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INVESTMENT PRESENTATIONS TO THE

TRS BOARD OF TRUSTEES

April 2012

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TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES AGENDA

April 19, 2012 TRS East Building, 5th Floor, Boardroom

NOTE: The Board may take up any item posted on the agenda during its meeting on Thursday, April 19, 2012, or during the meeting on the following day beginning at the time and place specified on this agenda. The open portions of the April 19-20, 2012 Board meetings are being broadcast over the Internet. Access to the Internet broadcast of the Board meeting is provided on TRS' Web site at www.trs.state.tx.us.

4. Discuss and consider investment matters, including the following items:

A. Performance Review: Fourth Quarterly 2011 – Brady O’Connell and Steve Voss, Hewitt EnnisKnupp

B. Review Quarterly Portfolio Performance and Market Update – Britt Harris

C. Review the report of the Investment Management Committee on its April 19, 2012 meeting – Todd Barth

D. Review the report of the Risk Management Committee on its April 19, 2012 meeting – Eric McDonald

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Performance Review: Fourth Quarter 2011

Teacher Retirement System of TexasApril 2012

Teacher Retirement System of Texas | April 2012 2

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Summary

Market results were positive during the quarter but mixed for the year.

During the fourth quarter, the risk appetite returned to the capital markets driven by better than expected economic data in the U.S.

TRS Total Fund gained 3.8% for the quarter but modestly underperformed the benchmark – Underperformance during 2011 relative to the benchmark driven largely by the challenging third

quarter results.

Sources of underperformance during the quarter– Real Return:

• Real Assets– Global Equity:

• U.S. Small Cap• Non-U.S. Developed and Emerging Markets

– Stable Value:• Other Absolute Return (opportunistic credit investments)

– Asset movements towards new policy allocation, which took effect in October 1, 2011


2.8-0.93.5-3.7-0.1HFRI Fund of Funds Conservative Index

3.3-0.73.6-5.6-0.3HFRI Fund of Funds Composite Index

Fourth Quarter One Year Three Years Five Years Ten Years

Global Equity:MSCI USA Standard 11.7% 2.0% 14.4% -0.1% 3.0%

MSCI USA Small Cap 14.7 -3.0 20.1 1.5 6.4MSCI EAFE + Canada Index 3.5 -12.2 8.5 -4.1 5.1

MSCI Emerging Markets Index 4.4 -18.4 20.1 2.4 13.9

State Street Private Equity Index (qtr lagged) -6.0 11.6 4.2 6.6 9.1

Global Equity Policy Benchmark 4.2 -5.1 13.9 -- --Stable Value:

Barclays Capital Long Treasury Index 1.9% 29.9% 7.4% 11.0% 9.0%

3 Month LIBOR + 2% 0.6 2.4 2.5 3.9 4.3

90 Day US Treasury Bill 0.0 0.1 0.1 1.5 2.0Stable Value Policy Benchmark 1.4 22.3 6.8 -- --

Real Return:Barclays Capital US Treasury TIPS Index 2.7% 13.6% 10.4% 8.0% 7.6%

NCREIF ODCE (qtr lagged) 3.3 17.2 -7.2 -0.9 4.0

Goldman Sachs Commodities Index 9.0 -1.2 6.9 -2.8 5.6MSCI US REIT 15.3 8.7 21.6 -2.1 9.8

Real Return Policy Benchmark 4.4 12.9 7.4 -- --TRS Policy Benchmark 3.9% 3.9% 11.7% 2.5% 5.5%

1. Market Summary – Fourth Quarter 2011


2. Market Value Change

Change in Market Value ( $Millions )From October 1, 2011 To December 31, 2011

$101,106.5

-$910.4

$3,846.8

$104,042.9

-20000.0

0.0

20000.0

40000.0

60000.0

80000.0

100000.0

120000.0

Beginning Market Value Net Additions / Withdrawals Investment Earnings Ending Market Value

Mill

ions

($)


3. Asset Allocation Detail

Market Value ($ in millions)

as of 12/31/2011Policy Target

RelativeAllocation

toPolicy Target Ranges($) (%)

Total Fund 104,043 100% 100% -- --

U.S. Large $20,629 19.8% 18% +1.8% 13-23%

U.S. Small $941 0.9% 2% -1.1% 0-7%

Non-U.S. Developed $15,403 14.8% 15% -0.2% 10-20%

Emerging Markets $10,490 10.1% 10% +0.1% 5-15%

Directional Hedge Funds $5,204 5.0% 5% 0.0% 0-10%

Private Equity $11,548 11.1% 12% -0.9% 7-17%

Global Equity $64,215 61.7% 62% -0.3% 55-69%

Long Treasuries $12,417 11.9% 13% -1.1% 0-20%

Stable Value Hedge Funds $3,385 3.3% 4% -0.7% 0-10%

Absolute Return (including OAR) $2,294 2.2% 0% +2.2% 0-20%

Cash $1,134 1.1% 1% +0.1% 0-5%

Stable Value $19,230 18.5% 18% +0.5% 13-23%

TIPS $6,479 6.2% 5% +1.2% 0-10%

Real Assets $11,217 10.8% 13% -2.2% 5-20%

REITS $2,096 2.0% 2% 0.0% 0-5%

Commodities $806 0.8% 0% +0.8% 0-5%

Real Return $20,598 19.8% 20% -0.2% 15-25%

Note: Actual allocations above are based upon Account Level information


4. Total TRS Performance Ending 12/31/2011

Investment ResultsAs of 12/31/2011

5.49%

2.25%

12.00%

1.85%

3.79%3.91%

5.45%

2.45%

11.74%

3.87%

-2.06%

0.26%

-0.20%

-0.08% 0.04%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

Quarter 1-Year 3-Years 5-Years 10-Years

Total Fund Policy Index Difference


5. Total Fund Attribution - Quarter Ending 12/31/2011

Asset ClassAllocation Effect

(in bps)

