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Executive Summary of Performance

Prepared for Tacoma Employes’ Retirement System

Third Quarter 2009

Wilshire Consulting Executive Summary of Performance – September 30, 2009 Prepared for Tacoma Employes’ Retirement System

Capital Market Overview

The third quarter of 2009 found global stock markets surging upward in full recovery mode, continuing the trend set in the prior quarter. The economy continued to hint at an imminent end to the current global recession, despite a US unemployment rate hovering at just under 10% (the Bureau of Labor Statistics estimate at quarter-end: 9.8%). Corporate earnings reports were generally good (results achieved primarily through cost-cutting), and housing prices in major US metro markets increased for three months in a row. Although the US Commerce Department projected a second quarter GDP contraction of -0.7% (annualized) in the second quarter of 2009, this represented a vast improvement over the -6.4% (annualized) pullback in GDP growth over the first quarter of the year. Investors dove into the securities markets with an extra appetite for risky assets; some of the biggest winners in the capital markets were the most downtrodden dogs of the recent market collapse. The US Federal Reserve maintained their 0.0-0.25% overnight rates target throughout the quarter, continuing their efforts to sustain and increase overall liquidity in the markets. Consumer inflation, as measured by the Consumer Price Index (All Urban Consumers), was relatively muted during the quarter, posting an increase of just 0.13% over the quarter. A downward drift in US interest rates at all maturities combined with a flight to yield, driving credits to continue the sharp gains seen in the second quarter. The investor rotation into real assets also continued in the third quarter, nudging commodity prices somewhat higher (crude oil: $70.61 as of September 30, up from $69.89 as of June 30). This also helped sustain the US dollar’s devaluation against most world currencies; naturally, this sweetened the performance of offshore assets held by US-based investors when converted to US dollar terms. U.S. Equity Market The S&P 500 enjoyed its best quarterly performance since the heady days of the Internet stock bubble of 1998, with a return of 15.60% for the third quarter. As befits a market that rewarded higher-volatility holdings, the Wilshire 5000 with its higher exposure to small- and micro-cap stocks outperformed the S&P, with a return of 16.12%. Indeed, large-cap stocks (Wilshire US Large Cap, 15.29%) could not keep up with the heady pace set by smaller-company stocks (Wilshire US Small Cap, 22.86%; Wilshire US Micro Cap, 22.68%). Size, however, was not the only factor driving stock performance. Among large-company stocks, growth was slightly favored, a slight nod to higher-beta issues (Wilshire US Large Growth, 15.46%; Wilshire US Large Value, 15.14%). However, among smaller-company stocks, value was strongly favored, perhaps reflecting stronger earnings prospects, more compelling company narratives, or simply beaten-down Financial stocks staging a comeback (Wilshire US Small Growth, 19.94%; Wilshire US Small Value, 25.94%). Drilling down to economic sectors of the S&P 500 (GICS classification), Financial stocks outpaced the pack with a 24.68% return for the quarter; Industrials (22.03%) and Materials (21.56%), reflecting optimism over recovery in manufacturing, were not far behind. The Telecomm Services sector was the worst performer at 5.60%, with Utilities a bit ahead (6.16%). However, the recovery in real estate securities continued with another winning quarter (Wilshire US Real Estate Securities, 35.93%).


Fixed Income Market The Fed maintained its program of broad purchases of Treasury and US Agency MBS, allowing interest rates to moderate and supporting increased liquidity in consumer borrowing, especially in the hard-hit home loan market. All broad fixed income sectors rallied in the third quarter as Treasury yields fell across all maturities. The yield on two-year Treasuries fell 18 basis points to 0.96%, while the thirty-year Treasury yield dropped 27 b.p. to 4.05%. The ten-year yield, the bellwether rate for the mortgage market, slid a healthy 31 b.p. to 3.56%. Given a lower and flatter yield curve, long-term paper outperformed shorter issuance (Barclays Long Treasury, 4.52%; Barclays 1-3 Year Treasury, 0.78%). As seen in equities, investors spent the quarter buying higher-risk fixed income assets; spreads tightened for both the credit and mortgage-backed markets (Barclays Credit, 7.48%; Barclays MBS, 2.32%) relative to government-backed straight debt (Barclays Government, 2.03%). This search for yield also strongly benefited below-investment-grade paper, where spreads plunged and the sector yielded equity-like returns (Barclays High Yield, 14.22%; Barclays US Aggregate, 3.74%). Non-U.S. Markets Among non-US equity markets, performance was broadly higher in the third quarter of 2009, especially in US dollar-converted terms thanks to the continued slump in the US dollar (MSCI All Countries World ex-US, 14.83% local currency terms, 19.69% US dollar terms), with a notable exception being seen in Japan, where stocks staged a minor pullback (MSCI Japan, net dividends, -1.16% Yen terms, 6.51% USD). European stocks yielded excellent performance, especially among the marquee-name financials that shed so much value in 2008 (MSCI Europe, net, 20.19% local, 22.92% USD). With Japan dragging down regional performance, Asia-Pacific stock markets could not keep pace with Europe (MSCI Pacific, net, 5.34% local, 13.15% USD). The second-quarter rally in emerging market stocks slowed somewhat in the third quarter as investors assessed near-term performance drags such as increased commodity prices and higher global interest rate prospects (MSCI Emerging Markets, net, 16.82% local, 20.91% USD; MSCI EAFE net, 14.82% local, 19.47% USD). Global fixed income markets enjoyed the same attractive market environment as US fixed income markets; low interest rates and a taste for yield and volatility led to tighter credit spreads and excellent overall performance (Barclays Global Aggregate, 6.23% USD; JP Morgan Emerging Markets Bond Plus, 10.24% USD).


Summary of Index Returns For Periods Ended September 30, 2009

One Three Five Ten

Quarter Year Years Years Years Domestic Equity

Standard & Poor's 500 15.60% -6.93% -5.43% 1.02% -0.16% Wilshire 5000 16.12 -6.43 -4.83 1.76 0.85 Wilshire 4500 19.39 -3.87 -2.87 3.91 3.96 Wilshire Large Cap 15.29 -7.06 -5.05 1.53 0.22 Wilshire Small Cap 22.86 -0.79 -2.15 4.25 5.96 Wilshire Micro Cap 22.69 6.23 -5.53 0.93 8.52

Domestic Equity Wilshire Large Value 15.13% -11.81% -8.03% 0.57% 2.31% Wilshire Large Growth 15.46 -2.27 -2.15 2.30 -2.05 Wilshire Mid Value 23.74 -5.84 -4.49 1.93 7.03 Wilshire Mid Growth 21.97 5.26 0.59 6.91 3.93 Wilshire Small Value 25.93 -2.18 -3.30 3.48 8.42 Wilshire Small Growth 19.94 0.60 -0.97 4.98 2.81

International Equity MSCI All World ex U.S. (USD) 19.69% 5.89% -1.24% 8.10% 4.04% MSCI All World ex U.S. (local currency) 14.82 1.92 -4.17 5.87 -.- MSCI EAFE 19.47 3.23 -3.60 6.07 2.55 MSCI Europe 22.92 1.57 -3.64 6.36 3.29 MSCI Pacific 13.15 6.89 -3.57 5.43 0.94 MSCI EMF Index 20.91 19.07 7.95 17.30 11.38

Domestic Fixed Income Barclays Aggregate Bond 3.74% 10.56% 6.41% 5.13% 6.30% Barclays Credit 7.48 19.49 5.84 4.72 6.53 Barclays Mortgage 2.32 9.86 7.41 5.92 6.44 Barclays Treasury 2.10 6.27 6.86 5.21 6.22 Citigroup High Yield Cash Pay 13.38 21.20 5.02 5.77 6.44 Barclays US TIPS 3.08 5.67 5.61 4.79 7.51 91-Day Treasury Bill 0.06 0.37 2.82 3.11 4.24

International Fixed Income Citigroup Non-U.S. Gov. Bond 7.33% 16.07% 10.15% 7.06% 6.66% Citigroup World Gov. Bond 6.16 13.78 9.41 6.65 6.70 Citigroup Hedged Non-U.S. Gov. 2.03 7.87 5.25 5.21 5.45

Currency* Euro vs. $ 4.21% 4.06% 4.89% 3.31% 3.22% Yen vs. $ 7.76 18.57 9.66 4.24 1.75 Pound vs. $ -2.88 -10.27 -5.04 -2.44 -0.29

Real Estate Wilshire REIT Index 35.42% -29.26% -13.70% 1.17% 9.73% Wilshire RESI 35.93 -29.31 -13.83 1.11 9.56 NCREIF Property Index -3.32 -22.11 -1.29 6.16 7.83

________________________________ *Positive values indicate dollar depreciation.


Total Fund Overview

Expected Return and Risk

7.65% 7.28%

10.37% 10.02%

1.68%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Target Allocation Actual Allocation

Expected Return Expected Risk Expected Allocation Based TE

♦ The Tacoma Employes’ Retirement System (“TERS, the System”)’s expected return based on its

actual asset allocation is currently slightly lower than the expected return based on its target allocation. However, given the current asset allocation, the System’s calculated expected volatility is also lower than that based on its target allocation.

Total Fund Asset Allocation

21.0%

8.4%

8.4%

4.2%

25.0%

15.0%

8.0%10.0%

0.0%

Target Asset Allocation

Domestic Equity

Intl Equity Hedged

Intl Equity Unhedged

Emerging Markets

Core Fixed Income

High Yield

REIT

Private Equity

Cash

31.1%

7.2%

10.8%4.4%

22.7%

15.2%7.4%

0.4% 0.8%

Actual Asset Allocation

Domestic Equity

Intl Equity Hedged


Emerging Markets

Core Fixed Income

High Yield

REIT

Private Equity

Cash

10.13%

‐1.21%

2.39%0.23%

‐2.27%

0.15%

‐0.61%

‐9.62%

0.81%

‐15%

‐10%

‐5%

0%

5%

10%

15%

TERS Asset Allocation Variance

‐6.50%

1.08%

‐1.06% ‐0.49%

1.76%

‐0.02%

1.10%

104.15%

‐0.02%

‐60%‐40%‐20%0%

20%40%60%80%100%120%

Contribution to Tracking Error


Total Fund Overview (Continued)

Total Fund Asset Allocation (Continued) ♦ At the end of the quarter, the System’s actual asset allocation was overweight in domestic equity

(+10.1%), total international equity (+1.4%), high yield (+0.2%) and cash (+0.8%) while underweight in core fixed income (-2.3%), real estate (-0.6%) and private equity (-9.6%) relative to its asset allocation policy.

