New Mexico State Investment Council Annual Report. Bill Richardson Governor of New Mexico

Transcription

1 New Mexico State Investment Council Annual Report Bill Richardson Governor of New Mexico

2 New Mexico State Investment Council Annual Report Investing in New Mexico s Children Creating New Mexico s Future

3 Letter from the State Investment Officer To The Honorable Governor Bill Richardson And The Honorable Members of the New Mexico State Legislature GARY BLAND STATE INVESTMENT OFFICER Honorable Governor Richardson and Members of the New Mexico State Legislature: I am pleased to present the State Investment Council s (SIC) Annual Report for (FY). For many years the State Investment Office staff has worked diligently with the Governor to optimize current benefits, while protecting the New Mexico Permanent Funds. The Funds are structured to make every dollar work hard for New Mexico s citizens, benefitting New Mexico s schools, taxpayers, and economy. I would like to highlight some accomplishments at the State Investment Council during the past year: New Mexico s Permanent Endowment Funds, which were created from the extraction of natural resources, continue to be grown through prudent investment, providing both current and future needs of the State s residents. In FY, the Land Grant and Severance Tax Permanent Funds distributed more than $609 million to the State and its beneficiaries, the equivalent of more than 10% of the state s annual budget. The majority of these distributions benefit New Mexico schools. Disbursements by the Funds also reduce the tax burden on all New Mexicans, saving almost $320 per person, or an average of more than $840 for every household in the state. The Land Grant Permanent Fund (LGPF) returned 17.9% for FY, outpacing its policy index by 60 basis points. The Severance Tax Permanent Fund (STPF) returned 17.8%, matching its benchmark, but exceeding the standard simple index of 60% S&P 500 / 40% Lehman Aggregate by more than 400 basis points. Fund investment policies added 70 basis points to performance, while active management added an additional 60 basis points above the allocation index. SIC internally managed pools had a strong year overall, with returns of 19.2% for the Large Cap Active and 16.9% for the All-Cap pool. External management helped boost overall equity returns to 2%. Five-year returns for the LGPF improved to 11.1% per annum, outperforming the benchmark by 0.3%, and ranking in the 46th percentile in its peer universe. The LGPF s three-year return is even better at 12.7%, or 30th percentile, with an outperformance of 70 basis points. For the five-year period closing in June, the STPF slightly lagged its index by 0.2%, but the Fund is also trending upward and matches its benchmark for the three-year period, ranking in the 35th percentile among its peers. Despite a very challenging environment and amid growing concerns about the credit markets, the SICmanaged Core Bonds Pool matched its index at 6.1%. Combined with other SIC structured debt investment vehicles, the total fixed income composite return was 7.3% While the SIC remains committed to quality management of its investments in traditional markets, it continues to place emphasis on structuring a diversified portfolio which optimizes risk adjusted returns, with an increasing focus on alternative investments in real estate, private equity, structured debt, and fund of hedge fund products. i

4 State Investment Council BILL RICHARDSON GOVERNOR JAMES LEWIS STATE TREASURER PAT LYONS STATE LAND COMMISSIONER KATHERINE MILLER SECRETARY DEPARTMENT OF FINCE & ADMINISTRATION With the support of the Richardson Administration and the New Mexico Legislature, the SIC s film investment program was expanded to allow up to 6% of the Severance Tax Permanent Fund, to be invested in film or television projects filmed in our state. During FY, the SIC invested in four productions. Those projects employed 700 New Mexico crew members and spent an estimated $42 million in our state. Governor Richardson and the Legislature also renewed their commitment to investing in New Mexico companies and venture capital funds, increasing the allocation amount to 9% of the Severance Tax Permanent Fund. Though still in relatively early stages, the New Mexico Private Equity Program has invested in 45 companies which employ more than 2,300 New Mexicans who have an average annual salary of more than $60,000. For every dollar invested by the state, more than six outside dollars were invested in these companies, which in turn spend $250 million annually in payroll and purchases. To date, and with the caveat that the performance will rise and fall as portfolio companies succeed and fail, the program has an internal rate of return of greater than 7%. Nineteen years ago, the Permanent Funds had a combined market value of just over $4 billion, and held only 7% in stocks. Due to the gradual increase in stock holdings, better diversification, good market returns, and new contributions, the SIC now manages more than $16 billion in Permanent Fund and state client dollars. These Funds are now more modern and diversified than ever before, and less at the mercy of the ebb and flow of traditional markets. While the Funds also continue to provide significant benefits to the current taxpayers of New Mexico, our goal is to ensure that these benefits continue on a permanent basis. We will continue to accomplish this objective by minimizing risk, optimizing returns and making every dollar in the Funds work hard for the state of New Mexico. These accomplishments could not be realized without Governor Bill Richardson and his administration, members of the Legislature, my highly professional and dedicated staff, members of the State Investment Council and its Private Equity Advisory Committee as well as the citizens of New Mexico, and I want to thank them all for their continued support. Sincerely, Gary B. Bland, State Investment Officer ii

5 DAVID HARRIS PUBLIC MEMBER ANDREW DAVIS PUBLIC MEMBER PAUL BLANCHARD PUBLIC MEMBER JIM RUTT PUBLIC MEMBER GARY BLAND STATE INVESTMENT OFFICER I. Introduction A. B. C. D. E. Background and History Growth in Total Assets under Management Benefits Provided by the Funds Investment Pools Assets, Allocations and Returns Other State Agency Clients II. in Review A. B. C. D. F. Performance for the Year Investment Fund Structure Distributions Audit Report Management Fees - A Unit Cost Perspective III. Investments A. B. C. D. E. Investment Funds Alternative Investments Risk Control Investment Funds - Assets, Allocations, and Returns Asset Allocation Summary IV. Trust Funds Managed by the SIC - Assets, Allocations, and Returns A. B. C. D. E. F. G. H. I. J. K. L. M. N. O. P. Q. R. S. T. U. Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund New Mexico Retiree Health Care Authority New Mexico Institute of Mining and Technology New Mexico School for the Blind and Visually Impaired Office of the State Engineer/Interstate Stream Commission New Mexico State Land Office New Mexico Highlands University New Mexico Military Institute New Mexico Miners Colfax Medical Center New Mexico Department of Game and Fish Eastern New Mexico University Springer Municipal School District City Of Albuquerque Los Alamos County Public Regulation Commission Luna County New Mexico Public Schools Insurance Authority New Mexico Mortgage Finance Authority Children Youth & Families Department V. Biographies A. B. SIC Profiles PEIAC Profiles iii VI. Future Initiatives A. B. Information Program Investment Policies 52 52

6 Mission Statement New Mexico s Permanent Land Grant and Severance Tax Funds represent the depletion of the state s natural resources and are intended to provide continuing benefits for all New Mexicans, both present and future. The State Investment Council will invest these assets to ensure future generations receive the same or greater benefits as current beneficiaries. The SIC will invest the Funds in a prudent manner as provided by law, to optimize benefits over time while also providing a current revenue source for the state s general fund.

7 I. Introduction Background and History The State Investment Council (SIC) is a non-cabinet level agency reporting to the Governor. The SIC was established by an act of the 23rd Legislature, which was approved on March 28, 1957 and subsequently ratified by a constitutional amendment adopted by the citizens of New Mexico in the general election of The enabling legislation of the SIC is located at section 6-8-1, NMSA According to the terms of the legislation, responsibility for the investment of the Land Grant Permanent Fund (LGPF) was transferred to the State Investment Officer, subject to the policy direction of the SIC. The State Investment Officer was assigned the responsibility for managing the Severance Tax Permanent Fund (STPF) in In 1991 the Legislature authorized the SIC to provide investment management services for other state agencies. The 1997 legislature further expanded this client authorization to include all political subdivisions of New Mexico and the New Mexico Finance Authority. In 2000 the SIC began to manage the Tobacco Settlement Permanent Fund, and in FY the SIC began to manage the newly created Water Trust Permanent Fund, which was funded with $40 million by the Legislature and will disburse $4 million annually for New Mexico capital water projects. Mission Statement The State Investment Council has approved the following Mission Statement, setting forth the purpose and objectives for New Mexico s permanent endowment Funds: New Mexico s Permanent Land Grant and Severance Tax Funds represent the depletion of the state s natural resources and are intended to provide continuing benefits for all New Mexicans, both present and future. The State Investment Council will invest these assets to ensure future generations receive the same or greater benefits as current beneficiaries. The SIC will invest the Funds in a prudent manner as provided by law, to optimize benefits over time while also providing a current revenue source for the state s general fund. State Investment Council Governor, Land Commissioner, State Treasurer, Secretary of DFA State Investment Officer, Public Members Gary B. Bland State Investment Officer Adam Levine Sr. Deputy SIO Kay Chippeaux Deputy SIO Michael Custer Deputy SIO Rick Scroggins CFO / ASD Director Legal Bryan Otero General Counsel Fixed Income Portfolio Connie Lee Manager Equity Portfolio Todd Frybarger Sr. Portfolio Manager Robin West Sr. Equity Portfolio Manager Charles Wollmann Public Information Officer Investment Accounting Cyndy Lynch Manager Admin. Accounting Pam Hamilton Accountant Information Services Bill Hyde IS Manager Human Resources Jeana Vigil Manager Real Estate Scott Smith Director Rose Struck Manager David Lee Portfolio Manager Starla Bennett Asst. Equity Portfolio Mgr. Angela Romero Financial Analyst Marisol Padilla Purchasong Paul Hamilton IT Technician Melissa Dimas Receptionist Private Equity / Film Greg Kulka Director Lori Romero Financial Analyst Bart Stucky Portfolio Manager Michael Custer Portfolio Manager Nicole Gallegos Financial Analyst Kelley Koehler Financial Analyst Paul Heine Equity Trader Mary Martinez Financial Analyst 1 New Mexico State Investment Council Annual Report

