investment management committee - texas documents/imc... · 3. cio update – jerry albright. mr....
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INVESTMENT MANAGEMENT COMMITTEE
July 2019
TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES
AND INVESTMENT MANAGEMENT COMMITTEE
(Committee Chair and Members: Mr. Colonnetta, Chair; Mr. Corpus; Mr.
Hollingsworth; Mr. Moss and Ms. Ramirez)
All or part of the July 18, 2019, meeting of the TRS Investment Management Committee and Board of Trustees may be held by telephone or video conference call as authorized under Sections 551.130 and 551.127 of the Texas Government Code. The Board intends to have a quorum and the presiding officer of the meeting physically present at the following location, which will be open to the public during the open portions of the meeting: 1000 Red River, Austin, Texas 78701 in the TRS East Building, 5th Floor, Boardroom.
AGENDA
July 18, 2019 – 10:30 a.m.
TRS East Building, 5th Floor, Boardroom
1. Call roll of Committee members.
2. Consider the approval of the proposed minutes of the April 25, 2019 committee meeting – Committee Chair.
3. CIO Update including Fleet Strategy; Talent Management; Accomplishments; Notices and Awards; Key Dates and Upcoming Events – Jerry Albright
4. First Quarter 2019 Performance Review – Steve Voss, Mike McCormick and Mike Comstock, Aon Hewitt.
5. Annual Update on External Private Markets – Eric Lang, Carolyn Hansard, Neil Randall, and Grant Walker.
6. Consider recommending to the Board adoption of the Strategic Asset Allocation Proposal – Mohan Balachandran, James Nield and Matt Talbert; Steve Voss and Mike McCormick, AON Hewitt.
7. Preliminary Investment Policy Statement Recommendations – Katy Hoffman and James Nield.
NOTE: The Board of Trustees (Board) of the Teacher Retirement System of Texas will not consider or act upon any item before the Investment Management Committee (Committee) at this meeting of the Committee. This meeting is not a regular meeting of the Board. However, because the full Committee constitutes a quorum of the Board, the meeting of the Committee is also being posted as a meeting of the Board out of an abundance of caution.
Minutes of the Investment Management Committee
April 25, 2019
The Investment Management Committee of the Board of Trustees of the Teacher Retirement System of Texas met on April 25, 2019, in the boardroom located on the fifth floor of the TRS East Building offices at 1000 Red River Street, Austin, Texas.
Committee Members present: Mr. Joe Colonnetta, Chair Mr. David Corpus Mr. Jarvis Hollingsworth Mr. Christopher Moss Other Board Members present: Mr. John Elliott Dr. Greg Gibson Mr. James D. Nance Ms. Nanette Sissney Others present: Brian Guthrie, TRS Steve Voss, Aon Hewitt Andrew Roth, TRS Mike Comstock, Aon Hewitt Don Green, TRS Karen Charlseton, Retired Carolina de Onis, TRS Michael Clayton, SAO Jerry Albright, TRS Jase Auby, TRS Mohan Balachandran, TRS James Nield, TRS Dale West, TRS Brad Gilbert, TRS Heather Traeger, TRS Katherine Farrell, TRS Dr. Keith Brown, Investment Advisor Keith Johnson, Fiduciary Counsel, Reinhart Boerner Van Deuren s.c. Investment Management Committee Chair Mr. Colonnetta called the meeting to order at 1:10 p.m.
1. Call roll of Committee members.
Ms. Farrell called the roll. A quorum was present, Ms. Ramirez was absent.
2. Consider the approval of the proposed minutes of the December 2018 committee meeting – Committee Chair.
On a motion by Mr. Hollingsworth, and with no opposition, the committee voted to approve the proposed minutes for the December 2018, Investment Management Committee meeting as presented.
3. CIO Update – Jerry Albright.
Mr. Jerry Albright noted at the end of quarter four the Trust value was $145 billion and as of last night, it was valued at $154.3 billion. He provided an update on the fleet hires of the 32 planned hires, 15 have been hired with 18 offers out. He noted a lot of the success was through using external firms. Mr. Albright announced Joyce Chow as IMD’s Investor of the Year. He noted that Mohan Balachandran was elected into the Hall of Fame for Risk. Mr. Albright then reviewed upcoming events.
4. Discuss the Fourth Quarter 2018 Performance Review – Steve Voss, Mike McCormick and Mike Constock, Aon Hewitt.
Mr. Mike McCormick stated that this is the fourth quarter report and all data reviewed is through December 31, 2018. He reviewed the major asset class components of the TRS Trust. He noted global equities down 8.2 percent for the quarter but year to date the global equities market is up almost 16 percent. He said the global equity is doing poorly due to slower growth expectations but the stable return, real return type asset classes did fairly well for the period. Mr. McCormick stated the asset classes were within their policy ranges with US equites underweighted and absolute return over weighted. Mr. Steve Voss reported on two key performance indicators (KPIs), excess returns of the actuarial assumed rate of return of 7.25 percent and basis points over various time periods. He said over 3, 5 and 10 year time periods TRS exceeded these KPIs quite notably.
5. Overview of Public Equity Markets – Dale West.
Mr. Dale West began by noting it was not a typical year for public equities, especially for the U.S. market, it was the first down market in nine years. He reported the public equity portfolio is 32 percent of the total Trust. It has become a smaller proportion of the Trust over the last several years. He said the drivers for that were deployment in private markets, opportunistic credit investments, and the tactical underweight in U.S. markets. Mr. West said the majority of the program, 54 percent, is managed internally. Mr. West had further discussion on activism and quantitative strategies versus fundamental strategies.
6. Annual Update on Hedge Funds – Brad Gilbert.
Mr. Brad Gilbert reported on the overall performance and how the two respective hedge fund performed versus the objectives laid out for them. He discussed the fee initiative and how the industry has responded and the 2019 priorities. He said hedge funds are $12.2 billion for the Trust, representing an 8.5 percent allocation. He said in absolute returns over the one-year period hedge funds were down 1.2 percent. Mr. Gilbert reported 75 percent of TRS’ hedge fund assets are on a hurdle-based structure, a “1 or 30” or Texas-style fee structure. He then reviewed the priorities for the remainder of the year such as continuing to review portfolio construction process.
7. Semi-annual Risk Report – James Nield.
Mr. James Nield provided the semi-annual risk report. He reviewed the eight key categories and noted each are in compliance. He gave further detailed report on asset allocation, drawdown risk and liquidity categories.
8. Strategic Asset Allocation (SAA) Update and Review of Benchmark Best Practices – Mohan Balachandran, Matt Talbert and Steve Voss and Mike McCormick, Aon Hewitt.
Mr. Keith Johnson commented on the strategic asset allocation (SAA) process that TRS was using was consistent with the Board’s fiduciary duties. He noted that the process is prudent and appropriately designed to address the Trustees’ fiduciary obligations.
Mr. Mohan Balachandran discussed the following options for the SAA: either stay with current allocation, increase allocation to private markets or use leverage to improve efficiency and balance. He noted the simple increase of allocation to private markets reduces the liquidity of the Trust. Mr. Nield reviewed a liquidity measure and implementation risk. He stated staff’s recommendation for all proposals is to have at least 1.5 times the amount of liquidity available to handle any potential uses of liquidity, to give a margin of safety. In response to Dr. Brown’s inquiry, Mr. Nield stated their approach is conservative as to what is considered illiquid. He said any hedge fund or private allocation is considered illiquid for the purpose of the stress test.
Mr. Balachandran stated as the assets are allocated currently, the expected return is 7 percent. He said with a tilt of the portfolio towards private equity there is a greater potential for 7.25 percent but with an increase in the illiquidity ratio. Mr. Jase Auby noted the actuarial profession’s standards require a zero percent alpha assumption for actuarial purposes. Mr. Balachandran reviewed alternative portfolios as part of the proposed strategy to increase allocation to private markets and TIPS.
Mr. Voss stated the process the Investment Management Division has gone through gathering the information and including assumptions is in keeping with best practices and within very tight tolerances on expected returns and risk. Mr. Colonnetta noted moving the process to adopting the Strategic Asset Allocation in July, rather than September, and keeping the adoption of the Investment Policy Statement in September. Without further discussion, the meeting adjourned at 3:37 p.m. APPROVED BY THE INVESTMENT MANAGEMENT COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE 18TH DAY OF JULY 2019.
______________________________ _________________ Katherine H. Farrell Date Secretary of the TRS Board of Trustees
Jerry Albright, Chief Investment Officer
July 2019
Investment Management Division
Chief Investment Officer Update
2
CIO Update
Trust Value is $153 billion as of Q1 2019
• Fleet Strategyo 32 planned Fleet hires in FY2019; 22 offers accepted and/or extended to
date An additional 10 fleet hires to complete Phase 1
6 current vacancies; hiring in process
o Initiated FY2020 hiring plano Signed Block 71 lease; anticipate relocation in 2021o Finalized planning for Asia office
• Talent Managemento Completed IMD 360 performance reviews
o Implementing initiatives to refine IMD career path framework
o Three IMD employees selected to participate in SPN Exchange Program
o Finalizing CIO succession plan
• Accomplishmentso Hosted SPN Joint Summit in New York Cityo Neil Randall (Private Equity) selected as Chairman of the Institutional
Limited Partners Association (ILPA) Board of Directorso Carolina de Onís (General Counsel) named to the Aspen Institute’s Finance
Leaders Fellowship Class of 2019
• Noticeo Texas Legislature eliminated sunset provision on TRS’ ability to invest up to
10% of Trust assets in Hedge Funds (HB 1612)
• IMD Awardso Private Equity Women Investor Network (PEWIN) Awards: “LP of the Year”o Private Equity team awarded the TRS Executive Director’s Award of
Excellence for development of Strategic Fleet Plano Institutional Investor Hedge Fund Awards: “Public Plan of the Year, Large”o Trusted Insight Awards: “Distinguished Pension CIO”
• Key Dates & Upcoming Eventso IMD Management Committee annual Talent Review – August
o CII Semi-Annual Fall Conference (Minneapolis) – Septembero Semi-Annual Portfolio Reviews – August/September
• September Board Meetingo CIO Updateo External Speaker – Jamie Dimon (JP Morgan)o Market Update
o Review of the Public and Private Strategic Partnership Networko IMD recommended changes to Investment Policy Statemento Proposed Modifications to Performance Incentive Plan
o Aon Hewitt Q2 ’19 Performance Review
General IMD Update Recognition and Upcoming IMD Events
Source: Trust value from State Street as of 3/31/2019. Fleet metrics from TRS IMD as of July 2019
3
Metrics Reporting
Source: State Street Bank, TRS IMDNote: Data shown as calendar-year. Public equity allocation excludes SPN
Metric Objective Target Q4 2018 Q1 2019
Total Trust Excess Return Return in excess of the benchmark return for the Total Trust (3 Year Rolling) +100 bp +71 bp +68 bp
Private Markets Excess Return
Return in excess of the benchmark return for Private Markets investments (3 Year Rolling) +155 bp +210 bp +206 bp
Active Public Markets Excess Return
Return in excess of the benchmark return for Active Public Markets investments (1 Year Rolling) +100 bp -32 bp -98 bp
Principal Investments Percent of portfolio capital plan in principal investments approved (cumulative year-to-date)1
2018: 33%2019: 35% 44% 15%
Public Equity Allocation Percent of internal public equity allocation 55% 54% 57%
EstimatedFee Savings External manager annual fee savings 2018: $53M
2019: $64M $46MTo be reported at April 2020 Board
Meeting
1 – Q4 represents actual capital commitments vs. approvals and actual capital plan vs. budgeted plan
4
Singapore Office
• TRS is exploring an opportunity to better serve its members by establishing an Asia Pacific presence in Singapore
• The legal entity would be established as the Teacher Retirement Investment Company of Texas – Asia (TRICOTA)
Source: State Street Bank
Proposed Singapore Presence Local Presence Advantages
• Purpose
o Increase direct access to local private investments andbetter transaction flow
o Enhance Asian public investing and security trading
o Closely manage regional investments and mitigate risks
• Asset Size – $22.2 billion (14.8% of the Trust)currently invested in Asia-Pacific assets
• Team – Begin with a team of four professionals andfollow ramp up similar to London office
• Demonstrates local market commitment
• Direct deal flow and due diligence
• Establish deeper relationships with managers andbroker partners
• Effectively evaluate emerging markets public equityinvestments
• Risk awareness of markets in real-time
• Enhanced trading capabilities and cost savings
• Monetary Authority of Singapore (MAS) subsidies
5
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Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.
Teacher Retirement System of TexasPerformance Review: First Quarter 2019
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Summary
Concerns of slowing global growth and trade wars partially eased in the first quarter, bolstering global equities in the process, with global equities returning 8.1% during the period
The U.S. nominal yield curve shifted downwards over the quarter with yields falling across all maturities, resulting in the strong returns shown for the Stable Value and Risk Parity components
TRS returned 5.6% for the quarter which was 0.4 percentage points below its benchmark− The underweight positioning to Total USA and an overweight to Other Absolute Return was the primary driver of the return
differential during the period
For the trailing twelve months, TRS returned 3.6% versus the benchmark return of 3.7%− Active management in Total USA was the primary detractor from relative results
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1. Market Summary – First Quarter 2019
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2. Market Value Change
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3. Asset Allocation DetailMarket Value $ in millions)
as of 03/31/2019 InterimPolicyTarget
Relative toInterimPolicy Target
Long TermPolicy Target
Long TermPolicy
Ranges($) (%)Investment Exposure -- 99% 99.0% 0.0% 99.0% 99-110%Total U.S.A. $22,303 14.6% 17.6% -2.9% 18.0 13-23%Non-U.S. Developed $19,702 12.9% 12.6% +0.4% 13.0 8-18%Emerging Markets $13,404 8.8% 8.6% +0.2% 9.0 4-14%Directional Hedge Funds $5,843 3.8% 4.0% -0.2% 4.0 0-10%Private Equity $21,925 14.4% 15.1% -0.7% 13.0 8-18%Global Equity $83,176 54.5% 57.8% -3.2% 57.0 50-64%Long Treasuries $15,622 10.2% 10.6% -0.3% 11.0 0-20%Stable Value Hedge Funds $6,330 4.1% 4.0% +0.1% 4.0 0-10%Absolute Return (including OAR) $5,266 3.5% 0.0% +3.5% 0.0 0-20%Stable Value $27,218 17.8% 14.6% +3.3% 15.0 11-21%TIPS $4,130 2.7% 2.6% +0.1% 3.0 0-8%Real Estate $20,093 13.2% 13.3% -0.1% 14.0 9-19%Energy, Natural Resource and Inf. $8,746 5.7% 5.8% -0.1% 5.0 0-10%Commodities $91 0.1% 0.0% +0.1% 0.0 0-5%Real Return $33,061 21.7% 21.7% 0.0% 22.0 17-27%Risk Parity $7,942 5.2% 5.0% +0.2% 5.0 0-10%Risk Parity $7,942 5.2% 5.0% +0.2% 5.0 0-10%Cash $2,300 1.5% 1.0% +0.5% 1.0 0-5%Asset Allocation Leverage -$1,172 -0.8% 0.0% -0.8% -- --Net Asset Allocation $1,128 0.7% 1.0% -0.3% 1.0 --Total Fund $152,525 100% --- 100.0% --
Note: Asset allocation information shown above is based upon PureView reporting. The excess returns shown above may not be a perfect difference between the actual and benchmark returns due entirely to rounding.
