the management team. Through the global financial crisis, low quality rally and macrodriven environment, Invesco has stayed true to its philosophy and has not materially deviated from its process. Over time the team hastweaked the process at the margins (loosening the tracking error budgets at time and reducing the number of holdings), but generally, theprocess has not changed..

Because of Invesco’s high quality bias and focus on investing only in those companies with strong balance sheet, strong management, andthe best properties in the best locations, we do not expect this strategy to outperform when real estate securities are driven by forces otherthan real estate fundamentals. Over a full market cycle, this strategy should offer strong downside protection with moderate upside potential.


Mercer 16

The team has been focused on increasing its active share over the past few years. After being close to 20% active share in 2011, the globalstrategy’s active share is now up to about 45%. Notwithstanding this trend it is notable that the level of ex ante tracking error remainssubdued at around 1 to 2%.

.


Mercer 17

Summary – Asset Allocation

27.0%

3.7%0.4%

0.3%

4.5%19.6%

37.5%

4.5%0.7% 1.8%

Current Asset Allocation - December 31, 2014

Stable Value

Domestic Fixed

International Fixed

Real Estate

Balanced

Target-Date

Domestic Equity

International Equity

Brokerage Window

Other

27.8%

3.8%0.4%0.2%

4.5%19.3%

36.9%

4.7%0.6% 1.7%

Prior Asset Allocation - September 30, 2014

Stable Value

Domestic Fixed

International Fixed

Real Estate

Balanced

Target-Date

Domestic Equity


Brokerage Window

Other

19.6%

17.7%

58.5%

4.2%

Current Tier Allocation - December 31, 2014

Tier I - LifeCycle Funds

Tier II - Core Array (Passive)

Tier III - Core Array (Active)

Tier IV - Extended Choice Array

19.3%

17.5%

59.2%

4.0%

Prior Tier Allocation - September 30, 2014


Tier II - Core Array (Passive)

Tier III - Core Array (Active)

Tier IV - Extended Choice Array


Mercer 18

Summary – Asset AllocationInvestment Option Tier/Asset Class Current Balance Prior Balance % of Plan % Chg vs. PriorLifeCycle Funds Tier I $96,276,135 $92,721,855 19.6% 0.3% LifeCycle Conservative Portfolio Target-Date $13,465,145 $13,229,622 2.7% 0.0%

LifeCycle 2015 Portfolio Target-Date $20,771,378 $20,633,863 4.2% -0.1% LifeCycle 2025 Portfolio Target-Date $33,773,135 $32,354,190 6.9% 0.1%

LifeCycle 2035 Portfolio Target-Date $15,389,157 $14,529,401 3.1% 0.1%



Core Array (Passive) Tier II $87,226,794 $83,960,125 17.7% 0.3% Vanguard Total Bond Market Index Fund Inst US Fixed $14,780,199 $14,628,980 3.0% 0.0%

Vanguard Institutional Index Fund Institutional US Large Cap Equity $71,202,480 $68,214,375 14.5% 0.3%

Vanguard Total International Stock Index Fund Inst International Equity $1,244,116 $1,116,770 0.3% 0.0%

Core Array (Active) Tier III $287,594,703 $284,522,791 58.5% -0.7% New Mexico Stable Value Fund Stable Value $132,962,230 $133,457,811 27.0% -0.7% Oakmark Equity and Income Fund I Balanced $21,336,728 $20,863,267 4.3% 0.0%

Principal Diversified Real Asset Fund Inst Balanced $774,735 $859,765 0.2% 0.0%

Dodge & Cox Stk Fund US Large Cap Equity $28,338,815 $27,853,106 5.8% 0.0%

Fidelity Contrafund K US Large Cap Equity $34,413,017 $33,563,756 7.0% 0.0%

Principal MidCap Fund Inst US Mid Cap Equity $9,369,866 $8,660,876 1.9% 0.1% T Rowe Price Inst Mid-Cap Eqty Growth Fund US Mid Cap Equity $21,872,480 $20,718,710 4.4% 0.1%