U.S. Large Cap 20

U.S. Small Cap 4

Non-U.S. Developed -5

Emerging Markets -3

Directional Hedge Funds 12

Private Equity 8

Long Treasuries 7

Stable Value Hedge Funds 5

Cash Equivalents -10

Other Absolute Return -8

U.S. TIPS 1

Real Assets 0

REITS -3

Commodities 11

Total Allocation Effect 39


5. Total Fund Attribution – One Year Ending 12/31/2011

Asset Class

Allocation Effect

(in bps)

U.S. Large Cap 29

U.S. Small Cap -8

Non-U.S. Developed 43

Emerging Markets -96

Directional Hedge Funds 12

Private Equity 1

Long Treasuries -85

Stable Value Hedge Funds 6

Cash Equivalents -10

Other Absolute Return -6

U.S. TIPS -6

Real Assets 19

REITS 3

Commodities 0

Total Allocation Effect -98


6. Global Equity: Performance Summary Ending 12/31/2011

Fourth Quarter

Non-U.S. Developed

MSCI EAFE + Canada

Difference

Non-U.S. EquityNon-U.S. Benchmark

Difference

U.S. Equity

U.S. Benchmark

Difference

Difference

Small Cap Benchmark

U.S. Small Cap

0.0Difference

Large Cap Benchmark

U.S. Large Cap

Difference

MSCI Emerging Markets

3.4%

3.5

-0.1

3.7%

3.9

-0.2

11.8%

12.0

-0.2

-1.3

14.7

13.4%

11.7

11.7%

-0.4

4.4

4.0%Emerging Markets

4.6%Total Global Equity

4.2Global Equity Benchmark

One Year

-11.0%

-12.2

+1.2

-15.0%

-14.6

-0.4

-1.0%

0.7

-1.7

+0.1

-3.0

-2.9%

-1.8

2.0

0.2%

-1.1

-18.4

-19.5%

-6.2%

-5.1

-1.1+0.4Difference14.1%

14.7

-0.6

14.2%

8.7%

8.5

+0.2

12.8%

13.1

-0.3

-0.6

16.9

16.3%

0.0

14.2

-0.7

20.1

19.4%

12.1%13.9

-1.8

Three Years


6. Global Equity (cont’d): Performance Summary Ending 12/31/2011

Fourth Quarter One Year Three YearsDirectional Hedge Funds 2.9% -- --HFRI Fund of Funds Composite Index -0.3 -- --

Difference +3.2 -- --

Total Public Equity 6.8% -9.0% 12.5%

Public Equity Benchmark 7.5 -7.5 12.9

Difference -0.7 -1.5 -0.4

Total Private Equity -4.5% 11.2% 6.3%

Private Equity Benchmark -6.0 11.6 19.9

Difference +1.5 -0.4 -13.6


7. Stable Value: Performance Summary Ending 12/31/2011

Fourth Quarter One Year Three Years

Total Stable Value 1.4% 17.0% 12.7%

Total Stable Value Benchmark 1.4 22.3 6.8

Difference 0.0 -5.3 +5.9

Long Treasuries 2.0% 30.8% 8.8%

Treasury Benchmark 1.9 29.9 7.4

Difference +0.1 +0.9 +1.4

Stable Value Hedge Funds 0.0% -1.6% 6.3%

Hedge Funds Benchmark -0.1 1.7 2.2

Difference +0.1 -3.3 +4.1

Other Absolute Return -0.5% -3.5% 15.3%

Other Absolute Return Benchmark 0.6 2.4 2.5

Difference -1.1 -5.9 +12.8

Cash Equivalents 0.3% 0.4% -0.7%

Cash Benchmark 0.0 0.1 0.1

Difference +0.3 +0.3 -0.8

Note: Performance of Cash Equivalents is shown net of fees paid to TRS Strategic Partners


8. Real Return: Performance Summary Ending 12/31/2011

Fourth Quarter One Year Three Year

Total Real Return 3.7% 11.1% 7.9%

Real Return Benchmark 4.4 12.9 7.4

Difference -0.7 -1.8 +0.5

TIPS 2.5% 13.6% 11.1%

U.S. TIPS Benchmark 2.7 13.6 10.9

Difference -0.2 0.0 +0.2

Real Assets 1.8% 12.7% -6.1%

Real Asset Benchmark 3.3 17.2 -3.7

Difference -1.5 -4.5 -2.4

REITS 15.4% 8.8% 22.9%

REITS Benchmark 15.3 8.7 21.3

Difference +0.1 +0.1 +1.6

Commodities 2.5% -4.9% 8.4%

Commodities Benchmark 9.0 -1.2 6.9

Difference -6.5 -3.7 +1.5

Appendix – Supplemental Reporting


Historical Excess Performance

Quarterly and Cumulative Excess Performance

Total Fund vs. Total Fund Benchmark


TRS Asset Growth

Total Fund Historical Growth (September 1997 - December 2011)

0

20

40

60

80

100

120

140

Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11

Mar

ket V

alue

(Billi

ons)