8 Introduction Left to Right, back row: Bryan Otero, Scott Smith, Paul Hamilton, Charles Wollmann, Adam Levine, Michael Custer, Greg Kulka, Starla Bennett, Robin West, Marisol Padilla, Lori Romero, Rosalyn Nguyen, Rose Struck, Connie Lee, Rick Scroggins; Middle row: Kay Chippeaux, Tammy Lopez, David Lee, Paul Heine, Cyndy Lynch, Kelley Koehler, Pam Hamilton, Bill Hyde; Front Row: Nicole Gallegos, Jeana Vigil, Gary Bland, Angela Romero, Melissa Dimas, Michelle Ortega; Not Pictured: Todd Frybarger, Mary Martinez, Chelsea Slaughter, Bart Stucky Organization of the State Investment Council The State Investment Council is composed of nine members: the Governor, who serves as Chairman; the State Treasurer; the Commissioner of Public Lands; the Secretary of the Department of Finance and Administration; the State Investment Officer; and four public members appointed by the Governor with the advice and consent of the Senate. One of the public members must be the chief financial officer of a state institution of higher education. Current Council members are profiled in this report. State Investment Office The State Investment Officer is appointed by the Governor and confirmed by the Senate, and is the executive in charge of the State Investment Office (SIO). Under his or her direction, the State Investment Office is charged with the responsibility of carrying out the policies of the SIC in day-to-day investment management functions. The Investment Office began operations in January Land Grant Permanent Fund - History The United States transferred 13.4 million acres of Federal land to the Territory of New Mexico in anticipation of a grant of statehood. The Fergusson Act of 1898 and the Enabling Act of 1910 were the primary Federal legislative vehicles for the public land transfers. The Acts stipulate that such lands are to be held in trust for the benefit of the public schools and 19 other specifically identified state institutions. The Commissioner of Public Lands and the State Land Office are the trustees for the original 13.4 million acres of mineral resources and the remaining 8.75 million acres of surface land. The Commissioner of Public Lands leases the trust lands for mineral exploration and grazing rights and, under certain conditions, may also sell or exchange trust properties. A substantial portion of royalties and income from the sales of land are transferred to the LGPF and are then invested by the State Investment Office. Severance Tax Permanent Fund - History Severance taxes have been collected on certain natural resources extracted from all lands within New Mexico since the 1930 s. Initially, revenues derived from these taxes were deposited in the State s General Fund. Since 1959, revenues have been deposited in the Severance Tax Bonding Fund and used to retire debt from bond issues that have funded a wide variety of capital projects. Prior to 1973, revenues not required for the service of outstanding debt were transferred to the State s General Fund. In that year, the STPF was established by statute under Chapter 294, Laws of The STPF was set up to receive the residual revenues from the Severance Tax Bonding Fund and to serve as an endowment fund. In November 1976, voters of the State approved a constitutional amendment (Article VIII, Section 10) establishing the STPF as a constitutionally protected Fund. Money in the corpus of the Fund could be appropriated by the Legislature with a three-fourth vote of both the House and Senate, although such appropriations were never made. In November 1982, the voters of New Mexico approved a constitutional amendment that removed the Legislature s authority to make appropriations from the Fund and established the STPF as a permanent endowment trust fund. Severance tax revenues first pay the required debt service on severance tax bonds issued by the State, and remaining tax receipts (a minimum of one-half of all severance taxes until New Mexico State Investment Council Annual Report 2

9 Land Grant Permanent Fund Sources of Income and Income Distributions Severance Tax Permanent Fund Sources of Income and Income Distributions Royalties on State Lands and Income from Land Sales Severance Taxes Land Grant Permanent Fund Severance Tax Bonding Fund Constitutional Distribution Formula 5.8% of 5-Year Average (5.8% for s , 5.5% for FYs , 5% thereafter) Public Schools and other Specified Beneficiaries Residual Revenues Reserved for Debt Service Severance Tax Permanent Fund Constitutional Distributions to the General Fund 4.7% of 5-Year Average 1998) are then transferred to the STPF. Since Fiscal Year (FY) 2003, a majority of the severance tax revenues of the preceding fiscal year have been used for debt service, with the remainder being contributed to the STPF. Tobacco Settlement Permanent Fund - History The Tobacco Settlement Permanent Fund (TSPF) was established by New Mexico statute during FY2000 as the result of a legal settlement between several states and the tobacco companies. The TSPF invests a portion of the proceeds from the settlement, which will provide ongoing annual payments to beneficiaries. One-half of the payments from the tobacco companies go into the corpus of the TSPF, with one-half distributed to various expenditures authorized by the Legislature. When the fund reaches a large enough size, distributions will be based on the 4.7% formula used by the Severance Tax Permanent Fund. Asset allocations will be invested in a manner similar to the Land Grant Permanent Fund. Water Trust Fund - History In August the State Investment Council received $40 million allocated by the Legislature and Governor Richardson to establish the Water Trust Permanent Fund (WTPF). The Fund was created in 2003 under State Statute 72-4A-8. The WTPF is invested in a manner similar to the Land Grant Fund, and distributes $4 million annually to a Water Projects Fund earmarked for various water infrastructure projects around New Mexico. The annual distribution will remain at $4 million annually, until such a time that the five year average market value of the WTPF exceeds $4 million. At that time, the standard 4.7% distribution formula will be used. The SIC seeks to manage the WTPF to insure that future generations receive the same or greater benefits as current beneficiaries while maximizing current distributions. Growth In Total Assets Under Management The assets under management by the State Investment Office have grown dramatically over the past four decades. For the fiscal year ending June 30, 1979, assets under management totaled $931 million. By 1989 that figure had grown to $4.39 billion. Eighteen years later, on June 30,, the market value of the assets under management by the State Investment Office stood at $16.1 billion. The most important contributor to this growth in assets has been the shift in asset allocation. In 1988 the allocation for public equity securities (stocks) for the Fund was approximately 10%. In 1993 the stocks were increased to 26%. As of June, this figure stood at 63.7% on a market value basis. 3 New Mexico State Investment Council Annual Report

10 Introduction Total Assets Under Management ($billions - fiscal years ending June) Asset values for FY through 2027 are projected and assume that average stock and bond market returns are realized The increased allocation in public equities is significant because the two primary investments for the Funds have historically been stocks and fixed income securities (bonds). Stocks provided much higher returns over the time period. This is a good example of the investment axiom that indicates that asset allocation is often responsible for a majority of investment returns. In addition to influencing past performance, the increased stock allocation helps the funds meet the long-term objectives set by the SIC. The preceding chart shows the growth in assets projected from to The year 2016 is particularly significant because it is projected that the two Permanent Funds will be distributing over $1.0 billion during that year (see page 9 graph). Income Statement from the Land Grant & Severance Tax Permanent Funds The table at right ($ in thousands) illustrates the benefits the two largest Permanent Endowment Funds provide to the people of New Mexico. The two Funds have historically distributed much more than the contributions they have received. Recently demands on oil and natural gas have reduced the difference between contributions and distributions in contrast to what has been seen historically, although the recent demand on oil and gas have made the amounts competitive in the past few year. Since 2003, the Funds have accumulated a total return of $12 billion, even though the returns in two of the fiscal years were negative. Since the Tobacco Settlement Permanent Fund (TSPF) and Water Trust Fund are not yet mature funds, they are not included in the table. For eighteen fiscal years ( ) Combined funds - Total (6/30/88) Contributions (FY89 - FY07) Total Return (FY89 - FY07) Subtotal Less: Distributions Total (6/30/07) For fiscal year Combined funds- Total (6/30/06) Contributions (12 Months) Total Return (12 Months) Subtotal Less: Distributions Combined funds - Total (6/30/07) $4,099 $4,895 $14,820 $23,815 ($8,397) $15,417 $13,282 $423 $2,323 $16,072 ($610) $15,417 Objectives for the Funds All funds managed by the State Investment Office are long-term trust funds. The SIC establishes investment policy, which includes the asset allocations, for the for the Land Grant, Severance Tax, Tobacco Settlement and Water Trust Permanent Funds. and the WTPF. The asset allocations and distribution policies for the other client funds are set by the client agencies. Contributions to the New Mexico State Investment Council Annual Report 4