Fidelity Low-Priced Stock Fund1 US Small + Mid Cap Equity $0 $8,334,707 0.0% -1.7%

Fidelity Low-Priced Stock Fund K1 US Small + Mid Cap Equity $8,729,251 $151,622 1.8% 1.7%

DFA US Small Cap Portfolio Institutional US Small Cap Equity $10,444,088 $10,064,264 2.1% 0.0% Fidelity Diversified International Fund1 International Equity $0 $11,324,818 0.0% -2.4%

Fidelity Diversified International Fund K1 International Equity $11,058,373 $106,204 2.2% 2.2%

American Funds EuroPacific Growth Fund R-6 International Equity $8,295,119 $8,563,886 1.7% -0.1%

Extended Choice Array Tier IV $20,589,005 $19,344,765 4.2% 0.2% BlackRock Inflation Protected Bond Port BlackRock US Fixed $3,653,908 $3,728,732 0.7% 0.0% Templeton Global Bond Fund R6 International Fixed $2,118,977 $1,691,509 0.4% 0.1%

Invesco Global Real Estate Fund R5 Real Estate $1,271,350 $1,194,071 0.3% 0.0%

Aberdeen Emerging Markets Fund Institutional Emerging Markets Equity $1,520,712 $1,635,860 0.3% 0.0%

Brokerage Link Brokerage Window $3,280,753 $2,929,525 0.7% 0.1%

Loan Account Other $8,743,306 $8,165,068 1.8% 0.1%Total Plan $491,686,637 $480,549,536 100%

1 Due to the redemption fees, assets were transferred from the retail to the K shares on 10/16/14 and 12/16/14 for the Diversified International and Low-Priced Stock funds, respectively


Mercer 19

Summary – Investment Expense AnalysisFund Style Fund Balance Estimated

FundExpense

Fund NetExpense

Ratio

Median NetExpense

Ratio2

NetExpense

Diff.

RevenueSharing ($)

RevenueSharing

(%) LifeCycle Conservative Portfolio Target-Date $13,465,145 $55,241 0.41% 0.55% -0.14% $0 0.00% LifeCycle 2015 Portfolio Target-Date $20,771,378 $82,380 0.40% 0.57% -0.17% $0 0.00% LifeCycle 2025 Portfolio Target-Date $33,773,135 $141,571 0.42% 0.61% -0.19% $0 0.00% LifeCycle 2035 Portfolio Target-Date $15,389,157 $71,091 0.46% 0.64% -0.18% $0 0.00% LifeCycle 2045 Portfolio Target-Date $8,792,085 $42,486 0.48% 0.65% -0.17% $0 0.00% LifeCycle 2055 Portfolio Target-Date $4,085,235 $20,042 0.49% 0.67% -0.18% $0 0.00% Vanguard Total Bond Market Index Fund Inst US Fixed $14,780,199 $10,346 0.07% 0.20% -0.13% $0 0.00% Vanguard Institutional Index Fund Institutional US Large Cap Equity $71,202,480 $28,481 0.04% 0.20% -0.16% $0 0.00% Vanguard Total International Stock Index Fund Inst International Equity $1,244,116 $1,493 0.12% 0.39% -0.27% $0 0.00% New Mexico Stable Value Fund Stable Value $132,962,230 $575,726 0.43% 0.46% -0.03% $0 0.00% Oakmark Equity & Income Fund I Balanced $21,336,728 $164,293 0.77% 0.90% -0.13% $64,010 0.30% Principal Diversified Real Asset Fund Inst Balanced $774,735 $6,740 0.87% 0.89% -0.02% $775 0.10% Dodge & Cox Stock Fund US Large Cap Equity $28,338,815 $147,362 0.52% 0.76% -0.24% $28,339 0.10% Fidelity Contrafund K US Large Cap Equity $34,413,017 $192,713 0.56% 0.78% -0.22% $0 0.00% Principal MidCap Blend Fund Inst US Mid Cap Equity $9,369,866 $61,841 0.66% 0.93% -0.27% $9,370 0.10% T Rowe Price Inst Mid-Cap Eqty Growth Fund US Mid Cap Equity $21,872,480 $133,422 0.61% 0.97% -0.36% $0 0.00% Fidelity Low-Priced Stock Fund K3 US Small + Mid Cap Equity $8,729,251 $62,851 0.72% 1.00% -0.28% $0 0.00% DFA US Small Cap Portfolio Institutional US Small Cap Equity $10,444,088 $38,643 0.37% 1.00% -0.63% $0 0.00% Fidelity Diversified International Fund K4 International Equity $11,058,373 $86,255 0.78% 0.99% -0.21% $0 0.00% American Funds EuroPacific Growth Fund R-6 International Equity $8,295,119 $40,646 0.49% 0.99% -0.50% $0 0.00% BlackRock Inflation Protected Bond Port BlackRock US Fixed $3,653,908 $12,058 0.33% 0.51% -0.18% $0 0.00% Templeton Global Bond Fund R6 International Fixed $2,118,977 $11,231 0.53% 0.70% -0.17% $0 0.00% Invesco Global Real Estate Fund R5 Real Estate $1,271,350 $11,315 0.89% 0.99% -0.10% $4,450 0.35% Aberdeen Emerging Markets Fund Institutional Emerging Markets Equity $1,520,712 $16,728 1.10% 1.15% -0.05% $0 0.00% Brokerage Link Brokerage Window $3,280,753 N/A N/A N/A NA NA Loan Account Other $8,743,306 N/A N/A N/A NA NATotal $491,686,637 $2,014,955 0.42%5 $106,943 0.02%6