$104.0


External Manager Program: Public Equity Performance as of 12/31/2011Allocation

($ in billions) Fourth Quarter One Year Three Years

EP Total Global Equity $25.8 6.2% -10.0% 15.5%

EP Global Equity Benchmark -- 7.1 -8.8 15.7

Difference -- -0.9 -1.2 -0.2

EP Total U.S. Large Cap $8.6 11.7% 0.9% 21.0%

EP Large Cap Benchmark -- 11.7 2.0 11.8

Difference -- 0.0 -1.1 +9.2

EP Total U.S. Small Cap $1.2 13.1% -4.2% --

EP Small Cap Benchmark -- 14.6 -3.0 --

Difference -- -1.5 -1.2 --

EP Total U.S. $9.8 11.9% 0.3% 21.0%

EP U.S. Benchmark -- 12.0 1.5 11.8

Difference -- -0.1 -1.2 +9.2

EP Total Non-U.S. Developed $4.0 2.6% -11.8% 6.9%

MSCI EAFE + Canada Index -- 3.5 -12.2 8.5

Difference -- -0.9 +0.4 -1.6

EP Total Emerging Markets $6.0 3.2% -20.4% 19.8%

MSCI Emerging Markets Index -- 4.4 -18.4 20.1

Difference -- -1.2 -2.0 -0.3

EP Total Non-U.S. $10.0 2.9% -17.1% 13.7%

EP Non-U.S. Benchmark -- 4.0 -15.7 15.0

Difference -- -1.1 -1.4 -1.3


External Manager Program: Public Equity Performance as of 12/31/2011 (cont’d)

Allocation ($ in billions) Fourth Quarter One Year Three Years

EP Total World Equity $3.3 4.2% -8.4% --

EP World Equity Benchmark -- 7.2 -7.3 --

Difference -- -3.0 -1.1 --

EP Total Directional Hedge Funds $2.7 0.8% -- --

HFRI Fund of Funds Composite Index -- -0.3 -- --

Difference -- +1.1 -- --


Strategic Partnership Program: Performance Summary Ending 12/31/2011

During the quarter the Program modestly underperformed its benchmarkOver the trailing three-year period, the Program exceeded its benchmark by 1.0 percentage point– All four managers outperformed the SPN benchmark over the three-year period, with Neuberger

Berman and J.P. Morgan generating the most value– The recently hired strategic partner, Barclays Capital, slightly outperformed its benchmark during the

fourth quarter

Allocation ($ in billions)

FourthQuarter

One Year

Three Years

Strategic Partnership Program (SPN) $5.0 6.6% 0.5% 14.3%

Strategic Partnership Program Benchmark -- 6.7 2.4 13.3

Difference -- -0.1 -1.9 +1.0

Blackrock $1.1 6.2% 0.5% 13.6%

J.P. Morgan $1.1 7.6% -1.3% 14.8%

Neuberger Berman $1.2 5.9% -0.1% 15.2%

Morgan Stanley $1.1 6.8% 2.6% 13.6%

Barclays Capital $0.5 6.9% -- --


BenchmarksTotal Fund Performance Benchmark – 18% MSCI US Standard, 2% MSCI US Small Cap, 10% MSCI Emerging Markets, 15% MSCI EAFE plus Canada, 5% HFRI FoF Composite Index, 12% State Street Private Equity (1 qtr lagged), 13% BC Long Term Treasury, 4% HFRI FoF Conservative Index, 1% Citigroup 3 Mo T-Bill, 5% BC US TIPS, 2% MSCI US REIT Index, 13% NCREIF ODCE (1 qtr lagged)

Global Equity Benchmark– 24% MSCI EAFE plus Canada, 29% MSCI US Standard, 3% MSCI US Small Cap,16% MSCI Emerging markets index, 8% HFRI FoF Composite Index, and 19% State Street Private Equity (1 qtr lagged)US Large Cap Benchmark - MSCI US Standard IndexUS Small Cap Benchmark - MSCI US Small Cap IndexEmerging Markets Benchmark – MSCI Emerging Markets Non-US Developed Benchmark– MSCI EAFE plus CanadaDirectional Hedge Funds – HFRI Fund of Funds (FoF) Composite IndexPrivate Equity Benchmark - State Street Private Equity (1 qtr lagged)

Stable Value Benchmark – 22% HFRI FoF Conservative Index, 72% BC Long Term Treasury, and 6% Citigroup 3 mo T-Bill.US Treasuries Benchmark – Barclays Capital (BC) Long Term TreasuryStable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative IndexOther Absolute Return Benchmark - 3 Mo LIBOR + 2%Cash Benchmark - Citigroup 3 Mo T-Bill

Real Return Benchmark – 25% BC US TIPS, 65% NCREIF ODCE, and 10% MSCI US REIT IndexUS TIPS Benchmark - BC US TIPS IndexReal Assets Benchmark –NCREIF ODCE (1qtr lagged) REITS Benchmark – MSCI US REIT IndexCommodities Benchmark - Goldman Sachs Commodity Index

Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periodsgreater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements dueentirely to rounding. These differences are generally within a few basis points and are not material.


Description of Performance Attribution

A measure of the source of the deviation of a fund's performance from that of its policy benchmark. Each bar on the attribution graph represents the contribution made by the asset class to the total difference in performance. A positive value for a component indicates a positive contribution to the aggregate relative performance. A negative value indicates a detrimental impact. The magnitude of each component's contribution is a function of (1) the performance of the component relative to its benchmark, and (2) the weight (beginning of period) of the component in the aggregate. The individual Asset Class effect, also called Selection Effect, is calculated as Actual Weight of Asset Class x (Actual Asset Class Return – Asset Class Benchmark Return)The bar labeled Allocation Effect illustrates the effect that a Total Fund's asset allocation has on its relative performance. Allocation Effect calculation = (Asset Class Benchmark Return –Total Benchmark Return) x (Actual Weight of Asset Class – Target Policy Weight of Asset Class). The bar labeled Cash Flow Effect describes the impact of asset movements on the Total Fund results. Cash Flow Effect calculation = (Total Fund Actual Return – Total Fund Policy Return) – Current Selection Effect – Current Allocation EffectThe bar labeled Benchmark Effect results from the weighted average return of the asset classes' benchmarks being different from the Total Funds’ policy benchmark return. Benchmark Effect calculation = Total Fund Policy Return – (Asset Class Benchmark Return x Target Policy Weight of Asset Class)Cumulative EffectCumulative Effect calculation = Current Effect t *(1+Cumulative Total Fund Actual Return t-1) +Cumulative Effect t-1*(1+Total Fund Benchmark Return t)

Tab BTab B

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blank.