11 LGPF come primarily from royalties on natural resources extracted from State trust lands. Contributions to the STPF come from severance taxes on all minerals removed from the ground in New Mexico. As these resources (mostly crude oil and natural gas) are non-renewable, the royalties and taxes serve as advance payments against depletion of those resources. The two Funds are designed to permanently hold these payments for current and future citizens to compensate for the depleted mineral resources. During the peak year for contributions in FY1982, the two Permanent Funds had an approximate market value of $2.1 billion at the end of the year and received $378 million in contributions, which equaled 17.9% of the combined Funds value. At the end of FY07 however, the two Funds had a market value of $15.4 billion and received $612 million in contributions, which despite record oil and gas revenues for the state, still only amounts to about 4.0% of the Permanent Funds value. To protect the two funds and all contributions to them from the erosive effects of inflation over the long term, and to optimize total returns to the Funds, the Council has established the goals outlined below. Performance Based Budgeting Agency Program Information: a. Program description - The State Investment Program The purpose of the state investment program is to provide investment management of the state s permanent funds for the citizens of New Mexico in order to maximize distributions to the state s operating budget while preserving the value of the funds for the future generations of New Mexicans. b. Goals and objectives: 1) To preserve the two permanent endowment funds for future generations by growing the funds at a rate at least equal to inflation plus distributions. 2) To distribute the legislatively mandated allocations to the beneficiaries of the two permanent endowment funds. 3) To optimize total returns within acceptable levels of risk in order to increase the benefits for both current and future beneficiaries of the two permanent endowment funds. c. Program Activities 1) Internal Investment Pools (Large Cap Active & Index, All Cap Active, Core Bonds). 2) External Investment Pools (Large Cap Active, Small/Mid Cap, High Yield Bonds, Non US Emerging Markets, Non US Developed Markets). 3) Economically Targeted Investments (private equity, film investments, SBA loans,cd s). 4) Other Alternative Investments (private equity, real estate, hedge funds, Structured Debt). 5) Program Support (Investment accounting, administrative accounting, purchasing, personnel, and other administrative support, legal counsel, and other administrative support). d. List of Performance Measures and Performance Standards: 1) One and Five-year annualized percentile performance ranking in Investment Consultants Cooperative (ICC) Endowment fund universe. - Outcome measure - FY 05 Target - >49th %. 2) One and Five-year annualized investment returns to exceed internal benchmarks in basis points. - Outcome Measure - FY 05 Target - >25 basis points (1 basis point = 1/100th of one percent). Other State Clients During, the SIC managed investment for nineteen other state clients. Several of the client agencies have more than one account with the SIC. The year each relationship began follows in parenthesis: 1 New Mexico Retiree Health Care Authority (NMRHCA) (1992) 2 New Mexico Institute of Mining and Technology (NMIMT) (1992) 3 New Mexico School for the Blind and Visually Impaired (NMSBVI) (1993) 4 New Mexico Interstate Stream Commission (NMISC) (1994) 5 New Mexico State Land Office (NMSLO)(1994) 6 New Mexico Military Institute (NMMI)(1997) 7 New Mexico Miners Colfax Medical Center (NMMCMC)(1997) 8 New Mexico Department of Game and Fish (NMDGF)(1998) 9 Eastern New Mexico University (ENMU) (1999) 10 Springer Municipal School District (SMSD) (1999) 11 City of Albuquerque (ABQ)(2000) 12 Los Alamos County (LAC)(2000) 13 Public Regulations Commission (PRC)(2001) 14 Luna County (LC) (2001) 15 New Mexico Public Schools Insurance Authority (2004) 16 New Mexico Highlands University (NMHU)(2005) 17 New Mexico Mortgage Finance Authority () 18 Children Youth & Families Department () 19. New Mexico Higher Education Department () 5 New Mexico State Investment Council Annual Report

12 II. in Review New Mexico State Investment Council Annual Report 6

13 November 19, New Mexico State Investment Council 2055 South Pacheco Street, Suite 100, Santa Fe, NM Dear Honorable Members of the State Investment Council, The overall objective of the New Mexico State Investment Council (NMSIC) is to preserve and enhance the inflationadjusted value of the participating funds over the long term, while maximizing the payouts to current fund beneficiaries. To ensure a solid foundation for the future of the Funds, NMSIC carefully plans and implements an investment program designed to produce superior long term investment returns, while prudently managing the risk of the portfolio. Investment Policy and asset allocation are reviewed and revised by the State Investment Council, at least annually, to reflect the Plan s current income needs, and the real value of fund principal. Following is a report on general market conditions and the performance of the fund for the fiscal year ending June 30,. From an economic perspective, the fiscal year began slowly, with Gross Domestic Product, the broadest measure of U.S. economic activity, slowing from the prior year. Despite declines in housing and autos, the U.S. economy strengthened during the first and second quarters. Consumer spending remained stable and business spending increased. Unemployment remained relatively low at 4.5%, and wage growth generally outpaced core inflation. The result has been a confident U.S. consumer. The fiscal year, however, ended with considerable uncertainty in the economy. Investors have been concerned about the housing sector, which has not yet reached a clear bottom and concerns have persisted on energy prices and inflation. Over the fiscal year, U.S. stock markets were up strongly, with the bellwether S&P up 20.6%. Positive results came from all equity size and style segments. Additionally, stocks in both developed and emerging countries performed well over the past year. The MSCI All Country World Index (excluding the U.S.), a broad measure of developed country stock returns, was up 29.6% for the fiscal year, while the MSCI Emerging Markets Free Index was up 45.0%. Fixed income returns were generally modest in view of stable to rising interest rates, with the Lehman Aggregate Bond Index rising 6.1% for the fiscal year. Finally, alternative asset classes also produced strong returns, with Real Estate up 17.2% and Private Equity up 31.9%. The NMSIC Land Grant Permanent Fund (LGPF), with its broad diversification and commitment to alternative asset classes, was well positioned to capitalize on these market conditions. The Fund gained 17.9% for the year, ranking in the 27th percentile of the Independent Consultant Cooperative s Endowments and Foundations Fund peer group universe. For the five-year period ending June 30,, the Fund returned a strong 11.1% per annum. Over the same time periods, the Severance Tax Permanent Fund (STPF) returned 17.8% for the year, ranking in the top third of its peers and 10.9% per annum over the last five years. Within equities, the composite of all NMSIC s active U.S. equity managers was up 2%, matching the Russell 3000 Equity Index (the Fund s domestic equity benchmark) for the one-year period. Domestic equities accounted for approximately 52% of the total Fund as of June 30,, with 42% in Large Cap Equities and 10% in Small/Mid Cap Equities. The NMSIC Non-U.S. Developed Markets Equity Pool, which constitutes about 7% of the total Fund, returned 27.0% for the year, trailing the FTSE Developed Markets ex-u.s. benchmark return of 28.4%. Roughly 5% of the Fund is invested in the NMSIC Non-U.S. Emerging Markets Equity Pool, which returned 47.3%, versus the MSCI Emerging Markets Free Index return of 45.0%. About 11% of the total Fund is allocated to the NMSIC U.S. Core Bonds Pool, which was even with the Lehman Brothers Aggregate Bond Index, returning 6.1. The U.S. High Yield Bonds Pool, roughly 2.5% of the total fund, returned 9.8%, lagging the Merrill Lynch U.S. High Yield BB/B Constrained Index by 1.0%. Finally, to add diversification and stability to the Funds, approximately 17 % of the fund is allocated to Private Equity, Real Estate, and Hedge Fund Investments. The Fund s Real Estate holdings returned 10.4%, the Absolute Return Pool returned 10.2%, and Private Equity earned 28.4%. The NMSIC Private Equity and Real Estate holdings are valued using a one quarter lag, while the Absolute Return pool is valued using a monthly lag. NEPC provides NMSIC with quarterly performance reviews, investment manager monitoring and selection advice, and related investment services. In preparing our performance analysis for NMSIC, we rely on the accuracy of financial data provided by the internal accounting staff at the NMSIC. Sincerely, Allan Martin, partner, New England Pension Consultants 7

14 in Review Domestic Large Cap Active Pool Large Cap Index Pool Mid/Small Cap Active Pool Performance for the Year was a very good year overall for the Trust Funds managed by the State Investment Office, resulting in positive returns for a fifth year in a row. The SIC Large Cap Active and Index Pools, had returns of 20.5% & 20.8% respectively. The SIC internally-managed Large Cap Active portfolio had another solid year of 19.2% while the SIC s All Cap portfolio returned 16.9%. The Total US Equity Pool returned 2%, 10 basis points behind the Russell 3000 benchmark. The SIC s fixed income portfolio returned 6.1%, matching its index, the Lehman US Aggregate. The High-Yield Bond Pool returned 9.8%, which lagged its benchmark by 1%. The Hedge Fund of Funds achieved higher than expected returns of 10.2%, which was 2.9% above the targeted return of 90-day Treasury bills +200 basis points. Overall, the combined funds experienced a net investment gain of $2.4 billion, growing SIC funds under management to $16.1 billion. Equity State Investment Council Investment Funds International Non-US Developed Markets Pool Non-US Emerging Markets Pool Fixed Income Domestic Core Bonds Pool High-Yield Bonds Pool Asset Allocations Managers placed equity asset allocations very near the SIC s long-term targets during the year in all asset classes. Correspondingly, bond allocations were also on target. The SIC continues efforts to diversify into alternative investments, including private equity, hedge funds, real estate and structured finance. Diversification will help the Fund reduce risk and better weather down equity markets. Investment Fund Structure The Investment Office is now a large investment fund manager. The chart above outlines the family of investment funds managed by the Office. The trust fund assets of the Land Grant Permanent Fund, the Severance Tax Permanent Fund, the Tobacco Settlement Permanent Fund and 19 other state agency clients (35 other client accounts) are allocated among these investment funds as specified by the investment policies of the Investment Office and the 19 client agencies. All client agencies are allowed to adjust their asset allocations as desired, on an annual basis. This policy allows the clients to diversify their assets widely. The individual investment funds are discussed in detail in a following section of this report. Distributions Over the last 19 years, the Funds have distributed more than $8.5 billion. Annually, these distributions have accounted for up to 15% of the State s total annual operating budget. The combined Funds distributed $609.9 million during, which is the equivalent of $320 for every man woman and child in the State. This demonstrates the primary benefit the two Permanent Funds provide to the people of New Mexico. If the two Funds did not exist, taxes would be an average of $840 higher for every household in New Mexico, just to provide the current level of governmental services. Beginning with FY05, based on the voters passage & enactment of Constitutional Amendment 2, distributions from the Land Grant Permanent Fund were raised to 5.8% of the most recent five-year average market values for the Fund. The distribution rate remains at 5.8% until 2013, where it will scale down to 5.5%, until dropping back down to its base distribution of 5.0% in FY2017. Assuming annual growth of 8.5% for the Fund, as well as conservative contributions from oil and gas revenues, the two funds are estimated to be distributing more than $1 billion to beneficiaries annually beginning in FY Audit Report In addition to the Investment Council s independent quarterly audits, the agency undergoes an outside independent audit on an annual basis. An audit of the general-purpose financial statements and the combination of individual fund and account group financial statements of the New Mexico State Investment Council for the year ending June 30,, was conducted by the Albuquerque firm of Moss Adams LLP, Certified Public Accountants. The audit was conducted in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing New Mexico State Investment Council Annual Report 8

