MINUTES - Contra Costa Community College District …2011/05/19 · MINUTES - Contra Costa...

MINUTES - Contra Costa Community College District

Retirement Board of Authority Meeting

May 19, 2011

Keenan Financial Services

2355 Crenshaw Boulevard, Ste. 200, Torrance, CA. 90501

Tel: 800-654-8102 Fax: 310-599-1329 www.keenan.com

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MEETING MINUTES

CONTRA COSTA COMMUNITY COLLEGE DISTRICT RETIREMENT BOARD OF AUTHORITY MEETING

May 19, 2011 9:00 AM – 11:00 AM

DISTRICT BOARDROOM

500 COURT STREET MARTINEZ, CA 94553

(925) 229-1000

I. CALL TO ORDER

The meeting was called to order by Eugene Huff at 9:03 AM.

II. ROLL CALL

Those in attendance were: RETIREMENT BOARD OF AUTHORITY (“BOARD”) MEMBERS: Interim College President Richard Livingston

Vice Chancellor, District Wide Administrative Services, ex officio Kindred Murillo Associate Vice Chancellor/Chief Human Resources Officer, ex officio Eugene Huff College Business Director Bruce Cutler United Faculty Representative Michael Anker Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri

PROGRAM COORDINATORS: Senior Vice President Gail Beal Account Manager Roslyn Washington Account Manager Ken Threeths

CONSULTANTS:

Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS

Polsinelli Shughart PC -- PLR Attorney Brian Johnston Those absent were: Morgan Stanley Smith Barney Cary Allison



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III. APPROVAL OF AGENDA

Board member Eugene Huff suggested repositioning the Private Letter Ruling (PLR) Agenda Item after the approval of the Meeting Minutes. As Brian Johnston of Polsinelli Shughart PC was only reporting on this single item, this would allow him the opportunity to speak and not have to wait until late in the meeting in order to report on the District’s PLR application. A motion was made by Board member Kindred Murillo, seconded by Board member Michael Anker and unanimously carried by the Board to reposition the Meeting Agenda and approve as amended.

IV. APPROVAL OF MINUTES

A motion was made by Board member Kindred Murillo, seconded by Board member Bruce Cutler and unanimously carried by the Board to approve the February 3, 2011 Meeting Minutes as presented.

V. PRIVATE LETTER RULING Attorney Brian Johnston of Polsinelli Shughart PC, advised the Board that the Private Letter Ruling

(PLR) has not been completed. Brian noted that although the PLR has not been completed it does not mean that there are issues with the District’s Investment Trust. The unique structure of the Futuris Public Entity Investment Trust Program is somewhat different from what the IRS normally works with and sees. Brian advised the Board that one of the reasons for the delay in the IRS issuing a PLR is due to the fact that the original IRS Agent he was working with had concerns about the use of the “Futuris” name vis-à-vis the Districts name. Brian also noted that the original IRS Agent that he worked with has retired and he has had to re-educate the new agent relative to the unique features of the District’s OPEB Trust.

Board member Eugene Huff asked Brian if other districts were encountering the same issues with their

PLR application. Brian noted that he is currently working on PLRs for eight different districts and none of these districts have received a Private Letter Ruling from the IRS at this time.

Board members inquired as to whether it was necessary to have a PLR affirmation from the IRS. Brian

advised that while it is not mandated to have a Private Letter Ruling, it is a best practice and adds an extra layer of protection for the Board and the district.

Chuck Thompson of RPM Consultant Group requested a commitment from Brian of more frequent

communication with the Board and consultants relative to the status of the PLR as well as committing to a date on when the PLR will be issued. Brian noted that he could not commit to the date of PLR approval by the IRS but did commit to communicating with the Board and consultants more frequently.

Chuck Thompson of RPM Consultant Group and Board member Eugene Huff articulated Board

concerns over the length of time involved in the PLR completion process. Brian Johnston requested the signature from Eugene Huff on Form 2848. Eugene executed Form 2848

to provide Brian with an updated Power of Attorney and allowing him to continue working on the PLR completion process with the IRS.



May 19, 2011




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VI. INVESTMENTS

PORTFOLIO REVIEW

Scott Rankin of Benefit Trust Company provided an overview of the District’s Investment Trust Change in Portfolio, Asset Allocation, and Time Weighted Return (Gross and Net of Fees) for period ending April 30, 2011. As of April 30, 2011, the District’s Investment Trust portfolio had an allocation of

57.5% in fixed income funds and 42.5% in equity funds (equity funds comprised 26.1% in domestic equity and 16.4% in international equity). The value of the portfolio on December 31, 2010 was $22,603,758.94 and as of April 30, 2011 the value is $28,410,035.13.The April 30, 2011 portfolio value represents an inception to date net rate of return of 14.75% compared to the S&P/Barclays Blend of 13.89%. The investments results for the last 12 months show a net increase of 12.42% compared to the S&P/Barclays Blend of 11.74%.

Board member Kindred Murillo noted there should be a formal report that can be presented to the District’s Governing Board relative to the status of the Investment Trust. The meeting is scheduled for June 22, 2011. Scott Rankin indicated that he would provide a one page Investment Trust Report to Kindred for her presentation to the District’s Governing Board. A copy of this Investment Trust Report will be sent to all Retirement Board of Authority (RBOA) members. The District will invite Cary Allison of Morgan Stanley Smith Barney (MSSB) to this meeting.

A motion was made by Board member Kindred Murillo to accept the Portfolio Review as presented,

seconded by Board member Bruce Cutler and unanimously carried by the Board. MARKET OVERVIEW

Scott Rankin of Benefit Trust Company (BTC) provided the Asset Allocation and Portfolio Updates for the Futuris Portfolio models for period ending April 30, 2011. Scott also provided the “Capital Markets Overview” from Morgan Stanley Smith Barney (MSSB). The MSSB “Capital Markets Overview” provided positive indicators of a global economic recovery as follows:

In the first quarter, despite the natural disaster in Japan and the political turmoil in the Middle East and North Africa, the global business and equity bull cycles continued. Looking ahead, there is growing optimism that the recovery from the financial crisis has become self-sustaining.

Both Morgan Stanley and Citi economists expect growth of about 6% in 2011 for emerging market economies, while developed-market economies could expand around 2%.

Commodities posted a solid 4.4% quarterly gain, according to the Dow Jones-UBS Commodity Index.

The price of oil rose 16.8% in the first quarter.

Companies executed big mergers and acquisitions during the quarter, and this trend is expected to continue for the rest of the year. Global mergers-and-acquisitions activity for the quarter totaled $716.3 billion, up 16% from a year ago.

Worldwide there were 282 IPOs that raised a combined $43.6 billion in the quarter.

In March, the U.S. unemployment rate fell to 8.8%, its lowest level in two years, signifying the fastest pace of job creation in almost a year.



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The Dow Jones Industrials were up 7.1% for the first quarter.

The S&P 500 advanced 5.9% for the quarter. The largest advances in the S&P 500 Stock Sectors for the quarter were for Energy (16.8%) and Industrials (8.8%). Health Care (5.6%) also rose respectably. Utilities and Consumer Staples were the laggards, up 2.8% and 2.5%, respectively.

The NASDAQ Composite gained 4% for the quarter. Scott also presented the MSSB Global Investment Committee Outlook for 2011.

Global GDP recovery has now become business cycle expansion.

Global economy growth of 4% with emerging economies expanding by 6% and developed ones by a much slower 2%.

Low 1%-2% inflation in developed countries but 5% in developing ones.

Developing economy central banks tighten; developed economy central banks are on hold until 2012.

US and European policy risk is asymmetric to the upside; EM policy risk is asymmetric to downside.

Modest US trade-weighted dollar strength; broad developed country currencies weakness to developing country currencies, especially Asia.

Longer-term prospects good for a multiyear global business cycle expansion.

VII. CORRESPONDENCE

No correspondence was presented. However, it was noted by Chuck Thompson of RPM Consultant Group that he believes that the letter supplied by Attorney Brian Johnston of Polsinelli Shughart PC to the District regarding the status of the Private Letter Ruling should be included in the correspondence agenda.

VIII. EDUCATION

Scott Rankin of Benefit Trust Company (BTC) advised the Board of asset-allocation changes in the District’s Investment Trust portfolio. Changes in the District’s Investment Trust portfolio were made as follows:

Domestic Equities -- Royce Special Equity (RSEIX) replaced Perkins Mid-Cap Value (JMCVX).

Domestic Equities -- Prudential Global Real Estate (PURZX) replaced Cohen & Steers Global Realty I(CSSPX).

International/Global Equities -- Royce Global Value (RGVIX) replaced Artio International Equity II (JETIX)/ Dodge & Cox International Stock (DODFX).

Global Allocation – Blackrock Global Allocation (MALOX) was removed from this investment category.

Fixed Income -- Prudential Total Return Bond Fund (PDBZX) replaced PIMCO Total Return (PTTRX).

International Fixed Income – Brandywine Global Opportunities Bond was an addition to this investment category.



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Scott also provided Board members with two articles from the Royce Funds. One article was a Royce Funds Research Paper entitled “Small-Cap: The Evergreen Asset Class” while the other article focused on how Royce Funds manage the risk and volatility of the small company universe and was entitled “Risky Business: Risk Management Begins with the Idea of Attempting to Establish a Margin of Safety”. The Royce Funds Research Paper reflected the fact that the investment universe of small companies is both large and diverse. Small-cap equities form the largest domestic equity universe, accounting for approximately 85% of all traded companies in the U.S. At Royce Funds, the universe of small-cap equities are divided into two distinct segments namely:

Micro-caps have market caps up to $500 million. The U.S. micro-cap segment consists of more than 3,300 companies with approximately $400 billion in total capitalization.

Small-caps have market capitalization between $500 million and $2.5 trillion. The U.S. small-cap segment encompasses more than 1,100 companies with a total capitalization of approximately $1.3 trillion.

In the Royce Funds article entitled “Risky Business: Risk Management Begins with the Idea of Attempting to Establish a Margin of Safety”, Royce Funds recognize that the historically superior long-term returns of small-cap stocks come with higher business risk and greater volatility. For Royce portfolio managers, paying attention to this risk begin with the basic concept of establishing a “Margin of Safety”. Establishing a “Margin of Safety” begins with the company’s balance sheet and ends with the purchase price in the context of a detailed analysis of the company’s fundamentals.

IX. ADMINISTRATION REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE

SUBSTANTIVE PLAN Roslyn Washington of Keenan Financial Services (KFS) informed the Board that KFS is nearing the

completion of the electronic library for the Comprehensive Compliance Plan, including the Substantive Plan. Roslyn indicated that this project should be completed by the end of June. Board member Kindred Murillo requested that the finalized Data Disc be sent to the district via an FTP site. Kindred also requested that the electronic library be positioned on a jump drive as back-up.

STATUS OF ACTUARIAL STUDY Board members Eugene Huff and Kindred Murillo informed the Board that Total Compensation

Systems (TCS) has been hired to complete the District’s Actuarial Valuation Study. As part of the Actuarial Valuation Study, TCS have been requested to complete two Actuarial Valuation Report models. One model will employ a discount rate using a percentage of pay-roll, while the other will use a flat discount rate. It is believed that the flat discount rate is 7%, however Kindred will confirm this. TCS had completed a preliminary draft on May 28, 2011 and the final Actuarial Valuation Study should be completed in time for the June Board meeting.



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FUTURE TRANSFER OF ASSETS INTO THE TRUST Board members Eugene Huff and Kindred Murillo informed the other Retirement Board of Authority

members that the District’s current Investment Trust funding process is to make quarterly deposits and the last scheduled quarterly deposit will happen in June 2011. Eugene and Kindred will make recommendations to the Governing Board that the District continue to make deposits on a quarterly basis. An inquiry was made as to the amount of the District’s Investment Trust funding. Eugene and Kindred informed the Board that the District will continue to fund at whatever the current ARC level requires until a new Actuarial Valuation Study has been completed.

RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF

INTEREST PROTECTION FOR OPEB PLANS Chuck Thompson of RPM Consultant Group informed the Board that he has worked with individual

attorneys to design a “Conflict of Interest” program. He will attempt to provide the finalized program to the Board at the next meeting and set-up dates for a RBOA training schedule.

X. INFORMATION REPORTS RETIREMENT BOARD OF AUTHORITY COMMENTS Board members acknowledged Kindred Murillo for her Retirement Board of Authority activities as well

as her work within the District and wished her good luck on her new position as President at Lake Tahoe Community College.

PROGRAM COORDINATOR/CONSULTANT COMMENTS Scott Rankin of Benefit Trust Company (BTC) informed the Board that BTC is creating a new Trust

accounting system. Communications regarding tutorials will be available prior to the release of the new system.

VISITORS COMMENTS There were no Visitor comments XI. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING Among the Agenda Items for the next RBOA Meeting are the following:

Conflict of Interest Policies. Procedures and Training Update

Actuarial Valuation Study

Private Letter Ruling (PLR) Update

Investment Letter to the Board



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The next RBOA Meeting is scheduled as follows:

November 10, 2011 at 9:00 AM XII. ADJOURNMENT

A motion was made by Board member Michael Anker to adjourn the RBOA Meeting at 10:40 AM, seconded by Board member Nick Dimitri and unanimously carried by the Board.

Keenan & Associates Tel: 800-654-8102/Fax: 310-533-1329 License No. 0451271

AGENDA


May 19, 2011 9:00 AM – 11:00 AM

DISTRICT BOARDROOM


(925) 229-1000

I. CALL TO ORDER II. ROLL CALL

RETIREMENT BOARD OF AUTHORITY (the “BOARD”) MEMBERS Interim College President Richard Livingston Vice Chancellor, District Wide Administrative Services, ex officio Kindred Murillo Associate Vice Chancellor/Chief Human Resources Officer, ex officio Eugene Huff College Business Director Bruce Cutler United Faculty Representative Michael Anker Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri PROGRAM COORDINATOR Senior Vice President Gail Beal Account Manager Roslyn Washington

Account Manager Kenneth Threeths CONSULTANTS Morgan Stanley Smith Barney Cary Allison Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS PLR Attorney Brian Johnston OTHER None

Contra Costa Community College District Retirement Board of Authority Meeting May 19, 2011 Page 2


III. APPROVAL OF AGENDA Action

2010/2011-046 The Retirement Board of Authority retains the right to change the order in which agenda items are discussed. Subject to review by the Retirement Board, the agenda is to be approved as presented. Items may be deleted or added for discussion only according to G.C. Section 54954.2.

