CURRENT Investment Policy Statement: Uniformed Retirement System (URS)

Overview and Statement of Purpose

The purpose of this document is to define the investment policy for the Fairfax County Uniformed Retirement System (the “System”). It will identify a set of investment goals, objectives, guidelines and performance standards for the assets of the System. The objectives are formulated in response to the following:

The anticipated financial needs of the System;
The return objectives and risk tolerance of the System; and
The desire of the Board of Trustees to define and fulfill their fiduciary responsibility over System assets.

This Statement of Investment Objectives and Policy describes how the Board of Trustees will effectively direct, supervise, monitor, and evaluate the investment assets of the System. This document is intended to specifically address the investment needs of the System over a full investment market cycle, to be reviewed at least annually and amended as needed.

Expectations

The Board of Trustees (the “Board”) expects the investment program to generate investment results which will be consistent with the actuarial assumptions which underly the funding policy. The Board also expect that each professional money manager will perform at a level which allows the overall goals of the System to be met. Specific investment guidelines and performance goals have been established for each investment manager.

II. Roles and Responsibilities

Sections 404 & 406(b) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), establishe a fiduciary standard of conduct for trustees, administrators, and other managers of employee benefit plans. While the System is not subject to the provisions of ERISA, the Board has elected to incorporate the standards of sections 404 & 406(b) of ERISA in the System’s Statement of Investment Objectives and Policy. Specifically, these standards include:

Act solely in the interest of plan participants and their beneficiaries;

Act for the exclusive purpose of providing benefits to plan participants and their beneficiaries and defraying reasonable expenses of administering the plan;

Exercise the same care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would exercise in the conduct of an enterprise of a like character and with like aims;

If the fiduciary is involved in investing plan assets, diversify plan investments so as to minimize the risk of large losses (unless it is clearly not prudent to do so under the circumstances); and

Act in accordance with the documents and instruments governing the plan.

The general responsibilities of the Board are:

As a primary objective, to make such decisions as may facilitate making sufficient assets available to provide the benefits for System members or beneficiaries at the time they are payable;

As a secondary objective, to achieve an optimum level of return within risk tolerances established by the Board; and,

To do so effectively and prudently, in full compliance with any applicable laws and regulations as presently stated or as they may be amended in the future.

The specific responsibilities of the Board are:

Developing a sound and consistent investment policy including strategic asset allocation, diversification, quality guidelines, and tactical asset allocation parameters;

Causing its Staff to communicate clearly the major duties and responsibilities of those accountable for achieving investment results and to whom specific responsibilities have been delegated;

Ensuring the selection of qualified investment managers and consultants;

Monitoring and evaluating results to ensure that policy guidelines are being adhered to and that policy objectives are being met;

Ensuring that action is taken under appropriate circumstances to discharge an investment manager for failing to perform in terms of stated expectations or to abide by this Statement of Investment Objectives and Policy;

Delegating to Staff such work and studies as may be necessary to keep the Board adequately informed as to the status of the System's assets;

Using System assets in a cost effective manner with regards to the administration of the Plan:

Adapting the investment program to the changing needs of the System; and,

Abiding by the Standards of Professional and Ethical Conduct adopted by the Fairfax County Uniformed Retirement System as attached hereto (Appendix B).

The Board will review the System’s investment performance relative to policy objectives and asset class benchmarks at least quarterly. The individual managers will be judged according to their “style” peer universe and against benchmarks which reflect the objectives and characteristics of the strategic role their mandate is to fulfill within the overall strategic asset allocation.

Further, Managers, when appropriate, may be invited to present to the Board, as well as receive a visit from Consultant, Staff, or Trustees. In addition, the Board may at any time direct Staff or Trustees to perform a due-diligence visit to any investment manager whenever there is concern about the manager’s performance, organization, or operations. The Board believes that the due-diligence process should include an examination of:
Management’s investment philosophy
Organization Structure
Firm history
Personnel education, experience and turnover
Research capabilities and process
Portfolio construction and risk controls
Historical performance--factor attribution analysis
Trading strategies/cost control
Plans for accommodating firm and asset growth

Delegation of Responsibilities

The Board is authorized to delegate certain responsibilities to Staff or to agents to assist them in properly meeting the Board’s responsibilities outlined above. Specifically, the Board has appointed a custodian, investment managers, investment consultant, legal counsel, and actuary to perform various functions. In addition, the Board is assisted by the Retirement Administration Agency Staff, to which certain responsibilities have been delegated.

Custodian - The custodian has been delegated the following responsibilities:

Serve as a fiduciary to the System, acting as an agent in the members’ best interests;

On behalf of the System, perform, participate in and exercise such rights, privileges, duties and responsibilities possessed by any other owner or holder of bonds or other evidence of indebtedness and common and preferred stock or other assets;

Perform such duties as may be required as a result of class action lawsuits or other legal proceedings related to any securities held on behalf of the System;

Safe keep all assets including securities, cash and cash equivalents;

Receive instructions from investment managers to purchase and sell various securities and ensure that transactions are settled according to established settlement procedures;

Provide monthly transaction accounting and performance calculations in a timely manner;

Oversee the lending of securities; and

Forward proxy materials to investment managers promptly after receiving them.