15 Historical ( ) and Projected ( ) Distributions ($millions - fiscal years ending June) $1,500 LGPF STPF Total $1,300 $1,100 $900 $700 $500 $300 $ Standards, issued by the Comptroller General of the United States. Such an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The New Mexico State Investment Council fiscal year financial audit was submitted to the New Mexico Office of the State Auditor prior to the time deadline established by that office and has been approved for release. The Independent Auditor s Report, together with the Financial Statements, the accompanying notes to the Financial Statements, and the Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters is available from the State Investment Council, 2055 South Pacheco Street, Suite 100, Santa Fe, New Mexico 87505, upon written request. Management Fees - A Unit Cost Perspective During FY07 the Investment Office's average cost for managing the entire investment portfolio was less than 19 basis points. According to a recent survey of endowment funds in the United States with assets in excess of $1 billion, the average cost to have outside money managers investing funds is approximately 45 basis points. Under the current State Investment Officer, the SIC has capped outside equity manager fees at 25 basis points, which saves the agency in excess of a million dollars in management fees annually, in contrast to management fees allowed prior to In addition, the Investment Office has historically provided superior performance and low cost management, resulting in significantly improved benefits for the State's budget and the beneficiaries of the Permanent Funds. 9 New Mexico State Investment Council Annual Report

16 III. Investments New Mexico State Investment Council Annual Report 10

17 Investments Investment Funds During, the Investment Office managed seven investment pools available to clients. Essentially all assets controlled by the Office were allocated among the operating investment pools described below, excluding SIC holdings in hedge funds, real estate, private equity, and economically targeted investments. Pool management shifts for FY were limited. During the year the SIC used 15 external equity and high yield managers, in addition to a highly qualified staff of internal investment portfolio managers. Equity The Large Cap Active Pool is managed by both eight external managers and internal State Investment Office portfolio managers. This pool seeks to exceed the performance of the S&P 500 Index by emphasizing stock selection. The Large Cap Active Pool was created to pool the assets of the SIC s client agencies on Oct 1, The LGPF and STPF pooled their equities with the Large Cap Active Pool on May 1, The Large Cap Index Pool is managed internally using complex risk models and optimization software. The objective of the Pool is to generate returns within 25 basis points of the S&P 500 Index. It began operations July 1, The Mid/Small Cap Active Pool, is a combination of four active external managers and an internally managed all-cap portfolio. This Pool is intended to match returns of the growth sector of the mid/small cap market. Overall, the manager mix is intended to exceed the returns of the S&P Mid Cap 400. The Pool began operations in November The Non-US Developed Markets Pool is an international equity pool with two active external managers that have complementary management styles, with focus in value, core and growth investment strategies. This Pool is designed to seek the best investment opportunities around the world, as well as to diversify away from a U.S.-only approach. The benchmark is the MSCI EAFE Index. The Non-US Developed Markets Pool began operations on March 1, The Non-US Emerging Markets Pool is an externally managed international equity pool, based upon the MSCI Emerging Markets Free Index. The Pool has one active external manager. The Non-US Emerging Markets Pool began operations on March 1, Fixed Income The Core Bonds Pool is an internally managed investment pool that invests in all major segments of the broad investment-grade fixed-income markets. The primary objective of the Pool is to add significant value over the returns of the broad U.S. bond market and to produce relatively high total returns for the risk assumed. The Core Bonds Pool uses the Lehman Aggregate Index as its benchmark. The Core Bonds Pool was created to pool the fixed income assets of the SIC s client agencies, Oct.1, The Credit and Structured Finance Pool is invested in various classes and ratings of securities in the credit and structured finance asset class and includes limited partnership interests and pooled vehicles. This pool began operations April 1,. Investments through June 30, are in collateralized debt obligations and collateralized loan obligations and in funds that manage these obligations. This asset class is utilized to diversify the portfolio holdings of the LGPF and STPF. While these assets have higher volatility than other fixed income assets, they should provide higher rates of return over the longterm. The structured credit markets in have suffered significant declines in market values. Contributing factors include deteriorating credit performance with unprecedented delinquencies and defaults in the subprime mortgage space; complex structures of existing products and large amounts of leverage; and asset and liability mismatches exacerbated by depressed market liquidity for shortterm liabilities. Real market values have been difficult to determine as there has been limited buying and selling of many structured assets, and true losses, not just projected losses, will not be known for several years. Structured credit products, especially those consisting of mortgage pools, are expected to remain depressed and suffer from lack of liquidity. The market conditions in resulted in wide spreads, high volatility and ratings migrations, which will continue to affect the performance in this asset class. The High Yield Bond Pool is managed by two active external money managers and invests in corporate bonds rated single B or better by a national rating service. The Pool benchmark is the Merrill Lynch US HY BB-B Constrained Index. High yield bonds have both higher expected returns and risk than the investment grade bonds in the Core Bonds Pool. The High Yield Pool began operations on November 1, New Mexico State Investment Council Annual Report

18 Investments Alternative Investments Private Equity Programs provide a source of financing for the start-up of new businesses, or the expansion or turn around of existing companies. The SIC invests in private equity through limited partnerships. The private equity funds are based primarily in the US (the SIC National Private Equity Program ) and some are here in New Mexico. As a limited partner or LP, the SIC is a passive investor, providing investment capital but not making investment decisions. The general partners of the limited partnerships are responsible for choosing and monitoring individual company investments. While the risk profile of this investment class is higher than the other investments utilized by the SIC, the expected returns are also higher. Compounded over the long term, the higher returns add significantly to overall portfolio returns. Another benefit of this investment class is portfolio diversification. Returns on private equity have a relatively low correlation to many other asset classes. This allows the SIC to realize diversification benefits from this asset class as discussed later in this report. In addition to these benefits, one of the goals of the New Mexico Private Equity Investment Program (NMPEIP) is to enhance the economic development climate within the State. Private Equity funds which receive investment from the NMPEIP have to invest in, or cause to be invested, an amount equal to the state s investment, in New Mexico companies. While the SIC is a large investor in these New Mexico funds, it is by no means the only investor, and the total investment capital available to these funds is more than one billion dollars. While not limited to investing solely in New Mexico interests, it represents a large pool of money that is potentially available for developing the economy of New Mexico. Since the first investment in 1994, the New Mexico Private Equity Funds have invested in 45 New Mexico companies. Advent Solar Altaview Technologies Altela, Inc. Amtech Aspen Avionics Bioreason Boomtime Controlled Recovery CoMeT Solutions Desert Power Earthstone International Eclipse Aviation Elisar Software Enerpulse Entrada Exagen Figaro Holochip Infantelligence InnovASIC Introbotics Kinetisis Lumidigm Mesofuel MicroOptical Devices MIOX Corporation Patchwork Systems Phase- I Molecular Toxicology Protalex Puente Partners Quadric Quasar Sage Sciences Seattle Fish Company of NM Seclarity Total Capital Investment by sources outside NMPEIP Small Smiles Surfect Technologies TCI Medical TruTouch Technologies VeraLight Vertical Power Wellkeeper Zia Laser ZTEC Instruments $1,221,950,000 The first investment from the program was made in an Albuquerque company called MicroOptical Devices in August of The ARCH II Venture Partners Fund, a New Mexico Program participant, led the venture capital financing for the company. EMCORE Corporation acquired Micro-Optical in Dec 1997 and subsequently invested $60 million in expanding the business and creating EMCORE Photovoltaics. EMCORE currently employs over 200 people in Albuquerque. With the exception of ARCH, all of the funds in the New Mexico Program started investment activities in September 1998 or later. Though it remains relatively early in the investment process, several of the new companies are showing potential for similar successes. Altogether, these companies currently employ more than 2,300 New Mexicans, with average salaries of $60,380. Payroll and other spending for these home grown New Mexico companies now tops $178 million annually. When the New Mexico and National Programs are added together, the SIC has made investments in more than 100 private equity limited partnerships (or funds) for the LGPF and STPF. Commitments to private equity for both programs have continued during the last year, with the Programs still below target allocations of 6%. An additional 9% allocation is authorized in the STPF for the NMPEIP. The SIC s private equity investments have performed extremely well since the first investment was made in November Although only a small portion of the Funds are invested in private equity, total returns have exceeded those from all other investments. For the one year period ending June 30,, the Land Grant Private Equity Portfolio produced an estimated IRR (Internal Rate of Return) of 28.4% while the Severance Tax returned 18.4%. However, returns in this class can significantly change from year to year. This volatility is the main reason why only a small percentage of the SIC s assets are committed to private equity. Longer-term IRRs were achieved in spite of the fact that many of the portfolio s partnerships are very New Mexico State Investment Council Annual Report 12

