TRS 2011 Comprehensive Annual Financial Report

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TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements (concluded) Investment Type S&P Rating Fair Value Corporate Obligations AAA $ 384,844 Corporate Obligations AA 3,959,823 Corporate Obligations A 17,935,626 Corporate Obligations BBB 43,430,987 Corporate Obligations BB 12,149,396 Corporate Obligations B 27,749,796 Corporate Obligations CCC 1,781,050 Corporate Obligations CC 1,317,098 Corporate Obligations NR 60,378,096 Total Corporate Obligations $ 169,086,716 International Government Obligations AAA $ 4,844,629 International Government Obligations CC 1,671,106 International Government Obligations NR 5,733,899 Total International Government Obligations $ 12,249,634 International Corporate Obligations AA $ 890,495 International Corporate Obligations A 2,132,633 International Corporate Obligations BBB 6,822,851 International Corporate Obligations BB 981,849 International Corporate Obligations B 4,104,257 International Corporate Obligations NR 503,127 Total International Corporate Obligations $ 15,435,212 Total Credit Risk of Debt Securities (excluding Short-Term) $ 1,185,503,640 U.S. Government Obligations and U.S. Government Agency Obligations $ 19,256,743,945 Total Fixed Income (Exhibit I) $ 20,442,247,585 Interest Rate Risk of Debt Securities and Investment Derivative Instruments Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Duration is a measure of a debt investment’s exposure to fair value changes arising from changes in interest rates. It uses the present value of cash flows, weighted for those cash flows as a percentage of the investment’s full price. The system does not have a formal interest rate risk policy. The table on the next page shows the long-term fixed income investments by investment type, fair value, and the effective weighted duration rate as of August 31, 2011. 50 FINANCIAL SECTION
TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements Effective Weighted Investment Type Fair Value Duration Rate* U.S. Government Obligations $ 19,253,593,496 11.49 U.S. Government Agency Obligations 12,532,454 8.99 Asset and Mortgage Backed Obligations 979,350,073 4.32 Corporate Obligations 169,086,716 5.55 International Government Obligations 12,249,634 7.65 International Corporate Obligations 15,435,212 6.32 Total Fixed Income (Exhibit I) $ 20,442,247,585 11.09 *The effective weighted duration rate is an option-adjusted measure of a bond’s (or portfolio’s) sensitivity to changes in interest rates. It is calculated as the average percentage change in a bond’s value (price plus accrued interest) under shifts of the Treasury curve +/- 100 bps. It incorporates the effect of embedded options for corporate bonds and changes in prepayments for mortgage backed securities (including pass-throughs, CMOs and ARMs). The table below shows the maturities of the system’s Swap contracts at August 31, 2011. Maturities in Years Less than 1 Year 1-5 6-10 11-20 Total $ (64,093,651) $ 2,076,453 $ 589,996 $ (626,393) $ (62,053,595) Investments Highly Sensitive to Interest Rate Changes The system’s investments in long-term Asset and Mortgage Backed Obligations are subject to prepayments by the obligees of the underlying assets in periods of decreasing interest rates. The resultant reduction in expected cash flows will affect the fair value of these securities. Prepayments by the obligee of the underlying assets in periods of declining interest rates could reduce or eliminate the stream of income that would have been received. As of August 31, 2011, these securities totaled $979,350,073. The system invests in Commingled Funds which hold a preponderance of investments with fair values that are highly sensitive to market conditions. The fair value of the Commingled Fund fluctuates as market conditions fluctuate. Interest rate changes are a part of changes in market conditions. As of August 31, 2011, these funds totaled $163,226,503. The system’s investments in Swap contracts have various reference rates based on various interbank offered rates and Treasury Bill rates. As these reference rates fluctuate, the payments due to/from the system fluctuate. At August 31, 2011, the notional amount and fair value of these contracts appear on the following page. FINANCIAL SECTION 51
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