Contribution to Total Risk based on Wilshire’s Asset Class Assumptions

♦ TERS’ domestic equity asset class is currently the biggest contributor to its total volatility (48.07%

based on actual allocation as of September 30). This is primarily attributed to the ramp-up process of the System’s new private equity allocation, as most of the capital earmarked for private equity investments have yet to be called down from the S&P 500 parking fund.

30.60%

10.95%

11.31%7.21%

4.39%

8.50%

5.48%

21.56%

0.00%

Contribution to Total Risk ‐ Target Allocation

Domestic Equity

Intl Equity Hedged


Emerging Markets

Core Fixed Income

High Yield

REIT

Private Equity

Cash

48.07%

9.87%

15.43%

7.89%

3.78% 9.15%

5.05%

0.76%

0.00%

Contribution to Total Risk ‐Actual Allocation

Domestic Equity

Intl Equity Hedged


Emerging Markets

Core Fixed Income

High Yield

REIT

Private Equity

Cash



Asset Class Performance

Total Fund 15.22 2.21 -1.04 5.21 6.25 8.12Asset Allocation Policy 1 14.56 -1.80 -2.09 3.84 4.29 7.59Actuarial Rate 1.88 7.75 7.75 7.75 7.77 7.60Policy Expected Return 2.04 8.40 8.40 8.40 8.50 8.93

U.S. Equity 16.79 -7.72 -5.72 1.60 2.85 7.51International Equity 20.10 -3.12 -4.61 6.13 2.29 3.93Fixed Income 7.47 13.16 7.16 6.07 6.76 7.25High Yield 9.75 11.27 4.58 -.- -.- -.-Real Estate 30.59 -31.53 -16.74 -0.47 8.99 6.85Private Equity 15.01 -.- -.- -.- -.- -.-Cash 0.70 2.15 -10.26 -4.98 -1.03 0.87

S&P 500 Index 15.60 -6.93 -5.43 1.02 -0.16 7.62Wilshire 5000 Index 16.12 -6.43 -4.83 1.76 0.85 7.66MSCI ACWI x US Index 19.69 5.89 -1.24 8.10 4.04 -.-Barclays Aggregate Bond Inde 3.74 10.56 6.41 5.13 6.30 6.81DJ Wilshire REIT Index 35.42 -29.26 -13.70 1.17 9.73 9.2891-Day Treasury Bill 0.06 0.37 2.82 3.11 3.11 3.86

15-yearPerformance (% )

10-yearQuarter 1-year 3-year 5-year

♦ The System generated a solid return of 15.2% for the third quarter of 2009, beating its actuarial rate

of return of 1.9% as well as its asset allocation policy benchmark’s return of 14.6%. The System also outperformed its policy benchmark for all longer-term periods, though against the actuarial rate of return it has lagged over all but the ten-year mark.

Asset Growth

($Mil.)4Q07 1,183.8 21.9 -23.3 -0.9 -32.0 1,149.5 -2.78%1Q08 1,149.5 14.5 -23.3 -0.8 -60.7 1,079.1 -5.21%2Q08 1,079.1 9.3 -13.4 -0.8 -16.2 1,058.0 -1.45%3Q08 1,058.0 10.1 -15.3 -1.1 -93.7 958.0 -8.91%4Q08 958.0 13.7 -14.6 -0.7 -188.9 767.4 -19.10%1Q09 767.4 9.8 -19.0 -0.2 -56.2 701.7 -5.51%2Q09 701.7 13.0 -12.2 -0.4 103.6 805.6 16.05%3Q09 805.6 8.6 -12.1 -0.6 117.1 918.7 15.22%

Invest. Gain/Loss

End. Mkt Value

Total Return

Beg. Mkt Value

Net Contrib.

Net Distrib.

Invest. Fees

♦ As of September 30, 2009, the System’s market value was approximately $919 million, which represented an increase of $113 million from the beginning of the quarter. The change in market value consisted of $9 million in net contributions, $12 million in net distribution and administrative fees, $0.6 million in investment fees, and $117 million in net investment gains.

1 Starting 2Q09, the international equity component changed from MSCI ACWI x-US to 40% MSCI EAFE/40% MSCI EAFE

Currency Hedged/20% MSCI Emerging Markets.



Total Fund Attribution

U.S. Equity 3.28 -0.08 0.24 3.44International Equity 3.73 0.34 0.52 4.62Fixed Income 0.94 -0.09 0.84 1.69High Yield 2.22 0.11 -0.78 1.54Real Estate 2.83 -0.53 -0.30 1.97Cash 0.00 0.00 0.00 0.00Private Equity 1.57 0.07 -0.07 1.57Total Fund 14.56 -0.18 0.73 15.22

Total Fund Return Contribution (% )

Strategic Policy

Actual Allocation

Active Mgmt

Actual Return

♦ The total fund attribution table above displays the return contribution of each asset class to the total

fund. This table will allow the Board to see if tactical allocation and active management within asset classes helped or hurt performance during the quarter.

− Strategic Policy: The policy return for each of the asset classes. − Actual Allocation: The return contribution during the quarter due to differences in the actual

allocation from the policy allocation (i.e. the actual allocation to fixed income was lower than the policy allocation). A positive number would indicate the overweight or underweight helped performance and vice versa.

− Active Management: The return contribution from active management. The number would be positive if the asset class outperformed the designated policy index and vice versa (i.e. the domestic equity segment outperformed the policy index, the S&P 500, during the quarter).

− Actual Return: The actual return of the asset classes if allocations to them were static during the quarter. These returns will not match exactly with the actual segment returns since asset class allocations change during the quarter due to market movement, cash flows, etc.

♦ Per Wilshire’s attribution model, TERS beat its asset allocation policy this quarter primarily due to

the outperformance of its international equity and core fixed income portfolios. Strong relative outperformance produced by TERS’ international equity composite (by 234 bps) and the core fix income composite (by 373 bps) helped offset a small negative asset allocation effect, which was the result of its underweight in real estate (the best returning asset class on an absolute basis) throughout the third quarter.


Domestic Equity Overview Domestic Equity Structure Total Domestic Equity vs. S&P 500 Rolling 3-Year Excess Return Composite

QuarterDomestic Equity 192.6 16.79 -7.72 -5.72 1.60 2.85S&P 500 Index 15.60 -6.93 -5.43 1.02 -0.16 Value Added vs Index 1.19 -0.79 -0.29 0.58 3.01

Wilshire 5000 Index 16.12 -6.43 -4.83 1.76 0.85S&P 500 Index 15.60 -6.93 -5.43 1.02 -0.16

Assets Performance (% )($Millions) 1-year 3-year 5-year 10-year

Managers

Large Cap Core - PassiveNorthern Trust S&P 500-Large Core 55.4 15.69 -6.79 -5.65 0.87 8.57 12/90 S&P 500 Index 15.60 -6.93 -5.43 1.02 8.62 12/90 Index Tracking Error 0.09 0.14 -0.22 -0.15 -0.05

Northern Trust S&P500 NonLending 18.5 18.49 -.- -.- -.- 18.49 6/09 S&P 500 Index 15.60 -.- -.- -.- 15.60 6/09 Value Added vs Benchmark 2.89 -.- -.- -.- 2.89

Large Cap Growth - PassiveNorthern Trust Large Cap Growth 24.1 13.98 -.- -.- -.- 32.61 3/09 Russell 1000 Growth Index 13.96 -.- -.- -.- 32.57 3/09 Index Tracking Error 0.02 -.- -.- -.- 0.04

Small Cap Core - PassiveNorthern Trust Small Cap Core 26.3 19.31 -9.40 -4.59 2.39 10.04 12/90 Russell 2000 Index 19.28 -9.54 -4.57 2.42 9.98 12/90 Index Tracking Error 0.03 0.14 -0.02 -0.03 0.06

Inception($Millions)Assets Performance (% )

DateQuarter 1-year 3-year 5-year

Large Growth13%

Enhanced Index35%

Large Core39%

Small Core13%

-4%

0%

4%

8%

Sep-

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Mar

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Domestic Equity Overview (Continued)

Managers

Enhanced IndexBGI Alpha Tilts 21.3 15.22 -8.39 -.- -.- -10.87 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -9.11 3/07 Value Added vs Benchmark -0.38 -1.46 -.- -.- -1.76 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -8.11 3/07 Value Added vs Objective -0.63 -2.46 -.- -.- -2.76

INTECH 21.0 14.72 -8.37 -.- -.- -9.49 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -9.11 3/07 Value Added vs Benchmark -0.88 -1.44 -.- -.- -0.38 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -8.11 3/07 Value Added vs Objective -1.13 -2.44 -.- -.- -1.38

Research Affiliates 26.0 21.29 -5.15 -.- -.- -9.25 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -9.11 3/07 Value Added vs Benchmark 5.69 1.78 -.- -.- -0.14 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -8.11 3/07 Value Added vs Objective 5.44 0.78 -.- -.- -1.14

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year Inception Date

♦ TERS’ domestic equity composite generated a return of 16.8% for the third quarter, beating its asset

allocation benchmark, the S&P 500 Index. This quarter’s outperformance can primarily be attributed to the composite’s higher small cap exposure: the composite’s smaller-than benchmark average market cap had a positive impact on return as small cap stocks continued to outpace their large cap counterpart (Wilshire U.S. Small Cap, +22.9% vs. Wilshire U.S. Large Cap, +15.3%). In addition, Research Affiliate, one of the TERS’ three enhanced index managers, produced significant outperformance (by 569 bps) which also contributed to the composite’s overall performance. The domestic equity composite trailed the S&P 500 Index over the one- and three-year periods, but has outperformed over longer-term periods.

♦ Northern Trust manages four index funds for the system, including two large cap core funds (one

participates in security lending while the other one does not), a large cap growth fund, and a small cap core fund, designed to track the S&P 500 Index, the Russell 1000 Growth Index, and the Russell 2000 Index, respectively. Both the lending and non-security lending version of the large core funds outpaced the S&P 500 Index, as did the large growth and small core funds against their respective benchmarks for the quarter. All funds also continue to add value over the long term.


Domestic Equity Overview (Continued)

Managers ♦ Barclays Global Investors manages the Alpha Tilts Fund, an enhanced index strategy, for the System.

