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The 2019 Investment Review The Board of Pensions Balanced Investment Portfolio returned 17.8%

The Cockeyed Optimist Slays Debbie Downer U.S. Bulls Flatten Global Bears

At the start of 2019, many global investors were wearing Debbie Downer caps, with modest if not low investment expectations for the year. Always the pessimist, Debbie sees the glass half empty and usually at about 10% full. The theme for the 2018 Investment Review was “Yard By Yard”, meaning that we must be long-term investors and not day traders. We were long-term positive on the U.S. but a Debbie Downer for the rest of the planet, for as challenging as conditions might be in the U.S., markets and denizens of the rest of the globe faced more serious challenges with fewer resources and less favorable outcomes than the U.S. What is your weltanschauung, or worldview? Are you a cockeyed optimist or Debbie Downer? It is more prudent to be a pessimist. It is an insurance against disappointment and no one can say “I told you

so”, which is how the prudent (pessimist) condemns the optimist.

Dietrich Bonhoeffer, Letters and Papers from Prison, 1945 Fortunately we were so wrong to be a Debbie Downer pessimist on the global economy. We should have been humming the tune sung by that famous Cockeyed Optimist, Ensign Nelly Forbush, in the musical “South Pacific”:

When the skies are brighter canary yellow But I’m stuck like a dope I forget ev'ry cloud I've ever seen, With a thing called hope So they called me a cockeyed optimist And I can’t get it out of this heart! Immature and incurably green. Not this heart… I have heard people rant and rave and bellow That we're done and we might as well be dead, But I'm only a cockeyed optimist And I can't get it into my head. Music by Richard Rodgers, lyrics by Oscar Hammerstein II

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Should we be Debbie Downer or a Cockeyed Optimist in 2020 and beyond? As we review the global economy and markets of 2019, and analyze the performance of the Board of Pensions Balanced Investment Portfolio, we explore events that surprised on the upside as well as disappointed on the downside. As we entered 2019, only a Cockeyed Optimist would have predicted the events of 2019. Wall Street investment bankers are rarely immature and incurably green, but are always optimistic that markets will turn in their favor, and there were many such turning points in 2019, including: As we rant and rave and bellow: The U.S. political gridlock on virtually all issues. Wars and human rights violations in Syria, Iraq, Afghanistan, India, Myanmar and China. Might as well be dead: Getting trade agreements with Canada, Mexico and China completed in 2019. With a thing called hope: Democratic contenders to the 2020 Presidential Election Stuck like a dope with a thing called hope: Global stock markets rallied on every glimmer of good news. 2019 Investment Outlook versus 2019 Actual Results Good investment performance is as simple as getting more things right than wrong in asset allocation and manager selection. 2019 was a year when we were right, partly right and wrong in our major asset allocation decisions. While some managers outperformed in major asset classes, we were wrong in our asset allocation decisions that reduced U.S. equity, the best performing asset class in 2019. We will compare our January 2019 outlook with actual results. Our 2019 Outlook comments are from the 2018 Investment Review. Our 2019 Outlook: Following the downturn of U.S. and international stocks in the fourth quarter of 2018, we believe stocks are likely to outperform bonds in 2019, yet it is unclear which regions, sectors and strategies are most likely to outperform 2019 Actual: Right. U.S., international developed markets and emerging market stocks all outperformed bonds. Our 2019 Outlook: Emerging market stocks, after a negative 2018, could provide superior performance in 2019. 2019 Actual: Partly Right. Emerging markets provided a return of 18.4% but lagged the performance of developed market and U.S. stocks. Our 2019 Outlook: U.S. large company value stocks underperformed growth/momentum stocks for the ten years ended December 31, 2018. Is 2019 a time for value stocks to outperform? 2019 Actual: Wrong. While it was a question and not a forecast, value stocks underperformed growth stocks by a wide margin in large capitalization growth stocks as well as small company stocks. Our 2019 Outlook: After a weak 2018, active international developed market managers will have the opportunity to reposition portfolios to recognize outsized gains in technology stocks in 2018. 2019 Actual: Right. Managers increased technology holdings and the sector returned 40.7% in 2019. Our 2019 Outlook: The U.K will wrestle with the impact of Brexit, the decision to leave the EU. We believe our managers will select the best companies, but at this time do not plan to increase the allocation to international developed markets.

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2019 Actual: Right. Despite a year of political uncertainty and no final Brexit decisions, companies in the U.K. carried on and returned 21.1%. We repositioned the international equity portfolio in 2019 but did not increase the allocation. Our 2019 Outlook: We continue to expect (since 2014) that long duration fixed income assets will be less attractive in 2019 as the Federal Reserve continues to increase rates. 2019 Actual: Wrong. The Federal Reserve reduced interest rates and long U.S. Treasury bonds returned 14.8%. Our 2019 Outlook: We do not expect inflation will be a problem in 2019 2019 Actual: Right. We took the opportunity to trim our allocation to inflation mitigating strategies. Our 2019 Outlook: Opportunities in private limited partnerships will be evaluated throughout 2019. The red flags waving for both private equity and real estate partnerships reflect the concern that fund sizes have increased and now exceed pre-2007 levels. Our initial focus will be on real estate opportunity funds and venture capital. 2019 Actual: Right. We made selective commitments to private partnerships in 2019, including to venture capital and real estate partnerships.

Introduction The Board of Pensions Balanced Investment Portfolio returns net of fees and the asset allocation on December 31, 2019 were as follows:

2019 Asset Allocation Return

$ Millions

Percent U.S. Equity 29.6% $3,439 33.8%

International Equity 23.1 2,200 21.6 Fixed Income 8.9 3,073 30.2

Private Partnerships 1.6 856 8.4 Marketable Diversifying Strategies 10.6 484 4.7

Real Estate 12.6 134 1.3 Total 17.8% $10,186 100.0%

To maintain the asset allocation ranges approved by the Board of Directors, in the asset allocation table shown above, the 1.6% allocation to Global Equity is included in U.S. and International Equity. The return for Global Equity was 28.6% in 2019. The 1.3% allocation to Real Estate is in Private Partnerships and a public market REIT in Market Diversifying Strategies. Assets in separately managed and commingled accounts are valued on a daily basis and reflect the actual market value on December 31, 2019. The assets in illiquid private partnerships are valued and reporterd on a one quarter lag. The Balanced Investment Portfolio data for private partnerships relects valuations on September 30, 2019 so do not include the significant global market actions in the fourth quarter of 2019. The Board of Pensions Balanced Investment Portfolio began 2019 with total assets of $9.616 billion. With an investment return of 17.8% in 2019, the market value of the Portfolio increased $10.186 billion by December 31, 2019, after paying out $407 million in net benefits payments to Plan members and their surviving spouses. Performance of the Board of Pensions Balanced Investment Portfolio is compared to the

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absolute return benchmark of the 6.0% long-term investment return assumption for the Pension Plan. The return of each component of the Balanced Investment Portfolio is compared to the relevant asset class benchmark.

The Absolute Return Benchmark: The Long-Term Investment Return Assumption In October 2016, a comprehensive review of future long-term capital market assumptions and their impact on the Balanced Investment Portfolio was presented in a joint meeting of the Investment and Pension Committees. As global economic and market conditions and historically low global interest rates have dampened expectations for long-term investment returns for almost all asset classes, the Investment Committee recommended, and the Board of Directors approved, a reduction in the expected long-term investment return assumption for the portfolio, from 7 percent to 6 percent. By moving to a more conservative assumption for financial planning, the Board took a step to ensure the long-term solvency of the Pension Plan, whose assets make up 89 percent of the portfolio. The Board believed that it would not be acting in the best interest of Plan members if it continued to rely on a long-term investment assumption of 7 percent when market expectations indicated that the Balanced Investment Portfolio could not achieve that return without restructuring the portfolio into asset classes that have higher risk and less liquidity than the current long-term asset allocation. Balanced Investment Portfolio Market Value and Cash Payments: 1988-2019 The Balanced Investment Portfolio had $2.1 billion in assets in 1988, paid out $6.4 billion in benefits to Plan members and surviving spouses from 1988 through 2019, and closed the year with assets of $10.2 billion on December 31, 2019.

Benefits paid have exceeded dues received since 1988. This is not a problem and is part of the

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plan design. In 1988, when the Balanced Investment Portfolio was valued at $2.1 billion, the one year cash payment from the portfolio, in addition to 1988 dues received, was $15 million. Cash from the Balanced Investment Portfolio for benefits payments totaled $132 million for the five years from 1988 to 1992. The $132 million cash in addition to dues for the five years ended December 31, 1992, is significantly less than the payments for the most recent five years. For the five years ended December 31, 2019, cash from the Balanced Investment Portfolio for benefits payments totaled $1.9 billion, including $407 million in 2019 alone. An Overview of Global Economics and Market Data That Impacted 2019 Investment Performance Prior to exploring specific data and trends, it is useful to compare countries by economic and financial indicators to include Gross Domestic Product (GDP) %; Consumer Prices (CPI) %; Unemployment Rate %; Current Account Balance as a % of 2019 GDP; Budget Balance as a % of 2019 GDP; and Interest Rate on 10-year government bond. Demographic data is also important for investors, to include Population in millions; Median Age of Population; the % of Urban Population and the Population of the Country as a % of the World Population of 7.760 billion people on January 1, 2020. The comparative data in the table below provides important perspective on the differences between countries based upon key economic and financial indicators as well as demographic data. Observation on highs and lows for 2019 include:

• GDP growth ranged from 6.1% for China to (3.3)% for Argentina. • CPI ranged from 0.4% in Japan to 53.2% in Argentina • Unemployment ranged from 2.2% in Japan to 16.6% in Greece • Current account balances ranged from 7.3% in Germany to (4.3)% in the U.K • Budget Balances ranged from 2.3% in Russia to (5.7)% in Brazil • Ten-Year interest rates ranged from 10.8% in Turkey to (0.2)% in Germany • Population ranged from 1,439 million for China to 10 million in Greece • Japan has a population with a median age of 48 while the median age in Mexico is 28 • Urbanization is highest in Japan, with an urban population of 92% compared to 35% of

India • China has 18.5% of the world population while Greece has a population of 0.1% of world

population.