Britt Harris

Chief Investment Officer

April 2012

Quarterly Portfolio Performance Review and Market Update

Trust Results

Current Conditions

Long-Term Outlook

Appendix

2

Agenda

Overview

Current Conditions

Long-Term Outlook

Appendix

1. ECONOMIC CONDITIONS

• Global economic conditions improving but still fragile

• Markets dominated by political issues in 2011

• Corporate profits are at all-time highs

2. RECENT FINANCIAL MARKET PERFORMANCE

• Disconnect continues between GDP growth and corporate profit

• Significant benefits continue from new diversification

3. TRUST PERFORMANCE

Total Return Value Added Peer Comparison

One Year 1.9% -2.1% Top 32%

Two Year 8.1% -0.3% Top 15%

Three Year 12.0% 0.3% Top 13%

4. TRUST VALUE

Ending Value $104.0 billion

4th Quarter Investment Return $ 3.8 billion

One-Year Investment Return $ 2.0 billion

Three-Year Investment Return $ 31.7 billion

3

Executive Summary – TRS Investment DivisionAs of December 31, 2011

Source: State Street Bank

5. TRUST RISK POSITIONS

Underweight Neutral Overweight

Real Assets -2.2% Public Equity Credit/OAR +2.1%

Treasuries -1.1% REITs TIPS +1.3%

Private Equity -0.9% Cash Commodities +1.2%

Hedge Funds -0.7%

6. ECONOMIC PROJECTIONS

Q4 2011Actual

2012Estimated

Real GDP 3.0% 2.2%

CPI 3.3% 2.1%

Nominal GDP 6.3% 4.3%

10-Year Rate 1.9% 2.5%

Discount Rate 0.3% 0.3%

EUR/USD 1.3 1.3

Unemployment Rate 8.7% 8.3%

7. DIVERSIFICATION PREMIUM REQUIREMENT (10 Year)*

Historical Average 1.7%

Current 6.1%

*Excess return over 10-Year treasury bond yield needed to achieve 8%

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

4

Relative Market Returns MatrixAs of December 31, 2011

Private Equity and Real Estate returns are quarter lagged, JPY and EUR are expressed in their purchase power in USDAll Domestic Equities modeled by Russell Indexes, all International Equities and REITs modeled by MSCI Indexes

Source: BloombergOverviewCurrent

ConditionsLong-Term

OutlookAppendix

Annual Annualized

Rank Quarter 1 Year 2010 2009 2008 2007 2006 5 Year 10 Year 20 Year

1 US Small Long Treasury Gold EM Equity Long Treasury EM Equity REITs Gold Gold Private Equity

15.5% 29.9% 29.5% 78.5% 24.0% 39.8% 35.9% 17.4% 18.8% 17.4%

2 REITs Real Estate REITs High Yield Japanese Yen Commodities EM Equity Japanese Yen EM Equity REITs

15.3% 17.2% 28.5% 58.2% 23.3% 32.7% 32.6% 8.0% 14.1% 10.7%

3 US Value US I/L US Small US Growth Gold Gold Private Equity EM Equity REITs US Value

13.1% 13.6% 26.9% 37.2% 5.8% 31.0% 30.8% 6.7% 10.2% 8.9%

4 US Large Private Equity EM Equity EAFE + CAN Real Estate Private Equity EAFE + CAN High Yield Private Equity Long Treasury

11.8% 11.6% 18.9% 33.7% 2.3% 21.1% 26.9% 6.5% 10.1% 8.7%

5 US Growth Gold US Growth REITs 90 Day Trsy Real Estate Gold Long Treasury Long Treasury US Small

10.6% 10.1% 16.7% 28.6% 1.8% 17.1% 23.2% 5.3% 9.0% 8.5%

6 Commodities REITs Private Equity US Large US I/L US Growth US Value US I/L High Yield EM Equity

9.0% 8.7% 16.2% 28.4% -2.4% 11.8% 22.2% 5.2% 8.9% 8.4%

7 High Yield Japanese Yen US Large US Small Euro US I/L US Small Private Equity US I/L High Yield

6.5% 5.5% 16.1% 27.2% -4.2% 11.6% 18.4% 3.1% 8.8% 8.2%

8 EM Equity High Yield US Value Gold Private Equity EAFE + CAN Real Estate US Growth Commodities US Large

4.4% 5.0% 15.5% 24.4% -25.1% 11.6% 16.3% 2.0% 5.6% 8.0%

9 EAFE + CAN US Growth High Yield US Value High Yield Euro US Large 90 Day Trsy US Small Gold

3.5% 2.6% 15.1% 19.7% -26.2% 10.5% 15.5% 1.4% 5.6% 7.7%

10 Real Estate US Large Japanese Yen Commodities US Small Long Treasury High Yield US Small Japanese Yen US Growth

3.3% 1.5% 14.7% 13.5% -33.8% 9.8% 11.8% 1.0% 5.5% 6.6%

11 US I/L US Value Long Treasury US I/L US Value Japanese Yen Euro Euro EAFE + CAN Real Estate

2.7% 0.4% 9.4% 11.4% -36.8% 6.5% 11.4% 0.3% 5.1% 5.8%

12 Long Treasury 90 Day Trsy Commodities Private Equity US Large US Large US Growth US Large Real Estate US I/L

1.9% 0.1% 9.0% 10.5% -37.6% 5.8% 9.1% -0.3% 4.9% 5.1%

13 Japanese Yen Commodities EAFE + CAN Euro REITs 90 Day Trsy 90 Day Trsy EAFE + CAN US Value EAFE + CAN

0.2% -1.2% 8.9% 2.5% -38.0% 4.8% 4.8% -1.7% 3.9% 5.0%

14 90 Day Trsy Euro US I/L 90 Day Trsy US Growth High Yield Long Treasury Commodities Euro Commodities