PUBLIC COMMENTS: BOARD CONSIDERATION: IV. APPROVAL OF MINUTES Action

2010/2011-047 The Retirement Board of Authority will review the minutes from the previous meeting, February 3, 2011, for any adjustments and adoption. PUBLIC COMMENTS:

BOARD CONSIDERATION: V. INVESTMENTS

PORTFOLIO REVIEW Action 2010/2011-048 Morgan Stanley Smith Barney (MSSB) will review the overall performance of the District’s Futuris Public Entity Investment Trust portfolio. PUBLIC COMMENTS: BOARD CONSIDERATION:

MARKET OVERVIEW Information 2010/2011-049 Morgan Stanley Smith Barney (MSSB) will provide an overview of the actions of the capital markets since the last Retirement Board of Authority meeting. PUBLIC COMMENTS:

BOARD CONSIDERATION:

VI. CORRESPONDENCE Information 2010/2011-050 Correspondence will be presented and reviewed by the Retirement Board of Authority. No action may be taken

in response; only referred for action on a subsequent agenda. PUBLIC COMMENTS: BOARD CONSIDERATION:



VII. EDUCATION Information 2010/2011-051 For OPEB plan governance, the Retirement Board of Authority is mandated to use the “prudent person” standard as codified by the California’s Constitution and Governmental Code. This standard requires that plan fiduciaries be (1)“familiar with such matters” as managing investments in a plan that pays OPEB benefits and that they take into account (2) “the circumstances then prevailing” relative to keeping abreast of changes in the economy, the marketplace for investment products and services to OPEB plans. The Education Agenda is for the furtherance of these OPEB requirements.

PUBLIC COMMENTS: BOARD CONSIDERATION:

VIII. ADMINISTRATION

REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, Information INCLUDING THE SUBSTANTIVE PLAN 2010/2011-052 Volume I, II & III of the Comprehensive Compliance Plan, including the Substantive Plan, are to be

reviewed relative to their electronic library status. PUBLIC COMMENTS: BOARD CONSIDERATION: STATUS OF ACTUARIAL STUDY Information

2010/2011-053 The Retirement Board of Authority members will discuss the status of the District’s new Actuarial Valuation Study. PUBLIC COMMENTS: BOARD CONSIDERATION: FUTURE TRANSFER OF ASSETS INTO THE TRUST Information 2010/2011-054 The District’s transfer of assets to the Investment Trust may require a tailored funding procedure. To meet the possibly tailored funding procedures, the Retirement Board of Authority (RBOA) will provide timing and asset transfer schedules related to the District’s Annual Required Contribution (ARC) and Pay-As-You-Go funding strategies based on current District financial considerations. PUBLIC COMMENTS: BOARD CONSIDERATION: PRIVATE LETTER RULING Information 2010/2011-055 The Retirement Board of Authority will review the status of the Private Letter Ruling (PLR) application to the Internal Revenue Service (IRS) regarding the Section 115 Trust arrangement.

PUBLIC COMMENTS: BOARD CONSIDERATION:



RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF INTEREST PROTECTION FOR OPEB PLANS Information

2010/2011-056 California's Constitution positions the Retirement Board of Authority (RBOA) with "sole and exclusive" authority over the assets of the OPEB Plan. The RBOA can be relieved of the responsibility to manage the OPEB Trust's portfolio; the selection of investment providers & investment platforms by shifting these responsibilities to a full-service discretionary Trustee.

The RBOA ensures "conflict of interest" protection by administering the OPEB Plan per the "exclusive

purpose" standard of providing benefits promptly to participants and monitoring all OPEB Trust activity per the "prudent person" standard of care.

Relative to fiduciary and conflict of interest standards, Chuck Thompson, of RPM Consultants will provide a report on the status of the Policies, Procedures and Training program being developed for the RBOA. PUBLIC COMMENTS: BOARD CONSIDERATION:

IX. INFORMATION REPORTS

RETIREMENT BOARD OF AUTHORITY COMMENTS Information

2010/2011-057 Each member may report about various matters involving the Retirement Board of Authority. There will be no Retirement Board discussion except to ask questions or refer matters to staff, and no action will be taken unless listed on a subsequent agenda.

PROGRAM COORDINATOR/CONSULTANT COMMENT Information

2010/2011-058 The Program Coordinator and Consultants will report to the Authority about various matters involving the Authority. There will be no Authority discussion except to ask questions, and no action will be taken unless listed on a subsequent agenda.

VISITORS COMMENTS Information 2010/2011-059 The public may address the Retirement Board of Authority on any matter pertaining to the Retirement Board that is not on the agenda. The Chairperson reserves the right to limit the time of presentations by individual or topic.

X. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING Information 2010/2011-060

The Agenda Items for the next meeting will be the same as for this meeting. Members and visitors may suggest additional items for consideration at the next Futuris Retirement Board of Authority meeting. PUBLIC COMMENTS: BOARD CONSIDERATION:



XI. ADJOURNMENT __________________________________________________________________________________________ Americans with Disabilities Act The Contra Costa Community College District Retirement Board of Authority conforms to the protections and prohibitions contained in Section 202 of the Americans with Disabilities Act of 1990 and the federal rules and regulations adopted in implementation thereof. A request for disability-related modification or accommodation, in order to participate in a public meeting of the Contra Costa Community College District Retirement Board of Authority meeting, shall be made to: Eugene Huff, Associate Vice Chancellor/Chief Human Resources Officer, Contra Costa Community College District, 500 Court Street, Martinez, CA. 94553.


PRESENTED TO:

DATE:

05/19/2011

Retirement Board of Authority SUBJECT:

ITEM #:

2010/2011-047

Approval of Minutes

Enclosure:

Yes Prepared by:


Requested by:

Retirement Board of Authority

BACKGROUND: As a matter of record and in accordance with the Brown Act, minutes of each meeting are kept and recorded. STATUS: The Board will review the minutes from the previous meeting February 3, 2011. RECOMMENDATION: Subject to changes or corrections, the minutes are to be approved.

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Contra Costa Community College District Retirement Board of Authority Meeting February 3, 2011

Keenan Financial Services 2355 Crenshaw Boulevard, Ste. 200, Torrance, CA. 90501


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MEETING MINUTES CONTRA COSTA COMMUNITY COLLEGE DISTRICT RETIREMENT BOARD OF AUTHORITY MEETING

FEBRUARY 3, 2011 9:00 AM – 11:00 AM

DISTRICT BOARDROOM


(925) 229-1000

I. CALL TO ORDER

The meeting was called to order by Board member Eugene Huff at 9:04 AM.

II. ROLL CALL

Those in attendance were: RETIREMENT BOARD OF AUTHORITY (the “BOARD”) MEMBERS: Interim College President Richard Livingston Vice Chancellor, District Wide Administrative Services, ex officio Kindred Murillo Associate Vice Chancellor/Chief Human Resources Officer, ex officio Eugene Huff Local 1 Representative Krista Ducharme Management Council Representative Nick Dimitri

PROGRAM COORDINATORS: Senior Vice President Gail Beal Account Manager Roslyn Washington Account Manager Ken Threeths

CONSULTANTS: Morgan Stanley Smith Barney Cary Allison Benefit Trust Company Scott Rankin RPM Consultant Group Chuck Thompson

GUESTS Vavrinek, Trine, Day & Company LLC Terry Montgomery Those absent were: College Business Director, Board Member Bruce Cutler United Faculty Representative, Board Member Michael Anker Associate Vice Chancellor of Finance/CFO, Guest Serena Muindi

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III. APPROVAL OF AGENDA

A motion was made by Board member Kindred Murillo to approve the Agenda as presented, seconded by Board member Nick Dimitri and unanimously carried by the Board.

IV. APPROVAL OF MINUTES

A motion was made by Board member Nick Dimitri to approve the November 1, 2010 Meeting Minutes as presented, seconded by Board member Krista Ducharme and unanimously carried by the Board.

V. CORRESPONDENCE

There was no correspondence presented. VI. INVESTMENTS

PORTFOLIO REVIEW: Cary Allison of Morgan Stanley Smith Barney (MSSB) provided an overview of the District’s Public

Entity Investment Trust’s Change in Portfolio, Asset Allocation, and Time Weighted Return (Gross and Net of Fees) for period ending December 31,2010. As of December 31, 2009, the Trust’s portfolio had an allocation of 55.8% in fixed income funds and 44.2% in equity funds (equity funds comprised 25.3% in domestic equity and 18.9% in international equity). The value of the portfolio on December 31, 2009 was $9,800,132.35 and as of December 31, 2010 the value is $22,612,572.33. The December 31, 2010 portfolio value represents an inception to date net rate of return of 14.43% compared to the S&P/Barclays Blend of 13.11%. The investments results for the last 12 months show a net increase of 12.56% compared to the S&P/Barclays Blend of 11.49%.

A motion was made by Board member Kindred Murillo to approve the Portfolio Review as presented,

seconded by Board member Richard Livingston and unanimously carried by the Board.

MARKET OVERVIEW: Cary Allison of Morgan Stanley Smith Barney (MSSB) presented the MSSB fourth quarter 2010 “Capital Markets Overview” tracking global economic expansion. Through the forth quarter of 2010, markets continued to benefit from the intervention by governments and central banks, making a second year of recovery from the financial crisis. Going forward, there is every indication that the recovery could become expansion with the primary engine for the expansion being the emerging market economies. Growth in excess of 6% is expected in 2011 for emerging market economies, whereas developed-market economies are expected to grow only 2%. In the U.S., recently enacted federal tax-cut extensions seem likely to provide a platform for stronger growth. U.S. corporate profits gained 30% in 2010, while cash reserves were the highest in half a century. The volume of mergers and acquisitions grew in 2010 by 25% and corporations continued to be able to borrow at exceedingly low rates.

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Cary also presented to the Board members the MSSB Global Investment Committee Outlook for 2011. MSSB provided the following economic parameters for the 2011: • Global GDP recovery has now become business cycle expansion. • Global economy growth of 4% with emerging economies expanding by 6% and developed ones by a

much slower 2%. • Low 1%-2% inflation in developed countries but 5% in developing ones. • Developing economy central banks tighten; developed economy central banks are on hold until 2012. • US and European policy risk is asymmetric to the upside; EM policy risk is asymmetric to downside. • Modest US trade-weighted dollar strength; broad developed country currencies weakness to developing

country currencies, especially Asia. • Longer-term prospects good for a multiyear global business cycle expansion.

VII. EDUCATION Cary Allison of Morgan Stanley Smith Barney reviewed a presentation by OppenheimerFunds entitled

“Oppenheimer International Bond Fund”. Cary explained why having International Bonds is good for the districts portfolio. • Potential benefits of overall portfolio diversification. • May provide attractive long-term returns. • Yields may be greater than domestic opportunities. • Foreign currency exposure as an inflation hedge. • Provide low correlation to other financial assets.

VIII. ADMINISTRATION REVIEW OF THE COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE

SUBSTANTIVE PLAN Chuck Thompson of RPM Consultant Group informed the Board that Volumes I, II & III of the

Comprehensive Compliance Plan, which includes the Substantive Plan have been delivered. Gail Beal of Keenan Financial Services (KFS) informed the Board that KFS is in the process of preparing

an electronic library of the Comprehensive Compliance Plan, including the Substantive Plan. The Board wondered if there was an estimated time of completion. Gail informed the Board that it should be completed by June 2011. COMPREHENSIVE COMPLIANCE PLAN, INCLUDING THE SUBSTANTIVE PLAN POLICIES AND PROCEDURES FOR THE MAINTENANCE OF THE PLAN UPDATE

Chuck Thompson of RPM Consultant Group provided the Retirement Board of Authority with the

Substantive Plan policies and procedures for the maintenance of the Plan.

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A motion was made by Board member Eugene Huff to approve the Comprehensive Compliance Plan, including the Substantive Plan policies and procedures for maintenance, seconded by Board member Kindred Murillo and unanimously carried by the Board.

STATUS OF ACTUARIAL STUDY Board member Kindred Murillo noted that the Actuarial Valuation Study is still in the process of being

completed. Chuck Thompson of RPM Consultant Group suggested to the Board that quick completion of their Actuarial Valuation Study is important as many actuaries will begin working on the CalPERS Actuarial Valuation Studies which may extend the amount of time that can be given to this Board’s project.

TRUST BYLAWS Gail Beal of Keenan Financial Services presented the Board with the updated Trust Bylaws that were

worked on by the Board’s sub-committee. Board member Kindred Murillo reminded the other Board members that the Trust Bylaws could still be modified at a later date if needed.

A motion was made by Board member Kindred Murillo to accept the Trust Bylaws as presented,

seconded by Board member Nick Dimitri and unanimously carried By the Board. FUTURE TRANSFER OF ASSETS INTO THE TRUST Benefit Trust Company provided Board members with a Trust Transaction Report reflecting activities

between November 1, 2010 and January 19, 2011. THE DISTRICT’S OPEB PLAN INDEPENDENT AUDITOR’S REPORT Terry Montgomery of Vavrinek, Trine, Day & Company LLC (VTD) reported on the District’s OPEB

audit. Terry reported that there were no audit issues and that the District’s Public Entity Investment Trust is in compliance. Board member Eugene Huff noted that the Audit Report has been posted to the Districts website.

For the next Audit Report, Scott Rankin of Benefit Trust Company (BTC) stated that BTC would

provide VTD with a certificated letter to confirm that the Investment Trust Portfolio is in compliance with the District’s Investment Policy Statement (IPS).

PRIVATE LETTER RULING Scott Rankin of Benefit Trust Company informed the Board the Private Letter Ruling (PLR) has not

been completed. Brian Johnston of Polsinelli Shughart PC is in discussions with the IRS relative to specific sections of the PLR that needing resolution before the IRS will issue a positive PLR.

Although the PLR has not been issued by the IRS, Scott Rankin of Benefit Trust Company has been able

to obtain a letter, from the IRS agent associated with our PLR Application, indicating the Trust would pass an IRS Audit at this time.