2 Median institutional share class net expense ratio as defined by the respective Mercer Mutual Fund Universe and Lipper categorizations; stable value median as of 9/30/20143 Fund carries a 1.5% redemption fee for shares held less than 90 days4 Fund carries a 1.0% redemption fee for shares held less than 30 days5 Total net expense ratio is calculated net of Loan and Brokerage accounts6 Total revenue sharing ratio is calculated net of Loan and Brokerage accounts


Mercer 20

Summary – PerformancePeriods ending December 31, 2014

% of Plan 3 Months 1 Year 3 Years 5 Years 7 Years


LifeCycle Conservative PortfolioNew Mexico Conservative IndexMercer MF Target-Date Income Universe MedianFund Rank in Universe

2.7% 1.0%1.0%1.1%

56

4.4%4.0%3.9%

37

5.9%5.5%6.2%

59

5.5%5.1%6.3%

70

4.0%3.3%4.5%

54

LifeCycle 2015 PortfolioNew Mexico 2015 benchmarkMercer MF Target-Date 2015 Universe MedianFund Rank in Universe

4.2% 1.4%1.2%1.5%

57

5.3%6.2%4.7%

33

8.0%8.1%9.2%

76

6.9%6.6%7.9%

89

3.0%2.6%4.4%

87


6.9% 1.7%1.5%1.8%

54

6.0%5.3%5.6%

40

11.9%11.3%11.6%

36

8.6%8.4%9.3%

78

3.9%3.2%4.6%

90


3.1% 1.6%1.4%2.0%

78

5.7%4.7%5.7%

52

13.3%12.6%13.5%

55

9.2%9.1%10.7%

94

3.8%3.5%4.8%

88


1.8% 1.6%1.3%2.2%

83

5.6%4.6%5.9%

66

14.0%13.2%14.6%

62

10.5%9.4%10.9%

61

4.4%3.4%5.0%

75

LifeCycle 2055 PortfolioNew Mexico 2055 benchmarkMercer MF Target-Date 2050+ Universe MedianFund Rank in Universe

