SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION

INVESTMENT POLICY STATEMENT(Adopted June 19, 2008)

INTRODUCTIONThe Board of Retirement of the San Diego County Employees Retirement Association has plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement system. The assets of a public pension or retirement system are trust funds. The Board of Retirement has exclusive control of the investment of the assets of SDCERA. (California Constitution Article XVI, Section 17.)

Under the County Employees Retirement Law of 1937 (Government Code Section 31594), the Board of Retirement is authorized to invest in any form or type of investment deemed prudent by the Board pursuant to the requirements of Section 31595 of the statute. Section 31595 provides in part:

“Except as otherwise expressly restricted by the California Constitution and by law, the board may, in its discretion, invest, or delegate the authority to invest, the assets of the fund through the purchase, holding, or sale of any form or type of investment, financial instrument, or financial transaction when prudent in the informed opinion of the board.

The board and its officers and employees shall discharge their duties with respect to the system:

(a) Solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. (b) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims. (c) Shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly prudent not to do so. “

This Investment Policy Statement governs all asset classes, types or forms in SDCERA’s investment program and establishes the guidelines, policies and procedures for the management of SDCERA’s diversified investment portfolio by the Board and the investment officers. This Investment Policy Statement is subject to applicable provisions of law and the applicable limitations and requirements of SDCERA’s governance policies. The Board of Retirement may amend, supplement or rescind this policy in its discretion.

ROLES AND RESPONSIBILITIES

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Board of RetirementAs a fiduciary to the beneficiaries of the SDCERA Fund, the Board is responsible for formulating and adopting investment policies and providing oversight of the SDCERA Investment program. In performing its duties, the Board shall rely upon and comply with SDCERA’s established Governance Policies as they relate to the management and oversight of the SDCERA Fund. Specifically, the Board is responsible for the following investment-related decisions, and others, as it may determine from time to time:

The Board is responsible for establishing the Fund’s strategic asset allocation and risk tolerance, which forms the basis of implementation of the investment program. This will include decisions on asset classes that may be used within the investment programs and the Board’s risk tolerances associated with the individual asset classes and overall portfolio.

Based on the strategic asset allocation, the Board is responsible for establishing a policy benchmark, which will form the basis for measurement of the excess performance of the Fund.

The Board is also responsible for specific policies relating to the management and implementation of the investment program. These include, but are not limited to, rebalancing, proxy voting, manager retention and termination, securities lending policies, trading policies, and strategic plans for real estate, private equity, and infrastructure investments.

The Board is responsible for approval of named vendors, e.g. consultants and investment managers. All vendor selection procedures should comply with SDCERA’s Vendor Selection Policy.

The Board will receive recommendations from Staff and advice from Consultant in performing its duties. From time-to-time, Consultant may disagree with a manager retention / termination recommendation made by Staff. In the event of such a case, Staff and Consultant shall provide memoranda outlining the difference for the Board’s evaluation. The Board reserves final authority on manager retention and termination.

The Board may from time-to-time delegate, at its discretion, one or more of its responsibilities to Staff.

StaffIn tandem with the Consultant, Investment Staff shall make detailed decisions with respect to the implementation of policies, subject to the Board’s review and approval. The Board shall approve all investment decisions relating to manager retention and program structure changes that fall outside of Staff’s authority. Unusual circumstances may arise, where time is of the essence and not taking immediate action could expose the Fund to material risk, that require Staff’s immediate action relating to the termination of an investment manager. In such cases, Staff must exercise its judgment and act in a manner that protects the interests of SDCERA. The Board delegates to Staff such authority as a necessary extension of Staff’s discretion. In such instances of a manager termination, Staff will subsequently report to the Board the rationale of the termination and external consultants will provide a verbal or written affirmation relating to the termination.

As part of its responsibilities to manage day-to-day investment operations, Staff will address and resolve violations of investment manager guidelines.

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In the case of hiring external managers, Staff and Consultant will undertake appropriate due diligence, select the most appropriate manager and request approval from the Board for retention based upon Staff’s reports, the Consultant’s opinion and the relevant due diligence.