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The Board inquired as to whether the absence of a PLR could expose the District to any sort of risk or penalty. Gail Beal of Keenan Financial Services informed the Board that the District is not at risk due to fact that a PLR Application to the Service is in place.

RETIREMENT BOARD OF AUTHORITY (RBOA) FIDUCIARY AND CONFLICT OF

INTEREST PROTECTION FOR OPEB PLANS Chuck Thompson of RPM Consultant Group informed the Board that he will soon provide the Board

with a template for the District’s OPEB Conflict of Interest program. IX. INFORMATION REPORTS RETIREMENT BOARD OF AUTHORITY COMMENTS Board member Kindred Murillo requested that any Action Items for the next RBOA Meeting be placed

at the beginning of the Agenda platform. PROGRAM COORDINATOR/CONSULTANT COMMENTS Gail Beal of Keenan Financial Services informed the Board that they should receive invitations to the

Futuris Investment Workshop within the next few weeks. VISITORS COMMENTS There were no Visitor comments. X. DATE, TIME AND AGENDA ITEMS FOR NEXT MEETING

• May 19, 2011 XI. ADJOURNMENT A motion was made by Board member Eugene Huff to adjourn the meeting at 10:30 AM, seconded by

Board member Nick Dimitri and unanimously carried by the Board.

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PRESENTED TO:

DATE:

05/19/2011


ITEM #: 2010/2011-048

Portfolio Review

Enclosure:

Yes

Prepared by:

Morgan Stanley Smith Barney

Requested by:


BACKGROUND: As Board members of the Retirement Board of Authority you have a fiduciary responsibility as described in Government Code section 53215, et seq. As part of fulfilling your fiduciary responsibility, it is important to periodically review the Portfolio. STATUS: Morgan Stanley Smith Barney will provide a review of the District’s Futuris Public Entity Investment Trust Portfolio Performance Report. RECOMMENDATION: The Retirement Board of Authority should review and accept the report and file as appropriate.

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CO�TRA COSTA COMMU�ITY COLLEGE DISTRICT FUTURIS PUB E�TITY I�V TR

March 31, 2011

Time Weighted Return - Net of Fees

Annualized Annualized

Quarter Year Latest 1 Latest 3 Inception

To Date To Date Year Year To Date

Account 2.51 2.51 11.05 - 13.79

S&P/Barclays Blend 3.16 3.16 10.89 4.61 13.16

Barclays Aggregate 0.43 0.43 5.14 5.26 5.21

S&P 500 Adj for Divs 5.92 5.92 15.65 2.35 20.37

NASDAQ 4.83 4.83 15.98 6.86 22.84

MSCI EAFE 3.36 3.36 10.42 -3.01 11.13

Time Weighted Return - Gross of Fees

Annualized Annualized

Quarter Year Latest 1 Latest 3 Inception

To Date To Date Year Year To Date

Account 2.60 2.60 11.42 - 14.18

S&P/Barclays Blend 3.16 3.16 10.89 4.61 13.16

Barclays Aggregate 0.43 0.43 5.14 5.26 5.21

S&P 500 Adj for Divs 5.92 5.92 15.65 2.35 20.37

NASDAQ 4.83 4.83 15.98 6.86 22.84

MSCI EAFE 3.36 3.36 10.42 -3.01 11.13

Asset Allocation

PORTFOLIO SUMMARY

March 31, 2011

16.2%

26.0% 57.8%

0.0%

CASH AND RECEIVABLES 0.38

FIXED INCOME FUNDS 13,385,175.69

DOMESTIC EQUITY FUNDS 6,032,745.42

INTERNATIONAL EQUITY FUNDS

3,752,145.75

Change In Portfolio

Portfolio Value on 12-31-10 22,603,758.94

Contributions 0.00

Withdrawals 0.00

Change in Market Value 446,735.82

Income Received 139,852.62

Management Fees -20,280.13

Portfolio Value on 03-31-11 23,170,067.25

23,170,067.25

Page 9 of 59

PORTFOLIO APPRAISAL March 31, 2011

Security Unit Total Market Pct. Cur.

Quantity Security Symbol Cost Cost Price Value Assets Yield

CASH A%D RECEIVABLES

NORTHERN INSTL

FUNDS

GOVERNMENT

SELECT

bgsx.x 0.38 0.38 0.0 0.0

FIXED I%C MUTUAL FU%DS

Taxable Funds

246,282.659 DELAWARE

DIVERSIFIED

INCOME INSTL

dpff.x 9.33 2,298,708.13 9.23 2,273,188.94 9.8 4.9

87,463.165 LEGG MASON BW

GLOBAL OPPS BD IS

GOBS.X 10.68 934,106.82 10.70 935,855.87 4.0 7.6

218,755.533 METROPOLITAN

WEST TOTAL

RETURN BOND I

mwti.x 10.52 2,300,554.90 10.41 2,277,245.10 9.8 4.7

184,190.189 OPPENHEIMER

INTERNATIONAL

BOND Y

oiby.x 6.50 1,197,445.07 6.55 1,206,445.74 5.2 4.4

49.067 PIMCO TOTAL

RETURN INSTL

pttr.x 10.88 533.85 10.88 533.85 0.0 3.3

163,772.576 PRUDENTIAL TOTAL

RETURN BOND Z

pdbz.x 13.80 2,260,061.55 13.86 2,269,887.90 9.8 4.1

157,323.543 TEMPLETON

GLOBAL BOND ADV

tgba.x 12.97 2,041,147.42 13.69 2,153,759.30 9.3 4.6

209,442.197 WESTERN ASSET

CORE PLUS BOND

INSTL

wacp.x 10.38 2,174,481.76 10.83 2,268,258.99 9.8 5.0

13,207,039.51 13,385,175.69 57.8 4.8

13,207,039.51 13,385,175.69 57.8 4.8

DOMESTIC EQUITY FU%DS

Large Cap Funds

49,906.216 BLACKROCK

EQUITY DIVIDEND

INSTL

MADV.X 15.56 776,366.95 18.71 933,745.30 4.0 2.0

30,142.106 HARTFORD CAPITAL

APPRECIATION Y

hcay.x 32.69 985,428.94 38.52 1,161,073.92 5.0 0.0

52,793.044 JHANCOCK CLASSIC

VALUE I

jcvi.x 14.64 772,644.23 17.61 929,685.50 4.0 0.5

19,358.310 NUVEEN

TRADEWINDS

VALUE

OPPORTUNITIES I

nvor.x 30.73 594,835.68 36.07 698,254.24 3.0 1.6

3,129,275.79 3,722,758.97 16.1 0.9

Mid Cap Funds

17,459.012 COHEN & STEERS

INSTL REALTY

SHARES

CSRI.X 31.18 544,457.34 40.42 705,693.27 3.0 1.7

18,136.678 HARTFORD MIDCAP

Y

hmdy.x 19.76 358,421.05 25.93 470,284.06 2.0 0.0

902,878.39 1,175,977.33 5.1 1.0

Small Cap Funds

21,183.037 ROYCE SPECIAL

EQUITY INSTL

RSEI.X 21.72 460,095.56 21.98 465,603.15 2.0 0.4

4,492,249.74 5,364,339.45 23.2 0.9

1

Page 10 of 59

PORTFOLIO APPRAISAL March 31, 2011

Security Unit Total Market Pct. Cur.

Quantity Security Symbol Cost Cost Price Value Assets Yield

I%TER%ATIO%AL FU%DS

International

58,581.501 BRANDES INSTL

INTERNATIONAL

EQUITY

biie.x 14.82 868,014.32 15.61 914,457.23 3.9 2.2

23,861.732 NUVEEN

TRADEWINDS

GLOBAL ALL-CAP I

nwgr.x 26.45 631,236.45 29.90 713,465.79 3.1 1.9

11,999.728 PRUDENTIAL

GLOBAL REAL

ESTATE Z

PURZ.X 19.78 237,389.35 19.49 233,874.70 1.0 1.3

77,296.053 ROYCE GLOBAL

VALUE INVMT

RGVI.X 15.00 1,159,440.79 15.21 1,175,672.97 5.1 0.7

23,950.237 THORNBURG

INTERNATIONAL

VALUE I

tgvi.x 25.48 610,219.31 29.84 714,675.07 3.1 0.9

3,506,300.21 3,752,145.75 16.2 1.4

3,506,300.21 3,752,145.75 16.2 1.4

BALA%CED EQUITY FU%DS

Balanced Funds

33,860.485 THORNBURG

INVESTMENT

INCOME BUILDER I

tibi.x 19.07 645,856.02 19.74 668,405.97 2.9 6.1

645,856.02 668,405.97 2.9 6.1

TOTAL PORTFOLIO 21,851,445.86 23,170,067.25 100.0 3.4

2

Page 11 of 59


PRESENTED TO:

DATE:

05/19/2011


ITEM #:

2010/2011-049

Market Overview

Enclosure:

Yes

Prepared by:


Requested by:


BACKGROUND: As Board members of the Retirement Board of Authority you have a fiduciary responsibility as described in Government Code section 53215, et seq. In fulfilling your fiduciary responsibility, it is important to understand the impact of market conditions on the assets in the trust. STATUS: Morgan Stanley Smith Barney (MSSB) will provide an overview of current capital market conditions. RECOMMENDATION: The Retirement Board of Authority should receive the information.

Page 12 of 59

Asset Allocation and Portfolio Updates

Cary M. Allison, CIMA®Senior Vice President, Senior Investment Management ConsultantMarch 31, 2011

Page 13 of 59

MODELS (USING CAPITAL MARKET ASSUMPTIONS AND EFFICIENT FRONTIER)

Portfolio 4.5 Portfolio 5 Portfolio 6 Portfolio 7 Portfolio 8 Portfolio 9

Target Returns 4.5% 5% 6% 7% 8% 9%EQUITIESLarge Cap Growth 0% 1% 3% 5% 5% 7%Large Cap Value 0% 4% 7% 8% 11% 14%Small/Mid Growth 0% 0% 1% 2% 4% 6%Small/Mid Value 0% 2% 3% 5% 8% 10%

0% 7% 14% 20% 28% 37%

International 0% 6% 13% 18% 25% 32%

REITs 0% 1% 3% 4% 5% 7%

Total Equities 0% 14% 30% 42% 58% 76%

FIXED INCOMEDomestic Intermediate 80% 60% 48% 40% 27% 14%International Intermediate 20% 26% 22% 18% 15% 10%

Total Fixed Income 100% 86% 70% 58% 42% 24%

Grand Total 100% 100% 100% 100% 100% 100%

PORTFOLIO STATISTICSAvg Annual Return 4.61% 5.03% 6.09% 7.11% 8.01% 9.15%Standard Deviation (Risk) 3.92% 3.89% 5.24% 6.84% 8.66% 11.33%Sharpe Ratio 0.54 0.65 0.69 0.68 0.64 0.58

Nominal BenchmarksStandard & Poor's 500 0% 10% 25% 40% 60% 75%Barclay's Aggregate Bond 100% 90% 75% 60% 40% 25%

NOTE: The Futuris portfolios listed above are sample representations only and may be altered from time to time at the discretion of the Trustee.

Cary M. Allison, CIMASenior Vice President, Senior Investment Management Consultant

Page 14 of 59

Portfolio 4.5 Portfolio 5 Portfolio 6 Portfolio 7 Portfolio 8 Portfolio 9EQUITIES Style Ticker Expenses 4.5% Target 5% Target 6% Target 7% Target 8% Target 9% TargetDomestic EquitiesHartford Capital Appreciation Large Growth HCAYX 0.71% 0% 1% 3% 5% 5% 7%Blackrock Equity Dividend Large Value MADVX 0.74% 0% 2% 3% 4% 5% 7%John Hancock Classic Value Large Value JCVIX 0.88% 0% 2% 4% 4% 6% 7%

Subtotals 0% 5% 10% 13% 16% 21%

Hartford Midcap Mid Growth HMDYX 0.79% 0% 0% 1% 2% 4% 6%Nuveen Tradewinds Value Opportunities Mid Blend NVORX 1.17% 0% 1% 2% 3% 4% 5%Royce Special Equity Small Blend RSEIX 1.05% 0% 1% 1% 2% 4% 5%

Subtotals 0% 2% 4% 7% 12% 16%

Cohen & Steers Realty Shares Real Estate CSRIX 0.75% 0% 1% 2% 3% 3% 5%Prudential Global Real Estate Real Estate PURZX 1.07% 0% 0% 1% 1% 2% 2%

Subtotals 0% 1% 3% 4% 5% 7%

International/Global EquitiesRoyce Global Value Small Blend RGVIX 1.63% 0% 2% 3% 5% 7% 10%Brandes International Equity Large Value BIIEX 1.13% 0% 1% 3% 4% 5% 6%Nuveen Tradewinds Global All-Cap Multi Value NWGRX 1.08% 0% 1% 2% 3% 4% 5%Thornburg International Value Large Blend TGVIX 0.89% 0% 1% 3% 3% 5% 6%Thornburg Investment Income Builder World Allocation TIBIX 0.89% 0% 1% 2% 3% 4% 5%

Subtotals 0% 6% 13% 18% 25% 32%

FIXED INCOMEDomestic Fixed IncomeMetropolitan West Total Return Bond Intermediate Term MWTIX 0.45% 20% 15% 12% 10% 7% 3%Delaware Diversified Income Intermediate Term DPFFX 0.72% 20% 15% 12% 10% 7% 4%Prudential Total Return Bond Fund Intermediate Term PDBZX 0.72% 20% 15% 12% 10% 6% 3%Western Asset Core Plus Bond Intermediate Term WACPX 0.46% 20% 15% 12% 10% 7% 4%

Subtotals 80% 60% 48% 40% 27% 14%

International Fixed IncomeBrandywine Global Opportunities Bond Global Bond GOBSX 0.65% 5% 6% 5% 4% 3% 2%Oppenheimer International Bond Inst International Bond OIBYX 0.54% 5% 7% 6% 5% 4% 3%Templeton Global Bond Inst Global Bond TGBAX 0.67% 10% 13% 11% 9% 8% 5%

Subtotals 20% 26% 22% 18% 15% 10%

SUMMARYTotal Equities 0% 14% 30% 42% 58% 76%Total Fixed Income 100% 86% 70% 58% 42% 24%Grand Total 100% 100% 100% 100% 100% 100%

Blended Expense Ratio 0.59% 0.65% 0.71% 0.76% 0.83% 0.90%

STATISTICS

Performance (as of 3/31/11)Qtr 1.50% 1.88% 2.26% 2.58% 3.09% 3.58%One Year 8.08% 9.12% 10.27% 11.15% 12.31% 13.86%Three Year 9.00% 8.32% 7.48% 6.82% 5.92% 5.18%Five Year 8.44% 8.14% 7.59% 7.26% 6.62% 6.03%

PORTFOLIOS


Prepared by Cary M. Allison, CIMASenior Vice President, Senior Investment Management Consultant

Page 15 of 59

Please refer to important information, disclosures and qualifications at the end of this material. 1

Capital Markets Overview Q1 2011

Introduction In the first quarter, despite the natural disaster in Japan and the political turmoil in the Middle East and North Africa, the global business and equity bull cycles

continued. Looking ahead, there is growing optimism that the recovery from the financial crisis has become self-sustaining.