0.8% 1.6%1.3%2.1%

85

5.6%4.7%6.1%

67

14.3%13.6%14.9%

67

10.4%9.6%10.6%

58

3.9%3.2%4.8%

72


Mercer 21



Tier II – Core Array (Passive)

Vanguard Total Bond Market Index Fund InstVanguard Spliced Barclays USAgg Float Adj IdxMercer MF US Fixed Core Universe MedianFund Rank in Universe

3.0% 1.7%1.8%0.9%

11

5.9%5.8%4.7%

27

2.6%2.7%3.4%

67

4.4%4.4%4.7%

57

4.7%4.8%4.8%

50

Vanguard Institutional Index Fund InstitutionalS&P 500Mercer MF US Equity Large Cap Core Universe MedianFund Rank in Universe

14.5% 4.9%4.9%4.5%

34

13.7%13.7%11.6%

21

20.4%20.4%19.3%

28

15.4%15.5%13.8%

17

7.3%7.3%6.5%

24

Vanguard Total International Stock Index Fund Inst7

Vanguard Total International Composite IndexMercer MF Intl Equity Universe MedianFund Rank in Universe

0.3% -4.2%-3.8%-3.3%

67

-4.2%-3.4%-5.2%

34

9.3%9.4%10.7%

73

4.3%4.4%5.8%

76

-0.8%-0.7%-0.1%

65

Tier III – Core Array (Active)

New Mexico Stable Value FundNew Mexico Stable Value Fund (Net)8

Galliard Composite (Net)9

Citigroup 3-Month Tbill + 100 bp PremiumMercer Stable Value Universe MedianFund Rank in Universe

27.0% 0.4%0.3%0.4%0.3%0.5%

93

1.5%1.2%1.6%1.0%1.8%

94

1.6%1.4%2.0%1.1%2.1%100

1.8%1.5%2.4%1.1%2.8%100

2.3%2.0%3.0%1.3%3.2%100

Oakmark Equity and Income Fund IS&P 500 60% / 40% BC AggregateMercer MF US Balanced Universe MedianFund Rank in Universe

4.3% 3.7%3.7%1.7%

9

6.9%10.6%5.2%

27

13.2%13.1%11.1%

28

9.8%11.2%9.1%

38

7.0%6.6%5.0%

7

7 Due to lack of performance history for the Institutional share class, performance for the Investor share class is shown for the 5- and 7-year periods.8 The Mercer Stable Value universe returns are shown gross of fees and the New Mexico Stable Value Fund’s rank within the universe is based off of the fund’s net returns.9 Assets were mapped from Dwight to a Galliard separate account on July 1, 2012. The Galliard composite is shown net of the same expenses paid by participants in the New Mexico StableValue Fund and is shown for informational purposes only.


Mercer 22




Principal Diversified Real Asset Fund InstPrincipal Real Asset Custom IdxMercer MF Diversified Inflation Hedge Universe MedianFund Rank in Universe

0.2% -3.0%-2.5%-1.8%

75

2.5%3.5%1.1%

0

5.2%5.7%1.1%

13

NA7.7%3.2%NA

NA4.5%2.7%NA

Dodge & Cox Stk FundRussell 1000 ValueMercer MF US Equity Large Cap Value Universe MedianFund Rank in Universe

5.8% 2.2%5.0%4.1%

81

10.4%13.5%10.9%

64

23.7%20.9%19.7%

0

15.6%15.4%13.9%

14

6.3%6.4%6.1%

44

Fidelity Contrafund K10

S&P 500Mercer MF US Equity Large Cap Core Universe MedianFund Rank in Universe

7.0% 3.1%4.9%4.5%

82

9.7%13.7%11.6%

78

19.7%20.4%19.3%

42

15.0%15.5%13.8%

24

7.1%7.3%6.5%

31

Principal MidCap Fund InstRussell MidcapMercer MF US Equity Mid Cap Core Universe MedianFund Rank in Universe