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4. Total TRS Performance Ending 03/31/2019
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5. Total Fund Attribution – One Quarter Ending 03/31/2019
* Negative value represents average leverage exposure during the period
Net Asset Allocation Leverage*
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5. Total Fund Attribution – One Year Ending 03/31/2019
* Negative value represents average leverage exposure during the period
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6. Risk Profile: Total Fund Risk-Return vs. Peers
Note: Public Plan peer group composed of 39 and 38 public funds with total assets in excess of $10B as of 03/31/2019 respectively for the periods above. An exhibit outlining the asset allocation of the peer portfolios is provided in the appendix of this report.
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6. Risk Profile: Trailing 3-Year and 5-Year Risk Metrics Peer Comparison
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7. Global Equity: Performance Summary Ending 03/31/2019
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
First Quarter One Year Three YearsTotal Global Equity 7.4% 1.9% 10.5%Global Equity Benchmark 8.1 2.7 10.8Difference -0.6 -0.8 -0.3Total U.S. Equity 13.0 6.6 12.1Total U.S. Equity Benchmark 14.2 8.9 13.6Difference -1.1 -2.3 -1.4Non-U.S. Equity 10.4 -5.0 8.6Non-U.S. Benchmark 10.3 -4.8 8.8Difference +0.1 -0.2 -0.2Non-U.S. Developed 10.7 -3.6 6.8MSCI EAFE + Canada 10.5 -3.1 7.3Difference +0.2 -0.5 -0.5
Emerging Markets 10.0 -7.1 11.1MSCI Emerging Markets 10.0 -7.2 10.8
Difference +0.0 +0.1 +0.4
Five Years
6.7%6.9
-0.2
8.710.5
-1.8
3.52.9
+0.5
2.92.2
+0.7
4.2
3.7
+0.5
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7. Global Equity: Performance Summary Ending 03/31/2019 (cont’d)First Quarter One Year Three Years Five Years
Directional Hedge Funds 6.4% 1.5% 6.6% 2.3%
HFRI Fund of Funds Composite Index 4.6 0.1 3.9 2.2
Difference +1.8 +1.3 +2.6 +0.1
Total Public Equity 11.0 0.0 9.8 5.5
Public Equity Benchmark 11.3 1.1 10.4 6.0
Difference -0.4 -1.1 -0.5 -0.4
Total Private Equity -1.6 8.2 12.3 11.6
Private Equity Benchmark -0.9 8.3 11.8 10.3
Difference -0.7 -0.1 +0.5 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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8. Stable Value: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Total Stable Value 3.2% 4.5% 3.0%
Total Stable Value Benchmark 4.3% 5.2% 2.1%
Difference -1.0 -0.8 +0.9
Long Treasuries 4.7 6.3 1.4
Treasury Benchmark 4.7 6.2 1.5
Difference +0.1 +0.1 0.0
Stable Value Hedge Funds 1.0 1.1 5.1
Hedge Funds Benchmark 3.2 1.7 3.5
Difference -2.2 -0.6 +1.6
Other Absolute Return 1.7 4.3 6.5
Other Absolute Return Benchmark 1.2 4.6 3.7
Difference +0.5 -0.3 +2.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
6.1%4.6%
+1.5
6.0
5.4
+0.6
4.8
2.1
+2.7
8.0
3.1
+4.8
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9. Real Return: Performance Summary Ending 03/31/2019First Quarter One Year Three Years Five Years
Total Real Return 2.0% 7.0% 9.0% 8.5%
Real Return Benchmark 0.8 5.3 6.2 6.8
Difference +1.2 +1.7 +2.8 +1.8
TIPS 3.3 2.8 1.9 2.1
U.S. TIPS Benchmark 3.2 2.7 1.7 1.9
Difference +0.1 +0.1 +0.2 +0.1
Real Estate 2.0 8.9 10.8 11.7
Real Estate Benchmark 1.5 7.4 7.3 9.4
Difference +0.5 +1.5 +3.5 +2.3
Energy, Natural Resource and Infrastructure 0.9 5.6 -- --
Energy and Natural Resources Benchmark -2.0 2.9 -- --
Difference +3.0 +2.7 -- --
Commodities 34.9 3.3 6.6 -10.0
Commodities Benchmark 15.0 -3.0 6.2 -12.6
Difference +20.0 +6.3 +0.5 +2.6
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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10. Risk Parity: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Total Risk Parity 10.3% 4.8% 9.0%
Risk Parity Benchmark 10.5 4.7 8.2
Difference -0.2 +0.1 +0.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
5.5%
4.3
+1.2
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11.Asset Allocation Leverage: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Cash Equivalents 0.3 1.9 2.0
Cash Benchmark 0.6 2.1 1.2
Difference -0.3 -0.2 +0.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
2.7
0.7
+2.0
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Appendix – Supplemental Reporting
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TRS Commitment Levels vs. Peers (>$10 Billion) as of 03/31/2019
Note: The Public Plan peer universe had 39 observations for the first quarter 2019. TRS allocations may not sum to 100.0% which is entirely due to the impact of rounding
The chart below depicts the asset allocation of peer public funds with assets greater than $10 billion.
− The ends of each line represent the 95th and 5th percentile of exposures, the middle light blue and grey lines represent the 25th and 75th percentile of exposures, the purple square represents the median, and the green dot represents TRS exposure.
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Historical Excess Performance Ending 03/31/2019
Quarterly and Cumulative Excess Performance Total Fund vs. Total Fund Benchmark
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TRS Asset Growth
-101030507090
110130150170
Mar
ket V
alue
(Billi
ons)
Total Fund Historical Growth (September 1997 - March 2019)
$152.5
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External Manager Program: Public Equity Performance as of 03/31/2019
Allocation ($ in billions)
FirstQuarter
OneYear
EP Total Global Equity $27.4 10.9% -1.0%EP Global Equity Benchmark -- 10.3 0.0Difference -- +0.6 -1.0EP U.S.A. $6.1 13.5 7.6EP U.S.A. Benchmark -- 14.2 8.9Difference -- -0.7 -1.3EP Non-U.S. Developed $4.0 11.3 -5.6MSCI EAFE + Canada Policy Index -- 10.5 -3.1Difference -- +0.9 -2.5EP Emerging Markets $5.2 10.8 -8.5MSCI Emerging Markets Policy Index -- 10.0 -7.2Difference -- +0.8 -1.3EP World Equity $6.3 12.5 2.2EP World Equity Benchmark -- 12.3 2.9Difference -- +0.2 -0.7EP Directional Hedge Funds $5.8 6.4 1.5HFRI Fund of Funds Composite Index -- 4.6 0.1Difference -- +1.8 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Three Years10.0%
9.6+0.312.313.6-1.27.37.3
+0.011.110.8+0.311.511.0+0.56.63.9
+2.6
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External Manager Program: Stable Value/Total Program Performance as of 03/31/2019
Allocation ($ in billions)
FirstQuarter One Year Three
Years
EP Total Stable Value $6.3 1.0% 1.1% 5.1%
EP Stable Value Benchmark -- 3.2 1.7 3.4
Difference -- -2.2 -0.6 +1.7
EP Stable Value Hedge Funds $6.3 1.0 1.1 5.1
EP Stable Value Hedge Funds Benchmark -- 3.2 1.7 3.5
Difference -- -2.2 -0.6 +1.6
Total External Public Program $33.7 8.9 -0.7 9.2
EP External Public Benchmark -- 8.9 0.3 8.7
Difference -- +0.0 -0.9 +0.5
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Public Strategic Partnership Program (SPN): Performance Summary as of 03/31/2019
The Public SPNs in aggregate outperformed the benchmark during the first quarter and also over the trailing one and three-year periods.
Allocation ($ in billions)
FirstQuarter
OneYear
Three Years
Public Strategic Partnership $8.3 10.5% 2.0% 8.8%Public SPN Benchmark -- 9.6% 3.2% 8.2%
Difference -- +0.9 -1.1 +0.5
Blackrock $2.1 11.0% 3.8% 9.9%J.P. Morgan $2.2 10.5% 0.1% 8.4%Neuberger Berman $2.0 10.4% 1.6% 8.4%Morgan Stanley $2.0 10.0% 2.8% 8.4%
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Total Fund Performance Benchmark – 17.6% MSCI U.S.A. IMI, 12.6% MSCI EAFE plus Canada Index, 8.6% MSCI Emerging Markets Index, 4.0% HFRI FoF Composite Index, 15.1% State Street Private Equity Index (1 quarter lagged), 10.6% Blmb. Barc. Long Term Treasury Index, 4.0% HFRI FoF Conservative Index, 1.0% Citigroup 3 Mo. T-Bill Index, 2.6% Blmb. Barc. U.S. TIPS Index, 13.3% NCREIF ODCE Index (1 quarter lagged), 5.8% Energy and Natural Resources Benchmark, and 5.0% Risk Parity Benchmark
Global Equity Benchmark – 30.4% MSCI U.S.A. IMI, 21.7% MSCI EAFE plus Canada Index, 14.8% MSCI Emerging Markets Index, 6.9% HFRI FoF Composite Index, and 26.1% State Street Private Equity Index (1 quarter lagged)– TF U.S. Equity Benchmark - MSCI U.S.A. Investable Markets Index (IMI)– Emerging Markets Equity Benchmark – MSCI Emerging Markets Index– Non-US Developed Equity Benchmark– MSCI EAFE + Canada Index– Directional Hedge Funds – HFRI Fund of Funds (FoF) Composite Index– Private Equity Benchmark - State Street Private Equity Index (1 quarter lagged)
Benchmarks
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 periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Benchmarks (cont’d) Stable Value Benchmark – 71.2% Blmb. Barc. Long Term Treasury Index and 28.8% HFRI FoF Conservative Index
– US Treasuries Benchmark – Bloomberg Barclays Long Term Treasury Index– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index– Other Absolute Return Benchmark - 3 Mo. LIBOR + 2%– Cash Benchmark - Citigroup 3 Mo. Treasury Bill Index
Real Return Benchmark – 61.3% NCREIF ODCE Index, 11.8% Blmb. Barc. U.S. TIPS Index, and 26.8% Energy & Natural Resources Benchmark– Real Estate Benchmark – NCREIF ODCE Index (1 quarter lagged) – US TIPS Benchmark – Bloomberg Barclays U.S. TIPS Index– Energy and Natural Resources Benchmark – 75% Cambridge Associates Natural Resources Index (reweighted) and 25%
quarterly Seasonally-Adjusted Consumer Price Index (1 quarter lagged) – Commodities 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 periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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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. Themagnitude 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 Other is a combination of Cash Flow Effect and Benchmark Effect:– 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 Effect– 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)
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Disclaimers and Notes
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Disclaimers and NotesDisclaimers:
Please review this report and notify Aon Hewitt Investment Consulting (AHIC) with any issues or questions you may have with respect to investment performance or any other matter set forth herein.
The client portfolio data presented in this report have been obtained from the custodian. AHIC has compared this information to the investment managers’ reported returns and believes the information to be accurate. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice.
Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for more information on HFR indices
Notes:
The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time weighted. Returns for periods longer than one year are annualized.
Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.
Due to rounding throughout the report, percentage totals displayed may not sum up to 100.0%. Additionally, individual fund totals in dollar terms may not sum up to the plan totals.
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Legal Disclosures and Disclaimers
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information containedherein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.
This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.
© Aon plc 2019. All rights reserved.
Eric Lang, Senior Managing Director
July 2019
Investment Management Division
External Private Markets
2
Overview
• Private Markets Philosophy
• Private Markets Role in the Trust
• TRICOT Update
• Building the Fleet Status
• Data Analytics
• Priorities
3
Philosophy
• Culture and Team: Demonstrating the TRS IMD culture through collaboration, openness, candor and meritocracy of ideas. Hire and retain great investors for internal capabilities
• World Class Investors through Partnership: Being the partner of choice for our managers and peers using speed, consistency, predictability, and our people
• Transparency: Using improved transparency through reporting and communication both internally and externally
• Innovate: Utilizing unique partnership and investment structures. Focus on technology and data. Always evolving
• Value Driven: Finding value where others are not looking
• Industry Leadership: Maintaining industry leadership roles across all private asset classes
4
Private Markets Role in the TrustExecutive Summary ($Millions)
Source: State Street based on 12/31/18 valuations; TWR as of 3/31/19; Percentage of trust based on 12/31/18 valuations and 3/31/19 Total Trust Value; Activity based on TRS IMD dataNote: ENRI TWR reflects combined ENR and Infrastructure performance from 10/1/13 to 3/31/19 Note: ENRI IRR reflects performance from fund investments initially transferred to ENRI portfolio (inception date: 10/28/04)Note: Approval activity does not include Emerging Managers. Capital Plan Impact does include Emerging Managers. Principal Investment Vehicles (PIVs) and rebalances typically do not have an impact on the Capital Plan.
PRINCIPAL INVESTMENTS (“PI”) PERFORMANCE
Portfolio Market Value% of
PortfolioNo.