19 young investments and still have small negative total IRRs. This is normal for private equity limited partnerships, where returns typically follow a J-curve, and IRRs are usually depressed for the first three to five years due to management costs and lack of realized gains. Over the long term, private equity returns are expected to average about 4% to 6% higher than the returns on the S&P 500 Index. Even with the negative IRRs in some recent years, the SIC s portfolio exceeded these expectations since its inception. Investing in limited partnerships requires long- term commitment, as the normal private equity partnership can last up to 15 years. Investors initially agree to a certain amount of committed capital. The general partners then draw the committed dollars down over several years as they find suitable investment opportunities. As of the end of FY, the SIC had outstanding commitments of more than $2 billion, while actual invested capital was $954 million. Due to the extended nature of private equity investing, the SIC must commit capital in excess of its target to achieve investments equal to its policy target. Direct Investments During the 2003 Regular Legislative Session, Governor Richardson and the legislature passed Senate Bill 779, giving the SIC the authority to make direct co-investments in New Mexico companies. The legislation became effective July 1, 2003, and the SIC, using co-investment partnership Funds, and has since invested in eleven New Mexico companies: Advent Solar, Inc.; Altela, Inc.; Aspen Avionics, Inc; CoMeT Solutions, Inc; Earthstone International; Eclipse Aviation Corporation; Exagen Diagnostics, Inc.; Lumidigm Inc.; Puente Partners; TCI Medical; and TruTouch Technologies. Fort Washington managed the first Co-Investment Fund, while Sun Mountain Capital is currently managing the second fund, as well as advising the SIC regarding NM private equity fund investments. More information about this program and these investments can be found at SBAs, CDs, and Other New Mexico Investments Differential Rate and other New Mexico investments are those authorized by the Legislature with specific statutes to encourage economic development within the State of New Mexico. These investments directly benefit New Mexico s economy by providing financing for small businesses. New Mexico Statutes allow for investments in Corporate Bonds, Certificates of Deposit in New Mexico financial institutions, New Mexico Mortgage Finance Authority Bonds, Small Business Administration (SBA) and Farm and Home Administration Guarantees (FmHA). Film Investment Program The SIC has authority to invest 6% of the Severance Tax Permanent Fund in film projects, in amounts up to $15 million per project. Qualifying films or television programs must be produced primarily in New Mexico, with at least 60% of the project s production crew New Mexico residents. The loan program requires an investment-grade entity, usually a corporation or an A-rated domestic bank, to guarantee repayment of the loan principal. In lieu of interest on the loan, which has a term up to five years, the SIC receives a profit participation in the film project, based on the loan amount, length of loan term and potential for the project s success. Since the loan principal is guaranteed to such a degree, the SIC s only realistic risk is opportunity cost of how the funds could otherwise be invested. During Fiscal, the SIC committed more than $52 million to four film projects: Wildfire, Season Four; In the Valley of Elah; Swing Vote; and Burrowers. As of the end of FY, the Film Investment Program has helped create 3,200 jobs for New Mexico film workers, with estimated payroll & other in-state spending of $198 million. Real Estate Investments The SIC s real estate program began in 2003 after legislative authority was granted to invest a very small percentage of the Permanent Funds in this asset class. The percentage restrictions on real estate investments were removed however, with the Legislature and Governor Richardson passing House Bill 389 in HB389 eliminates the legal list of investment restrictions mandating the Uniform Prudent Investor Act as the standard for New Mexico s three investment agencies. The asset allocation target for real estate is 3% of the Land Grant Fund and Severance Tax Fund. The SIC s real estate portfolio totals a little over $291 million at the end of FY, with $799 million in commitments. Courtland Partners is the SIC s real estate consultant. Hedge Funds After the legislature granted the SIC limited abilities to invest in hedge funds, the State Investment Office spent 2004 developing policies and procedures for this type of investment. Then in 2005, the Legislature granted additional investment powers under the Uniform Prudent Investment Act, and the SIC moved forward with a Request for Proposal 13 New Mexico State Investment Council Annual Report

20 Investments Efficient Frontier for portfolio Diversification Year Performance (%) Years ending June 30th Expected Return 12% 11% 10% 9% 8% Investment A Investment B A and B Combined Individual Returns Year 1 30% 0% 15% Private Equity Year 2 0% 30% 15% Large Cap Stocks Small Cap Stocks International Stocks 7% High Yield Bonds Hedge Funds Efficient Frontier with domestic stocks and bonds only 6% Frontier with diversifying asset classes, w/o Alternative Assets Frontier using Alternative Assets 5% Core Bonds 4% 0% 5% 10% 15% 20% 25% Forecasted Risk Total Return 30% 30% 32.3% Year S&P (17.98) (14.84) (6.89) (4.79) (11.34) Lehman Agg. (0.81) (1.30) (5.13) Non-US Equity (4.70) (7.90) (23.80) (RFP) for fund of hedge funds managers. Following a lengthy allocation evaluation process with SIC advisor New England Pension Consultants, the SIC hired 13 fund of hedge fund managers, and allocated approximately 10% of the Permanent Funds. These funds were chosen with a market neutral investment strategy in mind, with the intention of minimizing market risk and volatility while posting positive returns under most market cycles. These funds diversify the portfolio, provide protection to the Fund during down markets, and achieve returns above what has been an increasingly difficult investment environment for fixed income. By taking a conservative strategy with its hedge fund allocation, the SIC s goal is to better manage risk cycles and create positive returns regardless of market. Risk Control Investment managers like the SIC are focused on two primary factors for each asset type under management. The first factor is total return, and much of this report discusses the returns the Funds have generated over various time periods. Total returns are relatively easy to calculate and evaluate when compared to various indexes. The second factor is risk, and this factor is much more difficult to quantify and understand. There are two major types of risk for the SIC to consider. The first is unanticipated inflation, a risk that all investors share. The second type of risk is market risk, a term which includes a number of separate risks that are assumed by investors when various assets are purchased and held in a portfolio. A discussion of total returns is incomplete without considering the risks that are assumed to achieve those returns. The following section will discuss the various types of risk and how they can be reduced and minimized with careful portfolio construction. The most significant risk for the Permanent Funds, which are endowment funds with very long-term objectives, is inflation. To compensate for inflation, New Mexico State Investment Council Annual Report 14

21 Domestic and International Equity Returns Fiscal years 1971 $75 $50 Growth of a 1970 dollar invested in two asset classes S&P 500 $25 EAFE $0 Cumulative Return Calendar Years Annualized return 1971 S&P % MS EAFE 11.4% Annualized risk (volatility) 1971 S&P % MS EAFE NET 18.6% Global Markets Returns Rolling Three-Year Averages (Annualized) Three Years US (S&P500) Europe (MSCI) Pacific (MSCI) #times best #times worst % % 30.3% 46.8% % 22.6% 60.9% % 3.6% Emerging Markets (MSCI) n/a n/a n/a n/a 27.1% n/a 10.6% the Funds must retain enough of the total returns over time to grow at the same rate that inflation reduces the value of the Funds assets. The Funds must therefore produce enough total returns to both offset inflation and the distributions paid out of the fund to the beneficiaries. This is an achievable goal now that broader asset classes are available to the SIC. The Funds are currently performing better under all market conditions than was possible only a few years ago. There will be up years and down years in the future, but on average the Funds should outpace inflation and distributions. The Funds must also grow to compensate for the anticipated future decline in contributions from natural resource royalties and mineral depletion taxes. To provide the returns necessary to counter inflation and provide good distributions, the most important considerations for an investment manager are proper asset 15 New Mexico State Investment Council Annual Report

22 Investments Bond Yields and Stock Dividends s LB Aggregate Current Yield S&P 500 Dividend Yield % allocation and diversification. The decision on how to strategically allocate the available assets among the available asset classes will directly impact both investment returns and investment or market risk. Some market risk must be assumed in order to provide higher returns than Treasury Bills, which are considered risk-free assets. The most common measure of overall risk for investment assets is asset price fluctuation or volatility. Risk management has gained more and more attention from investment managers in recent years. The State Investment Council and staff studied the risk issue seriously when the changes to the Constitution and statutes were proposed and many of the changes were based upon the desire to reduce risk through increased diversification, while still maintaining good average total returns. A Key Strategy: Balanced Global Investing Diversification reduces risk, and the most potent form of investment diversification is the strategy referred to as balanced investing, or diversifying by asset class. One of the few free lunches in investing is the extra benefit that may be obtained from combining stocks, bonds, and/or alternative investments like private equity in a diversified portfolio. Volatility of returns is the most significant measure of the risk in a portfolio. Many asset classes that tend to experience large annual swings in value may be poorly or even negatively correlated with each other. In other words, their returns do not move together, and may even move in opposite directions much of the time. An asset class that is risky (or volatile) by itself may actually reduce overall risk when added to a portfolio of several other asset classes. Portfolios containing a small percentage of bonds have earned as much or nearly as much as all-stock portfolios over the last 30 years, with considerably less volatility. At the opposite end of the spectrum, adding a small percentage of stocks to an all-bond portfolio has boosted return with little if any extra volatility. In, stock market returns were much stronger than the previous year and considerably above historical averages. At the same time, bond returns again had a very poor year. Over long periods of time, each asset class may tend to produce its average return, but over one-year periods, their combined returns will act to reduce the overall portfolio variation. Diversifying by geography as well as asset class provides a further advantage (see page 15 table). While returns were generally strong in FY on equity in the U.S. (about 20.6% for the S&P 500), they were outstanding in emerging markets overseas (45.0% for the MSCI EMF). This tendency towards low correlations among the world s equity markets has made global diversification very beneficial in the past. High returns have tended to move fairly unpredictably over time from one region of the world to another. The same emerging markets that have been at the top of the performance chart the last few years are the same markets that were struggling mightily with negative returns during the late New Mexico State Investment Council Annual Report 16

