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i Yard by Yard Perspective, Perseverance, Time and Common Sense The 2018 Investment Review The Board of Pensions Balanced Investment Portfolio returned (3.9%) Inch by inch, life’s a cinch. Yard by yard it’s mighty hard! When we view everything in an 8 or 24 hour block of time and never think about the next year or ten, life can seem easier that it really is. Investments can be the same. We can approach global markets inch by inch as day traders or we can be yard by yard investors taking a long- term perspective. For the last 30 years, the Board of Pensions Balanced Investment Portfolio has been invested yard by yard. It has been mighty hard. While we are disappointed with 2018 performance, we believe the portfolio is well positioned for long-term success. Chinese style bowl on stand by Sarah Freyer. Bowl inscription based on Disney “Richest Cat in the World”, 1986 What do we mean by Yard by Yard? How long is long-term? Long-term, adj. On Wall Street, a phrase used to describe a period that begins approximately 30 seconds from now and ends, at most, a few weeks from now. Example: “Google was a long-term holding for us,” said Hugo Bailyn, a portfolio manager at Grimm, Rieper, Knight and Harkness, an investment manager in Opa-Locka, Florida, in an interview on June 13. “We bought it in May.” The Devil’s Financial Dictionary, Written by Jason Zweig, 2015 Yard by yard is long-term investing. Wall Street does not encourage long-term investing. Turning over stocks, currencies, bonds and investment managers makes money for those providers and servicers who live inch by inch. Before we review 2018 and what was “Yard by Yard” and what was “Inch by Inch” in global economies, markets and investment performance, we highlight four key characteristics shared by Yard by Yard long-term investors: Perspective, Perseverance, Time and Common Sense.

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Yard by Yard

Perspective, Perseverance, Time and Common Sense

The 2018 Investment Review The Board of Pensions Balanced Investment Portfolio returned (3.9%)

Inch by inch, life’s a cinch. Yard by yard it’s mighty hard! When we view everything in an 8 or 24 hour block of time and never think about the next year or ten, life can seem easier that it really is. Investments can be the same. We can approach global markets inch by inch as day traders or we can be yard by yard investors taking a long-term perspective.

For the last 30 years, the Board of Pensions Balanced Investment Portfolio has been invested yard by yard. It has been mighty hard. While we are disappointed with 2018 performance, we believe the portfolio is well positioned for long-term success.

Chinese style bowl on stand by Sarah Freyer. Bowl inscription based on Disney “Richest Cat in the World”, 1986

What do we mean by Yard by Yard? How long is long-term? Long-term, adj. On Wall Street, a phrase used to describe a period that begins approximately 30 seconds from now and ends, at most, a few weeks from now. Example: “Google was a long-term holding for us,” said Hugo Bailyn, a portfolio manager at Grimm, Rieper, Knight and Harkness, an investment manager in Opa-Locka, Florida, in an interview on June 13. “We bought it in May.” The Devil’s Financial Dictionary, Written by Jason Zweig, 2015 Yard by yard is long-term investing. Wall Street does not encourage long-term investing. Turning over stocks, currencies, bonds and investment managers makes money for those providers and servicers who live inch by inch. Before we review 2018 and what was “Yard by Yard” and what was “Inch by Inch” in global economies, markets and investment performance, we highlight four key characteristics shared by Yard by Yard long-term investors: Perspective, Perseverance, Time and Common Sense.

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Perspective To have a long-term perspective, investors need to understand the challenge. Can we complete the journey? Do we have the stamina to be long-term investors? The upside hill for investment excellence is challenging. Can we meet the challenge? Will we be left at the bottom of the hill due to lack of foresight and resources or climb to the top with the ability to think long-term?

Left-The bottom huge dune and tiny tree Middle-The unattainable summit Right-Success at the summit

Perseverance A good long-term investor has extreme perseverance as well as the hide of a rhino. This rhino took 40 minutes to approach the road before crossing very, very slowly.

The Tortoise and the Hare. Aesop’s Fables A hare was making fun of the tortoise one day for being so slow. The tortoise challenged the hare to a race. The hare was soon out front and took a nap. The tortoise kept going slowly and after a time, passed where the hare was sleeping. When the hare woke up, the tortoise was near the goal. He ran his swiftest but could not overtake the tortoise.

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Aesop reminds us that as investors, the long-term race does not always go the swift but rather to those who persevere. Time As investors, time is our long-term friend and short-term enemy. Time in a Bottle. Written by Jim Croce

If I could save time in a bottle The first thing that I’d like to do Is to save every day “Til eternity passes away Just to spend time with you

We all know we cannot put time in a bottle, but we don’t always act that way. This is a reminder that as investors we need to live every day making long-term decisions since we cannot put time in a bottle to use when we need it. Common Sense Use common sense. Know the investment game and how it is played. Know when you have the deck stacked against you. Don’t try to be too clever, too smart or too trusting. Long-term investors need to be hard headed. Hard Headed Woman. Written by Cat Stevens

…I know a lot of fancy dancers People who can glide you on the floor They move so smooth but have no answers When you ask them –What you come here for? I don’t know – Why? I know many fine feathered friends But their friendliness depends on how you do They know! Many sure fired ways To find out the one who pays And how you do I’m looking for a hard headed woman

You Don’t Mess Around With Jim. Written by Jim Croce

You don’t tug on superman’s cape You don’t spit in the wind You don’t pull the mask off that old lone ranger And you don’t mess around with Jim.

The world of investments has too many “Jims” you don’t mess around with.

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2018 Investment Outlook versus 2018 Actual Results Good investment performance is as simple as getting more things right than wrong in asset allocation and manager selection. 2018 was a year when we were right, partly right and wrong in our major asset allocation decisions. While some managers outperformed in major asset classes, we were wrong in our asset allocation decisions that increased international equity and bonds and reduced investments in the U.S. We were correct in our decision in August 2018 to reduce U.S. and international equity exposure and increase the allocation to cash and short duration fixed income. We will compare our January 2018 outlook with actual results. Our 2018 Outlook comments are from the 2017 Investment Review. Our 2018 Outlook: Despite overall valuations that are a bit pricey, stocks remain the asset class for 2018. Growth in the U.S., Europe and Japan has been stronger than expected, with consumer confidence rebounding from historic lows. The U.S. stock market should benefit from reduced corporate taxes and repatriation of cash held offshore. The impact of repatriation should be on large capitalization companies, while small companies will benefit from reduced corporate tax rates. Once again it should be a year for managers gifted in security selection. We believe we have retained those managers as we have noted in our list of partnerships we can be proud of.

2018 Actual: Wrong. Increasing the allocation to international equity was not warranted in 2018. U.S. stocks significantly outperformed international in 2018. The U.S. equity component lagged the passive benchmark due to poor stock selection by some of our active managers. Despite strong stock selection by some active developed market managers, the international equity component lagged the benchmark due to disappointing performance from emerging market equity managers. Our 2018 Outlook: We believe stocks are likely to outperform bonds in 2018, yet it is unclear which regions are most likely to outperform. Emerging market stocks provided outstanding performance in 2017, yet valuations are still attractive.

2018 Actual: Wrong. Bonds outperformed stocks in 2018. Our 2018 Outlook: After a strong 2017, active international developed market managers will have the opportunity to reposition portfolios to recognize outsized gains in technology stocks in 2018. The potentially negative impact of new regulations on European banks has again been deferred, but there will be increased regulatory and market issues in the telecommunications and technology sectors and many governments will continue to grapple with large debt levels. The U.K. will wrestle with the impact of BREXIT, the decision to leave the EU. We believe our managers will select the best companies, but at this time do not plan to increase the allocation to international developed markets.

2018 Actual: Wrong. An increase in emerging markets was not warranted in early 2018. Our 2018 Outlook: We continue to expect (since 2014) that long duration fixed income assets will be less attractive in 2018 as the Federal Reserve continues to increase rates. Spreads on high yield and investment grade corporate bonds are less attractive than they were in 2016. However, we still see opportunities in global high yield in 2018.

2018 Actual: Partly Right. Our core managers added value over a passive bond index fund. High yield, international and emerging market bonds all underperformed core. Short duration and cash were safe havens.

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Our 2018 Outlook: We do not expect inflation will be a problem in 2018. We will update our 2014 Inflation Study and evaluate inflation protection strategies that could benefit the Balanced Investment Portfolio in periods of inflation.

2018 Actual: Right. Inflation remained at a low level in 2018 due to a decline in oil prices. The Inflation Study was updated in 2018. No additional inflation protection strategies were added in 2018 and existing strategies were not increased. In 2018, with no increase in inflation, these strategies were a drag on total performance.

Introduction The Board of Pensions Balanced Investment Portfolio returns net of fees and the asset allocation on December 31, 2018 were as follows:

2018 Asset Allocation Long-Term Strategic

Asset Return

$ Millions

Percent

Allocation Ranges

U.S. Equity (5.7)% $2,913 32.4% 30-50%

International Equity (13.6) 1,812 20.2 10-25

Fixed Income (0.8) 2,824 31.4 25-45

Private Partnerships 12.4 927 10.3 1-20

Marketable Diversifying

Strategies (2.2) 516 5.7

Total (3.9)% $8,992 100.0%

To maintain the asset allocation ranges approved by the Board of Directors, in the asset allocation table shown above, the 1.1% allocation to Global Equity is included in U.S. and International Equity. The 1.3% allocation to Real Estate is in Private Partnerships and Market Diversifying Strategies. The investment performance for Global Equity and Real Estate are reported as separate line items in the 2018 Investment Review. The return for Global Equity was (13.1%) in 2018. The return for Real Estate, including real estate in private partnerships and public market securities was 6.5% in 2018. The Board of Pensions Balanced Investment Portfolio began 2018 with total assets of $9.616 billion. With an investment return of (3.9%) in 2018, the market value of the Portfolio decreased to $8.992 billion by December 31, 2018, after paying out $360 million in net benefits payments to Plan members and their surviving spouses. Performance of the Board of Pensions Balanced Investment Portfolio is compared to the absolute return benchmark of the 6.0% long-term investment return assumption for the Pension Plan. Performance is also compared to a relative Asset Mix Policy Benchmark, the return the portfolio could achieve using passively managed index funds and no asset allocation decisions. The return of each component of the Balanced Investment Portfolio is compared to the relevant asset class benchmark.

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The Absolute Return Benchmark: The Long-Term Investment Return Assumption In October 2016, a comprehensive review of future long-term capital market assumptions and their impact on the Balanced Investment Portfolio was presented in a joint meeting of the Investment and Pension Committees. As global economic and market conditions and historically low global interest rates have dampened expectations for long-term investment returns for almost all asset classes, the Investment Committee recommended, and the Board of Directors approved, a reduction in the expected long-term investment return assumption for the portfolio, from 7 percent to 6 percent.

By moving to a more conservative assumption for financial planning, the Board took a step to ensure the long-term solvency of the Pension Plan, whose assets make up 89 percent of the portfolio. The Board believed that it would not be acting in the best interest of Plan members if it continued to rely on a long-term investment assumption of 7 percent when market expectations indicated that the Balanced Investment Portfolio could not achieve that return without restructuring the portfolio into asset classes that have higher risk and less liquidity than the current long-term asset allocation. The Relative Benchmark: The Asset Mix Policy Benchmark of Investable Market Indices The relative benchmark, or asset mix policy benchmark, is used to compare the performance of the Board of Pensions Balanced Investment Portfolio to that of investable market indices. The asset mix policy benchmark is the return the Portfolio would have achieved by investing in each asset class using a passively managed index fund at the midpoint of the long-term strategic allocation range for each asset class. Alternatives are not included in the benchmark since there are no investable market indices for alternative investments. The Value of Long-Term Outperformance: The Board of Pensions Balanced Investment Portfolio Performance versus Asset Mix Policy Benchmark Performance As seen on the graph that follows, the actual investment performance of the Balanced Investment Portfolio compared to that of the asset mix policy benchmark through December 31, 2018 provided an additional $1.2 billion in portfolio value since December 1990. The green line is the return of the Balanced Investment Portfolio. The red line is the return of the passive asset mix policy benchmark. The graph shows the sharp recovery in portfolio value from the cumulative market decline of 2000-2002 and the depths of the financial crisis of 2008. Balanced Investment Portfolio outperformance has come from strong long-term performance from active investment managers and asset allocation decisions by the Investment Team and the Investment Committee.

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Balanced Investment Portfolio Market Value and Cash Payments: 1988-2018 The Balanced Investment Portfolio had $2.1 billion in assets in 1988, paid out $6.0 billion in benefits to Plan members and surviving spouses from 1988 through 2018, and closed the year with assets of $9.0 billion on December 31, 2018.

