INVESTMENT PRESENTATIONS TO THE
TRS BOARD OF TRUSTEES
June 2012
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TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES
AGENDA
June 7, 2012
TRS East Building, 5th Floor, Boardroom NOTE: The Board may take up any item posted on the agenda during its meeting on Thursday, June 7, 2012, or during the meeting on the following day beginning at the time and place specified on this agenda. The open portions of the June 7‐8, 2012 Board meetings are being broadcast over the Internet. Access to the Internet broadcast of the Board meeting is provided on TRS' Web site at www.trs.state.tx.us.
4. Discuss and consider investment matters, including the following items:
A. Recognize TRS as Private Equity International’s LP of the year and recognize Steve LeBlanc.
B. Performance Review: First Quarter 2012 – Brady O’Connell and Steve Voss, Hewitt EnnisKnupp.
C. Review Quarterly Portfolio Performance and Market Update – Britt Harris.
D. Receive the report of the Investment Management Committee on its June 7, 2012 meeting – Todd Barth.
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Tab BTab B
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blank.
Performance Review: First Quarter 2012
Teacher Retirement System of Texas June 2012
Teacher Retirement System of Texas | June 2012 2
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Teacher Retirement System of Texas | June 2012 3
Summary
Strong start to 2012 as most equity markets gained over 10% during the first quarter
Investor sentiment improved greatly throughout Europe during the quarter as the worries surrounding European banks and the peripheral European countries eased thanks in part to the European Central Bank’s long-term refinancing program
TRS Total Fund gained 6.9% during the first quarter and outperformed its benchmark–
Trailing results behind benchmark during the past 12 months, but
TRS exceeds its performance benchmark during the trailing 3 and 10 year periods
Sources of outperformance during the first quarter–
Global Equity:•
U.S. Large Cap•
Private Equity –
Stable Value:•
Other Absolute Return (opportunistic credit investments)•
Long Treasuries (an underweight allocation)–
Real Return:•
Real Assets
Teacher Retirement System of Texas | June 2012 4
FirstQuarter One Year Three Years Five Years Ten Years
Global Equity:
MSCI USA Standard 12.8% 8.6% 23.6% 2.2% 4.2%MSCI USA Small Cap 13.5 1.3 30.6 3.7 7.4
MSCI EAFE + Canada Index 10.4 -6.7 17.6 -3.0 6.1MSCI Emerging Markets Index 14.1 -8.8 25.1 4.7 14.1
HFRI Fund of Funds Composite Index 3.4 -3.4 4.6 -0.7 3.5
State Street Private Equity Index (qtr lagged) 2.6 6.3 11.6 4.7 9.7Global Equity Policy Benchmark 9.7 -1.2 21.8 -- --
Stable Value:Barclays Capital Long Treasury Index -5.8% 23.7% 7.1% 9.5% 8.5%
HFRI Fund of Funds Conservative Index 2.5 -2.2 4.2 -1.0 2.9
3 Month LIBOR + 2% 0.6 2.4 2.4 3.7 4.3
90 Day US Treasury Bill 0.0 0.1 0.1 1.1 1.8Stable Value Policy Benchmark -3.7 18.6 6.6 -- --
Real Return:Barclays Capital US Treasury TIPS Index 0.9% 12.2% 8.7% 7.6% 7.5%
NCREIF ODCE (qtr lagged) 2.7 15.0 -2.7 -1.1 5.2
Goldman Sachs Commodities Index 5.9 -6.2 13.2 -2.7 4.8MSCI US REIT 10.7 13.0 43.5 -0.7 10.1
Real Return Policy Benchmark 3.1 11.3 10.8 -- --TRS Policy Benchmark 5.9 5.8 17.1 3.2 6.0
1. Market Summary –
First Quarter 2012
Teacher Retirement System of Texas | June 2012 5
2. Market Value Change
Change in M arket Value ( $M i l l ions )
From January 1, 2012 T o M arc h 31, 2012
$110,289.4
$7,175.2
-$928.7
$104,042.9
-20000.0
0.0
20000.0
40000.0
60000.0
80000.0
100000.0
120000.0
Beginning Market Value Net Additions / Withdrawals Investment Earnings Ending Market Value
Mill
ions
($)
Teacher Retirement System of Texas | June 2012 6
3. Asset Allocation Detail
Market Value ($ in millions)as of 3/31/2012
Policy Target
RelativeAllocation
toPolicy Target Ranges($) (%)
Total Fund 110,289 100% 100% -- --
U.S. Large $21,743 19.7% 18% +1.7% 13-23%
U.S. Small $823 0.7% 2% -1.3% 0-7%
Non-U.S. Developed $16,470 14.9% 15% -0.1% 10-20%
Emerging Markets $12,734 11.5% 10% +1.5% 5-15%
Directional Hedge Funds $5,489 5.0% 5% 0.0% 0-10%
Private Equity $12,465 11.3% 12% -0.7% 7-17%
Global Equity $69,725 63.2% 62% +1.2% 55-69%
Long Treasuries $11,715 10.6% 13% -2.4% 0-20%
Stable Value Hedge Funds $3,889 3.5% 4% -0.5% 0-10%
Absolute Return (including OAR) $2,181 2.0% 0% +2.0% 0-20%
Cash $1,571 1.4% 1% +0.4% 0-5%
Stable Value $19,356 17.6% 18% -0.4% 13-23%
TIPS $6,311 5.7% 5% +0.7% 0-10%
Real Assets $11,756 10.7% 13% -2.3% 5-20%
REITS $2,300 2.1% 2% +0.1% 0-5%
Commodities $841 0.8% 0% +0.8% 0-5%
Real Return $21,208 19.2% 20% -0.8% 15-25%
Note: Actual allocations above are based upon Account Level information
Teacher Retirement System of Texas | June 2012 7
4. Total TRS Performance Ending 3/31/2012
In v e s tm e n t R e s u l t sAs o f 3/31/2012
6.89%
4.45%
17.79%
3.17%