The Alpha Tilts Fund produced a return of 15.2% for the third quarter, underperforming its benchmark, the S&P 500 Index, and its performance objective, benchmark + 1%. Stock selection was the primary drag on performance this quarter, as large positions with the likes of telecommunication company Sprint Nextel Corporation (0.2% weight, -17.9% return), information service provider McGraw-Hill Companies Inc (0.1% weight, -15.9% return), and discount merchandise retailer Family Dollar Stores (0.2% weight, -6.3% return) detracted from the fund’s overall return. Over the one-year and since-inception periods, BGI has underperformed both the S&P 500 Index and its performance objective.

♦ INTECH, one of the three enhanced index managers funded during the first quarter of 2007,

generated a return of 14.7%, underperforming its benchmark, the S&P 500 Index, and its performance objective, benchmark + 1%. Unfavorable stock selection weighed on INTECH’s performance; among the larger holdings that lead the decline were diagnostic testing services provider Quest Diagnostics Incorporated (0.4% weight, -7.2% return), health benefits provider WellPoint Inc (0.3% weight, -6.9% return), and information storage/protection company Iron Mountain Incorporated (0.3% weight, -7.3% return). The portfolio’s notable underweight to Financials, which was the highest returning sector in the S&P 500 Index, was also a detractor that contributed to this quarter’s relative underperformance. INTECH’s performance has continued to trail the S&P 500 Index and its performance objective over the one-year and since-inception periods.

♦ Research Affiliates, the largest of TERS’ three enhanced index portfolios, returned 21.3% for the

quarter and beat its benchmark, the S&P 500 Index, and performance objective, benchmark + 1%. The portfolio’s strong stock selection is what drove this quarter’s outperformance, particularly in Consumer Discretionary and Financials as six of the top ten best performers were from these sectors: publishing company Gannett Inc (0.4% weight) was up 252.2%, financial services company Hartford Financial Services Group (0.5% weight) was up 123.7%, and recreation products manufacturer Brunswick Corp (0.1% weight) was up 177.3%. Research Affiliate has outperformed the S&P 500 and its performance objective over the one-year period but it still trails since-inception.


International Equity Overview

International Equity Structure Total Int’l Equity vs. MSCI EAFE Index Rolling 3-Year Excess Return

Composite

QuarterInternational Equity (hedged) 205.9 20.10 -3.12 -4.61 6.13 2.29 Custom Benchmark 2 17.76 -0.41 -3.24 6.15 2.59 Value Added vs Benchmark 2.34 -2.71 -1.37 -0.02 -0.30

International Equity (Un-hedged) 20.84 1.13 -3.24 7.05 2.73

Performance (% )($Millions) 1-year 3-year 5-year 10-year

Assets

Managers

ActiveTT International 87.1 22.05 2.10 -3.49 7.52 3.60 3/99 MSCI EAFE Index 19.47 3.23 -3.60 6.07 3.10 3/99 Value Added vs Benchmark 2.58 -1.13 0.11 1.45 0.50 MSCI EAFE Index + 2.6% 20.12 5.83 -1.00 8.67 5.70 3/99 Value Added vs Objective 1.93 -3.73 -2.49 -1.15 -2.10

PassiveNorthern Trust EAFE Index Fund 78.0 19.51 -.- -.- -.- 50.17 3/09 MSCI EAFE Index 19.47 -.- -.- -.- 49.85 3/09 Index Tracking Error 0.04 -.- -.- -.- 0.32

Northern Trust EM Index Fund 40.7 20.68 -.- -.- -.- 62.31 3/09 MSCI Emerging Markets Index 20.91 -.- -.- -.- 62.90 3/09 Index Tracking Error -0.23 -.- -.- -.- -0.59

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year Inception Date

2 International Equity Composite Custom Benchmark: 4/2009-current, 40% MSCI EAFE Index/40% MSCI EAFE Index

Currency Hedged/20% MSCI EM Index. 4/2006-3/2009, MSCI ACWI x-US Index. 4/1988-3/2006, MSCI EAFE Index.

Active42%

Passive58%

-4%

-2%

0%

2%

4%

Sep-

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International Equity Overview (Continued)

Managers ♦ TERS’ international equity composite, which is 40% hedged, generated a return of 20.1% for the

third quarter of 2009, outperforming the 17.8% return of its custom benchmark, 40% MSCI EAFE/40% MSCI EAFE Hedged/20% MSCI Emerging Markets. The composite benefited from good absolute performance from its active EAFE account, managed by TT International, which was the highest returning component of the quarter. Over the one-year and all longer periods shown, the international equity composite has trailed its custom benchmark.

♦ TT International, the System’s active EAFE manager, returned 22.1% for the quarter and

outperformed its benchmark, the MSCI EAFE Index, and its performance objective, benchmark + 2.6%. Favorable stock selection effect, particularly within the developed European region, drove this quarter’s outperformance as outsized gains from large positions contributed to this quarter’s 258 bps outperformance: French banking group Credit Agricole SA (3.0% weight, +67.7% return), German financial service provider Allianz SE (2.3% weight, +35.6% return), and Switzerland based mining company Xstrata Plc (3.4% weight, +36.3% return). Over the long term, TT’s portfolio has added value relative to its benchmark, though it still underperforms its performance objective over all measured periods.

♦ As part of the newly adopted global equity approach, the System transitioned from a single

international equity allocation to have separate EAFE and emerging markets mandates during the first quarter of 2009. The System selected the Northern Trust EAFE Index Fund and the Northern Trust Emerging markets Index Fund to achieve this exposure; they are managed against the MSCI EAFE Index and the MSCI EM Index, respectively. The EAFE Fund returned 19.5% for the quarter, mirroring its benchmark and continued to add value since inception. The Emerging Markets Index Fund returned 20.7% and trailed its benchmark for the quarter; it has also trailed since inception.


Fixed Income Overview

Total Fixed Income vs. Lehman Aggregate Rolling 3-Year Excess Return

-5%-4%-3%-2%-1%0%1%2%3%4%5%

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Composite

Core Fixed Income 208.8 7.47 13.16 7.16 6.07 6.76 Barclays Aggregate Bond Index 3.74 10.56 6.41 5.13 6.30 Value Added vs Index 3.73 2.60 0.75 0.94 0.46Citigroup LPF Index 5.46 14.17 7.41 6.01 7.32Merrill Lynch High Yield Master II 14.82 22.36 5.21 6.04 6.03

1-year 3-year 5-year 10-yearAssets

($Millions) QuarterPerformance (% )

Managers

Metropolitan West 208.8 7.47 13.16 7.16 6.07 6.57 3/02 Barclays Aggregate Bond Index 3.74 10.56 6.41 5.13 5.76 3/02 Value Added vs Benchmark 3.73 2.60 0.75 0.94 0.81 Barclays Aggregate + 0.75% 3.93 11.31 7.16 5.88 6.51 3/02 Value Added vs Objective 3.54 1.85 0.00 0.19 0.06

Assets Performance (% )5-year Inception Date($Millions) Quarter 1-year 3-year

♦ Metropolitan West, the System’s core fixed income manager, returned 7.5% for the quarter and

outperformed its benchmark, the Barclays Aggregate Bond Index, and its performance objective, benchmark + 0.75%. Favorable sector positioning effect was the biggest driver to MetWest’s outperformance this quarter; its portfolio continued to maintain a large overweight to Credit issues (27% MetWest vs. 7% benchmark) while significantly underweighting Treasuries/Agencies (4% MetWest vs. 37% benchmark). This weighting differences contributed greatly to the portfolio’s relative performance as investor’s improved risk appetite continue to drive better returns from the non-government sectors. Over the long term, MetWest has outperformed the Barclays Aggregate Bond Index and its performance objective for all measured periods.


Fixed Income Overview (Continued)

Composite

High Yield 139.2 9.75 11.27 4.58 -.- -.-Merrill Lynch High Yield Master II 14.82 22.36 5.21 -.- -.- Value Added vs Index -5.07 -11.09 -0.63 -.- -.-

Merrill Lynch High Yield Master II 14.82 22.36 5.21 6.04 6.03

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year 10-year

Managers

Post Advisory Group 139.2 9.75 11.27 4.58 -.- 5.00 9/05 ML High Yield Master II 14.82 22.36 5.21 -.- 5.88 9/05 Value Added vs Benchmark -5.07 -11.09 -0.63 -.- -0.88 ML High Yield Master II + 1.75% 15.25 24.11 6.96 -.- 7.63 9/05 Value Added vs Objective -5.50 -12.84 -2.38 -.- -2.63

1-year 3-yearAssets Performance (% )

5-year Inception Date($Millions) Quarter

♦ Post Advisory Group, the Plan’s high yield manager, underperformed its benchmark, the Merrill

Lynch High Yield Master II Index, and its performance objective, benchmark + 1.75%, for the quarter. Duration positioning hurt performance, as Post’s lower-than benchmark effective duration (3.2 years Post vs. 4.2 years benchmark) was a large drag on portfolio return, after plateau-ing default rate and investors’ improving risk tolerance drove down yields during the quarter. Over the one-year, three-year and since-inception periods, Post has underperformed the Merrill Lynch High Yield Master II Index and its performance objective.


Real Estate Overview

Composite

Real Estate 67.9 30.59 -31.53 -16.74 -0.47 8.99 Wilshire REIT Index 35.42 -29.26 -13.70 1.17 9.73 Value Added vs Index -4.83 -2.27 -3.04 -1.64 -0.74

Wilshire Real Estate Securities Index 35.93 -29.31 -13.83 1.11 9.56

10-yearAssets Performance (% )

($Millions) Quarter 1-year 3-year 5-year

Managers

Adelante Capital Management 67.9 30.59 -31.53 -16.74 -0.47 6.30 12/97 Wilshire REIT Index 35.42 -29.26 -13.70 1.17 6.27 12/97 Value Added vs Benchmark -4.83 -2.27 -3.04 -1.64 0.03 Wilshire REIT Index + 1% 35.67 -28.26 -12.70 2.17 7.27 12/97 Value Added vs Objective -5.08 -3.27 -4.04 -2.64 -0.97

Assets($Millions) Quarter 1-year

Performance (% )Date3-year 5-year Inception

♦ Adelante Capital, the System’s real estate securities manager, produced a strong return of 30.6% for

the quarter, though it underperformed its benchmark, the Wilshire REIT Index, and its performance objective, benchmark + 1%. The portfolio’s underperformance was primarily the result of many Adelante’s larger holdings producing below-benchmark performance during the quarter, which in turn weighed on the portfolio’s relative return. Among the notables included Public Storage Inc (Storage, 5.9% weight, +15.8% return), Federal Realty Investment Trust (Local Retail, 3.9% weight, +20.4% return), and AMB Property Corp (Industrial, 4.7% weight, +23.8% return). While Adelante has added value over the since-inception period relative to its benchmark, it has trailed its performance objective for all measured periods.