SDCERA Staff shall be responsible for:

Implementation of Board-approved Investment Policies Manager monitoring and due diligence Conducting manager searches and recommending candidates for Board approval Development and recommendation of new strategies Determining an appropriate program structure to implement the Board-approved Investment Policy In-house trading, as approved by the Board Negotiations on manager fees Providing Board with important information about the program Providing Board education on topics of interest

General Investment ConsultantThe Board employs a General Investment Consultant (the Consultant) who serves as a fiduciary for the Fund. The Consultant works for the Board in tandem with SDCERA Staff, as follows:

Advising the Board and SDCERA Staff with respect to the investment program in general. Proposing asset allocation strategies, together with Staff, consistent with Board investment objectives

and risk tolerance. Assisting Staff in manager searches, evaluations, and contract terms. Monitoring investment management results. Providing reports and analyses to the Board relating to material events affecting investment managers,

such as, but not limited to, relative performance, changes in relevant manager senior personnel, investment processes and/or manager organizational structures and ownership.

Preparing presentations and papers on topical issues and specific investment projects for the Board and Staff.

The Board may also retain additional investment consultants to assist with private equity, real estate, hedge funds or other areas as may be necessary.

Investment Manager SelectionThe Board has delegated to its Staff, with assistance from its Investment Consultant(s), the process of manager identification and recommendation for selection. The Board retains for itself final authority for manager selection, retention and termination. The Staff is also charged with monitoring performance and making retention and termination recommendations to the Board.

SDCERA Staff and Consultant will conduct due diligence necessary to provide the Board with sufficient information allowing for selection of investment managers. The specific elements of due diligence will vary based on the asset class and the characteristics of individual manager(s) and/or strategies under

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consideration. Both Staff and Consultant will maintain and use commercially-available investment manager databases to assist in the vetting of a suitable universe of viable manager candidates.

The following is not intended to be exhaustive, but rather a general guide as to how new investment management mandates will be brought forward and presented to the Board.

Fit within investment program: Staff will identify the role the prospective managers will play within the investment program. The size of the mandate and expected contribution to the asset class risk budget, among other things, will be addressed in this process.

Sufficient quantitative and qualitative assessment: Staff will provide a written assessment of the manager candidates characteristics; performance relative to benchmarks and peers, as appropriate; and other background information necessary for Board approval

Attestation from external consultants: External consultants will provide a verbal or written attestation on managers brought forward for Board consideration. In cases where the consultant does not endorse a specific investment manager, the consultant will address such reasons in writing for Board review and consideration.

Manager presentations: The Board shall have access to a presentation from managers under consideration.

Each manager is selected and retained on the basis of an evaluation that establishes sufficient confidence that the manager will improve the risk / return profile of the investment program. Staff recommendation will be accompanied by an opinion of the Investment Consultant on this recommendation, which may be different than that of Staff. The Board retains the final authority to accept, modify or reject such recommendations.

Circumstances may exist wherein a manager presented for consideration and approval may not be covered within the scope of services of any of the consultants retained by the Board. Staff will, however, provide one or more of the Board’s consultants complete details on the investment strategy and the due diligence conducted by Staff. The consultant shall review Staff’s due diligence and provide an opinion to the Board on the adequacy and completeness of the due diligence. Thereupon, the Board shall rely upon the due diligence conducted by Staff in making any decisions.

Investment ManagersThe Board, on the recommendation of Staff and Consultant, has the authority to retain external investment managers, and to delegate authority to them, to manage SDCERA’s investments. All external managers retained by the Board shall act on behalf of the Board to a high fiduciary standard of prudence and care as defined by the Constitution of the State of California and the 1937 Act governing the SDCERA. Manager behaviors and practices must also be consistent with the ethical standards promulgated by the CFA Institute, in accordance with applicable Local, State, and Federal statutes, and with industry best practices in general.

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The responsibility of external investment managers include, but are not limited to, the following:

Invest assets in a prudent manner and consistent with the individual investment management guidelines and the role of fiduciary.

Be an SEC-Registered Investment Advisor under the 1940 Act, except as otherwise provided in this Policy, and be recognized as providing demonstrated expertise over a number of years in the management of institutional, tax-exempt assets within a defined investment specialty.