6.08%5.91%
17.06%
3.20%
5.95%5.84%
0.13%0.98% -0.03%0.73%
-1.39%-3.0%
2.0%
7.0%
12.0%
17.0%
22.0%
Q uarter 1-Year 3-Years 5-Years 10-Years
Total Fund P olic y Index D ifferenc e
Teacher Retirement System of Texas | June 2012 8
5. Total Fund Attribution -
Quarter Ending 3/31/2012
Asset Class
Allocation Effect
(in bps)
U.S. Large Cap 5
U.S. Small Cap -8
Non-U.S. Developed 7
Emerging Markets -6
Directional Hedge Funds 0
Private Equity 3
Long Treasuries 34
Stable Value Hedge Funds 3
Cash Equivalents -2
Other Absolute Return -12
U.S. TIPS -5
Real Assets 6
REITS 0
Commodities 0
Total Allocation Effect 25
Teacher Retirement System of Texas | June 2012 9
6. Risk Profile
Teacher Retirement System of Texas | June 2012 10
20.4%21.8
-1.4
7. Global Equity: Performance Summary Ending 3/31/2012
First Quarter
Non-U.S. Developed
MSCI EAFE + Canada
Difference
Non-U.S. EquityNon-U.S. Benchmark
Difference
U.S. Equity
U.S. Benchmark
Difference
Difference
Small Cap Benchmark
U.S. Small Cap
+1.0Difference
Large Cap Benchmark
U.S. Large Cap
Difference
MSCI Emerging Markets
10.2%
10.4
-0.2
11.5%
11.9
-0.4
14.0%
12.9
+1.1
+4.5
13.5
18.0%
12.8
13.8%
-0.1
14.1
14.0%Emerging Markets
10.4%Total Global Equity
9.7Global Equity Benchmark
One Year
-5.3%
-6.7
+1.4
-7.3%
-7.4
+0.1
6.0%
6.8
-0.8
+4.3
1.3
5.6%
-1.0
8.6
7.6%
0.0
-8.8
-8.8%
-1.3%-1.2
-0.1+0.7Difference24.3%
24.4
-0.1
23.8%
17.6%
17.6
0.0
20.3%
20.6
-0.3
+1.0
28.7
29.7%
+0.4
23.4
-0.3
25.1
24.8%
Three Years
Teacher Retirement System of Texas | June 2012 11
7. Global Equity (cont’d): Performance Summary Ending 3/31/2012
First Quarter One Year Three YearsDirectional Hedge Funds 3.3% -- --HFRI Fund of Funds Composite Index 3.4 -- --
Difference -0.1 -- --
Total Public Equity 11.7% -2.6% 20.9%
Public Equity Benchmark 11.5 -2.4 21.2
Difference +0.2 -0.2 -0.3
Total Private Equity 4.4% 6.4% 14.3%
Private Equity Benchmark 2.6 6.3 25.1
Difference +1.8 +0.1 -10.8
Teacher Retirement System of Texas | June 2012 12
8. Stable Value: Performance Summary Ending 3/31/2012
First Quarter One Year Three Years
Total Stable Value -2.2% 13.3% 12.5%
Total Stable Value Benchmark -3.7 18.6 6.6
Difference +1.5 -5.3 +5.9
Long Treasuries -5.7% 24.4% 8.2%
Treasury Benchmark -5.8 23.7 7.1
Difference +0.1 +0.7 +1.1
Stable Value Hedge Funds 0.3% -2.5% 5.6%
Hedge Funds Benchmark 2.4 3.7 2.8
Difference -2.1 -6.2 +2.8
Other Absolute Return 10.1% 1.6% 19.5%
Other Absolute Return Benchmark 0.6 2.4 2.4
Difference +9.5 -0.8 +17.1
Cash Equivalents 0.3% 0.4% -0.7%
Cash Benchmark 0.0 0.1 0.1
Difference +0.3 +0.3 -0.8
Note: Performance of Cash Equivalents is shown net of fees paid to TRS Strategic Partners
Teacher Retirement System of Texas | June 2012 13
9. Real Return: Performance Summary Ending 3/31/2012
First Quarter One Year Three Year
Total Real Return 3.9% 10.1% 12.0%
Real Return Benchmark 3.1 11.3 10.8
Difference +0.8 -1.2 +1.2
TIPS 0.8% 12.1% 10.4%
U.S. TIPS Benchmark 0.9 12.2 10.3
Difference -0.1 -0.1 +0.1
Real Assets 4.2% 12.2% 1.1%
Real Asset Benchmark 2.7 15.0 1.0
Difference +1.5 -2.8 +0.1
REITS 10.7% 13.1% 41.7%
REITS Benchmark 10.7 13.0 42.6
Difference 0.0 +0.1 -0.9
Commodities 6.0% -9.9% 14.0%
Commodities Benchmark 5.9 -6.2 13.2
Difference +0.1 -3.7 +0.8
Teacher Retirement System of Texas | June 2012 14
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Appendix –
Supplemental Reporting
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Teacher Retirement System of Texas | June 2012 17
Historical Excess Performance
Quarterly and Cumulative Excess Performance
Total Fund vs. Total Fund Benchmark
Teacher Retirement System of Texas | June 2012 18
TRS Asset Growth
Total Fund His to rical Growth (Sep tember 1997 - March 2012)
0
20
40
60
80
100
120
140
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Mar
ket V
alue
(Billi
ons)
$110.3
Teacher Retirement System of Texas | June 2012 19
External Manager Program: Public Equity Performance as of 3/31/2012Allocation
($ in billions) First Quarter One Year Three Years
EP Total Global Equity $28.3 12.5% -1.8% 23.1%
EP Global Equity Benchmark -- 11.6 -2.5 22.8
Difference -- +0.9 +0.7 +0.3
EP Total U.S. Large Cap $8.4 14.1% 8.0% 25.9%
EP Large Cap Benchmark -- 12.8 8.6 23.7
Difference -- +1.3 -0.6 +2.2
EP Total U.S. Small Cap $1.7 15.7% 3.1% --
EP Small Cap Benchmark -- 13.6 1.3 --
Difference -- +2.1 +1.8 --
EP Total U.S. $10.1 14.3% 7.4% 25.9%
EP U.S. Benchmark -- 12.9 7.7 23.7
Difference -- +1.4 -0.3 +2.2
EP Total Non-U.S. Developed $4.5 10.7% -4.5% 16.0%
MSCI EAFE + Canada Index -- 10.4 -6.7 17.6
Difference -- +0.3 +2.2 -1.6
EP Total Emerging Markets $6.8 14.8% -8.1% 26.1%
MSCI Emerging Markets Index -- 14.1 -8.8 25.1
Difference -- +0.7 +0.7 +1.0
EP Total Non-U.S. $11.3 13.2% -6.7% 21.6%
EP Non-U.S. Benchmark -- 12.6 -7.9 24.3
Difference -- +0.6 +1.2 -2.7
Teacher Retirement System of Texas | June 2012 20
External Manager Program: Public Equity Performance as of 3/31/2012 (cont’d)