Private Equity Overview Periods ending September 30, 2009

Composite

Private Equity 96.9 15.01 -.- -.- -.- -.- Custom Benchmark 4 15.68 -.- -.- -.- -.- Value Added vs Index -0.67 -.- -.- -.- -.-

10-yearAssets Performance (% )


Funds

Private Equity Parking FundNorthern Trust Large Cap Core 93.5 15.69 -.- -.- -.- 34.58 3/09 S&P 500 Index 15.60 -.- -.- -.- 34.01 3/09 Value Added vs Index 0.09 -.- -.- -.- 0.57

Private Equity Investments 5

HarbourVest Dover Street VII 3.5 -2.08 -.- -.- -.- -5.64 3/09 Capital Commitment 20.0 Contributions Since Inception 3.8 Cumulative Distributions 0.1 Unfunded Capital Commitment 16.2

Pantheon Global Secondary IV -.- -.- -.- -.- -.- -.-

Inception DateAssets Performance (% )


♦ Based on asset allocation policy adopted in 2008, the System started a Private Equity investment program during 1Q 2009. The Plan selected HarbourVest and Pantheon to be the first managers for this program and will use the existing Northern Trust Large Cap Core Fund as the source of funds for future capital calls. Wilshire will continue to report on HarbourVest and Pantheon as these funds deploy called down capital.

♦ The Private Equity Composite produced a return of 15.0% and underperformed its custom benchmark

for the quarter (15.7%). The “parking fund” for future private equity investments, the Northern Trust Large Cap Core Fund, returned 15.7%, producing a slight positive tracking error relative to the S&P 500 Index for the quarter. Since inception (3/09), the fund continues to track closely to the S&P 500 Index.

4 Private Equity Composite Custom Benchmark: dynamically calculated based on the actual weights of the private equity investments and the private equity source fund. To coincide with private equity investments reporting, 1-quarter lagged market values are used for the private equity component in the custom benchmark calculation.

5 Performance, fund size, and capital called down for private equity investments are presented on a 1-quarter lag basis.


Tacoma Historical Investment Performance Periods Ending September 30, 2009

Total Fund

5-year 10-year Date

Total Fund 15.22 2.21 -1.04 5.21 6.25 9.25 6/79 Policy Return 14.56 -1.80 -2.09 3.84 4.29 -.- 6/79

Quarter 1-year 3-year Inception

Domestic Equity Total Domestic Equity 16.79 -7.72 -5.72 1.60 2.85 10.51 9/84

Northern Trust Large Cap Core 15.69 -6.79 -5.65 0.87 -0.20 8.57 12/90 S&P 500 Index 15.60 -6.93 -5.43 1.02 -0.16 8.62 12/90

Northern Trust Large Cap Core (NonLending) 18.49 -.- -.- -.- -.- 18.49 6/09 S&P 500 Index 15.60 -.- -.- -.- -.- 15.60 6/09

Northern Trust Russell 1000 Growth 13.98 -.- -.- -.- -.- 32.61 3/09 Russell 1000 Growth Index 13.96 -.- -.- -.- -.- 32.57 3/09

Northern Trust Small Cap Core 19.31 -9.40 -4.59 2.39 4.87 10.04 12/90 Russell 2000 Index 19.28 -9.54 -4.57 2.42 4.88 9.98 12/90

BGI Alpha Tilts 15.22 -8.39 -.- -.- -.- -10.87 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -.- -9.11 3/07 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -.- -8.11 3/07

INTECH 14.72 -8.37 -.- -.- -.- -9.49 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -.- -9.11 3/07 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -.- -8.11 3/07

Research Affilliates 21.29 -5.15 -.- -.- -.- -9.25 3/07 S&P 500 Index 15.60 -6.93 -.- -.- -.- -9.11 3/07 S&P 500 Index + 1% 15.85 -5.93 -.- -.- -.- -8.11 3/07

S&P 500 Index 15.60 -6.93 -5.43 1.02 -0.16 10.36 9/84Wilshire 5000 16.12 -6.43 -4.83 1.76 0.85 10.18 9/84 International Equity Total International Equity (Hedged) 20.10 -3.12 -4.61 6.13 2.29 4.39 3/88

Northern Trust EAFE Index Fund 19.51 -.- -.- -.- -.- 50.17 3/09 MSCI EAFE Index 19.47 -.- -.- -.- -.- 49.85 3/09

Northern Trust EM Index Fund 20.68 -.- -.- -.- -.- 62.31 3/09 MSCI Emerging Markets Index 20.91 -.- -.- -.- -.- 62.90 3/09

TT International 22.05 2.10 -3.49 7.52 2.92 3.60 3/99 MSCI EAFE Index 19.47 3.23 -3.60 6.07 2.55 3.10 3/99 MSCI EAFE Index + 2.6% 20.12 5.83 -1.00 8.67 5.15 5.70 3/99

MSCI EAFE Index 19.47 3.23 -3.60 6.07 2.55 4.67 3/88MSCI Emerging Markets Index 20.91 19.07 7.95 17.30 11.38 -.- 3/88


Tacoma Historical Investment Performance (Continued) Periods Ending September 30, 2009

Core Fixed Income

5-year 10-year Date

Total Core Fixed Income 7.47 13.16 7.16 6.07 6.76 9.99 9/81

Metropolitan West 7.47 13.16 7.16 6.07 -.- 6.57 3/02 Barclays Aggregate Bond Index 3.74 10.56 6.41 5.13 -.- 5.76 3/02 Barclays Aggregate Bond + 0.75% 3.93 11.31 7.16 5.88 -.- 6.51 3/02

Barclays Aggregate Bond Index 3.74 10.56 6.41 5.13 6.30 9.49 9/81

Quarter 1-year 3-year Inception

High Yield Total High Yield 9.75 11.27 4.58 -.- -.- 5.00 9/05

Post Advisory Group 9.75 11.27 4.58 -.- -.- 5.00 9/05 ML High Yield Master II 14.82 22.36 5.21 -.- -.- 5.88 9/05 ML High Yield Master II + 1.75% 15.25 24.11 6.96 -.- -.- 7.63 9/05

ML High Yield Master II 14.82 22.36 5.21 -.- -.- 5.88 9/05 Real Estate Total Real Estate 30.59 -31.53 -16.74 -0.47 8.99 3.66 3/88

Adelante Capital Management 30.59 -31.53 -16.74 -0.47 9.02 6.30 12/97 Wilshire REIT Index 35.42 -29.26 -13.70 1.17 9.73 6.27 12/97 Wilshire REIT Index + 1% 35.67 -28.26 -12.70 2.17 10.73 7.27 12/97

Wilshire REIT Index 35.42 -29.26 -13.70 1.17 9.73 8.04 3/88Wilshire RE Securities Index 35.93 -29.31 -13.83 1.11 9.56 6.96 3/88 Private Equity Total Private Equity 15.01 -.- -.- -.- -.- 33.68 3/09

Northern Trust S&P 500 15.69 -.- -.- -.- -.- 34.58 3/09 S&P 500 Index 15.60 -.- -.- -.- -.- 34.01 3/09

Harbour Vest Partners -2.08 -.- -.- -.- -.- -5.64 3/09

Pantheon Ventures -.- -.- -.- -.- -.- -.-

Manager Guideline Compliance Affirmation

Client: Tacoma Employes’ Retirement System Manager: Adelante Capital Management Date: October 23, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: _X_ The portfolio referenced above was in compliance with its investment guidelines over the

time period stated above. The portfolio referenced above was not in compliance with its investment guidelines over

the time period stated above. The following describes in detail the nature of the noncompliance and quantifies any economic harm to the portfolio as a result of this noncompliance:

Yes The firm is currently in full compliance with the SEC. If the SEC has issued any

disciplinary actions against the firm during the time period stated above, please provide detailed explanation in Exhibit A.

No According to the firm’s knowledge, have any holdings, whose securities are held by the

portfolio referenced above, failed to timely file any reports to stay in compliance with the Sarbanes-Oxley Act? If the answer is YES, please check the box at the beginning of this paragraph and provide the company name and information regarding the late-filing report in Exhibit B.

Signed: _______________ Name (typed): Mark A. Hoopes Date: October 23, 2009


Client: Tacoma Employes’ Retirement System Manager: Northern Trust (EAFE Index Fund) Date: October 27, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: X The portfolio referenced above was in compliance with its investment guidelines over the



X The firm is currently in full compliance with the SEC. If the SEC has issued any


According to the firm’s knowledge, have any holdings, whose securities are held by the


Signed:

Name (typed): Richard L. Clark_____

Date: October 27,2009_______


Client: Tacoma Employes’ Retirement System Manager: Northern Trust (Emerging Markets Index Fund) Date: October 27, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: X The portfolio referenced above was in compliance with its investment guidelines over the







Signed: Name (typed): Richard L. Clark Date: October 27, 2009


Client: Tacoma Employes’ Retirement System Manager: Northern Trust (Russell 1000 Growth) Date: October 27, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: X The portfolio referenced above was in compliance with its investment guidelines over the









Client: Tacoma Employes’ Retirement System Manager: Northern Trust (Russell 2000) Date: October 27, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: X The portfolio referenced above was in compliance with its investment guidelines over the







Signed: Name (typed): Richard L. Clark Date:


Client: Tacoma Employes’ Retirement System Manager: Northern Trust (S&P 500) Date: October 27, 2009 Time Period: Quarter Ended September 30, 2009 Please check one of the following: X The portfolio referenced above was in compliance with its investment guidelines over the








Performance Review: Tacoma - BGI Alpha Tilts

Investment Philosophy:

Sources of Value Added:% Style% Sector% Stock Selection

Contact:Phone:E-Mail:

Open for New Business:Product Inception:

Assets Under Management:% Active Asset Allocation

Investment Philosophy:Annualized Ended 09/30/2009 Annual Returns

Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-8.40 -7.33 0.94 N/ABgi Alpha Tilts -36.62 0.66 16.17 9.07 10.91 29.21 N/A N/A N/A N/A-6.90 -5.42 1.02 -0.15S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation29.48 19.65 16.09 N/ABgi Alpha Tilts 21.46 10.25 6.14 8.04 8.10 10.75 N/A N/A N/A N/A29.58 19.68 15.95 16.25S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance23.39 15.53 13.07 N/ABgi Alpha Tilts 16.71 7.58 5.06 5.23 6.44 6.92 N/A N/A N/A N/A23.28 15.51 12.85 12.38S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns-1.50 -1.91 -0.08 N/AArithmetic Excess 0.37 -4.88 0.37 4.18 0.04 0.52 N/A N/A N/A N/A-1.61 -2.02 -0.08 N/AGeometric Excess 0.59 -4.62 0.32 3.99 0.03 0.41 N/A N/A N/A N/A