Adhere to the investment management style concepts and principle for which they were retained, including, but not limited to, developing portfolio strategy, performing research, developing buy, hold and sell lists, and purchasing and selling securities.

Execute all transactions for the benefit of SDCERA with brokers and dealers qualified to execute institutional orders on an ongoing basis at the best net cost to SDCERA, and facilitate the recapture of commissions on behalf of SDCERA, as directed.

Maintaining timely communication with the Consultant and SDCERA Staff relating to the investments managed on SDCERA’s behalf, including, but not limited to: – Major changes in the Investment Manager's investment outlook, investment strategy and portfolio

structure;– Significant changes in ownership, organizational structure, financial condition or senior personnel;– Any changes in the Portfolio Manager or other key personnel assigned to the SDCERA;– Each significant client which terminates its relationship with the Investment Manager, within 30

days of such termination;– All pertinent issues which the Investment Manager deems to be of significant interest or material

importance; and, Providing monthly and quarterly reports summarizing all portfolio activity and periodic reports attesting

to compliance with contractual, ethical and procedural guidelines as required by the SDCERA. Providing in-person account reviews as required by Consultant and/or SDCERA Staff. Providing timely reporting of trades to the SDCERA’s Master Custodian, as necessary. Each external manager retained by SDCERA shall be responsible to vote proxies relating to the

portfolios that they manage on behalf of SDCERA. The managers will vote proxies with the same care, skill, diligence and prudence as is exercised in managing its other assets. On an annual basis, the manager will provide Staff and / or Consultant a summary of proxies and how they voted on them.

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ASSET ALLOCATION STRATEGYThe Board has adopted the following long-term strategic asset allocation to satisfy the investment objectives. The strategic asset allocation takes into consideration the result of an asset/liability analysis, the expected returns and risks for the various asset classes.

Allocation Approved: October 18, 2007Effective: January 1, 2008

Asset Class % Allocation RangesU.S. Equity 23% 18 - 28%Non-U.S. Equity 24 20 - 28%Emerging Market Debt 4 0 – 8%High Yield Fixed Income 3 0 – 6%Real Estate 10 6 – 14%Commodities 4 1 – 7%Infrastructure 5 0 – 7 %Private Equity 5 0 – 7%Total Return-Driven Assets 78% 74 – 82%U.S. Bonds 17 14 – 20%U.S. TIPS 5 2- 8%Total Low-Risk Assets 22% 18 – 26%Total 100%

REBALANCINGThe investment program’s allocation to the various asset classes shall be monitored on an ongoing basis to ensure that the actual allocations lie within the ranges specified in the table above. The ranges noted above relate to the physical allocation of securities to these asset classes. When the actual allocation to an asset class falls outside of the range specified for the asset class, a rebalancing transaction shall be initiated to bring the allocation within the range. Staff shall utilize routine cash transactions or physical trading of securities to ensure that the actual allocations are in compliance with this Policy.

As a practical matter, allocations to illiquid asset classes such as private equity, infrastructure, and real estate cannot be altered meaningfully from quarter-to-quarter as they can be for publicly traded securities such as equities and bonds. Capital is committed to these asset classes over a multi-year period to ensure appropriate diversification of risks across vintage years and strategy type. Capital is drawn down for these investments over a staggered basis as investment opportunities present themselves. Further, capital invested in these asset classes is returned over time as investments are liquidated or at a predefined contract termination date. As a result, SDCERA has limited control on the allocations to these asset classes over the short-term. Regular pacing studies shall be conducted to ensure that the capital committed to these asset classes results in achieving and maintaining the target allocation over time, with due consideration to diversification of investments by type and vintage year. Over time it is expected that the allocations to these asset classes will lie within the range specified for these investments in this Policy.