(active)1-YearTWR
3-YearTWR
5-YearTWR
1-YearIRR
3-YearIRR
5-YearIRR
SIIRR
Energy, Natural Resources & Infrastructure $ 2,978 35.2% 23 8.1% 11.7% 16.0% 8.7% 14.8% 14.3% 14.1%Private Equity 5,538 25.8% 55 10.6% 15.2% 13.0% 10.7% 15.1% 13.1% 17.4%Real Estate 8,918 45.5% 80 10.2% 13.1% 14.2% 10.0% 13.2% 14.4% 16.2%Total $17,434 35.2% 158 10.2% 13.8% 14.3% 10.0% 14.1% 14.0% 16.3%
PORTFOLIO PERFORMANCE
Portfolio Market Value% of Trust
1-YearTWR
3-YearTWR
5-YearTWR
1-YearIRR
3-YearIRR
5-YearIRR
SIIRR
SAA Median Return
Premier List Invested
ManagersEnergy, Natural Resources & Infrastructure $ 8,471 5.6% 5.6% 10.1% 2.6% 4.7% 10.7% 6.1% 6.6% 7.3% 23Private Equity 21,460 14.1% 8.2% 12.3% 11.6% 8.4% 12.3% 11.5% 13.0% 8.4% 39Real Estate 19,616 12.9% 8.9% 10.8% 11.7% 8.9% 10.6% 11.6% 9.1% 8.5% 42Total $49,547 32.5% 8.1% 11.4% 11.0% 8.0% 11.3% 10.8% 10.8% 8.3% 87
2018 APPROVAL ACTIVITYNUMBER OF INVESTMENTS APPROVED
Portfolio Funds PIVs PIs TotalENRI 11 9 18 38Private Equity 17 11 46 74Real Estate 13 14 95 122Total 41 34 159 234
2018 APPROVAL ACTIVITYAMOUNT OF INVESTMENTS APPROVED
Portfolio Funds PIVs PIs TotalENRI $1,850 $1,300 $935 $4,085 Private Equity 3,185 1,688 1,569 6,442 Real Estate 3,629 2,520 3,764 9,914 Total $8,664 $5,509 $6,268 $20,441
2018 CAPITAL PLAN IMPACTAMOUNTS
Portfolio Funds PIs TotalENRI $1,850 $935 $2,785 Private Equity 3,220 1,306 4,525 Real Estate 2,304 3,524 5,828 Total $7,373 $5,765 $13,138
5
TRICOT UpdateTRS London
• Entering fourth year with solid results, sourcing principal investments throughout Europeo Since inception, sourced 212 opportunities representing over $22.6 billion in deal flowo In 2018, sourced 66 opportunities representing $7.7 billion in deal flowo Directly participated in 17 investments totaling $675 million during 2018o Over 200 meetings taken during the past year
• Expanding European deal sourcing programo Building direct relationships in Private Equity and ENRI with London-officed investment banks and in Real
Estate via operating partners with the goal of “bringing” investment ideas to our managers
• Providing team resources for fund partnership management, monitoring, and underwritingcapabilities for Austin-based team members on an ad-hoc basis
• Continuing of a successful London rotation - staffed with five team members• Reviewing a potential new office location to meet future growth needs with lower costs
6
Building the FleetPrivate Markets Cruiser
• Hired eight new team members in 2018 with an additional ten hired or identified to date for 2019
• The Private Equity and Real Estate Investment Committees are up and running
o Reviewing and approving all investments prior to Internal Investment Committee
o Approving “small deals” principal investments
o Approving opt-out investments in principal investment vehicles
• Preparing for team growth by focusing on organization design
• Holding outside investment board seats
• Training new hires in the Texas Way
7
Data Analytics
• Developing a data centric mindset – everyone at all levels within the External Private Markets value chain
• Starting simple while planning and working for the futureo Focusing on data we haveo Identifying additional datao Reviewing industry best practiceso Using technology more efficiently
• 2019 Key Prioritieso Implementing broad integration and adoption of new combined pipeline
tracking and relationship management toolo Moving away from spreadsheetso Better relationship and portfolio management tracking
o Developing a Fleet Savings Model to track metrics and fleet resourceso Automating processes that have the biggest impacto Making data more easily accessible to investment professionalso Work from everywhere initiatives
• Supporting industry initiatives such as ILPA
8
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APPENDIX
10
Private Markets OverviewOrganizational Structure
TRICOT – TRS LONDON
Allen MacDonell, CFAManaging DirectorBBA, University of GeorgiaMBA, Georgia State
Kimberly CareyInvestment ManagerBBA, Texas A&M
Haley TrainorAssociateBS, Northwestern
Justin WangSr. AssociateBBA, UT Austin
PRIVATE MARKETS DATA ANALYTICS AND SUPPORT
Tim KoekSr. Investment ManagerBA, Griffith University LLB, Griffith University
Melissa KleihegeAnalystBS, Texas A&M
Jeff StaffordAssociateBS, Pepperdine University, Canberra
Barbara Woodard, CPASr. AssociateBBA, Texas A&M
Eric LangSr. Managing DirectorBBA, UT AustinMBA, U. of Houston
Neil RandallManaging Director BBA, Texas A&MMS, Texas A&M
Grant WalkerSr. DirectorBBA, BaylorMBA, St. Edwards
Carolyn HansardDirector BS, UT Austin MBA, UT Austin
Private Equity13% of Trust Benchmark
Real Estate14% of Trust Benchmark
Energy, Natural Resources, & Infra.5% of Trust Benchmark
Private Markets32% of Trust Benchmark
Sam ZedanSenior AnalystBA, U of Illinois, Chicago
Nikhil MothukuriContractor B-Tech, JNTU, IndiaMS, U. of Hartford, Connecticut
Tia WahidContractor
Stephanie DaulAssociate BBA, Texas State University
Note: TRS PE leverages a Blackrock secondee in London
11
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12
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13
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Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.
Teacher Retirement System of TexasPerformance Review: First Quarter 2019
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Summary
Concerns of slowing global growth and trade wars partially eased in the first quarter, bolstering global equities in the process, with global equities returning 8.1% during the period
The U.S. nominal yield curve shifted downwards over the quarter with yields falling across all maturities, resulting in the strong returns shown for the Stable Value and Risk Parity components
TRS returned 5.6% for the quarter which was 0.4 percentage points below its benchmark− The underweight positioning to Total USA and an overweight to Other Absolute Return was the primary driver of the return
differential during the period
For the trailing twelve months, TRS returned 3.6% versus the benchmark return of 3.7%− Active management in Total USA was the primary detractor from relative results
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1. Market Summary – First Quarter 2019
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2. Market Value Change
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3. Asset Allocation DetailMarket Value $ in millions)
as of 03/31/2019 InterimPolicyTarget
Relative toInterimPolicy Target
Long TermPolicy Target
Long TermPolicy
Ranges($) (%)Investment Exposure -- 99% 99.0% 0.0% 99.0% 99-110%Total U.S.A. $22,303 14.6% 17.6% -2.9% 18.0 13-23%Non-U.S. Developed $19,702 12.9% 12.6% +0.4% 13.0 8-18%Emerging Markets $13,404 8.8% 8.6% +0.2% 9.0 4-14%Directional Hedge Funds $5,843 3.8% 4.0% -0.2% 4.0 0-10%Private Equity $21,925 14.4% 15.1% -0.7% 13.0 8-18%Global Equity $83,176 54.5% 57.8% -3.2% 57.0 50-64%Long Treasuries $15,622 10.2% 10.6% -0.3% 11.0 0-20%Stable Value Hedge Funds $6,330 4.1% 4.0% +0.1% 4.0 0-10%Absolute Return (including OAR) $5,266 3.5% 0.0% +3.5% 0.0 0-20%Stable Value $27,218 17.8% 14.6% +3.3% 15.0 11-21%TIPS $4,130 2.7% 2.6% +0.1% 3.0 0-8%Real Estate $20,093 13.2% 13.3% -0.1% 14.0 9-19%Energy, Natural Resource and Inf. $8,746 5.7% 5.8% -0.1% 5.0 0-10%Commodities $91 0.1% 0.0% +0.1% 0.0 0-5%Real Return $33,061 21.7% 21.7% 0.0% 22.0 17-27%Risk Parity $7,942 5.2% 5.0% +0.2% 5.0 0-10%Risk Parity $7,942 5.2% 5.0% +0.2% 5.0 0-10%Cash $2,300 1.5% 1.0% +0.5% 1.0 0-5%Asset Allocation Leverage -$1,172 -0.8% 0.0% -0.8% -- --Net Asset Allocation $1,128 0.7% 1.0% -0.3% 1.0 --Total Fund $152,525 100% --- 100.0% --
Note: Asset allocation information shown above is based upon PureView reporting. The excess returns shown above may not be a perfect difference between the actual and benchmark returns due entirely to rounding.
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4. Total TRS Performance Ending 03/31/2019
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5. Total Fund Attribution – One Quarter Ending 03/31/2019
* Negative value represents average leverage exposure during the period
Net Asset Allocation Leverage*
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5. Total Fund Attribution – One Year Ending 03/31/2019
* Negative value represents average leverage exposure during the period
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6. Risk Profile: Total Fund Risk-Return vs. Peers
Note: Public Plan peer group composed of 39 and 38 public funds with total assets in excess of $10B as of 03/31/2019 respectively for the periods above. An exhibit outlining the asset allocation of the peer portfolios is provided in the appendix of this report.
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6. Risk Profile: Trailing 3-Year and 5-Year Risk Metrics Peer Comparison
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7. Global Equity: Performance Summary Ending 03/31/2019
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
First Quarter One Year Three YearsTotal Global Equity 7.4% 1.9% 10.5%Global Equity Benchmark 8.1 2.7 10.8Difference -0.6 -0.8 -0.3Total U.S. Equity 13.0 6.6 12.1Total U.S. Equity Benchmark 14.2 8.9 13.6Difference -1.1 -2.3 -1.4Non-U.S. Equity 10.4 -5.0 8.6Non-U.S. Benchmark 10.3 -4.8 8.8Difference +0.1 -0.2 -0.2Non-U.S. Developed 10.7 -3.6 6.8MSCI EAFE + Canada 10.5 -3.1 7.3Difference +0.2 -0.5 -0.5
Emerging Markets 10.0 -7.1 11.1MSCI Emerging Markets 10.0 -7.2 10.8
Difference +0.0 +0.1 +0.4
Five Years
6.7%6.9
-0.2
8.710.5
-1.8
3.52.9
+0.5
2.92.2
+0.7
4.2
3.7
+0.5
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7. Global Equity: Performance Summary Ending 03/31/2019 (cont’d)First Quarter One Year Three Years Five Years
Directional Hedge Funds 6.4% 1.5% 6.6% 2.3%
HFRI Fund of Funds Composite Index 4.6 0.1 3.9 2.2
Difference +1.8 +1.3 +2.6 +0.1
Total Public Equity 11.0 0.0 9.8 5.5
Public Equity Benchmark 11.3 1.1 10.4 6.0
Difference -0.4 -1.1 -0.5 -0.4
Total Private Equity -1.6 8.2 12.3 11.6
Private Equity Benchmark -0.9 8.3 11.8 10.3
Difference -0.7 -0.1 +0.5 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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8. Stable Value: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Total Stable Value 3.2% 4.5% 3.0%
Total Stable Value Benchmark 4.3% 5.2% 2.1%
Difference -1.0 -0.8 +0.9
Long Treasuries 4.7 6.3 1.4
Treasury Benchmark 4.7 6.2 1.5
Difference +0.1 +0.1 0.0
Stable Value Hedge Funds 1.0 1.1 5.1
Hedge Funds Benchmark 3.2 1.7 3.5
Difference -2.2 -0.6 +1.6
Other Absolute Return 1.7 4.3 6.5
Other Absolute Return Benchmark 1.2 4.6 3.7
Difference +0.5 -0.3 +2.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
6.1%4.6%
+1.5
6.0
5.4
+0.6
4.8
2.1
+2.7
8.0
3.1
+4.8
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9. Real Return: Performance Summary Ending 03/31/2019First Quarter One Year Three Years Five Years
Total Real Return 2.0% 7.0% 9.0% 8.5%
Real Return Benchmark 0.8 5.3 6.2 6.8
Difference +1.2 +1.7 +2.8 +1.8
TIPS 3.3 2.8 1.9 2.1
U.S. TIPS Benchmark 3.2 2.7 1.7 1.9
Difference +0.1 +0.1 +0.2 +0.1
Real Estate 2.0 8.9 10.8 11.7
Real Estate Benchmark 1.5 7.4 7.3 9.4
Difference +0.5 +1.5 +3.5 +2.3
Energy, Natural Resource and Infrastructure 0.9 5.6 -- --
Energy and Natural Resources Benchmark -2.0 2.9 -- --
Difference +3.0 +2.7 -- --
Commodities 34.9 3.3 6.6 -10.0
Commodities Benchmark 15.0 -3.0 6.2 -12.6
Difference +20.0 +6.3 +0.5 +2.6
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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10. Risk Parity: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Total Risk Parity 10.3% 4.8% 9.0%
Risk Parity Benchmark 10.5 4.7 8.2
Difference -0.2 +0.1 +0.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
5.5%
4.3
+1.2
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11.Asset Allocation Leverage: Performance Summary Ending 03/31/2019First Quarter One Year Three Years
Cash Equivalents 0.3 1.9 2.0
Cash Benchmark 0.6 2.1 1.2
Difference -0.3 -0.2 +0.8
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
2.7
0.7
+2.0
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Appendix – Supplemental Reporting
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TRS Commitment Levels vs. Peers (>$10 Billion) as of 03/31/2019
Note: The Public Plan peer universe had 39 observations for the first quarter 2019. TRS allocations may not sum to 100.0% which is entirely due to the impact of rounding
The chart below depicts the asset allocation of peer public funds with assets greater than $10 billion.
− The ends of each line represent the 95th and 5th percentile of exposures, the middle light blue and grey lines represent the 25th and 75th percentile of exposures, the purple square represents the median, and the green dot represents TRS exposure.
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Historical Excess Performance Ending 03/31/2019
Quarterly and Cumulative Excess Performance Total Fund vs. Total Fund Benchmark
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TRS Asset Growth
-101030507090
110130150170
Mar
ket V
alue
(Billi
ons)
Total Fund Historical Growth (September 1997 - March 2019)
$152.5
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External Manager Program: Public Equity Performance as of 03/31/2019
Allocation ($ in billions)
FirstQuarter
OneYear
EP Total Global Equity $27.4 10.9% -1.0%EP Global Equity Benchmark -- 10.3 0.0Difference -- +0.6 -1.0EP U.S.A. $6.1 13.5 7.6EP U.S.A. Benchmark -- 14.2 8.9Difference -- -0.7 -1.3EP Non-U.S. Developed $4.0 11.3 -5.6MSCI EAFE + Canada Policy Index -- 10.5 -3.1Difference -- +0.9 -2.5EP Emerging Markets $5.2 10.8 -8.5MSCI Emerging Markets Policy Index -- 10.0 -7.2Difference -- +0.8 -1.3EP World Equity $6.3 12.5 2.2EP World Equity Benchmark -- 12.3 2.9Difference -- +0.2 -0.7EP Directional Hedge Funds $5.8 6.4 1.5HFRI Fund of Funds Composite Index -- 4.6 0.1Difference -- +1.8 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Three Years10.0%
9.6+0.312.313.6-1.27.37.3
+0.011.110.8+0.311.511.0+0.56.63.9
+2.6
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External Manager Program: Stable Value/Total Program Performance as of 03/31/2019
Allocation ($ in billions)
FirstQuarter One Year Three
Years
EP Total Stable Value $6.3 1.0% 1.1% 5.1%
EP Stable Value Benchmark -- 3.2 1.7 3.4
Difference -- -2.2 -0.6 +1.7
EP Stable Value Hedge Funds $6.3 1.0 1.1 5.1
EP Stable Value Hedge Funds Benchmark -- 3.2 1.7 3.5
Difference -- -2.2 -0.6 +1.6
Total External Public Program $33.7 8.9 -0.7 9.2
EP External Public Benchmark -- 8.9 0.3 8.7
Difference -- +0.0 -0.9 +0.5
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Public Strategic Partnership Program (SPN): Performance Summary as of 03/31/2019
The Public SPNs in aggregate outperformed the benchmark during the first quarter and also over the trailing one and three-year periods.
Allocation ($ in billions)
FirstQuarter
OneYear
Three Years
Public Strategic Partnership $8.3 10.5% 2.0% 8.8%Public SPN Benchmark -- 9.6% 3.2% 8.2%
Difference -- +0.9 -1.1 +0.5
Blackrock $2.1 11.0% 3.8% 9.9%J.P. Morgan $2.2 10.5% 0.1% 8.4%Neuberger Berman $2.0 10.4% 1.6% 8.4%Morgan Stanley $2.0 10.0% 2.8% 8.4%
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Total Fund Performance Benchmark – 17.6% MSCI U.S.A. IMI, 12.6% MSCI EAFE plus Canada Index, 8.6% MSCI Emerging Markets Index, 4.0% HFRI FoF Composite Index, 15.1% State Street Private Equity Index (1 quarter lagged), 10.6% Blmb. Barc. Long Term Treasury Index, 4.0% HFRI FoF Conservative Index, 1.0% Citigroup 3 Mo. T-Bill Index, 2.6% Blmb. Barc. U.S. TIPS Index, 13.3% NCREIF ODCE Index (1 quarter lagged), 5.8% Energy and Natural Resources Benchmark, and 5.0% Risk Parity Benchmark
Global Equity Benchmark – 30.4% MSCI U.S.A. IMI, 21.7% MSCI EAFE plus Canada Index, 14.8% MSCI Emerging Markets Index, 6.9% HFRI FoF Composite Index, and 26.1% State Street Private Equity Index (1 quarter lagged)– TF U.S. Equity Benchmark - MSCI U.S.A. Investable Markets Index (IMI)– Emerging Markets Equity Benchmark – MSCI Emerging Markets Index– Non-US Developed Equity Benchmark– MSCI EAFE + Canada Index– Directional Hedge Funds – HFRI Fund of Funds (FoF) Composite Index– Private Equity Benchmark - State Street Private Equity Index (1 quarter lagged)
Benchmarks
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 periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 25
Benchmarks (cont’d) Stable Value Benchmark – 71.2% Blmb. Barc. Long Term Treasury Index and 28.8% HFRI FoF Conservative Index
– US Treasuries Benchmark – Bloomberg Barclays Long Term Treasury Index– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index– Other Absolute Return Benchmark - 3 Mo. LIBOR + 2%– Cash Benchmark - Citigroup 3 Mo. Treasury Bill Index
Real Return Benchmark – 61.3% NCREIF ODCE Index, 11.8% Blmb. Barc. U.S. TIPS Index, and 26.8% Energy & Natural Resources Benchmark– Real Estate Benchmark – NCREIF ODCE Index (1 quarter lagged) – US TIPS Benchmark – Bloomberg Barclays U.S. TIPS Index– Energy and Natural Resources Benchmark – 75% Cambridge Associates Natural Resources Index (reweighted) and 25%
quarterly Seasonally-Adjusted Consumer Price Index (1 quarter lagged) – Commodities 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 periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 26
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. Themagnitude 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 Other is a combination of Cash Flow Effect and Benchmark Effect:– 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 Effect– 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)
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 27
Disclaimers and Notes
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 28
Disclaimers and NotesDisclaimers:
Please review this report and notify Aon Hewitt Investment Consulting (AHIC) with any issues or questions you may have with respect to investment performance or any other matter set forth herein.