Both Morgan Stanley and Citi economists expect growth of about 6% in 2011 for emerging market economies, while developed-market economies could expand around 2%.

Commodities posted a solid 4.4% quarterly gain, according to the Dow Jones-UBS Commodity Index.

The price of oil rose 16.8% in the first quarter.

Companies executed big mergers and acquisitions during the quarter, and this trend is expected to continue for the rest of the year. Global mergers-and-acquisitions activity for the quarter totaled $716.3 billion, up 16% from a year ago.

Worldwide there were 282 IPOs that raised a combined $43.6 billion in the quarter.

In March, the U.S. unemployment rate fell to 8.8%, its lowest level in two years, signifying the fastest pace of job creation in almost a year.

The Dow Jones Industrials were up 7.1% for the first quarter.

The S&P 500 advanced 5.9% for the quarter. The largest advances in the S&P 500 Stock Sectors for the quarter were for Energy (16.8%) and Industrials (8.8%). Health Care (5.6%) also rose respectably. Utilities and Consumer Staples were the laggards, up 2.8% and 2.5%, respectively.

The NASDAQ Composite gained 4.8% for the quarter.

Page 16 of 59


The U.S. Economy In its March 25 update, the Department of Commerce estimated that Gross Domestic Product grew at an annual rate of 3.1% in the fourth quarter of 2010, in

comparison with 2.6% in the third quarter of 2010. Morgan Stanley economists forecast that U.S. GDP will increase to 3.3% in 2011.

The seasonally adjusted unemployment rate remained between 9.0% and 8.8% for the quarter. In March, the unemployment rate fell to 8.8%, its lowest level in two years, signifying the fastest pace of job creation in almost a year. Job gains occurred in professional and business services, health care, leisure and hospitality, and mining. Employment in manufacturing continued to trend up.

According to the most recent estimate from the Commerce Department, corporate profits rose 2.3% between the third and fourth quarters of 2010, and 18.3% between the fourth quarter of 2009 and the fourth quarter of 2010.

Inflation remained low in the U.S. According to the Bureau of Labor Statistics, the seasonally adjusted Consumer Price Index rose 0.4% in January and 0.5% in February. Morgan Stanley economists expect an inflation rate of 2.9% for 2011.

The Census Bureau reported that privately-owned housing starts in February 2011 were at a seasonally adjusted annual rate of 479,000. This is 22.5% below the revised January estimate of 618,000, and 20.8% below the February 2010 rate of 605,000. Single-family housing starts in February 2011 were at a rate of 375,000. This is 11.8% below the revised January figure of 425,000. The expiration of federal tax breaks for homebuyers, the large supply of existing houses, and expectations of continuing declines in house prices continued to weigh down demand for new homes.

The Census Bureau also reported that seasonally adjusted retail and food services sales increased 1.0% between January and February, 0.7% between December and January, and 8.9% between February 2010 and February 2011.

In March, the Institute for Supply Management’s manufacturing-sector index (“PMI”) was 61.2, down 0.2 from February, and above 50 for the twentieth consecutive month. PMI was above 42 for the twenty-second consecutive month. The ISM Nonmanufacturing Index (“NMI”) fell 2.4 points to 57.3 between February and March. The index has now been above 50 for sixteen consecutive months. Generally speaking, a PMI or NMI over 50 indicates that the sector is expanding, and a PMI over 42 indicates that the overall economy is expanding.

Page 17 of 59


The U.S. Equity Markets The first quarter continued an upward trend in all major stock indices. The Dow Jones Industrial Average was up 7.1%, and the Standard & Poor’s 500 index

was up 5.9%.

Equity investors generally remained confident during the first quarter, according to the CBOE VIX volatility index, the so-called “fear index.” The VIX averaged a moderate 18.6 for the first quarter, reaching a quarterly high close of 29.4 on March 16, as concern over the Japanese earthquake crested. The index then fell almost as sharply, ending the quarter roughly flat.

During the first quarter, all sectors of the S&P 500 index shared the gains of the overall equity markets. The largest advances in the S&P 500 Stock Sectors for the quarter were for Energy (16.8%) and Industrials (8.8%). Health Care (5.6%) also rose respectably. Utilities and Consumer Staples were the laggards, up 2.8% and 2.5%, respectively.

Although both value- and growth-style stocks rose during the first quarter, growth stocks generally fared better, especially those of small-cap companies. The Russell 1000 index, a large-cap index, rose 6.2% for the quarter. In comparison, the Russell Midcap index rose 7.6% for the quarter, and the Russell 2000 index, a small-cap index, rose 7.9% for the quarter.

Returns for the large-cap Russell 1000 Value index were 6.5% for the quarter, while the Russell 1000 Growth index rose 6.0% for the quarter. The Russell Midcap Value index rose 7.4% for the quarter, while the Russell Midcap Growth index was up slightly more—7.9% for the quarter. In small caps, the Russell 2000 Value index rose 6.6% for the quarter, while the Russell 2000 Growth index rose 9.2% for the quarter.

Key U.S. Stock-Market Index Returns (%) for the Period Ending 3/31/11 Quarter 12 Months Five Years

(Annualized)Seven Years(Annualized)

S&P 500 index 5.9 15.7 2.6 4.5Dow Jones 7.1 16.5 4.9 5.2Russell 2000 7.9 25.8 3.4 6.6Russell Midcap 7.6 24.3 4.7 8.3Russell 1000 6.2 16.7 2.9 5.0Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

Page 18 of 59


Global Equity Markets For the first quarter, the Morgan Stanley Capital International Europe Australasia Far East index (“MSCI EAFE”), a benchmark for developed markets, rose

3.4% for U.S. dollar-based investors and 1.1% for local-currency investors, as the dollar fell in relation to many other currencies.

Similarly, the MSCI Europe index of developed markets rose 6.6% for U.S.-currency investors, and 2.2% for local-currency investors during the quarter. However, the MSCI Far East index fell 4.1% for the quarter in terms of the dollar, and 2.4% in terms of local currencies.

For the quarter, the MSCI Emerging Markets (“EM”) index rose 2.1% for U.S.-dollar investors and 0.7% in terms of local currencies.

The MSCI BRIC (Brazil, Russia, India, and China) index rose 3.3% for the quarter in terms of the dollar. The MSCI BRIC rose 1.7% for the quarter in local terms. For the quarter, the MSCI EM Asia index rose 1.6% in U.S.-dollar terms, and 0.7% in local terms.

Key Global Equity-Market Indices Based on the U.S. Dollar (%) for the Period Ending 3/31/11 Quarter 12 Months Five Years

(Annualized) Seven Years(Annualized)

MSCI EAFE 3.4 10.9 1.8 6.7MSCI EAFE Growth 2.3 12.9 2.5 6.7MSCI EAFE Value 4.6 8.8 1.0 6.7MSCI Europe 6.6 13.3 2.6 7.6MSCI Japan (4.9) 1.6 (4.6) 1.0MSCI Emerging Markets 2.1 18.8 11.0 16.5Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

Page 19 of 59


The U.S. Bond Market Quantitative easing and signs of recovery continued to move investors from low-risk bonds into higher-yielding securities.

For the quarter, high-yield bonds returned 3.9%, while investment-grade corporates returned 0.8%. High-yield bonds ended the quarter yielding about 7.0% on average, compared to about 4.0% for investment-grade bonds. Ten-year Treasury notes yielded 3.5% at the end of the quarter, up from about 3.3% at the beginning of the year. Investors poured a net $37.7 billion into taxable bond funds, which include corporate debt and Treasurys.

The Barclays Capital U.S. Aggregate Bond index rose 0.4% for the first quarter. The Barclays Capital High Yield index, a measure of lower-rated corporate bonds, rose 3.9% for the quarter. Though investors remained wary of mortgage-backed securities, the Barclays Capital Mortgage Backed index was still up 0.6% for the quarter.

In the municipal-bond market during the first quarter, investors pulled $19.3 billion from municipal bond funds. As a result, the Barclays Capital Muni index was up just 0.5% for the quarter.

U.S. Bond-Market Index Returns (%) for the Period Ending 3/31/11 Quarter 12 Months Five Years

(Annualized) Seven Years (Annualized)

Barclays Capital Govt/Credit 0.3 5.3 5.8 4.5Barclays Capital Intermediate Govt/Credit 0.3 4.6 5.7 4.3Barclays Capital Long Govt/Credit 0.0 8.5 6.7 5.5Barclays Capital Government (0.1) 4.3 5.6 4.3Barclays Capital Mortgage Backed Securities 0.6 4.4 6.5 5.4Source: Vestek Past performance is not a guarantee of future results. Investors cannot invest directly in an index. The performance of unmanaged indices reflects no deductions for fees, expenses or taxes that would affect the performance of actively managed assets.

Page 20 of 59

2

2011 Outlook

Global GDP recovery has now become business cycle expansion

Global economy growth of 4% with emerging economies expanding by6% and developed ones by 3%

Low 1%-2% inflation in developed countries but 6% in developing ones

Developing economy central banks and European Central Bank tighten; Fed on hold until 2012

Modest US trade-weighted dollar strength; broad developed country currencies weakness to developing country currencies, especially Asia

Longer-term prospects good for a multiyear global business cycle expansion

This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.

Please refer to important information, disclosures and qualifications at the end of this material.

Source: Citi Investment Research & Analysis (CIRA), Morgan Stanley Research & Co., Morgan Stanley Smith Barney Global Investment Committee, Thomson Financial, DataStream. Data as of March 2011.

Page 21 of 59

4

Global GDP and CPI Forecasts

Past performance is no guarantee of future results. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.


Source: Morgan Stanley & Co. Inc., Citi Investment Research & Analysis (CIRA), Morgan Stanley Smith Barney. Japan GDP forecasts for 2011 and 2012 are post 3/10/11 natural disaster. Data as of March 2011.

Morgan Stanley & Co. Inc.

(Year-over-Year % Change)

2010F 2011F 2012F 2011F 2010F 2011F 2012F 2011F

Global GDP 4.9 4.3 4.6 Global GDP 4.0 3.6 3.9

Developed Economies 2.6 2.5 2.7 31 Developed Economies 2.5 2.2 2.5 43U.S. 2.8 3.3 3.5 15 U.S. 2.9 2.9 3.3 21Euro Area 1.7 1.5 1.7 5 Euro Area 1.6 1.7 1.3 11U.K. 1.3 1.4 2.0 1 U.K. 1.3 1.9 2.2 2Japan 3.9 -0.5 2.9 -1 Japan 3.9 1.1 2.6 3

Developing Economies 7.5 6.3 6.6 69 Developing Economies 7.2 6.2 6.2 57Brazil 7.5 4.0 5.0 3 Brazil 7.5 4.0 4.5 3Russia 4.0 5.0 4.5 3 Russia 4.0 4.3 4.1 3India 8.7 7.7 8.7 9 India 8.6 8.4 8.7 6China 10.3 9.0 9.0 28 China 10.3 9.2 9.0 25

Global Inflation 3.3 3.9 3.2 Global Inflation 2.7 3.7 3.2Developed Economies 1.4 2.3 1.9 Developed Economies 1.4 2.4 1.8Developing Economies 5.4 5.5 4.6 Developing Economies 5.3 6.2 5.6U.S. Core 1.0 1.4 2.1 U.S. Core 1.0 1.3 1.4U.S. CPI 1.6 2.9 2.4 U.S. CPI 1.6 2.6 1.8

Citigroup Investment Research & Analysis % Contribution to 2011 Growth

Global Consumer Prices Global Consumer Prices

(Year-over-Year % Change) % Contribution to

2011 Growth

Page 22 of 59

Global Earnings Per Share

8

Source: Morgan Stanley & Co. Inc., CIRA, Morgan Stanley Smith Barney, Thomson Financial, Standard & Poor’s.Data as of March 2011.

Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized.This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.


Operating EPS ($)

YOY Change

(%)Operating

EPS ($)

YOY Change

(%)Operating

EPS ($)

YOY Change

(%)Operating

EPS ($)

YOY Change

(%)Operating

EPS ($)

YOY Change

(%)

84.50 38 85.85 38 85.28 40 23.70 42 86.40 42

92.50 9 96.50 12 98.04 15 27.31 15 100.22 16

98.20 6 103.50 7 111.52 14 30.94 13 114.14 14

52 Week Forward 101.23 28.27 103.99

2010E

2012E

2011E

S&P 500

Citigroup Investment Research& Analysis Consensus

MSCI AC World MSCI EMS&P 500

Morgan Stanley & Co. Inc.

Page 23 of 59

9

Interest Rate Forecasts

Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.


Note: Current rates as of February 2011. *Morgan Stanley’s current and forecast policy rate for China uses the 1-year lending rate.**CIRA’s current and forecast policy rate for China uses the 1-year deposit rate.

Source: Morgan Stanley & Co. Inc., CIRA, Bloomberg, Morgan Stanley Smith Barney LLC. Data as of March 2011.