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Global Economic and Financial Indicators and Demographic Data

Country

2019 %GDP

2019 %CPI

% Unempl

%Curr Acct Balance

%Budget Balance

%10 Yr Int Rate

Pop in Millions

Med. Age

%Urban Pop

% Pop World

U.S. 2.3 1.8 3.5 (2.4) (4.6) 1.8 331 38 83 4.3 China 6.1 2.9 3.6 1.5 (4.3) 2.9 1,439 38 61 18.5 Japan 0.8 0.4 2.2 3.2 (3.0) 0.0 126 48 92 1.6 U.K. 1.3 1.8 3.8 (4.3) (1.8) 0.8 68 40 83 0.9 Canada 1.7 2.0 5.6 (2.1) (1.1) 1.5 38 41 81 0.5 France 1.3 1.3 8.4 (0.9) (3.2) 0.1 65 42 82 0.8 Germany 0.6 1.3 3.1 7.3 1.0 (0.2) 84 46 76 1.1 Greece 2.2 0.5 16.6 (2.3) 0.6 1.4 10 46 85 0.1 Russia 1.1 4.5 4.6 6.2 2.3 6.3 146 40 74 1.9 Turkey 0.1 15.5 13.4 0.2 (3.0) 10.8 84 32 76 1.1 India 4.9 3.6 7.6 (1.8) (3.9) 6.6 1,380 28 35 17.7 Argentina (3.3) 53.2 9.7 (1.6) (4.3) NA 45 32 93 0.6 Brazil 1.2 3.7 11.2 (2.4) (5.7) 4.4 213 33 88 2.7 Mexico 0.0 3.6 3.5 (0.8) (2.7) 6.8 129 29 84 1.7

Sources: The Economist Intelligence Unit; United Nations Department of Economic and Social Affairs as published by Worldometer Population Data Total World Population January 1, 2020 of 7.760 billion

The U.S. Economy

Politics and the National Divide While the Presidential Election is not until November 2020, Democratic primary debates continued throughout 2019. Positions of Republicans and Democrats are widely different on most issues, including the rating of national economic conditions. 79% of Republicans rate the economy as excellent or good. Only 33% of Democrats would rate the economy excellent or good.

Source: J.P. Morgan Asset Management

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Where are We in the Current U.S. Economic Expansion?: Long in the Tooth

The graph that follows on the left side provides data on the duration of U.S. economic expansions since 1900. The average length of an economic expansion is 48 months. The shortest expansion was 10 months from March 1919 to January 1920. In more recent economic history, the expansion from July 1980 to July 1981 was 12 months. The longest economic expansion in more than a century was 120 months from March 1991 to March 2001, when the growth stock and tech bubble burst. The current expansion began in June 2009, and at 126 months as of December 31, 2019, is the longest running expansion. While long in the tooth and exceeding past expansions, most economists do not expect a recession in 2020. What is the Strength of the Current Economic Expansion?: Weakest Since World War II. While the current expansion is the longest on record, it is also the weakest expansion in the post World War II period. As shown on the graph that follows on the right, the current expansion (light blue line) began after the prior peak in the fourth quarter of 2007. It has produced growth in GDP significantly below every other economic expansions of the past 70 years.

Source: J.P. Morgan Asset Management

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Monetary Policy: Actions of the Federal Open Market Committee (FOMC) The decision of the Federal Reserve to cut interest rates three times in 2019 may have been the most significant driver of U.S. markets. The federal funds rate was 1.63% on December 31, 2019. The blue line is the FOMC expected path for interest rates. The expectation is to hold rates steady in 2020, with a 25 basis point increase in 2021. Longer-term, the rate is expected to be at 2.50%. The brown line that diverges in 2019 is market expectations for interest rates, which are for a 25 basis point rate cut in 2020. FOMC forecasts reflect long run real GDP of 1.9%, unemployment of 4.1% and inflation of 2.0%.

Source: J.P. Morgan Asset Management

U.S. Debt to GDP 1975- 2019 As household and non-financial corporate debt declined as a percent of GDP since 2008 highs, government debt has stabilized in 2019 at 99.8% of GDP. Government debt was less than 40% of GDP in 1975 and 99.8% of GDP in the second quarter of 2019. Household debt was 45% of GDP in 1975, increased to 100% in 2008 and decreased 75% in 2019. Non-financial corporate debt, 52% in 1975, has grown to 75% of GDP in 2019. While the decline in household debt is a favorable event, the level of government debt remains a long-term concern.

Source: J.P. Morgan Asset Management

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U.S. Investment Spending: Lower than Replacement Rate For Aging Property Plant and Equipment Recent U.S. corporate spending on fixed investment was 6.6% in 2014, declining to 1.9% in 2016. After peaking at 4.6% in 2018, 2019 fixed investment spending was 1.4% and the expectation for 2020 is 0.9%.

Source: KKR U.S. Wage Growth and Unemployment: Moving in the Right Directions U.S. unemployment post the 2008 Global Financial Crisis peaked at 10.0% and is now 3.5%, below the 50-year average of 6.2%. Wage growth declined through 2012, then resumed an upward trend to reach 3.7% in 2019, slightly below the 50-year average of 4.0%.

Source: J.P. Morgan Asset Management

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U.S. Union Labor: A Negative Trend for Workers Union membership was 35% of workers in 1947. It has declined in every year since 1947, with union membership at a historic low of 7% of the workforce.

Source: J.P. Morgan Asset Management Impact of Globalization on U.S. Compensation: Negative Trend As shown on the graph that follows, world trade as a percent of global GDP was 22% in 1960, increasing to 43% in 1982, 60% in 2009 and currently at about 57%. It could be assumed that increased global trade would increase compensation for U.S. workers but that was not the case. Worker compensation as a percent of net value added, a comparative measure of compensation levels, was 0.7% in 1960. However global trade increased the net value added by employees to 0.75% in 2001 then declined to 0.68% in 2015. This was no benefit from globalization for U. S. workers. By 2019, the percent of net value added was back to the 1960’s level of 0.7%. For U.S. workers, globalization meant a return to wages of the 1960’s with labor bargaining power reduced by 80% over the same time period.

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Oil Prices, Supplies and Consumption: Long-Term Positive Implications for U.S. as an Oil Power Right Graph - Oil Prices: Long-Term Volatility Hampers Oil Exploration and Viability of Alternative Energy Projects Projecting the price of oil from one year to the next has never been for the faint-hearted. Price volatility has made it challenging to project the economic viability of oil exploration and production projects as well as alternative energy, such as wind and solar projects. 2019 was a year of reduced volatility, with prices staring the year at $45 and closing the year at $61.

Source: J.P. Morgan Asset Management Left Graph - The U.S. Leads the Way: Increased U.S. production and decreased demand has reduced U.S. historic dependency on OPEC U.S. oil production in millions of barrels a day has increased in each year since 2016, with U.S. production experiencing 42.9% growth since 2016. This is significantly higher than the global average of 4.8%, and OPEC production growth of (8.3%) over the same period. Consumption has also increased annually; however, the U.S. had a 5.4% growth in consumption since 2016, compared to 15.3% for China and 5.6% for the average global increase in consumption

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U.S. Markets The S&P 500 Juggernaut Since March 9, 2009 The S&P 500 Stock Index closed at 677 on March 9, 2009, with a Price to Earnings Ratio (PE) of 10.3X. It closed on December 31, 2019 at 3,231, with a PE of 18.2X. the cumulative price increase was 378%. As investors, we probably should not expect a repeat of this S&P 500 performance in the near term.

Source: J.P. Morgan Asset Management

The U.S. Dollar: Long-Term Dollar Neutral Impact

The graph below shows a monthly weighted average of major currencies against the U.S. dollar. A strong dollar can reduce the competitiveness of U.S. exports and reduce the investment return of international investments to U.S. dollar-based investors. The graph shows the long cycles of dollar strength and weakness. Since 1973, it has been in 6 to 9 year periods of strength followed by a similarly long period of dollar weakness.

Source: J.P. Morgan Asset Management

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Fixed Income Nominal and Real 10-Year U.S. Treasury Yields The use of averages can mask significant outliers. Despite average nominal yield of 5.98% from 1958 to 2019, the 10-year U.S. Treasury peaked on September 30, 1981 at a nominal yield of 15.84% and closed on December 31, 2019 at 1.92%. The average real yield was 2.32% for the same period, closing 2019 at (0.40)%, yet in in the 1970s real yields were less than (4.0)%, given double digit levels of inflation that far exceeded the long-term average of 3.66%.

Source: J.P. Morgan Asset Management

Global Interest Rates: The Trend to Negative Rates One would assume that negative interest rates make no sense. Why would anyone give a bank $100 and get $95 back at the end of ten years? Yet people are earning no interest in Japan and Austria, negative 0.1% in the Netherlands, negative 0.2% in Denmark and Germany, and negative 0.5% in Switzerland.

. Source: J.P. Morgan Asset Management

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U.S. Interest Rates: A New Direction On December 31, 2013 and December 31, 2019, the 5-year U.S. Treasury had a yield of about 1.7%. That is the only similarity in the two yield curves. On December 31, 2013, the 1-year Treasury had a 0.13% yield. A pox on the house of savers. While still low, the 1-year yield was 1.59% in December 31, 2019. While short rates have increased dramatically since 2013, the 30-year Treasury was 3.96% on December 31, 2013 and 2.39% on December 31, 2019, with no expectation it will reach 4% in the forecast time period of three years.

Source: J.P. Morgan Asset Management U.S. Credit Quality a Concern Credit markets in the U.S. are experiencing a significant increase in issuers with weak credit, generally B- or below. The number of such companies exceeded 300 in 2008-2009 and is once again approaching that level.

Source: J.P. Morgan Asset Management

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Global Economy and Markets Country Allocations Country allocations in benchmark indices such as the All Country World Index are not static but constantly changing. They are based upon the annual stock market performance of individual companies. When the U.S. was 50% of MSCI ACWI, many investors used the 50/50 allocation to reduce U.S. equity and increase international. The allocation has not been advantageous to investors as the U.S. stock market exceeded the return from developed and emerging international managers for the decade ended December 31, 2019 and the U.S. allocation in the All Country World Index has increased from 50% to 56%.

Source: J.P. Morgan Asset Management The Decline of Central Bank Intervention: Positive Long-Term Impact Central Banks in both developed and emerging markets began monetary intervention during the emerging market crises in 1998. The policies continued but peaked after the Global Financial Crisis in 2008, when central bank net purchases of financial assets represented more than 5% of world Gross Domestic Product (GDP). As central banks wind down their balance sheets, economies need to increasingly rely on fiscal rather than monetary stimulus. Global Central Bank Balance Sheets: Reversal of Positive Long-Term Impact The graph that follows shows that balance sheet expansion of the U.S. Federal Reserve, Bank of Japan (BoJ), European Central Bank (ECB) and Bank of England (BOE) peaked in 2017. As the direction of central bank monetary policy shifted to reduction of balance sheets, the U.S. Fed (bottom gray bars) moved more aggressively in 2016 first to stop purchasing securities and then to sell them back to the open market. Timing in Europe and Japan has been about two years behind the Fed. As the graph shows, in 2019, the Fed reversed positions and began bond purchases. It is estimated that the central banks of the Fed, BoJ and ECB will all retain securities on their balance sheets past 2020.

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Source: J.P. Morgan Asset Management Global Services and Manufacturing Surveys: Short-Term Negative Impact The graph that follows shows global PMI or Purchasing Managers’ Index. PMI is an indicator of global growth based upon what purchasing managers are experiencing in hiring and purchasing decisions. 50 is the dividing line, with 50+ indicative of an expansion. Services were less than 40 in 2009, peaked at 55 in 2017 and after volatility in 2018-2019, is currently at 51.6. The current direction of surveys for manufacturing are slightly less favorable. Manufacturing was less than 35 in 2009 and also peaked in 2018. It has continued to trend lower and is currently at 50.3, a sign of potentially weaker global growth in 2020.

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Source: J.P. Morgan Asset Management

Global Growth Revisited: Nominal GDP Growth Investors need to revisit global growth rates for India and China, given the high expectations for the development of middle class consumers in both countries. The graph that follows uses data from 2007 and 2019 to highlight the significant slowing of global growth. While the U.S. declined from 4.6% to 4.1% is not surprising, the decline of China from 23.1% in 2007 to 8.0% in 2019 is significant, as is the decline for India from 16.4% to 8.3%. Overall global growth declined from 12.9% to 4.9%.