The client portfolio data presented in this report have been obtained from the custodian. AHIC has compared this information to the investment managers’ reported returns and believes the information to be accurate. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice.
Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for more information on HFR indices
Notes:
The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time weighted. Returns for periods longer than one year are annualized.
Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.
Due to rounding throughout the report, percentage totals displayed may not sum up to 100.0%. Additionally, individual fund totals in dollar terms may not sum up to the plan totals.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 29
Legal Disclosures and Disclaimers
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information containedherein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.
This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.
© Aon plc 2019. All rights reserved.
Carolyn Hansard, Senior Director
July 2019
Investment Management Division
Energy, Natural Resources & Infrastructure
2
Overview
• ENRI in the Trust
• 2018 Performance
• Market Conditions: Assessing Opportunities in a Bifurcated Market
• Spotlight: ENRI Risk Assessment Framework
• Priorities
3
0%
3%
6%
9%
ENRI % of Trust ENRI Target
Risk Parity 5%
Role in the TrustEnergy, Natural Resources & Infrastructure (ENRI)
Source: State Street
ENRI TARGET % OF TRUST HISTORICAL TRUST ALLOCATION
Sept 2016: Infrastructure
transferred to ENR (+I)
Sept 2013: ENR established as a
policy asset class
ENRI 5%
Global Equity57%
Real Return22%
Stable Value15%
Net Asset Allocation Leverage 1%
5.6%
4
Performance Summary($Millions)
PORTFOLIO PERFORMANCE PORTFOLIO GROWTH1-Year 3-Year 5-Year ENRI ($ millions) 1-Year 3-Year 5-Year
Asset Class Return Return Return Ending Value $8,471 $8,471 $8,471ENRI IRR 4.7% 10.7% 6.1% less Starting Value 6,357 3,652 3,363ENRI TWR 5.6% 10.1% 2.6% less Contributions 2,613 5,590 7,788ENRI Benchmark 2.9% 8.3% (0.4%) plus Distributions 836 2,481 4,193ENRI Excess Return 2.7% 1.8% 3.0% Investment Return $337 $1,710 $1,513
PORTFOLIO STRATEGY SUMMARY
Style
Target Portfolio Weight % of Portfolio Investment Returns
12/31/2018 12/31/2015 Change 1-Year TWR 3-Year TWR SI IRR
Energy Diversified 45.0% 52.2% 38.1% 14.1% 4.1% 9.0% 1.2%
Infrastructure 45.0% 41.5% 50.9% (9.4%) 8.1% -- 11.3%
Natural Resources 10.0% 6.3% 11.0% (4.7%) 4.0% 13.6% 14.3%
ENRI TOTAL 100.0% 100.0% 100.0% 0.0% 5.6% 10.1% 6.6%
FUND AND PRINCIPAL INVESTMENTS PERFORMANCE
PortfolioMarket Value
% of Portfolio
No. (active)
1-YearTWR
3-YearTWR
5-YearTWR
1-YearIRR
3-YearIRR
5-YearIRR SI IRR
Funds $5,493 64.8% 59 4.8% 9.5% (3.6%) 2.9% 9.2% 3.6% 4.6%
Principal Investments 2,978 35.2% 23 8.1% 11.7% 16.0% 8.7% 14.8% 14.3% 14.1%
ENRI TOTAL $8,471 100.0% 82 5.6% 10.1% 2.6% 4.7% 10.7% 6.1% 6.6%
Source: State Street based on 12/31/18 valuations; TWR as of 3/31/19Note: SI IRR reflects performance from fund investments initially transferred to ENRI portfolio (inception date: 10/28/04)Note: TWR and Benchmark reflect ENR performance from 10/01/13 through 9/30/2016 and ENRI (ENR plus Infrastructure) from 10/01/16 through 3/31/19Note: Legal fees are included in the total aggregate IRR and TWR performance
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PerformanceTRS Vintage Year Comparison
Source: State Street as of 12/31/18; Cambridge Associates as of 12/31/18
TOTAL ENRI PORTFOLIO VERSUS BENCHMARK
4.4%
18.9%
4.3%
-100.0%
10.0%
8.3%
11.1% 10.9%
16.3%
12.1%
-9.1%
3.4%
7.5%
2.1%
5.4%
8.0%
5.1%
9.1%10.3%
7.7%6.7%
-8.6%-10%
-5%
0%
5%
10%
15%
20%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018TRS Vintage Year SI IRR ENRI Benchmark Vintage Year
• ENRI outperformed the benchmark 9 out of the last 11 years
7
Source: State Street as of 12/31/18 Note: Target is the long-term target for Principal Investments
PerformanceENRI Principal Investments Program
• ENRI continues to focus on Principal Investments with increased transaction volumes through innovative structures
• Capital Plan impact of approximately $935 million in 2018
PRINCIPAL INVESTMENT MARKET VALUE OVER TIME TARGET
83% 76% 73% 80% 75% 71% 65%
17% 24% 27% 20% 25% 29% 35%
0%
25%
50%
75%
100%
2012 2013 2014 2015 2016 2017 2018
Funds Principal Investments
60%
40%
Funds Principal Investments
8
Market ConditionsEnergy and Infrastructure
Attractive (To Buyer) Unattractive (To Buyer) A TALE OF TWO CITIES
Industry Fundamentals
Public TransactionMultiples
Private TransactionMultiples
PE $ Raised
Capital Markets Availability
Energy InfrastructureEnergy Infrastructure
• Capital markets remain closed for energy, but robust for infrastructure assets across sectors (with exception of midstream) and geographies
• Energy and Infrastructure fundamentals are solid• Commodity prices remain volatile
• Firms are utilizing unique structures to raise capital as multiples in energy remain low
• Infrastructure assets are transacting at high multiples
• Energy companies (upstream/services) are trading at historical lows• Infrastructure sectors, with the exception of midstream, remain fully priced
as investors continue to seek yield
• Traditional plan sponsors are de-emphasizing hydrocarbon strategies • Global unlisted Infrastructure funds raised a total of $92 billion in 2018 and
have significant dry powder
Source: Preqin; IHS Markit; EIA; St. Louis Fed; European Central Bank; Bloomberg
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APPENDIX
12
TRICOT (ENRI)
OrganizationENRI Team
Mark Cassens*, CFASenior Investment ManagerBS, UT AustinMBA, UT Austin
Emerson HalsteadSenior AssociateBS, UT AustinMBA, Indiana University BloomingtonMA, Harvard University
Carolyn HansardSenior DirectorBS, UT AustinMBA, UT Austin
Edgar MayorgaSenior AnalystBA, UT Austin
Eric ChangInvestment ManagerBBA, UT Austin
Allen MacDonell, CFAManaging DirectorBBA, University of GeorgiaMBA, Georgia State
Maddie Kurapati, PEAssociateBS, Osmania University, IndiaMS, Stanford UniversityMBA, UT Austin
Mary RogersContractorBA, Southwestern UniversityMBA, Texas State University
DeMarius McKeeAssociate (Joins Jul ’19)BS, UT Dallas
*Internal Fundamental team
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Neil Randall, Managing Director
July 2019
Investment Management Division
Private Equity
2
Overview
• Private Equity in the Trust
• 2018 Performance
• Market Conditions: Continuing to navigate high valuations in the private markets
• Spotlight: Strategic Plan Update
• Priorities
3
0%
4%
8%
12%
16%PE % of Trust PE Target
Role in the TrustPrivate Equity (PE)
Source: State Street
PE TARGET % OF TRUST HISTORICAL TRUST ALLOCATION
Risk Parity 5%
PE 13%
Global Equity57%
Real Return22%
Stable Value15%
Net Asset Allocation Leverage 1%
14.1%
4
Performance Summary($Millions)
PORTFOLIO PERFORMANCE PORTFOLIO GROWTH
Asset Class1-Year Return
3-Year Return
5-Year Return
Private Equity ($ millions) 1-Year 3-Year 5-Year
Private Equity IRR 8.4% 12.3% 11.5% Ending Value $21,460 $21,460 $21,460Private Equity TWR 8.2% 12.3% 11.6% less Starting Value 19,636 15,361 14,858Private Equity Benchmark 8.3% 11.8% 10.3% less Contributions 3,911 11,203 17,448Private Equity Excess Return (0.1%) 0.6% 1.3% plus Distributions 3,731 11,495 20,209TUCS Peer (Percentile) 46th 23rd 21st Investment Return $1,644 $6,391 $9,363
PORTFOLIO STRATEGY SUMMARY
Style
Target Portfolio Weight % of Portfolio Investment Returns
12/31/2018 12/31/2015 Change 1-Year TWR 3-Year TWR SI IRR
Buyout 70.0% 70.8% 71.7% (0.9%) 6.1% 12.3% 13.6%
Venture / Growth Equity 15.0% 18.4% 14.6% 3.8% 19.2% 14.5% 11.3%
Credit / Special Situations 15.0% 10.8% 13.7% (2.9%) 5.0% 10.3% 11.2%
PRIVATE EQUITY TOTAL 100.0% 100.0% 100.0% 0.0% 8.2% 12.3% 13.0%
FUND AND PRINCIPAL INVESTMENTS PERFORMANCE
Portfolio Market Value% of
PortfolioNo.
(active)1-YearTWR
3-YearTWR
5-YearTWR
1-YearIRR
3-YearIRR
5-YearIRR SI IRR
Funds $15,922 74.2% 190 8.1% 11.8% 11.4% 7.6% 11.5% 11.1% 12.7%
Principal Investments 5,538 25.8% 55 10.6% 15.2% 13.0% 10.7% 15.1% 13.1% 17.4%
Total $21,460 100.0% 245 8.2% 12.3% 11.6% 8.4% 12.3% 11.5% 13.0%
Source: State Street based on 12/31/18 valuations; TWR and TUCS as of 3/31/19Note: Legal fees are included in the total aggregate IRR and TWR performanceNote: Since Inception IRR reflects performance from fund investments since June 1992
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6
PerformanceTRS Vintage Year Comparison
13.1%
24.9%
12.4%
28.3%
15.6%
9.5%8.0% 8.7%
15.2% 15.0%
11.2%
15.7%13.7%
11.7% 12.0%
19.4%17.2%
20.7%
-3.4%
9.7%
16.5%18.8%
17.4%
12.7%
9.4%
6.5%
9.9%11.5%
13.9%11.9%
16.2% 15.9%
12.4%
15.0%16.6% 16.4%
7.0%
-3.9%-5%
0%
5%
10%
15%
20%
25%
30%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
TRS Vintage Year SI IRR PE Benchmark Vintage Year
TOTAL PE PORTFOLIO VERSUS BENCHMARK
• PE outperformed the benchmark 11 out of the last 19 years
Source: State Street as of 12/31/18
7
$0.2 $0.3 $0.4 $0.9 $1.2 $1.3 $1.7$3.1 $3.3
$5.3
$7.3 $8.0$9.2
$10.1 $9.6$8.0
$8.7$10.1 $9.3
$0.2 $0.3 $0.5 $0.9 $1.5 $2.0$2.8
$4.7 $4.9
$6.8
$9.6
$11.4
$13.3$14.9
$15.8 $15.3$17.0
$19.6
$21.5
$0
$5
$10
$15
$20
$25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Market Value - Public Market Market Value - Private Market
PerformancePE Value Added
• $12.2 billion of value added net of fees
• Since inception alpha versus MSCI All World Index: 649 bps
Source: State Street as of 12/31/18Note: Public Market values calculated by assuming investments were made in the MSCI All World index in the same size and timing as TRS Private Equity cash flows
PRIVATE EQUITY PERFORMANCE RELATIVE TO PUBLIC MARKETS
8
PerformancePE Principal Investments Program
• PE continues to focus on Principal Investments with increased transaction volumes through innovative structures
• Capital Plan impact amounted to approximately $1.3 billion in 2018; $260 million of which went to Small Deals
Source: State Street as of 12/31/18Note: Target is long-term target for Principal InvestmentsNote: IIC approved the PE Small Deals program in March 2018
PRINCIPAL INVESTMENT MARKET VALUE OVER TIME
91% 88% 85% 83% 79% 77% 74%
9% 12% 15% 17% 21% 23% 26%
0%
25%
50%
75%
100%
2012 2013 2014 2015 2016 2017 2018Funds Principal Investments
65%
35%
Principal Investments Funds
TARGET
9
Source: US Large Buyout data from Preqin; St. Louis Federal Reserve; Dealogic; S&P LCD; Bloomberg; Credit Suisse
2018 (Today) 2007 (Peak) 2009 (Trough)
Attractive (To Buyer) Unattractive (To Buyer)
• Price and leverage remain historically high
• 2018 Distributions continued at attractive levels
• Dry powder remains at an all-time high levels despite uptick in investment activity
• Run-rate fundraising has modestly slowed down since 2017
• A significant upward trend in rates could have a material impact on future valuations
Market ConditionsPE
Price Multiple
Leverage
Multiple
$ Distributed
$ Invested
$ Raised
$ Dry Powder
Current Rates
Key metrics related to macro PE environment remain unattractive vs historical levels:
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APPENDIX
13
Scott Ramsower*Co-Head of FundsSr. Investment ManagerBBA, Texas A&M
Shelby Wanstrath, CFA*Co-Head of FundsSr. Investment ManagerBBA & MS, SMUMBA, London Business
Neil Randall*Managing DirectorBBA, Texas A&MMS, Texas A&M
TRICOT (PRIVATE EQUITY)
Michael Lazorik*Head of TechnologyDirectorBBA, UT Austin
Tamara Polewik*Head of Consumer/InternetDirectorBA, Dartmouth CollegeMBA, University of Chicago
Samuel DobberpuhlSr. AnalystBA, Pepperdine University
Justin WangSr. AssociateBBA, UT Austin
OrganizationPE Team