1 Year 3 Years 5 Years 10 YearsExcess StatisticsManager vs. Benchmark

Annualized Ended 09/30/2009

Tracking Error 1.00Information Ratio -1.61Downside Deviation 0.73Skewness -0.05Kurtosis -0.76Alpha -1.63

1.61

Beta 1.00

-1.26

Residual Risk 1.02

1.03

R Squared 1.00

0.660.60

-2.03

0.99

1.67

0.10-0.60-0.051.001.660.99

1.001.57

-0.051.17

N/AN/AN/AN/AN/AN/AN/AN/AN/A

Page 1

Holdings Analysis: Tacoma Employes' Retirement System - BGI Alpha Tilts September 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Style Focus:


Assets Under Management:

Capitalization Focus:

< Unknown >< Unknown >< Unknown >

Period EndALPHA S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

09/30/2009 -6.40 99.90 -15.43 101.5406/30/2009 -17.97 98.89 -13.40 103.2903/31/2009 -23.69 103.04 -13.89 105.2612/31/2008 -11.74 102.14 -7.35 104.3909/30/2008 -8.43 99.83 -5.84 105.2506/30/2008 -7.73 101.33 -0.02 105.9903/31/2008 -16.91 101.66 -5.69 106.0912/31/2007 -13.57 100.32 -4.08 105.1909/30/2007 -19.66 101.84 -8.89 106.3606/30/2007 -23.43 102.24 -9.80 102.7103/31/2007 -15.29 100.11 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.32

Min -23.69 98.89 -15.43 101.54Max -6.40 103.04 24.22 106.78Avg -14.98 101.03 -4.63 105.25

Median -15.29 101.33 -8.12 105.49Stddev 6.03 1.29 10.44 1.33

Page 2

Performance Review: Tacoma - INTECH







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-8.37 -5.56 1.73 N/AIntech -36.58 6.92 14.64 9.18 15.58 28.82 N/A N/A N/A N/A-6.90 -5.42 1.02 -0.15S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation29.02 19.51 15.87 N/AIntech 21.82 9.15 5.82 7.54 7.57 10.76 N/A N/A N/A N/A29.58 19.68 15.95 16.25S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance23.10 15.65 12.99 N/AIntech 16.90 6.89 4.54 5.14 5.87 7.07 N/A N/A N/A N/A23.28 15.51 12.85 12.38S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns-1.47 -0.15 0.70 N/AArithmetic Excess 0.40 1.38 -1.16 4.29 4.71 0.13 N/A N/A N/A N/A-1.58 -0.15 0.70 N/AGeometric Excess 0.64 1.31 -1.00 4.09 4.25 0.10 N/A N/A N/A N/A



Tracking Error 1.34Information Ratio -1.18Downside Deviation 0.89Skewness 0.45Kurtosis -0.43Alpha -1.77

2.04

Beta 0.98

-0.08

Residual Risk 1.26

1.55

R Squared 1.00

-0.641.19

-0.26

0.99

1.84

-0.601.400.680.991.820.99

0.992.01

0.381.37


Page 3

Holdings Analysis: Tacoma Employes' Retirement System - INTECH September 30, 2009






Period EndTACINTECH S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

09/30/2009 -20.45 94.86 -15.43 101.5406/30/2009 -19.74 94.33 -13.40 103.2903/31/2009 -18.86 97.64 -13.89 105.2612/31/2008 3.55 96.05 -7.35 104.3909/30/2008 7.87 97.13 -5.84 105.2506/30/2008 6.09 99.72 -0.02 105.9903/31/2008 5.47 100.02 -5.69 106.0912/31/2007 5.90 97.55 -4.08 105.1909/30/2007 -2.62 97.12 -8.89 106.3606/30/2007 -9.67 86.39 -9.80 102.7103/31/2007 -9.81 85.56 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.32

Min -20.45 85.56 -15.43 101.54Max 7.87 100.02 24.22 106.78Avg -4.75 95.12 -4.63 105.25

Median -2.62 97.12 -8.12 105.49Stddev 11.35 4.84 10.44 1.33

Page 4

Performance Review: Tacoma - RAFI







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-5.17 -5.12 N/A N/ARafi -37.49 4.00 20.17 6.94 N/A N/A N/A N/A N/A N/A-6.90 -5.42 1.02 -0.15S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation33.32 21.49 N/A N/ARafi 22.28 9.42 5.02 8.35 N/A N/A N/A N/A N/A N/A29.58 19.68 15.95 16.25S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance25.98 16.75 N/A N/ARafi 17.45 7.10 4.10 5.72 N/A N/A N/A N/A N/A N/A23.28 15.51 12.85 12.38S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns1.73 0.30 N/A N/AArithmetic Excess -0.50 -1.54 4.36 2.05 N/A N/A N/A N/A N/A N/A1.86 0.32 N/A N/AGeometric Excess -0.80 -1.46 3.77 1.96 N/A N/A N/A N/A N/A N/A



Tracking Error 5.60Information Ratio 0.33Downside Deviation 3.37Skewness 0.94Kurtosis 0.50Alpha 3.38

3.74

Beta 1.12

0.09

Residual Risk 4.47

2.19

R Squared 0.98

1.272.751.20

0.98

N/A

N/AN/AN/AN/AN/AN/A

1.083.40

N/AN/A


Page 5

Holdings Analysis: Tacoma Employes' Retirement System - Research Affiliates September 30, 2009






Period EndTACRAF S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

09/30/2009 -50.29 80.34 -15.43 101.5406/30/2009 -48.66 74.16 -13.40 103.2903/31/2009 -56.29 78.59 -13.89 105.2612/31/2008 -50.01 74.30 -7.35 104.3909/30/2008 -52.01 71.61 -5.84 105.2506/30/2008 -36.75 74.73 -0.02 105.9903/31/2008 -38.90 75.81 -5.69 106.0912/31/2007 -41.86 83.47 -4.08 105.1909/30/2007 -46.26 94.35 -8.89 106.3606/30/2007 -46.09 95.42 -9.80 102.7103/31/2007 -46.62 94.28 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.32

Min -56.29 71.61 -15.43 101.54Max -36.75 95.42 24.22 106.78Avg -46.70 81.55 -4.63 105.25

Median -46.62 78.59 -8.12 105.49Stddev 5.76 9.04 10.44 1.33

Page 6

Performance Review: Tacoma - TT International







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 19992.10 -3.49 7.53 2.91Tt International -47.87 15.15 29.29 21.44 13.17 34.89 -17.32 -29.64 -11.71 N/A3.23 -3.60 6.08 2.56MSCI EAFE $N -43.39 11.18 26.35 13.56 20.24 38.59 -15.94 -21.45 -14.16 26.97

Risk - Standard Deviation36.05 26.00 21.89 20.27Tt International 30.67 11.29 12.94 12.33 12.25 17.02 16.14 17.69 16.43 N/A35.25 24.12 19.92 18.08MSCI EAFE $N 27.02 9.62 9.40 10.06 9.50 14.57 18.95 17.12 13.57 12.65

Risk - Semi-Variance28.96 20.88 17.75 15.34Tt International 24.32 7.78 9.66 9.54 8.79 11.34 11.85 13.68 10.69 N/A27.86 18.85 15.89 13.97MSCI EAFE $N 20.73 6.64 7.24 7.45 6.77 10.41 14.41 11.94 9.05 9.43

Excess Returns-1.13 0.11 1.45 0.36Arithmetic Excess -4.49 3.98 2.94 7.89 -7.06 -3.70 -1.38 -8.19 2.45 N/A-1.10 0.12 1.37 0.35Geometric Excess -7.92 3.58 2.32 6.95 -5.88 -2.67 -1.64 -10.43 2.85 N/A



Tracking Error 4.29Information Ratio -0.26Downside Deviation 3.51Skewness -1.18Kurtosis 1.20Alpha -0.86

4.46

Beta 1.02

0.03

Residual Risk 3.90

3.81

R Squared 0.99

-2.217.210.90

0.98

4.27

-1.554.961.431.083.720.97

1.073.75

0.323.46

6.040.064.040.743.860.701.075.890.92

Page 7

Holdings Analysis: Tacoma Employes' Retirement System - TT International September 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Regional Focus:


Assets Under Management:< Unknown >< Unknown >

MS EAFETACTT

Country Allocation (% of Equity Holding)

EUROPE0.3--AUSTRIA1.0--BELGIUM0.90.8DENMARK1.2--FINLAND

11.07.7FRANCE8.113.1GERMANY0.31.3IRELAND3.71.8ITALY2.51.8NETHERLANDS0.71.8NORWAY4.72.7SPAIN2.52.4SWEDEN7.73.8SWITZERLAND

20.828.7UNITED KINGDOMAMERICAS

0.0--CANADA0.00.2UNITED STATES

PACIFIC BASIN8.26.1AUSTRALIA2.31.5HONG KONG

21.523.5JAPAN0.0--MALAYSIA0.10.2NEW ZEALAND1.41.0SINGAPORE

1.6OTHER COUNTRIES 1.1

Structural Characteristics# Stocks 134 959% Cash -- --% Stocks -- --

Page 8

Performance Review: Tacoma - Metropolitan West







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 199913.17 7.16 6.08 N/AMetropolitan West -1.46 7.17 6.60 2.81 5.59 13.70 N/A N/A N/A N/A10.56 6.41 5.13 6.30BC Aggregate 5.24 6.96 4.33 2.43 4.34 4.11 10.27 8.42 11.63 -0.83

Risk - Standard Deviation7.34 4.92 4.09 N/AMetropolitan West 6.11 2.69 2.34 2.46 2.93 4.65 N/A N/A N/A N/A5.72 4.03 3.62 3.79BC Aggregate 6.09 2.64 2.70 3.14 4.04 5.26 3.75 3.79 2.84 2.70

Risk - Semi-Variance5.77 3.46 2.83 N/AMetropolitan West 3.86 1.90 1.61 1.89 2.38 3.83 N/A N/A N/A N/A4.06 2.74 2.49 2.82BC Aggregate 3.83 1.89 1.90 2.31 3.42 4.17 3.05 2.83 2.13 2.05