Investment Managers - The designated investment managers are charged with the following responsibilities:

Be registered as an investment advisor under the Investment Advisor Act of 1940, unless not required to be registered;

Adhere to the investment guidelines contained in their respective investment management agreements or fund documents;

Exercise complete investment discretion within the boundaries of the restrictions outlined in their respective investment management agreements;

Strictly comply with all of the provisions of appropriate law as they pertain to the firm's dealings, functions and responsibilities as fiduciaries;

Diversify the portfolio so as to minimize the risk of large losses unless, under the circumstances, it is clearly prudent to not so diversify;

Select brokers on a competitive, best execution basis;

Invest the assets of the System with the care, skill, prudence and diligence under circumstances then prevailing that a prudent person, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of a like character and with such aims; and

Vote the proxies for securities held in the accounts over which they have accepted responsibility, at all times in such manner as they deem to be solely in the best interest of plan participants, beneficiaries, and the System.

Legal Counsel – The Office of the County Attorney acts as legal counsel to the System and advises the Board on relevant legal matters.

System Actuary – The Board’s designated plan actuary shall have the following responsibilities:

Prepare, on an annual basis, a comprehensive evaluation of the System's funded status and required contribution levels and attest to the appropriateness of the Fund's assumptions and funding policy; and

Conduct special experience and actuarial studies as required by the Board.

Investment Consultant - It shall be the responsibility of the designated investment consultant to assist the Board with the following functions:

Provide, on a periodic basis, comprehensive evaluation of the investment results achieved by the designated investment Managers in light of the investment guidelines and performance standards contained in both their investment management agreement or fund document and this Statement of Investment Objectives and Policy;

Make recommendations to the Board of appropriate actions to be considered which, in the consultant's opinion, will enhance the probability of achieving overall Fund objectives. Such recommendations may include, but are not limited to:

Use of alternate asset strategies or asset classes;
Changes in overall investment policy;
Changes in designated investment managers.

Provide assistance to the Board in screening and selecting investment managers, as appropriate;

Educate the Board on new investment concepts and strategies;

Assist in the preparation of the Statement of Investment Objectives and Policy;

Meet with the Board on a quarterly basis at a minimum; and

Act as a fiduciary to the Pension Fund.

Retirement Administration Agency Staff - The Staff shall have the following responsibilities:

Work with the Investment Consultant to develop and make recommendations to the Board of appropriate actions to be considered which will enhance the probability of achieving overall System objectives. Such recommendations may include, but are not limited to:

Use of strategic, alternate or tactical asset strategies to optimize the asset allocation structure;
Conduct periodic rebalancing of the portfolio consistant with the policy targets and ranges;
Changes in overall investment policy;
Changes in designated investment managers;
Assist the Board in screening and selecting investment managers, as appropriate;
Educate the Board on new investment concepts and strategies; and
Maintain and update the Statement of Investment Objectives and Policy.

Assist the Board in fulfilling their fiduciary obligations with respect to the System's assets;

Implement the investment policies of the Board, including assisting the Board in selecting and monitoring external investment managers;

Negotiate and execute investment management agreements;

Rebalance per these guidelines to the extent derivatives and cash are available and inform the Board at the next Board meeting, including presenting a detailed rebalancing summary;

Administer the day-to-day functions of the System;

Serve as the primary interface between the Board and the System's agents and ensure adherence to contracts with aforementioned agents;

Ensure that the System complies with all relevant County administrative policies and procedures;

Submit an annual budget for the System to the Board;

Designate the Chief Investment Officer. As Chief Investment Officer he/she can attest to the actions of the Board and can sign documents consistent with those actions; and

Designate the Executive Director as Secretary to the Board. As Secretary, he/she can attest to the actions of the Board and can sign documents consistent with those actions.

The Board or Staff may employ the use of external consultants to assist in fulfilling their responsibilities to the System, or to execute special studies or projects as deemed necessary.

III. Investment Objectives

General Investment Philosophy

The Board believes that a well-diversified, high quality investment program can meet the long-term needs of the Uniformed Retirement System. The Board further believes that the retention of experienced money management professionals with proven investment disciplines is the best means of attaining the System’s investment goals. Also, the Board believes the System’s investment program should be sufficiently flexible to adapt to changes in the financial markets.

The Board is long-term oriented and patient. It believes that the primary goal for the pension assets is to prudently meet long-term benefit obligations. This entails structuring the assets to take advantage of long-term and shorter-term opportunities in financial markets. The Board understands that investment strategies often take time to realize their potential. It also seeks to stay current on investment opportunities which may offer unusual potential but be relatively short-lived.

Return Objective

The overall return objective of the System is to earn a total return equal to or greater than the rate assumed in determining the actuarially required funding. The System has a long-term actuarial total return assumption of 7.25% anualized over time, after fees and expenses. This actuarial assumption includes a 3% inflation rate. Additionally, the System has the following broad return objectives:

Invest the assets of the plan so as to maximize the return for the level of risk taken; and

Strive to achieve a return higher than a passively-managed portfolio of comparable benchmarks of the asset classes invested in the portfolio (i.e. earning a total return, net of fees, above the policy benchmark as defined in the investment policy statement). This will be measured over three to five year rolling periods, which are considered an appropriate time frame for measurement over a market cycle.

Risk Objective

The primary risk objective is to fully diversify the portfolio while achieving the return objectives. Diversification can minimize the probability of a large one-time loss and mitigate the volatility of the funding ratio of the System.