1.9% 6.9%5.9%5.4%

25

12.7%13.2%8.0%

13

21.5%21.4%18.9%

17

19.1%17.2%15.1%

0

11.3%8.9%7.8%

0

T Rowe Price Inst Mid-Cap Eqty Growth FundRussell Midcap GrowthMercer MF US Equity Mid Cap Growth Universe MedianFund Rank in Universe

4.4% 8.9%5.8%5.3%

6

13.8%11.9%7.1%

2

21.6%20.7%18.1%

8

18.0%16.9%15.1%

7

10.4%8.6%7.3%

4

Fidelity Low-Priced Stock Fund K11

Russell 2500 ValueRussell 2000Mercer MF US Equity Small+Mid Value Universe MedianFund Rank in Universe

1.8% 4.2%6.1%9.7%6.1%

73

7.7%7.1%4.9%5.0%

25

19.8%19.4%19.2%18.8%

34

15.8%15.5%15.5%15.1%

25

9.1%8.6%8.2%8.4%

33

DFA US Small Cap Portfolio InstitutionalRussell 2000Mercer MF US Equity Small Cap Core Universe MedianFund Rank in Universe

2.1% 8.8%9.7%7.3%

29

4.4%4.9%4.2%

48

20.7%19.2%18.2%

20

17.4%15.5%15.1%

14

9.9%8.2%7.9%

13

10 Due to lack of performance history for the K share class, performance for the Retail share class is shown for the 7-year period.11 Due to lack of performance history for the K share class, performance for the Retail share class is shown for the 7-year period.


Mercer 23




Fidelity Diversified International Fund K12

MSCI EAFE NET WHTMercer MF Intl Equity Universe MedianFund Rank in Universe

2.2% -1.1%-3.6%-3.3%

14

-3.0%-4.9%-5.2%

23

13.3%11.1%10.7%

18

6.6%5.3%5.8%

33

-0.2%-0.5%-0.1%

51

American Funds EuroPacific Growth Fund R-613

MSCI EAFE NET WHTMSCI AC Wld ex US NetMercer MF Intl Equity Universe MedianFund Rank in Universe

1.7% -1.6%-3.6%-3.9%-3.3%

21

-2.3%-4.9%-3.9%-5.2%

18

12.1%11.1%9.0%10.7%

30

6.0%5.3%4.4%5.8%

45

1.5%-0.5%-0.6%-0.1%

26

Tier IV – Extended Choice Array

BlackRock Inflation Protected Bond Port BlackRockBarclays US TIPSMercer MF US Inflation Protected Universe MedianFund Rank in Universe

0.7% -0.8%0.0%-0.5%

63

2.7%3.6%2.7%

53

0.4%0.4%0.2%

36

3.8%4.1%3.7%

43

4.3%4.2%3.8%

19

Templeton Global Bond Fund R614

Citigroup WGBIMercer MF Global Fixed Universe MedianFund Rank in Universe

0.4% -1.6%-1.5%-0.9%

76

2.0%-0.5%2.3%

52

6.6%-1.0%3.3%

0

6.0%1.7%4.2%

17

7.9%3.1%4.7%

0

Invesco Global Real Estate Fund R5FTSE NAREIT EPRA DevelopedMercer MF Global Real Estate Universe MedianFund Rank in Universe

0.3% 6.7%8.1%6.6%

49

14.8%15.9%13.9%

32

14.9%15.9%14.9%

45

10.8%12.0%10.2%

41

2.8%3.5%2.7%

45

Aberdeen Emerging Markets Fund InstitutionalMSCI EM NetMercer MF Emerging Markets Equity Universe MedianFund Rank in Universe

0.3% -5.6%-4.5%-4.9%

58

-2.5%-2.2%-2.6%

49

4.4%4.0%4.5%

52

5.3%1.8%2.1%

16

4.5%-1.3%-1.7%

1

12 Due to lack of performance history for the K share class, performance for the Retail share class is shown for the 7-year period.13 Due to lack of performance history for the R-6 share class, performance for the R-5 share class is shown for the 7-year period.14 Due to lack of performance history for the R6 share class, performance for the Advisor share class is shown for the 3-, 5-, and 7- year periods.