Other Investments

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The Board has further approved an allocation of 8% to “Opportunistic” investments, and 4% to a “beta” strategy with Bridgewater Associates. These allocations will be funded out of public equities (U.S. and non-U.S.) and U.S. bonds in the ratio of return-driven to low-risk assets (78/22) as indicated below:

Approved: October 18, 2007Effective: January 1, 2008

Asset Class Long-term Strategic Allocation %

Asset Class Implementation Targets %

U.S. Equity 23% U.S. Equity 19%Non-U.S. Equity 24 Non-U.S. Equity 19Emerging Market Debt 4 Emerging Market Debt 4High Yield Fixed Income 3 High Yield Fixed Income 3Real Estate 10 Real Estate 10Commodities 4 Commodities 4Infrastructure 5 Infrastructure 5Private Equity 5 Private Equity 5Return Driven Assets 78% 69%

Opportunistic 8Bridgewater All-Weather 4

12%U.S. Bonds 17 U.S. Bonds 14U.S. TIPS 5 U.S. TIPS 5Low-Risk Assets 22% 19%Total 100% Total 100%

“Opportunistic” InvestmentsIn an increasingly complex investment world, certain investment strategies and new instruments do not fit neatly into traditional asset classes, or that share characteristics of more than one asset class (e.g. convertible bonds). Some of these investments are also truly opportunistic in the sense that they may be available for investment only during certain market environments. The Board has therefore adopted a policy allocation of up to 8% of total assets to such investments that have acceptable risk/return characteristics, and which can further the diversification of the investment program. Such investments may include, but are not limited to, bank loan funds, distressed mortgage debt, niche private investments, certain types of hedge funds, and convertible bonds.

Implementation of Strategic AllocationOnce the Board approves long-term strategic asset allocation decisions, Staff is expected to implement the new allocation in a timely manner, balancing the trade-off between the costs associated with implementing the decision versus the tracking error resulting from a delay in implementation. When implementing asset allocation, Staff will take various factors into considerations that may call for a more gradual implementation plan. Such items include the liquidity of a particular asset class, vintage year diversification considerations, scarcity of viable investment vehicles and transition costs.

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As part of its regular and routine reporting, Staff will keep the Board informed about the implementation of the asset allocation process.

The asset allocation strategy will be implemented by means of the following investment strategies: Direct investment in the asset class or sub-asset classes (e.g. small cap U.S. equities), through the use

of active or passive (indexed) managers Investments in portable alpha strategies combined with overlays to maintain the strategic asset

allocation Long/Short investment portfolios with sufficient Beta to proxy for asset class exposure.

Active Risk BudgetActive Risk is the risk associated with the differences in returns between the policy benchmark and the actual results of the portfolio. It is measured as the standard deviation of the difference between the returns of active managers and their respective benchmarks (also referred to as “tracking error”). The active risk of the overall SDCERA portfolio shall not exceed 200 basis points, as applied to the marketable securities portion of the portfolio.1

PERFORMANCE MEASUREMENTThe success of the implementation of the strategic asset allocation will be measured by comparing the rate of return earned by Total Fund against a policy benchmark comprised of the following market indices at the indicated weights:

Asset Class Index % AllocationU.S. Equity Russell 3000 Stock Index 23Non-U.S. Equity MSCI All Country World Ex-U.S. Investable Market

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Emerging Market Debt JP Morgan Global Emerging Market Bond Index 4High Yield Fixed Income Citigroup High Yield Cash Pay Index 3Real Estate Custom Benchmark* 10Commodities S&P GSCI Index 4Infrastructure Consumer Price Index + 5% 5Private Equity Vintage Year Benchmark** 5U.S. Bonds Lehman Brothers Aggregate Bond Index 17U.S. TIPS Barclays U.S. Inflation-Linked Index 5Total 100%

* The real estate component is measured against a custom benchmark that comprises the NCREIF Property Index (private RE) and

the NAREIT Equity Index (REITs). The allocation between the two indices is adjusted quarterly to reflect the actual weightings

between SDCERA’s Private Real estate and REIT allocations. Information for the NCREIF Property Index is lagged one quarter.

1 Non-publicly traded investments such as private real estate and private equity will be excluded from this calculation

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** Performance of the private equity allocation should be measured against a pool of private equity funds closed in the same vintage

year as that of SDCERA’s investments drawn from an appropriate database.

The performance of each asset class will be compared to the corresponding market index as indicated in the table above. The performance of the “opportunistic” strategies will be compared to a benchmark comprising 39% Russell 3000 Index, 39% MSCI All Country World Ex-U.S. Investable Market Index, and 22% Lehman Brothers Aggregate Bond Index.