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Source: KKR China: A Slowdown in Real GDP Given the size of the Chinese economy as a component of the global economy, any slowdown in real GDP will have significant ramifications for global trade and global markets. In 2009, investment made up 8.1% of real GDP of 9.4%. In 2019, investment was 1.3% of real GDP of 6.0%. What caused the decline? Factors could include a reduction in residential housing as well as government sponsored programs that have been reduced in scope. The decline in consumption has been from 5.3% of the 9.4% GDP in 2009 to 3.7% of the 6.0% in 2019.

Source: KKR

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Chinese Private Market Debt: A New Concern? With a signicant portion of the Chinese economy controlled by SOEs or State Owned Enterprises, there were few reported defaults on Chinese private market debt, as shown on the graph that follows. There was a brief spike in 2017, but defaults began to accelerate until bond defaults by Chinese private firms began to accelerate in mid-2018. Such shadow banking has provided limited reporting information until defaults must be recognized. This is a new area of concern for investors.

Impact of Global Tariffs: Uncertainty of Outcomes Negatively Impacts Global Trade Topics of Discussion Between U.S. and China Why a trade war with China? The table below targets points of discussion in the U.S. trade war with China. Many negotiating points that now should seem obvious, such as to protect U.S. technology and proprietary businesses, were never part of earlier trade dicussions with China.

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World Trade Volume: Negative Blow to Globalization As shown on the graph that follows, the percentage increase in global trade has averaged 4.7% since 1994. Growth for the year ended October 2019 was a negative 1.4%, reflecting the impact of trade wars during the 12-month period.

Source: J.P. Morgan Asset Management

Global Equities By Sector: Key Differences Between U.S., Emerging Markets and Developed Markets (EAFE) Investors, especially those using index funds and ETFs, should be aware of the key differences in sector allocations as a percentage of the index market capitalization. Technology and health care have the highest weight in U.S. indices while emerging market countries have the highest allocation to the financial sector and commodities. Developed markets had the highest allocation to consumer and industrial stocks. These allocations will change as emerging markets develop an increased exposure to health care and reduced dependence upon commodities.

Source: J.P. Morgan Asset Management

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Global Equities By Sector: Key Differences Between U.S. Europe and Japan Advantage U.S.? U.S. bulls believe that the U.S. markets will retain their current advantage due to the significantly larger percent of high tech companies that drive the U.S. stock market while low growth materials, energy and industrials are the larger components of market indices in Europe and Japan.

Source: J.P. Morgan Asset Management Private Partnerships / Private Equity Capital Allocation and Investment Returns Part 1: A Trend in the Wrong Direction When capital is poorly allocated, investment returns decline. In 2008, more than 40% of the private equity share of capital went to companies that were categorized as profitable. That allocation dropped to 20% in 2009. In 2019, the allocation has increased to more than 55% of capital being allocated to unprofitable companies. This misallocation to unprofitable companies may reduce the investment return for investors and may ultimately lead investors to commit less capital to private market investments.

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Source: J.P. Morgan Asset Management

Capital Allocation and Investment Returns Part 2: A Trend in the Wrong Direction In 2000, young, unprofitable companies averaged about 6% of total market capitalization and about 4% of corporate spending. Those percentages declined sharply after the tech wreck of 2000. In 2013, the percentages began to increase so young unprofitable companies are again approaching 4% of corporate spending and about 2.5% of total market capitalization. Since these companies make heavy use of technology on Amazon and fund ads on Google and Facebook, a demise of these companies would have revenue implications for both large and mid capitalization tech service providers.

Source: J.P. Morgan Asset Management

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Capital Allocation and Investment Returns Part 3: A Trend in the Wrong Direction The graph below shows the percent of Initial Public Offerings (IPOs) in a given year with positive net income in year one from 1995 to 2019. The low for IPOs was 20% in 2000. The high was in 2009 when there were few IPOs and more than 80% were profitable in year one. The current average since 1995 is 51% of IPOs had positive net income in year one. In the past six years, five out of six years had 40% or fewer IPOs with positive net income in year one. 23% of the IPOs in 2019 has positive net income in one year, close to the 2000 low of 20%. Caution is warranted when private partnership and IPO data resembles statistics from 2000. One Pets.com sock puppet was enough.

Source: KKR

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Global Markets in 2019 – A Volatile Year More Surprises Than Expected in Interest Rates and the Stock Market

The annual overview of economic and market events that impacted investment performance usually concludes with a timeline to help us remember just how our U.S. stock and bond markets were impacted by domestic and international events. In 2019, the timeline is of use since investors were routunely rattled by any negative news that might impact U.S. stock and bond markets. Markets reacted to Presidential tweets and the lack of action by the U.S. Congress on any issues of substance other than taxes; threats of nuclear war from North Korea; continuing investigation into Russian involvement in the 2016 U.S. Presidential election; worries over the economic impact of a shutdown of the government due to lack of agreement on immigration issues; and trade confrontation with China as well as our NAFTA neighbors. The Federal Reserve reversed course in 2019 with three interest cuts. Concerns over inflation and the brief emergence of an inverted yield curve, both indicators of a lower economic growth and potentially a recession, roiled markets throughout the year. Trade wars impacted U.S. farmers, as did weather conditions attributed to climate change. Wars continued in Syria and Afghanistan. The prospects for Democratic candidates for the 2020 election rose and fell. The U.K. muddled through elections, missing a final resolution to Brexit in the waning days of 2019. It should have been a year for pessimists and Debbie Downers but cockeyed optimism propelled U.S. and international markets to provide investors with unexpectedly strong performance in 2019. In the graph that follows, the green line (right axis) is the value of the Standard & Poor’s 500 Index. The red line (left axis) is the interest rate on a 10-year U.S. Treasury bond. The interest rate on a 10-year U.S. Treasury bond was 2.68% on December 31, 2018. It closed on December 31, 2019 at 1.92%, a decrease of 77 basis points in a volatile year that saw a yield of 1.46% in August and 1.94% in November, an increase of 46 basis points in three months. The S&P 500 began the year at 2,507 and closed the year at 3,231, an increase of 28.9% excluding dividend payments. The market peaked at 3,026 in June, lost ground in July, August and September before closing the year at 3,231.

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Review of the Board of Pensions Balanced Investment Portfolio We begin the detailed review of the Board of Pensions Balanced Investment Portfolio with an overview of global markets in 2019 and a comparison of the 2019 Balanced Investment Portfolio return of 17.8% to the returns available from public market indices. All major asset classes shown on the graph that follows had positive performance in 2019, from the 14% return from high yield bonds (brown line), to the 31% return from U.S. stocks (red line). Developed market international stocks (blue line) had a 22% return. Emerging market stocks (black line) and commodities (purple line), had slightly lower returns at 19% and 18% (black line). With a decline in U.S. interest rates, Treasury Bonds (green line) provided a 15% return.

As shown on the graph that follows, in 2019 the U.S. dollar appreciated against the euro. The increase in the value of the U.S. dollar reduced the investment return for dollar-based investors in euro countries. The decline of the U.S. dollar against the Japanese yen and the British pound increased the return on Japanese and U.K. stocks for dollar-based investors.

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As a diversified portfolio, the Board of Pensions Balanced Investment Portfolio return of 17.8% is made up of returns from multiple asset classes. The 2019 Investment Review will provide a detailed commentary, analysis and performance review of all components of the Balanced Investment Portfolio, to include U.S. equity, international equity, fixed income, private partnerships and marketable diversifying strategies. As shown on the graph that follows, it was an excellent year for virtually all asset classes.

9.7

13.5

14.1

17.8

18.4

21.5

22.0

24.5

25.5

31.0

0 5 10 15 20 25 30 35

Barclays Govt/Credit

JPM GBI EM Gl Diversified Unhedged

CG High Yield Cash Pay

BOARD OF PENSIONS

MSCI EM

MSCI ACWI ex US

MSCI EAFE

S&P US REIT

Russell 2000

Russell 3000

% Return

Sources: BNY Mellon, MSCI (net)

What is the Structure of the Board of Pensions Balanced Investment Portfolio? The Board of Pensions Balanced Investment Portfolio uses external investment management firms for the day-to-day investment of $10.2 billion in assets. The Portfolio is unitized on a monthly basis and is the investment portfolio for the Pension Plan as well as other plans and programs administered by the Board of Pensions. The U.S. equity component of the Portfolio has nine active investment managers and two index funds. The international equity component has seven active managers, including two managers focused solely on emerging markets, and two index funds. The global equity component has one active strategy, a manager dedicated to investing in global environmental markets and excluding investment in fossil fuel companies. The fixed income component has ten active managers, including dedicated assignments to managers for core fixed income, high yield or below investment grade securities, global bonds, emerging markets debt, Treasury Inflation Protection bonds (TIPS) and short duration securities. Private partnership investments include commitments to 77 limited partnerships investing in distressed debt, private equity, venture capital and real estate. Marketable diversifying strategies include absolute return, risk parity and inflation protection strategies. Portfolio diversification is a function of the long-term expected return for each asset class, but also must include risk assessments based on investment styles, liquidity and the potential firm risk for each investment manager retained by the Investment Committee. In 2019, commitments were approved to limited partnerships in U.S. private equity, distressed debt, venture capital and real estate. Each year, separate account managers for the Balanced Investment Portfolio are provided lists of those companies on the current Prohibited Securities lists. The lists have historically included companies on the General Assembly Divestment List for involvement in military and tobacco. The military list includes those corporations that manufacture hand guns and assault weapons.

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In recent years, the General Assembly of the Presbyterian Church (U.S.A.) voted to add to the General Assembly Divestment List companies that operate for-profit prisons and three U.S. companies whose products and services were deemed to detract from the peace process in Israel and Palestine. The Investment Committee annually approves the General Assembly Divestment List and approves it as the Board of Pensions Prohibited Securities List.

BOARD OF PENSIONS BALANCED INVESTMENT PORTFOLIO DECEMBER 31, 2019 Annualized Rate of Return (%) 1 Year 2 Years 3 Years 5 Years 10 Years 15 Years 20 Years

BOP U.S. EQUITY 29.6 10.6 14.7 11.3 13.5 9.3 7.5 Russell 3000 Index 31.0 11.4 14.6 11.2 13.4 9.0 6.4

BOP INTERNATIONAL EQUITY 23.1 3.2 10.5 6.8 6.6 6.7 5.0 MSCI All Country World Index ex US (gross) 22.1 2.6 10.4 6.0 5.4 5.7 4.3

BOP GLOBAL EQUITY 28.6 5.7 -- -- -- -- --

MSCI All Country World Net Index 26.6 7.1 12.4 8.4 8.8 -- --

BOP FIXED INCOME 8.9 3.9 4.3 3.6 4.5 4.7 5.4 Bloomberg Barclays Gov/Credit Index 9.7 4.5 4.3 3.2 4.0 4.2 5.1

BOP PRIVATE PARTNERSHIPS 1.6 6.9 9.5 8.0 10.3 11.3

BOP MARKETABLE DIVERSIFYING STRATEGIES 10.6 4.0 5.2 3.3 4.6 -- --

Consumer Price Index + 5% 7.1 6.9 6.9 6.6 6.5 6.8 6.9

BOP REAL ESTATE 12.6 9.5 9.5 9.1 11.1 -- --

Russell 3000 + 300 basis points 37.0 16.6 19.2 15.1 17.0 12.3 9.5

BOP BALANCED PORTFOLIO 17.8 6.4 9.8 7.3 8.6 6.9 6.3

Long-term Investment Return

6.0 6.0 6.0 6.0 6.0 6.0 6.0 Notes: Returns are net of management fees. Private partnerships generally report valuations on a one-quarter lag.