Allen MacDonell, CFAHead of TRICOTManaging DirectorBBA, University of GeorgiaMBA, Georgia State
Yemi OjutikuSr. AssociateBA, University of North CarolinaJD, Georgetown Law SchoolMBA, The Wharton School
Deniz OranAssociateBBA, College of William & Mary
Kaitlin MilesInvestment ManagerBBA, University of Richmond
Mikhael RawlsSr. Associate (Joins Sept ’19)BA, Harvard University
Stephanie DaulAssociate BBA, Texas State University
Beth BookerContractorBA, Texas State University
Thomas Albright, CFA Head of FinancialsInvestment ManagerBA, Dartmouth College
Will Carpenter, CFA*Head of IndustrialsSr. Investment ManagerBBA, Texas A&MMS, Texas A&M
Caitlyn MacdonaldAssociate BA, Williams College
FUNDS PRINCIPAL INVESTMENTS
Shared resources across Funds & Principal Investments
Note: TRS PE leverages Blackrock secondees in Austin and London* Private Equity Investment Committee (PEIC) members; PEIC also includes Eric Lang
Travis GaunttAssociate (Joins July ’19)BBA, Texas Christian UniversityMBA, UT Austin
D’Oncee BrockingtonSr. Analyst (Joins Aug ’19)BBA, UT Austin
Edward StroudSr. Analyst (Joins Aug ’19)BA, Washington & Lee University
Chase DaughtridgeAssociate (Joins July ’19)BA, University of North CarolinaMBA, UT Austin
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Grant Walker, Senior Director
July 2019
Investment Management Division
Real Estate
2
Overview
• Real Estate in the Trust
• 2018 Performance
• Market Conditions: Environment remains relatively unattractive for Core real estate buyers
• Spotlight:
o TRS Real Estate Global Partnership Initiative
o TRS Real Estate Portfolio vs. ODCE Benchmark
• Priorities
3
Role in the TrustReal Estate (RE)
RE TARGET % OF TRUST HISTORICAL TRUST ALLOCATION
Risk Parity 5%
Real Estate14%
Global Equity57%
Real Return22%
Stable Value15%
Net Asset Allocation Leverage 1%
Source: State Street
0%
4%
8%
12%
16%
RE % of Trust RE Target
12.9%
4
Performance Summary($Millions)
Source: State Street based on 12/31/18 valuations; TWR and TUCS as of 3/31/19Note: Inception date of RE portfolio is April 2006 Note: Currency hedges and legal fees are included in the total aggregate IRR and TWR performanceNote: RE Portfolio Leverage from General Partner reporting as of 9/30/18
PORTFOLIO PERFORMANCE PORTFOLIO GROWTH
Asset Class1-Year Return
3-Year Return
5-Year Return Real Estate ($ millions) 1-Year 3-Year 5-Year
Real Estate IRR 8.9% 10.6% 11.6% Ending Value $19,616 $19,616 $19,616Real Estate TWR 8.9% 10.8% 11.7% less Starting Value 17,351 16,402 14,020Real Estate Benchmark 7.4% 7.3% 9.4% less Contributions 5,802 12,355 18,565Real Estate Excess Return 1.5% 3.5% 2.3% plus Distributions 5,096 14,493 21,929TUCS Peer (Percentile) 33rd 11th 13th Investment Return $1,559 $5,352 $8,960
PORTFOLIO STRATEGY SUMMARY
Style
Target Portfolio Weight
RE Portfolio Leverage % of Portfolio Investment Returns
12/31/2018 12/31/2015 Change 1-Year TWR 3-Year TWR SI IRRCore 35% - 45% 34.0% 36.2% 37.8% (1.6%) 9.5% 9.8% 10.8%Value-Add 10% - 15% 48.0% 13.8% 12.7% 1.1% 7.9% 13.0% 7.6%Opportunistic 30% - 40% 46.0% 34.1% 35.6% (1.5%) 10.1% 11.1% 7.7%RASSOther Real Estate
10% - 15%-
57.0%-
14.9%1.0%
11.9%2.0%
3.0%(1.0%)
8.0%(13.0%)
10.8%(1.1%)
13.0%1.3%
REAL ESTATE TOTAL 100% 45.0% 100.0% 100.0% 0.0% 8.9% 10.8% 9.1%
FUND AND PRINCIPAL INVESTMENTS PERFORMANCE
PortfolioMarketValue
% of Portfolio
No.(active)
1-YearTWR
3-YearTWR
5-YearTWR
1-YearIRR
3-YearIRR
5-YearIRR
SIIRR
Funds $10,682 54.5% 129 7.7% 9.6% 10.7% 7.4% 9.0% 10.3% 7.1%
Principal Investments 8,918 45.5% 80 10.2% 13.1% 14.2% 10.0% 13.2% 14.4% 16.2%
Total $19,616 100% 209 8.9% 10.8% 11.7% 8.9% 10.6% 11.6% 9.1%
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6
PerformanceTRS Vintage Year Comparison
Source: State Street and NCREIF data as of 12/31/18
1.9%0.7%
3.8%
13.4% 13.0%
10.8% 11.2%
15.1% 14.8%
12.8%
7.5%
20.6%
8.6%
5.4%4.4% 4.7%
10.3% 10.8%10.0% 9.9% 9.5% 9.1%
7.7%7.1% 7.4%
6.2%
0%
5%
10%
15%
20%
25%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
TRS Vintage Yr TWR (SI) ODCE TWR Benchmark
TOTAL RE PORTFOLIO VERSUS BENCHMARK
• RE outperformed the benchmark 10 out of the last 13 years
7
PerformanceRE Principal Investments Program
• RE continues to focus on Principal Investments with increased transaction volumes through innovative structures.
• Committed approximately $3.5 billion to 95 Principal Investments in 2018
Source: State Street as of 12/31/18Note: Target is long-term target for Principal Investments
75% 75% 76% 70% 65% 61% 55%
25% 25% 24% 30% 35% 39% 45%
0%
25%
50%
75%
100%
2012 2013 2014 2015 2016 2017 2018
Funds Principal Investments
50%
50%
Funds Principal Investments
PRINCIPAL INVESTMENT ALLOCATION OVER TIME TARGET
8Source: Preqin; St. Louis Federal Reserve; CMAlert; Real Capital Analytics; Altus; Green Street; JP Morgan; CBRE
2019 (Today) 2007 2009
Attractive (To Buyer) Unattractive (To Buyer)
What has stayed the same?• Cap Rates remain historically low
• Interest rates remain low, rising rates expected in the future
What metrics are transitioning to Unattractive?• Core return expectations continue to lower in current
market conditions
• Fundraising levels (and dry powder) are at record highs
What to watch?• An upward trend in interest rates could have a
material impact on future valuations
Market ConditionsRE
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APPENDIX
14
TRICOT (REAL ESTATE)
Allen MacDonell, CFAManaging DirectorBBA, University of GeorgiaMBA, Georgia State
Kimberly CareyInvestment ManagerBA, Texas A&M
Grant Walker*Sr. DirectorBBA, BaylorMBA, St. Edwards
Luke LuttrellAnalystBBA, Abilene Christian MBA, Texas TechJD, Texas Tech
Gracie MarshAnalystBA, UC Davis
Malorie HardingSr. AssociateBBA, Texas A&M
Gavin GreenblumAnalystBBA, University of Georgia
Jared Morris, CFA*Investment Manager BBA, Texas A&MMS, Texas A&M
Brendan Cooper*Investment ManagerBA, Carleton College MS, University of Minnesota
Joyce Chow*Investment ManagerBA, PrincetonMBA, Wharton
OrganizationRE Team
Craig Rochette, CFA, CAIA*Sr. Investment ManagerBS, University of Arizona
Jennifer Wenzel*Sr. Investment Manager BBA, UT Austin
Matt Halstead*Sr. Investment ManagerBBA, UT AustinMPA, UT Austin
Haley Trainor, CFAAssociateBS, Northwestern
Catherine CagleySr. AssociateBBA, Duke
Elliott Fry, CFAAssociateBBA, University of GeorgiaMBA, Columbia
Chase LewisAnalystBBA, UT Austin
Thomas MaguireAnalyst (Starting July 1st) BBA, University of Wisconsin -Madison
* Real Estate Investment Committee (REIC) members; REIC also Includes Eric Lang
15
RE Strategy Definitions
Core• Institutional quality, best-located and best-leased assets in the market in each of the traditional property types (office, multifamily,
retail, industrial)• Typical leverage is up to 50% loan-to-value (LTV)• 35% - 45% allocation target
Opportunistic• Broad range of risk and return via opportunity funds, specialized investments, and mezzanine debt or equity with the majority of
strategies involving some level of development or distress• Typical leverage is 70% LTV and higher• 30% - 40% allocation target
Value-Add• Return-enhancing strategies executed at the property level designed to enhance value through execution of one or more of the
following strategies: lease-up, rehabilitation, repositioning• Typical leverage is 50% to 65% LTV• 10% - 15% allocation target
Real Assets Special Situations (RASS)• Publicly traded shares of listed REITs (Real Estate Investment Trusts) and REOCs (Real Estate Operating Companies) or other real asset
related entities, public or private real asset debt• 10% - 15% allocation target
Other Real Estate (ORE)• Land and other opportunistic investments providing inflation protection with relatively low expected volatility
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Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon.
Asset-Liability Study ResultsTeacher Retirement System of Texas (TRS)June 19, 2019
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2
Executive Summary Summary and Conclusions
Given the expected population growth, and the long duration of liabilities, the program is expected to benefit from maintaining a meaningful allocation to return seeking assets
Under the Current Policy (along with increased contributions from Senate Bill 12), the Plan is projected to attain full funding by 2037; however, there is risk that Plan assets could be depleted over the projection period due to the static contribution policy
The Alternative Allocation (with leverage) moves the portfolio north & east on the current frontier –adding both risk and return while increasing the Sharpe ratio
Similar portfolio characteristics could be attained by adjusting the Current Policy’s return-seeking vs. risk-reducing mix
Asset Allocation
(Return-Seekingvs.
Risk-Reducing)
Portfolio Structure
Liquidity Analysis
Current Policy (81% R-S) and Alternative Allocation (83% R-S w/ Leverage) portfolios have sufficient liquidity in the modeled Base Case, Recession, and Black Skies scenarios
TRS would have to pare back on future commitments to illiquid assets at the time of a Black Skies scenario in order to keep the illiquid asset allocation close to target
1 Expected returns based on AHIC’s Q2 2019 30 year Capital Market Assumptions assuming the current target asset allocation. All expected returns are geometric (long-term compounded; rounded to the nearest decimal) and net of investment fees. Expected returns presented are models and do not represent the returns of an actual client account. Not a guarantee of future results. See Appendix for the Capital Market Assumptions.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 3
Current Investment Policy
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4
Current State Asset-Liability ProfileAs of August 31, 2018
Asset-Liability Snapshot as of 8/31/2018
Metric ($, Billions) Value Fund %
Market Value of Assets $154.6 77.2%
Actuarial Value of Assets $154.1 76.9%
Liability Metrics
Actuarial Liability (AL) - Funding $200.21
Asset-Liability Growth Metrics
Metric ($, Billions) Value % Liability % Assets
AL Discount Cost $14.5 7.25% 9.39%
AL Normal Cost $5.3 2.62% 3.40%
Total Liability Hurdle Rate $19.8 9.87% 12.79%
Expected Return on Assets² $11.0 5.51% 7.13%
Total Contributions $7.0 3.47% 4.50%
Total Exp. Asset Growth $18.0 8.98% 11.63%
Hurdle Rate Shortfall/(Surplus) $1.8 0.89% 1.16%
Est. Benefit Payments $11.5 5.73% 7.42%
Target Asset Allocation as of 8/31/2018Metric ($, Billions) Value Alloc %Return-Seeking- U.S. Equity $27.8 18%- International Equity $34.0 22%- Private Equity $20.1 13%- Hedge Funds $6.2 4%- Real Estate $21.6 14%- Risk Parity $7.7 5%- Infrastructure $7.7 5%- Total $125.2 81%Risk-Reducing- Cash & Short Duration Fixed Income $1.5 1%- Inflation-Linked Bonds $4.6 3%- Stable Value Hedge Funds3 $6.2 4%- Long Duration Fixed Income $17.0 11%- Total $29.4 19%Total $154.6 100%
Key Takeaways: Pension plan is 77.2% funded on a market value of assets basis as of August 31, 2018 Asset allocation is 81% return-seeking assets with 19% risk-reducing/safety assets to
withstand stressed markets Asset hurdle rate of 12.79%, via cash funding and investment returns, needed to
maintain or improve actuarial funded status
1Based on a 7.25% discount rate consistent with the August 31, 2018 valuation results.2Expected returns are using AHIC Q2 2019 10-Year Capital Market Assumptions. Assumptions do not include fees/expenses. All expected returns are geometric (long-term compounded; rounded to the nearest decimal) and net of investment fees. Expected returns presented are models and do not represent the returns of an actual client account. Not a guarantee of future results. See Appendix for capital market assumptions.