The individual managers’ returns will be compared with a market index appropriate to each manager’s investment approach. For performance evaluation purposes, all rates of return will be measured net of investment management fees. For value added purposes, the marketable portfolio result will be compared to the policy marketable portfolio result on a regular basis.

DERIVATIVES/LEVERAGEFor the purposes of this policy, derivatives include, without limitation, futures contracts; options; options on futures contracts; forward contracts; swap agreement, including swap contracts with embedded options; any instrument or contract intended to manage transaction or currency exchange risk in purchasing, selling or holding investments; and any other instrument commonly used by institutional investors to manage institutional investment portfolios. Derivatives may be purchased through a national exchange or through a direct OTC arrangement with a counterparty.

At a macro level, derivatives may be used to maintain the program’s strategic asset allocation. Staff will have discretion to engage in derivative transactions to achieve, maintain or hedge any asset class exposure consistent with this Policy at a lower cost and/or risk than would be the case with direct investments in the underlying securities. The usage of derivatives within each asset class shall be consistent with the investment guidelines defined for each asset class.

At a micro level, external managers retained by the Board may be permitted to utilize derivatives to implement their investment strategies. Each individual manager’s guidelines shall specify guidelines regarding derivatives usage.

The following guidelines shall apply with respect to the use of OTC derivatives: SDCERA may enter into OTC derivative or swap transactions with high-quality counterparties that have

an ISDA (International Swaps and Derivatives Agreement) in place with SDCERA and are rated “A” or higher by S&P (Standard and Poors) or a comparable rating by another rating agency.

Swaps should typically be one-year agreements with a maximum of four (4) years for counterparties with “AAA” ratings and two (2) years for those with “AA” ratings.

The exposure to any one single counterparty shall not exceed 35% of the total derivatives exposure in aggregate at the total fund level.

There should be adequate diversification of counterparties to minimize the risk to SDCERA of any counterparty default. At a minimum, SDCERA shall maintain five counterparties to execute derivative transactions.

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Reset periods with respect to equity and fixed income swaps should occur no less than every three (3) months and expiration and reset dates should be staggered to avoid excessive cash outflows occurring over a single month. Swaps in respect of commodity transactions shall occur on a monthly basis.

Swaps and OTC derivatives with the same counterparty should be settled on a net basis at each reset date to minimize SDCERA’s exposure to the counterparty.

Financial leverage may be utilized in implementing investment strategies so long as the use of leverage does not materially alter the risk level of the investment program given the current asset allocation as approved by the Board. Risk constraints established by the Board for the total portfolio, the individual asset classes, and individual manager’s control the use of leverage. The Board will continue to exercise oversight over the use of leverage at the total fund and manager level by its approval of internally or externally managed investment strategies.

SECURITIES LENDINGSDCERA may enter into agreements establishing securities lending programs. These programs may be established with the master custodian or one or more third-party securities lending agents. Staff shall assess the suitability of such programs taking into consideration the nature and diversity of the collateral investment pools provided by the lending agent, as well as the agent’s track record, reputation, costs and other relative merits between the programs. The focus of the securities lending program should be to keep risks low, with the preservation of capital taking precedence over income maximization.

Investment Guidelines All security loans shall be secured by cash or non-cash collateral equal to 102% or more of the value of

the securities loaned in the case of domestic securities, and 105% or more in the case of international securities.

All security loans shall be marked to market on a daily basis. The collateral received against security loans shall be well diversified, maintain adequate liquidity, and

focus on principal preservation. All securities purchased for the collateral reinvestment portfolio shall have an investment grade rating

by at least one NRSRO; or, in the case of securities that have a remaining maturity of 13 months or less, a top-tier rating by a NRSRO, or, if unrated, be of comparable quality.

The dollar-weighted average maturity to reset shall not exceed 90 days. No instrument will have a maturity or weighted average life in excess of 18 months, with the exception

of floating rate securities, which may have a five-year maturity or weighted average life.

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MONITORING AND REPORTINGThe Board relies on Staff and the Investment Consultant to continuously monitor the investment program and to report to the Board as outlined below.

Staff and Investment Consultant provide comprehensive periodic reports on the entire investment program, including asset allocation, performance, attribution analysis, and risk analysis.