Allocation ($ in billions) First Quarter One Year Three Years
EP Total World Equity $3.7 13.6% 0.6% --
EP World Equity Benchmark -- 11.9 -0.7 --
Difference -- +1.7 +1.3 --
EP Total Directional Hedge Funds $3.0 3.3% -- --
HFRI Fund of Funds Composite Index -- 3.4 -- --
Difference -- -0.1 -- --
Teacher Retirement System of Texas | June 2012 21
Strategic Partnership Program: Performance Summary Ending 3/31/2012
During the quarter the Program outperformed its benchmark by 1.3 percentage pointsOver the trailing three-year period, the Program exceeded its benchmark by 0.9 percentage points–
All four managers matched or outperformed the SPN benchmark –
J.P. Morgan and Neuberger Berman generated the most value
Allocation ($ in billions)
FirstQuarter
One Year
Three Years
Strategic Partnership Program (SPN) $5.5 8.9% 5.0% 20.2%
SPN Benchmark -- 7.6 6.2 19.3
Difference -- +1.3 -1.2 +0.9
Blackrock $1.2 8.6% 4.9% 19.3%
J.P. Morgan $1.3 10.1% 4.2% 21.2%
Neuberger Berman $1.3 8.6% 4.0% 20.4%
Morgan Stanley $1.2 8.8% 7.2% 19.9%
Barclays Capital $0.5 7.5% -- --
Teacher Retirement System of Texas | June 2012 22
BenchmarksTotal Fund Performance Benchmark – 18% MSCI US Standard, 2% MSCI US Small Cap, 10% MSCI Emerging Markets, 15% MSCI EAFE plus Canada, 5% HFRI FoF Composite Index, 12% State Street Private Equity (1 qtr lagged), 13% BC Long Term Treasury, 4% HFRI FoF Conservative Index, 1% Citigroup 3 Mo T-Bill, 5% BC US TIPS, 2% MSCI US REIT Index, 13% NCREIF ODCE (1 qtr lagged)
Global Equity Benchmark– 24% MSCI EAFE plus Canada, 29% MSCI US Standard, 3% MSCI US Small Cap,16% MSCI Emerging markets index, 8% HFRI FoF Composite Index, and 19% State Street Private Equity (1 qtr lagged)US Large Cap Benchmark - MSCI US Standard IndexUS Small Cap Benchmark - MSCI US Small Cap IndexEmerging Markets Benchmark – MSCI Emerging Markets Non-US Developed Benchmark– MSCI EAFE plus CanadaDirectional Hedge Funds – HFRI Fund of Funds (FoF) Composite IndexPrivate Equity Benchmark - State Street Private Equity (1 qtr lagged)
Stable Value Benchmark – 22% HFRI FoF Conservative Index, 72% BC Long Term Treasury, and 6% Citigroup 3 mo T-Bill.US Treasuries Benchmark – Barclays Capital (BC) Long Term TreasuryStable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative IndexOther Absolute Return Benchmark - 3 Mo LIBOR + 2%Cash Benchmark - Citigroup 3 Mo T-Bill
Real Return Benchmark – 25% BC US TIPS, 65% NCREIF ODCE, and 10% MSCI US REIT IndexUS TIPS Benchmark - BC US TIPS IndexReal Assets Benchmark –NCREIF ODCE (1qtr lagged) REITS Benchmark – MSCI US REIT IndexCommodities Benchmark - Goldman Sachs Commodity Index
Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periodsgreater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements dueentirely to rounding.
These differences are generally within a few basis points and are not material.
Teacher Retirement System of Texas | June 2012 23
Description of Performance Attribution
A measure of the source of the deviation of a fund's performance from that of its policy benchmark. Each bar on the attribution graph represents the contribution made by the asset class to the total difference in performance. A positive value for a component indicates a positive contribution to the aggregate relative performance. A negative value indicates a detrimental impact. The magnitude of each component's contribution is a function of (1) the performance of the component relative to its benchmark, and (2) the weight (beginning of period) of the component in the aggregate. The individual Asset Class effect, also called Selection Effect, is calculated as Actual Weight of Asset Class x (Actual Asset Class Return –
Asset Class Benchmark Return)The bar labeled Allocation Effect illustrates the effect that a Total Fund's asset allocation has on its relative performance. Allocation Effect calculation = (Asset Class Benchmark Return –Total Benchmark Return) x (Actual Weight of Asset Class – Target Policy Weight of Asset Class). The bar labeled Cash Flow Effect describes the impact of asset movements on the Total Fund results. Cash Flow Effect calculation = (Total Fund Actual Return –
Total Fund Policy Return) –
Current Selection Effect –
Current Allocation EffectThe bar labeled Benchmark Effect results from the weighted average return of the asset classes' benchmarks being different from the Total Funds’ policy benchmark return. Benchmark Effect calculation = Total Fund Policy Return – (Asset Class Benchmark Return x Target Policy Weight of Asset Class)Cumulative EffectCumulative Effect calculation = Current Effect t *(1+Cumulative Total Fund Actual Return t-1) +Cumulative Effect t-1*(1+Total Fund Benchmark Return t)
Teacher Retirement System of Texas | June 2012 24
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Tab CTab C
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blank.