The Board recognize that financial market returns are unpredictable and can fluctuate greatly, but that only by assuming this risk can the System achieve its return objectives. Based on historical returns, targeting an investment return objective of 7.25% requires the System to assume investment risk and volatility in portfolio returns. The investment portfolio may not achieve the rate of return objective over shorter investment periods. These risks can be managed, but not eliminated, by establishing constraints on the investment portfolio and by properly monitoring the investment markets, the System’s asset allocation, and the managers hired by the System.

The “Target Allocation”, as defined in the next section is expected to achieve a long-term expected return of 7.25% with a portfolio volatility, or risk, of 10% to 12%. In times of financial distress, asset correlations may converge towards one, thus reducing the benefits of diversification. At these extreme times, portfolio volatility may approach 20%.

Total Plan Policy Allocation Targets

The Board has received advice and counsel on the types of assets suitable for a retirement plan. After considering this advice, the liquidity needs of the plan, and its understanding of the risks involved within each asset class, the Board has adopted the mix of assets listed in the table below. Within the ranges adopted further diversification by manager styles is deemed to be a prudent and appropriate way to allocate the assets of the System for additional risk mitigation.

Strategic Asset Class	Target Allocation	Expected Volatility	Calculated Band	Allowable Range
Total Equity	45%
US Large Cap Equity	17.5%	15.0%	+/- 3%	12.5% – 18.5%
US Small Cap Equity	5.5%	18%	+/- 1.5%	2.5% – 5.5%
Non-US Equity Developed	10%	17%	+/- 3%	10% – 16%
Non-US Small Cap Equity	3%	18%	+/- 2%	1% - 5%
Emerging Markets Equity	9%	24%	+/- 2%	5.5% – 9.5%
Total Fixed Income	18%
Core & Diversified Fixed Income	8%	5%	+/- 2%	6% - 10%
TIPS	2%	6.5%	+/- 2%	0% – 2%
Opportunistic Credit	4%	8%	+/- 2%	2% – 6%
Emerging Market Debt (Local and US$)	4%	12%	+/- 2%	2% – 6%
Total Alternative Assets	30%
Private Equity	10%	27%	+/- 2%	8% – 12%
Private Debt	6%	7%	+/- 2%	3% – 7%
Real Assets	14%	20%	+/- 2%	11% - 15%
Real Estate	7%	17.5%	+/- 2%	4% – 8%
REITs	3%	15.5%	+/- 2%	1% – 5%
Commodities	0%	15%	+ 2%	0% - 2%
Private R.A.	2%	12.5%	+/- 2%	0% - 4%
Liquid R. A.	2%	12%	+/- 2%	0% - 4%
Other	21%
Hedge Funds	12%	9%	+/- 4%	8% - 16%
Cash*	5%	<1%	+/-4	1% – 9%
Total**	110%

* Total Cash includes colateral for derviative positions (margin) held at overlay investent manager and unincumbered cash held in custodian account.
** Total adds up to 110% with cash. There is a notional offset of 10% for derivative positions.

The “Target Allocation” is a long-term strategy policy (five- to ten-year horizon) which the Board believes will meet the return requirements of the fund and maintain a comfortable risk tolerance. The Board may estabish short-term, tactical targets as plan circumstances or market conditions change.

A similar review is expected to be performed annually to incorporate changes in investment assumptions. An Asset/Liability Study will be completed at least every five years to consider the impact of changes in liabilities.

Rebalancing Policy

Actual allocations will vary over time based on the individual market movements. The Board has established a policy to manage and rebalance the portfolio as described below.

The “Calculated Band” is generated based on the following:

Capital market volatility assumptions (asset classes with more volatile returns generally have wider ranges);

Strategic target allocation for each asset class (asset classes with larger allocations generally have larger absolute ranges); and

Transaction costs (assets classes that are more costly to trade have larger ranges).

Rules for rebalancing asset class exposures:

Periodic rebalancing across asset classes ensures a successful “buy low, sell high” strategy and can add significant value over time. Staff will also use Plan contributions and benefit payments as a means to adjust asset classes closer to target as much as possible. Targets and ranges are listed in the table in the “Total Plan Policy Allocation Targets” section above. Staff is herein directed by the Board to work with the overlay investment manager & custodian to rebalance strategic asset classes that fall outside of the allowable ranges based on a month-end valuation. This rebalancing process may have two stages:

First stage of rebalancing, derivative instruments such as futures, swaps, and ETFs, may be used to increase or decrease exposure to an asset class. Staff will only rebalance if sufficient cash or collateral is available in the portfolio to do so. Staff may also decide to defer a rebalancing decision to the next Board meeting if the Staff deems it appropriate to seek Board approval;

The following instruments are approved for Staff and the overlay investment manager to cost effectively replicate various asset class exposures. Not all asset classes can be effectively replicated or may require a source of cash and Staff may defer to the next Board meeting to seek approval for a rebalancing recommendation;

Asset Class	Derivatives Contract Description
US Large Cap Stocks	S&P 500 Mini
US Small Cap Stocks	Russell 2000 Mini or Russell 2500 Mini
Non US Equity Developed	MSCI EAFE Mini
Emerging Markets	MSCI Emerging Markets Mini
Fixed Income - Core	Treasury note/bond futures, Investments Grade Defauld Index (CDX)
Fixed Income - High Yield	Treasury note/bond futures, High Yield Credit Default Index (CDX)
Fixed Income - Global	Not Possible
Emerging Market Debt	Treasury note/bond Futures, Emerging Markets Debt Index Swap (CDX)
Private Equity*	Russell 2000 Mini
Global REITs	Physical ETFs
Commodities	Futures