Mercer 24

Family ProfileTier I - Target-Date - New Mexico PERA Lifecycles15

Glide Path Comparison vs. Universe of Target-Date Families (as of 12/31/2014)

Family Asset Allocation (as of 12/31/2014)

15 The global REIT allocation is included in the equity category: 50% to domestic equity and 50% to international equity.

15

25

35

45

55

65

75

85

95

2055 2045 2035 2025 2015 Conservative

Allo

catio

nto

Equi

ty(%

)

75th-95th Median-75th 25th-Median 5th-25th New Mexico PERA Lifecycles

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2055 2045 2035 2025 2015 Conservative

Allo

catio

n(%

)

Cash and Equivalents

Fixed Income

Domestic Equity


Other


Mercer 25

Family ProfileTier I - Target-Date - New Mexico PERA Lifecycles16

Fund Conservative 2015 2025 2035 2045 2055Qtr. Return Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio

Stable ValueNew Mexico Stable Value Fund (Galliard) 0.3% 25.0% 16.3% 2.0% 0.0% 0.0% 0.0%

Total Stable Value 25.0% 16.3% 2.0% 0.0% 0.0% 0.0%

US Fixed Income Blackrock Inflation Protection Bond -0.8% 12.5% 4.7% 0.0% 0.0% 0.0% 0.0%

Vanguard Total Bond Market Index Fund 1.7% 20.4% 26.5% 21.4% 9.4% 3.2% 0.9%Total US Fixed Income 32.9% 31.2% 21.4% 9.4% 3.2% 0.9%

Global Fixed IncomeTempleton Global Bond Fund -1.6% 1.0% 1.2% 2.4% 2.7% 2.3% 1.6%

Total Global Fixed Income 1.0% 1.2% 2.4% 2.7% 2.3% 1.6%

US EquityUS Large Cap Equity

Vanguard Institutional Index Fund 4.9% 9.1% 12.7% 20.7% 25.5% 27.8% 28.9%Sub-Total US Large Cap Equity 9.1% 12.7% 20.7% 25.5% 27.8% 28.9%

US Mid/Small Cap EquityPrincipal MidCap Equity 6.9% 2.0% 1.8% 3.0% 3.6% 4.0% 4.1%T. Rowe Price Mid Cap Growth Fund 8.9% 0.0% 1.8% 3.0% 3.6% 4.0% 4.1%DFA US Small Cap Portfolio 8.8% 2.0% 1.8% 3.0% 3.6% 4.0% 4.1%

Sub-Total US Mid/Small Cap Equity 3.9% 5.4% 8.9% 10.9% 11.9% 12.4%Total US Equity 13.0% 18.2% 29.6% 36.5% 39.7% 41.2%

Non-US EquityVanguard Total International Stock Index -4.2% 3.0% 4.2% 6.9% 8.5% 9.3% 9.6%Fidelity Diversified International -1.1% 3.0% 4.2% 6.9% 8.5% 9.3% 9.6%American Funds EuroPacific Growth Fund -1.6% 3.0% 4.2% 6.9% 8.5% 9.3% 9.6%Aberdeen Emerging Markets -5.6% 3.9% 5.4% 8.9% 10.9% 11.9% 12.4%

Total Non-US Equity 13.0% 18.2% 29.5% 36.5% 39.7% 41.3%

Global Real Estate Securities INVESCO Global Real Estate 6.7% 7.8% 8.2% 10.0% 10.0% 10.0% 10.0%Total Non-US Equity 7.8% 8.2% 10.0% 10.0% 10.0% 10.0%

Real Return (Diversified Inflation Protection)Principal Diversified Real Asset -3.0% 7.3% 6.9% 5.0% 5.0% 5.0% 5.0%

Total Real Return 7.3% 6.9% 5.0% 5.0% 5.0% 5.0%Totals 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