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Benefits paid have exceeded dues received since 1988. This is not a problem and is part of the plan design. In 1988, when the Balanced Investment Portfolio was valued at $2.1 billion, the one year cash payment from the portfolio, in addition to 1988 dues received, was $15 million. Cash from the Balanced Investment Portfolio for benefits payments totaled $132 million for the five years from 1988 to 1992. The $132 million cash in addition to dues for the five years ended December 31, 1992, is significantly less than the payments for the most recent five years. For the five years ended December 31, 2018, cash from the Balanced Investment Portfolio for benefits payments totaled $$1.8 billion. In 2018 cash for benefits payments totaled $404 million. The Pension account at Wells Fargo was reduced in late 2017 and cash was transferred to the Pension Plan account at BNY Mellon. The Investment Team anticipated market volatility in 2018. The cash was invested in the short term money market portfolio and not the Balanced Investment Portfolio. In addition to benefits paid from the Balanced Investment Portfolio, cash invested at the Pension Plan level was used throughout 2018 to total $404 million. An Overview of Economic and Market Events That Impacted 2018 Investment Performance: Yard by Yard or Inch by Inch, Long-Term or Short-Term?

The Global Economy

The Decline of Central Bank Intervention: Positive Long-Term Impact Central Banks in both developed and emerging markets began monetary intervention during the emerging market crises in 1998. The policies continued but peaked after the Global Financial Crisis in 2008, when central bank net purchases of financial assets represented more than 5% of world Gross Domestic Product (GDP). As central banks wind down their balance sheets, economies will increasingly rely on fiscal rather than monetary stimulus.

Source: J.P. Morgan Asset Management

Global Central Bank Balance Sheets: Positive Long-Term Impact The graph that follows affirms the decline in central bank intervention shown on the prior graph. Balance sheet expansion of the U.S. Federal Reserve, Bank of Japan (BoJ),

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European Central Bank (ECB) and Bank of England (BOE) peaked in 2017. As the direction of central bank monetary policy shifted to reduction of balance sheets, the U.S. Fed (bottom gray bars) moved more aggressively in 2016 first to stop purchasing securities and then to sell them back to the open market. Timing in Europe and Japan has been about two years behind the Fed. As the graph shows, it is estimated that the central banks of the BoJ and ECB will both retain securities on their balance sheets throughout 2019.

Source: KKR

Developed Wage Growth US vs. Eurozone: Wage Pressure and Inflation: Long-Term Negative Impact

The graph below shows the decline in wage growth in the U.S. and Eurozone following the Global Financial Crisis in 2008. The U.S. wage growth in late 2012 declined to 1.5% over year in late 2012 and has seen steady growth to the current 3.0%. The Eurozone was slower to recover. Wage growth fell to 1.0% growth in 2016 and is currently above 2.0%. Increase wage pressures both in the U.S. and Eurozone could impact inflation and create sentiment for populist recognition of lagging growth in wages.

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Source: J.P. Morgan Asset Management

Global Services and Manufacturing Surveys: Short-Term Negative Impact

In the graph that follows, global services and manufacturing surveys neared a recent low of 50% in 2016. The 50% is the dividing line, with 50+% indicative of an expansion. Services peaked at 55% in 2017 and after volatility in 2018, is currently at 54% and trending higher. The direction of surveys for manufacturing are less favorable. Manufacturing also peaked in 2018. It has continued to trend lower, a sign of potentially weaker global growth in 2019.

Source: J.P. Morgan Asset Management

Global Earnings Revisions: Short-Term Negative Impact

Global analyst earnings revisions in 2018 changed from net positive upward earnings revisions to more net negative company earnings revisions. This is directionally the same for companies in developed markets, the blue line, as well as global companies in both developed and emerging markets. While analyst earnings estimates and revisions may or may not prove to be accurate, downward revisions can lead to increased portfolio turnover and market volatility as portfolio managers reposition out of potentially poor performing companies.

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Source: J.P. Morgan Asset Management

China Tariffs: Short-Term Negative Impact

While U.S. and China discussions on tariffs impacted certain industries in 2018, it is too early to determine the long-term impact on investment perform. As shown on the graph below, the impact of China’s tariffs are expected to be minimal for U.S. GDP and consumer spending at about 2% as a share of S&P 500 earnings. The more significant impact will be on earnings of companies in industrial capital goods with tariffs comprising almost 12% of company earnings, as well as on technology hardware, where tariffs could represent about 13% of the company earnings.

Source: J.P. Morgan Asset Management

The U.S. Dollar: Long-Term Strength of the Dollar Negative Impact

The graph below shows a monthly weighted average of major currencies against the U.S. dollar. A strong dollar can reduce the competitiveness of U.S. exports and reduce the investment return of international investments to U.S. dollar based investors.

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Source: J.P. Morgan Asset Management

Growth of Middle Class in Emerging Markets: Long-Term Positive Impact

As shown on the graph below, in 1995 India and China had virtually no middle class compared to Brazil, Mexico and Korea, with the middle class 92% of the Korean economy. The estimate for 2018 reflects dramatic changes in India and China, with the Indian middle class now 14% of the population and China making a great leap to 34% of the population. During the same time period, Brazil and Mexico made even more significant increases in their middle class populations. It is expected that by 2030, the middle class percent of the population in India and China will exceed that of Brazil as a percent of the population and be in line with the middle class distribution in Mexico and Korea. Middle class people buy more goods and services than lower income people. The growth of the middle class is important in virtually all economic sectors, to include autos, consumer goods, technology, travel and health care.

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Source: J.P. Morgan Asset Management

U.S. Economy

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

The graph that follows provides data on the duration of U.S. economic expansions since 1900. The median economic expansion is 37 months. The shortest expansion was 10 months from March 1919 to January 1920. In more recent economic history, the expansion from July 1980 to July 1981 was 12 months. The longest economic expansion in more than a century was 120 months from March 1991 to March 2001, when the growth stock and tech bubble burst. The current expansion began in June 2009, and at 114 months as of December 31, 2018, is the second longest running expansion. While long in the tooth and close to the record of 120 months, most economists do not expect a recession until 2020.

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Source: KKR Global Institute

Changes in Ownership of U.S. Treasury Securities: Long-Term Positive Impact

The graph below shows the ownership of U.S Treasury securites in 2014 and in the second quarter of 2018. It was less than a decade ago that investors worried Japan and China held a significant portion of U.S. Treasury securities. This led to concerns that foreign central banks and sovereign wealth funds could move government bond markets as they increased or decreased asset holdings. If we compare the ownership of U.S. Treasury securities in 2016 and 2018, the changes in allocation are all in the right direction. The U.S. Federal Reserve sold Treasury holdings to restore its balance sheet to pre-2009 asset levels. Foreign central banks also reduced their holdings of U.S. Treasury securities, mostly due to a deceleration of the growth rate of the Chinese economy and decline in the surplus to be invested. The third positive is an increase in Treasury holdings by U.S. savers. All three trends are long-term positive.

Source: KKR Global Institute

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U.S. Wages: Short-Term Negative Impact/Long-Term Positive Impact

The graph that follows is similar in direction as the graph on page 9 for the global economy. The upward trend since 2010 for U.S. wage growth is positive for workers but could result in wage pressure and populist programs. The current level of unemployment in the U.S. is creating opportunities for often marginalized workers, including handicapped and those with prison records. Employers are also experiencing more hard to fill positions and increased employee turnover.

Source: J.P. Morgan Asset Management

Construction Jobs: Long-Term Positive Impact for Employment in the U.S. Construction Trades; Long-Term Negative Impact for Infrastructure Projects

Openings in U.S. construction jobs peaked with nearly 4.0% of construction jobs open in 2001. By 2009, open construction jobs were down to 0.5%. While volatile, currently about 4.2% of construction jobs are open; there are more projects underway in the U.S. than there are skilled workers to fill them. This is very good for construction workers but negative for infrastructure projects to replace aging tunnels, bridges and roads.

Source: J.P. Morgan Asset Management

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U.S. Company Buybacks: Long-Term Negative Impact

The fact that U.S. public companies in 2018 had the highest level of stock buybacks since 2013 may have been a result of newly approved U.S. corporate tax policies, repatriation of cash to the U.S, or lack of investment opportunities. Many investors believe cash should be used for dividends or acquisitions and not buying back stock. Stock buybacks in 2018 totaled over $900 billion, exceeding the 2015 buybacks of $650 billion, a 38% increase. This is not a positive long-term trend for corporate America in terms of innovative growth in new products and technologies.

Source: J.P. Morgan Asset Management

Reduction in U.S. Public Market Companies: Long-Term Negative Impact

The number of U.S. listed companies peaked in 1996 at about 8,000. In 2017, the most current available data, the number of public companies had declined by 46% to 4,336 companies. This reduces the universe of companies that can be owned by long-term investors. Investors in public market companies can file shareholder resolutions, meet with management, review publicly disclosed financial information and challenge the Board of Directors strategies. These are all reasons public corporations become private companies and reduce contact with investment analysts, regulatory bodies, and public market shareholders.

Source: J.P. Morgan Asset Management

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The Federal Budget: Long-Term Negative Impact. Wrong direction for Social Security and Health Care

Defense spending experienced a 67% decline since the 45% allocation of the Federal Budget in 1969 with commitments to the Vietnam War. The current 15% allocation to military includes the commitments to Afghanistan and Iraq military expenditures. Long–term investments in Medicare and Medicaid health care ranged from 5% in 1969 to 25% estimated for 2019, a 400% increase. The increase in Social Security from 15% in 1969 to 24% in the 2019 forecast is an increase of 60%. The increase in health care and social security programs reduces contributions to education, the arts and infrastructure upgrade projects.

Source: J.P. Morgan Asset Management, Congressional Budget Office

U.S. Markets

Growth versus Value Stocks: Long-Term Positive Impact. Value Outperforms Growth The graph below represents the significant valuation difference since 2000 between companies in the Russell 1000 Value Index and Russell 1000 Growth Index. Value (blue line) has underperformed Growth (gold line). Valuation differences are so extreme that a reversion to the mean is expected in the near term. For the ten years ended December 31, 2018, the Russell 1000 Growth Index returned 15.3% compared to the Russell 1000 Value Index return of 11.2%. While growth has outperformed value over ten years, value outperformed growth for the twenty years ended December 31, 2018. The Russell 1000 Value Index returned 6.2% compared to the 5.1% of the Russell 1000 Growth Index for the same period.

Source: KKR Global Institute

0%10%20%30%40%50%

Other Net interest Non-defensediscretionary

Defense Social Security Medicare &Medicaid

The Federal Budget: Yesterday & Tomorrow

1969 2019 forecast

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S&P 2019 Estimated Earnings Per Share (EPS) Compared to 2018 Estimates: Negative Short-Term Reduction in EPS Growth

The graphs that follow provide earnings per share estimates for the S&P 500 and sector components. The graph on the right was the 2018 estmated growth of 11.9%. In 2018, growth forecasts for financials at 24.6% and information technology at 25.6% were more robust than the 1.3% growth for the utility sector and contributed 50.2% of the estimated S&P 500 EPS growth. Investors were wary of the highly concentrated sources of growth in the S&P 500 for 2018 that relied primarily on two sectors subject to regulation, tax legislation and merger and acquisition activity. The graph on the left shows the 2019 S&P 500 earnings growth estimate of 6.5%, a significant decrease compared to the 2018 estimate of 11.9%. While analysts still expect financials stocks to have earnings per share growth of 25.2% in 2019, information technology, a major sector, has been reduced from 25.6% earnings per share in the 2018 estimate to 9.0% in the 2019 estimate.

Source: KKR Global Institute Source: KKR Global Institute

S&P Operating Margins Relative to Long-Term History: Short-Term Negative Impact. Retreat for Several Key Sectors

In the following graph, the floating orange bars represent the maximum and minimum ranges over 25 years for operating margins of sectors. The black diamond shows the latest operating margin for the index or sector. The bar for the S&P 500 shows that operating margins are near the top of their 25-year range. Two sectors stand out. The latest operating margins for technology companies are above the 25-year range, while the operating margins for health care companies remain below the 25-year range. While this may not result in stronger performance in 2019 for health care companies and lower returns for technology companies, both sectors could be subject to increased merger and acquisition activity and regulatory risk that could impact margins in the future.

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Source: KKR Global Institute

China

The Contribution of China to World GDP: Long-Term Positive Impact

As shown on the graph that follows, the contribution of China to World GDP was 27% in 2010. This increased to 36% in 2016, but as domestic growth slowed, the contribution of China to World GDP declined to a still significant 32% in the estimate for 2019.