3Hedge funds have elements of both return-seeking and risk-reducing assets. Stable value hedge funds have been categorized as risk-reducing based on the composition of the hedge funds within the TRS portfolio.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 5
Asset Hurdle Rate
Asset Hurdle Rate is the level of asset growth needed to keep pace with the growth of the Plan liabilities– Assets must grow at this rate or
more in order to maintain or reduce the existing funding shortfall
Assets can grow via:– Investment performance, and/or– Funding contributions
Asset hurdle rates increase as funded ratio declines, as shown in the chart to the right
TRS’ Hurdle Rate =
12.79%
1Expected returns are using AHIC Q2 2019 10-Year Capital Market Assumptions. Assumptions do not include fees/expenses. All expected returns are geometric (long-term compounded; rounded to the nearest decimal) and net of investment fees. Expected returns presented are models and do not represent the returns of an actual client account. Not a guarantee of future results. See Appendix for capital market assumptions.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6
Current Policy (81% R-S) 90% Return-Seeking
4.52% 4.55%
13.78%14.80%
0.88% 0.54%
7.13% 7.43%
9.81%10.39%
60% Return-Seeking
4.37%
11.42%
1.55%
6.37%
8.41%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Portf
olio
Nom
inal
Ret
urns
Capit
al M
arke
t Exp
ecta
tions
-10
Yea
r Out
look
Range of Nominal Returns1
50th
95th
75th
25th
5th
Percentile
50th
95th
75th
25th
5th
Percentile
50th
95th
75th
25th
5th
Percentile
50th
95th
75th
25th
5th
Percentile
Key Takeaways: Using Aon’s 10-year capital market assumptions, strategies with at least 85% return-seeking assets are projected to approximately
meet or exceed the actuarial assumed rate of return (7.25%)
Actuarial assumed rate of return
(7.25%)
1Expected returns are using AHIC Q2 2019 10-Year Capital Market Assumptions. Assumptions do not include fees/expenses. All expected returns are geometric (long-term compounded; rounded to the nearest decimal) and net of investment fees. Expected returns presented are models and do not represent the returns of an actual client account. Not a guarantee of future results. See Appendix for capital market assumptions.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 7
Current Policy (81% R-S) 90% Return-Seeking
2037 2035
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
60% Return-Seeking
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2018
2023
2028
2033
2038
2043
2048
Fund
ed R
atio
(MVA
/ AL)
Mar
ket V
alue
of A
sset
s / A
ctua
rial L
iabilit
y
2028 2038 2048 2028 2038 2048 37% 20% 0% 35% 18% 0% 61% 57% 55% 61% 58% 58% 84% 102% 127% 87% 109% 143% 114% 169% >200% 121% 187% >200% 168% >200% >200% 187% >200% >200%
37% 51% 59% 41% 55% 63%
Current Policy (81% R-S) 90% Return-Seeking
Strategy
Year 2028 2038 20485th Percentile 42% 24% 3%25th Percentile 60% 53% 45%50th Percentile 77% 84% 93%75th Percentile 97% 126% 184%95th Percentile 131% >200% >200%
Probability > 100% 23% 40% 48%
60% Return-Seeking
Asset-Liability Projection AnalysisMarket Value of Assets / Actuarial Liability Funded Ratio
* Liability projections assume discount rates of 7.25% for all investment policies studied
Key Takeaway: Higher (or lower) return-seeking strategies have higher (or lower) likelihood of attaining full funding, but also higher (or lower) likelihood
of depleting assets in stressed economic environments
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
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2027 2037 2047 2027 2037 2047 0.8% -0.4% -0.9% 0.8% -0.4% -0.8% 1.5% 0.9% 0.3% 1.4% 0.8% 0.3% 2.1% 1.9% 1.4% 2.0% 1.8% 1.2% 2.9% 3.7% 3.8% 2.9% 3.6% 3.4% 4.7% 10.8% 100.0% 5.0% 11.7% 100.0%
<1% 7% 24% <1% 9% 24%
Current Policy (81% R-S) 90% Return-Seeking
Strategy
Year 2027 2037 20475th Percentile 1.0% -0.5% -1.1%25th Percentile 1.7% 1.2% 0.5%50th Percentile 2.2% 2.4% 1.9%75th Percentile 2.9% 4.1% 4.7%95th Percentile 4.3% 9.4% 51.1%
Probability > 10% <1% 5% 23%
60% Return-Seeking
Current Policy (81% R-S) 90% Return-Seeking
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
60% Return-Seeking
-5%
0%
5%
10%
15%
20%
2018
2023
2028
2033
2038
2043
2048
Net O
utflo
w(B
enef
it Pay
men
ts -
Cont
ribut
ions
) /M
arke
t Valu
e of
Ass
ets
Asset-Liability Projection AnalysisNet Outflow Analysis: (Benefit Payments less Contributions) / Market Value of Assets
Key Takeaway: Net outflow is consistent across the policies modeled with central expectations (50th percentile outcome) between 1-3% over the
projection period* Liability projections assume discount rates of 7.25% for all investment policies studied
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 9
Economic CostPresent Value of Contributions plus AL Funding Shortfall/(Surplus)* at 7.25%, $billions
Exp
ecte
d C
ost r
educ
tion
0% RS
100% RS
0% RS
100% RS
0% RS
100% RS
$40
$80
$120
$160
$200
$240-$40 $0 $40 $80 $120 $160 $200 $240 $280 $320 $360
Risk95th Percentile
Risk reduction
Rew
ard
50th
Per
cent
ileAugust 31, 2019
(1 Year)
August 31, 2028 (10 Years) August 31, 2048
(30 Years)
Asset-Liability Projection ResultsEconomic Cost Analysis—1 Year, 10 Year, and 30 Year Horizons
Key Takeaway: Longer time horizons are expected to
reward higher levels of risk whereas shorter time horizons are not
* Liability projections assume discount rates of 7.25% for all investment policies studied; Reflects a utility function: Excludes 50% of surplus in excess of 130% of Actuarial liability, and includes twice the shortfall below 40% of Actuarial liability, on a market value basis
Ideal
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Alternative Allocation
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 11
Asset-Liability Projection AnalysisMarket Value of Assets / Actuarial Liability Funded Ratio
* Liability projections assume discount rates of 7.25% for all investment policies studied
Key Takeaway: Relative to the Current Policy, the Alternative Allocation increases the trajectory of the central expectation (50th
percentile outcome)
Strategy
Year 2028 2038 2048 2028 2038 20485th Percentile 37% 20% 0% 37% 21% 0%25th Percentile 61% 57% 55% 62% 59% 58%50th Percentile 84% 102% 127% 86% 105% 136%75th Percentile 114% 169% >200% 117% 175% >200%95th Percentile 168% >200% >200% 173% >200% >200%
Probability > 100% 37% 51% 59% 39% 53% 62%
Current Policy (81% R-S) Alternative Allocation (83% R-S w/ Leverage)
Current Policy (81% R-S) Alternative Allocation (83% R-S w/ Leverage)
2037 2036
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
Fund
ed R
atio
(MVA
/ A
L)M
arke
t Val
ue o
f Ass
ets
/ Act
uaria
l Lia
bilit
y
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 12
Asset-Liability Projection AnalysisNet Outflow Analysis: (Benefit Payments less Contributions) / Market Value of Assets
Key Takeaway: Net outflow is consistent across the policies modeled with central expectations (50th percentile outcome) between 1-2% over the
projection period
* Liability projections assume discount rates of 7.25% for all investment policies studied
Strategy
Year 2027 2037 2047 2027 2037 20475th Percentile 0.8% -0.4% -0.9% 0.8% -0.4% -0.9%25th Percentile 1.5% 0.9% 0.3% 1.5% 0.9% 0.3%50th Percentile 2.1% 1.9% 1.4% 2.0% 1.9% 1.3%75th Percentile 2.9% 3.7% 3.8% 2.8% 3.6% 3.5%95th Percentile 4.7% 10.8% 100.0% 4.7% 10.5% 89.5%
Probability > 10% <1% 7% 24% <1% 6% 23%
Current Policy (81% R-S) Alternative Allocation (83% R-S w/ Leverage)
Current Policy (81% R-S) Alternative Allocation (83% R-S w/ Leverage)
-5%
0%
5%
10%
15%
20%
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
Net
Out
flow
(Ben
efit
Pay
men
ts -
Con
tribu
tions
) /M
arke
t Val
ue o
f Ass
ets
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
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Economic CostPresent Value of Contributions plus AL Funding Shortfall/(Surplus)* at 7.25%, $billions
Exp
ecte
d C
ost r
educ
tion
$40
$60
$80
$100
$120
$140$70 $90 $110 $130 $150 $170 $190 $210 $230 $250 $270
Risk95th Percentile
Risk reduction
Rew
ard
50th
Per
cent
ile
August 31, 2019 (1 Year)
August 31, 2028 (10 Years)
August 31, 2048 (30 Years)
Asset-Liability Projection AnalysisEconomic Cost Analysis—1 Year, 10 Year, and 30 Year Horizons
* Liability projections assume discount rates of 7.25% for all investment policies studied; Reflects a utility function: Excludes 50% of surplus in excess of 130% of Actuarial liability, and includes twice the shortfall below 40% of Actuarial liability, on a market value basis
Key Takeaways: The magnitude of the risk/reward trade-off changes over a longer-term projection Under the Current Policy (81% R-S) asset allocation over a 30-year time horizon, the expected Economic Cost is $138.54B and the
potential risk is $245.27B
Ideal
Strategy ($Billions) Cost Risk
18 Current Policy (81% R-S) $48.70 $81.71
20 Alternative Allocation (83% R-S w/ Leverage) $48.36 $82.35
17 $0.0 $0.00 $0.00
44 $0.0 $0.00 $0.00
20 $0.0 $0.00 $0.00
14
Strategy ($Billions) Cost Risk
18 Current Policy (81% R-S) $90.08 $162.99
20 Alternative Allocation (83% R-S w/ Leverage) $87.97 $163.28
17 $0.0 $0.00 $0.00
44 $0.0 $0.00 $0.00
20 $0.0 $0.00 $0.00
Strategy ($Billions) Cost Risk
18 Current Policy (81% R-S) $138.54 $245.27
20 Alternative Allocation (83% R-S w/ Leverage) $133.93 $244.56
August 31, 2048
Economic Cost
August 31, 2019
August 31, 2028
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Appendix Asset Allocation
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 15
Risk/Reward Spectrum
Key Takeaways:
The Alternative Allocation with leverage moves the portfolio north & east on the current frontier – adding both risk and return while increasing the Sharpe ratio
Similar portfolio characteristics could be attained by adjusting the Current Policy’s return-seeking vs. risk-reducing mix
Ideal
Return-Seeking Assets Risk-Reducing / Safety Assets Financing
Expected Nominal Return1
Expected Nominal Volatility1
Sharpe Ratio
U.S. Equity
Non-U.S.
EquityPrivate Equity
Directional Hedge Funds
Real Estate
Risk Parity
Infra-structure Cash TIPS
Stable Value Hedge Funds
Long Duration
Gov't Bonds Leverage
Current Policy (81% R-S) 7.13% 12.52% 0.394 18.0% 22.0% 13.0% 4.0% 14.0% 5.0% 5.0% 1.0% 3.0% 4.0% 11.0% 0.0%Alternative Allocation (83% R-S w/ Leverage) 7.34% 12.85% 0.400 18.0% 22.0% 14.0% 0.0% 15.0% 8.0% 6.0% 2.0% 0.0% 5.0% 16.0% -6.0%
Current Frontier0% Return-Seeking 3.61% 5.51% 0.257 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.3% 15.8% 21.1% 57.9% 0.0%10% Return-Seeking 4.13% 5.23% 0.370 2.2% 2.7% 1.6% 0.5% 1.7% 0.6% 0.6% 4.7% 14.2% 18.9% 52.1% 0.0%20% Return-Seeking 4.63% 5.44% 0.447 4.4% 5.4% 3.2% 1.0% 3.5% 1.2% 1.2% 4.2% 12.6% 16.8% 46.3% 0.0%30% Return-Seeking 5.10% 6.09% 0.477 6.7% 8.1% 4.8% 1.5% 5.2% 1.9% 1.9% 3.7% 11.1% 14.7% 40.5% 0.0%40% Return-Seeking 5.55% 7.05% 0.475 8.9% 10.9% 6.4% 2.0% 6.9% 2.5% 2.5% 3.2% 9.5% 12.6% 34.7% 0.0%50% Return-Seeking 5.97% 8.23% 0.458 11.1% 13.6% 8.0% 2.5% 8.6% 3.1% 3.1% 2.6% 7.9% 10.5% 28.9% 0.0%60% Return-Seeking 6.37% 9.54% 0.437 13.3% 16.3% 9.6% 3.0% 10.4% 3.7% 3.7% 2.1% 6.3% 8.4% 23.2% 0.0%70% Return-Seeking 6.75% 10.93% 0.416 15.6% 19.0% 11.2% 3.5% 12.1% 4.3% 4.3% 1.6% 4.7% 6.3% 17.4% 0.0%80% Return-Seeking 7.10% 12.38% 0.396 17.8% 21.7% 12.8% 4.0% 13.8% 4.9% 4.9% 1.1% 3.2% 4.2% 11.6% 0.0%90% Return-Seeking 7.43% 13.86% 0.377 20.0% 24.4% 14.4% 4.4% 15.6% 5.6% 5.6% 0.5% 1.6% 2.1% 5.8% 0.0%100% Return-Seeking 7.74% 15.38% 0.361 22.2% 27.2% 16.0% 4.9% 17.3% 6.2% 6.2% 0.0% 0.0% 0.0% 0.0% 0.0%
1Expected returns are using AHIC Q2 2019 10-Year Capital Market Assumptions. Assumptions do not include fees/expenses. All expected returns are geometric (long-term compounded; rounded to the nearest decimal) and net of investment fees. Expected returns presented are models and do not represent the returns of an actual client account. Not a guarantee of future results. See Appendix for capital market assumptions.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 16
Appendix Impact of Senate Bill 12 (SB 12)
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Senate Bill 12 (SB 12) Provisions
State contribution rates increasing between FY2020 and 2024 Social Security contributing public education employers are no longer exempt from the public education employer contributions effective
FY2020– Contribution rates increasing between FY2021 and 2025
Employee contribution rates increasing effective FY2022 and FY2024– If future legislation reduces the state contribution, employee contributions will be reduced by an equivalent rate
Schedule of contribution increases:
Supplemental payment (13th check) for eligible retirees as of December 31, 2018 Unfunded liability is expected to be paid off in 29 years (assuming asset returns equal expectations)
– Pre Senate Bill 12, the payoff period was 87 years
Pre-Reform Post-Reform
Fiscal Year
State Contribution
Public Ed ER Contribution
Active EE Contribution
State Contribution
Public Ed ER Contribution
Active EE Contribution
2019 6.80% 1.50% 7.70% 6.80% 1.50% 7.70%2020 6.80% 1.50% 7.70% 7.50% 1.50% 7.70%2021 6.80% 1.50% 7.70% 7.50% 1.60% 7.70%2022 6.80% 1.50% 7.70% 7.75% 1.70% 8.00%2023 6.80% 1.50% 7.70% 8.00% 1.80% 8.00%2024 6.80% 1.50% 7.70% 8.25% 1.90% 8.25%
2025+ 6.80% 1.50% 7.70% 8.25% 2.00% 8.25%
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Impact of Senate Bill 12 (SB 12)Total Contribution Percentage
* Liability projections assume discount rates of 7.25% for all investment policies studied
Key Takeaway: SB 12 increases the level of total plan contributions going into the pension plan
Strategy
Year 2027 2037 2047 2027 2037 20475th Percentile 15.5% 15.5% 15.5% 18.6% 18.6% 18.6%25th Percentile 15.5% 15.5% 15.5% 18.6% 18.6% 18.6%50th Percentile 15.5% 15.5% 15.5% 18.6% 18.6% 18.6%75th Percentile 15.5% 15.5% 15.5% 18.6% 18.6% 18.6%95th Percentile 15.5% 15.5% 33.7% 18.6% 18.6% 19.2%
Current Policy (81% R-S) - Pre SB 12 Current Policy (81% R-S) - Post SB 12
Current Policy (81% R-S) - Pre SB 12 Current Policy (81% R-S) - Post SB 12
0%
5%
10%
15%
20%
25%
30%
35%
40%
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
Plan
Yea
r C
ontr
ibut
ion
Perc
enta
geA
ll fig
ures
in %
of P
ayro
ll
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 19
Impact of Senate Bill 12 (SB 12)Market Value of Assets / Actuarial Liability Funded Ratio
* Liability projections assume discount rates of 7.25% for all investment policies studied
Key Takeaway: SB 12 increases the trajectory of the central expectation (50th percentile outcome) projecting the Plan to reach full funding
Strategy
Year 2028 2038 2048 2028 2038 20485th Percentile 33% 9% 0% 37% 20% 0%25th Percentile 56% 43% 28% 61% 57% 55%50th Percentile 79% 84% 93% 84% 102% 127%75th Percentile 107% 147% >200% 114% 169% >200%95th Percentile 160% >200% >200% 168% >200% >200%
Probability > 100% 31% 44% 49% 37% 51% 59%
Current Policy (81% R-S) - Pre SB 12 Current Policy (81% R-S) - Post SB 12
Current Policy (81% R-S) - Pre SB 12 Current Policy (81% R-S) - Post SB 12
2037
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2018
2023
2028
2033
2038
2043
2048
2018
2023
2028
2033
2038
2043
2048
Fund
ed R
atio
(MVA
/ A
L)M
arke
t Val
ue o
f Ass
ets
/ Act
uaria
l Lia
bilit
y
5th Percentile 25th Percentile 50th Percentile 75th Percentile 95th Percentile
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 20
Appendix Additional Asset-Liability Projection Analysis
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 21
Actuarial Assumptions and Methods
Actuarial projections provided by the plan actuary as of August 31, 2018, after reflection of Senate Bill 12– Projections assumed 1% population growth for 15 years before leveling off– Investment Rate of Return = 7.25%– Assumed Inflation Rate = 2.30%– Payroll Growth = 3.00%
Contribution Policy– Contributions are static and not actuarial in nature– Post Senate Bill 12, contributions are as follows:
Other Actuarial Assumptions– All other assumptions and benefit provisions as documented in the Actuarial Valuation Report as of August 31, 2018 unless noted
otherwise
Pre-Reform Post-Reform
Fiscal Year
State Contribution
Public Ed ER Contribution
Active EE Contribution
State Contribution
Public Ed ER Contribution
Active EE Contribution
2019 6.80% 1.50% 7.70% 6.80% 1.50% 7.70%2020 6.80% 1.50% 7.70% 7.50% 1.50% 7.70%2021 6.80% 1.50% 7.70% 7.50% 1.60% 7.70%2022 6.80% 1.50% 7.70% 7.75% 1.70% 8.00%2023 6.80% 1.50% 7.70% 8.00% 1.80% 8.00%2024 6.80% 1.50% 7.70% 8.25% 1.90% 8.25%
2025+ 6.80% 1.50% 7.70% 8.25% 2.00% 8.25%
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 22
Appendix About This Material
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 23
About This Material
This material includes a summary of calculations and consulting related to the finances of Teacher Retirement System of Texas (TRS). The following variables have been addressed: Contributions Economic Cost Funded Ratio Hurdle Rate Liquidity Net Outflow
This analysis is intended to assist the Investment Committee with a review of the associated issues and options, and its use may not be appropriate for other purposes. This analysis has been prepared solely for the benefit of the Investment Committee. Any further dissemination of this report is not allowed without the written consent of Aon Hewitt Investment Consulting, Inc.Our calculations were generally based on the methodologies identified in the actuary’s valuation report for TRS. We believe the methodology used in these calculations conforms to the applicable standards identified in the report. Experience different than anticipated could have a material impact on the ultimate costs of the benefits. In addition, changes in plan provisions or applicable laws could have a significant impact on cost. Actual experience may differ from our modeling assumptions.Our calculations were based on data provided by the plan actuary. The actuarial assumptions and methods and plan provisions reflected in these projections are the same as those used for the 2018 actuarial valuations for TRS as noted in the actuarial reports, except where noted in this report. Unless specifically noted, our calculations do not reflect any other changes or events after August 31, 2018.In conducting these projections, we have relied on plan design, demographic and financial information provided by other parties, including the plan’s actuary and plan sponsor. While we cannot verify the accuracy of all of the information, the supplied information was reviewed for consistency and reasonableness. As a result of this review, we have no reason to doubt the substantial accuracy or completeness of the information and believe that it has produced appropriate results. These projections have been conducted in accordance with generally accepted actuarial principles and practices, including applicable Actuarial Standards of Practice as issued by the Actuarial Standards Board. The undersigned actuary is familiar with the near-term and long-term aspects of pension valuations and meet the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. All sections of this report are considered an integral part of the actuarial opinions. To our knowledge, no colleague of Aon Hewitt Investment Consulting, Inc. providing services to TRS has any direct financial interest or indirect material interest in TRS. Thus, we believe there is no relationship existing that might affect our capacity to prepare and certify this report for TRS. Aon Hewitt Investment Consulting, Inc.Phil Kivarkis FSA, CFA
Mohan Balachandran, Sr. Managing DirectorJames Nield, Chief Risk OfficerMatt Talbert, Sr. Investment Manager
July 2019
Investment Management Division
Strategic Asset Allocation Study
2
1
Agenda
Review SAA Process
Findings and Recommendations
3
2
4 Transition Plan
Implementation Considerations
3
Strategic Asset Allocation (SAA) Study Overview
1 Update / Review Long-Term Objectives
What are long term goals? What has changed? What level of risk is tolerable?