Staff and Investment Consultant monitor changes and developments at investment managers and at custodian(s), compliance with guidelines, etc. on an ongoing basis, and report significant changes or events with recommended actions as needed.

The specific reports that the Board should receive with respect to the investment program, the scope of reporting, and the frequency of such reporting is specified in the Monitoring and Reporting Policy, which forms part of SDCERA’s Governance Policies.

PROXY VOTINGSDCERA recognizes that the ownership of equities entitles proxies to be voted. Each external manager retained by SDCERA shall be responsible to vote proxies relating to the portfolios that they manage on behalf of SDCERA. The managers will vote proxies with the same care, skill, diligence and prudence as is exercised in managing its other assets. On an annual basis, the manager will provide Staff and / or Consultant a summary of proxies and how they voted on them.

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ASSET CLASS GUIDELINESThe following section represents the broad investment guidelines that are expected to be in place for each of the asset classes within the investment program. It is expected that the individual managers used within each asset class will comply with these guidelines. The Board may, at its discretion, approve manager guidelines for individual managers that differ from the asset class guidelines depending on the manager’s investment strategy and the role that the strategy is expected to play within the broader investment program.

U.S. EquityPurpose: The purpose of the U.S. equity allocation is to provide for capital appreciation over the long-term.

Benchmark: The performance of the U.S. equity component shall be measured against the Russell 3000 Index.

Performance Objectives: Performance of the U.S. equity component should exceed the returns of the Russell 3000 Index by 100 basis points over the long-term, encompassing a full market cycle, on a net-of-fee basis, and at a comparable level of risk as that of the Index.

Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie within 300 basis points of the return of the Russell 3000 Index.

Investment Guidelines: The U.S. equity allocation shall be readily marketable and well diversified across securities, industries,

sectors, capitalization and styles. No more than 10% of the portfolio may be invested in American Depository Receipts (ADRs) and

foreign securities. 95% of the assets will be invested in equity securities, or securities convertible to equities, or

instruments capturing the returns on equities, at all times. There shall be no short-selling. The fully diluted equity holding in any one company should not exceed 8% of the market value of the

manager’s portfolio or the weight of the company in the benchmark index, whichever is higher.

Non-U.S. EquityPurpose: The purpose of the non-U.S. equity allocation is to provide for capital appreciation over the long-term.

Benchmark: The performance of the non-U.S. equity component shall be measured against the MSCI All-Country World ex-U.S. Investable Market Index.

Performance Objectives: Performance of the non-U.S. equity component should exceed the returns of the MSCI All Country World ex-U.S. Investable Market Index by 100 basis points over the long-term, encompassing a full market cycle, net-of-fees, and at a comparable level of risk as that of the Index.

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Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie within 300 basis points of the return of the MSCI All Country World ex-U.S. Investable Market Index.

Investment Guidelines: The non-U.S. equity allocation shall be readily marketable and well diversified among developed and

emerging market countries, geographic regions, sectors, industries, and currencies. The non-U.S. equity portfolio’s exposure to emerging markets shall be limited to two times the weight of

emerging markets in the benchmark index. No more than 20% of the portfolio’s non-U.S. equity exposure will be invested in securities that are not

included in the benchmark index. 95% of the assets will be invested in equity securities, or securities convertible to equities, or

instruments capturing the returns on equities, at all times. There shall be no short-selling. The fully diluted equity holding in any one company should not exceed 8% of the market value of the

manager’s portfolio or the weight of the company in the benchmark index, whichever is higher. The manager may purchase or sell currency on a spot basis to accommodate securities settlement. The manager may enter into foreign exchange contracts on currencies, provided that such contracts

have a maturity of one year or less and are used exclusively for hedging currency exposure.

Emerging Market DebtPurpose: The emerging market debt allocation is expected to provide stable current income, excess returns relative to Treasury issues, and diversification of equity risk.

Benchmark: The performance of the emerging market debt component shall be measured against the JP Morgan Global Emerging Market Bond Index.

Performance Objectives: Performance of the emerging market debt component should exceed the returns of the JP Morgan Global Emerging Market Bond Index by 100 basis points over the long-term, encompassing a full market cycle, net-of-fees, at a comparable level of risk as that of the Index.

Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie within 300 basis points of the return of the JP Morgan Global Emerging Market Bond Index.