0.0% -3.2% 6.3% 0.1% -38.4% 1.9% 1.9% -2.6% 3.8% 3.9%

15 Euro US Small Real Estate Japanese Yen EAFE + CAN US Value US I/L US Value US Large 90 Day Trsy

-3.2% -4.2% 6.0% -2.6% -43.6% -0.2% 0.4% -2.7% 3.3% 3.3%

16 Gold EAFE + CAN 90 Day Trsy Long Treasury Commodities US Small Japanese Yen REITs US Growth Japanese Yen

-3.7% -12.2% 0.1% -12.9% -46.5% -1.6% -1.1% -3.1% 2.6% 2.5%

17 Private Equity EM Equity Euro Real Estate EM Equity REITs Commodities Real Estate 90 Day Trsy Euro

-6.0% -18.4% -6.5% -35.7% -53.3% -16.8% -15.1% -4.0% 1.9% -0.3%

5

Overview of Investment ResultsAs of December 31, 2011

Q4 11 Return 1.4% 4.6% 3.7% 3.8%

1 Year Return 17.0% -6.2% 11.1% 1.9%

Ending Value $20.1B $62.9B $21.0B $104.0B

Period Stable Value Global Equity Real Return Total Trust

Real Return20%

Policy weights:

5% - TIPS2% - REITS

13% - Real Estate/Real Assets

Stable Value18%

Policy weights:

13% - Long Treasuries4% - Hedge Funds

1% - Cash

Global Equity62%

Policy weights:

18% - US Large Cap2% - US Small Cap

15% - Non- US Developed10% - Emerging Market Equities

5% - Directional Hedge Funds12% - Private Equity


Trust Value over $100 Billion Modest year (up 1.9%) 32nd percentile versus peer funds

Q4 up 3.8% 3 year return: 12% and likely to rise Economic recovery complete; expansion phase pending

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

6

One Year Summary of Portfolio PerformanceOne Year Ending December 31, 2011

Global Equity60%



8% - Private Equity


AssetsValue($B)

As of 12/31/11

Total Return

ExcessReturn

Value Added

NOTES% of Fund

+/-weight

ByAllocation

BySelection Total

Public Equity* 51.4 49.4 -0.6% -9.0% -1.5% -0.4% -0.1% -0.5% Struggled (European debt crisis, U.S. downgrade)

Private Equity 11.5 11.1 -0.9% 11.2% -0.4% 0.0% -0.1% -0.1% Stronger returns for Private Equity

Global Equity 62.9 60.5 -1.5% -6.2% -1.0% -0.4% -0.2% -0.6%

Long-Term Treasuries 12.4 11.9 -1.1% 30.8% 0.8% -1.0% 0.1% -0.9% Treasuries had a phenomenal year

Stable Value Hedge Funds 3.4 3.3 -0.7% -1.6% -3.3% 0.1% -0.1% 0.0% Outperformed Public Equity by 7.4% in down market

Credit/OAR 2.2 2.1 2.1% -3.5% -5.9% -0.2% 0.0% -0.2% Primarily RMBS

Cash 2.1 2.0 1.0% 0.4% 0.3% -0.1% 0.0% -0.1%

Stable Value 20.1 19.3 1.3% 17.0% -5.3% -1.2% 0.0% -1.2%

TIPS 6.5 6.3 1.3% 13.6% 0.1% -0.1% 0.0% -0.1%

Commodities 1.2 1.2 1.2% -4.9% -3.7% -0.1% 0.1% 0.0%

REITs 2.1 2.0 0.0% 8.8% 0.1% 0.0% 0.0% 0.0% Advanced despite public market weakness

Real Assets 11.2 10.7 -2.3% 12.7% -4.5% 0.2% -0.4% -0.2% Strong returns from Real Assets

Real Return 21.0 20.2 0.2% 11.1% -1.8% 0.0% -0.3% -0.3%

Total Trust 104.0 100% 0.0% 1.9% -2.1% -1.6% -0.5% -2.1%

Public Assets 81.3 78.2 3.2% -0.1% -2.1% -1.8% 0.0% -1.8% Asset allocation challenging in Q311

Private Assets 22.7 21.8 -3.2% 12.1% -2.9% 0.2% -0.5% -0.3% Private Markets provided diversification

Total Trust $ 104.0 100% 0.0% 1.9% -2.1% -1.6% -0.5% -2.1%

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

* Public Equity includes Directional Hedge Funds

Source: Trust Universe Comparison Services 7

TUCS Comparisons for Public TrustsGreater Than $10 Billion

TRS IMD Competitive RankPeriods ending December 31, 2011

0

25

50

75

100

1 Year32nd

2 Year15th

3 Year13th

4 Year30th

5 Year25th

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

8

Growth of TrustAs of December 31, 2011 (in millions)