Review of Performance and Investment Outlook
Britt Harris Chief Investment Officer
June 2012
2
Agenda
Executive Summary
Review of Previous Three Years
Outlook Going Forward
Conclusions
Appendix
Executive Summary
Review
Outlook
Conclusion
Appendix
Executive Summary Three-Year Period Ending March 31, 2012
Period since global equity market bottom
TRS investment earnings have exceeded $45 billion
Investment returns per year have been 17.8%, with 1.6% value added per year
Top 15% versus peer funds1
Top 2 of 64 funds on risk/return basis2
3 Executive Summary Review Outlook Conclusion Appendix
1 Trust Universe Companion Services (TUCS) , Funds greater than $10 billion in assets 2 Hewitt EnnisKnupp
4
Current GDP/CPI Regime for US Global Equity (Box 5) as of March 2012
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
-12% -8% -4% 0% 4% 8% 12%
Head
line
CPI Q
OQ
Ann
ualiz
ed
Real GDP QoQ Annualized
Signal 2008 2009 2010 2011 2012
Start (June 2008)
Current (March 2012)
Box 1
Box 4
Box 3
Box 5 Box 6
Box 7
Box 2
Box 8 Box 9
Executive Summary Review Outlook Conclusion Appendix
Asset Class Returns Three Year Cumulative as of March 31, 2012
5 Source: Bloomberg
119.2
110.1
105.8
99.2
91.8
90.3
81.3
76.1
62.5
40.2
0 20 40 60 80 100 120
Russia
South Africa
Latin America
Australia
US
Asia
Canada
Global
Europe w/UK
Japan
Equity Indices
90.0
47.7
41.7
32.6
28.6
23.0
19.9
16.6
12.1
0.3
0 20 40 60 80 100 120
US High Yield Corp
EM Govt Bonds
US Credit
Global Inflation Linked
US TIPS
US Long Treasuries
Global Govt Bonds
Residential Mortgages
US Short Duration Treasuries
Cash
Bond Indices
Executive Summary Review Outlook Conclusion Appendix
Investment Earnings Exceeded $45 Billion Three Years Ending March 31, 2012
6
March 2012 Total Fund Value $110.3 Billion March 2009 Total Fund Value $ 73.5 Billion ------------------- 3 Year Change in AUM $ 36.8 Billion Total Net Payouts From Fund $ 8.4 Billion ------------------- Total 3 Year Investment Earnings $ 45.2 Billion
Executive Summary Review Outlook Conclusion Appendix
7
Source: Data from Bureau of Labor Statistics (CPI) and Bureau of Economic Analysis (GDP). Graph depicts year-over-year quarterly observations from 1948 to date. Market returns based on 2011 TRS policy, dependent on QoQ inflation and GDP prevailing since 1990
Real Return Regime High CPI, Low GDP
15.0% of observations Average Inflation: 8.3%
Global Equity: +5.7% Stable Value: +4.3%
Real Return: +13.5%
Stable Value Regime Stagnant GDP & Low CPI
18.8% of Observations Average Inflation: 1.0%
Global Equity: -7.0%
Stable Value: +14.2% Real Return: +0.7%
Global Equity Regime Favorable GDP/CPI 66.2% of observations Average Inflation: 3.0%
Global Equity: +15.9%
Stable Value: +6.7% Real Return: +8.3%
Portfolio Diversification in Different Market Conditions
Executive Summary Review Outlook Conclusion Appendix
Three-Year Investment Return: 17.8% per Year As of March 31, 2012
8 Executive Summary Review Outlook Conclusion Appendix
Returns Alpha March 2012 March 2009 March 2012 March 2009GLOBAL EQUITYLarge Cap 23.8% 0.4% 17.3% 27.0% 2.3% 11.4%Small Cap 29.7% 1.0% 1.7% 3.0% 0.5% 11.4%Non-US Developed 17.6% 0.0% 15.5% 14.0% 6.4% 13.2%Emerging Markets 24.8% -0.3% 11.3% 10.0% 7.9% 13.3%Directional Hedge Funds - - 5.0% 0.0% 6.0% - Private Equity 14.3% -10.8% / 1.5% 1 11.3% 7.0% 14.0% 14.0%
Total Global Equity 20.3% 62.1% 61.0%
STABLE VALUELong Treasury 8.2% 1.1% 10.6% 8.0% 1.8% 3.0%SV Hedge Funds 5.6% 2.8% 3.0% 5.0% 4.0% - Other Absolute Return 19.5% 17.1% 2.0% 8.0% 6.0% 18.0%Cash 0.3% 0.2% 2.0% 1.0% 1.8% 2.7%
Total Stable Value 12.5% 17.6% 22.0%
REAL RETURNTIPS 10.4% 0.1% 5.8% 9.0% 1.0% 4.3%Real Assets 1.1% 0.9% 10.6% 5.0% 8.0% 5.0%REITS 41.7% -0.8% 2.1% 1.0%Commodities 14.0% 0.8% 1.0% 2.0%
Total Real Return 12.0% 19.5% 17.0%
TOTAL FUND 17.8% 0.7% / 1.6% 1 100.0% 100.0%
Performance results are reported net of fees
2 Per GMO 7 Year Forecast where available as of dates presented (without alpha). Directional HF, PE and RA are internal estimates
Three YearsAsset Class
Asset Mix Long Term Expected Return2
1 Alpha using Private Equity policy benchmark in place at time of performance / using current Private Equity benchmark (SSPEI) for entire period
Source: Trust Universe Comparison Services, Funds greater than $10 billion 9
Top 15% Versus Peer Funds Over Up Cycle Periods Ending March 31, 2012
TRS IMD Competitive Rank
0
25
50
75
100
1 Year45th
2 Year20th
3 Year15th
4 Year47th
5 Year27th
Executive Summary Review Outlook Conclusion Appendix
TRS IMD Ranks 2nd of 66 Funds Hewitt EnnisKnupp Risk Profile Analysis
10 Source: Hewitt EnnisKnupp, March 17, 2012 Executive Summary Review Outlook Conclusion Appendix
Annualized Return vs. Annualized Standard Deviation 3 Years Ending March 31, 2012
Trust Level Assets – Three Year Return and Risk Measures As of March 31, 2012
11 Executive Summary Review Outlook Conclusion Appendix