23 US Stock Valuations* s *as represented by the S&P 500 index Price / Earnings Ratio 10 5 Price / Book Ratio s as the S&P 500 boomed. No region of the world has yet been able to sustain an advantage in returns for long, and since high investment returns tend to precede positive fundamental news, it is difficult to know with certainty where next year s best returns will come from. In the SIO s judgment, the best policy is to maintain a fairly steady exposure to a diversified range of markets over time. Investing outside the U.S. continues to be an attractive alternative, as evidenced by significantly positive returns for. Based on this discussion, it is important for all involved to recognize what our balanced global investment strategy can and cannot achieve. It can and should achieve a better longterm balance of risk and return for New Mexico s Permanent Funds than is obtainable from any single market; in other words, a higher long-term return for a prudent level of risk. This strategy will not, by definition, match the best returns of any given year, since not all assets will be invested in those asset classes with the best returns. The Funds will have some exposure to some of the year s worst returns, although those exposures will be limited. All in all, the balanced global investment strategy gives our state the best chance of meeting the needs of the Funds beneficiaries for the future. a diversified portfolio. Adding a risky asset class that has a low correlation with other asset classes to an endowment portfolio serves to lower overall portfolio risk. As an example, investing in asset classes that can be expected to move together (i.e., are highly correlated) such as U.S Large Cap and U.S. Small/Mid. Cap equities (which move together 80% of the time) produces a moderate diversification benefit. In contrast, due to their lower correlation to U.S. equities, adding non-u.s. equities (60% correlation) or Emerging Markets equity (45% correlation) to a U.S. Large Cap equities-only portfolio produces a far greater diversification benefit and can reduce overall portfolio volatility. The following table shows one measure of diversification, the correlation coefficient. A correlation of 1.0 is a perfect correlation, and indicates two asset classes that will rise and fall together. A correlation of -1.0 is a perfect negative correlation, and if one asset class is up 10% the other will be down 10%. A correlation of zero means that the movement of one asset class cannot be predicted by the other. Asset Correlation A key factor in diversification is how the various asset classes relate to each other. Each asset class should be considered for the role it would play in 17 New Mexico State Investment Council Annual Report

24 Investments Correlations among selected asset classes Return Cash Core Bonds TIPs Long Bonds Global Bonds Emerg Mkt Bonds Real Estate High-Yield Bonds Large Cap Equities Small /Mid Cap Equities Int l Equities Int l Small Cap Equities Emerg Int l Equities Private Equity Hedge Funds - Con Hedge Funds - Mod Commodities Cash Core TIPs Long Global EMD RE HY Large S/Mid Intl Intl Sm Emg PE HF-C HF-M Comm (0.10) 0 (0.10) (0.20) (0.10) (0.10) (0.10) (0.10) (0.20) (0.10) (0.10) (0.10) (0.10) (0.20) (0.30) (0.10) 1.00 (0.20) (0.10) 0.30 (0.10) (0.20) (5) (0.10) (0.10) 0 (5) (0.10) 0 (0.10) (0.20) (0.20) (0.20) (0.20) (0.10) (0.10) (0.10) Source: New England Pension Consultants Investment Pools - Assets, Allocations and Returns As of June 30,, approximately 72.6% of all assets managed by the State Investment Office were invested in the following investment pools: Core Bonds Pool June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Cash/cash equivalents U.S. Treasury notes/bonds Government Agencies Mortgage backed securities Asset backed securities Non-government backed c.m.o.s. Corporate bonds % 18.9% 0.2% 13.0% 23.8% 8.0% 21.8% % 5.9% 9.8% 15.4% 19.7% 4.9% 29.8% Total investments 2, % 2, % Accrued income Securities lending investments Accrued management fees Due from custodian/brokers % 22.9% 0.1% % % 20.9% % % Total assets 2, % 3, % Liabilities: Accrued management fees Securities lending liability Due to custodian/brokers (2.0) (498.7) (2.1) -0.1% -22.8% -0.1% (0.1) (570.7) (1.3) % -20.9% % Net asset values (V) 2, % 2, % Allocations of V to beneficiaries: Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Perm. Fund Water Permanent Fund Other governmental agencies 1, % 10.6% 1.3% 0.6% 11.2% 1, % 17.8% 0.8% % 8.0% Net assets % 2, % New Mexico State Investment Council Annual Report 18

25 Core Bonds Pool The Core Bonds Pool began on October 1, 1996 when the SIC s first five clients pooled their fixed income assets. The Core Bonds Pool had a total return for the fiscal year ending June 30, of 6.1%, matching the benchmark Lehman Aggregate Index. The market rate of return in this sector continues to face a challenging environment for overall returns. For the past 5-years, the internally managed Core Bonds Pool has returned 5.4% and exceeded its benchmark by 90 basis points. Large Cap Active Equity Pool The Large Cap Active Equity Pool began on October 1, 1996 when the SIC s first five clients pooled their equity assets. The Large Cap Active Equity Pool, which is comprised of eight external managers and two internal portfolios, had a total return for fiscal year of 20.5%, 10 basis points under the benchmark (S&P 500 Index), which returned 20.6%. Asset Allocations Core Bonds Pool Cash/Cash Equivalents 13.4% U.S. Treasury Notes 18.9% Corporate Bonds 21.8% Government Agencies 0.2% Mortgage backed securities 13.0% Non-Governments cmos 8.0% Asset backed securities 23.8% Large Cap Active Equity Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Water Permanent Fund Other Governmental Agencies 3, , % 28.6% 0.6% 0.3% 2.5% 2, , % 28.8% 0.6% % 2.1% Net assets 4, % 4, % 19 New Mexico State Investment Council Annual Report

26 Investments Fifteen Largest SIC Managed Large Cap Active Equity Holdings As of June 30, Shares Held Company Name Ticker Symbol (in 1000s) Price per Share (in $ millions) Exxon Mobil Corp. General Electric Co. Cysco Sys Inc. Citigroup Inc. Altria Group Inc. Google Wells Fargo Co. Qualcomm Inc. Conoco Phillips American Intl. Group American Express Wyeth AT&T Inc. Gen-Probe Inc. Dominion Res Inc. XOM GE CSCO C MO GOOG WFC QCOM COP AIG AXP WYE T GPRO D , , Total Percent of SIC Large Cap Active Portfolio 10.3% Percent of SIC Equity Assets Under Management 4.9% Fifteen Largest SIC Managed All-Cap Equity Holdings As of June 30, Company Name Ticker Symbol Shares Held (in 1000s) Price per Share (in $ millions) Apple Computer Sunpower Corp. Emcor Group Research in Motion Southwestern Energy America Movil SA de CV. St.Jude Medical Inc. Buffalo Wild Wings Inc. Orient Express Hotels Ltd. Alon USA Energy Nuvasive Sears Group Inc. J Crew Group Inc. Axsys Technologies Andersons Inc. AAPL SPWR EME RIMM SWN AMX STJ BWLD OEH ALJ NUVA SHLD JCG AXYS ANDE Total Percent of SIC Small/Mid Active Portfolio 10.3% Percent of SIC Equity Assets Under Management 1.6% Large Cap Equity Index Pool The Large Cap Equity Index Pool began operations on July 1, 1998 with $1.0 Billion from the Land Grant and Severance Tax Permanent Fund. During the, the Sic Managed Large Cap Equity Index Pool had a total return of 20.8%, 20 basis points above its benchmark of the S&P 500 policy index. New Mexico State Investment Council Annual Report 20

27 Large Cap Equity Index Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Other Governmental Agencies 1, % 28.8% 0.7% 4.8% Net assets 1, % 1, % Mid/Small Cap Active Equity Pool The Mid/Small Cap Active Equity Pool began operations in November The total return on the mid/small cap portfolio this year was 18.0%, below its S&P 400 benchmark of 18.5%. The State Investment Office uses three external managers to diversify investment and maximize return: Earnest MID & SMID, First Quadrant and Fox. Mid/Small Cap Active Equity Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Water Permanent Fund Other Governmental Agencies 1, , Net assets 1, % 1, % Non-US Developed Markets Pool The Non-U.S. Developed Markets Pool began on May 1, 1998 as the Non-U.S. Active Equity Pool. Since then, the Pool has changed to separate the more volatile emerging foreign markets into their own Pool. The Developed Markets Pool now focuses on the major developed countries around the world, using the FTSE Developed ex-us as its benchmark. The Pool is managed by two external managers with complimentary management styles: Alliance Bernstein, and Simms. The Non-U.S. Developed Markets Pool had a total return for the ending June 30, of 27.0%, lagging its benchmark of FTSE World ex-us, which returned 28.4%. Non-US Developed Markets Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Water Permanent Fund Other Governmental Agencies % 30.9% 0.7% % 5.1% Net assets 1, % % 21 New Mexico State Investment Council Annual Report

28 Investments Non-US Emerging Markets Equity Pool The Non-U.S. Emerging Markets Pool began on February 1, 2002 and now uses one outside manager, Alliance Bernstein. The total return for the Pool for the fiscal year was 47.31%, outperforming its benchmark, the MSCI EMF index, which returned 45.0% Non-US Emerging Markets Equity Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Water Permanent Fund Other Governmental Agencies Net assets % % High-Yield Bonds Pool The High-Yield Bonds Pool began on November 1, 2001 when legislative action allowed up to 3% of the LGPF & STPF to be invested in this Pool. The Pool had two external managers in FY, Wells and Caywood-Scholl. The High-Yield Bonds Pool invests in bonds rated single B or better by a national rating service, and returned 9.8% for FY, below its benchmark (Merrill Lynch US HY BB-B) of 10.8%. High-Yield Bonds Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Other Governmental Agencies Net assets % % Hedge Funds Pool & CDO Equity Pool The Hedge Funds Pool and Credit & Structured Finance Pool are newly established investment pools and are not available to SIC clients. Hedge Funds Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Tobacco Settlement Permanent Fund Water Permanent Fund 1, Net assets 1, % 1, % New Mexico State Investment Council Annual Report 22