Global Equity60%



8% - Private Equity

Source: TRS Accounting Division

1 Year 3 Years 10 YearsStarting Value $105,344 $80,504 $74,442

Less:Benefit Payments 7,467 20,688 59,014

Withdrawals 368 897 2,590Other Expenses 93 246 583

Total Reductions 7,928 21,830 62,187

Add:State Contributions 1,789 5,393 14,704

Employee Contributions 2,230 7,248 21,126Other Additions 574 1,026 2,038

Total Contributions 4,594 13,667 37,868

Investment Return 2,033 31,701 48,920

Ending Value $104,043 $104,043 $104,043

Ending Fund Value of $104.0 Billion

$ 7.9 Billion in Payouts

$ 4.6 Billion in Contributions

$ 2.0 Billion in Investment Returns

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Current Conditions

9

10

Source: Data from Bureau of Labor Statistics (CPI) and Bureau of Economic Analysis (GDP). Graph depicts year-over-year quarterly observations from 1948 to date. Market returns based on 2011 TRS policy, dependent on QoQ inflation and GDP prevailing since 1990

Real Return RegimeHigh CPI, Low GDP

15.1% of observationsAverage Inflation: 8.3%

Global Equity: +5.7%Stable Value: +4.3%

Real Return: +13.5%

Stable Value RegimeStagnant GDP & Low CPI

18.9% of Observations

Average Inflation: 1.0%

Global Equity: -7.0%

Stable Value: +14.2%Real Return: +0.7%

Global Equity RegimeFavorable GDP/CPI66% of observations

Average Inflation: 3.0%

Global Equity: +15.4%Stable Value: +7.1%

Real Return: +8.3%

Portfolio Diversification in Different Market Conditions

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

11

Current GDP/CPI Regime for USGlobal Equity (Box 5) as of December 2011

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

12

Current GDP/CPI Regimeas of December 2011

China

Global Equity (Box 5)

Europe

Real Return (Box 2)

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Signal Signal

Markets and Politics

13

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

Financials Return vs. Broader Market (RH Axis) S&P Financials Normalized S&P Normalized

4/18/11S&P puts US on watch

07/11Debt ceiling debate Intensifies

7/31/11Debt ceiling agreement reached

8/5/2011S&P downgrades US

7/25/10Frank Dodd passes into law

9/21/11Operation Twist

4/23/10Greece requests bailout

5/9/10Creation of EFSF

11/28/10Irish bailout approved

5/16/11Portugal bailout approved

10/2/11Greece misses targets

8/8/11ECB begins buying Italian and Spanish bonds

8/26/2011Jackson Hole

10/26/11EU plan announced

11/9/11Italian yields pierce 7%

12/2/11Good US jobs report

12/22/11LTRO 1

1/13/12France downgraded

2/3/12Jobless rate falls to 8.3%

2/21/122nd Greek bailout finalized

2/29/12LTRO 2

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Correlations Reach All-Time High in 2011

14

Text box

OverviewCurrent

ConditionsLong-Term

OutlookAppendix Source: Nomura Securities International, Inc., Russell, IDC

Risk Signal UpdateBubble Monitor

15OverviewCurrent

ConditionsLong-Term

OutlookAppendix

S&P 500

EAFE

February, 2009

Gold

Crude Oil

REITS

S&P 500

EAFE

(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5

Gold

10 Year Treasuries

Australian Dollar

REITS

Crude Oil

S&P 500

Emerging Markets

Property Index

BBB Credit

EAFE

7 Year Z score

Bubble Level Monitor: March 2012

(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5

10 Year Treasuries

Gold

Australian Dollar

Property Index

Crude Oil

REITS

Emerging Markets

BBB Credit

S&P 500

EAFE

7 Year Z score

Bubble Level Monitor: September 2011

(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5

10 Year Treasuries

Gold

Property Index

Emerging Markets

Crude Oil

Australian Dollar

EAFE

REITS

S&P 500

BBB Credit

7 Year Z score


(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5

Gold

Property Index

Crude Oil

10 Year Treasuries

REITS

Australian Dollar

Emerging Markets

EAFE

S&P 500

BBB Credit

7 Year Z score

Bubble Level Monitor: September 2008

16

One Year Three Years

Le

ast A

ttra

ctive

Mo

st A

ttra

ctive

3431

28

22

16

High Yield Debt Distressed

Debt LC High Quality Equities

Bank Loans

Stronger Dollar

4644 43

31

16

US Sovereign

Debt Financial Sector

EquitiesEuro

Currency

Non US Dev.

Sovereign Debt

European Equities

Note: Bubbles represent the total number of votes for an asset

29 2925

22 22

Emerging Market Equities

High Yield Debt Stronger

Dollar

Opportunistic Real Estate

Distressed Debt

60

45

2622 21

Non US Dev.

Sovereign Debt

Core Real Estate

Opportunistic Rea l Estate Investment

Grade Credit

US Sovereign

Debt

2012 Best Ideas SurveyTop 5 Ideas

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Residential Mortgage-Backed Securities (RMBS)

Comparable Security Yields as of 2/29/2012

Average Life (Years)

Yield (%)

Investment Grade 1-10 year 5.2 2.7

High Yield Corporate 6.6 7.0

Non-Agency RMBS* 4.8 13.0

*TRS portfolio

17

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011

ABX – Non-Agency RMBS

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Cumulative Total Returns (January 2008 - Present)

Treasuries High Yield ABX

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Equity Valuations

18Sources: Bloomberg, DatastreamOverviewCurrent

ConditionsLong-Term

OutlookAppendix

152%

122%

50%

75%

100%

125%

150%

175%

200%

225%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Small/Large Trailing P/E

111%

139%

50%

75%

100%

125%

150%

175%

200%

225%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

EAFE/EM Forward P/E

111%

102%

50%

75%

100%

125%

150%

175%

200%

225%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

US/EAFE Forward P/E

129%

150%

50%

100%

150%

200%

250%

300%

350%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Growth/Value Trailing P/E