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Investment Guidelines: The emerging market debt allocation shall be well diversified across issuers, issues, geographical

regions, and countries. No single sovereign issue or issuer should exceed the greater of 20% of the weight of the issue or

issuer in the portfolio or two times the weight of the issue or issuer in the benchmark index. Private placements (excluding securities that are available for resale under Rule 144a) are limited to

10% of the portfolio. No single corporate issue or issuer should exceed 5% of the portfolio. Up to 50% of the portfolio in non-dollar denominated / local currency debt. The manager may purchase or sell currency on a spot basis to accommodate securities settlement. The manager may enter into foreign exchange contracts on currencies, provided that such contracts

have a maturity of one year or less and are used exclusively for hedging currency exposure. There shall be no short-selling.

High Yield Fixed IncomePurpose: The purpose of the high yield fixed income allocation is to provide for capital appreciation over the long-term.

Benchmark: The performance of the high yield fixed income component shall be measured against the Citigroup High Yield Cash Pay Index.

Performance Objectives: Performance of the high yield fixed income component should exceed the returns of the Citigroup High Yield Cash Pay Index by 100 basis points over the long-term, encompassing a full market cycle, net-of-fees, and at a comparable level of risk as that of the benchmark index.

Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie within 300 basis points of the return of the Citigroup High Yield Cash Pay Index.

Investment Guidelines: The high yield fixed income allocation shall be well diversified across issuer, coupon, sector, maturity,

quality, and geography. The overall weighted average quality of the portfolio will be B/B+ or higher, based upon ratings

available from Moody’s, Standard and Poors, or Fitch. The portfolio’s allocations to issues rated CCC or lower shall be restricted to 1.5 times the weight of

CCC and lower rated issues in the benchmark index. No more than 5% of the portfolio shall be invested in securities of any single issuer, with the exception

of the US Treasury and government agencies. Non-rated issues shall not exceed 15% of the portfolio. No more than 10% of the portfolio shall be invested in non-dollar denominated issues and issuers. Holdings of common stock are limited to 10%.

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Real EstatePurpose: The purpose of the real estate allocation is to provide for a combination of stable current income, inflation protection, and capital appreciation.

Benchmark: The real estate component is measured against a custom benchmark that comprises the NCREIF Property Index (private RE) and the NAREIT Equity Index (REITs). The allocation between the two indices is adjusted quarterly to reflect the actual weightings between SDCERA’s Private Real estate and REIT allocations. Information for the NCREIF Property Index is lagged one quarter.

Additional guidelines relating to the real estate portfolio can be found under separate cover / appendix.

CommoditiesPurpose: The purpose of the commodities allocation is to diversify equity and bond risk and to provide a hedge against inflation.

Benchmark: The performance of the commodities component shall be measured against the S&P GSCI Index.

Performance Objectives: Performance of the commodities component should exceed the returns of the S&P GSCI Index by 200 basis points over the long-term, encompassing a full market cycle, net-of-fees, and at a comparable level of risk as that of the benchmark index. Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie within 500 basis points of the return of the S&P GSCI Index.

Investment Guidelines: A maximum of 15% of the portfolio can be invested in commodity-related equity securities. A maximum of 15% of the portfolio can be allocated to physical commodities. Short positions may be permitted; however, the portfolio should be at least 75% net long. Managers may invest in derivative positions such as swaps and futures. In the case of swaps, no more

than 30% of the portfolio’s exposure should be held with any single swap counterparty

InfrastructurePurpose: The purpose of the infrastructure allocation is to provide for a steady income stream, a cushion against equity and bond risk, and a hedge against inflation.

Benchmark: Performance of the infrastructure allocation shall be measured against the return of the Consumer Price Index (CPI) + 5 percentage points on an annualized basis, net-of-fees.

Performance Objectives: Performance of the infrastructure allocation should exceed the return of the Consumer Price Index (CPI) + 5 percentage points on an annualized basis, net-of-fees.

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Tracking Error Expectations: Given the illiquid nature of and lack of market-based pricing sources for infrastructure investments, we do not believe a tracking error computation provides for meaningful analysis of risk or performance.