Review of the Board of Pensions Balanced Investment Portfolio Performance The Long-Term Investment Return: The 6.0% Pension Plan Actuarial Assumption In calculating the health and solvency of the pension plan, the actuary uses certain assumptions about plan demographics and financial metrics. These assumptions are reevaluated regularly to ensure that they are reasonable and current. One of the critical assumptions is the investment return of pension plan assets. To measure the health of the pension plan, the actuary assumes that the return on the Balanced Investment Portfolio will, over the long-term, meet or exceed 6.0%. It is important to remember that this is a long-term goal and will not be met in every calendar year. For the long-term health and stability of the pension plan, it is imperative that the actual long-term return on assets meet or exceed the plan investment return assumption. The Board conducted an Asset-Liability Study in 2019. The study confirmed the 6% actuarial interest assumption was attainable.

The 17.8% return in 2019 exceeded the 6.0% long-term assumption. The Balanced Investment

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Portfolio returns exceeded the 6.0% assumption for the one, two, three, five, ten, fifteen and twenty years ended December 31, 2019. Asset Allocation The Balanced Investment Portfolio is invested for the long-term. The 2019 performance was based on asset allocation decisions and manager selections made in the past 24 months or longer. In most years, the asset allocation is relatively static from one year to the next. Given global market volatility in 2019 and changes in investment managers, more aggressive reviews and rebalancing were warranted. The Investment Team meets on a monthly basis to review global economic and market conditions and expectations, investment performance and upcoming capital commitments and cash flow requirements for benefits. Asset allocation shifts between year-end 2018 and 2019 reflect market movement but also the rebalancing from asset classes and managers. Despite using equity as a source of cash in 2019, this top performing asset class increased from 52.5% to 55.4%. Fixed income, with a lower return than equity, decreased from 31.4% to 30.2%. Raising cash in 2019 was important to preserve long-term portfolio performance and have more than adequate cash for the payment of benefits and capital calls from private partnerships. Approximately $800 million was raised during 2019 to provide benefits to Plan members and implement active asset allocation decisions to increase or decrease asset classes based upon expectations for performance in the next 12-24 months.

COMPARATIVE ASSET ALLOCATION BOARD OF PENSIONS BALANCED INVESTMENT PORTFOLIO

December 31, 2019 December 31, 2018 $Millions Percent $Millions Percent

Equity 5,639 55.4 4,726 52.5 U.S. Equity 3,439 33.8 2,913 32.4 International Equity 2,200 21.6 1,812 20.2

Fixed Income 3,073 30.2 2,824 31.4

Alternative Investments 1,474 14.4 1,443 16.0 Private Partnerships 856 8.4 927 10.3 Marketable Diversifying Strategies 484 4.7 516 5.1 Real Estate 134 1.3

Total 10,186 100.0% 8,992 100.0% U.S. Equity Component of the Balanced Investment Portfolio 33.8% of the Balanced Investment Portfolio on December 31, 2019 The U.S. equity component of the Board of Pensions Balanced Investment Portfolio had a return of 29.6%, lagging the 31.0% return of the benchmark Russell 3000 Index. The U.S. equity component exceeded the return of the Russell 3000 Index for the three, five, ten, fifteen and twenty years ended December 31, 2019. The U.S. equity component at the close of 2019 had an allocation of 75% to managers investing in large company stocks and 25% to managers investing in the stocks of small and mid-sized companies. Long-term outperformance is a function of retaining superior active investment managers. The U.S.

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equity component has one manager with tenure of less than three years. It has eight managers with an average relationship of 15 years, with a range of 9 years to 31 years. Regular reviews include performance evaluation as well as a review of investment strategy, portfolio composition, changes in assets under management, risk management and compliance, as well as firm staffing and succession management. The evaluation of investment performance is based upon data and statistics as well as the qualitative evaluation of people, processes and philosophy. The appropriate blend of science and art is required for long-term investment success. The large capitalization component of the portfolio returned 29.7%, lagging the 31.5% return of the S&P 500. One of the core managers returned 34.0%, exceeding the 31.5% return of the benchmark S&P 500 Index. One of the two value managers exceeded the 26.5% return of the Russell 1000 Value Index. One of the growth stock managers had a return of 40.5%, exceeding the 36.4% return of the benchmark Russell 1000 Growth Index. The small and mid-capitalization component of the Portfolio returned 33.0%, exceeding the 27.9% return of the Dow Jones Completion Index. The active small capitalization growth manager returned 35.3%, exceeding the 28.5% return of the Russell 2000 Growth Index. The active small capitalization core manager returned 27.8%, exceeding the 25.5% return of the Russell 2000 Index. The mid capitalization value manager had a return of 35.8%, exceeding the 27.1% return of the Russell Mid Cap Value Index.

U.S. Equity Index ReturnsYear to Date December 31, 2019

31.0

36.4

31.5

22.4

26.5

24.5

28.5

29.6

0 10 20 30 40

Russell 2000 Value

S&P US REIT

Russell 1000 Value

Russell 2000 Growth

Russell 3000

S&P 500

Russell 1000 Growth

% Return

* Preliminary June 30, 2008 dataSource: BNY Mellon

Board of Pensions U.S. Equity

U.S. Equity Market Historical Performance The Russell 3000 Index includes stocks of large and small companies and is a broader measure of the U.S. equity market than the S&P 500. However, the Russell 3000 originated in 1979, so it does not have the additional history that is valuable for long-term investment perspective. For purposes of the following graph, U.S. equity market returns are represented by the S&P 500 Index beginning in 1970 and the Russell 3000 Index from 1979. The Russell 3000 Index had a 31.0% return in 2019. The 31.0% return is above both the 13.4% average return of the last ten years, as reflected in the black 10-year trend line, and the long-term 50-year average return of 9.8% since 1970. The U.S. equity market had negative returns in ten out of those 50 years, five of the last 20 years, and one in the last ten years.

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U.S. Equity Returns in Historical PerspectiveJanuary 1, 1970 – December 31, 2019

-40

-30

-20

-10

0

10

20

30

40

50

60

1970 1976 1982 1988 1994 2000 2006 2012 2018

S&P 500/Russell 3000 Blended 10 Year Trend

37.132.3 32.1

36.8

-5.1-5.1-7.4

-26.5-21.5

50-Year Average

9.8%

Includes reinvestment of dividends

13.4%

-37.3

28.3

Note: S&P 500 through 1978; Russell 3000 effective 1979

21.1

-5.2

31.0

Market Capitalization and Style Investors know that the size of the companies they invest in, or company market capitalization, can significantly impact portfolio success. Market capitalization, the price per share of the company stock, times the number of shares outstanding, varies as the share price of a company increases or decreases over time. As shown on the table below, large company stocks in the Russell 1000 Index returned 13.5% annually for the ten years ended December 31, 2018, exceeding the 11.8% return of small company stocks in the Russell 2000 Index for the same time period. Investment styles also affect performance. Stocks in the Russell 1000 Growth Index returned 15.2% annually for the ten years ended December 31, 2019, exceeding the 11.8% return of the Russell 1000 Value Index. Small growth stocks also outperformed small value stocks over the ten-year period. However, value outperformed growth for the long-term, as measured over the twenty years ended December 31, 2019. Large value had a 1.8% annual advantage over large growth. Small value had an even larger long-term advantage over small growth, with an extra 3.8% annually credited to value investors.

LARGE/SMALL AND VALUE/GROWTH PERFORMANCE FOR PERIODS

ENDED DECEMBER 31, 2019 Short Term 1

Year Medium Term

10 years (annualized)

Long Term 20 years

(annualized) Russell 1000 (Large) 31.4% 13.5% 6.3% Russell 2000 (Small) 25.5 11.8 7.6 Russell 1000 Value 26.5 11.8 7.0 Russell 1000 Growth 36.4 15.2 5.2 Russell 2000 Value 22.4 10.6 9.4 Russell 2000 Growth 28.5 13.0 5.6

Source: Dimensional Fund Advisors

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Value versus Growth Stocks Investors hoped/expected value to outperform growth in 2019, and once again it did not happen. Using the total U.S. market of the Russell 3000 divided into growth and value companies, since January 1, 2010, growth stocks returned a cumulative 251% compared to value stocks 137%. Some investors continue to believe that value will outperform after more than a decade of underperformance against growth stocks.

Sector Performance As noted above, the broad U.S. stock market, as represented by the Russell 3000 Index, had a return of 31.0% in 2019, with all major sectors having positive returns in 2019. Performance ranged from 9.6% for energy stocks to 49.2% for stocks of companies in the information technology sector. In the graph that follows, energy, the worst sector in 2017 and 2018, remained the worst sector in 2019.

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It is important to remember that sector weights are not constant and will vary over time, as shown in the graph that follows. There are three major sectors in the Russell 3000, the large capitalization passive index frequently used by investors to represent the U.S. stock market. Technology was 33.6% of the index when tech stocks were high fliers in the late 1990s. The weight of technology stocks as a sector was at a low of 12.2% after the collapse of the tech bubble. With a barely positive return for information technology stocks in 2018 followed by a 49.2% return in 2019, the sector was 22.4% of the index at the close of 2019. Energy stocks, 16.2% of the index in 1998, made up 4.1% of the S%P 500 in 2019.

The Balanced Investment Portfolio had broad sector diversification in 2019. The top ten global stocks stocks held on December 31, 2019 were Microsoft, Alphabet (Google), JP Morgan, Wells Fargo, Alibaba Group, Amazon, Visa, Novartis, Taiwan Semiconductor and Astrazeneca. These top ten global stock holdings component of the portfolio and include companies in the health care, information technology and financial sectors. Structure of the U.S. Equity Component of the Balanced Investment Portfolio Stock Selection in the U.S. Equity Component Active portfolio managers select individual stocks based upon valuations and expectations for future growth. Many of the best managers call themselves “benchmark agnostic”, meaning they don’t select stocks or sectors based upon the weighting in a benchmark. It is important to remember that the composition of most indices is backward looking, reflecting the performance of prior periods. The weighting of an individual stock and its sector in most indices is based upon its market capitalization, so strong past performance leads to a higher current weighting in the index. When you buy an index fund, you are buying more of the recent winners, and fewer of the recent losers. Since active managers try to anticipate the next winners, the stocks and sectors in their portfolios often differ significantly from an index. Sector Allocation in the U.S. Equity Component When the stocks selected by our U.S. equity managers are aggregated by sector, the U.S. equity component has over and underweights in certain sectors. Employing active portfolio managers who select companies with the greatest potential for stock price appreciation should result in a

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portfolio that does not look like an index fund. Since these are decisions made at the level of individual companies and not sectors, the U.S. equity component has over and underweights when compared to the sector weights of the Russell 3000 Index. As shown in the graph that follows, U.S. equity managers’ favorable outlook for information technology, consumer discretionary stocks and industrial sector stocks resulted in overweights in these three sectors, three of the four best performing sectors in the Russell 3000 Index in 2019. Unfavorable earnings expectations for stocks in the energy sector led managers to underweight these stocks, the worst performing sector for the third year. Unfortunately, managers also had overweights in stocks in the health care and materials sectors, two of the three worst performing sectors in 2019.