Second stage of rebalancing, Staff will advise the Board at the next Board meeting of any rebalancing actions taken as well as present a detailed rebalancing plan. This plan should evaluate and consider the overall balance across asset classes in the portfolio including:

If the derivative instruments used in rebalancing are the best way to maintain asset class exposure (should we buy or sell investment managers in that asset class)

If other asset classes should be reallocated to or from that are proportionally furthest from target (for example, if we rebalance and reduce equity exposure should we perhaps increase fixed income exposure to maintain overall portfolio risk and return exposures)

Investment Guidelines

The following guidelines are intended for the general investment operation of the System's assets. Each designated investment manager is expected to adhere to the investment guidelines contained in their respective investment management agreements or fund documents. Each investment manager’s guidelines should clearly define the investment objectives, allowable strategies, limits, risks, and performance benchmarks applicable to the account in question.

Discretionary Authority

The System's Managers are authorized to exercise investment discretion in selecting portfolio investments within the guidelines set forth in their respective investment management agreements and in compliance with the "Prudent Expert Rule" as defined in the Code of Virginia Section 51.1-803.A. attached as Appendix A.

Adherence to ERISA Guidelines

On September 2, 1974, the Employee Retirement Income Security Act of 1974 (ERISA) was enacted into law. At present, municipal pension plans are not governed by this law. However, the Board wishes to comply with the spirit of this law to the extent that it does not conflict with Virginia Code Section 51.1-803.A. Accordingly, the Managers shall not engage in any fiduciary transactions that are prohibited by sections 404 & 406(b) of ERISA without permission from the Board, or from which they have been granted a Prohibited Transaction Exemption by the Department of Labor.

Pooled Funds

It is understood that investing through a pooled fund vehicle means that the investments will be governed by the fund's own set of guidelines and restrictions. While it is the intent of the Board to invest in funds which meet the general intent of these guidelines, there may, in fact, be instances in which the funds' guidelines differ in a number of ways. In such cases, the pooled fund guidelines and restrictions will supersede those outlined herein. The Fund Manager shall provide a copy of the prospectus of any pooled funds and any guidelines and restrictions that differ from those outlined herein.

Employer and Employee contributions are deposited in the Fairfax County Pooled Cash Fund. This Fund is used for the payment of expenses, such as benefit payments to System retirees and their beneficiaries, and for other expenses of the System as authorized by the Board. Funds will be transferred from the custodian to meet benefit and expense payments as necessary.

Rule 144A Securities

The System's Managers can invest in securities as defined in Rule 144A under the General Rules and Regulations of the Securities Act of 1933. All other forms of private placements, generally defined as "securities that are acquired directly or indirectly from an issuer, or an affiliate of an issuer, in a transaction not involving any public offering", are prohibited unless expressly authorized in the manager’s specific investment guidelines.

Trading and Brokerage

Trading costs represent a material expense to the system. Policies have been established, including the use of directed brokerage arrangements, in order to control these costs.

Each investment manager has discretion in the direction of security transactions. However, each manager is expected to employ best professional execution standards to insure competitive price and execution of orders taking into account all factors.

Prohibited Investments

The Managers are prohibited from making any investment which is precluded by any special instruction, issued in writing, and executed by the Board or individuals who have been authorized by the Board toact on behalf of the Board. Unless expressly included in the investment guidelines of the investment management agreement or fund documents, the following investments are prohibited:

Any transaction that would be a “prohibited transaction” under ERISA or the IRS code;
Securities issued by the System’s investment managers;
Naked sales of futures or writing of options;
Short selling;
Margin or financial leverage;
Commodities;
Securities lending (by separate account investment managers);
Mortgaging, pledging, hypothecation of securities
Private placements (except Rule 144A securities).

Derivatives Policy

The Government Accounting Standards Board (GASB) Technical Bulletin 94-1 defines derivatives generally as contracts whose value depends on, or derives from, the value of an underlying asset, reference rate or index. Examples include option contracts, futures contracts, interest rate swaps and forward contracts. GASB reporting requirements also apply to similar debt and investment transactions such as structured financial instruments. The GASB gives the following as examples of structured financial instruments; certain mortgage-backed securities, investments in securitized receivables, collateralized mortgage obligations, interest-only strips (IOs), principal-only strips (POs), inverse floating rate securities and real estate mortgage investment conduits.

Recognizing that derivatives should not be evaluated generically and that when used by knowledgeable investors derivatives can be a useful tool in risk control, the Board's intent is to allow the use of derivatives prudently and within the spirit of the investment guidelines set forth in this document.

Therefore, options, futures and swaps may be utilized for defensive hedging strategies designed to protect principal or facilitate liquidity. They may also be used at the direction of the Board for the purpose of achieving a desired market exposure or to enhance investment returns. Certain designated Managers, employing specific strategies, may be authorized to use derivatives to create leverage and achieve return enhancement objectives. Leverage, or the control of notional values greater than the actual dollar values of securities held in any Manager’s portfolio, is prohibited unless explicitly included in the investment guidelines or fund documents. Staff monitors the overall portfolio’s exposure to derivatives and the System has a target exposure allocation of 105%.