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Do

llars

pe

r Eu

ro

Euro spot Euro fair value

US Dollar Versus Yen and Euro

19OverviewCurrent

ConditionsLong-Term

OutlookAppendix

70

90

110

130

150

170

190

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Ye

n p

er

Do

llar

Yen spot Yen fair value

81

88

1.34

1.28

Long-Term Treasury Bonds and Real Yields

20

-0.61

-0.21

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0Value Gap = Actual Yield - TRS Estimated Fair Value

10 Yr Value Gap 30 Yr Value Gap

Overvalued

Undervalued

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

-2

0

2

4

6

8

101

99

0

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

10-Year UST Yields

10 Yr Yld 10 Yr Real Yld

-2

0

2

4

6

8

10

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

30-Year UST Yields

30 Yr Yld 30 Yr Real Yld

3.4%

0.9%

2.4%

-0.1%

Long-Term Outlook

21

22

GMO 7-Year Asset Class Return ForecastsAs of December 31, 2011

Source: GMO (reprinted with permission)

The chart represents real return forecasts1 for several asset classes. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are nota guarantee of future performance. Actual results may differ materially from the forecasts above

1 Long-term inflation assumption: 2.5% per year

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

Estimated

Range of

7-Year

Annualized

Returns

23

Historical Ability to Produce 8% Investment ReturnAs of December 31, 2011

Source: State Street and BloombergOverviewCurrent

ConditionsLong-Term

OutlookAppendix

7.9% 8.1% 6.7% 6.7% 5.8% 7.8% 5.6% 6.4% 5.8% 4.7% 6.5% 5.1% 5.1% 1.9%

5.5% 4.9%

3.5%

1.7% 3.6%

2.9%

3.2% 2.4%

2.0%

-2.1%

-3.2%

-0.4%

0.4%6.1%

13.4%13.0%

10.2%

8.4%

9.4%

10.7%

8.8% 8.9%

7.7%

2.6% 3.3%

4.8%5.5%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Current

Implied Diversification Risk Premium Earned

10 Yr Treasury Bond YTM (Ten Years Earlier)

10 Yr Annualized Return of TRS Fund

TRS Target Long-Term Return RequiredRisk

Premium Going

Forward

Implied Loss from Diversification

24

Summary PointsAs of December 31, 2011

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

One Year Three Year

Investment Return 1.9% 12.0%

Alpha -2.1% 0.3%

TUCS Rank 32nd 13th

Investment Earnings $5.7 Billion $34.1 Billion

Top Performers Long Treasuries 30.8% REITs 22.9%

US TIPS 13.6% Dislocated Credit 15.3%

Real Assets 12.7% Public Equity 12.5%

Private Equity 11.2% TIPS 11.1%

REITs 8.8% Long Treasuries 8.8%

Appendix

25

26

TUCS Comparisons for Public TrustsGreater Than $10 Billion

Source: Wilshire Trust Universe Comparison Services (TUCS).** All TUCS returns are reported GROSS of Management Fees.

Master Trust Performance AnalysisPerformance Comparison

Total Returns of Public Fund Master Trusts > $10 BillionCumulative Periods Ending: December 31, 2011

Percentile Rankings 1 Qtr 2 Qtrs 3 Qtrs 1 Year 2 Years 3 Years 4 Years 5 Years 7 Years 10 Years

5th 6.47 4.31 6.47 8.35 9.56 12.25 5.98 6.12 5.88 6.8625th 5.13 -3.48 -1.66 2.65 7.77 11.91 0.75 2.31 4.89 6.0150th 4.29 -4.44 -2.95 0.86 6.80 10.39 0.05 1.89 4.57 5.5275th 3.77 -5.05 -3.80 0.25 6.50 10.21 -0.66 1.33 4.17 5.2895th 2.50 -6.05 -5.10 -1.07 5.91 8.40 -1.71 0.62 3.56 4.51

No. of Observations 41 40 40 40 39 39 39 39 38 37

Total Fund 3.81 (72) -3.48 (25) -2.20 (32) 1.96 (32) 8.21 (15) 12.10 (13) 0.63 (30) 2.31 (25) 4.66 (41) 5.52 (50)Total Fund Benchmark 3.86 (67) -1.70 (8) -0.07 (10) 3.91 (8) 8.36 (8) 11.74 (27) 0.93 (17) 2.44 (20) 4.63 (47) 5.45 (52)

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

27

Economic ForecastsAs of December 31, 2011

Source: BloombergOverviewCurrent

ConditionsLong-Term

OutlookAppendix

Actual 2012 Forecast 2013 Forecast

Indicator Q4 2011 Q1 Q2 Q3 Q4 Q1

Economic Activity

Real GDP (QoQ % saar) 3.0 2.1 2.2 2.4 2.5 2.3

CPI (YoY%) 3.3 2.4 2.0 1.8 2.0 2.0

Unemployment (%) 8.7 8.3 8.3 8.2 8.1 8.0

External Balance

Current Account (% of GDP) -3.1 -3.0 -3.0 -3.0 -3.0 -3.0

Fiscal Balance

Budget (% of GDP) -8.2 -8.3 -6.9 -6.6 -6.8 -6.8

Interest Rates

Central Bank Rate (%) 0.3 0.3 0.3 0.3 0.3 0.3

2-Year Note (%) 0.2 0.3 0.3 0.4 0.5 0.6

10-Year Note (%) 1.9 2.0 2.1 2.3 2.5 2.7

Exchange Rates

EUR/USD 1.3 1.3 1.3 1.3 1.3 1.3

28

Description of TRS BenchmarksAs of December 31, 2011

Source: TRS Investment Policy StatementOverviewCurrent

ConditionsLong-Term

OutlookAppendix

Asset Class Benchmark Description

US Large Cap Equity MSCI USA Standard Index

US Small Cap Equity MSCI USA Small Cap Index

Non-US Developed Equity MSCI EAFE+Canada Index

Emerging Market Equity MSCI Emerging Markets Index

Directional Hedge Funds HFRI Fund of Funds Index - Composite

Private Equity State Street Private Equity Index (lagged one quarter)