Excess Returns2.61 0.75 0.95 N/AArithmetic Excess -6.70 0.21 2.27 0.38 1.25 9.60 N/A N/A N/A N/A2.36 0.70 0.90 N/AGeometric Excess -6.37 0.20 2.17 0.37 1.20 9.22 N/A N/A N/A N/A



Tracking Error 5.79Information Ratio 0.41Downside Deviation 4.86Skewness -1.62Kurtosis 3.60Alpha 4.44

3.41

Beta 0.81

0.21

Residual Risk 5.80

2.73

R Squared 0.39

-1.819.121.14

0.53

2.74

-2.0713.53

1.220.862.730.57

0.893.44

0.332.18


Page 9

Holdings Analysis: Tacoma Employes' Retirement System - Metropolitan West September 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Duration Focus:



Sector Focus:


Period EndTACMW BC Aggregate

AverageQuality

EffctvDuration

AverageQuality

EffctvDuration

09/30/2009 7.00 6.58 6.52 4.4306/30/2009 7.00 4.34 6.54 4.1903/31/2009 7.00 5.66 6.58 3.7312/31/2008 7.00 4.48 6.58 3.7109/30/2008 6.26 4.57 6.58 4.4706/30/2008 6.66 5.38 6.55 4.6803/31/2008 6.64 5.04 6.57 4.3812/31/2007 6.11 5.62 6.57 4.4109/30/2007 5.87 5.79 6.43 4.6206/30/2007 5.77 5.18 6.45 4.7003/31/2007 6.67 4.96 6.44 4.5012/31/2006 6.75 4.91 6.42 4.4609/30/2006 7.00 4.72 6.41 4.6106/30/2006 7.00 5.07 6.43 4.8003/31/2006 7.00 4.93 6.42 4.6812/31/2005 7.00 4.56 6.40 4.5709/30/2005 7.00 4.77 6.53 4.4406/30/2005 7.00 4.81 6.40 4.1603/31/2005 7.00 4.92 6.37 4.5012/31/2004 7.00 4.18 6.30 4.34

Min 5.77 4.18 6.30 3.71Max 7.00 6.58 6.58 4.80Avg 6.74 5.02 6.47 4.42

Median 7.00 4.93 6.45 4.47Stddev 0.41 0.56 0.08 0.29

Page 10

Performance Review: Tacoma - Post Advisory Group







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 199911.28 4.58 5.23 N/APost Advisory Group -19.95 4.17 8.58 3.66 9.70 18.84 N/A N/A N/A N/A22.34 5.20 6.04 6.01ML HY Master II -26.39 2.21 11.72 2.73 10.80 28.07 -1.91 4.49 -5.23 2.49

Risk - Standard Deviation19.72 12.11 9.52 N/APost Advisory Group 16.21 4.59 1.89 3.87 2.69 3.07 N/A N/A N/A N/A27.12 17.04 13.36 11.33ML HY Master II 21.59 5.68 2.28 4.92 3.84 5.78 12.20 11.99 6.37 3.46

Risk - Semi-Variance17.12 10.00 7.89 N/APost Advisory Group 13.63 3.78 1.59 3.07 2.30 2.31 N/A N/A N/A N/A22.83 13.23 10.41 8.77ML HY Master II 17.10 4.63 1.80 3.78 3.23 4.00 9.18 9.02 4.80 2.30

Excess Returns-11.06 -0.62 -0.81 N/AArithmetic Excess 6.45 1.96 -3.14 0.93 -1.10 -9.23 N/A N/A N/A N/A

-9.04 -0.59 -0.76 N/AGeometric Excess 8.76 1.92 -2.81 0.90 -0.99 -7.21 N/A N/A N/A N/A



Tracking Error 10.11Information Ratio -0.89Downside Deviation 6.37Skewness 0.60Kurtosis -0.68Alpha -4.02

6.47

Beta 0.70

-0.09

Residual Risk 5.90

4.60

R Squared 0.91

0.021.55

-0.11

0.92

5.05

0.074.04

-0.040.682.770.92

0.683.53

-0.153.57


Page 11

Holdings Analysis: Tacoma Employes' Retirement System - Post Advisory Group September 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Duration Focus:



Sector Focus:


Period EndTACPOST ML HIYLD MSTR II

AverageQuality

EffctvDuration

AverageQuality

EffctvDuration

09/30/2009 7.00 3.21 2.19 4.2406/30/2009 7.00 3.11 2.23 4.1003/31/2009 7.00 3.04 2.23 3.7912/31/2008 7.00 3.56 2.24 3.8309/30/2008 7.00 3.66 2.23 4.2406/30/2008 7.00 3.80 2.24 4.5003/31/2008 7.00 4.07 2.24 4.5212/31/2007 7.00 4.02 2.21 4.7409/30/2007 7.00 3.91 2.24 4.8306/30/2007 7.00 4.00 2.23 4.8903/31/2007 7.00 3.68 2.23 4.6712/31/2006 7.00 3.48 2.22 4.6809/30/2006 7.00 3.40 2.26 4.6606/30/2006 7.00 3.67 2.26 4.7103/31/2006 7.00 3.84 2.24 4.6612/31/2005 7.00 4.19 2.27 4.6209/30/2005 7.00 4.34 2.31 4.7606/30/2005 2.30 4.7303/31/2005 2.25 4.8212/31/2004 2.24 4.52

Min 7.00 3.04 2.19 3.79Max 7.00 4.34 2.31 4.89Avg 7.00 3.70 2.24 4.53

Median 7.00 3.68 2.24 4.66Stddev 0.00 0.37 0.03 0.32

Page 12

Performance Review: Tacoma - Adelante







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-31.53 -16.74 -0.47 9.02Adelante -45.30 -17.31 37.16 16.00 35.42 35.34 3.81 10.88 33.04 -0.88-29.25 -13.70 1.18 9.74WIL REIT -39.20 -17.56 35.99 13.82 33.14 36.18 3.60 12.36 31.04 -2.57

Risk - Standard Deviation63.38 38.99 31.93 24.70Adelante 43.24 20.95 12.22 18.01 21.31 7.89 13.34 10.62 14.78 14.4667.98 41.22 33.32 25.55WIL REIT 47.69 20.64 13.09 16.41 20.93 7.97 12.91 11.89 14.77 13.36

Risk - Semi-Variance46.72 29.20 24.81 19.48Adelante 35.73 14.75 9.39 13.91 18.64 6.35 9.81 7.26 11.13 7.8349.81 30.67 25.63 19.94WIL REIT 38.88 14.41 10.23 12.60 18.44 6.28 9.65 8.50 10.49 6.97

Excess Returns-2.28 -3.04 -1.65 -0.72Arithmetic Excess -6.10 0.25 1.17 2.18 2.28 -0.84 0.21 -1.48 2.00 1.69-3.23 -3.53 -1.63 -0.65Geometric Excess -10.03 0.30 0.86 1.92 1.71 -0.62 0.20 -1.32 1.53 1.73



Tracking Error 7.00Information Ratio -0.46Downside Deviation 5.70Skewness -1.31Kurtosis 2.31Alpha -6.70

5.27

Beta 0.93

-0.67

Residual Risk 5.69

4.33

R Squared 0.99

-1.483.44

-4.86

0.98

4.32

-1.856.08

-1.900.954.180.98

0.944.85

-0.383.59

3.57-0.182.84

-1.637.32

-0.460.963.520.98

Page 13

Holdings Analysis: Tacoma Employes' Retirement System - Adelante Capital Mgmnt September 30, 2009






Period EndTACROSWC Wil REIT

StyleScore

SizeScore

StyleScore

SizeScore

09/30/2009 -130.72 14.61 -92.94 -6.7406/30/2009 -86.22 7.14 -86.58 -4.1203/31/2009 -87.87 -2.67 -81.84 -12.3112/31/2008 -63.32 3.37 -74.96 -2.0709/30/2008 -69.84 20.65 -78.33 10.3806/30/2008 -69.73 15.83 -98.32 -0.9603/31/2008 -64.07 25.26 -96.50 4.2512/31/2007 -58.24 15.32 -74.13 -9.0109/30/2007 -44.11 22.85 -81.04 2.4306/30/2007 -37.94 19.54 -70.56 -1.6503/31/2007 -19.82 28.72 -45.01 9.5012/31/2006 -1.58 29.94 -58.53 10.3309/30/2006 -7.39 24.87 -60.90 9.0806/30/2006 -53.42 24.65 20.42 22.5703/31/2006 16.08 59.09 18.73 18.7612/31/2005 22.19 28.04 22.39 11.5009/30/2005 23.53 23.80 23.75 11.3206/30/2005 27.20 22.31 26.58 11.2603/31/2005 29.17 12.55 28.79 3.1912/31/2004 8.79 17.45 8.22 7.87

Min -130.72 -2.67 -98.32 -12.31Max 29.17 59.09 28.79 22.57Avg -33.37 20.67 -42.54 4.78

Median -41.03 21.48 -65.73 6.06Stddev 46.39 12.45 49.74 9.11

Page 14

Tacoma Managers

Domestic Equities: common stock represents equity ownership in a public traded US corporation. Wilshire’s long term expected return for US equities is 8.25%, unchanged from the past two years.

A. Index Managers‐ Index Managers seek to build portfolios that replicate the movement of the index being tracked. Tracking can be achieved by holding all of the securities in the index, or by holding representative securities. Index portfolios should earn the return of the index and have the risk characteristics of the index. This is a passive approach to investing and is attractive because of its lower fees and tracking error.

1. Northern Trust – S&P 500 Index (Lending/Non‐lending) Inception Date: 12/1990

This manager seeks to earn the return and have the risk characteristics of the S&P 500 Index.

2. Northern Trust – Russell 1000 Growth Index Inception Date: 3/2009

This manager seeks to earn the return and have the risk characteristics of the Russell 1000 Growth Index.

3. Northern Trust – Small‐cap Core Index Inception Date: 12/1990

This manager seeks to earn the return and have the risk characteristics of the Russell 2000 Index. The Russell 2000 Index is used as a performance benchmark by small cap managers.

B. Enhanced Index Managers‐Enhanced Index Managers seeks to add small amounts of incremental return above a specified benchmark by creating portfolios that have more attractive characteristics than the index without taking significant “bets” against the benchmark in terms of sector weightings, style, or market cap size.