Risk Parity Strategies

The System employs Risk Parity strategies to diversify Beta (asset class) risk and returns. Using primarily futures, the System’s risk parity managers increase the allocation to low risk and return asset classes and reduces the relative allocation to high risk, higher return asset classes. This balanced asset allocation is designed to capture the risk premiums embedded across a variety of asset classes while diversifying away the impact of unanticipated changes in economic conditions.

In implementing a risk parity strategy, the Manager must use economic leverage to increase the return potential from low risk asset classes. This is implemented using futures, which increases the portfolio’s risk-adjusted return from all asset classes combined together. By allocating to risk parity strategies and using futures at the portfolio level, the System’s economic exposure or weighting to Beta commonly exceeds 100% of the value of the portfolio’s assets.

9. Equity

Equity securities shall mean common and preferred stocks, and issues convertible into common stocks, of both domestic and international corporations and American Depository Receipts (ADRs).

Diversification and concentration of a manager’s portfolio will be governed by its investment guidelines. Generally, the securities of any one issuer shall not exceed 5.0% as measured by market value.

10. Fixed Income

Debt instruments issued by the U.S. Government and its agencies, U.S. corporations, Yankees, non-U.S. dollar denominated instruments, mortgage and asset-backed securities and convertible bonds.

The securities of any one issuer, with the exception of the U.S. Government and its agencies, are limited to 5% (unless otherwise agreed to in manager’s contract) at purchase of each fixed income portfolio.

The portfolio’s aggregate fixed income exposure (including the exposure held by the Risk Parity managers)should be, on average, comprised of high-quality issues but may consist of securities rated below investment grade, non-U.S. and emerging market debt up to the limits designated by the Board in each investment manager’s contract. If any security has a split rating, the higher of the two ratings shall be considered for the purposes of meeting minimum quality standards. The Board recognizes that the CAFR reports credit quality for separate accounts only. The Board takes a more holistic approach in monitoring the fixed income exposure in the whole portfolio by including the fixed income exposure held by the System’s Risk Parity managers.

11. Real Estate

Permitted Investment Structures

Investments in commingled or separately managed accounts whose primary objective is equity investment in public shares of companies that invest in income-producing, real property. The portfolio should be well diversified across global markets.

Units in pooled fund(s) (open-end, closed-end or real estate investment trusts) whose primary objective(s) is equity investment in income-producing real property. The portfolio should be well diversified across region, property type, and markets.

Each pooled fund should have broad diversification as a primary objective. Diversification can be by either property type (office, retail, industrial or residential) and/or by the various geographic regions of the country. In no event shall the Fund's interest in any pooled fund exceed 15% of the pooled fund's market value.

Each pooled fund should have as an objective the establishment of a portfolio of high quality, income-producing real estate. Ownership should primarily be through equity interests with the use of leverage being limited to no more than 30% of the total pooled fund portfolio.

Units in pooled funds (open end, closed end or limited partnership) whose primary objective is investment in “value-added” or “opportunistic” real property where the value added is generated from green-field or rehabilitation construction.

12. Private Equity

Private equity investments will be in externally managed limited partnerships which focus on private equity investments that are broadly diversified across industry, partnerships, investment stage, and investment risk.

Private equity investments include: private investment funds focusing on start-up, early and expansion stage companies; mezzanine funds investing in equity and debt instruments of established companies; buy-out and acquisition funds which make controlling and non-controlling investments in established companies; and special situation funds which include partnerships which invest in natural resources, etc.

13. Absolute Return

The Absolute Return Strategies seek to achieve alpha by exploiting unique market niches while limiting volatility. These hedge fund portfolios may use various types of investment structures such as the following: fund of funds, limited partnerships, group trusts, and limited liability companies.

14. Other Real Assets

Commodities. Invest in strategies that exploit inflation-sensitive real assets, such as precious metals, industrial metals, energy, livestock or agriculture.

V. Performance Standards

Standards used to measure Total Fund investment performance are set forth in context with the established objectives.

Total Fund Performance Standards

Over a full market cycle, defined as rolling five-year periods, the Total Fund (net of management fees) should exceed the Policy Index, a benchmark index weighted according to the System’s target asset allocation. The Total Fund performance will also be evaluated versus comparable public pension fund peer groups supplied by the custodian and the investment consultant.

The net-of-fees performance of each asset class will be measured against an appropriate benchmark to provide a total return evaluation by an independent third party. The effectiveness of the System’s investment manager selection shall be evaluated by comparing the returns of the investment portfolio, “Total Fund”, with the returns of a blended policy benchmark, “Policy Index”, and the returns of the “Allocation Index”. The indices are defined as follows:

Policy Index: The Policy Index return shall measure the success of the Fund’s target allocation. It shall be calculated by using index rates of return for each asset class invested in by the Fund multiplied by the percent targeted to each asset class.

Allocation Index: The Allocation Index return shall measure the success of the Fund’s current allocation. It shall be calculated by using index rates of return for each asset class invested in by the Fund multiplied by the actual percent allocated to each asset class. The difference between the Allocation Index return and the Policy Index return measures the effects of deviating from the target allocation. If the Allocation Index return is greater than the Policy Index return, then deviating from the target allocation has added value. If the Allocation Index return is less than the Policy Index return, then active management has not added value.