Source: KKR Global Institute

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Participation in the MSCI Emerging Markets Index: Long-Term Winners and Losers

In 1998, China (the red line) had barely any participation the MSCI EM Index. That rapidly began to change as China became one of the BRIC countries (Brazil, Russia, India and China) and index funds as well as active emerging market managers increased their allocations to China and China rapidly outpaced India’s weight in the MSCI EM Index. India has hovered around a 10% weight for twenty years while in the same time period, China went from virtually 0% to more than 30% in 2018.

If China was the index winner over the past two decades, companies in Latin America (the green line) were the losers, moving down from a 35% weight in 1998 to a 12.5% weight in 2018.

Source: J.P. Morgan Asset Management

China Reduces Impact of Exports: Long-Term Positive

The graph that follows reflects the declining importance of exports for growth of the Chinese economy. As China moves from exporting commodity goods made with low cost labor, unskilled workers and low value exports to products made with high quality goods and skilled labor, exports have declined as a percent of China’s GDP. Exports peaked at 36% of Chinese GDP in 2006. Following the Great Financial Crisis in 2008, as the need for Chinese goods experienced global reductions, exports declined to 17% of China’s GDP in 2018. This is a healthy long-term direction for China and provides export opportunities for India and South East Asian countries with significant populations of unemployed low wage laborers.

Source: J.P. Morgan Asset Management

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China Semiconductor Imports: Potential Long-Term Positive Impact for China

The graph that follows shows the export of chips and equipment to China of almost $9 billion. Developed market exporters, including Japan, U.S. and Singapore sell semiconductor equipment and chips primarily used in computers and phones. Less developed economies including South Korea and Taiwan are exporting semiconductor chips for computers and other electronic device applications. As noted above, China is reducing economic exposure to low cost commodity products like semiconductor chips to focus on value added, cutting edge technologies, to include artificial intelligence and robotics.

Source: J.P. Morgan Asset Management

China’s Current Account Balance: Long-Term Negative Impact

The graph that follows provides guidance on China’s current account balance over the last twenty years. Despite current account deficits in many emerging markets in 1998, China had more than a 4% surplus. That declined during a period of aggressive infrastructure construction but reached an 11% surplus in 2007. The Global Financial Crisis in 2008 impacted current account balances in virtually all developed and emerging markets. China maintained growth through bank loans as well as “shadow bank” lending provided by non-bank lenders for the construction of infrastructure and housing projects while the economy began to slow to 6-7% growth. In 2018 China experienced a current account deficit of 1%, the first time since a slight deficit in 2001. In order to maintain growth rates, the government funded huge infrastructure projects and new cities which may result in a further increase in current account deficits.

Source: J.P. Morgan Asset Management

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Oil Prices, Supplies and Consumption: Long-Term Positive Implications for U.S. as an Oil Power

Left Graph - Oil Prices: Long-Term Volatility Hampers Oil Exploration and Viability of Alternative Energy Projects Projecting the price of oil from one year to the next has never been for the faint-hearted. As shown on the graph on the left that follows, prices fell from $40 in September 1990 to $11 in November 1998, a 72% decline over eight years. Following a steady climb to $140 in June 2008, prices declined 70% in seven months to $42 in January of 2009, then increased by 150%, to $105 a barrel by June 2014. Just six months later, on December 31, 2014, the price was $53, a 50% decrease. In January 2016, oil closed at a price of $34 a barrel. Price volatility has made it challenging to project the economic viability of oil exploration and production projects as well as alternative energy, such as wind and solar projects. 2018 was again a year of volatility, with prices peaking at $70 at the start of the year but closing the year at $45, a 35% decline in price.

Source: J.P. Morgan Asset Management Source: J.P. Morgan Asset Management

Right Graph - The U.S. Leads the Way: Increased U.S. production and decreased demand has reduced U.S. historic dependency on OPEC

Oil production in millions of barrels a day has increased in each year since 2015, with U.S. production experiencing 29.5% growth since 2015. This is significantly higher than the global average of 5.0%, and OPEC production growth of (0.2%) over the same period. Consumption has also increased annually; however, the U.S. had a 6.6% growth in consumption since 2015, compared to 15.8% for China and 6.0% for the average global increase in consumption. U.S. Markets in 2018 – A Volatile Year More Surprises Than Expected in Interest Rates and the Stock Market

The annual overview of economic and market events that impacted investment performance usually concludes with a timeline to help us remember just how our U.S. stock and bond markets were impacted by domestic and international events. In 2018, the timeline is of use since investors were rattled by any negative news that might impact U.S. stock and bond markets. Markets reacted to Presidential tweets and the lack of action by

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the U.S. Congress on any issues of substance other than taxes; threats of nuclear war from North Korea; continuing investigation into Russian involvement in the 2016 U.S. Presidential election; worries over the economic impact of a shutdown of the government due to lack of agreement on immigration issues; and trade confrontation with China as well as our NAFTA neighbors. In the graph that follows, the green line (right axis) is the value of the Standard & Poor’s 500 Index. The red line (left axis) is the interest rate on a 10-year U.S. Treasury bond. The interest rate on a 10-year U.S. Treasury bond was 2.41% on December 31, 2017. It closed on December 31, 2018 at 2.68%, an increase of 27 basis points in a volatile year that saw 3.11% in the third quarter and 3.24% in the fourth quarter of 2018. The S&P 500 began the year at 2674 and closed the year at 2507, a decrease of 6.2% excluding dividend payments. The market peaked at 2931 in August and fell to 2351 in December, a decline of 19.8%, before it rebounded 6.6% to close at 2507.

Review of the Board of Pensions Balanced Investment Portfolio We begin the detailed review of the Board of Pensions Balanced Investment Portfolio with an overview of global markets in 2018 and a comparison of the 2018 Balanced Investment Portfolio return of (3.9%) to the returns available from public market indices. As shown on the graph that follows, the worst asset classes in 2018 were emerging markets (black line), commodities (purple line), and developed market international stocks (blue line), all providing a (14%) return for the year. U.S. stocks (red line) had a return of (4%). While not the investment approach used in the Balanced Investment Portfolio, the best strategy for those with nerves of steel in 2018 would have been to invest only in emerging markets stocks for the month of January, hold all cash from late January to March, invest in commodities until May, sell commodities and go back into cash until going back into commodities in July. Investing 100% in cash was the best strategy from September until the

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late December rebound of U.S. stocks and high yield bonds. Investors could have had less volatile returns from Treasury Bonds (green line) with a (2%) return and high yield bonds (brown line) with a (2%) return.

As shown on the graph that follows, in 2018 the U.S. dollar appreciated against the euro and the British pound. The increase in the value of the U.S. dollar reduced the investment return for dollar-based investors in euro countries and the United Kingdom. The decline of the U.S. dollar against the Japanese yen increased the return on Japanese stocks for dollar-based investors.

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As a diversified portfolio, the Board of Pensions Balanced Investment Portfolio return of (3.9%) is made up of the returns from multiple asset classes. The 2018 Investment Review will provide a detailed commentary, analysis and performance review of all components of the Balanced Investment Portfolio, to include U.S. equity, international equity, fixed income, private partnerships and marketable diversifying strategies. As shown on the graph that follows, it was a terrible year for virtually all asset classes. We could have improved our return by investing in more fixed income, primarily short duration and cash. We increased the fixed income allocation from 25.9% to 31.4% during the period beginning on July 31, 2018 through December 31, 2018.

-14.6

-13.8

-13.8

-11.0

-5.2

-3.9

-3.8

-2.3

-0.4

-0.1

-20 -15 -10 -5 0

MSCI EM

MSCI EAFE

MSCI ACWI ex US

Russell 2000

Russell 3000

BOARD OF PENSIONS

S&P US REIT

CG High Yield Cash Pay

Barclays Govt/Credit

JPM GBI EM Gl Diversified Unhedged

% Return

Returns of Market Indices and Board of Pensions Balanced Investment Portfolio

December 31, 2018

Sources: BNY Mellon, MSCI (net)

What is the Structure of the Board of Pensions Balanced Investment Portfolio? The Board of Pensions Balanced Investment Portfolio uses external investment management firms for the day-to-day investment of $9.0 billion in assets. The Portfolio is unitized on a monthly basis and is the investment portfolio for the Pension Plan as well as other plans and programs administered by the Board of Pensions. The U.S. equity component of the Portfolio has ten active investment managers and two index funds. The international equity component has eight active managers, including two managers focused solely on emerging markets, and two index funds. The global equity component has one active strategy, a manager dedicated to investing in global environmental markets. The fixed income component has ten active management strategies, including dedicated assignments to managers for high yield or below investment grade securities, global bonds, emerging markets debt and short duration securities. Private partnership investments include commitments to 74 limited partnerships investing in distressed debt, private equity, venture capital and real estate. Marketable diversifying strategies include absolute return, risk parity and inflation protection strategies. Portfolio diversification is a function of the long-term expected return for each asset class, but also must include risk assessments based on investment styles, liquidity and the potential firm risk for

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each investment manager retained by the Investment Committee. Commitments were approved to limited partnerships in U.S. private equity, international private equity, and real estate. Each year, separate account managers for the Balanced Investment Portfolio are provided lists of those companies on the current Prohibited Securities lists. The lists have historically included companies on the General Assembly Divestment List for involvement in military and tobacco. The military list includes those corporations that manufacture hand guns and assault weapons. In recent years, the General Assembly of the Presbyterian Church (U.S.A.) voted to add to the General Assembly Divestment List companies that operate for-profit prisons and three U.S. companies whose products and services were deemed to detract from the peace process in Israel and Palestine. The Investment Committee annually approves the General Assembly Divestment List and incorporates it as the Board of Pensions Prohibited Securities List. The Board of Pensions policy does not require the sale of companies newly added to the lists. Instead, the policy prohibits the future purchase of the securities and enables managers to retain securities until managers sell them in accounts with the same investment objective and strategy.

BOARD OF PENSIONS BALANCED INVESTMENT PORTFOLIO DECEMBER 31, 2018 Annualized Rate of Return (%) 1 Year 2 Years 3 Years 5 Years 10 Years 15 Years 20 Years

BOP U.S. EQUITY (5.7) 7.8 9.3 8.0 13.9 8.4 7.3 Russell 3000 Index (5.2) 7.1 9.0 7.9 13.2 7.9 6.0

BOP INTERNATIONAL EQUITY (13.6) 4.7 5.1 1.8 7.5 6.1 6.0 MSCI All Country World Index ex US (gross) (13.8) 5.0 5.0 1.1 7.1 5.7 4.6

BOP GLOBAL EQUITY -13.1 -- -- -- -- -- --

MSCI All Country World Net Index -9.4 6.0 6.6 4.3 9.5 -- --

BOP FIXED INCOME (0.8) 2.1 3.6 2.5 5.6 4.5 5.0 Bloomberg Barclays Gov/Credit Index (0.4) 1.8 2.2 2.5 3.5 3.8 4.5

BOP PRIVATE PARTNERSHIPS 12.4 13.6 12.2 10.5 10.4 11.4 13.2

BOP MARKETABLE DIVERSIFYING STRATEGIES (2.2) 2.5 5.1 1.2 6.7 -- --

Consumer Price Index + 5% 6.7 6.8 6.8 6.3 6.5 6.9

BOP REAL ESTATE 6.5 8.0 6.5 10.9 12.0 -- --

Russell 3000 + 300 basis points -0.8 11.1 12.7 11.3 16.5 9.0

BOP BALANCED PORTFOLIO (3.9) 6.0 6.9 5.0 9.3 6.6 6.5

BOP RELATIVE BENCHMARK Asset Mix Policy Benchmark* (4.9) 5.0 6.1 5.0 8.9 6.4 5.6

LONG-TERM INVESTMENT RETURN

6.0 6.0 6.0 6.0 6.0 6.0 6.0

Notes: Returns are net of management fees. *Effective 1/1/2005, the Asset Mix Policy Benchmark is calculated using each asset class midpoint multiplied by its index.