Hit Rates not included for quarterly benchmarks 1Shown as if Private Equity was benchmarked to State Street Private Equity Index for entire period
Return Alpha Portfolio BenchmarkGLOBAL EQUITIESLarge Cap 23.8% 0.4% 1.7% 0.2 17.0% 16.4% 1.0 1.4 60.0% 18.2% 3Small Cap 29.7% 1.0% 1.9% 0.5 21.6% 21.9% 1.0 1.4 44.0% 81.8% 7EAFE 17.6% 0.0% 1.5% 0.0 20.1% 20.9% 1.0 0.9 38.9% 72.2% 6Emerging Markets 24.8% -0.3% 1.9% -0.2 24.9% 25.1% 1.0 1.0 57.9% 47.1% 4Private Equity 14.3% 1.5%1 12.2% 0.1 8.8% 9.4% 0.9 1.9 4
STABLE VALUELong Treasury 8.2% 1.1% 0.5% 2.3 12.6% 12.6% 1.0 0.6 85.7% 80.0% 9SV Hedge Funds 5.6% 2.8% 3.7% 0.8 3.5% 0.9% -0.3 1.6 58.8% 100.0% 1Other Absolute Return 19.5% 17.1% 7.7% 2.2 7.8% 0.1% 30.1 2.5 75.0% N/A 4
REAL RETURNTIPS 10.4% 0.1% 0.3% 0.4 5.1% 5.1% 1.0 2.0 59.3% 44.4% 3Real Assets 0.6% 0.8% 12.5% 0.1 10.4% 13.0% 0.8 0.1 4REITs 41.7% -0.8% 1.5% -0.6 25.4% 26.3% 1.0 1.6 30.4% 69.2% 5Commodities 14.0% 0.8% 10.9% 0.1 24.5% 21.4% 1.0 0.6 52.0% 63.6% 4
Total Trust 17.8% 1.6%1 1.9% 0.8 9.9% 9.2% 1.1 1.8 79.2% 66.7% 3
Sharpe Ratio
Hit Rate Up
Hit Rate Down
Current TD Valuation
Three Year Annualized Standard DeviationTracking Error
Information Ratio
Beta vs Asset Benchmark
Review Three-Year Period Ending March 31, 2012
New initiatives performed well Strategic Partnership Network up 20.2% per year with 0.9% value added External Public Market portfolios outperforming the market in 5 of 6 areas Hedge Funds restructured into both conservative and directional strategies Principal Investments group established, active and efficient
Trust outperformed in 79% of rising markets and 67% of falling markets
Additional abilities within TRS Replication of Hedge Funds Factor-based Portfolios Volatility Targeting Currency Management Risk Based Strategies
12 Executive Summary Review Outlook Conclusion Appendix
New Initiatives Three Year Return and Risk Measures
13 Executive Summary Review Outlook Conclusion Appendix
Hit Rates not included for quarterly benchmarks Shown as if Private Equity was benchmarked to State Street Private Equity Index for entire period
Return Alpha Portfolio Benchmark
TOTAL SPN 20.2% 0.9% 1.4% 0.6 13.3% 12.3% 1.1 1.5 78.3% 23.1% 3
EXTERNAL PUBLICLarge Cap Value 26.5% 4.2% 5.2% 0.8 18.6% 16.3% 1.1 1.4 63.6% 50.0% 5Large Cap Growth 25.7% 1.2% 3.3% 0.4 17.1% 17.0% 1.0 1.5 58.3% 50.0% 6Large Cap 25.9% 2.2% 3.2% 0.7 17.8% 16.5% 1.1 1.5 58.3% 25.0% 4EAFE 16.0% -1.6% 3.0% -0.5 18.6% 20.9% 0.9 0.9 27.8% 66.7% 7Emerging Markets 26.1% 1.1% 2.7% 0.4 24.7% 25.1% 1.0 1.1 52.6% 64.7% 5Other Absolute Return 17.4% 15.0% 7.9% 1.9 8.0% 0.1% - 2.2 69.4% - 3
PRIVATE EQUITYDomestic LBO 13.8% 1.0% 12.8% 0.1 9.2% 9.4% 1.0 1.5 5International LBO 15.0% 2.2% 16.5% 0.1 12.7% 9.4% 0.4 1.2 4Special Situation 24.3% 11.4% 16.5% 0.7 13.0% 9.4% 1.0 1.9 5Emerging Managers 6.4% -6.4% 12.5% -0.5 7.6% 9.4% 0.1 0.8 5
GBI 20.5% -0.3% 1.2% -0.2 18.9% 18.8% 1.0 1.1 47.6% 60.0% 5
New InitiativesSharpe Ratio
Hit Rate Up
Hit Rate Down
Current TD Valuation
Three Year Annualized Standard DeviationTracking Error
Information Ratio
Beta vs Asset Benchmark
Outlook Going Forward
Bubble monitor signals: None (with Gold and Treasury Bonds closest)
Expected Global Equity returns below average, but above Bonds
International equity markets appear better long-term value than U.S. equity markets
Small Cap stocks offer the least long-term value
Larger and higher quality stocks appear more attractive
Market recovery cycle now at three years
Generally following historical patterns
Only 7 of 21 up cycles lasted longer than three years
Equity valuation higher than at the bottom, but not extended
Government economics and political factors have been increasingly influential
U.S. Dollar has depreciated by 13% since March 2009
14 Executive
Summary Review Outlook Conclusion Appendix
Data Comparison–Beginning of Bull Market vs. Today Periods Ending March 31, 2012
Yields 2009 2012 P/E Ratios – Trailing 2009 2012
10 Year Treasury Bond 2.7% 2.2% S&P 500 10.3x 14.4x
Global Inflation-linked 1.7% 0.2% Russell 2000 11.1x 17.4x
High Yield 18.1% 7.2% MSCI EAFE 10.7x 12.4x
US TIPS 1.8% 0.1% MSCI EM 10.2x 11.2x
Russell 1000 Growth 11.6x 16.8x
Economic Data 2009 2012 Russell 1000 Value 9.2x 12.8x
CPI - Headline YoY -0.4% 2.7%
CPI - Core YoY 1.8% 2.3% P/E Ratios - Forward 2009 2012
Inflation Forecast -0.4% 2.4% S&P 500 12.1x 13.4x
Real GDP Growth YoY -4.5% 2.1% Russell 2000 12.5x 15.8x
GDP Forecast -2.3% 2.2% MSCI EAFE 10.9x 11.7x
Unemployment Rate 8.7% 8.2% MSCI EM 10.7x 10.5x
US Total Public Debt to GDP 40.5%** 67.7%* Russell 1000 Growth 13.1x 15.2x
US Government Gross Debt to GDP 76.1%** 102.9%* Russell 1000 Value 11.1x 12.2x
Due to annual reporting:
* as of 12/31/2011 ** as of 12/31/2008
15 Executive Summary Review Outlook Conclusion Appendix Source: Bloomberg
Foreign Exchange Trade Weighted US Dollar
16
60
70
80
90
100
110
120
130
140