The difference between the Allocation Index return and the Total Fund return measures the effect of active management. If the Total Fund return is greater than the Allocation Index return, then active management has in aggregate added value. If the Total Fund return equals or is less than the Allocation Index return then active management has not added value.

Manager Benchmarks: The Investment Managers shall be compared to a combination of passively managed index returns matching the managers’ specific investment styles, as well as the median manager in their appropriate peer group universe.

Effective June 23, 2021

Asset Class	Allocation	Representative Benchmark
US Large Cap Stocks	17.5%	S&P 500
US Small/Mid Cap Stocks	5.5%	Russell 2000
Non-U.S. Equity Developed	10%	MSCI EAFE
Non-U.S. Small Cap Developed	3%	MSCI EAFE Small Cap
Emerging Markets	9%	MSCI Emerging Markets
Fixed Income Core and Diversified	8%	Barclay’s U.S. Aggregate Bond Index
Fixed Income Opportunistic Credit	4%	CSFB High Yield Index
Global Bonds	0%	Citigroup WGBI Index
Emerging Markets Debt	4%	50% JPM EMBI Global Diversified + 50% JPM GBI-EM
US Treasury / TIPS	2%	Barclay’s U.S. - TIPS Index
Core Real Estate	3%	NCREIF ODCE Index
Non-Core Real Estate	4%	NAREIT Property Index
Global REITs	3%	FTSE EPRA NAREIT Developed Gross Index
Absolute Return*	12%	HFRI Fund of Funds Composite
Real Assets - Liquid	2%	DJ UBS Commodity Index
Private Real Assets	2%	C/A Global Infrastructure, PE Energy, Upstream & Royalties
Private Equity	10%	Cambridge All Private Equity
Private Debt	6%	50% S&P/LSTA Leveraged Loan Index + 50% S&P European Leveraged Loan Index
Cash	-5%	USD 3 Month T-Bill
Total	100%

*Note: 5% of the cash allocation is used to account for the financing cost imbeded in the Futures contracts used for the 17.5% US Large Cap Stock notional exposure.

VI. Investment Administration

Documentation

Each Manager’s contract (for separate accounts) will describe their proposed investment strategy and tactics for achieving the Board approved investment goals and objectives. They should also submit requests to deviate from this contract when ever their strategy or tactics change significantly as a result of changing market conditions or other factors.
On a Quarterly basis indicating:

The portfolio composition (i.e., asset mix at book and at market values) for each major class of security, including cash equivalents.

Position, by individually named securities and/or by appropriately described units of collective funds, showing both book and market values of individually invested securities.

A listing of derivative holdings as of year-end; a discussion of the use of derivatives during the year, the nature of the transactions and the reasons for entering into them.

A commentary on the portfolio’s drivers of performance and future expectations considering the market trends the Manager is seeing.

On a Monthly basis indicating:

The portfolio’s performance, gross and net of fees, with comparison to appropriate benchmarks,

Market Value (NAV) of the System’s investment

The Manager is required to reconcile the account with the System’s Custodian on a monthly basis. The reconciliation should include both the number of shares and market value by security. Differences should be researched and communicated to the Custodian. Unresolved differences should also be communicated to the Staff. Reconcilation of the performance is also required on a monthly basis.

For all other non-separate account managers such as commingled funds and mutual funds, the investment manager will supply governing fund documents.

Manager Review Meetings

The investment manager will be expected to periodically meet with the Staff and/or Board, as requested. The agenda for these meetings shall include, but not be limited to:

A presentation of investment results in light of the stated objectives of the governing fund documents and of this Statement of Investment Objectives and Policy.
A discussion of investment strategies currently being executed by the manager.
Communication of material changes in policy, objectives, staffing or business condition of the investment manager.

APPENDIX A

STANDARD OF CARE REQUIRED IN MAKING INVESTMENTS AS STATED IN THE CODE OF VIRGINIA § 51.1-803.A.

Prudent Expert Rule

If the governing body of any county, city or town establishes a retirement system pursuant to the provisions of this article, any funds that may be allocated, segregated, or otherwise designated for the retirement system, which are on hand at any time and are not necessary for immediate payment of pensions or benefits, shall be invested with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with the same aims. Such investments shall be diversified so as to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so.

APPENDIX B

Standards of Professional and Ethical Conduct for The Board of Trustees of The Fairfax County Uniformed Retirement System

The nature of business that the Fairfax County Uniformed Retirement System (System) is involved in places its Trustees and employees in positions of public trust. The members of the Board of Trustees (the “Board”) depend on each individual to perform their duties with integrity, independence and a high sense of personal responsibility.

It is the obligation of every member of the Board and each employee of the System to conduct him or herself in a manner that promotes public confidence and with integrity, impartiality, professionalism and ethical behavior in relations with retirees, members, the public, staff, and outside providers of goods and services.

In furtherance of these obligations, the Board hereby adopts the following Standards of Professional and Ethical Conduct:

A member of the Board shall:

Recognize and be accountable for his or her responsibility as a fiduciary as set forth in the Code of Virginia § 51.1-803.A.,
Conduct all business and business negotiations in a fair and honest manner,
Strive to provide quality performance and counsel,
Use care and discretion in the handling of confidential information which is received or maintained by the System,
Disclose to the Board when a decision is being made concerning any investment, benefit or other action in which the member has an interest and refrain from participating in the discussion concerning the action, including abstention from voting and,
Annually file a disclosure statement of financial interest as required under Fairfax County Code § 3-5-2.1 on the form specified in Chapter 40.1 of Title 2.1 of the Code of Virginia.