Current Rate 3Q11F 3Q12F 3Q11F 3Q12F

0.00 – 0.25 0.13 2.00 US 0.00 - 0.25 0.25 1.001.00 1.50 2.25 Eurozone 1.00 1.50 2.250.10 0.05 0.05 Japan 0.10 0.10 0.100.50 0.75 1.75 UK 0.50 0.75 1.756.06* 6.56* 6.56* China 3.00** 3.50** 3.75**

US 3.40 3.75 4.50 US 3.40 3.60 4.00Eurozone 3.37 3.40 3.50 Eurozone 3.37 3.50 4.00Japan 1.14 1.10 1.30 Japan 1.14 1.40 1.50UK 3.56 3.90 4.10 UK 3.56 3.90 4.60

10-Year Government Bond Yields (%) 10-Year Government Bond Yields (%)

JapanUKChina

Morgan Stanley & Co. Inc. Citigroup Investment Research & AnalysisCurrent Rate

Policy Rates (%) Policy Rates (%)USEurozone

Page 24 of 59

Stocks vs. Bonds and Cash Valuation

10

Note: Standard deviation is a statistical measurement that sheds light on historical volatility.

Source: CIRA, Morgan Stanley & Co. Inc., Morgan Stanley Smith Barney, Thomson Financial. Data as of March 2011.

Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.


Despite Rally, Equities are Still Cheap Relative to Bonds and Cash

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10-3

-2

-1

0

1

2

3

4

-3

-2

-1

0

1

2

3

4

Equities Relatively Cheap

Equities Relatively Expensive

Standard Deviations From Average

Cash Rate/Dividend YieldBond Yield/Dividend Yield

Page 25 of 59

13

Global Investment CommitteeEquity Strategy



Equities expected to outperform with lower volatility

EPS growth is the primary driver of the bull cycle

Overweight Emerging Markets, Australia & Canada

Market weight U.S in an all-equity portfolio

Underweight Europe and Japan

Within U.S., market weight Small and Mid Caps and overweight growth, underweight value

Page 26 of 59

14

Global Investment CommitteeFixed Income Strategy



Bonds expected to underperform stocks

Developed country Sovereign Debt yield curves expected to rise

Overweight Global Investment Grade Corporates and High Yield (Munis for U.S. clients)

Market weight Emerging Market Debt

Underweight Short Duration and Developed Market Sovereign Debt

Page 27 of 59

16

Glossary of Indices

CPI

In economics, a Consumer Price Index (CPI, also retail price index) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas. It is a price index that tracks the prices of a specified set of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and a sort of cost-of-living index. The CPI can be used to track changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included. Core CPI excludes volatile food and energy prices.

MSCI EAFE

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada.

MSCI World Index

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of May 2005 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. An investment cannot be made directly in a market index.

S&P 500

Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market.


Page 28 of 59

17

Important DisclosuresThis material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Research Departments of Morgan Stanley & Co. Incorporated or Citigroup Global Markets Inc. The views and opinions contained in this material are those of the author(s) and may differ materially from the views and opinions of others at Morgan Stanley Smith Barney LLC or any of its affiliate companies. Past performance is not necessarily a guide to future performance.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Smith Barney is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein.

The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Smith Barney recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actualevents may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Smith Barney does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.

This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Smith Barney is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material.

Morgan Stanley Smith Barney and its affiliates do not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implications that may result from acting on a particular recommendation.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures funds, funds of hedge funds, private equity, andmanaged futures funds, are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Page 29 of 59

18

Important DisclosuresBonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if securities are issued within one's city of residence.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instrumentstransaction.

This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813);

Page 30 of 59

19

Important DisclosuresMorgan Stanley Smith Barney is not incorporated under the People's Republic of China ("PRC") law and the research in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities.

Morgan Stanley Private Wealth Management Ltd, which is authorized and regulated by the Financial Services Authority, approves for the purpose of section 21 of the Financial Services and Markets Act 2000, content for distribution in the United Kingdom;

Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC.

Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data.

Morgan Stanley Smith Barney material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney.

© 2011 Morgan Stanley Smith Barney LLC. Member SIPC.

Page 31 of 59

Disclosures

Other Important Disclosures2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley & Co. Incorporated Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.© 2009 Morgan Stanley Smith Barney

Morgan Stanley Smith Barney Investment Strategy

Page 32 of 59


PRESENTED TO:

DATE:

05/19/2011


ITEM #:

2010/2011-051

Education

Enclosure:

Yes

Prepared by:


Requested by:


BACKGROUND: The investment of public funds carries with it certain fiduciary duties and therefore also potential liability for fiduciaries. The Futuris program has been designed to help the Retirement Board of Authority to mitigate its potential fiduciary liability. STATUS: There will be a discussion relative to the changes made to the Futuris Portfolio Models RECOMMENDATION: Hear and receive the presentation prepared by Franklin Templeton Investments and presented by Cary Allison of Morgan Stanley Smith Barney (MSSB).

Page 34 of 59

Portfolio Changes

Cary M. Allison, CIMA®Senior Vice President, Senior Investment Management ConsultantMarch 31, 2011

Page 35 of 59


Subtotals 0% 5% 10% 13% 16% 21%

Hartford Midcap Mid Growth HMDYX 0.79% 0% 0% 1% 2% 4% 6%Nuveen Tradewinds Value Opportunities Mid Blend NVORX 1.17% 0% 1% 2% 3% 4% 5%Royce Special Equity Small Blend RSEIX 1.05% 0% 1% 1% 2% 4% 5%

Subtotals 0% 2% 4% 7% 12% 16%

Cohen & Steers Realty Shares Real Estate CSRIX 0.75% 0% 1% 2% 3% 3% 5%Prudential Global Real Estate Real Estate PURZX 1.07% 0% 0% 1% 1% 2% 2%

Subtotals 0% 1% 3% 4% 5% 7%

International/Global EquitiesRoyce Global Value Small Blend RGVIX 1.63% 0% 2% 3% 5% 7% 10%Brandes International Equity Large Value BIIEX 1.13% 0% 1% 3% 4% 5% 6%Nuveen Tradewinds Global All-Cap Multi Value NWGRX 1.08% 0% 1% 2% 3% 4% 5%Thornburg International Value Large Blend TGVIX 0.89% 0% 1% 3% 3% 5% 6%Thornburg Investment Income Builder World Allocation TIBIX 0.89% 0% 1% 2% 3% 4% 5%

Subtotals 0% 6% 13% 18% 25% 32%

FIXED INCOMEDomestic Fixed IncomeMetropolitan West Total Return Bond Intermediate Term MWTIX 0.45% 20% 15% 12% 10% 7% 3%Delaware Diversified Income Intermediate Term DPFFX 0.72% 20% 15% 12% 10% 7% 4%Prudential Total Return Bond Fund Intermediate Term PDBZX 0.72% 20% 15% 12% 10% 6% 3%Western Asset Core Plus Bond Intermediate Term WACPX 0.46% 20% 15% 12% 10% 7% 4%

Subtotals 80% 60% 48% 40% 27% 14%

International Fixed IncomeBrandywine Global Opportunities Bond Global Bond GOBSX 0.65% 5% 6% 5% 4% 3% 2%Oppenheimer International Bond Inst International Bond OIBYX 0.54% 5% 7% 6% 5% 4% 3%Templeton Global Bond Inst Global Bond TGBAX 0.67% 10% 13% 11% 9% 8% 5%

Subtotals 20% 26% 22% 18% 15% 10%



PORTFOLIOS



Page 36 of 59


Subtotals 0% 5% 10% 13% 16% 21%

Hartford Midcap Mid Growth HMDYX 0.79% 0% 0% 1% 2% 4% 6%Nuveen Tradewinds Value Opportunities Mid Blend NVORX 1.17% 0% 1% 2% 3% 4% 5%Perkins Mid Cap Value Mid Blend JMCVX 1.06% 0% 1% 1% 2% 4% 5%

Subtotals 0% 2% 4% 7% 12% 16%

Cohen & Steers Realty Shares Real Estate CSRIX 0.75% 0% 1% 2% 3% 3% 5%Cohen & Steers Global Realty I Real Estate CSSPX 1.41% 0% 0% 1% 1% 2% 2%

Subtotals 0% 1% 3% 4% 5% 7%

International/Global EquitiesArtio International Equity II Large Blend JETIX 0.93% 0% 1% 3% 4% 5% 6%Brandes International Equity Large Value BIIEX 1.13% 0% 2% 3% 4% 5% 6%Dodge & Cox International Stock Large Value DODFX 0.64% 0% 1% 2% 3% 4% 6%Nuveen Tradewinds Global All-Cap Multi Value NWGRX 1.08% 0% 1% 2% 2% 2% 6%Thornburg International Value Large Blend TGVIX 0.89% 0% 1% 2% 3% 5% 6%

Subtotals 0% 6% 12% 16% 21% 30%

Global AllocationBlackrock Global Allocation World Allocation MALOX 0.86% 0% 0% 1% 1% 2% 1%Thornburg Investment Income Builder World Allocation TIBIX 0.89% 0% 0% 0% 1% 2% 1%

Subtotals 0% 0% 1% 2% 4% 2%

FIXED INCOMEDomestic Fixed IncomeMetropolitan West Total Return Bond Intermediate Term MWTIX 0.45% 21% 17% 13% 10% 7% 3%Delaware Diversified Income Intermediate Term DPFFX 0.72% 21% 16% 13% 10% 7% 4%PIMCO Total Return Intermediate Term PTTRX 0.43% 21% 16% 13% 10% 6% 3%Western Asset Core Plus Bond Intermediate Term WACPX 0.46% 21% 17% 13% 10% 7% 4%

Subtotals 84% 66% 52% 40% 27% 14%

International Fixed IncomeOppenheimer International Bond Inst International Bond OIBYX 0.54% 8% 10% 9% 9% 7% 5%Templeton Global Bond Inst Global Bond TGBAX 0.67% 8% 10% 9% 9% 8% 5%

Subtotals 16% 20% 18% 18% 15% 10%



PORTFOLIOS



Page 37 of 59

Legg Mason BW Global Opps Bd IS Overall Morningstar Rtg Incept Type Total Assets Morningstar CatTM

(214) 11-01-06 MF $403 mil World Bond (MF)Standard Index Category IndexBarcap Agg CitiNon-$ Wld Gv

Performance 02-28-2011

Quarterly Returns 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total %

2009 -2.92 13.11 9.98 0.23 21.042010 2.35 1.33 10.10 -0.99 13.062011 __ __ __ __ 1.29

Trailing Returns 1 Yr 3 Yr 5 Yr 10 Yr Incept

Load-adj Mthly 13.20 7.18 __ __ 7.92Std 12-31-2010 13.06 __ __ __ 7.90Total Return 13.20 7.18 __ __ 7.92.................................................................................................+/- Std Index 8.27 1.78 __ __ __

+/- Cat Index 7.30 2.78 __ __ __.................................................................................................% Rank Cat 4 14 __ __ __.................................................................................................No. in Cat 270 214 161 109 __

7-day Yield __.................................................................................................

Performance Disclosure

The Overall Morningstar Rating is based on risk-adjustedreturns, derived from a weighted average of the three-,five-, and ten-year (if applicable) Morningstar metrics.

The performance data quoted represents past performanceand does not guarantee future results. The investmentreturn and principal value of an investment will fluctuatethus an investor's shares, when redeemed, may be worthmore or less than their original cost.

Current performance may be lower or higher than returndata quoted herein. For performance data current to the mostrecent month-end, please call 877-515-3863 or visitwww.leggmason.com.

Fees and ExpensesSales Charges

Front-End Load %

Deferred Load %

NA

NA

Fund Expenses

Management Fees %12b1 Expense %Prospectus Gross Exp Ratio %

0.50NA

0.67

Risk and Return Profile3 Yr 5 Yr 10 Yr

214 funds 161 funds 109 funds

MorningstarRatingTM 4 __ __

Morningstar Risk +Avg __ __

Morningstar Return +Avg __ __

3 Yr 5 Yr 10 Yr

Standard Deviation 11.64 __ __

Mean 7.18 __ __

Sharpe Ratio 0.61 __ __

MPT Statistics Standard Index Best Fit IndexDJ Moderate TR USD

Alpha -1.33 3.95Beta 1.74 0.64R-Squared 39.00 73.00

12-Month Yield 6.33%30-day SEC Yield 0.00Potential Cap Gains Exp 3.00% Assets

Operations

Family: Legg Mason/Western Objective: World Bond Minimum IRA Purchase: $0Manager: Smith/McIntyre/Hoffman Ticker: GOBSX Min Auto Investment Plan: $0Tenure: 3.7 Years Minimum Intitial Purchase: $1,000,000 Purchase Constraints: T/A/

Investment StyleFixed IncomeBond %__ __ __ __ __ __ 86 76 87 88 92 92

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

4k

10k

20k

40k

60k

80k100k

Growth of $10,000Legg Mason BW GlobalOpps Bd IS$13,687

Category Average$12,728

Standard Index$12,677

Performance Quartile(within category)

History2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 02-11__ __ __ __ __ __ 9.96 10.44 8.88 10.12 10.60 10.66__ __ __ __ __ __ __ 9.93 -8.93 21.04 13.06 1.29

NAVTotal Return %

__ __ __ __ __ __ __ 2.96 -14.17 15.11 6.52 0.92__ __ __ __ __ __ __ -1.52 -19.04 16.65 7.85 0.74............................................................................................................................................................................................................................................................................__ __ __ __ __ __ __ 20 85 10 5 26............................................................................................................................................................................................................................................................................

145 134 144 162 167 170 197 218 234 269 270 314

+/- Standard Index+/- Category Index

% Rank Cat

No. of Funds in Cat

Portfolio Analysis 12-31-2010Composition % Long % Short% Net %

Cash 8.1 0.0 8.1U.S. Stocks 0.0 0.0 0.0Non-U.S. Stocks 0.0 0.0 0.0Bonds 91.9 0.0 91.9Other 0.0 0.0 0.0.................................................................................................Total 100.0 0.0 100.0

Equity StyleValue Blend Growth

Small

Mid

Large

Portfolio Port Rel RelStatistics Avg Index Cat

P/E Ratio TTM __ __ __

P/C Ratio TTM __ __ __

P/B Ratio TTM __ __ __

Geo Avg Mkt __ __ __

Cap $mil

Fixed-Income Style

Short Int Long

LowM

edHigh

Avg Eff Duration 7.50Avg Eff Maturity 15.60Avg Credit Quality __

Avg Wtd Coupon 5.54Avg Wtd Price 79.55

Credit Analysis 12-31-2010 Bond %

AAA 50.80AA 2.30A 20.10.................................................................................................................BBB 8.50BB 0.00B 0.00.................................................................................................................Below B 4.40NR/NA 13.90

Regional Exposure Stocks % Rel Std Index

Americas __ __

Greater Europe __ __

Greater Asia __ __

Share Chg Share 0 Total Stocks % Netsince Amount 75 Total Fixed-Income Assets09-30-2010 39% Turnover Ratio

42 mil31 mil31 mil17 mil

151 mil

US Treasury Bond 4.25%US Treasury Bond 4.5%New South Wales Treasury 6%United Kingdom (Government OfSweden(Kingdom Of) 5.5%

7.70 6.00 5.97 4.84 4.45..............................................................................................................................