The policy benchmark is: U.S. Equity = 47.5% * Russell 3000 Index International Equity = 17.5% * MSCI All Country World Index ex US (ACWI) Fixed Income = 35% * Bloomberg Barclays Capital Gov/Credit Bond Index

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Alternatives = 0

Review of the Board of Pensions Balanced Investment Portfolio Performance

Performance of the Board of Pensions Balanced Investment Portfolio is measured against both a relative benchmark and the 6.0% long-term investment return assumption for the Pension Plan. The Relative Benchmark: The Asset Mix Policy Benchmark of Investable Market Indices

The relative benchmark, or asset mix policy benchmark, is used to compare the performance of the Board of Pensions Balanced Investment Portfolio to that of investable market indices. The asset mix policy benchmark is the return the Portfolio would have achieved by investing in each asset class using a passively managed index fund at the midpoint of the long-term strategic allocation range for each asset class. Alternatives are not included in the benchmark since there are no investable passive market indices for private partnership investments. Years such as 2018 with above benchmark performance reflect the contribution, both positive and negative, of active investment management strategies and asset allocation decisions, including allocations to high yield bonds, emerging market stocks and bonds, distressed debt, private equity and other non-benchmark investments. The following graph for the Balanced Investment Portfolio shows returns compared to the asset mix policy benchmark. Columns above the line are those years when the difference between the actual return and the asset mix policy benchmark is positive. Columns below the line are years when the actual return was lower than the policy benchmark. The green bar for 2018 is the (3.9%) actual return less the (4.9%) asset mix policy benchmark return, or a positive relative return of 1.0%. While it is difficult to consistently add value over a passively managed index portfolio, the Balanced Investment Portfolio has been able to do so in 21 out of the last 32 years, or 65.6% of the time, as well as over the one, two, three, five, ten, fifteen and twenty year periods ended December 31, 2018.

Investment Performance vs. Asset Mix Policy BenchmarkActual Investment Performance net Asset Mix Policy Benchmark

-4-3-2-1012345

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

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2006

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2008

2009

2010

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2018

% R

etur

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Actual Inv Perf net Asset Mix Policy Benchmark 10 Year Trend

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The Long-Term Investment Return: The 6.0% Pension Plan Actuarial Assumption

In calculating the health and solvency of the pension plan, the actuary uses certain assumptions about plan demographics and financial metrics. These assumptions are reevaluated regularly to ensure that they are reasonable and current. One of the critical assumptions is the investment return of pension plan assets.

To measure the health of the pension plan, the actuary assumes that the return on the Balanced Investment Portfolio will, over the long-term, meet or exceed 6.0%. It is important to remember that this is a long-term goal and will not be met in every calendar year. For the long-term health and stability of the pension plan, it is imperative that the actual long term return on assets meet or exceed the plan investment return assumption.

The (3.9%) return in 2018 lagged the 6.0% long-term assumption. The Balanced Investment Portfolio returns exceeded the 6.0% assumption for the two, three, ten, fifteen and twenty years ended December 31, 2018. Performance Attribution

Performance attribution compares actual investment performance with Asset Mix Policy Benchmark performance. The Asset Mix Policy Benchmark does not include alternative investments since there are no investable market indices for alternative investments. The table that follows shows the average allocation in 2018 for each asset class compared to the allocation used in the Asset Mix Policy Benchmark.

2018 AVERAGE ASSET ALLOCATION vs. ASSET MIX POLICY BENCHMARK 2018 Actual

Average Asset Allocation

Asset Mix Policy Benchmark

Asset Allocation

Over/

Underweight U.S. Equity 34.0% 47.5% (13.5%) International Equity 21.7 17.5 +4.2 Fixed Income 29.4 35.0 (5.6) Private Partnerships 9.5 0.0 +9.5 Marketable Diversifying Strategies

5.4 0.0 +5.4

Total 100.0% 100.0%

2018 PERFORMANCE ATTRIBUTION

BOARD OF PENSIONS BALANCED INVESTMENT PORTFOLIO vs. ASSET MIX POLICY BENCHMARK

Asset Mix Policy Benchmark Return

(4.9%)

U.S. Equity (0.12) International Equity (0.49) Fixed Income (0.27) Private Partnerships +1.64 Marketable Diversifying Strategies +0.17 Net Impact on Portfolio Performance +0.96

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Board of Pensions Balanced Investment Portfolio Return

(3.9%)

The purpose of the Asset Mix Policy Benchmark is to evaluate the benefit of an actively managed portfolio with out of Benchmark strategies and asset allocations. If the long-term investment performance of the actively managed Board of Pensions Balanced Investment Portfolio does not exceed that of the passive, more conservative Asset Mix Policy Benchmark, an evaluation of the value of active strategies and asset allocations should be initiated.

When reviewing the performance of the Board of Pensions Balanced Investment Portfolio return of (3.9%) in 2018 compared to the (4.9%) return of the Asset Mix Policy Benchmark, asset allocation differences between the actual portfolio and the benchmark should be noted. The most significant difference is the asset mix policy benchmark does not contain an allocation to alternative investments, an average allocation of 14.9% in the actual portfolio.

The actual commitments to private partnerships and marketable diversifying strategies were made over the last twenty years by reducing the allocations to both U.S. equity and fixed income. The U.S. equity allocation in 2018 averaged 13.5% below the benchmark while the fixed income allocation averaged 5.6% below. Part of the long-term reduction in U.S. equity was reallocated to international equity. 2018 Performance Attribution: Contributors and Detractors Board of Pensions Balanced Investment Portfolio vs. Asset Mix Policy Benchmark

+1.64% Private Partnerships – Contributor The 12.4% return from illiquid partnerships improved the return of the Balanced Investment Portfolio compared to the (4.9%) return of the Asset Mix Policy Benchmark. An average asset allocation of 9.5% compared to the 0% allocation in the Asset Mix Policy Benchmark contributed to relative performance in 2018. +0.17% Marketable Diversifying Strategies - Contributor The (2.2%) return from the marketable diversifying strategies lagged the 6.7% return of the benchmark of the Consumer Price Index plus 5% annually, but the asset class outperformed the (4.9%) return of the Asset Mix Policy Benchmark. An average allocation of 5.4% compared to the 0% allocation in the Asset Mix Policy Benchmark contributed to comparative performance in 2018. (0.12%) U.S. Equity - Detractor The (5.7%) return of the U.S. equity component lagged the benchmark of the Russell 3000 Index primarily due to a slight overweight to value managers. The component return of (5.7)% was less than the (4.9%) return of the Asset Mix Policy Benchmark. The component average asset allocation of 34.0% was underweight the 47.5% allocation in the Asset Mix Policy Benchmark. While the underweight helped relative returns, the combination of individual manager returns detracted from overall component performance. (0.27%) Fixed Income - Detractor The fixed income component hurt performance due to weak returns by out of benchmark strategies such as high yield, non-U.S. bonds, and emerging market debt. With a return of

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(0.8%), the fixed income component outperformed the Asset Mix Policy Benchmark return of (4.9%). However, with an average allocation of 29.4%, the component was underweight the fixed income allocation of 35% in the Asset Mix Policy Benchmark. Despite strong relative performance, the under allocation detracted from overall performance in 2018. (0.49%) International Equity - Detractor With a return of (13.6%), the international equity component slightly outperformed the benchmark of the MSCI ACWI ex U.S. Index. However, the international equity component return of (13.6%) was lower than the (4.9%) return of the Asset Mix Policy Benchmark. The component average asset allocation of 21.7% was overweight the 17.5% allocation in the Asset Mix Policy Benchmark. Underperformance and an allocation above that of the Asset Mix Policy Benchmark detracted from overall performance in 2018.

Asset Allocation

The Balanced Investment Portfolio is invested for the long term. The disappointing 2018 performance was based on asset allocation decisions and manager selections made in the past 24 months or longer. In most years, the asset allocation is relatively static from one year to the next. Given global market volatility in 2018, more aggressive review and rebalancing was warranted. The Investment Team meets on a monthly basis to review global economic and market conditions and expectations, investment performance and upcoming capital commitments and cash flow requirements for benefits.

Asset allocation shifts between year-end 2017 and 2018 reflect market movement but also the rebalancing from asset classes and managers. Equity was decreased from 58.9% to 52.5% and fixed income, including cash, was increased from 27.4% to 31.4%. Raising cash in 2018 was important to preserve portfolio performance and have more than adequate cash for the payment of benefits and capital calls from private partnerships.

Approximately $600 million was raised during 2018 to provide benefits to plan members and implement active asset allocation decisions to increase or decrease asset classes based upon expectations for performance in the next 12-24 months.

COMPARATIVE ASSET ALLOCATION BOARD OF PENSIONS BALANCED INVESTMENT PORTFOLIO

December 31, 2018 December 31, 2017 $Millions Percent $Millions Percent Equity 4,726 52.5 5,663 58.9 U.S. Equity 2,913 32.4 3,429 35.7 International Equity 1,812 20.2 2,234 23.2

Fixed Income 2,824 31.4 2,634 27.4

Alternative Investments 1,443 16.0 1,319 13.7 Private Partnerships 927 10.3 816 8.5 Marketable Diversifying Strategies 516 5.1 503 5.2

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Total 8,992 100.0% 9,616 100.0%

U.S. Equity Component of the Balanced Investment Portfolio 32.4% of the Balanced Investment Portfolio on December 31, 2018

The U.S. equity component of the Board of Pensions Balanced Investment Portfolio had a return of (5.7%) in 2018, lagging the (5.2%) return of the benchmark Russell 3000 Index. The U.S. equity component exceeded the return of the Russell 3000 Index for the two, three, five, ten, fifteen and twenty years ended December 31, 2018.

The U.S. equity component at the close of 2018 had an allocation of 69% to managers investing in large company stocks, 21% to managers investing in the stocks of small and mid-sized companies and 10% to a manager who can invest in the stock of companies of any market capitalization.

Long-term outperformance is a function of retaining superior active investment managers. The U.S. equity component has two managers with tenure of less than three years. It has eight managers with an average relationship of 14 years, with a range of 8 years to 30 years. Regular reviews include performance evaluation as well as a review of investment strategy, portfolio composition, changes in assets under management, risk management and compliance, as well as firm staffing and succession management. The evaluation of investment performance is based upon data and statistics as well as the qualitative evaluation of people, processes and philosophy. The appropriate blend of science and art is required for long-term investment success.

The large capitalization component of the portfolio returned (3.4%), exceeding the (4.4%) return of the S&P 500. One of the core managers lagged the return of the benchmark S&P 500 Index. Both of the value managers exceeded the (8.3%) return of the Russell 1000 Value Index. Both of the growth stock managers had positive returns, one 5.3% and one 6.2%, exceeding the (1.5%) return of the benchmark Russell 1000 Growth Index.

The small and mid-capitalization component of the Portfolio returned (10.0%), lagging the (9.6%) return of the Dow Jones Completion Index. The active small capitalization growth manager returned (1.8%) compared to the (9.3%) return of the Russell 2000 Growth Index. The active small capitalization core manager returned (19.7%), lagging the (11.0%) return of the Russell 2000 Index.

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U.S. Equity Index ReturnsYear to Date December 31, 2018

-4.4

-1.5

-3.8

-12.9

-8.3

-9.3

-5.7

-5.2

-15 -10 -5 0 5

Russell 2000 Value

Russell 2000 Growth

Russell 1000 Value

Russell 3000

S&P 500

S&P US REIT

Russell 1000 Growth

% Return

* Preliminary June 30, 2008 dataSource: BNY Mellon

Board of Pensions U.S. Equity

U.S. Equity Market Historical Performance The Russell 3000 Index includes stocks of large and small companies and is a broader measure of the U.S. equity market than the S&P 500. However, the Russell 3000 originated in 1979, so it does not have the additional history that is valuable for long-term investment perspective. For purposes of the following graph, U.S. equity market returns are represented by the S&P 500 Index beginning in 1970 and the Russell 3000 Index from 1979. The Russell 3000 Index had a (5.2%) return in 2018. The (5.2%) return is below both the 13.2% average return of the last ten years, as reflected in the black 10-year trend line, and the long-term 49-year average return of 10.2% since 1970. The U.S. equity market had negative returns in ten out of those 49 years, five of the last 18 years, and two of the last ten years.

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U.S. Equity Returns in Historical PerspectiveJanuary 1, 1970 – December 31, 2018

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-20

-10

0

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1970 1976 1982 1988 1994 2000 2006 2012 2018

S&P 500/Russell 3000 Blended 10 Year Trend

37.132.3 32.1

36.8

-5.1-5.1-7.4

-26.5 -21.5

49-Year Average 10.2%

Includes reinvestment of dividends

13.2%

-37.3

28.3

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

21.1

-5.2

Market Capitalization and Style

Investors know that the size of the companies they invest in, or company market capitalization, can significantly impact portfolio success. Market capitalization, the price per share of the company stock, times the number of shares outstanding, varies as the share price of a company increases or decreases over time. As shown on the table below, large company stocks in the Russell 1000 Index returned 13.3% annually for the ten years ended December 31, 2018, exceeding the 12.0% return of small company stocks in the Russell 2000 Index for the same time period.