No member of the Board and no System employee shall:

Utilize any property or resources of the System for personal gain,
Falsify any document, record, or request for reimbursement,
Knowingly be a party to, or condone, any illegal activity in connection with the System or,
Engage in activities involving dishonesty, fraud, deceit or misrepresentation in connection with carrying out any activities of the Board in pursuit of the System's investment objectives.

Prohibited interest of Trustee or employee of the Board:

As stated in Fairfax County Code § 3-3-19, no member or employee of the Board shall have any direct or indirect interest in the gains or profits of any investment made by the Board.

APPENDIX C

Definitions of financial terms incorporated in this Investment Policy.

Beta - The risk and return available from the major asset classes. An expanded definition would describe this as the systematic risk and returns from the broad financial market. The System’s investment portfolio can generate Beta from low cost passive investment funds, futures, and active managers that provide a combination of Beta and Alpha.

Alpha - Alpha is the excess risk and returns generated from investments that are active investment decisions and processes. Alpha is distinguished from Beta risk and returns in that skill or a value added process is a key component in the value creation process. Fees tend to be higher for Alpha-based mandates. Alpha is also defined as the manager’s net of fees return less their assigned benchmark or index.

Excess Returns - The returns generated above those available from investing in cash.

Market Risk Premium - The difference between the expected return on a market portfolio and the risk-free rate. Three distinct concepts are part of market risk premium:
1) Required market risk premium: the return of a portfolio over the risk-free rate (such as that of treasury bonds) required by an investor;
2) Historical market risk premium: the historical differential return of the market over treasury bonds; and
3) Expected market risk premium: the expected differential return of the market over treasury bonds.

Information Ratio - A measure of risk adjusted return. Calculated as Alpha (annualized excess return relative to the assigned benchmark return) divided by Tracking Error (annualized standard deviation of the excess return relative to the benchmark). It is the Board’s belief that the Information Ratio is the best measure of the efficiency of a manager in allocating risk to achieve investment return.

Portfolio Leverage - This is a measure of the amount of economic leverage introduced into a portfolio in obtaining Beta exposure from the combination of investing in physical assets and using futures. This is a relative measure with 100% being the size of the portfolio’s reported net assets. Exposure/weight is used as a measure of leverage.

Sharpe Ratio - A measure of risk adjusted return. The ratio of the annualized Excess Return relative to the risk-free rate divided by the to the annualized standard deviation of the excess return relative to the risk-free rate of return. .

Risk Parity – Is an investment strategy for constructing portfolios that focuses on the amount of risk in each asset class rather than the specific dollar amounts invested in each asset class. In other words, risk parity focuses not on the allocation of capital (like traditional allocation models), but on the allocation of risk. Risk parity considers four different components: equities risk, credit and currencey risk, inflation risk, and interest rates, and attempts to spread risk evenly across the asset classes. The goal of risk parity investing is to earn the same level of return with less volatility and risk, or to realize better returns with an equal amount of risk and volatility (versus traditional asset allocation strategies). In implementing a risk parity approach, leverage is used to increase the return potential from low risk asset classes. This is implemented using futures which increases the portfolio’s risk adjusted return from all asset classes combined together.

Alternative Non-Traditional Funds These funds encompass a wide range of strategies and targeted risk levels. These fund managers provide sources of returns that are uncorrelated to traditional asset classes using various techniques to hedge risk or exploit a specific niche strategy, such as Global Macro, Directional, Event Driven and Relative Value.

APPENDIX D

Historical Policy Benchmarks Changes

Effective 6/28/2018

12% - S&P 500
3% - Russell 2000 Index
10% - MSCI EAFE Index
6% - MSCI EMF
11% - Barclays Capital Aggregate Bond Index
4% - CSFB High Yield Index
3% - Citigroup WGBI Index
4% - JPM EMBI Global Diversified
2% - Barclay’s Capital TIPS Index
7% - NCREIF ODCE Index
3% - FTSE EPRA/NAREIT Index
13% - 90 Day T-Bill + 300 Basis Points
2% - DJ UBS Commodity Index
7% - Cambridge All Private Equity
3% - 50% S&P/LSTA Leveraged Loan Index + 50% European Leveraged Loan Index
10% - 25% MSCI ACWI (LC Gross), 75% Barclays Glodal Treasury 7-10 (hedged), 25% Bloomberg UBS Commodity Index (TR), 75% Barclay’s World Gov’t Inflation Linked Bond Index (LC), -100% LIBOR 3 Month Return

Effective 4/27/2016

12% - S&P 500
3% - Russell 2000 Index
10% - MSCI EAFE Index
6% - MSCI EMF
11% - Barclays Capital Aggregate Bond Index
6% - CSFB High Yield Index
3% - Citigroup WGBI Index
4% - JPM EMBI Global Diversified
2% - Barclay’s Capital TIPS Index
5% - NCREIF ODCE Index
3% - FTSE EPRA/NAREIT Index
13% - 90 Day T-Bill + 300 BP
2% - DJ UBS Commodity Index 5% - Cambridge All Private Equity
3% - 50% S&P/LSTA Leveraged Loan Index + 50% European Leveraged Loan Index
12% - 25% MSCI ACWI (LC Gross), 75% Barclays Glodal Treasury 7-10 (hedged), 25% Bloomberg UBS Commodity Index (TR), 75% Barclay’s World Gov’t Inflation Linked Bond Index (LC), -100% LIBOR 3 Month Return