23 bil63 mil34 mil16 mil16 mil

Korea(Republic Of) 5.75%Poland(Rep Of) 5.25%Nota Tesouro Nacional 01/21 FCanada Govt 2%US Treasury Bond 3.875%

4.00 3.88 3.34 2.92 2.80..............................................................................................................................

41 mil59 mil86 bil

10 mil12 mil

Malaysia 3.718%Norway(Kingdom Of) 6.5%Indonesia(Rep Of) 10%New Sth Wales Tsy 6%New Zealand(Govt) 6%

2.53 2.04 1.94 1.87 1.82

Sector Weightings Stocks % Rel Std Index

Information Economy __ __

Software __ __

Hardware __ __

Media __ __

Telecommunication __ __

Service Economy __ __

Healthcare Services __ __

Consumer Services __ __

Business Services __ __

Financial Services __ __

Manufacturing Economy __ __

Consumer Goods __ __

Industrial Goods __ __

Energy __ __

Utilities __ __

...................................................................................................................................................

...................................................................................................................................................

Page 1 of 10Release date 02-28-2011

© 2011 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, (2) may include, or be derived from, account informationprovided by your financial advisor which cannot be verified by Morningstar, (3) may not be copied or redistributed, (4) do not constitute investment advice offered by Morningstar, (5) are provided solely for informational purposes andtherefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or otherlosses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supplemental sales literature. If applicable it must be preceded or accompanied by a prospectus, or equivalent, and disclosure statement.Please read the prospectus carefully. Page 38 of 59

Prudential Global Real Estate Z Overall Morningstar Rtg Incept Type Total Assets Morningstar CatTM

(126) 05-05-98 MF $294 mil Global Real Estate (MF)Standard Index Category IndexMSCI Eafe Ndtr_D MSCI World/Real Estate



2009 -22.09 36.61 24.04 5.02 38.662010 3.56 -7.82 19.01 5.87 20.282011 __ __ __ __ 4.67


Load-adj Mthly 29.22 1.17 2.62 13.43 9.91Std 12-31-2010 20.28 __ 3.37 12.62 9.64Total Return 29.22 1.17 2.62 13.43 9.91.................................................................................................+/- Std Index 9.22 3.79 0.19 8.53 __

+/- Cat Index -0.65 3.20 1.51 6.59 __.................................................................................................% Rank Cat 12 5 11 1 __.................................................................................................No. in Cat 152 126 48 16 __

7-day Yield __.................................................................................................




Current performance may be lower or higher than returndata quoted herein. For performance data current to the mostrecent month-end, please call 800-225-1852 or visitwww.prudentialfunds.com.


Front-End Load %

Deferred Load %

NA

NA

Fund Expenses


0.75NA

1.07



MorningstarRatingTM 4 4 5Morningstar Risk +Avg +Avg AvgMorningstar Return High +Avg High

3 Yr 5 Yr 10 Yr

Standard Deviation 31.88 26.35 21.19Mean 1.17 2.62 13.43Sharpe Ratio 0.18 0.15 0.60

MPT Statistics Standard Index Best Fit IndexMSCI Wrld/RelEstND

Alpha 5.48 3.31Beta 1.14 1.01R-Squared 87.00 98.00

12-Month Yield __

30-day SEC Yield __

Potential Cap Gains Exp -3.00% Assets

Operations

Family: Prudential Investments Objective: Specialty--Real Estate Minimum IRA Purchase: $0Manager: Romano/Lee/Halle Ticker: PURZX Min Auto Investment Plan: $0Tenure: 3.9 Years Minimum Intitial Purchase: $0 Purchase Constraints: T/A/

Investment StyleEquityStock %96 95 94 98 100 98 96 100 93 97 96 93

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

4k

10k

20k

40k

60k

80k100k

Growth of $10,000Prudential Global RealEstate Z$40,426




History2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 02-11

8.95 9.29 9.64 13.83 19.08 21.80 29.14 22.52 12.27 16.31 19.08 19.9717.71 8.19 7.78 46.44 40.19 16.15 36.27 -6.92 -44.22 38.66 20.28 4.67

NAVTotal Return %

31.88 29.63 23.72 7.85 19.94 2.61 9.93 -18.09 -0.84 6.88 12.53 -1.0716.28 20.78 14.17 10.10 4.50 1.29 -3.59 -1.35 3.87 6.01 -0.09 0.21............................................................................................................................................................................................................................................................................

54 43 14 17 14 8 55 35 25 19 17 15............................................................................................................................................................................................................................................................................18 20 22 24 28 34 48 107 162 147 163 164


% Rank Cat

No. of Funds in Cat




Small

Mid

Large


P/E Ratio TTM 15.5 1.08 1.02P/C Ratio TTM __ __ __

P/B Ratio TTM 1.5 0.94 1.09Geo Avg Mkt 6429 0.20 0.94Cap $mil

Fixed-Income Style

Short Int Long

LowM

edHigh

Avg Eff Duration __

Avg Eff Maturity __

Avg Credit Quality __

Avg Wtd Coupon __

Avg Wtd Price __

Credit Analysis NA Bond %

AAA __

AA __

A __.................................................................................................................BBB __

BB __

B __.................................................................................................................Below B __

NR/NA __


Americas 45.4 __

Greater Europe 13.2 __

Greater Asia 41.4 __


35 mil249,556

1 mil1 mil

882,780

Prudential Core InvtSimon Property Group, Inc.Cheung Kong Holdings, Ltd.Sun Hung Kai Properties, Ltd.Mitsubishi Estate

5.90 4.27 3.07 2.93 2.81..............................................................................................................................

1 mil121,982629,339474,95259,694

Westfield GroupPublic StorageMitsui Fudosan Co., Ltd.Sumitomo Realty & DevelopmentUnibail-Rodamco Se

2.35 2.24 2.16 1.95 1.92..............................................................................................................................

128,692276,430188,636280,334496,755

Vornado Realty Trust Shs of BKilroy Realty CorporationVentas, Inc.Mack-Cali Realty CorporationHost Hotels & Resorts, Inc.

1.91 1.78 1.76 1.65 1.55


Information Economy 0.0 __

Software 0.0 __

Hardware 0.0 __

Media 0.0 __

Telecommunication 0.0 __

Service Economy 96.1 __

Healthcare Services 0.0 __

Consumer Services 0.4 __

Business Services 0.0 __

Financial Services 95.6 __

Manufacturing Economy 3.9 __

Consumer Goods 0.0 __

Industrial Goods 3.9 __

Energy 0.0 __

Utilities 0.0 __

...................................................................................................................................................

...................................................................................................................................................



Prudential Total Return Bond Z Overall Morningstar Rtg Incept Type Total Assets Morningstar CatTM

(1026) 09-16-96 MF $123 mil Intermediate-Term Bond (MF)Standard Index Category IndexBarcap Agg Barcap 5-10Yr Gvt/Cred

| Note: Portions of the analysis are based on pre-inception returns. Please read disclosure for more information.



2009 1.14 6.89 7.90 2.89 20.012010 3.48 2.30 4.34 -0.47 9.932011 __ __ __ __ 1.41


Load-adj Mthly 8.41 8.83 7.27 6.13 6.41Std 12-31-2010 9.93 __ 7.12 6.36 6.38Total Return 8.41 8.83 7.27 6.13 6.41.................................................................................................+/- Std Index 3.48 3.43 1.47 0.52 __

+/- Cat Index 1.26 2.77 0.68 -0.29 __.................................................................................................% Rank Cat 18 4 8 16 __.................................................................................................No. in Cat 1159 1026 877 565 __

7-day Yield __.................................................................................................




Current performance may be lower or higher than returndata quoted herein. For performance data current to the mostrecent month-end, please call 800-225-1852 or visitwww.prudentialfunds.com.


Front-End Load %

Deferred Load %

NA

NA

Fund Expenses


0.50NA

0.72



MorningstarRatingTM 5 5 4Morningstar Risk Avg Avg AvgMorningstar Return High High +Avg

3 Yr 5 Yr 10 Yr


MPT Statistics Standard Index Best Fit IndexBarcap Credit


12-Month Yield __

30-day SEC Yield __

Potential Cap Gains Exp 4.00% Assets

Operations

Family: Prudential Investments Objective: Multi-Sector Bond Minimum IRA Purchase: $1,000Manager: Willcox/Tipp/Kellner/Bessey/Collins Ticker: PDBZX Min Auto Investment Plan: $50Tenure: 6.0 Years Minimum Intitial Purchase: $0 Purchase Constraints: A/

Investment StyleFixed IncomeBond %86 98 100 97 95 74 82 80 75 78 92 77

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

4k

10k

20k

40k

60k

80k100k

Growth of $10,000Prudential Total ReturnBond Z$20,442




History2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 02-11

12.52 12.58 12.67 12.88 12.93 12.66 12.57 12.61 11.55 13.23 13.77 13.878.83 7.16 6.61 6.43 5.18 2.70 4.61 5.69 -3.32 20.01 9.93 1.41

NAVTotal Return %

-2.80 -1.28 -3.65 2.33 0.84 0.27 0.28 -1.28 -8.56 14.08 3.39 1.04-3.61 -1.66 -6.42 0.46 -0.12 0.87 0.80 -1.86 -8.38 13.51 0.51 0.92............................................................................................................................................................................................................................................................................

__ __ __ 21 11 8 22 37 48 15 14 18............................................................................................................................................................................................................................................................................614 706 784 952 1035 1043 1092 1097 1135 1123 1164 1266


% Rank Cat

No. of Funds in Cat




Small

Mid

Large


P/E Ratio TTM __ __ __

P/C Ratio TTM __ __ __

P/B Ratio TTM __ __ __

Geo Avg Mkt __ __ __

Cap $mil

Fixed-Income Style

Short Int Long

LowM

edHigh

Avg Eff Duration 4.90Avg Eff Maturity __


Avg Wtd Coupon 5.55Avg Wtd Price 101.54

Credit Analysis 12-31-2010 Bond %

AAA 30.66AA 15.18A 12.96.................................................................................................................BBB 22.81BB 9.42B 8.01.................................................................................................................Below B 0.67NR/NA 0.29


Americas __ __

Greater Europe __ __

Greater Asia __ __


3 mil17 mil12 mil12 mil10 mil

Dryden Core InvtDryden Core InvestUS Treasury Note 2%Recv Rec Fix 4.9 12/10/20Mbna Master Cc Tr Ii 2004-2c

3.53 2.34 1.65 1.61 1.37..............................................................................................................................


U S Treas Sec Stripped Int PmFNMAFNMA 5%Recv Rec Fix 4.9 12/14/20Cw Media Hldgs 144A 13.5%

1.23 1.19 1.14 1.07 0.95..............................................................................................................................


Gnma2 30y Tba 4.5 2/18/40U S Treas Sec Stripped Int PmGs Mtg Coml 2006-Gg8 CMO 5.47Charter Comms Oper 144A 8%Recv Rec Fix 4.61 11/9/15

0.94 0.91 0.85 0.85 0.73


Information Economy __ __

Software __ __

Hardware __ __

Media __ __

Telecommunication __ __

Service Economy __ __

Healthcare Services __ __

Consumer Services __ __

Business Services __ __

Financial Services __ __

Manufacturing Economy __ __

Consumer Goods __ __

Industrial Goods __ __

Energy __ __

Utilities __ __

...................................................................................................................................................

...................................................................................................................................................



Royce Global Value Invmt Overall Morningstar Rtg Incept Type Total Assets Morningstar CatTM

(653) 09-01-10 MF $11 mil World Stock (MF)Standard Index Category IndexMSCI Eafe Ndtr_D MSCI Wld Ndtr_D




2009 -5.67 30.22 20.90 9.01 61.892010 3.43 -6.72 19.88 17.33 35.712011 __ __ __ __ 2.61


Load-adj Mthly __ __ __ __ 30.31Std 12-31-2010 __ __ __ __ 26.99Total Return 40.04 10.42 __ __ 32.97.................................................................................................+/- Std Index 20.04 13.04 __ __ __

+/- Cat Index 18.37 10.66 __ __ __.................................................................................................% Rank Cat 1 3 __ __ __.................................................................................................No. in Cat 882 653 497 261 __

7-day Yield __.................................................................................................




Current performance may be lower or higher than returndata quoted herein. For performance data current to the mostrecent month-end, please call 800-221-4268 or visitwww.roycefunds.com.


Front-End Load %

Deferred Load %

NA

NA

Fund Expenses


1.25NA

1.82



MorningstarRatingTM 5 __ __

Morningstar Risk High __ __

Morningstar Return High __ __

3 Yr 5 Yr 10 Yr

Standard Deviation 29.45 __ __

Mean 10.42 __ __

Sharpe Ratio 0.47 __ __

MPT Statistics Standard Index Best Fit IndexNA

Alpha 13.61 __

Beta 1.04 __

R-Squared 85.00 __

12-Month Yield __

30-day SEC Yield __

Potential Cap Gains Exp __

Operations

Family: Royce Objective: Growth Minimum IRA Purchase: $100,000Manager: Nadel/George Ticker: RGVIX Min Auto Investment Plan: $100,000Tenure: 4.2 Years Minimum Intitial Purchase: $100,000 Purchase Constraints: NA

Investment StyleEquityStock %__ __ __ __ __ __ __ 87 97 88 91 __

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

4k

10k

20k

40k

60k

80k100k

Growth of $10,000Royce Global ValueInvmt$15,479




History2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 02-11__ __ __ __ __ __ __ __ __ __ 14.54 14.92__ __ __ __ __ __ __ 14.28 -39.92 61.89 35.71 2.61

NAVTotal Return %

__ __ __ __ __ __ __ 3.11 3.46 30.11 27.96 -3.13__ __ __ __ __ __ __ 5.24 0.79 31.90 23.95 -3.23............................................................................................................................................................................................................................................................................__ __ __ __ __ __ __ __ __ __ __ 80............................................................................................................................................................................................................................................................................