Investment styles also affect performance. Stocks in the Russell 1000 Growth Index returned 15.3% annually for the ten years ended December 31, 2018, exceeding the 11.2% return of the Russell 1000 Value Index. Small growth stocks also outperformed small value stocks over the ten year period. However, value outperformed growth for the long-term, as measured over the twenty years ended December 31, 2018. Large value had a 1.1% annual advantage over large growth. Small value had an even larger long term advantage over small growth, with an extra 2.1% annually credited to value investors.

LARGE/SMALL AND VALUE/GROWTH PERFORMANCE FOR PERIODS

ENDED DECEMBER 31, 2018

Short Term 1 Year

Medium Term 10 years

(annualized)

Long Term 20 years

(annualized) Russell 1000 (Large) -4.8% 13.3% 5.9% Russell 2000 (Small) -11.0 12.0 7.4 Russell 1000 Value -8.3 11.2 6.2 Russell 1000 Growth -1.5 15.3 5.1 Russell 2000 Value -12.9 10.4 8.2 Russell 2000 Growth -9.3 13.5 6.1

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Source: Dimensional Fund Advisors

As shown in the table that follows, getting both style and market capitalization right was important for investors in 2018. Growth exceeded value in large, mid and small capitalization companies. The stocks of large capitalization companies in the Russell 1000 Growth Index outperformed stocks in the Russell 1000 Value Index by 6.8%. Stocks in the Russell Midcap Growth Index exceeded the return of the Russell Midcap Value Index by 7.5%.

2018 U.S. STOCK MARKET PERFORMANCE BY MARKET CAPITALIZATION AND STYLE

Russell 3000 – Total Market -5.2% Russell 1000 Index (Large Capitalization) -4.8 Russell Mid Cap Index (Mid Capitalization) -9.1 6.2% advantage to large Russell 2000 Index (Small Capitalization) -11.0 Russell 1000 Growth Index -1.5 6.8% advantage to growth Russell 1000 Value Index -8.3 Russell Midcap Growth Index -4.8 7.5% advantage to growth Russell Midcap Value Index -12.3 Russell 2000 Growth Index -9.3 3.6% advantage to growth Russell 2000 Value Index -12.9 Source: Russell Investments

Sector Performance As noted above, the broad U.S. stock market, as represented by the Russell 3000 Index, had a return of (5.2%) in 2018. Only three sectors, health care, utilities and information technology had positive returns in 2018, and the information technology return was a barely positive 0.4%. Performance ranged from 5.3% for health care stocks to (19.9%) for stocks in the energy sector. In the graph that follow, energy, the worst sector in 2017, remained the worst sector in 2018. Of the top three sectors in 2017, technology and health care remained in the top three sectors in 2018.

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It is important to remember that sector weights are not constant and will vary over time, as shown in the graph that follows. There are three major sectors in the Russell 3000, the large capitalization passive index frequently used by investors to represent the U.S. stock market. Technology was 33.6% of the index when tech stocks were high fliers in the late 1990s. The weight of technology stocks as a sector was at a low of 12.2% after the collapse of the tech bubble. With a barely positive return for information technology stocks in 2018, the sector was 19.9% of the index at the close of 2018.

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The fate of technology stocks in 2018 was impacted by the decline in value of the five FAANG stocks. After several years of momentum growth and outsized returns to investors, the stocks of Facebook, Amazon, Apple, Netflix and Google experienced a decline in the valuation premium investors were willing to pay for their shares. From a premium of more than 3.4 times the price to earnings ratio of the S&P 500, FAANG stocks ended 2018 with a premium to market of about 1.9 times.

Source: JP Morgan Asset Management

The Balanced Investment Portfolio had broad sector diversification in 2018. The top ten stocks held on December 31, 2018 were Microsoft, Alphabet (Google), JP Morgan, Eli Lilly, Wells Fargo, Astrazeneca PLC, Visa, Amazon, Southwest Airlines and Charles Schwab. Some of these stocks were not the top ten holdings of the Balanced Investment Portfolio for the entire year. Nine of the companies were in the top ten holdings on December 31, 2017. These top ten U.S. stock holdings were 15.9% of the U.S. equity component of the portfolio and include companies in the health care, industrials, information technology and financial sectors.

Structure of the U.S. Equity Component of the Balanced Investment Portfolio Stock Selection in the U.S. Equity Component Active portfolio managers select individual stocks based upon valuations and expectations for future growth. Many of the best managers call themselves “benchmark agnostic”, meaning they don’t select stocks or sectors based upon the weighting in a benchmark. It is important to remember that the composition of most indices is backward looking, reflecting the performance of prior periods. The weighting of an individual stock and its sector in most indices is based upon its market capitalization, so strong past performance leads to a higher current weighting in the index. When you buy an index fund, you are buying more of the recent winners, and fewer of the recent losers. Since active managers try to anticipate the next winners, the stocks and sectors in their portfolios often differ significantly from an index.

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Sector Allocation in the U.S. Equity Component When the stocks selected by our U.S. equity managers are aggregated by sector, the U.S. equity component has over and underweights in certain sectors. Employing active portfolio managers who select companies with the greatest potential for stock price appreciation should result in a portfolio that does not look like an index fund. Since these are decisions made at the level of individual companies and not sectors, the U.S. equity component has over and underweights when compared to the sector weights of the Russell 3000 Index. As shown in the graph that follows, U.S. equity managers’ favorable outlook for information technology, health care and consumer discretionary stocks resulted in overweights in these three sectors, three of the four best performing sectors in the Russell 3000 Index in 2018. Unfavorable earnings expectations for stocks in the telecom and energy sectors led managers to underweight these stocks in the four worst performing sectors. Unfortunately, managers also had overweights in stocks in the materials and industrial sectors, two of the four worst performing sectors. When the U.S. economy is strong and there is limited chance for a recession, consumers buy more products of consumer discretionary or consumer cyclical companies. These products are nice to have but not necessities (to some consumers), including apparel, entertainment, leisure goods, services and autos. Consumer durables or staples are products that most would consider to be essential regardless of economic conditions. This would include products such as food, beverages and basic household items. At this point in the U.S. economic cycle, investment managers favored consumer discretionary companies over consumer staples. The green bars show the U.S. equity component sector allocation compared to that of the Russell 3000. The bottom up stock selection of superior companies in the technology, health care and consumer discretionary sectors contributed to the U.S. equity component return, while the slight underweight to financials and overweights to industrials and materials detracted from investment performance, resulting in a U.S. Equity Component return of (5.7%) compared to the (5.2%) return from the Russell 3000 Index.

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International Equity Component of the Balanced Investment Portfolio 20.2% of the Balanced Investment Portfolio on December 31, 2018 The international equity component of the Board of Pensions Balanced Investment Portfolio had a return of (13.6%) in 2018, slightly better than the (13.8%) return of the benchmark MSCI All Country World Index ex U.S., or ACWI ex U.S Gross1. The index is designed to measure the equity market performance of both developed and emerging markets, including the country indices of 23 developed and 21 emerging market countries. The international equity component of the Balanced Investment Portfolio exceeded the return of the ACWI ex U.S. Index for the one, three, five, ten, fifteen and twenty years ended December 31, 2018.

International Equity Index ReturnsYear to Date December 31, 2018

-13.8

-12.9

-13.6

-14.9

-14.5

-14.6

-14.2

-14.2

-11.9

-6.6

-20 -10 0

MSCI Europe

MSCI EM

MSCI EM Asia

MSCI ACWI ex U.S.

MSCI United Kingdom

MSCI EAFE

Board of Pensions International Equity

MSCI Japan

MSCI EM Europe

MSCI EM Latin America

% Return

Sources: BNY Mellon, MSCI (net)

In a year when virtually all global markets had negative investment performance, stocks in Latin America, as represented in the MSCI EM Latin America Index, were the best performers, with a (6.6%) return to U.S. investors and a 3.8% return to local market investors. Currency was a significant component of the return to U.S. dollar investors. Virtually all currencies weakened or depreciated against a strong U.S. dollar, providing lower returns to U.S. dollar investors like the Board of Pensions. The weakest return on the table above was the MSCI Europe Index with a return for U.S. dollar investors of (14.9%), and a (10.6%) to investors in local market currencies. The MSCI Emerging Markets Index (net) return of (14.6%) lagged the (13.8%) return from developed market companies, represented by the MSCI EAFE Index. Since managers in the international equity component of the Balanced Investment Portfolio build portfolios on a stock by stock basis, stock selection was the primary reason for below benchmark performance. The international equity component of the Balanced Investment Portfolio has managers with a value style bias. This detracted from performance in 2018. Two out of six developed market international equity managers in the international equity component of the Balanced Investment Portfolio outperformed respective benchmarks in

1 The International Equity component of the Balanced Investment Portfolio is benchmarked against the ACWI ex U.S. benchmark gross of taxes on dividends because it has a longer history; it returned (13.8%) in 2018. Several charts in this review show the benchmark net of taxes on dividends, which returned (14.2%) in 2018.

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2018. Both managers had an EAFE Benchmark, with managers hedging currencies back to the U.S. dollar. Stock selection was critical. The EAFE Index on December 31, 2018 had a 62.4% allocation to Europe, which had a (14.9%) Index return. One manager had a 75% allocation to European stocks but had a hedged return of (6.4%). The other manager had an underweight to European stocks and returned (7.3%). The international equity component total allocation to emerging markets stocks was 23.2%, lower than the 26.0% allocation to emerging market stocks in the ACWI ex U.S. Index. Emerging markets stocks are selected for the international equity component of the portfolio by the six core international equity managers and two dedicated emerging markets managers. Four of these core managers found compelling investment opportunities in emerging markets but had less than the index weight of 26.0% in emerging markets in the ACWI ex US Index. Both emerging markets managers underperformed their benchmark, with one manager returning (15.3%) and the other (18.1%) versus the MSCI Emerging Markets Index return of (14.3%). Underperformance was primarily due to stock selection that led to an overweight of stocks in Turkey (41.4%) and South Africa (24.8%). International Equity Market Historical Performance We have created a graph of historical long-term international equity returns showing developed international equity markets, as represented by the MSCI Europe, Australasia and the Far East (EAFE) Index from 1970 through 2000 and developed and emerging markets represented by the MSCI All Country World Index ex U.S. beginning in 2001, the inception date of the ACWI ex U.S. Index. As shown in the graph that follows, the 2018 net return of (14.2%) is below the 10-year trend line return of 6.6% and the long-term 49-year average return of 9.5% for the blended indices since 1970. Following the pattern of the U.S. equity market, international equity had negative returns in 15 out of 49 years and in eight of the last 19 years.

-60

-40

-20

0

20

40

60

80

1970 1976 1982 1988 1994 2000 2006 2012 2018

MSCI EAFE/ACWI exUS blended 10 Year Trend

International Equity Returns in Historical PerspectiveJanuary 1, 1970 – December 31, 2018

37.6

56.7

69.9

32.9

-23.2-22.2 -21.4

49-Year Average

9.5%40.8 41.5

-45.5

-13.7

6.6

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

-14.2

15.327.2

As shown in the graph that follows, U.S. stocks outperformed international stocks in 2018. However, the pattern of U.S. versus international outperformance is not predictable, with long periods of over and underperformance for developed markets international stocks versus U.S. stocks. In the most recent ten year period ending December 31, 2018, stocks in the S&P 500 Index had a compound annual return of 13.1%, significantly outperforming the return of 6.3%

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from international stocks in the developed markets EAFE Index.

Developed Markets Performance International equity performance in 2018 depended on both stock and country selection while, as shown in the graph that follows, currency had a significant impact. A strong U.S. dollar contributed to reduced returns for U.S. dollar investors in virtually all developed markets. A strong dollar makes imported goods and vacations abroad less expensive for Americans, but it hurts our export industries and decreases investment returns since international stocks are worth less in strong U.S. dollars than in local currencies. As shown on the graph of developed market returns that follows, U.S. investors in the twelve EMU countries that use the euro as their currency had a return of (16.9%) compared to the (12.8%) return to local investors. However, the (16.9%) return from an index of stocks based on the twelve countries and translated back to U.S. dollars masks the variability of returns U.S. investors would have received from the indices of each country, from the (3.4%) return for companies in Finland to a (27.4%) return for companies in Austria. Despite incomplete BREXIT negotiations, the index of UK companies returned (14.2%) for U.S. investors and (8.8%) for pound-based investors. While investors in Japan received a return of (15.2%), return to dollar investors was (12.9%) due to the strength of the yen against the dollar in 2018.