When the U.S. economy is strong and there is still a limited chance for a recession, consumers may buy more products from consumer discretionary or consumer cyclical companies. These products are nice to have but not necessities (to some consumers), including apparel, entertainment, leisure goods, services and autos. Consumer discretionary companies now include McDonald’s, Walt Disney, Ford and Amazon. Consumer durables or staples are products that most would consider to be essential regardless of economic conditions. This would include products such as food, beverages and basic household items provided by companies like Coca-Cola and Wal-Mart. At this point in the U.S. economic cycle, investment managers favored consumer discretionary companies over consumer staples.

International Equity Component of the Balanced Investment Portfolio 21.6% of the Balanced Investment Portfolio on December 31, 2019 The international equity component of the Board of Pensions Balanced Investment Portfolio had a return of 23.1% in 2019, exceeding 22.1% return of the benchmark MSCI All Country World Index ex U.S., or ACWI ex U.S Gross1. The index is designed to measure the equity market performance of

1 The International Equity component of the Balanced Investment Portfolio is benchmarked against the

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both developed and emerging markets, including the country indices of 23 developed and 21 emerging market countries. The international equity component of the Balanced Investment Portfolio exceeded the return of the ACWI ex U.S. Index for the one, three, five, ten, and twenty years ended December 31, 2019.

International Equity Index ReturnsYear to Date December 31, 2019

21.5

23.1

22.0

17.5

19.2

18.4

19.6

21.1

23.8

32.3

0 10 20 30 40

MSCI EM Latin America

MSCI EM

MSCI EM Asia

MSCI Japan

MSCI United Kingdom

MSCI ACWI ex U.S.

MSCI EAFE

Board of Pensions International Equity

MSCI Europe

MSCI EM Europe

% Return

Sources: BNY Mellon, MSCI (net)

In a year when virtually all global markets had positive investment performance, stocks in Europe, as represented in the MSCI Europe Index, were the best performers, with a 23.8% return to U.S. investors. Currency was a component of the return to U.S. dollar investors. Many currencies weakened or depreciated against a strong U.S. dollar, providing lower returns to U.S. dollar investors like the Board of Pensions. Since managers in the international equity component of the Balanced Investment Portfolio build portfolios on a stock by stock basis, stock selection was the primary reason for above benchmark performance. The international equity component of the Balanced Investment Portfolio has managers with a value style bias. This detracted from performance in 2019. Three out of five developed market international equity managers in the international equity component of the Balanced Investment Portfolio outperformed respective benchmarks in 2019. The international equity component total allocation to emerging markets stocks was , lower than the allocation to emerging market stocks in the ACWI ex U.S. Index. Emerging markets stocks are selected for the international equity component of the portfolio by the five core international equity managers and two dedicated emerging markets managers. Four of these core managers found compelling investment opportunities in emerging markets but had less than the index weight of emerging markets in the ACWI ex US Index. In 2019 emerging markets underperformed developed markets so a slight underweight to emerging markets was a portfolio advantage. A new emerging markets manager was retained in April 2019. The longer-term emerging markets equity manager returned 18.0%, lagging the benchmark MSCI Emerging Markets Index return of 18.9%.

ACWI ex U.S. benchmark gross of taxes on dividends because it has a longer history; it returned 22.1% in 2019. Several charts in this review show the benchmark net of taxes on dividends, which returned 21.5% in 2019.

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International Equity Market Historical Performance We have created a graph of historical long-term international equity returns showing developed international equity markets, as represented by the MSCI Europe, Australasia and the Far East (EAFE) Index from 1970 through 2000 and developed and emerging markets represented by the MSCI All Country World Index ex U.S. beginning in 2001, the inception date of the ACWI ex U.S. Index. As shown in the graph that follows, the 2019 net return of 21.5% is above the 10-year trend line return of 5.0% and the long-term 50-year average return of 9.0% for the blended indices since 1970. Following the pattern of the U.S. equity market, international equity had negative returns in 4 out of 10 years, 8 out of 20 years and 13 out of 50 years.

-60

-40

-20

0

20

40

60

80

1970 1976 1982 1988 1994 2000 2006 2012 2018

MSCI EAFE/ACWI exUS blended 10 Year Trend

International Equity Returns in Historical PerspectiveJanuary 1, 1970 – December 31, 2019

37.6

56.7

69.9

32.9

-23.2-22.2 -21.4

50-Year Average

9.0%40.8 41.5

-45.5

-13.7

5.0

Note: MSCI EAFE until 2000; MSCI ACWI ex US effective 2001

-14.2

15.327.2

21.5

As shown in the graph that follows, U.S. stocks outperformed international stocks in 2019. However, the pattern of U.S. versus international outperformance is not predictable, with long periods of over and underperformance for developed markets international stocks versus U.S. stocks. In the most recent ten-year period ending December 31, 2019, stocks in the S&P 500 Index had a compound annual return of 13.6%, significantly outperforming the return of 5.5% from international stocks in the developed markets EAFE Index.

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Developed Markets Performance International equity performance in 2019 depended on both stock and country selection while, as shown in the graph that follows, currency had an impact. A strong U.S. dollar contributed to reduced returns for U.S. dollar investors in many markets. A strong dollar makes imported goods and vacations abroad less expensive for Americans, but it hurts our export industries and decreases investment returns since international stocks are worth less in strong U.S. dollars than in local currencies. When the U.S. dollar is weak and local currencies strengthen against the dollar, investment returns are higher for U.S. dollar investors. U.S. goods are cheaper so exports improve, but travel is more expensive with a weak dollar. As shown on the graph of developed market returns that follows, U.S. investors in the twelve EMU countries that use the euro as their currency had a return of 23.2% compared to the 25.5% return to local investors due to the strength of the U.S. dollar. Despite significant political turmoil, regulatory change and incomplete Brexit negotiations, the index of UK companies returned 16.4% for pound-based investors and 21.1% to U.S. investors due to the appreciation of the pound against the dollar. While investors in Japan received a return of 18.5%, the return to dollar investors was 19.6% due to the strength of the yen against the dollar in 2019.

International Sector Performance In 2019, all major sectors in the MSCI ACWI ex US Index provided positive returns. Despite the linkages of a global economy, it cannot be assumed that the best performing sector in one region will also be the best sector in another. However, as shown in the graph that follows, international equity sector performance was different from that of the U.S. in 2019. The best performing four sectors in the ACWI ex US in 2019 were information technologies, with a return of 40.7%, followed by health care, consumer discretionary and industrials.

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Worst performing sectors in the ACWI ex US were communication services, energy, real estate and financials. Worst performing sectors in the Russell 3000 in 2019 were energy, health care, materials and utilities.

As investors review portfolio performance in 2019, it is important to appreciate the difference in composition between the Russell 3000 Index of U.S. companies and the ACWI ex U.S. Index of international companies. Active portfolio management results in different sector allocations than the index and provides portfolio diversification that is different from that of index funds. Financials are the largest sector in the ACWI ex U.S., with a 21.4% weighting, yet financials represented only 13.5% of the Russell 3000 Index. Information technology, the largest sector in the Russell 3000 Index, had a weight of 22.4% on December 31, 2019. With fewer and smaller technology companies based in non-U.S. markets, information technology had only a 9.4% weighting in the ACWI ex U.S. Index in 2019. The dominance of government run health care programs outside the U.S. reduced the ACWI ex US health care weighting to 8.9% of the Index, compared to the health care allocation of 14.2% in the U.S. based Russell 3000 Index. The Balanced Investment Portfolio active managers had overweights in all four top performing sectors, to include technology, health care, consumer discretionary and industrials. Managers were underweight the underperforming energy, real estate and financial sectors. Sector Allocation in the International Equity Component When the stocks selected by our international equity managers are aggregated by sector, the international equity component has over and underweights in certain sectors. If we explore the structure and composition of the international equity component of the Board of Pensions Balanced Investment Portfolio compared to the sectors of the ACWI ex U.S. Index, as shown in the graph that follows, we can see that the portfolio’s international equity component, based upon sector allocations, does not look like the ACWI ex U.S. Index. Retaining active portfolio managers who select companies with the greatest long-term potential for stock price appreciation should result in a portfolio that does not look like an index fund. Since these are decisions made at the level of individual companies and not sectors, the resulting portfolio has meaningful over and underweights when compared to the sector weights of the ACWI ex U.S. Index.

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Looking at the four best performing sectors, the overweight to technology stocks with a return of 40.7% helped performance in 2019 as did a significant overweight to industrial companies. In the four worst performing sectors, an underweight to financials helped performance, while underweights to energy and real estate also helped performance in 2019.

As shown on the graph that follows, active stock selection also results in country allocations that differ from the ACWI ex U.S in the international equity component.

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The slight overweight to developed markets and underweight to emerging markets in 2019 had a positive impact on performance. Emerging Markets Performance In 2019, the MSCI Emerging Markets Index (net) returned 18.4%. In many years, currency in emerging markets has had limited impact on investment performance, but in periods of political uncertainty, rising inflation and central bank management of reserves and interest rates, the relationship of a country’s currency to the U.S. dollar can add to or detract from performance for U.S. dollar-based investors. Among the best returns were from Russia and Brazil. The Russian economy experienced volatile oil prices and an appreciation of the ruble. Russian stocks returned 37.1% to local investors and a 50.9% return to U.S. dollar-based investors. Brazil continued to experience improved economic and political stability in 2019. The stock market returned 31.1% to local investors, as the Brazilian real appreciated against the dollar, U.S. investors had a return of 26.3%. The country with among the worst investment performance in 2019 was Turkey. This was due to a continuation of the government efforts to reduce the impact of rival politicians and to control all segments of public life, including the military, media and education, and to create a theocracy. Turkey was also heavily involved in Syria and the invasion of Kurdish territories when the U.S. withdrew. The Turkish lira depreciated against the U.S. dollar. U.S. investors had a return of 11.1%, with a return of 24.3% to local investors.

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As shown on the graph that follows, emerging markets underperformed developed markets in 2018, with a return of (14.6%) compared to the (13.8%) return from EAFE developed markets. The MSCI Emerging Markets Index has a ten year compound annual return of 8.0%, exceeding the 6.3% return from stocks in the developed markets EAFE Index for the ten year period ending December 31, 2018. The Russell 3000 had a return of 13.2% for the same period.