Investment Guidelines: The infrastructure allocation shall be well diversified across geographies, as described below:

– North America – between 40% and 70%– OECD regions ex-North America – between 20% and 40%– Non-OECD regions – between 10% and 30%

Between 80% and 100% of the allocation will be made to Brownfield assets. Upto 20% of the allocation can be made to Greenfield assets.

The assets shall be diversified across different asset types (airports, roads, etc.) and by market size (large to mega deals, small to medium deals, etc.)

No more than 30% of the allocation shall be made to any single investment manager The allocation will be comprised of direct investments, primary partnership investments, co-

investments, secondary funds, and fund-of-funds.

Private EquityPurpose: The purpose of the private equity allocation is to provide for capital appreciation over the long-term.

Benchmark: Performance of the private equity allocation should be measured against a pool of private equity funds closed in the same vintage year as that of SDCERA’s investments drawn from the Venture Economics Database.

Additional guidelines relating to the private equity portfolio can be found under separate cover / appendix.

U.S. BondsPurpose: The purpose of the U.S. bond allocation is to provide for a cushion against equity and equity-like risk in the investment program.

Benchmark: The performance of the U.S. Bond component shall be measured against the Lehman Brothers Aggregate Bond Index.

Performance Objectives: Performance of the U.S. Bond component should exceed the returns of the Lehman Brothers Aggregate Bond Index by 50 basis points over the long-term encompassing a full market cycle on a net-of-fee basis, at a comparable level of risk as that of the Index.

Tracking Error Expectations The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term (3-5 years), the tracking error of the portfolio will lie 150 basis points of the return of the Lehman Brothers Aggregate Bond Index.

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Investment Guidelines: The portfolio shall be diversified across sectors, issuers, issues, coupon, quality, maturity, and

countries. The portfolio shall comprise of core, investment grade fixed income securities. Securities that are

downgraded below investment grade need not be sold immediately. Investment managers are required to provide to Staff their investment thesis on downgraded securities that they continue to hold in their portfolios.

No single issue or issuer should constitute more than 10% of the portfolio’s assets. No more than 35% of the portfolio will be invested in global bonds. The portfolio’s duration should range within 25% of that of the benchmark index. The manager may purchase or sell currency on a spot basis to accommodate securities settlement. The manager may enter into foreign exchange contracts on currencies, provided that such contracts

have a maturity of one year or less and are used exclusively for hedging currency exposure.

TIPSPurpose: The purpose of the TIPS allocation is to provide for a hedge against inflation.

Benchmark: The performance of the TIPS component shall be measured against the Barclays U.S. Inflation-Linked Index.

Performance Objectives: Performance of the TIPS component should exceed the returns of the Barclays U.S. Inflation-Linked Index by 50 basis points over the long-term, encompassing a full market cycle, net-of-fees, and at a comparable level of risk as that of the Index.

Tracking Error Expectations: The pursuit of the performance objective will entail tracking error risk relative to that of the benchmark. It is expected that over the short-term, the tracking error of the portfolio will lie within 75 basis points of the return of the Barclays U.S. Inflation-Linked Index.

Investment Guidelines: The portfolio shall be well diversified across issues, issuers, coupon, maturity, and geography. At least 80% of the portfolio’s assets must be invested in inflation-indexed bonds at all times. No single issue or issuer should constitute more than 10% of the portfolio’s assets. The overall weighted average credit quality of the portfolio shall be A-/A3. Securities rated below BBB

should be limited to 15% of the total portfolio. Non-U.S. dollar denominated investments should be limited to 20% of the portfolio’s assets. At least

75% of the non-U.S. dollar currency exposure should be hedged at all times. The manager may purchase or sell currency on a spot basis to accommodate securities settlement. The manager may enter into foreign exchange contracts on currencies, provided that such contracts

have a maturity of one year or less and are used exclusively for hedging currency exposure.

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AppendicesSDCERA uses certain programs that further the long term strategic asset allocation plan. These programs are all vetted and approved by the Board. The following is a list of existing programs used in implementing the Strategic Asset Allocation and a reference to the specific Board-approved policy that governs the program.

Private Equity

Real Estate

Alpha Engine

Managed Futures

Currency

Beta Engine

Strategic Policy Overlay Program

…