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International Sector Performance In 2018, all sectors in the MSCI ACWI ex US Index provided negative returns. Despite the linkages of a global economy, it cannot be assumed that the best performing sector in one region will also be the best sector in another. However, as shown in the graph that follows, international equity sector performance was very different from that in the U.S. in 2018. The best performing four sectors in the ACWI ex US in 2018 were utilities, with a return of (0.9%), followed by health care, energy, and consumer staples. In the U.S. Russell 3000 Index, health care returned 5.3% and utilities returned 4.5%. Both sectors were also in the top four in MSCI ACWI ex US sector performance returns. Worst performing sectors in the Russell 3000 in 2018 were energy (19.9%), materials, industrials and telecommunications. Worst performing sectors in the ACWI ex US were consumer discretionary (20.2%), information technology, financials, and materials. Materials was the only sector in the bottom four for both the U.S. and international indices.

As investors review portfolio performance in 2018, it is important to appreciate the difference in composition between the Russell 3000 Index of U.S. companies and the ACWI ex U.S. of international companies. Active portfolio management results in different sector allocations than the index and provides portfolio diversification that is different from that of the Russell 3000 Index of U.S. companies. Financials are the largest sector in the ACWI ex U.S., with a 22.2% weighting, yet financials represented only 13.9% of the Russell 3000 Index. Information technology, the largest sector in the Russell 3000 Index, had a weight of 19.9% on December 31, 2018. With fewer and smaller technology companies based in non-U.S. markets, information technology had only an 8.0% weighting in the ACWI ex U.S. Index in 2018. The dominance of government run health care programs outside the U.S. reduced the ACWI ex US health care weighting to 8.4% of the Index, compared to the health care allocation of 15.1% in the U.S. based Russell 3000 Index.

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Sector Allocation in the International Equity Component When the stocks selected by our international equity managers are aggregated by sector, the international equity component has over and underweights in certain sectors. If we explore the structure and composition of the international equity component of the Board of Pensions Balanced Investment Portfolio compared to the sectors of the ACWI ex U.S. Index, as shown in the graph that follows, we can see that the portfolio’s international equity component, based upon sector allocations, does not look like the ACWI ex U.S. Index. Retaining active portfolio managers who select companies with the greatest long-term potential for stock price appreciation should result in a portfolio that does not look like an index fund. Since these are decisions made at the level of individual companies and not sectors, the resulting portfolio has over and underweights when compared to the sector weights of the ACWI ex U.S. Index. Looking at the four best performing sectors, the overweight to health care stocks with a return of (6.2%) helped performance in 2018. The underweight to top performing utility, energy and consumer staples stocks hurt performance. In the four worst performing sectors, an underweight to financials helped performance, while overweights to consumer discretionary, with a return of (20.2%), information technology (17.6)% and materials (15.9)%, hurt performance in 2018.

As shown on the graph that follows, active stock selection also results in country allocations that differ from the ACWI ex U.S in the international equity component. The slight overweight to developed markets in 2018 had minimal performance impact.

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Emerging Markets Performance

In 2018, the MSCI Emerging Markets Index (net) returned (14.6%). In many years, currency in emerging markets has had limited impact on investment performance, but in periods of political uncertainty, rising inflation and central bank management of reserves and interest rates, the relationship of a country’s currency to the U.S. dollar can add to or detract from performance for U.S. dollar-based investors. The BRICS Index, comprised of stocks in Brazil, Russia, India, China and South Africa, had a return to U.S. investors of (13.4%) in 2018. The BRICS Index is heavily weighted to China, with a 2018 return of (18.9%). The five BRICS countries represent 57.2% of the MSCI Emerging Markets Index. The best returns were in Russia and Brazil. The Russian economy experienced volatile oil prices and a depreciation of the ruble. Russian stocks returned 17.1% to local investors and a (0.4%) return to U.S. dollar-based investors. Brazil experienced elections and improved economic and political stability in 2018. The stock market returned 16.3% to local investors, as the Brazilian real depreciated against the dollar, U.S. investors had a return of (0.5%). The worst returns for U.S. investors were from BRICS member South Africa with a return of (24.8%) to U.S. investors due to a strong dollar against the rand. The country with the worst investment performance in 2018 was Turkey. This was due to a continuation of the government efforts to reduce the impact of rival politicians and to control all segments of public life, including the military, media and education, and to create a theocracy. The Turkish lira depreciated against the U.S. dollar. U.S. investors had a return of (41.4%), with a return of (17.8)% to local investors.

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

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Fixed Income Component of the Balanced Investment Portfolio 31.4% of the Balanced Investment Portfolio on December 31, 2018 The fixed income component of the Balanced Investment Portfolio is the most structurally complex part of the portfolio. To provide superior investment returns, the Portfolio structure must successfully anticipate the direction of U.S. interest rates, spreads of investment grade, high yield and emerging market bonds, as well as credit quality and the impact of currencies. In 2018, the fixed income component of the Portfolio had a return of (0.8%) compared to the benchmark return of (0.4%) provided by the Bloomberg Barclays U.S. Government/Credit Index. The fixed income component exceeded the return of the Barclays Government/Credit Index for the two, three, five, ten, fifteen and twenty years ended December 31, 2018. It was a volatile and difficult year for fixed income investors in 2018. As shown on the graph that follows, 3 month Treasury Bills returned 1.9% in 2018, followed by the 1.6% short duration BofA Merrill Lynch 1-3 year Government/Credit Index. Credit, international, global government and high yield all detracted from performance. Emerging market local currency portfolios as measured by the JPM Emerging Markets Global Diversified Unhedged Index Fund returned (6.2%). Currency played a significant role in negative performance. Credit and currency were not factors in the (5.8%) return of the Bloomberg Barclays TIPS Index. The Portfolio is comprised of 10 year and longer U. S. Government Treasury Inflation Protected Securities (TIPS).

-6.2

-5.8

-4.3

-3.5

-1.2

-0.8

-0.8

-0.4

1.6

1.9

-8 -3 2 7

JPM GBI-EM Global Diversified Unhedged

Bloomberg Barclays TIPS 10+ Year

JPM Emg Mkts Bond - Global Diversified

BofA ML Non-Financial Developed Markets HYConstrained

Board of Pensions Fixed Income ex Cash

Citigroup World Govt Bond

Board of Pensions Fixed Income

Bloomberg Barclays Govt/Credit

BofA ML Gov/Corp 1-3

3 Month T-Bill

% Return

Fixed Income Index ReturnsYear to Date December 31, 2018

Source: BNY Mellon

As shown in the graph below, a 1% increase in U.S. interest rates will impact longer term securities more than money market funds or short duration portfolios. The impact of rising interest rates will have a smaller impact on a bond with a 2 year maturity than on one with a 30 year maturity. If investors believe that interest rates will increase by 1%, an investment in a 30 year Treasury will have a (13.9%) total return while the 2 year Treasury will have a 0.6% total return.

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Source – J.P. Morgan Asset Management

At the start of 2018, the consensus forecast was that U.S. interest rates would increase in 2018. Not surprisingly, this has been the consensus forecast since 2014. The market anticipated four Federal Funds rate increases in 2018, subject to employment and economic conditions. Few anticipated the continued strength in the U.S. dollar against virtually all currencies and the decline in oil prices. With declining levels of unemployment and stable inflation, the Federal Reserve did increase rates four times in 2018, to close at a Fed Funds rate of 2.50% on December 31, 2018. The interest rate on a 10-year U.S. Treasury was 2.41% on December 31, 2017. It closed on December 31, 2018 at 2.68%, an increase of 27 basis points. It was a volatile year that saw the 10-year Treasury at 3.11% in the third quarter and 3.24% in the fourth quarter of 2018, only to close at 2.68%. Duration is an important part in the structure of any bond portfolio. While a complicated calculation, duration is often reported in years. Duration measures the sensitivity of the price of a fixed income investment to a change in interest rates. In a period of rising interest rates and falling bond prices, portfolios benefit from having a short duration of two to three years or less. In periods of declining interest rates and rising bond prices, a longer duration portfolio would have the best return. The Bloomberg Barclays Government/Credit Index had a 6.3 year duration on December 31, 2018. The fixed income component core bond managers had durations of 5.8, 5.3 and 4.1 years on the same date. The structure of the Fixed Income Composite is shown in the graph that follows. The breakdown is by investment manager strategy, with 35% of the composite managed by core managers. There is a 15% dedicated allocation to global high yield. Short duration and cash represent 22% of the composite. Global developed and emerging markets represent 16% of the composite. The unconstrained portfolio represents 8% and TIPS 5% of the composite on December 31, 2018.

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Mindful of the volatility in interest rates on a long duration portfolio, we reduced the duration of our internally managed Treasury Inflation Protection Securities (TIPS) portfolio from a duration of 16.2 years on January 1, 2017, to 5.9 years on December 31, 2017. The internally managed TIPS portfolio had a duration of 5.4 years on December 31, 2018. The TIPS portfolio returned (1.1%), exceeding the (5.8%) return of the benchmark TIPS index fund which has a 10+ year duration. Shortening the duration of the Board of Pensions TIPS portfolio helped relative performance. Our short duration portfolio, with a duration of less than 2 years, returned 1.5%. A shorter than benchmark duration for core fixed income portfolios reflected our managers’ views on reducing interest rate risk and was important for success in 2018. Core fixed income manager performance was impacted by shorter than index duration as well as the allocation to, and superior selection of, corporate bonds. Two of the three core fixed income managers met or exceeded the (0.4%) return of the Bloomberg Barclays Government/Credit Index. The (0.8%) return of the fixed income component included the returns from core fixed income managers, TIPS and the short duration manager as well as a (3.4%) return from our global high yield portfolio. The dollar denominated emerging market debt portfolio returned (6.1%); the local currency emerging market debt investment returned (4.2%). One strategy exceeded the benchmark returns while the other lagged. The global sovereign bond portfolio return of (0.9%) slightly lagged the (0.8%) return of the Citigroup World Government Bond Index. With the expectation of increasing U.S. interest rates in 2018, the unconstrained strategy returned 0.7%, exceeding the (0.4%) return of the Bloomberg Barclays Government Credit Index.

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The cash and the short duration portfolios comprised 22.0% of the fixed income component on December 31, 2018. The allocation to cash and short duration was 16.1% on December 31, 2016, and 18% on December 31, 2017. A strategic short duration fixed income allocation of approximately 125% of annual benefits payments was approved by the Investment Committee in July 2008. The short duration strategy detracted from the performance of the fixed income component of the Balanced Investment Portfolio in 2017, but helped performance in 2018. Excluding cash and the short duration portfolio, the fixed income component had a return of (1.2%) in 2018. Fixed Income Market Historical Performance

The chart that follows provides the historical performance of the U.S. fixed income market, as represented by the returns of the Bloomberg Barclays Government/Credit Index. Investors in fixed income can experience negative returns during periods of rising interest rates or when spreads widen on corporate bonds and other types of credit based instruments. However, if we compare annual performance in a graph similar to that of long-term performance for U.S. and international stocks, fixed income has had far fewer and less severe years of negative performance. Over the last 10 years, as shown on the 10-year trend line in the graph, the Bloomberg Barclays Government/Credit Index had a return of 3.5%, below the 46-year average return of 7.0%. Fixed income markets as represented by Barclays Government/Credit Index had negative returns in 1994, 1999, 2013 and 2018, or only four out of 46 years.

Fixed Income Returns in Historical PerspectiveJanuary 1, 1973 – December 31, 2018

-10

10

30

50

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Bloomberg Barclays Capital Govt/Credit 10 Year Trend

15.6

31.1

21.3 19.2

-3.5 -2.2

46-Year Average

7.0%

4.03.5

-2.4 -0.4

Fixed Income Investment Performance Fixed income performance depends on multiple factors. Historically, the most influential factors are: the level and direction of interest rates, portfolio duration, credit quality and investor appetite for risk, as reflected in the spread over U.S. Treasuries for corporate bonds.