29 Credit & Structured Finance Pool Allocations of V to beneficiaries June 30, and (millions $) June 30, Market Value Percent of Pool June 30, Market Value Percent of Pool Land Grant Permanent Fund Severance Tax Permanent Fund Net assets % % IV. Trust Funds Managed by the SIC Assets, Allocations and Returns 23 New Mexico State Investment Council Annual Report

30 Trust Funds Managed by the SIC Assets, Allocations and Returns As of June 30,, the New Mexico State Investment Office, under the policy guidance of the State Investment Council, managed 36 trust fund accounts with assets totaling $16.1 billion. Four of these trust funds, the LGPF, STPF, TSPF and WTPF, account for $15.5 billion of the total and benefit the State of New Mexico. The remaining 32 trust funds are managed to benefit 19 governmental clients and total $565 million in assets. The 19 client agencies have executed joint powers agreements with the SIO. Prior to October 1, 1996, all of the SIO s client agencies were managed as individual accounts. On that date, all of the existing client accounts were pooled into two investment pools, the Core Bonds Pool and the Large Cap Active Equity Pool. Five additional investment pools have since been added. The clients have all established and maintain their own investment policies that determine their individual asset allocations to the investment pools managed by the SIO. Combined Investment Allocation For 22 clients, as of June 30, US Core Bonds Pool 11.4% Non-US Emerging Markets Pool 5.4% Non-US Developed Markets Pool 6.7% US High-Yield Bonds Pool 2.5% CDO Equity Pool 3.7% ETI s 1.3% Private Equity 5.9% Real Estate 1.8% Hedge Fund 9.1% Cash 0.7% Small/Mid Cap Pool 9.9% Large Cap Index Pool 11.1% Large Cap Active Pool 30.6% Investment Allocations Land Grant Permanent Fund US Core Bonds 13.1% US High Yield 2.4% CDO 3.8% Non-US Emerging 5.3% ETI's % Private Equity 5.1% Non-US Developed 6.3% Real Estate 1.6% Hedge Funds 9.5% US Mid / Small Cap Equity 10.1% Cash 0.5% US Large Cap Equity 42.3% New Mexico State Investment Council Annual Report 24

31 Land Grant Permanent Fund Statement of Net Assets June 30, and (millions $) June 30, Market Value Percent of Fund June 30, Market Value Percent of Fund Cash/cash equivalents % % Fixed Income Core Bond Pool High-Yield Bonds Pool 1, % 2.4% 1, % 2.6% Total Fixed Income 1, % 1, % Equities Large Cap Active Equity Pool Large Cap Index Equity Pool Mid/Small cap Equity Pool Non-Us Developed Markets Equity Pool Non-US Emerging Markets Equity Pool 3, , , % 10.9% 1% 6.3% 5.3% 2, , % 8.7% 11.7% 5.8% 4.2% Total Equities 6, % 5, % Hedge Fund Pool CDO Equity Pool 1, % 3.6% % 1.6% Alternative Investments FHA loans Private Equity National Real Estate Stock Distributions Total Alternative Investments Total Investment Assets ,733.9 % 5.4% 1.6% % 7.1% 100.2% , % 5.2% 1.1% 0.1% 6.5% 10% Interagency Receivable, net Accrued Investment Income Liabilities: Beneficiary distributions payable Due to broker/custodian (36.5) 0.1% % -0.3% (35.5) 0.4% % -0.4% Net Assets 10, % 9, % Statement of Changes in Investment Assets, at Years ending June 30, 1989 to (millions $) Less Beginning New Contributions Beneficiary Distributions Total Return Market Value , , , , , , , , , , , , , , , , , , (9.9) , (534.1) (590.7) , , , , , , , , , , , , , , , , , , , , Totals 3, , ,093.3

32 Trust Funds Managed by the SIC Assets, Allocations and Returns Allocations to Beneficiairies At June 30, (millions $) Fund Balances Percentage Ownership (%) Distributions FY Common Schools NM Military Institute NM School for the Deaf NM School for Blind and Visually Impaired NM State Penitentiary University of NM Public Buildings Capital Inc. DHI Miner s Hospital Water Reservoir Charitable Penal & Reform NM State University Improvement of Rio Grande NM State Hospital NM Institute of Mining & Technology Eastern NM University Western NM University NM Highlands University Northern NM Community College NM Boys School UNM Saline Lands 8, Totals 9, % Historical Asset Allocation and Investment Return July1, 1988 to June 30, (Since inception of performance reporting) June 30 Bench Mark Total Fund Investment Market Value (millions $) US Equity% Non-US Equity% Private Equity% Bonds% Portfolio Allocations Cash% Hedge Funds Real Estate CDOs Averages (0.5) (7.7) (8.1) % (0.5) (6.6) (7.9) % 2, , , , , , , , , , , , , , , , , , , , New Mexico State Investment Council Annual Report 26

33 Performance The following table and graphs present the yearly rates of return for equities and for bonds for the last 19 years since the inception of performance reporting. An independent consultant, currently New England Pension Consultants (NEPC), calculates all performance data. Over the 19-year period, both the LGPF equities and bonds have outperformed the financial markets. Prior to the 1996 Constitutional Amendment, all equity investments were severely restricted. SDAQ (over-the-counter) or other stocks without a continuous 10-year dividend history were not allowed. Actual performance during the years prior to 1997 would have been significantly better without these restrictions. Similar restrictions on investing in alternative asset classes have also negatively impacted diversification and returns prior to. Historical Investment Return by and Major Asset Class June 30, 1989 to June 30, (Since inception of performance reporting) US Equity Non-US Equity Fixed-Income June 30 Large Cap LGPF% S&P500 Index% Non-US LGPF% Non-US Index% LGPF Bonds% Aggregate Index% (18.1) (21.0) (14.8) (18.0) (20.2) (6.2) (3.5) (23.8) (7.9) (4.7) (1.4) (1.3) (0.8) 6.1 Averages 12.1% 12.1% 9.9% 9.0% 7.8% 7.5% Growth of a LGPF Dollar Invested in Large Cap Active Equity Compared to two indexes LGPF Equities S&P500 Index CPI Inflation Index 8.76 Nominal Dollars Jun 89 Dec 89 Jun 90 Dec 90 Jun 91 Dec 91 Jun 92 Dec 92 Jun 93 Dec 93 Jun 94 Dec 94 Jun 95 Dec 95 Jun 96 Dec 96 Jun 97 Dec 97 Jun 98 Dec 98 Jun 99 Dec 99 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun New Mexico State Investment Council Annual Report

34 Trust Funds Managed by the SIC Assets, Allocations and Returns Total Returns LGPF Large Cap Equity Compared to the S&P500 Index 40 Total Return (%) LGPF Equity S&P500 Index s June Total Returns LGPF Bonds Compared to the Lehman Aggregate Index LGPF Bonds Aggregate Index Total Return (%) s June 2005 New Mexico State Investment Council Annual Report 28

35 New Mexico State Investment Council Land Grant Permanent Fund Equity Performance $90,000 $80,000 $10,000 invested in the Land Grant Permanent Fund U.S.Large Cap Active Equity Pool on July 1, 1988 would be at $85,473 as of June 30, $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Jun 88 Dec 88 Jun 89 Dec 89 Jun 90 Dec 90 Jun 91 Dec 91 Jun 92 Dec 92 Jun 93 Dec 93 Jun 94 Dec 94 Jun 95 Dec 95 Jun 96 Dec 96 Jun 97 Dec 97 Jun 98 Dec 98 Jun 99 Dec 99 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Investment Allocations Severance Tax Permanent Fund CDO 2.4% ETI s 4.4% Real Estate 1.9% Large Cap Index Equity 8.4% US Mid / Small Cap Equity 9.9% NON-US Emerging 5.9% CDO Equity 0.1% Hedge Funds 9.3% Non-US Developed 7.0% US Large Cap Equity 41.0% Private Equity 8.8% High Yield Bonds 2.7% US Core Bonds 4.1% Cash 0.7% Severance Tax Permanent Fund Statutory authority for investment of the Severance Tax Permanent Fund by the State Investment Council became effective July 1, The transition from the Office of the State Treasurer was completed on April 1, 1985, with the transfer of the $573 million Certificate of Deposit program. Currently, severance tax revenues first pay the required debt service on severance tax bonds issued by the State, and the remaining severance tax receipts are then transferred to the Severance Tax Permanent Fund. The STPF is now a broadly diversified permanent fund, and except for the Economically Targeted Investments, the STPF investment statutes and asset allocations are similar to those in the LGPF. 29 New Mexico State Investment Council Annual Report