US Treasury Barclays (BarCap) US Long Treasury Index

Absolute Return 3 Month LIBOR + 2% applied annually

Cash Citigroup 90-day US Treasury Index

Stable Value Hedge Funds HFRI Fund of Funds Index - Conservative

Real Assets NCREIF ODCE Index (lagged one quarter)

US TIPS Barclays (BarCap) US Treasury TIPS index

Commodities Commodities (Int & SPN)

REITs MSCI REIT Index

29

Historical Trust Returns

Global Equity60%



8% - Private Equity


Total Trust Quarterly 1 Year5 Years

Annualized10 Years

Annualized

Global Equity 4.6% -6.2% -0.7% 4.4%

Stable Value 1.4% 17.0% 7.9% 7.0%

Real Return -0.2% 11.1% 5.3% 5.5%

Alternative Markets

Private Equity -4.5% 11.2% 8.1% 13.2%

Hedge Funds* 0.3% -1.4% 1.1% 4.3%

Real Assets 1.8% 12.7% -1.7% 1.7%

Total Trust 3.8% 1.8% 2.3% 5.5%

Total Trust Composite Index 3.9% 3.9% 2.5% 5.5%

Trust Value Added -0.1% -2.1% -0.2% 0.0%

OverviewCurrent

ConditionsLong-Term

OutlookAppendix

* Hedge Funds includes both Stable Value and Directional Hedge Funds

Chi Kit Chai Steve LeBlanc

David DeStefano Rich Hall Janis Hydak Eric Lang Nigel Lewis Shayne McGuire Dale West

Mark Albert Bernie Bozzelli Ralph Linn

Jase Auby Sylvia Bell Patrick Cosgrove Katy Hoffman Susanne Gealy Neil Randall John Ritter Curt Rogers

Tom Cammack Kay Cuclis Tim Jones Kevin Lincoln Allen MacDonell Steve Peterson Matt Robertson Wayne Speer KJ Van Ackeren John Watkins

Mark Cassens Brad Gilbert Michael Lazorik Jaime Llano Scott Moore Michael Pia Corina Scoggins Joe Tannehill Courtney Villalta Grant Walker

James Nield Demetrius Pope

Phillip Auth Ashley Baum Grant Birdwell Todd Centurino William Guinn Craig McCullough Marshall Reid Tayyib Shah Brad Thawley Jennifer Wenzel

Stuart Bernstein Rich Campbell John DeMichelle Amit Kumar Stacey Peot Craig Rochette Daniel Steinberg Nathan Zinn

Jeremy Aston Brian BaumhoverPatricia Cantu Kendall Courtney Karoline Freeman Jon Hook Scott Ramsower Matt Talbert Mark Telschow Susan Wade

David Cox Jingshan Fu Kelly Newhall Komson Silapachai

JB Daumerie Ranu Dutta Roy Kurian Terri Krumnow Lourdes Llano Barbara Woodard Tony Yiu

Pat Barker Rachel Clark Jelena Melenseko Jared Simpson Kristi Vorce Ross Willman

Andy Cronin Chase Hill Felicia Jones Jon Klekman Melissa Kleihege Steve Lambert Maribel Nesuda Lilly Rodgers Molly Rose Thomas Albright

Monica Larson Gracie Marsh Cynthia Mendoza Hugo Rangel Babette Ruiz Marina Salazar Sharon Toalson Susan White

Associate (8)

Senior Managing Directors (2)

Jerry Albright, Deputy CIO

Britt Harris, CIO

Assistants (8)

Senior Investment Managers (22)

Directors (9)

Senior Directors (3)

Managing Directors (7)

Mohan Balachandran

Irma Zavaleta-Castillo

Barbara Forssell

Investment Managers (18)

Senior Associate (14)

Senior Analyst (7)

Analyst (9)

IMD OrganizationAs of March 2012

30Overview

Current Conditions

Long-Term Outlook

Appendix

Key Positions0 New Hire/Positions0 Turnover1 Transfer

50 MBAs 22 Other Masters30 CFAs5 PhDs3 JDs

Risk Signals

No Bubble Signals in March, 2012

100 different assets monitored monthly

3 Factor model

Relative index change, correlations, absolute change

Most recent bubbles have been in commodities and fixed income

-

2

4

6

8

10

12

14

A-9

9

D-9

9

A-0

0

A-0

0

D-0

0

A-0

1

A-0

1

D-0

1

A-0

2

A-0

2

D-0

2

A-0

3

A-0

3

D-0

3

A-0

4

A-0

4

D-0

4

A-0

5

A-0

5

D-0

5

A-0

6

A-0

6

D-0

6

A-0

7

A-0

7

D-0

7

A-0

8

A-0

8

D-0

8

A-0

9

A-0

9

D-0

9

A-1

0

A-1

0

D-1

0

A-1

1

A-1

1

D-1

1

Nu

mb

er o

f Bu

bb

les

Monthly Bubble Signals by Asset Class

Equities Fixed Income Commodities Currencies Alternatives

31OverviewCurrent

ConditionsLong-Term

OutlookAppendix

(3.5) (2.5) (1.5) (0.5) 0.5 1.5 2.5 3.5

Gold

10 Year Treasuries

Australian Dollar

REITS

Crude Oil

S&P 500

Emerging Markets

Property Index

BBB Credit

EAFE

7 Year Z score


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