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Interest Rates The Federal Reserve’s target for the federal funds rate was 4.25% at the start of 2008. This is the interest rate at which private depository institutions, primarily banks, lend balances at the Federal Reserve on an overnight basis to other depository institutions. On December 16, 2008, after six reductions in the first ten months of 2008, the Federal Open Market Committee made the unprecedented move of setting the funds target rate in the range of zero to 0.25%. No change in the fed funds target rate was made until the rate was increased to 0.25% in December 2015 and 0.50% in December 2016 and with three increases in 2017 to 1.25% on December 31, 2017, and four increases in 2018 to 2.25%. As shown on the historical yield curve graph that follows, the interest rate for the benchmark 10-year U.S. Treasury was 6.5% on December 31, 1999 (green line). By December 31, 2007, rates had declined (red line) with the 10-year at 4.0%. After the Global Financial Crisis in the fall of 2008, the Federal Reserve dropped short rates to 0.1%, with a 10-year Treasury at 2.3% (light blue line). As noted above, as short rates increased, investors expected an increase in rates on longer term securities. As shown on the yield curve for 2018, (dark blue line) the 10-year U.S. Treasury closed 2018 at 2.7%.

Source: Treasury.gov

Investors and savers have become numb to brutally low interest rates in the U.S. We have experienced historically low interest rates for almost a decade, since the Global Financial Crisis of 2008, so it is important to step back and review where yields have been over the longer time periods and put the current 2.7% yield on a 10-year Treasury in perspective. In July 1954, the yield on a 10-year U.S. Treasury bond was 2.3%. Yields had an uneven but steady progression to higher levels, culminating in the 15.3% yield on a 10-year Treasury in September 1981. While yields experienced modest increases and decreases on an annual basis, over the next 30+ years, interest rates generally declined, providing investors in long bonds more than 30 years of superior returns.

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As shown on the graph that follows, the U.S. experienced interest rates persistently below 4% on the 10-year Treasury from the late 1920s through the 1950s. Low rates can persist for a long time.

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

Credit Quality and Spreads As reflected in the graph below, U.S. Treasury bonds provided investors with safety and liquidity and a 0.9% return in 2018. Investors in corporate bonds hope to obtain a higher return when they give up some safety and liquidity. Investors in AAA corporate bonds had the same 0.9% return as the better quality Treasuries. BBB securities had a return of (2.9%). This was lower than the returns on BB or B-rated bonds, which carry higher credit risk.

Source: Bloomberg

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An important trend in the fixed income market since the 2008 Global Financial Crisis has been the decline in high quality (e.g. AA2, AA3) issuance of investment grade bonds and the increase in issuance of BBB rated corporate bonds, often for mergers and acquisitions. As shown on the graph below, BBB3 rated bonds increased from 7.5% of the U.S. investment grade corporate bond index in 2007 to 12.5% in 2018. Lower quality BBB1 rated bonds increased from 11.0% of the investment grade corporate bond index in 2007 to 20.0% in 2018. The AA3 bonds decreased from 12.5% of the investment grade corporate bond index in 2007 to 6.0% in 2018. AAA corporates, the highest quality corporate bonds, decreased from 5.0% of the investment grade corporate bond index in 2007 to 2.0% in 2018.

Source – J.P. Morgan Asset Management

The U.S. Treasury bond is typically considered the highest quality long-term fixed income investment with the greatest liquidity and no default risk. As such, it is the benchmark security used by investors to price all other long term bonds. The spread for investment grade corporate bonds is a risk premium, or additional yield that investors require for any bond that is not a U.S. Treasury bond. The graph that follows provides a historical overview of the relationship of the yield on high yield bonds and U.S. Treasuries. The yield spread is the additional cushion of safety required by investors to purchase high yield bonds instead of comparable maturity U.S. Treasury bonds. High yield spread movements mirrored the pattern of investment grade corporate bonds to Treasuries in 2008, with spreads tripling in the second half of 2008, to close the year at 1,673 basis points, just below the historic high of 2,031 basis points reached in November 2008. In 2012, high yield spreads continued to fall as income-seeking investors were willing to accept less liquidity and to assume the additional credit risk of high yield bonds. Spreads also narrowed in 2013 and through the first half of 2014, declining from a spread of approximately 492 basis points at the start of 2013 to just below 337 basis points in June 2014. In 2014 about 20% of the high yield bond index was comprised of energy and energy-related companies. With the collapse in oil prices in the second half of 2014, spreads on high yield bonds widened to almost 529 basis points by December 31, 2014, just below the 20-year average spread of 570 basis points. Oil prices had a significant impact on spreads again in 2015 as the price per barrel dropped 31%, creating a more difficult environment for the energy sector. High yield spreads widened to 660 in

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December 2015, peaking in January 2016 at 823 basis points. As the oil market stabilized in 2016, option-adjusted spreads fell to just above 400 basis points at year end. Spread compression continued in 2017 as high yield bond prices continued to increase, ending the year with spreads at 335 basis points, well below the 20 year average of 519. 2018 was volatile year for high yield portfolios. Spreads closed on December 31, 2018 at 526, slightly above the long-term average of a 519 basis point premium for high yield bonds over U.S 10-year Treasury.

Source: Bloomberg As investors, it is important to evaluate whether the return achieved is commensurate with the level of volatility and lack of liquidity in the investment or asset. Are we being rewarded for risk, including illiquidity and potential loss of principal? When reviewing the performance of high yield indices and active managers, it is important to understand historical returns by high yield credit rating as well as volatility by credit ratings. The graph that follows shows returns for BB, B and CCC rated bonds for the three, five, ten and twenty years ended December 31, 2018. Returns for the most risky CCC corporate bonds provided the best total return in the last three and ten years but lagged the performance of BB bonds for the last five and twenty years.

53

Source: Bloomberg Standard deviation of returns is one way investors measure the risk of an investment. The graph that follows shows the annual standard deviation of returns for BB, B and CCC corporate bonds over the three, five, ten and twenty years ended December 31, 2018. During each time period, the BB bonds have exhibited less than 45% of the volatility of CCC bonds, so CCC bonds have been more than twice as volatile as the higher rated BB bonds.

Source: Bloomberg

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Default Rates The default rate for U.S. dollar-denominated bonds is the par value of defaulted securities as a percentage of the par value of outstanding issues. As shown in the graph that follows, default rates hit a multi-decade peak in 2009 (2nd highest recorded rate to 1933) with a default rate of 5% for all corporates. Speculative grade bonds had a default rate of 12.1% for high yield borrowers primarily due to weak underwriting standards in the 2004 to 2006 period. This led to only the fourth time since 1920 where defaults of high yield issuers exceeded 10.0%. The incidence of corporate defaults then declined from 2009 through 2014 as banks and other lenders provided corporations extra time to work through potential breaches in loan covenants, extended maturities and refinanced debt to avoid foreclosures and bankruptcies. As a result, investors remained enthusiastic buyers of high yield debt refinancing during a low interest rate environment. At the close of 2017, the most recent data available, the default rate of all corporate bonds was 1.4% and 2.9% on speculative bonds.

Source: Moody’s Default Study

Emerging Market Debt As shown on the graph that follows, emerging market debt has greatly increased in importance and market size over the last 30 years. In 1989, it represented approximately 1.0% of the global bond market with the U.S. dominating at 61.3% of the global bond market. As of June 2017, emerging market debt as a percentage of the global bond market has increased twenty fold to 20.1%, while the U.S. share has decreased by almost half to 37.4%.

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Source – J.P. Morgan Asset Management

Emerging market bonds, both local currency and U.S. dollar denominated, were the top performing fixed income sectors in 2017 with returns of 15.2% and 10.3%, respectively. Returns in 2018 were disappointing for both the U.S. dollar denominated emerging markets, with a return of (4.3)%, and local currency strategies down (6.2)%. As shown in the chart that follows, after strong performance in 2017, spreads for both emerging market sovereign bonds and emerging market corporate bonds were 202 in January 2018, their lowest point in over a decade. Spreads widened to 330 basis points in 2018, close to the long-term average of 358. As investors move farther out the risk curve in search of yield and diversification, emerging market bonds will continue to play an important role in the global bond market and in portfolio composition.

Source - Bloomberg

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Private Partnerships Component of the Balanced Investment Portfolio 10.3% of the Balanced Investment Portfolio on December 31, 2018 Private partnerships are used in the Balanced Investment Portfolio to supplement the traditional asset classes of stocks and bonds. Private partnerships provide access not available in the public markets to investment opportunities with potentially superior long-term returns and to managers with long-term records of creating value for their investors. In 2018, new commitments were approved for limited partnerships in U.S private equity, global private equity, venture capital, distressed debt and real estate. Two commitments were with new limited partnership relationships. When reviewing performance, some of the differences can be attributed to partnerships’ one quarter lag in performance reporting, making it important to remember that private limited partnerships are long-term investments with a minimum of a ten year horizon.

PRIVATE PARTNERSHIPS INVESTMENT PERFORMANCE HIGHLIGHTS PERIODS ENDED DECEMBER 31, 2018

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

U.S. Private Equity 21.0 19.4 17.8 17.3 13.0 Natural Resources 10.8 12.0 9.3 4.9 5.9 International Private Equity (0.9) 5.4 6.0 4.2 6.8 Distressed Debt 9.0 12.6 11.6 9.4 10.4 Venture Capital 21.2 14.4 11.8 15.4 12.2 BOP TOTAL PRIVATE PARTNERSHIPS 12.4 13.6 12.2 10.6 10.4

BOP REAL ESTATE 6.7 8.0 6.3 8.5 11.9

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

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Private Partnership Asset Allocation and Actual Market Value on December 31, 2018

Private PartnershipsCurrent Market Value

$927 Million = 10.3% of Balanced Portfolio MV

Distressed Debt 16.5%

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

Venture Capital 5.3%

Total assets $8,992 million

Natural Resources/Energy26.0%

Real Estate6.9%

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

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

Private PartnershipsCommitments by Vintage Year

as of December 31, 2018

0

5

10

15

20

25

199820002001200220032004200520062007200820092010201120122013201420152016201720182019NFInternational PE U.S. PE Venture Capital

Distressed Debt Natural Resources/Energy Real Estate

%

Of To

tal C

ommi

tmen

ts

2008 201020072005

20042003

20022001

20001998

20062009 2011 2012 Not

Funded

20132014

20152016

20172018

2019

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

Private PartnershipsComparative Cash Flows for years ended 12/31

020406080

100120140160180200

2014dist

2014calls

2015dist

2015calls

2016dist

2016calls

2017dist

2017calls

2018dist

2018calls

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

$ mill

ions

Calls$165

Dist $161

Dist $152

Calls$165

2014 2015 2016Dist $174

Calls $162

Dist$154

2018Calls$166

2017Dist$193

Calls$145

Marketable Diversifying Strategies Component of the Balanced Investment Portfolio 5.7% of the Balanced Investment Portfolio on December 31, 2018 The marketable diversifying strategies component of the Balanced Investment Portfolio currently includes inflation protection and absolute return investments in commingled funds as well as real estate securities. Absolute return investments offer returns which are potentially uncorrelated to public market securities. Inflation protection investments include real estate and commodities. Absolute return strategies include risk parity portfolios. Other types of marketable diversifying strategies have been included in the Balanced Investment Portfolio previously and may be included in the future. The investments in inflation protection strategies were initiated in 2005 to provide protection during periods of increasing U.S. inflation. Inflation has not been a problem and these investments have underperformed the Balanced Investment Portfolio. The Inflation Study was updated and reviewed by the Investment Committee in 2018. With no expectation of increased inflation near-term, no change was made in the asset allocation to these strategies. In 2018, the two inflation protection portfolios returned (8.6%) and (11.4%), versus the 6.7% return of the benchmark of the CPI +5%. Inflation protection strategies lagged the benchmark in all time periods ended December 31, 2018.

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The Balanced Investment Portfolio is invested in three absolute return strategies. One is a global macro strategy that returned 10.0% in 2018. Two risk parity strategies lagged expectations. One returned (5.2%) and one returned (8.3%) compared to the 6.7% benchmark return of the CPI +5%.

The public markets real estate securities portfolio returned 3.7% in 2018 compared to the (3.8%) return of the S&P U.S. REIT Index.

MARKETABLE DIVERSIFYING STRATEGIES INVESTMENT PERFORMANCE HIGHLIGHTS PERIODS ENDED DECEMBER 31, 2018

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

BOP MARKETABLE DIVERSIFYING STRATEGIES

(2.2)

2.5

5.1

1.2

6.7

Consumer Price Index +5% 6.7 6.8 6.8 6.3 6.5

BOP Balanced Investment Portfolio (3.9) 6.0 6.9 5.0 9.3

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

Marketable Diversifying StrategiesCurrent Market Value

$516 Million = 5.7% of Balanced Portfolio MV

Absolute Return 30.4%

Inflation Protection 24.4%

Total assets $8,992 million

Real Estate10.7%

Risk Parity 34.5%

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Portfolio Accounting

The total return on the Balanced Investment Portfolio is measured using the actual market value of assets held on January 1, 2018, and the actual market value of assets held on December 31, 2018. The beginning asset value is increased by interest income and dividends and decreased by fees and benefits paid during the year. In 2018, the portfolio paid out $407 million in benefits in excess of dues received. The portfolio had net realized gains of $536 million on securities sold in 2018 and had unrealized losses of $1,035 million due to a decline in the market value of securities still held in the portfolio on December 31, 2018. Cash flows into the Balanced Investment Portfolio were from the Board of Pensions Fixed Income Portfolio and assets from other fixed income portfolios.