Fixed Income Component of the Balanced Investment Portfolio 30.2% of the Balanced Investment Portfolio on December 31, 2019 The fixed income component of the Balanced Investment Portfolio is the most structurally complex part of the portfolio. To provide superior investment returns, the component structure must successfully anticipate the direction of U.S. and global interest rates, spreads of investment grade, high yield and emerging market bonds, as well as credit quality and the impact of currencies. In 2019, the fixed income component of the Portfolio had a return of 8.9% compared to the benchmark return of 9.7% provided by the Bloomberg Barclays U.S. Government/Credit Index. The fixed income component exceeded the return of the Barclays Government/Credit Index for the three, five, ten, fifteen and twenty years ended December 31, 2019. It was a volatile and difficult year for fixed income investors in 2019. Most investors expected interest rates in the U.S. to increase. Few investors expected three rate cuts to the Fed funds rate in 2019 and correctly positioned the portfolio in long bonds. As shown on the graph that follows, investors in a portfolio of 10+ years TIPS had a return of 17.4%. Emerging markets fixed income returned 15.0%. An index of world government bonds had a return of 5.9%. The fixed income component return of 8.9% including cash and a short duration bond portfolio, lagged the 9.7% return of the Bloomberg Barclays Government/Credit Index for the year ended December 31, 2019, but exceeded it for the three, five and ten years ended December 31, 2019.

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Fixed Income Index ReturnsYear to Date December 31, 2019

10.1

14.0

13.5

2.3

5.9

4.1

8.9

9.7

15.0

17.4

0 10 20

3 Month T-Bill

BofA ML Gov/Corp 1-3

Citigroup World Govt Bond

Board of Pensions Fixed Income

Bloomberg Barclays Govt/Credit

Board of Pensions Fixed Income ex Cash

JPM GBI-EM Global Diversified Unhedged

BofA ML Non-Financial Developed Markets HYConstrained

JPM Emg Mkts Bond - Global Diversified

Bloomberg Barclays TIPS 10+ Year

% Return

Sources: BNY Mellon, MSCI (net)

As shown in the graph below, based upon interest rates on December 31, 2019, a 1% increase in U.S. interest rates will impact longer term securities more than money market funds or short duration portfolios. The impact of rising interest rates will have a smaller impact on a bond with a 2 year maturity than on one with a 30 year maturity. If investors believe that interest rates will increase by 1%, an investment in a 30 year Treasury will have a (16.3%) total return while the 2 year Treasury will have a 0.5% total return.

Source: Dodge and Cox

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At the start of 2019 the consensus forecast was that U.S. interest rates would increase in 2019. Not surprisingly, this has been the consensus forecast since 2014. The market anticipated four Federal Funds rate increases in 2018, subject to employment and economic conditions. Few anticipated the continued strength in the U.S. dollar against virtually all currencies and the decline in oil prices. With declining levels of unemployment and stable inflation, the Federal Reserve did increase rates four times in 2018, to close at a fed funds rate of 2.50% on December 31, 2018. The interest rate on a 10-year U.S. Treasury was 2.68% on December 31, 2018. the Fed funds rate was cut three times in 2019, with the 10-year Treasury closing at 1.92% on December 31, 2019. Duration is an important part in the structure of any bond portfolio. While a complicated calculation, duration is often reported in years. Duration measures the sensitivity of the price of a fixed income investment to a change in interest rates. In a period of rising interest rates and falling bond prices, portfolios benefit from having a short duration of two to three years or less. In periods of declining interest rates and rising bond prices, a longer duration portfolio would have the best return. The Bloomberg Barclays Government/Credit Index had a 6.8 year duration on December 31, 2019. The fixed income component core bond managers had durations of 5.2, 7.0 and 6.3 years on the same date. While two of the three core bond managers outperformed the index, the manager with a 7.0 year duration outperformed with a return of 10.5%, exceeding the index return of 9.7%. The structure of the fixed income composite is shown in the graph that follows. The breakdown is by investment manager strategy, with 36% of the composite managed by core managers. There is a 15% dedicated allocation to global high yield. Short duration and cash represent 22% of the composite. Global developed and emerging markets represent 15% of the composite. The unconstrained portfolio represents 7% and TIPS 5% of the composite on December 31, 2019.

The cash and the short duration portfolios comprised 22.0% of the fixed income component on December 31, 2019. The allocation to cash and short duration was 22.0% on December 31, 2018; 18.0% on December 31, 2017, and 16.1% on December 31, 2016. A strategic short duration fixed income allocation of approximately 125% of annual benefits payments was approved by the

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Investment Committee in July 2008. The short duration strategy detracted from the performance of the fixed income component of the Balanced Investment Portfolio in 2019, but helped performance in 2018. Excluding cash and the short duration portfolio, the fixed income component had a return of 10.1% in 2019. Fixed Income Market Historical Performance The chart that follows provides the historical performance of the U.S. fixed income market, as represented by the returns of the Bloomberg Barclays Government/Credit Index. Investors in fixed income can experience negative returns during periods of rising interest rates or when spreads widen on corporate bonds and other types of credit based instruments. However, if we compare annual performance in a graph similar to that of long-term performance for U.S. and international stocks, fixed income has had far fewer and less severe years of negative performance. Over the last 10 years, as shown on the 10-year trend line in the graph, the Bloomberg Barclays Government/Credit Index had a return of 4.0%, below the 47-year average return of 6.9%. Fixed income markets as represented by Barclays Government/Credit Index had negative returns in 1994, 1999, 2013 and 2018, or only four out of 47 years.

Fixed Income Returns in Historical PerspectiveJanuary 1, 1973 – December 31, 2019

-10

10

30

50

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Bloomberg Barclays Capital Govt/Credit 10 Year Trend

15.6

31.1

21.3 19.2

-3.5 -2.2

47-Year Average

6.9%9.7

4.0

-2.4 -0.4

Fixed Income Investment Performance Fixed income performance depends on multiple factors. Historically, the most influential factors are: the level and direction of interest rates, portfolio duration, credit quality and investor appetite for risk, as reflected in the spread over U.S. Treasuries for corporate bonds. Interest Rates The Federal Reserve’s target for the federal funds rate was 4.25% at the start of 2008. This is the interest rate at which private depository institutions, primarily banks, lend balances at the Federal Reserve on an overnight basis to other depository institutions. On December 16, 2008, after six reductions in the first ten months of 2008, the Federal Open Market Committee made the unprecedented move of setting the funds target rate in the range of zero to 0.25%. No change in the fed funds target rate was made until the rate was increased to 0.25% in December 2015 and 0.50% in December 2016 and with three increases in 2017 to 1.25% on December 31, 2017, and four increases in 2018 to 2.25%.

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As shown on the historical yield curve graph that follows, the interest rate for the benchmark 10-year U.S. Treasury was 6.5% on December 31, 1999 (orange line). By December 31, 2007, rates had declined (black line) with the 10-year at 4.0%. After the Global Financial Crisis in the fall of 2008, the Federal Reserve dropped short rates to 0.1%, with a 10-year Treasury at 2.3% and short rates at 0.1% (green line). As noted above, as short rates increased, investors expected an increase in rates on longer term securities. As shown on the yield curve for 2018, (blue line) the 10-year U.S. Treasury closed 2018 at 2.7%, while the yield on 3-month paper was 2.5%. Interest rates decreased in 2019. The 10-year Treasury was 1.9%, with short rates at 1.6% (red line).

Source: Treasury.gov

Investors and savers have become numb to brutally low interest rates in the U.S. We have experienced historically low interest rates for almost a decade, since the Global Financial Crisis of 2008, so it is important to step back and review where yields have been over the longer time periods and put the current 1.9% yield on a 10-year Treasury in perspective. In July 1954, the yield on a 10-year U.S. Treasury bond was 2.3%. Yields had an uneven but steady progression to higher levels, culminating in the 15.3% yield on a 10-year Treasury in September 1981. While yields experienced modest increases and decreases on an annual basis, over the next 30+ years, interest rates generally declined, providing investors in long bonds more than 30 years of superior returns. As shown on the graph that follows, the U.S. experienced interest rates persistently below 4% on the 10-year Treasury from the late 1920s through the 1950s. Low rates can persist for a long time.

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Sources: Bloomberg from 1953 to 2018, Robert Shiller from 1901 to 1953

Global Government Ten-Year Bonds Despite periods in 2018-2019 when the yield on Italian 10-year bonds (black line) exceeded the yield on a 10-year U.S. Treasury (blue line), the U.S. Treasury 10-year provided a higher yield to investors. The graph below reflects the zero to negative yields on 10-year government bonds in Japan (light green) and Germany (turquoise) in 2019.

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Credit Quality and Spreads As reflected in the graph below, U.S. Treasury bonds provided investors with safety and liquidity and a 6.9% return in 2019. Investors in corporate bonds hope to obtain a higher return when they give up some safety and liquidity. Investors in AAA corporate bonds had a 6.7% return, lower than the return of the better quality Treasuries. BBB securities had a return of 19.6%. This was higher than the returns on BB or B-rated bonds, which carry higher credit risk.

Source: Bloomberg

An important trend in the fixed income market since the 2008 Global Financial Crisis has been the decline in high quality (e.g. AA2, AA3) issuance of investment grade bonds and the increase in issuance of BBB rated corporate bonds, often for mergers and acquisitions. As shown on the graph that follows, BBB3 rated bonds increased from 7.5% of the U.S. investment grade corporate bond index in 2007 to 14.0% in 2019. Lower quality BBB1 rated bonds increased from 11.0% of the investment grade corporate bond index in 2007 to 20.0% in 2019. The AA3 bonds decreased from 12.5% of the investment grade corporate bond index in 2007 to 5.0% in 2019. AAA corporates, the highest quality corporate bonds, decreased from 5.0% of the investment grade corporate bond index in 2007 to less than 2.0% in 2019.

Source – J.P. Morgan Asset Management

6.9% 7.6% 6.4% 6.7%9.5%

13.0%

19.6%

15.5% 14.8%

9.5%

-0.3%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2019

Tot

al R

etur

n (%

)

2019 Total Return by Credit Rating

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The U.S. Treasury bond is typically considered the highest quality long-term fixed income investment with the greatest liquidity and no default risk. As such, it is the benchmark security used by investors to price all other long term bonds. The spread for investment grade corporate bonds is a risk premium, or additional yield that investors require for any bond that is not a U.S.Treasury bond. The graph that follows provides a historical overview of the relationship of the yield on high yield bonds and U.S. Treasuries. The yield spread is the additional cushion of safety required by investors to purchase high yield bonds instead of comparable maturity U.S. Treasury bonds. High yield spread movements mirrored the pattern of investment grade corporate bonds to Treasuries in 2008, with spreads tripling in the second half of 2008, to close the year at 1,662 basis points. By 2014, about 20% of the high yield bond index was comprised of energy and energy-related companies. With the collapse in oil prices in the second half of 2014, spreads on high yield bonds widened to almost 529 basis points by December 31, 2014, in line with the 20-year average spread of 528 basis points. Oil prices had a significant impact on spreads again in 2015 as the price per barrel dropped 31%, creating a more difficult environment for the energy sector. High yield spreads widened to 660 in December 2015. Spreads closed on December 31, 2019 at 336, below the long-term average of a 528 basis point premium for high yield bonds over U.S 10-year Treasury.

Source: Bloomberg High Yield Bond Returns By Credit Rating and Volatility As investors, it is important to evaluate whether the return achieved is commensurate with the level of volatility and lack of liquidity in the investment or asset. Are we being rewarded for risk, including illiquidity and potential loss of principal? When reviewing the performance of high yield indices and active managers, it is important to understand historical returns by high yield credit rating as well as volatility by credit ratings. The graph that follows shows returns for BB, B and CCC rated bonds for the three, five, ten and twenty years ended December 31, 2019. Returns for the most risky CCC corporate bonds failed to provide the best total return for all periods.