150
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
USTW$ Index
Source: Bloomberg
Periods ending March 31, 2012
Cumulative Return
3 Years -13.2%10 Years -34.4%Since Peak (March 1985) -49.3%
Executive Summary Review Outlook Conclusion Appendix
Risk Signal Update Bubble Monitor
17
(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5
Gold
10 Year Treasuries
Australian Dollar
REITS
Crude Oil
S&P 500
Emerging Markets
Property Index
BBB Credit
EAFE
7 Year Z score
Bubble Level Monitor: March 2012
(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5
10 Year Treasuries
Gold
Australian Dollar
Property Index
Crude Oil
REITS
Emerging Markets
BBB Credit
S&P 500
EAFE
7 Year Z score
Bubble Level Monitor: September 2011
(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5
10 Year Treasuries
Gold
Property Index
Emerging Markets
Crude Oil
Australian Dollar
EAFE
REITS
S&P 500
BBB Credit
7 Year Z score
Bubble Level Monitor: March 2009
(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5
Emerging Markets
Property Index
Gold
EAFE
Crude Oil
S&P 500
Australian Dollar
REITS
BBB Credit
10 Year Treasuries
7 Year Z score
Bubble Level Monitor: September 2007
Executive Summary Review Outlook Conclusion Appendix
Markets and Politics
18
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
4/18/11S&P puts US on watch
July 2011Debt Ceiling Debate Intensifies
7/31/11Debt Ceiling Agreement Reached
8/5/2011S&P Downgrades US
7/25/10Frank Dodd passes into law
9/21/11Operation Twist
4/23/10Greece requests bailout
5/9/10Creation of EFSF
11/28/10Irish bailout approved
5/16/11Portugal bailout approved
10/2/11Greece misses targets
8/8/11ECB begins buying Italian and Spanish bonds
8/26/2011Jackson Hole
10/26/11EU plan announced
11/9/11Italian yields pierce 7%
12/2/11Good US jobs report
12/22/11LTRO 1
1/13/12France downgraded
2/3/12Jobless rate falls to 8.3%
2/21/122nd
Greek Bailout finalized
2/29/12LTRO 2
Executive Summary Review Outlook Conclusion Appendix
Financials Return vs. Broader Market (RH Axis) S&P Financials Normalized S&P Normalized
Current Cycle Trending Previous Equity Cycles Analysis of Market Cycles
19 Executive Summary Review Outlook Conclusion Appendix
Market Cycle Extended Analysis of Market Cycles
20 Executive Summary Review Outlook Conclusion Appendix
The blast off the March 2009 low ranks as the largest three-year gain since the
move off the 1942 market low.
21
GMO 7-Year Asset Class Return Forecasts As of March 31, 2009
Source: GMO (reprinted with permission)
The chart represents real return forecasts1 for several asset classes. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Actual results may differ materially from the forecasts above
1 Long-term inflation assumption: 2.5% per year
Executive Summary Review Outlook Conclusion Appendix
22
GMO 7-Year Asset Class Return Forecasts As of March 31, 2012
Source: GMO (reprinted with permission)
The chart represents real return forecasts1 for several asset classes. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Actual results may differ materially from the forecasts above
1 Long-term inflation assumption: 2.5% per year
Estimated Range of 7-Year
Annualized Returns
Executive Summary Review Outlook Conclusion Appendix
23
Historical Ability to Produce 8% Investment Return As of March 31, 2012
Source: State Street and Bloomberg
8.1% 6.7% 6.7% 5.8% 7.8% 5.6% 6.4% 5.8% 4.7% 6.5% 5.1% 5.1% 3.8% 2.2%
4.9%
3.5%
1.7% 3.6%
2.9%
3.2% 2.4%
2.0%
-2.1%
-3.2%
-0.4%
0.4% 2.2% 5.8%
13.0%
10.2%
8.4%
9.4%
10.7%
8.8% 8.9%
7.7%
2.6% 3.3%
4.8% 5.5%
6.1%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Current
Implied Diversification Risk Premium Earned
10 Yr Treasury Bond YTM (Ten Years Earlier)
10 Yr Annualized Return of TRS Fund
TRS Target Long-Term Return
Required Risk
Premium Going
Forward Implied Loss from Diversification
(YTD)
Executive Summary Review Outlook Conclusion Appendix
Operations/Trust Performance *Sylvia Bell
Professional Development Susan Wade
Technology David Cox
Reporting Patricia Cantu
24
Investment Management Division Organizational Structure as of March 31, 2012
*CIO – Britt Harris *Deputy CIO – Jerry Albright
*Jase Auby – Risk Strategies Curt Rogers – Tactical Asset Allocation
Bernie Bozzelli – Trading TBD - Resources
* IIC Voting Members Executive Summary Review Outlook Conclusion Appendix
Description
• 15 years average experience • 49 MBAs • 29 CFAs • 4 PhDs • 21 other advanced degrees
Steve LeBlanc, External Private Markets
Dale West, External Public Markets
IMD Employees Recruited Since 2007
25
Team Employees
IIC (4) Steve LeBlanc, Jase Auby, Sylvia Bell, (Ashley Baum)
Senior Management (2) Mohan Balachandran, Rich Hall
CIO Office (6) Tommy Albright, Stacy Sakoulas, Marina Salazar, Sharon Toalson, Susan Wade, Susan White,
PSE/Risk Management (7) Grant Birdwell, JB Daumerie, Tim Jones, James Nield, Matt Talbert, Mark Telschow, Tony Yiu