MARKET VALUE RECONCILIATION BOARD OF

PENSIONS BALANCED INVESTMENT PORTFOLIO

$Millions

Market Value on January 1, 2018 $9,616 Net Income 161 Net Realized Gain 536 Net Unrealized Gain/(Loss) (1,035) Cash Flows into Portfolio 102 Benefit Payments/Transfers (360) Investment and Custody Fees (28)

Market Value on December 31, 2018 $8,992

Plan and Program Participation The assets of the Board of Pensions Balanced Investment Portfolio are unitized so that each participating plan and program owns units in the portfolio rather than individual securities. This reduces the investment and custodial fees for all plans and programs. The valuation of units is done monthly by BNY Mellon, custodian for all assets, using an accounting process similar to that used to develop the net asset value of a mutual fund. Plans, with the exception of the Benefit Supplement Fund, Medical Plan Long-Term Reserve and Medical Plan Contingency Reserve, own only units of the portfolio and have the same asset allocation and investment performance as the Balanced Investment Portfolio, dependent upon the time the plan or program adopted a 100% allocation to the portfolio. The Benefit Supplement Fund, High Cost Claims Fund, Medicare Supplement Fund and Medical Dental Fund own units of both the Board of Pensions Balanced Investment Portfolio and the Board of Pensions Fixed Income Portfolio. The Fixed Income Portfolio, valued at $480 million on December 31, 2018, can be used by plans and programs with differing investment horizons, enabling the Board of Pensions to customize their long-term asset allocations. The table that follows shows the market values of plans and programs participating in the Board of Pensions Balanced Investment Portfolio and the Board of Pensions Fixed Income Portfolio at BNY Mellon as of December 31, 2018.

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PLAN AND PROGRAM PARTICIPATION

$Millions % of BOP Balanced Pension Plan $7,932 88.21%

Death and Disability Plan 763 8.49 Supplemental Death Benefits Plan 42 0.47 Chaplains Deposit Fund 4 0.04 SR Plan 4 0.04 Pension 8,745 97.26 General Assistance Fund 38 0.43 Endowment Fund 22 0.24 Benefit Supplement Fund 22 0.25 Restricted Gifts Fund 10 0.11

Retirement Housing Fund 6 0.07

GAC Special Cuban Fund 1 0.00 Assistance / Endowment 99 1.10 Medical Contingency Reserve 85 0.95 High Cost Claims Fund 24 0.27 Post-Employment/Post-Retirement (PEPRM) 9 0.10 Medical Plan Operating Reserves 21 0.23 Medicare Supplement 8 0.09 Medical Dental 1 0.01 Medical / Healthcare 148 1.65

Total Invested in Board of Pensions Balanced Investment Portfolio

$8,992 100.00%

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

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

Benefit Supplement Fund 12 26.11 Assistance / Endowment 12 26.11 High Cost Claims Fund 26 53.44 Medicare Supplement Fund 9 0.01 Medical Dental 1 1.86 Medical / Healthcare 35 73.89 Total Invested in Board of Pensions Fixed Income Portfolio

$48 100.00%

Cash & Miscellaneous Securities 6 Total Investments at BNY Mellon $9,046

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Outlook for 2019 - What is Inch by Inch and What is Yard by Yard? What are Short-Term Inches versus Long-Term Yards for the Board of Pensions Balanced Investment Portfolio? What can we expect in 2019? Our job as investors is to understand what are short-term and what are long-term strategies. We need to invest with perspective, perseverance, time, and common sense. We need to be hard headed. As noted in our 2017 Review, we cannot see with eyes clouded by the lure of easy money and easy decisions. We need to hear what is going on around us as the sounds of change ricochet at an ever increasing pace through our global investment world. We must always remember what we value, and that we take care of our own, our Plan members. As we dust off our crystal ball for 2019, we should remember that it has been an interesting and challenging decade for global investors. The December 31, 2018 10-year return for the Balanced Investment Portfolio was a respectable 9.3%. The five-year return for the Balanced Investment Portfolio is 5.0%, lower than our 6.0% long-term actuarial assumption. As shown in the table below, U. S. stocks led performance in both time periods, and any allocation away from the U.S. markets detracted from performance.

Periods Ended December 31, 2018 10 years 5 years Balanced Investment Portfolio 9.3% 5.0% U.S. Large Company Stocks 13.3% 8.2% U.S. Small Company Stocks 12.0% 4.4% International Stocks – Emerging Markets 8.0% 1.7% International Stocks – Developed Markets 6.3% 0.5% Total U.S. Bond Market 3.5% 2.5% U.S. Treasury Bills 0.3% 0.6%

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

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

2019 Outlook In October 2016 the Board of Directors approved the reduction in the expected long-term investment return assumption for the Balanced Investment Portfolio from 7 percent to 6 percent. Despite an outstanding 2017 for virtually all asset classes, the return on the Balanced Investment Portfolio for the twenty years ended December 31, 2018 was 6.5%. In 2019 we will be conducting an Asset/Liability Study to review Pension Plan long-term investment assumptions and asset allocation. The actuarial interest assumption in 2019 is 6.0%, the same actuarial interest assumption of 6.0% that was adopted in 1986 when today’s Defined Benefit Pension Plan was designed. We have a well-diversified portfolio and will review any future change in the long-term asset allocation that could potentially increase return without increasing risk and decreasing liquidity. Following the downturn of U.S. and international stocks in the fourth quarter of 2018, we believe stocks are likely to outperform bonds in 2019, yet it is unclear which regions, sectors and strategies are most likely to outperform. Emerging market stocks, after a negative 2018, could provide superior performance in 2019. As shown in the table that follows, U.S. large company value stocks underperformed growth/momentum stocks for the ten years ended December 31, 2018. Is 2019 a time for value stocks to outperform?

Style Index U.S. Value vs. U.S. Growth 5 Year 10 Year 20 Year Large Growth 10.4% 15.3% 5.1% Large Value 6.0% 11.2% 6.2% Small Growth 5.1% 13.5% 6.1% Small Value 3.6% 10.4% 8.2%

After a weak 2018, active international developed market managers will have the opportunity to reposition portfolios to recognize outsized gains in technology stocks in 2018. The potentially negative impact of new regulations on European banks has again been deferred, but there will be increased regulatory and market issues in the telecommunications and technology sectors and many governments will continue to grapple with large debt levels. The U.K will wrestle with the impact of BREXIT, the decision to leave the EU. We believe our managers will select the best companies, but at this time do not plan to increase the allocation to international developed markets.

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We continue to expect (since 2014) that long duration fixed income assets will be less attractive in 2019 as the Federal Reserve continues to increase rates. Spreads on high yield and investment grade corporate bonds are more attractive after the compression of spreads in the fourth quarter of 2018. While we see opportunities in global high yield in 2019, we will not increase the allocation.

We do not expect inflation will be a problem in 2019. In 2018, we updated our 2014 Inflation Study and affirmed inflation protection strategies that could benefit the Balanced Investment Portfolio in periods of inflation.

Opportunities in private limited partnerships will be evaluated throughout 2019. The red flags waving for both private equity and real estate partnerships reflect the concern that fund sizes have increased and now exceed pre-2007 levels. Existing partnerships are retaining “dry powder” for new deals while new partnerships are oversubscribed by investors not wanting to miss out on an increase in the allocation to illiquid partnerships. The combination of dry powder and new cash means more money chasing fewer deals in 2019.

Based upon the decline of public market valuations on December 31, 2018, it may be difficult to increase the Balanced Investment Portfolio allocation to private markets as a percent of total assets. The private markets allocations may enable a commitment of one to two new commitments in 2019. Our initial focus will be on real estate opportunity funds and venture capital.

As we have done for more than twenty-five years, we will continue to use short-term market outperformance or volatility in individual asset classes to raise cash to pay benefits. In 2019, benefits payments will require cash in excess of dues of more than $407 million.

We are long-term investors. We have a long-term strategic asset allocation based on our liabilities, or the future benefits for our Plan members. We will not increase portfolio risk by using short-term trading strategies in an attempt to improve investment performance.

We are socially responsible investors and partner with the denomination’s Committee on Mission Responsibility Through Investment (MRTI) to assist in the mission of the denomination on issues of corporate governance, global social issues and the environment. We will faithfully pursue the goals of our assigned mission, recognizing the multiple needs of those we serve in the Presbyterian Church (U.S.A.).

February 5, 2019

Judy Freyer Telephone: 215/587-7245 Email: [email protected]

The 2018 Investment Review was prepared by the Investment Team of the Board of Pensions of the Presbyterian Church (U.S.A.).

Text and commentary: Judith D. Freyer, CFA Content for Graphs and Charts: Peter T. Maher, CFA Additional research and assistance: Mary Elizabeth C. Pfeil, CFA; Donald A. Walker III, CFA; Matthew M. Cleary, CFA; Michael J. Kwiatkowski, CFA, Lydia M. Yost; Martha D. Smyrski

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NOTES: Inch by Inch Life is a Cinch, Yard by Yard it is Mighty Hard Richest Cat in the World. Disney Sunday Movie Hosted by Michael Eisner, March 9, 1986. The death of millionaire Oscar Kohlmeyer leaves an inheritance to a talking cat called Leo Kohlmeyer. The actual movie phrase by Mr. Leo was “Inch by inch, life’s a cinch. Yard by yard it is very, very hard “.

Mr. Leo shares “Inch by Inch” Trailer for Disney Sunday Movie Tiger Freyer as Mr. Leo The Devil’s Financial Dictionary, Written by Jason Zweig, 2015 Long-term, adj. On Wall Street, a phrase used to describe a period that begins approximately 30 seconds from now and ends, at most, a few weeks from now. Other useful descriptions include: Alpha, n. Luck. Technically, alpha is the excess return over a market index adjusted for the risk that the portfolio manager incurred to achieve it. Used as a synonym for skill, alpha is in fact nearly always the result of random chance. Example: “We bought Mongolian mortgage-backed securities when other investors had decided that the market for yurts would collapse,” said Ivana Butler, an analyst at the investment-management firm of Bosch, Tosh & Mallarkey in Boston. “But an outbreak of botulism among camels and yaks sent the yurt market higher, driving up the price of our bonds. This is only the latest example of the alpha-generating research process that enables us to outperform.”

Bactrian No Botulism Camel Building a Yurt for the Explosive Market Yurt For Sale

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The Hare & the Tortoise. Aesop’s Fables. The race is not always to the swift. Slow and steady wins the race. Perseverance is critical to long-term success. Illustrations by:

Milo Winter Arthur Rackham Don Daily

Jim Croce (born James Joseph Croce, January 10, 1943 – September 20, 1973), was an American folk and rock singer-songwriter, Philadelphia native, and graduate of Villanova University. Between 1966 and 1973, Croce released five studio albums and singles. “You Don’t Mess Around With Jim” was recorded in 1972. Time in a Bottle was recorded in 1973. His songs "Bad, Bad Leroy Brown" and "Time in a Bottle" reached No. 1 on the U.S. Billboard Hot 100 chart. On September 20, 1973, during Croce's Life and Times tour and the day before his ABC single "I Got a Name" was released, Croce and all five others on board were killed when their chartered Beechcraft E18S crashed into a tree during take-off from the Natchitoches Regional Airport in Natchitoches, Louisiana. Croce was thirty years old.

Jim Croce 1972 Cat Stevens 1967 Yusuf Islam 2010

Yusuf Islam (born Steven Demetre Georgiou; 21 July 1948), commonly known by his stage name Cat Stevens, is a British singer-songwriter and multi-instrumentalist. “Hard Headed Woman” was recorded in 1970. His 1967 debut album reached the top 10 in the UK, and its title song "Matthew and Son" reached number 2 on the UK Singles Chart. Stevens' albums Tea for the Tillerman (1970) and Teaser and the Firecat (1971) were certified triple platinum in the US. His musical style consists of folk, pop, rock, and Islamic music. In December 1977, Stevens converted to Islam and adopted the name Yusuf Islam. He left his musical career to devote himself to educational and philanthropic causes in the Muslim community. In 2006, he returned to music.