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Source: Bloomberg Standard deviation of returns is one way investors measure the risk of an investment. The graph that follows shows the annual standard deviation of returns for BB, B and CCC corporate bonds over the three, five, ten and twenty years ended December 31, 2019. For all periods other than the most recent three years, the BB bonds have exhibited less than 52% of the volatility of CCC bonds, with CCC bonds having more than twice the volatility as the higher rated BB bonds.

Source: Bloomberg

6.6% 6.2%

7.7% 7.7%

6.5%5.9%

7.2%6.2%

5.1%6.1%

7.7%

6.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

3yr 5yr 10yr 20yr

2019

Tot

al R

etur

n (%

)

U.S. High Yield Returns by Credit RatingPeriod Ended 12/31/2019

BB-Rated Bonds B-Rated Bonds CCC-Rated Bonds

4.9% 4.9% 5.0%

7.5%

5.1%5.9% 5.8%

9.4%

7.8%

10.1% 9.7%

17.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

3yr 5yr 10yr 20yr

Annu

aliz

ed S

tam

dard

Dev

iatio

n (%

)

U.S. High Yield Volatility by Credit RatingPeriod Ended 12/31/2019

BB-Rated Bonds B-Rated Bonds CCC-Rated Bonds

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Default Rates The default rate for U.S. dollar-denominated bonds is the par value of defaulted securities as a percentage of the par value of outstanding issues. As shown in the graph that follows, default rates hit a multi-decade peak in 2009 (2nd highest recorded rate to 1933) with a default rate of 5% for all corporates. Speculative grade bonds had a default rate of 12.1% for high yield borrowers primarily due to weak underwriting standards in the 2004 to 2006 period. This led to only the fourth time since 1920 where defaults of high yield issuers exceeded 10.0%. The incidence of corporate defaults then declined from 2009 through 2014 as banks and other lenders provided corporations extra time to work through potential breaches in loan covenants, extended maturities and refinanced debt to avoid foreclosures and bankruptcies. As a result, investors remained enthusiastic buyers of high yield debt refinancing during a low interest rate environment. At the close of 2018, the most recent data available, the default rate of all corporate bonds was 1.1% and 2.3% on speculative bonds.

Source: Moody’s Default Study

Emerging Market Debt As shown on the graph that follows, emerging market debt has greatly increased in importance and market size over the last 30 years. In 1989, it represented approximately 0.7% of the global bond market with the U.S. dominating at 58.6% of the global bond market. As of June 2019, emerging market debt as a percentage of the global bond market has increased to 22.7%, while the U.S. share has decreased to a 35.9% allocation.

1990, 3.6% 2001, 3.7%

2009, 5.0%

2018, 1.1%

1990, 10.5%

2001, 9.6%

2009, 12.1%

2018, 2.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1988

1989

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

2015

2016

2017

2018

Issuer-Weighted Default RatesPeriod Ended 12/31/2018

All Corp Spec-Grade

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Source: J.P. Morgan Asset Management Emerging market bonds, both local currency and U.S. dollar denominated, were the top performing fixed income sectors in 2019 with returns of 15.0% and 13.5%, respectively. As shown in the chart that follows, after strong performance in 2017, spreads of hard currency emerging market bonds were 202 in January 2018, their lowest point in over a decade. Spreads in 2019 closed the year at 287, below the long-term average of 355 basis points. As investors move farther out the risk curve in search of yield and diversification, emerging market bonds will continue to play an important role in the global bond market and in portfolio composition.

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Source: Bloomberg Private Partnerships Component of the Balanced Investment Portfolio 9.1% of the Balanced Investment Portfolio on December 31, 2019 Private partnerships are used in the Balanced Investment Portfolio to supplement the traditional asset classes of stocks and bonds. Private partnerships provide access not available in the public markets to investment opportunities with potentially superior long-term returns and to managers with long-term records of creating value for their investors. In 2019, new commitments were approved for limited partnerships in U.S private equity, venture capital, distressed debt and real estate. One commitment was with a new limited partnership relationship. When reviewing performance, some of the differences can be attributed to partnerships’ one-quarter lag in performance reporting, making it important to remember that private limited partnerships are long-term investments with a minimum of a ten-year horizon.

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PRIVATE PARTNERSHIPS INVESTMENT PERFORMANCE HIGHLIGHTS PERIODS ENDED DECEMBER 31, 2019

Internal Rate of Return (%) 1 Year 2 Years 3 Years 5 Years 10 Years BOP PRIVATE PARTNERSHIPS

U.S. Private Equity 8.0 14.4 15.6 14.6 16.1 Natural Resources -15.0 -3.2 1.6 -1.1 2.1 International Private Equity 5.1 2.1 5.3 3.8 6.3 Distressed Debt 5.8 7.4 10.4 8.5 9.2 Venture Capital 21.4 21.3 16.6 15.5 16.2

BOP TOTAL PRIVATE PARTNERSHIPS 1.6 6.8 9.5 7.9 10.6

BOP REAL ESTATE 12.6 9.7 9.6 8.5 10.7 Assets in private partnerships are diversified among different types of investments, including distressed debt, real estate, venture capital and three different types of private equity: U.S., international and natural resources/energy. Some of these categories blur in practice: for instance, some general partners invest for control of portfolio companies through either debt or equity securities depending in part on valuation of the respective securities at the time of investment. The current breakdown of private partnerships by type of investment at market value on December 31, 2019 appears in the following chart. Private Partnership Asset Allocation and Actual Market Value on December 31, 2018

ressed Debt 16.5%

International Private Equity 13.5%U.S. Private Equity 31.9%

Venture Capital 5.3%

Total assets $10,186 million

Natural Resources/Energy26.0%

Real Estate6.9%

Investments in private partnerships are diversified by fund type, by fund manager and also diversified over time, since fund returns are strongly affected by cyclical factors which do not become apparent until long after investors have finalized their commitments to a specific fund. Spreading the investment

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periods of private partnerships over time potentially avoids concentration in periods which ultimately provide substandard returns.

Private Partnerships by Vintage (Investment) Year The chart that follows shows private partnership commitments in the Balanced Investment Portfolio by vintage year, the year the general partner began investing capital committed to the partnership. Vintage year may differ from the year the Board of Pensions made the legal commitment to the partnership; the general partner may not begin investing funds immediately after a fund’s close because the general partner is still investing a prior fund or because of disruptions in the investment marketplace. Commitments to private partnerships are shown by vintage year as a percentage of the total commitment to private partnerships in the Balanced Investment Portfolio and, within each vintage year, by type of partnership.

Private PartnershipsCommitments by Vintage Year

as of December 31, 2019

0

5

10

15

20

25

199820002001200220032004200520062007200820092010201120122013201420152016201720182019NFInternational PE U.S. PE Venture Capital

Distressed Debt Natural Resources/Energy Real Estate

2008 201020072005

20042003

20022001

20001998

20062009 2011 2012 Not

Funded

20132014

20152016

20172018

2019

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Private Partnership Capital Calls and Cash Distributions When the Board of Pensions makes a legal commitment to invest in a private partnership, the partnership invests committed capital over a period of years. As each partnership sells its holdings, the general partner makes cash distributions to the Board of Pensions. The private partnerships in the Balanced Investment Portfolio have returned more cash than they called in most recent years, although cash generation from these partnerships is highly unpredictable. Private partnership cash flows for the last five years are shown in the chart that follows.

Private PartnershipsComparative Cash Flows for years ended 12/31

020406080

100120140160180200

2014dist

2014calls

2015dist

2015calls

2016dist

2016calls

2017dist

2017calls

2018dist

2018calls

2019dist

2019calls

International PE U.S. PEVenture Capital Distressed DebtNatural Resources/Energy Real Estate

$ m

illio

ns

Calls$127

Dist $161

Dist $152

Calls$165

2014 2015 2016Dist $174

Calls $162

Dist$154

2018Calls$166

2017Dist$193

Calls$145

2019Calls$121

Dist$142

Marketable Diversifying Strategies Component of the Balanced Investment Portfolio 5.4% of the Balanced Investment Portfolio on December 31, 2019 The marketable diversifying strategies component of the Balanced Investment Portfolio currently includes inflation protection and absolute return investments in commingled funds as well as real estate securities. Absolute return investments offer returns which are potentially uncorrelated to public market securities. Inflation mitigating investments include real estate and commodities. Absolute return strategies include risk parity portfolios. Other types of marketable diversifying strategies have been included in the Balanced Investment Portfolio previously and may be included in the future. The investments in inflation mitigating strategies were initiated in 2005 to provide protection during periods of increasing U.S. inflation. Inflation has not been a problem and these investments have underperformed the Balanced Investment Portfolio. The Inflation Study was updated and reviewed by the Investment Committee in 2018. With no expectation of increased inflation near-term, no increase was made in the asset allocation to inflation mitigating strategies. In 2019, the two inflation mitigating portfolios returned 12.3% and 9.7%, exceeding the 7.1% benchmark return of the CPI +5%.

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The Balanced Investment Portfolio is invested in three absolute return strategies. One is a global macro strategy that returned 0.3% in 2019. Two risk parity strategies exceeded expectations. One returned 24.4% and one returned 16.6%, compared to the 7.1% benchmark return of the CPI +5%. The public markets real estate securities portfolio returned 15.9% in 2019 compared to the 24.5% return of the S&P U.S. REIT Index.

MARKETABLE DIVERSIFYING STRATEGIES INVESTMENT PERFORMANCE HIGHLIGHTS PERIODS ENDED DECEMBER 31, 2019

Annualized Rate of Return (%) 1 Year 2 Years 3 Years 5 Years 10 Years

BOP MARKETABLE DIVERSIFYING STRATEGIES

10.6 4.0 5.2 3.3 4.6

Consumer Price Index +5% 7.1 6.9 6.9 6.6 6.5

BOP Balanced Investment Portfolio 17.8 6.4 9.8 7.3 8.6

The graph that follows reflects the diversification of the marketable diversifying strategies component of the Balanced Investment Portfolio on December 31, 2018.

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Portfolio Accounting

The total return on the Balanced Investment Portfolio is measured using the actual market value of assets held on January 1, 2019, and the actual market value of assets held on December 31, 2019. The beginning asset value is increased by interest income and dividends and decreased by fees and benefits paid during the year. In 2019, the portfolio paid out $407 million in benefits in excess of dues received. The portfolio had net realized gains of $323 million on securities sold in 2019 and had unrealized gains of $1,104 million due to a gain in the market value of securities still held in the portfolio on December 31, 2019. Cash flows into the Balanced Investment Portfolio were from the Board of Pensions Fixed Income Portfolio and assets from other fixed income portfolios.