16 Totals may not add due to rounding.


Mercer 26

Fund ProfileTier I - Target-Date - LifeCycle Conservative Portfolio


Mercer 27

Fund ProfileTier I - Target-Date - LifeCycle 2015 Portfolio


Mercer 28



Mercer 29



Mercer 30



Mercer 31



Mercer 32

Fund ProfileTier II - Domestic Fixed - Vanguard Total Bond Market Index Fund Inst - VBTIX


Mercer 33

Fund ProfileTier II - Domestic Equity - Vanguard Institutional Index Fund Institutional - VINIX


Mercer 34

Fund ProfileTier II - International Equity - Vanguard Total International Stock Index Fund Inst - VTSNX


Mercer 35

Fund ProfileTier III - Stable Value - New Mexico Stable Value FundShare Class: N/A Benchmark: Citigroup 3-Month Tbill + 100 bp Premium

Investment Philosophy

Galliard’s primary stable value investment objective is to provide safety of principal. Secondary objectives are consistency of returns, while maintaining a stable creditedrate of interest.

Fund Composition as of December 31, 2014 Credit Quality Distribution as of December 31, 2014

Key Facts and Figures

Portfolio Manager: Galliard Capital ManagementMarket-to-Book Ratio: 100.9%Crediting Rate (Gross): 1.46%

Total Fund Assets: $140.2 MillionFund Duration: 2.6 years

Expense Ratio (Net): 0.43%Mercer Median Expense Ratio (Net): 0.46% (9/30/14)

U.S.Treasury/Agency,

25.5%

Other U.S.Government, 2.4%

Corporates, 22.9%

Taxable Municipals,1.8%

MBS, 23.5%

ABS, 11.5%

Intl Govt/Agency,0.3%

Cash/Equivalents,11.9%

AAA, 76.6%

AA, 4.7%

A, 13.0%

BBB, 5.4% <BBB, 0.3%


Mercer 36

Fund ProfileTier III - Balanced - Oakmark Equity and Income Fund I - OAKBX


Mercer 37

Fund ProfileTier III - Balanced - Principal Diversified Real Asset Fund Inst - PDRDX


Mercer 38

Fund ProfileTier III - Domestic Equity - Dodge & Cox Stk Fund - DODGX


Mercer 39

Fund ProfileTier III - Domestic Equity - Fidelity Contrafund K - FCNKX


Mercer 40

Fund ProfileTier III - Domestic Equity - Principal MidCap Fund Inst - PCBIX


Mercer 41

Fund ProfileTier III - Domestic Equity - T Rowe Price Inst Mid-Cap Eqty Growth Fund - PMEGX


Mercer 42

Fund ProfileTier III - Domestic Equity - Fidelity Low-Priced Stock Fund K - FLPKX


Mercer 43

Fund ProfileTier III - Domestic Equity - DFA US Small Cap Portfolio Institutional - DFSTX


Mercer 44

Fund ProfileTier III - International Equity - Fidelity Diversified International Fund K - FDIKX


Mercer 45

Fund ProfileTier III - International Equity - American Funds EuroPacific Growth Fund R-6 - RERGX


Mercer 46

Fund ProfileTier IV - Domestic Fixed - BlackRock Inflation Protected Bond Port BlackRock - BPLBX


Mercer 47

Fund ProfileTier IV - International Fixed - Templeton Global Bond Fund R6 - FBNRX17

17 Due to lack of performance history for the R6 share class, performance is shown for the Advisor share class.


Mercer 48

Fund ProfileTier IV - Real Estate - Invesco Global Real Estate Fund R5 - IGREX


Mercer 49

Fund ProfileTier IV - International Equity - Aberdeen Emerging Markets Fund Institutional - ABEMX


Mercer 50

Appendix – DisclosuresImportant noticesReferences to Mercer shall be construed to include Mercer LLC and/or its associatedcompanies.

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Mercer 52

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