1. Barclays Global Investors: Alpha Tilts Fund (2% risk) Inception Date: 3/2007

This quantitative manager seeks to outperform the S&P 500 Index by 1%‐2% annually with a tracking error of less than 2%. BGI’s strategy is to gather data and process this information into forecasts for excess returns. BGI looks at 1200 stocks and uses 30 signals, or factors (relative value, earnings quality, and sentiment) to rank each stock. This ranking is converted into a score. The portfolio is constructed by optimizing the score against the marginal risk active positions introduce. The portfolio typically holds about 300 positions and the maximum an individual security can be is +/‐ 3% of benchmark weight.

2. INTECH: Enhanced Plus Index Inception Date: 3/2007

This quantitative manager seeks to outperform the S&P 500 Index by 2% annually with a tracking error of less than 2%. INTECH’s strategy is unique because it is purely mathematical and focuses on volatility and covariance (other quantitative managers look to exploit security mis‐pricing). The portfolio is constructed by weighting stocks based on their expected volatility and covariance but INTECH ensures that this volatility is well diversified within the portfolio, so that the total portfolio does not have volatility that is meaningfully different than the S&P 500. The portfolio is optimized and rebalanced regularly to ensure tracking error is controlled.

3. Research Affiliates – Enhanced Large Company Index Inception Date: 3/2007

This fundamental index manager seeks to outperform the S&P 500 Index by 2% annually. Using data, this manager weights securities based on accounting fundamentals instead of the traditional market capitalization weighting used by most index managers. This manager determines the weight for each security based on: cash flow, total book value, dividends, and sales on a trailing 5 year basis. The portfolio is constructed based on selecting the 1000 US securities with the highest weights determined using the fundamental approach.

International Equities: common stock represents equity ownership in a non‐US public traded corporation. Wilshire’s long term expected return for International equities is 8.25%, unchanged from last years.

1. TT International – Active International Equity Inception Date: 3/1999

This active global manager utilizes a top down approach to evaluate theme opportunities in the market place and shifts between the value style and growth style based on manager interpretation of market sentiment. Following geopolitical and country policy analysis, this manager evaluates individual securities based on valuation, verification and catalyst for change. The portfolio is benchmarked to the EAFE Index and it is diversified with 100 positions; individual positions are capped at 5% of the portfolio. Tracking error is monitored for risk control.

2. Northern Trust – EAFE Index – Passive International Equity Inception Date: 3/2009

This manager seeks to earn the return and have the risk characteristics of the Morgan Stanley Capital International’s Europe, Australia & Far East Index (MSCI EAFE Index)

3. Northern Trust – Emerging Markets Index – Passive International Equity Inception Date: 3/2009 This manager seeks to earn the return and have the risk characteristics of the Morgan Stanley Capital International’s Emerging Markets Index (MSCI EM Index)

Fixed Income: bonds are debt instruments that are contractually required to be repaid at maturity by the issuer. Wilshire’s long term expected return for US bonds is 5%, a 25bp decline from the prior year.

1. Metropolitan West Asset Management: Total Return Bonds Inception Date: 3/2002

Metropolitan West manages an investment grade fixed income portfolio. This active fixed income manager adds value by 1) varying the duration of the portfolio from the benchmark’s duration, 2) yield curve management, 3) sector rotation, 4) individual security selection, 5) proprietary buy/sell execution strategies. The portfolio is constructed based on macro themes. Duration changes are constrained to be +/‐ 1 year of the benchmark. Individual positions are limited to 1% at purchase and may rise to 2.5% of portfolio over time. This manager typically holds 75 – 95 issues.

2. Post Advisory Group – High Yield Bonds Inception Date: 9/2005

This active high yield bond manager ranks bonds based on 100 point quantitative and qualitative system. Industry position accounts for (20%), Company position (60%), and Security position (20%). The portfolio is constructed by consensus team decision, it is well diversified with individual positions range from 1%‐2% of the portfolio. Post is not allowed to hold CCC rated bonds (very low credit quality) in this portfolio.

US Real Estate Securities (REITS): a REIT is a security that trades like a stock and invests in real estate directly, either through properties or mortgages. Wilshire’s long term expected return for REITS is 5.75%, unchanged from last year.

1. Adelante: Total Return Inception Date: 12/1997

Adelante seeks current income and long term capital growth by investing in companies that are trading at or below the private market value. This manager uses quantitative models to identify relative value opportunities. The portfolio is fairly concentrated with 25‐35 issues; individual position limits of 10%. The property type limitation prevents this manager from having more than two times benchmark weight.

Private Equity: professionally managed equity and debt investments in the unregistered securities of private and public companies. Private markets investment strategies exist across various risk/return spectrums, including Mezzanine, Distressed Debt, Leveraged Buyouts, Growth Capital and Venture Capital.

1. HarbourVest Dover Street VII L.P. Inception Date: 3/2009

One of HarbourVest’s global secondary funds, Dover Street VII, or the “Fund”, makes secondary investments in venture capital, leveraged buyout and other private equity assets, as well as portfolios of operating companies. The geographic focus is in the U.S., Europe, Latin America, Asia and emerging private equity markets. The Fund considers many different types of transactions: traditional limited partner interests, portfolio of direct investments, structured transactions, and select linked transactions (strategic primaries).

STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES

FOR

TACOMA EMPLOYES’ RETIREMENT SYSTEM

March 5, 2007 Effective March 5, 2007

STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES FOR THE TACOMA EMPLOYES’ RETIREMENT SYSTEM

March 2007

I. Introduction The investment policies and objectives of the Tacoma Employes’ Retirement System (TERS) are intended to allow for sufficient flexibility in the management process to capture investment opportunities, yet provide parameters that will ensure prudence and care in the execution of the investment program. The Retirement Board in investing TERS’ assets shall act with the care, skill, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Definition of Terms

1. Allocated Cash - Funds allocated to the Investment Managers. These funds are generated by income (interest, dividends) and monies earned as a result of the sales of a security. The investment manager’s allocated cash is invested in cash equivalents as per the short-term investment policy and is readily available for investment by the investment manager.

2. Cost - Book value or purchase price of the security. 3. Fair Value - Current price of the security if sold on the open market as of a given date. 4. Policy - Definite course or method of action selected from among alternatives, in light of

given conditions to guide and determine present and future decisions. 5. Strategic Asset Allocation - The long range asset allocation of a plan designed to obtain a

reasonable long-term total return consistent with the degree of risk assumed while emphasizing the preservation of long-term capital.

6. Tactical Asset Allocation - The procedural and implementation aspects of the strategic asset

allocation to include periodic review and on-going adjustment to achieve goals of the plan. Tactical asset allocation will address the issue of unallocated cash.

7. Target Allocation - The percentage of TERS’ portfolio (at fair value) to be allocated to the

specific asset classes. 8. Unallocated Cash - Funds generated by TERS from contributions less administrative

expenses and benefit payments, invested in cash equivalents.

Page 2

II. General Objectives Policies The general objectives are intended to define the goals to be achieved through the management of TERS’ assets. General policies are intended to provide guidelines for the Retirement Board to follow in meeting the general objectives. A. General Objectives:

1. The overall objective of TERS is to provide adequate retirement and death benefits to its plan beneficiaries through the investment of contributions and other TERS assets, utilizing investment policies designed to maintain adequate funding for the plan’s liabilities over time.

2. The general investment objective is to obtain a reasonable long term total return

consistent with the degree of risk assumed while emphasizing the preservation of capital. 3. The Retirement Board will seek to control the cost of funding the plan within prudent

levels of risk through the investment of TERS assets. B. General Policies:

1. All transactions undertaken on behalf of TERS will be for the sole benefit of plan participants.

2. Investments shall be made without distinction between return generated from income as

opposed to capital gains, and that diversification, need for liquidity, and the potential for gain and loss will be monitored on an on-going basis.

3. The allocation of assets among various asset classes shall be approved by the Retirement

Board. The asset allocation policy shall be predicated on the following factors:

a) the historical performance of capital markets adjusted for the perception of the future short and long term capital market performance;

b) the correlation of returns among the relevant asset classes; c) the perception of future economic conditions, including inflation and interest rate

assumptions; d) the projected liability stream of benefits and the costs of funding to both covered

employees and employers; e) the relationship between the current and projected assets of the plans and the

projected actuarial liability stream. This asset allocation policy will identify the target allocation to the classes of assets TERS can utilize and the ranges within which each can fluctuate as a percent of the total portfolio. This policy is expected to provide diversification of assets in an effort to maximize the investment return to TERS consistent with prudent market and economic

Page 3

risk. All assets of TERS are to remain invested at all times in either cash equivalents or other asset classes as designated by this Policy.

4. Professional investment management firms, which are registered investment advisors or

which are appropriately exempt from registration under the Investment Advisers Act of 1940 as may be amended, shall be retained to assist in managing TERS assets. Investments shall be sufficiently diversified so as to minimize the risk of large losses. Each investment manager will function under a formal contract that delineates its responsibilities and appropriate performance expectations. A formal set of investment guidelines and administrative requirements for management of each portfolio is to be provided to each manager. The Retirement Board will review the investment performance of these managers against their stated objectives at least quarterly. The individual managers will be judged according to benchmarks that reflect the objectives and characteristics of the strategic role their portfolio is to fulfill. Investment managers may act at their own discretion provided their actions are in accordance with Washington State RCW Chapter 35.39, and this Policy.

5. The Retirement Board will allocate net pension fund contributions on an on-going basis in

accordance with this Policy to balance the overall asset allocation against target when deviations occur because of capital market fluctuations. Such allocations can be made even if contributions to managers or asset classes, which have recently experienced poor performance, are entailed. If such poor performance is the result of an occurrence other than expected market-related volatility then a reassessment of that investment shall be undertaken.

6. The Retirement Board may utilize the services of an investment consultant for the purpose

of performance review, asset allocation studies, manager screening and selection and topical studies. The comments and recommendations of the consultant will be considered by the Retirement Board in conjunction with other available information for the purpose of making an informed and prudent decision. The pension consultant acts in a fiduciary capacity providing investment advice to the Retirement Board. The Retirement Board, as per RCW 35.39, obtains an annual statement from the Investment Advisory Committee, who act in a fiduciary capacity on the investment activity of the Fund. The Retirement Board and Investment Advisory Committee will review TERS’ investment results, the System’s asset allocation and investment managers. Should the Retirement Board and Investment Advisory Committee deem that the best possible rate of return with prudent risk has not been obtained, over a full economic cycle, the Board may, at its discretion, issue a request for proposal for investment consulting services.

7. The Retirement Board will utilize the services of a master custodian bank that will be

responsible for holding TERS’ assets, settling purchases and sales of securities; identifying and collecting income which becomes due and payable on assets held; and providing a management information/accounting system.