273 314 355 403 399 438 491 581 647 755 865 994


% Rank Cat

No. of Funds in Cat




Small

Mid

Large


P/E Ratio TTM 16.4 1.14 1.10P/C Ratio TTM 12.1 1.77 1.36P/B Ratio TTM 2.4 1.52 1.15Geo Avg Mkt 1578 0.05 0.07Cap $mil

Fixed-Income Style

Short Int Long

LowM

edHigh

Avg Eff Duration __

Avg Eff Maturity __


Avg Wtd Coupon __

Avg Wtd Price __


AAA __

AA __

A __.................................................................................................................BBB __

BB __

B __.................................................................................................................Below B __

NR/NA __


Americas 31.1 __

Greater Europe 51.8 __

Greater Asia 17.0 __


70,000287,500350,00049,500

3 mil

Major Drilling Group InternatHochschild Mining PLCLamprell PLCSemperit AG HoldingValue Partners Group Limited

2.76 2.76 2.69 2.60 2.58..............................................................................................................................

445,000310,000702,00036,0007,000

Jupiter Fund Management PLCAshmore Group PLCLuk Fook Holdings (InternatioSanderson Farms, Inc.Burckhardt Compression Holdin

2.49 2.23 2.15 2.14 2.13..............................................................................................................................

14,0008,500

15,00085,000

400,000

Mayr-Melnhof Karton AGPartners Group HoldingSIPH (Internationale de PlantGrafTech International, Inc.Raubex Group Limited

1.95 1.93 1.83 1.82 1.79


Information Economy 8.5 __

Software 1.6 __

Hardware 5.5 __

Media 0.0 __

Telecommunication 1.4 __

Service Economy 26.8 __

Healthcare Services 7.2 __

Consumer Services 3.7 __

Business Services 0.0 __

Financial Services 15.8 __

Manufacturing Economy 64.8 __

Consumer Goods 16.6 __

Industrial Goods 36.3 __

Energy 11.8 __

Utilities 0.0 __

...................................................................................................................................................

...................................................................................................................................................



Royce Special Equity Instl Overall Morningstar Rtg Incept Type Total Assets Morningstar CatTM

(568) 07-25-03 MF $482 mil Small Blend (MF)Standard Index Category IndexS&P 500 Rus 2000




2009 -8.50 18.74 13.49 4.15 28.422010 7.57 -9.75 8.09 14.06 19.692011 __ __ __ __ 2.60


Load-adj Mthly 19.97 11.02 7.79 __ 9.36Std 12-31-2010 19.69 __ 8.15 __ 9.19Total Return 19.97 11.02 7.79 11.79 9.36.................................................................................................+/- Std Index -2.61 8.83 4.92 9.17 __

+/- Cat Index -12.63 3.23 3.99 4.73 __.................................................................................................% Rank Cat 98 11 6 4 __.................................................................................................No. in Cat 647 568 485 278 __

7-day Yield __.................................................................................................




Current performance may be lower or higher than returndata quoted herein. For performance data current to the mostrecent month-end, please call 800-221-4268 or visitwww.roycefunds.com.


Front-End Load %

Deferred Load %

NA

NA

Fund Expenses


1.00NA

1.05



MorningstarRatingTM 5 5 5Morningstar Risk Low Low LowMorningstar Return +Avg High High

3 Yr 5 Yr 10 Yr


MPT Statistics Standard Index Best Fit IndexMstar Small Cap TR


12-Month Yield __

30-day SEC Yield __

Potential Cap Gains Exp 26.00% Assets

Operations

Family: Royce Objective: Small Company Minimum IRA Purchase: $0Manager: Dreifus, Charles Ticker: RSEIX Min Auto Investment Plan: $0Tenure: 12.8 Years Minimum Intitial Purchase: $1,000,000 Purchase Constraints: T/

Investment StyleEquityStock %96 94 84 82 88 95 96 91 70 79 83 83

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

.....................................................................................................................................................................................................................

4k

10k

20k

40k

60k

80k100k

Growth of $10,000Royce Special EquityInstl$38,341




History2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 02-11

9.44 12.35 14.24 17.95 19.58 18.66 19.68 18.22 13.65 17.44 20.79 21.3316.30 30.75 15.32 27.59 13.97 -0.93 14.12 4.79 -19.52 28.42 19.69 2.60

NAVTotal Return %

25.40 42.64 37.42 -1.10 3.09 -5.84 -1.67 -0.70 17.48 1.96 4.63 -3.2819.32 28.26 35.80 -19.66 -4.36 -5.48 -4.25 6.36 14.27 1.25 -7.17 -2.61............................................................................................................................................................................................................................................................................

__ __ __ __ __ __ __ __ __ 50 89 97............................................................................................................................................................................................................................................................................277 313 382 446 521 563 608 645 670 649 649 688


% Rank Cat

No. of Funds in Cat




Small

Mid

Large


P/E Ratio TTM 14.3 0.89 0.85P/C Ratio TTM 9.2 0.95 0.98P/B Ratio TTM 2.0 0.86 1.09Geo Avg Mkt 1203 0.02 0.91Cap $mil

Fixed-Income Style

Short Int Long

LowM

edHigh

Avg Eff Duration __

Avg Eff Maturity __


Avg Wtd Coupon __

Avg Wtd Price __


AAA __

AA __

A __.................................................................................................................BBB __

BB __

B __.................................................................................................................Below B __

NR/NA __


Americas 100.0 1.00Greater Europe 0.0 0.00Greater Asia 0.0 __


631,600576,500

4 mil951,400602,600

Lubrizol CorporationNational Presto IndustriesAVX CorporationHubbell, Inc. BClearwater Paper Corp

3.83 3.51 2.82 2.76 2.62..............................................................................................................................

961,5001 mil

432,5001 mil

925,500

Lancaster Colony CorporationBed Bath & Beyond, Inc.Bio-Rad Laboratories Inc.Dorman Products, Inc.Gymboree Corporation

2.61 2.58 2.24 2.20 2.20..............................................................................................................................

1 mil847,500496,500844,900

2 mil

Park Electrochemical Corp.Thomas & Betts CorporationStepan CompanyPlantronicsAmerican Eagle Outfitters

2.08 1.99 1.68 1.63 1.52


Information Economy 18.9 0.80

Software 1.4 0.33

Hardware 10.4 1.13

Media 1.5 0.44

Telecommunication 5.6 0.82

Service Economy 35.7 0.95

Healthcare Services 8.1 0.77

Consumer Services 18.9 2.39

Business Services 8.7 2.90

Financial Services 0.0 0.00

Manufacturing Economy 45.4 1.17

Consumer Goods 28.6 2.72

Industrial Goods 16.4 1.37

Energy 0.4 0.03

Utilities 0.0 0.00

...................................................................................................................................................

...................................................................................................................................................



It’s Bigger Than You ThinkA Large and Diverse Equity Universe

The investment universe of small companies is both large

and diverse. Small-cap equities form the largest domestic

equity universe, accounting for approximately 85% of all

publicly traded companies in the U.S. The universe includes

approximately 4,500 companies and represents $1.7 trillion

in total market capitalization. At Royce, we divide small

companies into two distinct segments: micro-cap, those with

market caps up to $500 million; and small-cap, those with

market caps between $500 million and $2.5 billion.

Micro-Cap: The U.S. micro-cap segment consists of more

than 3,300 companies with approximately $400 billion in

total capitalization. It offers many choices, but also faces

significant trading difficulties, including limited trading

volumes and higher volatility.

Small-Cap: The U.S. small-cap segment encompasses more

than 1,100 companies with a total capitalization of

approximately $1.3 trillion. It is more efficient, offering

greater trading volumes and narrower bid/ask spreads.

Evolving Universe

The last 20 years have seen substantial change in what

constitutes a small company—for example, it wasn’t long ago

when small-caps were those with market caps up to $500

million, a definition that now equates to the micro-cap sector.

SMALL-CAP: THEEVERGREEN ASSET CLASS

R O Y C E R E S E A R C H

MARKET CAPITALIZATIONNumber of Companies

$0 – $500 million 3,361

$500 million – $1 billion 507

$1 billion – $2.5 billion 606

$2.5 billion – $5 billion 333

$5 billion and above 479

Data provided by CompuStat as of 9/30/10.

Page 43 of 59

2 | The Royce Funds Small Cap: The Evergreen Asset Class

The ongoing evolution of the asset class, which includes the

entrance of new companies and IPOs, makes small companies

an evergreen source of investment opportunities.

Professional Asset Class

Once regarded as highly volatile and viewed opportunistically

from an investment standpoint, small-cap has evolved over

the last several years into an accepted asset class, one used

by institutions, consultants, advisors and individuals.

Strong Absolute Results

Although most investors are aware of the long-term

performance advantages that the small-cap asset class has

historically offered, fewer are familiar with the high level of

absolute returns that the asset class has generated. Research

shows that since the end of World War II, what we deem

“the modern era,” small-caps, represented by the CRSP 6-10,

have generated monthly trailing three-year average annual

total returns of 10% or better 62% of the time. In 29% of all

three-year periods, returns were 20% or greater. Historically

strong returns from the asset class are precisely why we

believe investors need continuous exposure to small-caps.

The Appropriate Benchmark Index

With such a large and diverse selection universe, what is

the appropriate benchmark for our domestic small-cap

portfolios? While we believe that the Russell 2000 index is

the best choice, people often ask us why we use this

benchmark instead of a style index such as the Russell 2000

Value index. Considering our own risk-conscious value

approach, wouldn’t it make more sense to use a value index

as the benchmark?

To us, a benchmark is a point of reference that provides

a representative return for a broad-based asset class.

Unlike a lot of managers, we do not manage against an

index. In other words, we select companies for our portfolios

because we believe that they can provide a desired rate of

return, not because we think that they can beat the return

provided by an index. Any time one of our funds outperforms

its benchmark, it is a happy byproduct of our investment

process and nothing more.

General Index Versus Style Specific

There are some other important reasons why we use the

Russell 2000 rather than its value counterpart. First,

the Securities and Exchange Commission requires that we

use a broad-based index for certain performance com -

parisons, such as the graphs in our annual reports that

show the growth of $10,000 over a certain time period.

The Russell 2000 better satisfies this requirement in that it

is broad (approximately 2,000 issues ranging in market

cap from $112 million to $2.3 billion as of 5/31/10), has

history (1979 inception) and incorporates a full range of

securities, industries and sectors.

As a broad-based index, the Russell 2000 is also more

representative of our selection universe. Style indices such

as the Russell 2000 Value and Growth generally include

Our choice of a benchmark reflects the need for broad representation across an asset class and the inclusion of our entire selection universe, not one thatmay (or may not) be a ‘fit’ for our investment approach.

CRSP 6-10 THREE-YEAR MONTHLY AVERAGE ANNUAL TOTAL RETURNS January 1946 through June 2010

Three-Year Average Annual Percent Total Return Averages of Periods1

≥ 20.0% 29%

9.9 – 10.0% 33

0% – 9.9% 24

(9.9) – 0% 9

(19.9) – (10.0)% 3

≤ (20.0)% 02

1 Does not add to 100% due to rounding.2 Represents 0.3% of all periods.

Page 44 of 59

The Royce Funds Small Cap: The Evergreen Asset Class | 3

only companies that meet certain statistical definitions

as defined by the company that maintains the index.

So while we use a value approach to select companies, we

do not limit our selection universe to the stocks in the

Russell 2000 Value index (or the Russell 2000 index).

In fact, many times we buy what may be regarded as growth

stocks in areas such as technology and healthcare, when

they meet our own selection criteria. In addition, there are

also sectors traditionally associated with value investing,

such as utilities, in which we typically do not make

significant investments.

Valuation Discrepancies, Not Statistically Cheap Stocks

Instead of using only statistical criteria, such as low P/E

and/or low P/B ratios, we employ a business buyer’s

approach to investing that takes into consideration

quantitative and qualitative factors. Unlike a lot of firms,

we do not begin the investment process looking for low

P/E or P/B stocks. Rather, we look for well-run companies

with histories of high returns on invested capital that

are trading at discounted stock prices. This may also lead us

to companies that have recently experienced earnings

disappointments and consequently sport above-average

P/E ratios—ratios more in line with those contained in

growth style indices.

Ultimately, then, our choice of a benchmark reflects

the need for broad representation across an asset class and

the inclusion of our entire selection universe, not one that

may (or may not) be a ‘fit’ for our investment approach.

See Fund Performance and Expenses on the back

The thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce & Associates, and, of course, there canbe no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly tradedU.S. companies in the Russell 3000 index. The Russell 2000 Value and Growth indexes consist of the respective value and growth stocks within the Russell 2000 asdetermined by Russell Investments. CRSP (Center for Research in Security Pricing) equally divides the companies listed on the NYSE into 10 deciles based on marketcapitalization. Deciles 1-5 represent the largest domestic equity companies and deciles 6-10 represent the smallest. CRSP then sorts all listed domestic equitycompanies based on these market cap ranges. By way of comparison, the CRSP 1-5 would have similar capitalization parameters to the S&P 500 and the CRSP 6-10would approximately match those of the Russell 2000. Small- and micro-cap stocks may involve considerably more risk than larger-cap stocks.

There can be no assurance that the performance of any Royce Fund will be similar to that of CRSP 6-10. The CRSP 6-10 performance does not reflect the expenses ofinvesting in a Royce Fund or any other mutual fund. An investor should carefully consider a Fund’s investment objective, risks, charges and expenses before investingor sending money. This and other important information about The Royce Funds can be found in the Funds’ prospectus. To obtain a prospectus, and information aboutthe performance of The Royce Funds, please call (800) 221-4268 or visit www.roycefunds.com. Please read the prospectus carefully before investing.

NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Page 45 of 59

SMR2

K-BR

O-09

10

745 Fifth Avenue | New York, NY 10151 | P (800) 221-4268 | www.roycefunds.com

PERFORMANCE AND EXPENSES Through September 30, 2010

Average Annual Total Returns Annual ExpensesOne- Five- 10- Since Gross Operating Net Operating

CATEGORY/Fund Year Year Year Inception (Date) Expenses Expenses

CORERoyce Pennsylvania Mutual Fund 12.21% 3.21% 9.05% 14.63% 0.92% 0.92%

Royce Heritage Fund 16.27 6.77 8.45 14.06 (12/27/95) 1.51 1.51

CORE + DIVIDENDSRoyce Total Return Fund 15.13 2.83 8.17 10.71 (12/15/93) 1.19 1.19

Royce Dividend Value Fund 19.16 6.27 n.a. 7.33 (5/3/04) 2.09 1.54

QUALITY + FOCUSEDRoyce Premier Fund 12.77 6.35 10.30 12.06 (12/31/91) 1.15 1.15

Royce Special Equity Fund 9.17 6.03 11.82 8.48 (5/1/98) 1.17 1.17

Royce Value Fund 10.97 5.62 n.a. 11.10 (6/14/01) 1.47 1.47

Royce 100 Fund 11.66 6.37 n.a. 10.62 (6/30/03) 1.54 1.49

MICRO-CAP/OPPORTUNISTICRoyce Micro-Cap Fund 18.25 6.59 10.54 13.21 (12/31/91) 1.60 1.60

Royce Low-Priced Stock Fund 16.67 6.82 9.28 12.80 (12/15/93) 1.62 1.51

Royce Opportunity Fund 15.52 3.24 8.41 12.37 (11/19/96) 1.22 1.22

Royce Value Plus Fund 7.61 2.64 n.a. 12.12 (6/14/01) 1.47 1.47

GLOBAL/INTERNATIONALRoyce European Smaller-Companies Fund 27.48 n.a. n.a. 0.93 (12/29/06) 3.28 1.76

Royce Global Value Fund 26.09 n.a. n.a. 6.92 (12/29/06) 2.07 1.88

QUALIFIED INVESTORRoyce Select Fund I 8.47 7.66 10.67 14.02 (11/18/98) 0.03 0.03

Royce Select Fund II 17.36 7.11 n.a. 7.04 (6/30/05) 0.69 0.69

Royce Global Select Fund 29.11 12.94 n.a. 13.96 (6/30/05) 0.17 0.17

Russell 2000 13.35 1.60 4.00 n.a. n.a. n.a.

*Royce Pennsylvania Mutual Fund’s average annual total return for the 35-year period ended 9/30/10.

Important Performance and Expense Information All performance information in this Review reflects past performance, is presented on a total return basis,reflects the reinvestment of distributions and doesnot reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee offuture results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost whenredeemed. For Funds other than the Select Funds, shares redeemed within 180 days of purchase may be subject to a 1% redemption fee payable to the Fund(2% for Royce European Smaller-Companies and Global Value Funds). Shares of Royce Select Fund I, Select Fund II, and Global Select Fund may be subject to a2% redemption fee payable to the Fund if redeemed within 365 days of purchase. Redemption fees are not reflected in the performance shown above; if theywere, performance would be lower. Current performance may be higher or lower than performance quoted. Current month-end performance information maybe obtained at www.roycefunds.com. All performance and expense information reflects results of the Fund’s oldest share Class (Investment Class or ServiceClass, as the case may be). Gross operating expenses reflect each Fund’s gross total annual operating expenses, including management fees, any 12b-1distribution and service fees, other expenses, and any applicable acquired fund fees and expenses. Net operating expenses reflect contractual fee waiversand/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed towaive fees and/or reimburse operating expenses through April 30, 2011 to the extent necessary to limit total net annual operating expenses, other thanacquired fund fees and expenses, to no more than 1.49% for the Service Class of Royce Dividend Value, 100 and Low-Priced Stock Funds, and to no more than1.69% for the Service Class of Royce European Smaller-Companies and Global Value Funds. Royce & Associates has contractually agreed to waive fees and/orreimburse operating expenses through April 30, 2020 to the extent necessary to limit total net annual operating expenses, other than acquired fund fees andexpenses, to no more than 1.99% for the Service Class of Royce Dividend Value Fund and Royce European Smaller-Companies Fund. Annual operating expensesfor Royce Select Fund I, Select Fund II and Global Select Fund reflect each Fund’s total annual operating expenses as of the most current prospectus and includethe Fund’s management fee based on 12.5% of each Fund’s respective 2009 pre-fee, high-watermark total return. There was no high watermark return forRoyce Select Fund I, Select Fund II, Global Select Funds for 2009. For Royce Select Fund I, expenses consisted of dividends on securities sold short and acquiredfund fees and expenses. For Royce Select Fund II expenses consisted of dividends on securities sold short, acquired fund fees and expenses and interestexpense on borrowings. For Royce Global Select Fund, expenses consisted solely of acquired fund fees and expenses. Royce has contractually agreed to absorball other operating expenses of each Select Fund, other than acquired fund fees and expenses, dividend expenses relating to any short selling activity andinterest expense on borrowings of these Funds. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly byany applicable Fund through its investments in mutual funds, hedge funds, private equity funds and other investment companies.

Shares of a Fund’s Service, Consultant, R and K Classes bear an annual distribution expense that is not borne by, or is higher than, the Fund’s oldest share Class.The Royce Funds invest primarily in securities of micro-cap, small-cap and/or mid-cap companies, which may involve considerably more risk than investments insecurities of larger-cap companies (see “Primary Risks for Fund Investors” in the respective Prospectus). This piece must be accompanied or preceded by acurrent prospectus for the Funds. Please read the Prospectus carefully before investing or sending money. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index.Royce Fund Services, Inc. is The Royce Fund’s distributor and a member of FINRA and SIPC.

Page 46 of 59

A t Royce, one core belief permeates everything we do,

not only in our investment portfolios, but in our

business practices as well. We believe that paying

attention to risk is the cornerstone for long-term excellence.

The way we think about risk helps to define our culture,

from the types of professionals we hire to the countercyclical

way we seek to grow our business and the way we invest.

Our evaluations of risk are geared both toward the potential

loss that may result from unforeseen events as well as from

lost opportunities of failing to act. It is our conviction that

preserving capital in difficult periods creates the foundation

for growing capital in healthy ones. Absolute return over

time is the true measure of success. As Chuck Royce likes to

counsel, “You cannot eat from the table of relative returns.”

In the small company universe, we recognize that the

historically superior long-term returns provided by the asset

class come with higher business risk, greater volatility and

limited institutional sponsorship. The future, forever unpre -

dictable, contains the ever-present possibility that something

can go wrong. For us, the key is to assess the various risks

involved with an investment, all the time guarding against

the unknowable.

Paying attention to risk begins with the idea of establishing

a “margin of safety.” While this idea is a widely shared

investment principal, it can be employed in a variety of ways.

For most of our portfolio managers, attempting to establish

a margin of safety begins with the balance sheet and ends

with the purchase price; in between comes a detailed analysis

of the company’s fundamentals.

We want our examination of the balance sheet to show us

that a company has sufficient financial flexibility both to

survive difficult periods and to invest when the opportunity

arises. We ask ourselves, “What is the relationship of the

assets of the business to its indebtedness? Does the business

have the flexibility to withstand a substantial downturn?

How well-insulated is this firm from bankruptcy?”

Finding quality companies is another important factor in our

effort to manage risk. Simply put, higher quality companies

generally are less risky. A company’s ability to generate high

internal rates of return, particularly its return on invested

capital, gives us a strong sense of the sustainability of the

company’s success. The ability to generate free cash flow

and allocate it productively to grow the business and reward

shareholders are key elements in our search for a high-

quality business.

A third component relates to the difference between

the company’s market price and our estimate of its intrinsic

value. Our portfolio managers and analysts seek companies

that are trading for at least a 30% discount to this estimate,

although our preferred discount is 50% or more. The price

that we pay is the key determinant of return. We operate

on the assumption that under historically normal operating

conditions the discount to intrinsic value will narrow,

but typically over the course of years—not days, weeks

or months.

Many investors measure the success or failure of their

investments in months, with the result that holding periods

for stocks have been shorten ing for some time. This stands in

RISKY BUSINESSRisk Management Begins with the Idea of Attempting to Establish a “Margin of Safety”

Page 47 of 59

stark contrast to the average business cycle, which typically

last for years, as well as to our average holding period, which

usually lasts anywhere from three to five years.

Entry and exit price are thus critical to our total return

experience with any stock. In each case, we build a valuation

matrix, which serves as a guide for where to buy and sell.

We generally use a dollar-cost-averaging model, which

equates to a slow wade into and out of the shallow end of the

pool, and gives us an added layer of protection against

the often-dramatic whims of the market. In short, we find it

far easier to have an idea of what is likely to happen as

opposed to when it is going to happen.

We are far more comfortable with the risk of being wrong

about an investment with low market expectations rather

than one where expectations are high and thus any disap -

pointment is likely to be met with potentially greater loss.

Perhaps unsurprisingly, paying attention to risk goes beyond

our investment process and is broadly evident in how we

operate at Royce. Many of the decisions we make about adding

to the investment team, how we compensate our portfolio

managers, opening and closing funds and the launching of

new products are all scrutinized with the same critical,

risk-averse lens by which we evaluate companies.

We are as contrarian and opportunistic in hiring investment

professionals as we are in evaluating businesses, often

adding staff when the rest of the industry is contracting and

the talent pool is robust. This means that people often join

us with a strong skill set that finds a home over time. We tend

to attract seasoned professionals who have met with some

adversity or disappoint ment in their careers; often, that

adversity has bred the same healthy respect for risk that helps

to define our culture.

Compensation practices for our investment professionals

are expressly designed to align incentives as closely as

possible with our long-term investment horizon and the

importance of absolute, risk-adjusted returns. To this end,

we take into account both absolute return as compared

to a risk-free rate and the risk-adjusted performance over

trailing three-, five- and 10- year periods and over trailing

market cycles, curbing short-term pressures in an attempt

to produce long-term excellence.

Our practice of opening and closing funds is often at odds with

what might make short-term sense in terms of asset growth.

Being an organization led by investment professionals, we are

far more interested in maximizing our shareholders’ potential

return than in maximizing our firm’s assets under manage -

ment. This means closing funds when inflows are too plentiful

relative to our ability to prudently invest them. We are often

the largest individual shareholders in The Royce Funds, so our

interests are closely aligned with those of our shareholders.

We have seen more than our share of the unpredictable over

our nearly four decades of investment management Like any

asset manager, we have been wrong about investments and

have fallen victim to numerous shocks, down cycles and bear

markets. Through each challenge, we have maintained our

unrelenting focus on risk and on the application of our absolute

return discipline in all that we do. And while building wealth

has always been our primary objective— meaning far more

to us than beating the market—success on both fronts has been

a significant byproduct of our time-tested approach.

Advisor ServicesFund Materials andPerformance Updates(800) 33-ROYCE (337-6923)

Joanne NewgardDirector of Advisor Services(800) 562-0880

Broker/Dealer ServicesFund Materials andPerformance Updates(800) 59-ROYCE (597-6923)

745 Fifth Avenue | New York, NY 10151 | P (800) 221-4268 | www.roycefunds.com

RB-1

PG-0

410

Please read the prospectus carefully before investing or sending money. For a prospectus please call (800) 221-4268. The prospectus contains information

regarding the Funds’ respective investment objectives, risk profile, fees and other expenses. The Royce Funds invest primarily in securities of micro-cap, small-

cap and/or mid-cap companies, which may involve considerably more risk than investments in securities of larger-cap companies (see “Primary Risks for Fund

Investors” in the prospectus). Royce Fund Services, Inc. is The Royce Fund’s distributor and a member of FINRA and SIPC.

Page 48 of 59

Disclosures

Other Important Disclosures2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client.The information in Morgan Stanley & Co. Incorporated Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley & Co. Incorporated Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.© 2009 Morgan Stanley Smith Barney

Morgan Stanley Smith Barney Investment Strategy

Page 49 of 59


PRESENTED TO:

DATE:

05/19/2011


ITEM #:

2010/2011-054

Future Transfer of Assets into the Trust

Enclosure:

Yes

Prepared by:


Requested by:


BACKGROUND: The Trust was created for the exclusive purpose of prefunding unfunded retiree OPEB liabilities. STATUS: The Retirement Board of Authority will discuss the timing of future prefunding deposits to the Trust. RECOMMENDATION: The Retirement Board of Authority should receive the information.

Page 52 of 59

Activity For February 3, 2011 - April 27, 2011

Activity Type MISCELLANEOUS CASH RECEIPT By Security

Date Security Description Cash Quantity Cost

04/01/2011 RECEIVED FROM CONTRA COSTA $ 4,550,000.00 0.000 $ 0.00

Activity List

CONTRA COSTA CCD**43-E022-01-7 February 3, 2011 - April 27, 2011

Page 1 04/27/2011 02:39 PMPage 53 of 59


PRESENTED TO:

DATE:

05/19/2010


ITEM #:

2010/2011-055

Private Letter Ruling Update

Enclosure:

No

Prepared by:


Requested by:


BACKGROUND: Generally, states and their political subdivisions are not subject to taxation by the federal government. However, separate instrumentalities of states or political subdivisions, may be subject to taxation. These instrumentalities may avoid tax liability by establishing a trust under Internal Revenue Code Section 115. The program is set up to avoid tax liability through the use of such a trust. The Internal Revenue Service will review these trusts, on a case-by-case basis, at the request of each public entity, for compliance with the tax code, and issue what is called a “Private Letter Ruling,” (PLR). The Retirement Board of Authority at a prior meeting decided to proceed with obtaining a PLR and approved the hiring of Brian M. Johnston of Polsinelli Shughart PC. STATUS: Brian Johnston of Polsinelli Shughart PC had discussions with the IRS relative to the District’s application for a Private Letter Ruling (PLR). The Retirement Board of Authority will be updated on the status of the District’s PLR application. RECOMMENDATION: The Retirement Board of Authority should receive the information.

Page 54 of 59

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