February: review goals, market conditions, risk tolerance
Reviewed by GRS in 2018: Liability, liability risks, actuarial assumptions
2 Develop Forward Looking Capital Market Assumptions (CMA)
Which asset classes to add or eliminate? Develop return, risk, correlation assumptions
February: Preliminary CMA results April: Review asset classes, finalized CMAs
3 Evaluate Alternative Portfolios / Model Results
Determine metrics for comparing alternatives Review benchmarks and ranges Consider practices of peers
February: Peer comparison, risk considerations April: Comparing alternate portfolios July: Review Benchmarks
4 Consider Implementation Issues
Active vs. passive; currency hedging; internal vs. external
Review risk budgets Incorporate investor competitive advantages
July: Alpha assumptions, currency considerations, internal vs. external, risk tolerance & budgeting
5 Adopt a New Policy Asset Allocation & Commitment Ranges
Review current target relative to alternatives Formally adopt a new target in IPS
July: Review conclusions to SAA study; Board adoption of policy weights
September: Review and adopt changes to Investment Policy: benchmarks, ranges, any other changes
6 Implementation and Monitoring
Design plan for implementation of any changes Monitor compliance with new targets and ranges
over time
Q4 2019 – Q1 2020 : Execute on any changes Ongoing: Compliance monitoring, updating CMAs
Aon Best Practices TRS SAA Study Timeline
4
SAA Study Key Findings
1. Expected returns from capital markets assumptions survey declined from the 2014 survey
2. A review of peer allocations and processes identified potential refinements to the SAA
3. TRS has capacity for additional private markets assets
4. Leverage can be employed to further improve return and risk characteristics
5. Current benchmarks are in line with best practices
6. Alpha targets remain achievable with proposed SAA
5
G l o ba l Eq u it y54%
( c u r r e n t l y 5 7 % )
Proposed policy framework shows improved diversification
Risk Parity 8% (currently 5%)
Net Asset Allocation Leverage -4% (currently 1%)
S tab le Va l ue21%
( c u r r e n t l y 1 5 % )
Re a l Ret u rn21%
( c u r r e n t l y 2 2 % )
TreasuriesStable Value Hedge Funds
Absolute ReturnReal Estate
ENRI
Public Equities:USA
Non-US DevelopedEmerging Markets
Private Equity
6
Three main themes behind SAA recommendations
Real Estate +1%
Change Directional Hedge Fund Benchmark
Private Equity +1%
US Treasuries +5%
Change Risk Parity Volatility
to 12%
Increase Allocation to Private Markets
More Efficient
More Balance
Take additional illiquidity risk to improve returns
Diversify away from equity risk
Make each dollar work
harder
ENRI +1%
Risk Parity +3%
Themes Description
1
3
2
Stable Value Global Equity Real Return Risk Parity Net Asset Allocation Leverage
Stable Value Hedge Funds
+1%
Cash +1%
Net Asset Allocation
Leverage -5%
7
Final Proposal
Current vs. Proposed Portfolio Characteristics fromCapital Market Assumptions
Source: TRS IMD, Responses to the 2019 TRS Capital Markets Assumptions survey
6.97% 7.23%Long-term expected
passive return improves
11.3% 11.6%Expected volatility
rises as well
0.40 0.41Expected Sharpe
ratio increases as risk taking becomes more
efficient
USA 18% 18% -Non-US Developed 13% 13% -Emerging Markets 9% 9% -Directional Hedge Funds 4% 0% -4%*Private Equity 13% 14% +1%Total Global Equity 57% 54% -3%
US Treasuries – Long 11% 16% +5%Stable Value Hedge Funds 4% 5% +1%Total Stable Value 15% 21% +6%
Real Estate 14% 15% +1%US TIPS 3% 0% -3%ENRI 5% 6% +1%Total Real Return 22% 21% -1%
Risk Parity 5% 8% +3%
Cash 1% 2% +1%Asset Allocation Leverage 0% -6% -6%Net Asset Allocation Leverage 1% -4% -5%
Current Proposed Change
*Directional Hedge Funds (with an overlay) may be incorporated into other assets
Investment Exposure 99% 104% +5%
8
1.9 1.8Liquidity ratio declines
but stays above 1.5 threshold
VolatilityProbability of Earning 7.25%
SAA evaluation framework indicates overall improvement
Percentage of time in a Drawdown
Max Drawdown
26% 26%No change in historical maximum drawdown
49% 54%Historical probability of 3 year returns earning
7.25% improved
16% 13%Percent of time rolling 3 year
returns are negative improved
7.7% 7.7%Historic volatility
steady
Source: TRS IMD, Responses to TRS Capital Markets Assumptions survey, State Street, Bloomberg. Historical data based on TRS asset class benchmark returns for past 20 years. Data updated from February board report to reflect quarterly benchmark returns
Please see Appendix for additional risk metrics information
Liquidity Ratio
9
Increasing active asset classes with higher demonstrated alpha
Source: State Street, TRS IMD. Asset Class Alpha calculated as returns vs. current policy benchmark. Alpha calculations for trailing 9 years or since inception for Asset Classes introduced after 2010Note: Directional Hedge Funds to be incorporated into public equities. Realized and expected alpha in appendix
% of years exceeded alpha expectation
Proposed weight change
Proposed weight change
Weighted average of historical alpha from active asset classes improves by an estimated 5-10 bp
1%
1%
1%
1%
80%
Private Equity
SV Hedge Funds
Real Estate
ENRI
Risk Parity
0%
0%
0%
-4%
USA
Non-US Developed
Emerging Markets
Directional Hedge Funds
Assets with increased exposure
Assets with equal or lower exposure
56%
67%
67%
3%
50%
11%
44%
44%
50%
% of years exceeded alpha expectation
10
Proposed SAA
Current SAA
35% / 65% 86% / 14%
28% 34% / 66% 88% / 12%
Source: TRS IMD. Weights are as a fraction of investment exposure as of 3/31/19. Proposed SAA are exposures using current holdings with proposed target SAA weights
Non-USD Currency Active vs. Passive Internal vs. External
I ERisk Contribution
27%
of current exposure is non-USD
Proposed changes have minimal impact on currency exposure
of current allocation is in active/ passive strategies
Percentage of Trust in active strategies declines due to more
passive Treasuries
82%of current allocation is in
internal/external strategies
Percentage of Trust in internal strategies increases primarily due
to Treasuries
of current VaR contribution comes from Global Equity
72%
Global Equity VaR contribution expected to decline as Trust becomes more diversified
Implementation Considerations
11
10%
11%
12%
13%
14%
15%
16%
17%
Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20
Transition Period Benchmark Weight Actual Weight
Proposal• 3 asset class weights would gradually transition
to policy target over the next 6 months:1. US Treasuries2. Global Inflation-Linked Bonds3. Risk Parity
• The remaining targets would take effect 10/1/2019
• The benchmark weight for transition assets would be set at the actual weight at the end of each month
• The CIO can authorize an early end to the transition
Transition Proposal
Hypothetical Transition Example: US Treasuries
Note: Non-transition asset class policy weights would continue to be governed by an offset formula for Private Markets
• Transition plan achieves 3 main goals:1. Minimize market impact2. Diversify entry and exits points3. Ensure operational infrastructure supports changes
before full implementation
12
Leverage Implementation
Source: TRS IMDNote: ISDA – International Swaps and Derivatives Association, ISDA agreements provide standard terms for swap transactions. FCM – Futures commission merchant, supports transactions for exchange traded futures
Sources Considerations Benchmark Operations
Several low cost, high capacity sources of leverage can be employed
Examples include:
• Exchange Traded Futures• Total Return Swaps• Repurchase Agreements• Interest Rate Derivatives• Equity Index Options
AON recommends 3 month LIBOR as the benchmark reference rate for calculating the performance of leverage
The best assets to lever will vary over time with market conditions
Identifying and implementing Asset Allocation Leverage will take dedicated resources
Repurchase agreements limited to 2% by policy
TRS has extensive history managing derivatives, with regular audits and controls in place
• Dedicated derivatives operations team
• Traders with specialties across multiple asset classes
• 14 ISDA agreements
• 3 FCM relationships
• 10 futures executing brokers
Consistent with peers and best practices
LIBOR may not exist past 2021. IMD will continue to monitor best practices for leverage benchmarking and report updates to the Board
13
Final Proposal
Source: TRS IMD
G l o ba l Eq u ity54%
( c u r r e n t l y 5 7 % )
Risk Parity 8% (currently 5%)
Net Asset Allocation Leverage -4% (currently 1%)
S tab le Va l ue21%
( c u r r e n t l y 1 5 % )
Re a l Retu rn21%
( c u r r e n t l y 2 2 % )
TreasuriesStable Value Hedge Funds
Absolute ReturnReal Estate
ENRI
Public Equities:USA
Non-US DevelopedEmerging Markets
Private Equity
USA 18% 18% -Non-US Developed 13% 13% -Emerging Markets 9% 9% -Directional Hedge Funds 4% 0% -4%*Private Equity 13% 14% +1%Total Global Equity 57% 54% -3%
US Treasuries – Long 11% 16% +5%Stable Value Hedge Funds 4% 5% +1%Total Stable Value 15% 21% +6%
Real Estate 14% 15% +1%US TIPS 3% 0% -3%ENRI 5% 6% +1%Total Real Return 22% 21% -1%
Risk Parity 5% 8% +3%
Cash 1% 2% +1%Asset Allocation Leverage 0% -6% -6%Net Asset Allocation Leverage 1% -4% -5%
Current Proposed Change
Investment Exposure 99% 104% +5%
*Directional Hedge Funds (with an overlay) may be incorporated into other assets
Appendix
15
Appendix: Long-Term Expected Returns – Key Assets
• Long-term expected returns calculated from Capital Markets Assumptions survey responses submitted by 26 firms representing TRS external managers, Strategic Partners and consultants.
• Some estimates are derived from other asset class forecasts provided.