8. TERS considers the active voting of proxies an integral part of the investment process.

The investment managers shall vote the proxies in a prudent manner.

Page 4

9. A formal review of TERS’ investment structure should be conducted annually by the

Retirement Board. Updated financial projections will be developed at least every two years. The information for these reviews shall come from staff, outside consultants and investment managers, as they may be retained.

10. It is the responsibility of the Retirement Board to administer the investments of TERS at

reasonable cost, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to TERS.

11. Any investment or any action pursuant to an investment for TERS which is not expressly

permitted under this Policy is not allowed unless formally reviewed and approved by the Retirement Board.

12. The Retirement Board will operate the pension investment program in compliance with all

applicable state, federal, and local laws and regulations concerning the investment of pension assets (USC section 401 (a) (8), (9), (16) and (25) of the Internal revenue Code; RCW Chapter 35.39, 41.28, and RCW Section 41.04.040 - 04.04.110; and Chapter 1.30 of the City of Tacoma ordinances as attached and may be hereafter amended).

III. Asset Allocation Policy and Objectives Based on the factors identified in the General Policies above, the Retirement Board has established strategic asset allocation targets and ranges for domestic and international equities, domestic fixed income instruments, real estate investment trusts (REITS) and cash or cash equivalents on a fair value basis. Ranges for each asset class are included in the asset allocation policy to provide the Retirement Board with the flexibility to take advantage of market opportunities.

A. The following strategic asset allocation policy was adopted by the Retirement Board in February 2005.

Targets Ranges Domestic Stocks 40% 37-43% International Stocks 15 12-18 Total Equity 55 49-62% Investment-grade Fixed Income 20 17-23% High Yield Fixed Income 10 7-13 Total Fixed Income 30 27-33% REITS 15 12-18%

Page 5

Cash Equivalents 0 0-2% Total Assets 100% While no strategic allocation has been made to cash equivalents, it is expected that some cash balances will exist as a result of the investment process. These asset classes are defined as: Equities - investments representing ownership interest to include public

and private stock, preferred stock, convertible to stock, options on stock, units, participation or partnership shares which represent ownership interests in an underlying investment (excluding real property).

Fixed Income - investments representing instruments with maturities greater than

one year with obligated fixed rate of interest to include public and private debentures, mortgages, investments in life insurance general accounts and guaranteed investment contracts, with maturities greater than one year, and options on debentures.

Cash Equivalents - investments in fixed income securities with maturities of less

than one year including but not limited to Treasury bills and notes, commercial paper, bankers’ acceptances, certificates of deposit, asset backed securities, eurodollar securities and debentures and mortgages with less than one year remaining to maturity.

REITS - investments representing ownership interest in publicly-traded

stock of real estate companies that are registered under the REIT Act of 1960. Also includes investment in publicly-traded non-REITS which are operating companies that may not technically qualify as REITS for legal purposes but derive a majority of their revenue from real estate operations.

The assets of TERS may be rebalanced to target once an allocation reaches the minimum or maximum point in its range. The actual allocation to asset class shall be monitored frequently to ensure adherence to Policy allocations.

Page 6

B. Each asset class shall be suballocated as follows:

New

Asset Class Target Equities Domestic Core 16.0% Domestic Enhanced Core 16.0 Domestic Growth 8.0 International Passive - ACWI ex-US 7.5% Active - EAFE 7.5

Total Equities 55.0%

Investment-grade Fixed Income 20.0% High Yield Fixed Income 10.0% Fixed Income 30.0%

REITS 15.0% Total 100.0%

The strategic role of each asset class and subclass is defined as follows: Equity

Domestic Core - two stock portfolios: one designed to track the return and characteristics of the Russell 2000, and the other designed to track the return and characteristics of the S&P 500.

Domestic Enhanced Core – three stock portfolios: expected to outperform the S&P 500

index over a full market cycle of 3 to 5 years. These portfolios are expected to track the return of the index closely and exhibit characteristics such as P/E ratio and market capitalization similar to the S&P 500.

Domestic Growth - a portfolio of stocks characterized by higher risk, lower dividend

yield and a higher P/E ratio compared to the market. The growth stock portfolio is expected to provide above market performance in rising markets.

International Equity - a portfolio of stocks of non-domestic companies traded on

exchanges outside the U.S. and denominated in non-U.S. currency. The international equity investment is expected to provide diversification from U.S. equity investments. Passive international equity management attempts to replicate performance and

Page 7

characteristics of a predetermined benchmark. Active management attempts to add value over the benchmark through country allocation, stock selection, etc.

Fixed Income Investment Grade - a portfolio of high quality, publicly-traded fixed income securities,

designed to preserve capital, generate cash flow and earn an incremental yield and return to an investment in U.S. Treasury securities.

High Yield – a portfolio of fixed income securities which are rated below investment

grade and therefore harbor higher volatility. They display a low correlation to virtually all asset classes, thereby reducing overall portfolio volatility. High yield bonds exhibit higher yield to maturity than investment grade bonds which improves the System’s net cash flow.

REITS REITS - a portfolio of publicly-traded equity securities of companies primarily engaged

in operating real estate or related mortgage assets in a manner which satisfies the Real Estate Investment Trust Act of 1960. The REIT investment is expected to provide diversification from traditional capital market risk, liquidity, and a strong level of cash flow.

Cash Equivalents - a portfolio of short-term fixed income securities with an average

maturity of less than one year. Its purpose is to provide liquidity and safety of principal from capital market and default risk.

IV. Performance Objectives

The investment performance will be measured on two levels: against objectives for the total TERS and against objectives for individual portfolio components (asset classes and individual managers). Investment performance shall be measured no less than quarterly on a net of fees basis. Because capital markets fluctuate, and given the length of the duration of the liability stream, the performance relative to objectives is to be judged over a period of three to five years.

A. Performance Objectives for the Total Trust

1. To avoid actuarial loss. The actuarial interest rate is 8.0% (7.75% net of fees) Exceed inflation by 3% as measured by the Consumer Price Index, to ensure real asset growth consistent with risk levels assumed.

Page 8

2. To measure the value added by active management: Exceed a policy index calculated by weighting the appropriate indices according to the asset allocation targets as follows: 40% x S&P 500 20% x Lehman Aggregate Bond Index 10% x Merrill Lynch High Yield Master II Index 15% x Morgan Stanley ACWI Ex-US 15% x Wilshire REIT Index 3. Expected return for the asset allocation policy is 7.52%.

B. Performance Objectives for Individual Components

1. Domestic Equities Passive core Return within 20 basis points of the Wilshire 5000

Index over one year. Growth 2% above S&P 500 over a market cycle of three to

five years. Enhanced Core 1.5% above S&P 500 over a market cycle of three

to five years. 2. Fixed Income

Investment Grade 0.75% above the Lehman Aggregate Bond Index over a market cycle of three to five years.

High Yield 1% above the Merrill Lynch High Yield Master II

Index over a market cycle of three to five years. 3. Real Estate Investment Trusts (REITS)

REITS Return to exceed the Wilshire REIT Index by 2% per annum.

4. International Equities

Passive Return within 0.30% of the MSCI ACWI Ex-US Index per year.

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Active 2% above the MSCI EAFE Index over a three year

period. V. General Investment Manager Guidelines and Requirements

1. Purchases and sales, security selection, and portfolio implementation of investment strategies are delegated to the discretion of the investment manager, subject to compliance with TERS’ investment policies.

2. The following transactions are prohibited: purchase of non-negotiable securities, short

sales, stock and bond transactions on margin, straddles, options (other than covered options where expressly allowed), leverage (other than where expressly allowed) or letter stock.

3. Transactions that involve a broker acting as a “principal” where such broker is also the

investment manager who is making the transaction is prohibited. 4. Transactions shall be executed at a reasonable cost, taking into consideration prevailing

market conditions and services and research provided by the executing broker. 5. TERS considers the active voting of proxies an integral part of the investment process.

The investment managers shall vote the proxies in a prudent manner. 6. No more than 5% of any TERS portfolio at cost may be invested in the securities of a

single issuer or in a single tangible asset, excluding securities issued by the U.S. government or its agencies. Further, no more than 1.5% of any TERS stock or bond portfolio at cost may be invested in the securities of any company with less than $75 million in available market capitalization in that class of security.

7. No fixed income security shall have an equivalent credit quality below investment grade

at the time of purchase unless specified as Authorized Investments within the manager’s guidelines. Below investment grade is defined as:

BBB by Standard & Poor’s for straight bonds and convertibles. Baa by Moody’s Investor Service for straight bonds and convertibles. A3 by Standard & Poor’s for short term securities. P3 by Moody’s Investor Service for short-term securities. 8. The use of U.S. equity index futures is permitted to achieve the following:

a) To reduce the opportunity cost caused by “cash drag” in a rising equity market.

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b) To decrease the transaction costs of equity trading without increasing the risk (volatility) of the equity component of TERS.

c) To increase the manager’s flexibility in meeting the performance objectives set forth

for it while still constraining it to maintain investment style and, therefore, its strategic role.

9. The use of U.S. equity futures is constrained by the following requirements:

a) Futures cannot be used for speculative purposes, or for hedging strategies at this

time. b) The use of futures contemplated is as a substitute for the underlying stocks. c) The use of futures is limited to S&P 500 Index contracts only.

10. Performance objectives are to be met on a net of fees basis. 11. Any investment or action with respect to an investment not expressly allowed is

prohibited, unless presented to and approved prospectively by the Board. All guidelines must be adhered to by the external money managers, however, if from time to time an exception to the guidelines shall be deemed appropriate by a manager, it may seek review and approval by the Board to make such an exception.

VI. Review and Modification of Investment Policy Statement The Retirement Board will review the Policy from time to time to determine if modifications

are necessary or desirable. If modifications are made, they shall be promptly communicated to all investment managers and other interested persons.

Modifications may occur due to:

1. operational problems that become apparent during the investment management process. 2. changes in economic prospects, plan characteristics or sponsoring employer

organizations. VII. Adoption Dated this ____________________ day of ________________________________, 2007. THE CITY OF TACOMA TACOMA EMPLOYES’

RETIREMENT SYSTEM

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Approved as to form: By: __________________________ Chairman, Board of Administration ________________________ Assistant City Attorney By: __________________________ Secretary, Board of Administration THE CITY OF TACOMA TACOMA EMPLOYES’ RETIREMENT SYSTEM ________________________ Patricia F. Pabst Retirement System Director

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