Internal Public (9) Jeremy Aston, John DeMichele, Jon Hook, Amit Kumar, Stacey Peot, Marshall Reid, Tayyib Shah, Daniel Steinberg, John Watkins
External Private (16) Brian Baumhover, Stuart Bernstein, Andrew Cronin, Chase Hill, Michael Lazorik, Gracie Marsh, Cynthia Mendoza, Michael Pia, Scott Ramsower, Neil Randall, Craig Rochette, Molly Rose, Grant Walker, Jennifer Wenzel, Ross Willmann, Nathan Zinn
External Public (8) Todd Centurino, Rachel Clark, Susanne Gealy, Rusty Guinn, Jon Klekman, Lulu Llano, Joe Tannehill, Dale West
Trading (3) Jared Morris, Steve Peterson, Komson Silapachai
Operations (13) Kendall Courtney, David Cox, Barbara Forssell, DC Gunnia, Roy Kurian, Steven Lambert, Jelena Melesenko, Maribel Nesuda, Kelly Newhall, Hugo Rangel, Babette Ruiz, Jared Simpson, Irma Zavaleta-Castillo
Executive Summary Review Outlook Conclusion Appendix
Major Awards
Fund TUCS Highest One Year Return for Funds Greater Than $10 Billion Nominated for aiCIO Industry Public Pension Innovation Award Plan Sponsor of the Year -Honored by Alties Public Plans
Private Equity North American LP of the Year –Honored by Private Equity International, 2009 North American LP of the Year –Honored by Private Equity International, 2010 North American LP of the Year –Honored by Private Equity International, 2011
Real Assets
North American LP of the Year in Real Assets –Honored by PERE Nominated for North American Deal of the Year for GGP Investment -Honored by PERE
Public Markets # 6 in The Top 30 Most Influential Investors and Advisors in the Hedge Fund Space –Honored by HFM Week Nominated for Large Public Plan of the Year –Institutional Investor Hedge Fund Industry Awards
Emerging Managers
Public Plan of the Year -Honored at Emerging Managers Summit Star Awards Recipient –Senator Royce West Dr. Emmett J. Conrad Leadership Program Service Awards
26 Executive Summary Review Outlook Conclusion Appendix
Modified IMD Structure
27 Executive Summary Review Outlook Conclusion Appendix
Conclusions Looking Backward
Past three years have been unusually positive
17.8% annualized returns
$45 billion in investment appreciation
1.6% annualized value added
Top 15% versus comparable funds on absolute return
Top 5% on a risk-adjusted basis
Key initiatives have gone well
Both the SPN and externally managed portfolios above market(s)
Tactical credit strategy up 19.5% per year
Principal transactions capability now well established
All risk metrics have remained well within TRS policies
TRS IMD has received numerous industry awards for effective investment management
28 Executive Summary Review Outlook Conclusion Appendix
Conclusions Looking Forward Next three years are unlikely to repeat previous period
Current bubbles: None
Longer term equity market valuations have eroded
From above average to below average
Lower quality and smaller companies appear least attractive
Higher quality and larger companies may offer “fair value”
Fixed income values are low and spreads are normal
Fixed income returns unlikely to outperform equity over next 5-10 years
Credit spreads have returned to approximately normal
Real asset valuations have generally improved relative to other investment areas
Debt levels and political trends are increasingly problematic
29 Executive Summary Review Outlook Conclusion Appendix
Conclusions Looking Forward IMD abilities and investment processes have matured and increased
Organization has significant new capabilities
Restructuring to increase focus on future required returns
Sharpening accountability within each of the three main strategies (Stable Value, Global Equity, Real Return)
Increasing focus and resources on strategic relationships, principal investments and resource related investments
Continuing to attract and retain top investors committed to operating within the TRS IMD culture and to using “The Texas Way”
SuperSet of IMD priorities focused on the future rather than the past
Debt levels and political trends are increasingly problematic
30 Executive Summary Review Outlook Conclusion Appendix
Appendix
32
Relative Market Returns Matrix As of March 31, 2012
Private Equity and Real Estate returns are quarter lagged, JPY and EUR are expressed in their purchase power in USD All Domestic Equities modeled by Russell Indexes, all International Equities and REITs modeled by MSCI Indexes
Source: Bloomberg
Annual AnnualizedRank Quarter 1 Year 2011 2010 2009 2008 2007 5 Year 10 Year 20 Year
1 US Growth Long Treasury Long Treasury Gold EM Equity Long Treasury EM Equity Gold Gold Private Equity14.7% 23.6% 29.9% 29.5% 78.5% 24.0% 39.8% 18.7% 18.6% 16.8%
2 EM Equity Gold Real Estate REITs High Yield Japanese Yen Commodities Long Treasury EM Equity REITs14.1% 16.5% 17.2% 28.5% 58.2% 23.3% 32.7% 10.8% 14.3% 11.3%
3 US Large Real Estate US I/L US Small US Growth Gold Gold Japanese Yen Private Equity US Value12.9% 15.0% 13.6% 26.9% 37.2% 5.8% 31.0% 8.9% 10.7% 9.4%
