TRS 2011 Comprehensive Annual Financial Report

TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011
Investment Overview
PORTFOLIO STRUCTURE
In 2008, TRS began a transition to a more diversified investment
strategy. That transition is now complete. The investment
strategy focuses on three possible economic scenarios. Scenario
One is characterized by favorable Gross Domestic Product (GDP)
growth and an average Consumer Price Index (CPI) which, since
1948, has been the prevailing economic condition 66% of the
time. Scenario Two is one of low GDP growth and high CPI,
which has occurred 21% of the time. Finally, Scenario Three is
characterized by stagnant GDP and low CPI, which has occurred
13% of the time. TRS is positioned to take advantage of any
of these various market scenarios by allocating 60% to global
equity markets, which perform well under Scenario One, 20%
to real return, which should perform well in Scenario Two, and
20% to a stable value portfolio, which should perform well and
minimize downside risk in Scenario Three.
INVESTMENT PORTFOLIO PERFORMANCE
TRS had a return of 15.5% for the year ending August 31, 2011,
which exceeded the fund’s benchmark by 1%. This return ranked
in the second quartile of public pension funds for the year. The
total investment value of the trust as of August 31 was $107.1
billion. Annual rates of return for the three-, five- and 10-year
periods ending August 31, 2011 were 3.6%, 4.0% and 5.8%
respectively.
Additional performance information is included on the Total
Time-Weighted Returns and Asset Allocation Charts on the
following pages. The Total Time-Weighted Returns shown are
for the 12-month period ended June 30, 2011, and include comparisons
with established benchmarks for the same time period.
Investment performance is calculated using a time-weighted
rate of return. Returns are calculated by State Street Bank and
Trust Company, the fund’s custodian bank, independently and
using industry best practices.
STRATEGIC INITIATIVES
In July 2011, the Investment Management Division (IMD)
celebrated the third anniversary of its Strategic Partnership
Network (SPN). Four managers, JP Morgan, Neuberger Berman,
Morgan Stanley, and BlackRock, were funded $1 billion each
to invest globally across the same public asset classes as the
trust. The IMD gains valuable insight from the positioning of each
Strategic Partner and incorporates that information into our own
Tactical Asset Allocation models. In addition, each year the SPN
collaborates to produce eight research projects used to benefit
the trust, with a special focus on asset allocation. In July 2011,
a fifth partner, Barclays Capital, was added to the SPN with an
allocation of $500 million. As of August 31, 2011, the total SPN
is valued at $5 billion. For the three-year period as of August
31, the SPN returned 5.3% annually, which added 1.83% over
its three-year benchmark. For the one-year period, the SPN
returned 14.89% to the trust, adding 0.8% over its benchmark.
The Investment Management Division has a dedicated risk
management function. Risk Management performs an independent
risk certification for every new manager commitment
and monitors the performance of each manager and portfolio
monthly with a risk alarm review. During the last 12 months,
the Risk Management team launched an improved suite of
tools and reports, which monitor the risk levels of the trust and
its portfolios. One of the tools developed is a bubble monitor,
which scans the global markets for significant overvaluations
in an asset class. The indications from this monitor provide an
independent alert on asset classes where something abnormal
is occurring. The IMD investigates each signal and may decide
to lower our exposure to that asset class, either through entering
into protective derivatives or an outright sale.
On October 1, 2009, the IMD launched an internal gold fund
to provide protection in times of uncertainty. Uncertainty has
continued in the last 12 months due to continued concerns
about Europe and potential currency devaluation in the US. For
the one-year ended August 31, 2011, the gold fund produced
a return of 41.94%.
In 2011, the Private Markets Group continued to build TRS’
first Principal Investments Program. Since the beginning of the
program in 2009, the trust has committed $2.7 billion in nine
private equity principal investments and nine real asset principal
investments. While this program is still growing, we believe
the combination of lower fees and increased transparency into
the decision-making of our private partners will be accretive
to the trust.
In September, the board reviewed and adjusted the investment
policy to help achieve the trust’s targeted 8% long-term
return. The primary adjustments starting October 1, 2011 are to
incorporate the increased allocation to hedge funds approved by
the Texas Legislature and to increase the amount allocated to
private equity. These changes result in a 2% increase to Global
Equity from current 60% policy benchmark to a 62% allocation
and corresponding decrease in Stable Value from a current
20% policy benchmark to a 18% allocation. This adjustment will
provide greater flexibility for the IMD to respond to changes in
market conditions.
Looking forward, our investment outlook has not changed in
the past 12 months. Due to the very low interest rates today
and the European sovereign debt concerns, our expectations
are for muted returns over the next few years.
Prepared by:
Investment staff of the system
INVESTMENT SECTION
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