MARKET VALUE RECONCILIATION BOARD OF

PENSIONS BALANCED INVESTMENT PORTFOLIO

$Millions

Market Value on January 1, 2019 $8,992 Net Income 167 Net Realized Gain 323 Net Unrealized Gain/(Loss) 1,104 Cash Flows into Portfolio 67 Benefit Payments/Transfers (436) Investment and Custody Fees (31)

Market Value on December 31, 2019 $10,186

Plan and Program Participation The assets of the Board of Pensions Balanced Investment Portfolio are unitized so that each participating plan and program owns units in the portfolio rather than individual securities. This reduces the investment and custodial fees for all plans and programs. The valuation of units is done monthly by BNY Mellon, custodian for all assets, using an accounting process similar to that used to develop the net asset value of a mutual fund. Plans, with the exception of the Benefit Supplement Fund, Medical Plan Long-Term Reserve and Medical Plan Contingency Reserve, own only units of the portfolio and have the same asset allocation and investment performance as the Balanced Investment Portfolio, dependent upon the time the plan or program adopted a 100% allocation to the portfolio. The High Cost Claims Fund, Medicare Supplement Fund and Medical Dental Fund own units of both the Board of Pensions Balanced Investment Portfolio and the Board of Pensions Fixed Income Portfolio. The Fixed Income Portfolio, valued at $35 million on December 31, 2019, can be used by plans and programs with differing investment horizons, enabling the Board of Pensions to customize their long-term asset allocations. The table that follows shows the market values of plans and programs participating in the Board of Pensions Balanced Investment Portfolio and the Board of Pensions Fixed Income Portfolio at BNY Mellon as of December 31, 2019.

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PLAN AND PROGRAM PARTICIPATION

$Millions % of BOP Balanced Pension Plan 8,943 87.79

Death and Disability Plan 879 8.63 Supplemental Death Benefits Plan 50 0.49 Chaplains Deposit Fund 4 0.04 SR Plan 5 0.05 Pension 9,881 97.0 General Assistance Fund 45 0.45 Endowment Fund 25 0.25 Benefit Supplement Fund 38 0.38 Restricted Gifts Fund 11 0.11 Retirement Housing Fund 6 0.06 GAC Special Cuban Fund 0 0.00 Assistance / Endowment 125 1.25 Medical Contingency Reserve 95 0.93 High Cost Claims Fund 29 0.28 Post-Employment/Post-Retirement (PEPRM) 10 0.10 Medical Plan Operating Reserves 34 0.33 Medicare Supplement 10 0.09 Medical Dental 2 0.02 Medical / Healthcare 180 1.75

Total Invested in Board of Pensions Balanced Investment Portfolio

$10,186 100.00%

Note: Due to rounding, percentages may not total 100%.

Board of Pensions Fixed Income Portfolio $Millions % of BOP Fixed Income Portfolio

High Cost Claims Fund 24 67.93 Medicare Supplement Fund 9 27.21 Medical Dental 2 4.86 Medical / Healthcare Total Invested in Board of Pensions Fixed Income Portfolio

$35 100.00%

Cash & Miscellaneous Securities 1 Total Investments at BNY Mellon $10,222

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Outlook for 2020 – Are We Cockeyed Optimists or Debbie Downers? What can we expect in 2020? Our job as investors is to understand what are short-term and what are long-term strategies. We need to invest with perspective, perseverance, time, and common sense. We need to be hard headed. As noted in our 2017 Review, we cannot see with eyes clouded by the lure of easy money and easy decisions. We need to hear what is going on around us as the sounds of change ricochet at an ever increasing pace through our global investment world. We must always remember what we value, and that we take care of our own, our Members. We often we believe we understand and can even forecast global markets, interest rates and dozens of economic variables, yet we need humility to remember we really are not in charge. In Charge We are not in charge. We are not in charge of life. We are not in charge of much about life. O, we can do many things, And we are responsible for many things, But in the final analysis, We are not really in charge. Dr. James Phillips Noble. Words and Images That Seep into the Soul. 2013 As we dust off our crystal ball for 2020, we should remember that it has been an interesting and challenging decade for global investors. The December 31, 2019, 10-year return for the Balanced Investment Portfolio was 8.6%. The five-year return for the Balanced Investment Portfolio was 7.3%. Returns for both periods exceeded the 6.0% long-term actuarial assumption. As shown in the table below, U. S. stocks led performance in both time periods, and any allocation away from the U.S. markets detracted from performance.

Periods Ended December 31, 2018 10 years % 5 years % Balanced Investment Portfolio 8.6 7.3 U.S. Large Company Stocks 13.5 11.5 U.S. Small Company Stocks 11.8 8.2 International Stocks – Developed Markets 5.5 5.7 International Stocks – Emerging Markets 3.7 5.6 Total U.S. Bond Market 3.8 3.1 U.S. Treasury Bills 0.6 1.0

In 2014, the Balanced Investment Portfolio provided a return of 5.6%. The 2014 Review was “We are Believers”. The 2015 Review reported a return of (1.1%) and a theme of Global Markets Rocked Us in 2015. In 2016 the Balanced Investment Portfolio returned 9.0%. We wrote the Review and positioned our portfolios for success in 2016, with an overarching “Whole Lotta Shakin’ Goin’ On” for 2017. We held on in 2017 and had a portfolio return of 17.0%. As we reviewed the success of 2017, we questioned, “What is Real?” In 2018 we failed to anticipate the level of increased volatility in U.S. stock and bond markets and spent time questioning what is short-term and long-term in an ever-changing U.S. political and economic environment. We failed to appreciate the impact of social media and “Fake News” on people overwhelmed by the inch by inch direction of political and economic events. We failed to anticipate the magnitude of highly polarizing political events, to include trade tariffs, immigration reform, the building of the wall, a shutdown of the U.S. government and our pull out from major conflicts in Syria and Afghanistan. U.S. markets in 2018? Markets inched up and then took several yards down. Market volatility reflected the important hard line on immigration and building the wall for Trump supporters. Markets recognized the growth of income inequality, setting up a potential

59

Wall Street/Main Street conflict over new tax programs. In 2019, we questioned whether we could be long-term investors, investing “Yard By Yard”. We remained true to our long-term investment diciplines and the portfolio had a return of 17.8%. While investment performance is of paramount importance, we have several missions, and risk management is an integral part of our stewardship, if not our primary responsibility. It is difficult, if not impossible, to protect the Balanced Investment Portfolio from unexpected global risks that might have a probability of 0.3% or less, but such risks, known as tail risks by statisticians, are very real. Investors should recognize that in an interconnected global economy, we should expect systemic global shocks. We need to be mindful of what could be unusual, high risk events and their potentially devastating impact on investment portfolios. We need to raise questions with our managers that may appear to be out of the box and unrelated. We must always remember that the possible, improbable and “impossible” are with us every day as part of a normal distribution of events. As always, the hard part is to know where we are on the risk curve today and where we could be tomorrow.

2020 Outlook In October 2016 the Board of Directors approved the reduction in the expected long-term investment return assumption for the Balanced Investment Portfolio from 7 percent to 6 percent. In 2019 we conducted an Asset/Liability Study to review Pension Plan long-term investment assumptions and asset allocation. The Asset-Liability Study affirmed the actuarial interest assumption of 6.0%, the same actuarial interest assumption of 6.0% that was adopted in 1986 when the Defined Benefit Pension Plan was designed. We have a well-diversified portfolio and are reviewing future changes in the long-term asset allocation of the Balanced Investment Portfolio that could potentially increase return without a meaningful increase in risk and a decrease in liquidity. Following the downturn of U.S. and international stocks in the fourth quarter of 2018, we believed stocks would outperform bonds in 2019, and they did. As we look at valuations in January of 2020, many U.S. and international developed market stocks, especially in technology, are fully valued. However, we believe our active managers will find opportunities in stocks of companies that still have reasonable valuations and can outperform in 2020. We are maintaining our current allocation to U.S. and international equities. Emerging market stocks, after slightly underperforming developed market company stocks in 2019, could provide superior performance in 2020. While we expect to add a new active manager for emerging markets, the allocation will not materially increase. Despite the fact that value stocks have significantly underperformed growth/momentum stocks over the past decade, we believe we have the appropriate allocation to value. We continue to expect (since 2014) that long duration fixed income assets will be less attractive in 2020 as the Federal Reserve maintains the current level of the fed funds rate. While we see opportunities in global high yield in 2020, we will not increase the allocation. We continue to believe that U.S. inflation will not be a problem in 2020 and will review strategies to mitigate the risk of unexpected inflation. Opportunities in private limited partnerships will be evaluated throughout 2020 as we focus on building our private real estate portfolio and maintaining our allocaton to private partnerships in equity, venture capital and distressed debt. The red flags waving for both private equity and real estate partnerships reflect the concern that fund sizes have increased and now exceed pre-2007 levels. Existing partnerships are retaining “dry powder” for new deals while potential new partnerships are oversubscribed by investors not wanting to miss out on an increase in the allocation to illiquid partnerships. The combination of dry powder and new cash means more money chasing fewer deals in 2020.

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As we have done for more than twenty-five years, we will continue to use short-term market outperformance or volatility in individual asset classes to raise cash to pay benefits. In 2020, benefits payments will require cash in excess of dues of more than $407 million. We are long-term investors. We have a long-term strategic asset allocation based on our liabilities, or the future benefits for our Plan members. We will not increase portfolio risk by using short-term trading strategies in an attempt to improve investment performance. We are socially responsible investors and partner with the denomination’s Committee on Mission Responsibility Through Investment (MRTI) to assist in the mission of the denomination on issues of corporate governance, global social issues and the environment. We will faithfully pursue the goals of our assigned mission, recognizing the multiple needs of those we serve in the Presbyterian Church (U.S.A.).

January 31, 2019

Judy Freyer Telephone: 215/587-7245 Email: jfreyer@pensions.org

The 2019 Investment Review was prepared by the Investment Team of the Board of Pensions of the Presbyterian Church (U.S.A.). Text and commentary: Judith D. Freyer, CFA Content for Graphs and Charts: Peter T. Maher, CFA Additional research and assistance: Donald A. Walker III, CFA; Michael J. Kwiatkowski, CFA, Lydia M. Yost

Notes and Our Sources of Inspiration

Debbie Downer is the name of a fictional character in the 2004-2006 seasons of the TV show “Saturday Night Live”. The character was a spoof on people who are always pessimistic and frequently add bad news and negative feelings to a gathering, thus bringing down the mood of everyone around them. Debbie has a theme song: "You're enjoying your day, everything's going your way, when along comes Debbie Downer. Always there to tell you 'bout a new disease, a car accident, or killer bees. You beg her to spare you, 'Debbie, please!' but you can't stop Debbie Downer!"

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Dr. Noble hired me in 1988, despite the fact that I am a little Yankee gal. Dr. Noble was President of the Board of Annuities and Relief, and in 1988, was Co-President of the Board of Pensions. Dr. Noble played a significant role in the civil rights movement. He is the author of Beyond the Burning Bus: The Civil Rights Revolution in a Southern Town, (2003). Thank you Dr. Noble.

Dietrich Bonhoeffer was a German theologian imprisoned by the Nazis in April 1943. He was hanged in 1945 at the age of 39. His letters have been an inspiration to people of all faiths. Since this book cost $1.45, you should assume it was a college text in 1966.

Tiger Freyer, also known as Mr. Tiger, has been the home office support staff on the annual Investment Review. His recommendation for pets.com because he was in love with the sock puppet was a money loser. His recent recommendation for cat food delivery services has been interesting but increased his bottom more than our portfolio bottom line.

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