4 US Small REITs Private Equity EM Equity EAFE + CAN Real Estate Private Equity US I/L REITs US Small12.4% 13.0% 11.6% 18.9% 33.7% 2.3% 21.1% 7.4% 10.4% 8.8%
5 US Value US I/L Gold US Growth REITs 90 Day Trsy Real Estate High Yield High Yield US Large11.1% 12.2% 10.1% 16.7% 28.6% 1.8% 17.1% 7.0% 9.2% 8.8%
6 REITs US Growth REITs Private Equity US Large US I/L US Growth Private Equity Long Treasury Long Treasury10.7% 11.0% 8.7% 16.2% 28.4% -2.4% 11.8% 4.2% 8.5% 8.6%
7 EAFE + CAN US Large Japanese Yen US Large US Small Euro US I/L US Growth US I/L Gold10.4% 7.9% 5.5% 16.1% 27.2% -4.2% 11.6% 2.3% 8.0% 8.3%
8 Gold High Yield High Yield US Value Gold Private Equity EAFE + CAN EM Equity US Small EM Equity6.7% 6.5% 5.0% 15.5% 24.4% -25.1% 11.6% 2.0% 6.4% 8.1%
9 Commodities Private Equity US Growth High Yield US Value High Yield Euro 90 Day Trsy EAFE + CAN High Yield5.9% 6.3% 2.6% 15.1% 19.7% -26.2% 10.5% 1.1% 6.1% 8.1%
10 High Yield US Value US Large Japanese Yen Commodities US Small Long Treasury US Small Real Estate US Growth5.3% 4.8% 1.5% 14.7% 13.5% -33.8% 9.8% -0.2% 5.2% 7.6%
11 Euro Japanese Yen US Value Long Treasury US I/L US Value Japanese Yen US Large Japanese Yen Real Estate2.9% 0.3% 0.4% 9.4% 11.4% -36.8% 6.5% -0.3% 4.8% 6.2%
12 Real Estate 90 Day Trsy 90 Day Trsy Commodities Private Equity US Large US Large Euro Commodities EAFE + CAN2.7% 0.0% 0.1% 9.0% 10.5% -37.6% 5.8% -0.6% 4.8% 6.1%
13 Private Equity US Small Commodities EAFE + CAN Euro REITs 90 Day Trsy Real Estate US Value US I/L
2.6% -0.2% -1.2% 8.9% 2.5% -38.0% 4.8% -1.6% 4.6% 5.3%14 US I/L Euro Euro US I/L 90 Day Trsy US Growth High Yield REITs US Large Commodities
0.9% -5.8% -3.2% 6.3% 0.1% -38.4% 1.9% -2.2% 4.5% 4.0%15 90 Day Trsy Commodities US Small Real Estate Japanese Yen EAFE + CAN US Value US Value Euro 90 Day Trsy
0.0% -6.2% -4.2% 6.0% -2.6% -43.6% -0.2% -2.9% 4.3% 3.2%16 Long Treasury EAFE + CAN EAFE + CAN 90 Day Trsy Long Treasury Commodities US Small Commodities US Growth Japanese Yen
-5.8% -6.7% -12.2% 0.1% -12.9% -46.5% -1.6% -3.8% 4.3% 2.4%17 Japanese Yen EM Equity EM Equity Euro Real Estate EM Equity REITs EAFE + CAN 90 Day Trsy Euro
-7.2% -8.8% -18.4% -6.5% -35.7% -53.3% -16.8% -5.0% 1.8% 0.3%
Executive Summary Review Outlook Conclusion Appendix
Asset Class Returns Three-Year Cumulative as of March 31, 2012
33
Greece
130.3
106.1
99.6
78.8
75.1
60.7
58.5
54.0
36.6
27.2
0 20 40 60 80 100 120 140
Consumer Discretionary
Information Technology
Industrials
Financials
Materials
Consumer Staples
Energy
Health Care
Utilities
Telecom
S&P 500 Sectors
125.2
108.1
99.2
83.0
74.4
69.9
67.1
65.5
40.4
26.8
26.0
25.4
16.2
13.3
5.7
-66.7
-100 -50 0 50 100 150
Sweden
Norway
Denmark
United Kingdom
Belgium
Switzerland
Germany
Netherlands
France
Austria
Ireland
Finland
Spain
Italy
Portugal
European Country Returns
Asset Class Returns Three Year Cumulative as of March 31, 2012
34 Source: Bloomberg
241.0
230.5
151.4
133.5
128.7
121.2
106.4
99.2
88.9
87.8
82.6
50.3
40.2
0 50 100 150 200 250
Thailand
Indonesia
Philippines
Malaysia
Singapore
Korea
New Zealand
Australia
Hong Kong
India
Taiwan
China
Japan
Asia Pacific Country Returns
Executive Summary Review Outlook Conclusion Appendix
Asset Class Returns Three Year Annualized as of March 31, 2012
35 Source: Bloomberg Executive Summary Review Outlook Conclusion Appendix
229.9
136.0
120.8
118.7
92.1
0 50 100 150 200 250
Colombia
Mexico
Chile
Peru
Brazil
Latin America Country Returns
124.4
110.1
33.0
18.9
5.2
0 50 100 150 200 250
Turkey
South Africa
Egypt
Israel
Morocco
Africa/Mideast Country Returns
Only One in Three Up Cycles Have Advanced Beyond Three Years Analysis of Market Cycles
36 Executive Summary Review Outlook Conclusion Appendix
37
TUCS Comparisons for Public Trusts Greater Than $10 Billion
Source: Wilshire Trust Universe Comparison Services (TUCS). ** All TUCS returns are reported GROSS of Management Fees.
Executive Summary Review Outlook Conclusion Appendix
Master Trust Performance Analysis Performance Comparison
Total Returns of Public Fund Master Trusts > $10 Billion Cumulative Periods Ending: March 31, 2012
Percentile Rankings 1 Qtr 2 Qtrs 3 Qtrs 1 Year 2 Years 3 Years 4 Years 5 Years 7 Years 10 Years 5th 9.21 16.47 7.72 9.95 10.41 18.81 7.30 6.59 6.72 7.30 25th 8.31 13.61 3.21 5.03 9.62 17.20 3.99 3.27 6.21 6.71 50th 7.43 12.50 2.77 4.39 9.16 16.05 3.18 2.91 5.80 6.14 75th 6.82 10.93 2.12 3.74 8.44 15.15 2.70 2.56 5.30 6.00 95th 4.06 7.98 1.40 2.88 7.85 13.49 1.47 1.45 4.67 5.40
No. of Observations 40 40 39 39 38 38 38 38 37 36
Total Fund 6.92 (67) 10.99(72) 3.19(27) 4.57(45) 10.13(20) 17.90(15) 3.52(47) 3.23(27) 5.80(50) 6.11(61) Total Fund Benchmark 5.91 (91) 10.00(80) 4.11(10) 5.83(13) 10.04(20) 17.06(25) 3.42(47) 3.20(30) 5.67(58) 5.95(75)
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