Effective 6/30/2014

10% - S&P 500
3% - Russell 2000 Index
9% - MSCI EAFE Index
5% - MSCI EMF
12% - Barclays Capital Aggregate Bond Index
5% - CSFB High Yield Index
5% - Citigroup WGBI Index
3% - JPM EMBI Global Diversified
2% - Barclay’s Capital TIPS Index
4% - NCREIF ODCE Index
4% - FTSE EPRA/NAREIT Index
13% - 90 Day T-Bill + 300 BP
2% - DJ UBS Commodity Index
3% - Cambridge All Private Equity
20% - 30% MSCI ACWI, 90% Barclays Global Aggregate Bond Index, 10% Bloomberg UBS Commodity Index (TR), 20% Barclay’s World Inflation Linked Bond Index Hedged, - 50% LIBOR 3 Month Return

Effective 9/1/2013

14.5% S&P 500
4% Russell 2000 Index
9.5% MSCI EAFE Index
3% MSCI EAFE Small Cap Index
5% MSCI EMF
9% Barclays Capital Aggregate Bond Index
5% CSFB High Yield Index
5% Citigroup WGBI Index
3% JPM EMBI Global Diversified
3% Barclay’s Capital TIPS Index
4% NCREIF ODCE Index
4% FTSE EPRA/NAREIT Index
14% 90 Day T-Bill + 300 BP
3% DJ UBS Commodity Index
4% Cambridge All Private Equity
10% 60% MSCI World (Gross) / 40% CITI WGBI

Effective 9/1/2012

14.5% S&P 500
4% Russell 2000 Index
9.5% MSCI EAFE Index
5% MSCI EM
3% MSCI EAFE Small Cap Index
9% Barclays Capital Aggregate Index
5% Barclays Capital High Yield Index
5% Citigroup WGBI Index
3% Barclays Capital TIPS Index
4% NCREIF ODCE Index
4% FTSE EPRA/NAREIT Index
14% 90 Day T-Bill + 300 BP
3% JPM EMBI Global Diversified
3% DJ UBS Commodity Index
4% Cambridge All Private Equity
10% 60% MSCI World / 40% Citi WGBI

Effective 7/1/2010

16% S&P 500
8% Russell 2000 Index
13% MSCI EAFE Index
5% MSCI EMF
4% MSCI EAFE Small Cap Index
9% Barclays Capital Aggregate Index
5% Barclays Capital High Yield Index
5% Citigroup WGBI Index
3% Barclays Capital TIPS Index
4% NCREIF ODCE Index
4% FTSE EPRA/NAREIT Index
14% 90 Day T-Bill + 300 BP
3% JPM EMBI Global Diversified
3% DJ UBS Commodity Index
4% Cambridge All Private Equity

Effective 4/1/2008

23% S&P 500
9% Russell 2000 Index
15% MSCI EAFE Index
5% MSCI EMF
5% MSCI EAFE Small Cap Index
9% Barclays Capital Aggregate Index
5% Barclays Capital High Yield Index
6% Citigroup WGBI Index
10% NCREIF Property Index
10% 90 Day T-Bill + 300 BP
3% JPM EMBI Global Diversified

Effective 6/1/2006

23% S&P 500
9% Russell 2000 Index
15% MSCI EAFE Index
5% MSCI EMF
5% MSCI EAFE Small Cap Index
9% Lehman Brothers Aggregate Index
6% Lehman Brothers High Yield Index
8% Citigroup WGBI Index
10% NCREIF Property Index
10% 90 Day T-Bill + 300 BP

Effective 1/1/2005

45% Russell 3000 Index
14% MSCI EAFE Index
3% MSCI EMF
33% Lehman Brothers Aggregate Index
5% NCREIF Property Index

Effective 4/1/2003

45% Russell 3000 Index
10% MSCI EAFE Index
5% MSCI EMF
35% Lehman Brothers Aggregate Index
5% NCREIF Property Index

Effective 4/1/2000

45% Russell 3000 Index
10% MSCI EAFE Index
5% MSCI EMF Index
30% Lehman Brothers Aggregate Index
4% Salomon High-Yield Index
4% Salomon World Govt Bond ex US Index
2% JP Morgan EMBI Global Index

Effective 2/1/2000

40% Russell 3000 Index
10% MSCI EAFE Index
5% MSCI EMF Index
45% Lehman Brothers Aggregate Index

Effective 10/1/99

40% Russell 3000 Index
15% MSCI EAFE GDP 50% Hedged Index
45% Lehman Brothers Aggregate Index

Effective 3/1/98

37.5% Russell 3000 Index
18.0% MSCI EAFE GDP 50% Hedged Index
44.5% Lehman Brothers Aggregate Index

Effective 10/1/95

45.5% Russell 3000 Index
10.0% MSCI EAFE GDP-Weighted Gross (half-hedged) Index
44.5% Lehman Brothers Aggregate Bond Index

12/31/81 to 9/30/95

50% Standard & Poor’s 500 Index
45% Lehman Brothers Government/Corporate Bond Index+
5% 91-Day Treasury Bill Index