870173 TMRS CAFR new8 fix 049-081.qxd - Texas Municipal ...

REPORT ON INVESTMENT ACTIVITY
April 29, 2005
To The Board of Trustees and Participants of the
Texas Municipal Retirement System
Ladies and Gentlemen:
The objective of the TMRS investment program is to produce consistent income that will allow annual interest credits
according to statutory requirements and the TMRS plan design. TMRS achieves this by investing in quality
bonds with long maturities with an emphasis on protection from the likelihood of a bond being retired prematurely.
As a result, the investment program objectives focus on income rates of return rather than total rates of return that
are impacted by volatile valuations in a changing interest rate environment. Depending on the interest rate environment,
the TMRS investment portfolio's total rate of return can fluctuate significantly, while the income rate of return
is relatively stable. The TMRS focus on income return and its consistent strategy of holding quality long-term
bonds has contributed to TMRS' ability to grant for the year 2004 an interest credit of 7.0%. This was above the
general market environment and above the statutory target rate of 5%. In addition, TMRS paid one "extra check" to
annuitants in 2004, and ended the year with an interest reserve in excess of 2.0% of invested assets.
The year 2004 was characterized by challenges in finding high quality investments at relatively attractive yields.
Upgrades were few and far between and the staff's focus was on continuing improvement of the overall quality of
the portfolio as well as capturing significant realized gains during the year due to the low interest rate environment.
TMRS' economic advisors, A. Gary Shilling and Co., Inc. and Hillswick Asset Management, L.L.C., continue to project
an environment of lower long-term interest rates even though we have seen interim short-term rate increases
during the second half of 2004. Lower rates mean higher bond prices and zero coupon securities, which are a significant
part of the current TMRS investment strategy, perform particularly well in a declining interest rate environment.
During 2004, yields ranged from a low of 4.77% to a high of 5.35%. Volatility in yields (i.e. prices) provided
opportunities to enhance the portfolio's income through realized gains.
The TMRS portfolio performance was calculated by Holbein Associates and State Street Analytics, a division of State
Street Corporation. TMRS makes every effort to compute and present accurate investment return information in
accordance with the Global Investment Standards of the CFA Institute, formerly known as the Association for
Investment Management and Research (AIMR). Comparisons were made to other pension plans in the State Street
Universe (SSU), without regard for the investment objectives of the individual plans in the universe. The State
Street Universe is a proprietary comparative universe service developed by State Street Corporation, representing
more than $1 trillion in assets and containing over 5,000 portfolios. Additional comparisons are made to a relevant
nationally recognized bond index, the Lehman Government/Credit Long Bond Index (LG/C Long).
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T M R S COMPREHENSIVE ANNUAL FINANCIAL REPORT 2004