Note: Risk Parity is 10% volatility target. 12% volatility target Risk Parity median expected return is 6.5%
Median Max Min
USA 6.4% 7.9% 1.7%Non-US Dev 6.3% 8.6% 2.6%Emerging Markets 7.3% 9.3% 5.1%Directional Hedge Funds 5.2% 7.1% 4.5%Private Equity 8.4% 13.3% 4.8%
US Treasury 3.1% 7.2% 0.4%Stable Value Hedge Funds 4.5% 7.7% 2.9%
Inflation Linked Bonds 3.3% 4.5% 1.8%Real Estate 8.5% 14.7% 5.6%ENRI 7.3% 12.6% 4.9%
Risk Parity 5.8% 8.9% 2.9%
Asset Allocation Leverage 2.7% 3.5% 1.9%Cash 2.5% 3.3% 1.6%
Expected Inflation 2.1% 2.3% 1.7%
Long-Term Expected Returns
16
Appendix: Long-Term Expected Returns
Risk Parity Weights: Correlation Assumptions:
US Large Cap 3.6%
US Mid Cap 2.2%
US Small Cap 2.4%
MSCI EAFE & Canada 27.2%
Emerging Markets 9.5%
US Treasuries – Intermediate 27.7%
WGBI ex US Hedged 35.9%
Emerging Market Debt – Local 5.2%
US High Yield 7.9%
US TIPs 45.9%
Commodities 22.5%
Cash -90.1%
Volatility Assumptions:
• Correlation Matrix from 2019 JPMorgan Long-Term Capital Market Assumptions used for total Trust expected return
US Large Cap 14%
US Mid Cap 16%
US Small Cap 18%
MSCI EAFE & Canada 14%
Emerging Markets 21%
US Treasuries – Intermediate 4%
WGBI ex US Hedged 3%
Emerging Market Debt – Local 10%
US High Yield 8%
US TIPs 5%
Commodities 16%
Cash 1%
Directional Hedge Funds 11%
Stable Value Hedge Funds 7%
Private Equity 21%
Real Estate 20%Energy, Natural Resources and Infrastructure 12%
Note: Risk Parity weights for 10% volatility target. For 12% volatility target these weights are multiplied by 1.2
17
Appendix: Long-Term Expected Returns
TRS Policy Asset Class Assets from CMA Survey
USA IMI-weighted blend of US Large Cap and US Small Cap
Non-US Developed MSCI EAFE & Canada
Emerging Markets Emerging Markets
Directional Hedge Funds 50/50 blend of Event-Driven Hedge Funds and Long Bias Hedge Funds
Private Equity Private Equity
US Treasuries US Treasuries – Long
Stable Value Hedge Funds 50/50 blend of Relative Value Hedge Funds and Macro & CTA Hedge Funds
Global Inflation-Linked Bonds US TIPs
Real Estate TRS Real Estate NAV-weighted blend of Core Real Estate with Leverage, Value Added Real Estate with Leverage, Opportunistic Real Estate with Leverage
Energy, Natural Resources and Infrastructure
40/40/20 blend of Natural Resources Private Equity, Infrastructure, and US Inflation
Risk Parity Blend of Public Market Assets at TRS Internal Risk Parity neutral weights
Asset Allocation Leverage Cash plus 0.25% to reflect cost of leverage
Cash Cash
World Equity InfrastructureUS Large Cap Energy/Natural Resources Private Equity US Large Cap Value US REITSUS Large Cap Growth Global REITSUS Midcap Core Real Estate UnleveredUS Smallcap Opportunistic Real Estate UnleveredMSCI EAFE & Canada Value Added Real Estate UnleveredEmerging Markets Core Real Estate with LeverageEurope ex UK Opportunistic Real Estate with LeverageUK Value Added Real Estate with LeverageJapan Large Cap US TIPSAsia ex Japan Global Inflation Linked BondsInternational Small Cap GoldChina OilPrivate Equity CommoditiesDomestic Buyout Private Equity Diversified Hedge FundsInternational Buyout Private Equity Event-Driven Hedge FundsSmall/Mid Buyout Private Equity Long Bias Hedge FundsVC/Growth Equity Private Equity Relative Value Hedge FundsLong Term Private Equity Macro & CTA Hedge FundsCash Risk ParityUS Aggregate EuroUS Treasuries -- Intermediate PoundUS Treasuries -- Long YenUS Investment Grade Credit US InflationUS High Yield Global InflationCMBS Financing RateWGBI ex US hedgedWGBI ex US unhedgedEmerging Market Debt - USDEmerging Market Debt - LocalBank Loans
Glob
al E
quity
Fixe
d In
com
e
Real
Ass
ets
Mac
ro &
Alte
rnat
ives
Assets in Capital Market Assumptions Survey: Mapping of Survey Responses to Policy Asset Classes:
18
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19
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20
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21
Appendix: Alpha
• Global Bonds, Cash, and Asset Allocation Leverage have zero alpha target
• Total of Assumed Contribution exceeds Total Trust target by 1.25 bp
• Data from State Street is 9 calendar years from 2010-2019, with asset classes with less history including data since inception
• Private Equity alpha calculated as return against SSPEI, other assets vs. benchmarks as of performance date
• Total Trust Cumulative alpha for these 9 years is 51 bps annualized
USA 100 -103 18% 18EAFE + Canada 100 57 13% 13Emerging Markets 100 99 9% 9Private Equity 200 240 14% 28
Stable Value Hedge Funds 100 132 5% 5
Real Estate 125 148 15% 18.75ENRI 125 141 6% 7.5
Risk Parity 25 71 8% 2
Alpha Assumption
(bp)Proposed
Weight
Assumed Contribution
(bp)
Median Realized Alpha
(up to 9 yrs, bp)
Total Trust 100 57 100% 101.25
Assumed and Realized Alpha for Active Asset Classes
22
BloombergTicker
US Treasuries4 Barclays Capital (BarCap) Long Treasury Index LUTLTRUU 0% 20% 11% 11.00% 12.25% 1.25%
INVESTMENT EXPOSURE 110% 99% 99.00% 100.25% 1.25%Asset Allocation Leverage:Cash Citigroup 90-day US Treasury SBMMTB3 0% 5% 1% 1.00% 1.00% 0.00%Asset Allocation Leverage6 0% -1.25% -1.25% Net Asset Allocation Leverage: 1% 1.00% -0.25% -1.25% TOTAL FUND Target-weighted Blend 100% 100.00% 100.00% 0.00%
Interim Target Actual O/(U) TargetAsset Class BenchmarkMinimum Range1,2
Maximum Range1,2 Target2
Appendix: July 2018 Board SlideHow would asset allocation report look with leverage?
• In the hypothetical example above, we have asset allocation leverage from US Treasuries • In this example, we would report
o Investment exposure of 100.25% 99% target exposure + 1.25% additional exposure from US Treasuries
o Asset allocation leverage of -1.25% 100% - (Investment exposure of 100.25% + Cash of 1.00%)
o Net asset allocation leverage of -0.25% 1.00% in Cash + (-1.25% in Asset Allocation Leverage)
23
Appendix: Target Return Portfolios
Current Policy Neutral
Target 7.15%
Target 7.25%
Target 7.35%
Final Proposal
USA 18% +1% 0% -1% 0%EAFE + Canada 13% +1% 0% 0% 0%Emerging Markets 9% +1% 0% 0% 0%Directional Hedge Funds 4% -4% -4% -4% -4%Private Equity 13% 0% +1% +2% +1%US Treasuries - Long 11% 0% +5% +5% +5%Stable Value Hedge Funds 4% +1% +1% +1% +1%Real Estate 14% +1% +1% +2% +1%US TIPS 3% -2% -3% 0% -3%ENRI 5% +1% +1% +1% +1%Risk Parity 5% 0% +3% +3% +3%Investment Exposure 99% +5% +9% +5%Cash 1% 0% 0% 0% +1%Asset Allocation Leverage 0% 0% -5% -9% -6%
Portfolios presented in April
• Final proposal mirrors 7.25% portfolio presented at April Board meeting
• Relative to 7.25% proposal, portfolio cash increased by +1% and offset to Asset Allocation Leverage decreased by -1%
24
Appendix: Peer Distribution
Source: TRS IMD, Center for Retirement Research, Boston College, Annual Reports
Public Equity
Hedge Funds
Private Equity
Fixed Income Real Estate ENRI Risk Parity Cash Leverage
Total Equity
Total Privates
TRS Current Allocation 40% 8% 13% 14% 14% 5% 5% 1% 0% 53% 32%Proposed SAA 40% 5% 14% 16% 15% 6% 8% 2% 6% 54% 35%Median Endowment 26% 22% 25% 7% 11% 8% 0% 1% 0% 52% 43%
Public Equity
Hedge Funds
Private Equity
Fixed Income Real Estate ENRI Risk Parity Cash Leverage
Total Equity
Total Privates
TRS Current Allocation 40% 8% 13% 14% 14% 5% 5% 1% 0% 53% 32%Proposed SAA 40% 5% 14% 16% 15% 6% 8% 2% 6% 54% 35%Median Global 34% 0% 10% 31% 14% 9% 0% 0% 12% 44% 30%
Public Equity
Hedge Funds
Private Equity
Fixed Income Real Estate ENRI Risk Parity Cash Leverage
Total Equity
Total Privates
TRS Current Allocation 40% 8% 13% 14% 14% 5% 5% 1% 0% 53% 32%Proposed SAA 40% 5% 14% 16% 15% 6% 8% 2% 6% 54% 35%Median Pension 48% 6% 10% 23% 10% 0% 0% 1% 0% 59% 19%
SAA vs. US Pensions
SAA vs. US Endowments
SAA vs. Global Peers
1
2
3
25
Appendix: Peer Universe
Endowment Peers
University AUM ($bn)
Harvard $39
UTIMCO $29
Yale $27
Stanford $27
Princeton $25
MIT $16
Michigan $12
Global Pension Peers
Pension AUM ($CAD bn) AUM ($USD bn)
Canada Pension Plan Investment Board
$356 $267
Caisse de dépôt et placement du Québec
$298 $224
Ontario Teachers $194 $146
PSP Investments $153 $115
British ColumbiaInvestment Management
$146 $110
Alberta Investment Management
$104 $78
Ontario Municipal $95 $71
Healthcare of Ontario $78 $59
Ontario Pension Board $27 $20
OPTrust $24 $18
Source: Annual Reports
26
Appendix: Peer Universe
Source: TRS IMD, Center for Retirement Research, Boston College. Assets are beginning fiscal year 2017 by plan
US Public Pension Peers
Katy Hoffman, Chief of StaffJames Nield, Chief Risk Officer
July 2019
Investment Management Division
Investment Policy Proposals
2
Introduction
• This presentation summarizes proposed modifications to the Investment Policy Statement (IPS)
o The modifications are primarily driven by the Strategic Asset Allocation (SAA) recommendations
• Proposed modifications are presented today for discussion to the Investment Management Committee
• Policy Chair to review proposed changes to Investment Policy Statement language
• A formal proposal will be presented to the Policy Committee in September 2019 which will then consider recommending the proposed changes to the Board for approval
3
Potential Modifications
Modification # Proposed Modifications
1A Incorporate new Asset Class target weights
1B Establish benchmark for Asset Allocation Leverage, update benchmark for Risk Parity to 12% volatility and update for benchmark name changes
1C Update existing Asset Class ranges, eliminate Public Equity maximum and minimum and increase Real Return and Stable Value ranges
1D Change the ‘US Treasuries’ Asset Class to ‘Government Bonds’
1E Update repurchase agreement language and remove 2% limitation to align with new Asset Allocation Leverage target
1F Establish a 6-month transition plan to implement new asset class weights and update Private Market offset Asset Classes
1G Clarify and clean up IPS to improve document readability and clarity
2 Add new limit on Manager Concentration based on market value and increase existing limits based on exposure (Appendix B)
• Strategy Asset Allocation study outlined rationale for majority of the changes in Modification #1
• Modification #2 unrelated to SAA study
• Items in bold are discussed in more detail on the following slides
4
Modification 1 Implement the 2019 Strategy Asset Allocation Study proposals
1A – New Targets
1C – Update Ranges
1D – Govt. Bonds
• Proposed Asset Allocation table• Clean version in the Appendix
1B – Update Benchmarks
5
Modification 1CUpdate existing asset class ranges
Proposal• Update Asset Class policy maximum and minimum range to reflect new target weights
• Widen range for Real Return (currently +/- 5%) and Stable Value (currently +6% /- 4%) to +/- 7% to provide increased flexibility to manage the Trust
• Remove separate Public Equity range within Global Equity
Rationale• Current Public Equity range limits liquidity options during a market dislocation and IMD views the market risk of
Private Equity similarly to Public Equity
• Public Equity allocation is managed by limits on each Asset Class (i.e. US Equity, Private Equity), the total Global Equity range and Total Public Fund tracking error maximum
Background Information• Floating benchmark weights that offset Private Market weights constrain the Public Equity range to less than 5%
in practice
• Real Return only contains Private Market assets and are impacted by lagged valuation. Stable Value limit constrains ability to overweight Treasuries given current late cycle view to invest in Credit instead of Equity
6
Modification 1DChange the US Treasury to a Government Bond Asset Class
Proposal
• Combine all US and global bonds (nominal and inflation-linked) into one asset class while retaining existing US Treasury benchmark
• Add tracking error constraint of 300 bp to Government Bond Asset Class
Rationale
• SAA proposed 0% Global Inflation Linked Bonds target no longer requires a dedicated Asset Class
• Investment strategies often mix US and Non-US bonds in the same portfolio (Public SPNs, IMD Internal)
Background Information
• We estimate consolidating current strategies will generate approximately 50-100 bp of tracking error in the new Government Bond asset class
7
Modification 2Add new limit on Manager Concentration based on market value and increase existing limits based on exposure
Proposal• Update Appendix B to distinguish limits by invested amount (market value) and by total exposure (market value
plus unfunded commitments)• Add language that all investments must be mapped to one of the four portfolios for the purpose of testing
Appendix B to ensure completeness
Rationale• Provide a consistent approach to manage concentration risk as not all portfolios have unfunded commitments• Private Market target allocation has grown from 25% to 35% with no similar change to concentration limits
Background Information
• Private Market portfolio commitments have a tighter concentration limit relative to public portfolios as unfunded commitments are applied to the concentration test
• Industry consolidation has led to larger asset managers and consequently larger TRS relationships• Opportunities with several private managers are constrained at this time given the treatment of commitments
8
• The proposed change to Appendix B is shown below
• Market Value is the current value as determined by the custodian of existing investments with the Manager Organization
• Exposure is the sum of Market Value and Unfunded Commitments with a Manager Organization
• In addition, the following language would be added to Appendix B: “All investments approved by the IIC must be assigned to one of the four portfolios at time of approval for the purposes of testing manager concentration”
Portfolio Initial Allocation or Commitment with Manager, by Portfolio
Additional or Follow-On Allocation or Commitment with the same Manager, by Portfolio
Total Manager Organization Limits, by Portfolio
External Public Markets Portfolios 0.5% 1% 3%Private Equity Portfolio 0.5% 1% 3%Real Estate Portfolio 0.5% 1% 3%Energy, Natural Resources and Infrastructure Portfolio 0.5% 1% 3%
Total IIC Approval Authority, each Manager Organization 6%
Portfolio Initial Allocation or Commitment with Manager, by Portfolio
Additional or Follow-On Allocation or Commitment with the same Manager, by Portfolio
Total Manager Organization Market Value, by Portfolio
Total Manager Organization Limits, by Portfolio Exposure
Public Markets Portfolios 0.5% 1% 3% 5%Private Equity Portfolio 0.5% 1% 3% 5%Real Estate Portfolio 0.5% 1% 3% 5%Energy, Natural Resources and Infrastructure Portfolio 0.5% 1% 3% 5%
Total IIC Approval Authority, each Manager Organization 6% 10%
Modification 2Add new limit on Manager Concentration based on market value and increase existing limits based on exposure
APPENDIX
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Modification 2Implement the results of the 2019 Strategy Asset Allocation Study
1A – New Targets
1C – Update Ranges
1D – Govt. Bonds
1B – Update Benchmarks
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Transition Benchmark Example
Source: TRS IMDNote: After transition period the offset assets changes to 60% USA, 20% EAFE and 20% UST
Current Neutral
Offset Amount
PE 14.0% 13.0% 1.0%RE 15.0% 14.0% 1.0%ENRI 6.0% 5.0% 1.0%Total 3.0%
Offset Weight Offset
USA 0.2 -0.6%EAFE 0.2 -0.6%EM 0.2 -0.6%UST 0.2 -0.6%TIPs 0.2 -0.6%Total 1.0 -3.0%
Neutral Weights Offset
Floating Benchmark
US 18% -0.6% 17.4%EAFE 13% -0.6% 12.4%Emerging Markets 9% -0.6% 8.4%Directional HF 4% 4.0%Private Equity 13% 1.0% 14.0%US Treasuries 11% -0.6% 10.4%Stable Value HF 4% 4.0%Real Estate 14% 1.0% 15.0%TIPs 3% -0.6% 2.4%ENRI 5% 1.0% 6.0%Risk Parity 5% 5.0%Cash 1% 1.0%Total 100% 0.0% 100.0%
Hypothetical Actual
Proposed Neutral
Offset Amount
PE 15.0% 14.0% 1.0%RE 16.0% 15.0% 1.0%ENRI 7.0% 6.0% 1.0%Total 3.0%
OffsetUSA 0.8 -2.4%EAFE 0.2 -0.6%Total 100.0% -3.0%
Transition Neutral Offset
New Floating
Transition Weight*
10/1 Benchmark
US 18% -2.4% 15.6% 15.6%EAFE 13% -0.6% 12.4% 12.4%Emerging Markets 11% 11.0% 11.0%Private Equity 14% 1.0% 15.0% 15.0%Global Bonds transition transition 12.0% 12.0%Stable Value HF 5% 5.0% 5.0%Real Estate 15% 1.0% 16.0% 16.0%TIPs transition transition 2.5% 2.5%ENRI 6% 1.0% 7.0% 7.0%Risk Parity transition transition 5.5% 5.5%Cash 2% 2.0% 2.0%Leverage** -4.0%Total 100% 0.0% 100% 100%
*Hypothetical transition weights; benchmark weights set to actual each month during transition**Leverage benchmark weight is 100% - Cash - Investment Exposure
Offset weight during transition
Hypothetical Actual
Current Offset Methodology Proposed Transition Offset Methodology
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