36 Trust Funds Managed by the SIC Assets, Allocations and Returns Statement of Net Assets June 30, and (millions $) June 30, Market Value Percent of Fund June 30, Market Value Percent of Fund Cash/cash equivalents % % Fixed Income Core Bond Pool High-Yield Bonds Pool % 2.7% % 2.8% Total Fixed Income % % Equities Large Cap Active Equity Pool Large Cap Index Equity Pool Mid/Small cap Equity Pool Non-Us Developed Markets Pool Non-US Emerging Markets Pool 1, % 11.1% 9.9% 7.0% 5.8% 1, % 8.4% 11.3% 6.3% 4.5% Total Equities 3, % 2, % Hedge Fund Pool CDO Equity Pool % 3.7% % 1.5% Alternative Investments Economically Targeted Investments Private Equity National Private Equity NM Real Estate Stock Distributions % 5.7% 3.0% 2.4% 0.3% % 5.2% 2.4% 1.9% 0.2% Total Alternative Investments % % Total Investment Assets 4, % 4, % Interagency Receivable, net Accrued Investment Income Liabilities: Beneficiary distributions payable Due to broker/custodian (14.2) 0.1% % -0.3% (14.3) 3.3% % -0.3% Net Assets 4, % 4, % Statement of Changes in Investment Assets, at Years ending June 30, 1989 to (millions $) Less Beginning New Contributions Beneficiary Distributions Total Return Market Value , , , , , , , , , , , , , , , , , , , (337.9) (332.2) , , , , , , , , , , , , , , , , , , ,709.5 Totals 1, , ,

37 Historical Asset Allocation and Investment Return July1, 1988 to June 30, (Since inception of performance reporting) Portfolio Allocations June 30 Bench Mark Total Fund Investment (millions $) US Equity% Non-US Equity% Alt. Investm.% Bonds% Cash Hedge Funds Real Estate CDOs ETIs (8.9) (8.1) (7.8) (8.7) , , , , , , , , , , , , , , , , , , , (0.1) Averages 9.7% 9.9% Performance The following table and graphs present the yearly rates of return for equities and for bonds for the last 19 years since the inception of performance reporting. An independent consultant, currently New England Pension Consultants (NEPC), calculates all performance data. Over the 19-year period, both the STPF equities and bonds have outper formed the benchmarks. Prior to the 1996 Constitutional Amendment, all equity investments were severely restricted. SDAQ (over-the-counter) or other stocks without a continuous 10-year dividend history were not allowed. Actual performance during the years prior to 1997 would have been significantly better without these restrictions. Historical Investment Return by and Major Asset Class June 30, 1989 to June 30, (Since inception of performance reporting) US Equity Non-US Equity Fixed-Income June 30 Large Cap STPF% S&P500 Index% Non-US STPF% STPF Index% Aggregate Bonds% Index% Averages (18.1) (22.0) (1.7) % (14.8) (18.0) % (20.2) (6.2) (3.5) % (23.8) (7.9) (4.7) % (1.3) % (1.3) (0.8) %

38 Trust Funds Managed by the SIC Assets, Allocations and Returns Total Returns STPF Bonds Compared to the Lehman Aggregate Index STPF Bonds Aggregate Index Total Return (%) s June Total Returns STPF Large Cap Active Equity Compared to the S&P500 Index 40 Total Return (%) s June STPF Equity S&P500 Index New Mexico State Investment Council Annual Report 32

39 Tobacco Settlement Permanent Fund The Tobacco Settlement Permanent Fund (TSPF) was established by New Mexico statute during The TSPF will receive ongoing payments from the settlement between the State of New Mexico and various tobacco companies. Asset allocation targets will be similar to that of the LGPF. The Fund received the first investment of $14.7 million on December 16, These monies and subsequent contributions were invested in overnight investments until April 1, 2000 when the Fund was invested long term in similar percentages as the LGPF. Investment performance is affected by the statutory requirement to hold large cash positions for distribution in early July of each year. On June 30,, the balance of the Fund was $116.6 million. Currently, half of each prior year s settlements are distributed, with the remainder added to the TSPF. When the Fund reaches a large enough size, it will retain all of the annual settlements, and distributions will be based on the same 4.7% formula as the Severance Tax Permanent Fund. Statement of Net Assets June 30, and (millions $) June 30, Market Value Percent of Fund June 30, Market Value Percent of Fund Cash/cash equivalents % % Fixed Income Core Bond Pool High-Yield Bonds Pool % 2.2% % 2.7% Total Fixed Income % % Equities Large Cap Active Equity Pool Large Cap Index Equity Pool Mid/Small cap Equity Pool Non-Us Developed Markets Equity Pool Non-US Emerging Markets Equity Pool % 4.8% 10.8% 6.6% 3.0% % 10.7% 12.6% 7.2% 2.8% Total Equities % % Hedge Funds 1 8.6% % Total Investment Assets % % Accrued tobacco settlement Interagency Receivable (net) Net Assets % 0.2% 10% % 10% Historical Asset Allocation and investment Return June 2000 to June (Since inception of performance reporting) June 30 Benchmark Total Fund Investment (millions $) US Equity Non-US Equity Portfolio Allocations Hedge US Bonds Cash (5.9) (6.7) (7.3) (6.2) % 35.7% 35.1% 48.1% 56.8% 56.0% 55.3% 40.7% 7.6% 10.6% 11.0% 11.0% 8.2% 8.9% 7.0% 9.7% 0% 0% 0% 0% 0% 0% 10.8% 8.5% 17.6% 22.4% 27.8% 37.6% 34.6% 34.4% 24.1% 22.9% 5% 31.3% 26.0% 0.3% 0.4% 0.7% 2.8% 18.2% Averages New Mexico State Investment Council Annual Report

40 Trust Funds Managed by the SIC Assets, Allocations and Returns Statement of Changes in Investment Assets, at Years ending June 30, 2000 to (millions $) Beginning New Contributions Total Return Less Beneficiary Distributions (2.1) (4.4) Totals Water Trust Permanent Fund The Water Trust Permanent Fund was created in 2003 but only funded by the Legislature in. On July 1 of each fiscal year the Fund will distribute $4,000,000 to the water project fund, but shall not be expended for any other purpose. The fund is to be invested by the State Investment Officer as the Land Grant Permanent Fund is invested. When 4.7% of the Fund is greater than $4 million, annual distributions will be 4.7% of a 5-year rolling average of the Fund. As of the end of FY, the WTPF was $46.2 million. Statement of Net Assets June 30, (millions $) Cash/cash equivalents Fixed Income Core Bond Pool Total Fixed Income Equities Large Cap Active Equity Pool Mid/Small cap Equity Pool Non-Us Developed Markets Equity Pool Non-US Emerging Markets Equity Pool Total Equities Hedge Fund Pool Total Investment Assets Due to beneficiaries Net Assets June 30, Market Value (4.0) 42.2 Percent of Fund 1% 28.2% 28.2% 37.2% 13.5% 7.6% 3.8% 62.1% 9.2% % 100% New Mexico State Investment Council Annual Report 34

41 Agency Clients 1. New Mexico Military Institute 2. New Mexico Retiree Health Care Authority 3. New Mexico Institute of Mining and Technology 4. City of Albuquerque 5. Los Alamos County 6. Springer Municipal School District 7. New Mexico Miner s Hospital 8. Eastern New Mexico University 9. New Mexico Department of Game and Fish 10. New Mexico School for the Visually Impaired 11. State Engineer / Interstate Stream Commission 12. New Mexico State Land Office 13. Public Regulation Commission 14. Luna County 15. New Mexico Public Schools Insurance Authority 16. New Mexico Highlands University 17. New Mexico Mortgage Finance Authority 18 Children Youth & Families Department 19. New Mexico Higher Education Department New Mexico Retiree Health Care Authority The New Mexico Retiree Health Care Authority (NMRHCA) was formed on February 13, 1990 as an independent statutory agency of the State. The NMRHCA provides comprehensive core group health insurance for persons who have retired from certain types of public service in New Mexico, and their spouses, dependents, and surviving spouses and dependents. These benefits are purchased with contributions, investment earnings and co-payments or out-of-pocket payments by insured members. Originally, all public school districts, the State and all of its agencies, and all cities and counties in New Mexico were mandated to participate in the NMRHCA, but cities and counties were given a one-time opportunity to opt out of the Program, and universities were given a one-time opportunity to opt into the Program. Other local public entities such as special districts, joint powers, and agencies and councils of government were also given a onetime opportunity to opt into the Program. In 1993 and 1998, legislation was enacted which allows non-participating employers to participate in the Program, provided they contribute the appropriate fees. The NMRHCA has been a client of the SIO since June Investments represent long-term reserve funds for the NMRHCA beneficiaries. Historical Asset Allocation and investment Return June 1992 to June (Since inception of performance reporting) June Benchmark 12.1 (0.2) (8.7) (8.0) Total Fund Investment (8.2) (7.9) (millions $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% High Yield Bonds% Cash% Averages

42 Trust Funds Managed by the SIC Assets, Allocations and Returns New Mexico Institute of Mining and Technology New Mexico Institute of Mining and Technology is a student-oriented public research university specializing in science and engineering. Referred to as New Mexico Tech, by its students, faculty, and friends, Tech is considered one of the top research institutions in the country. America s 100 Best College Buys, recently recognized New Mexico Tech as one of the nation s top values for a university education, and Tech has consistently received high marks from publications such as Princeton Review, Kiplinger s, and US News and World Report. The Carnegie Foundation classifies Tech as an Intensive Doctoral/ Research University, one of only 112 schools across the country with such a designation. The school's current enrollment is about 1,800. Students who choose New Mexico Tech are serious, careeroriented students who go on to become successful engineers, scientists, computer systems analysts, researchers, college professors, doctors, and other medical and professional personnel. Tech expects its students to work hard and take their education seriously. About 80 percent of Tech students graduate with work experience in a research environment. NMIMT is a LGPF beneficiary, and became a client of the SIO on December 1, Until October 1, 1996 all of the NMIMT assets were managed by the SIO in one client account. When the client accounts were pooled into the investment funds, the NMIMT assets were separated into four accounts: the NMIMT Employees Health Benefits Fund; the NMIMT Plant & Equipment Fund; the NMIMT Endowment Fund; and the NMIMT Research Foundation Fund. The objectives for all of these Funds are to protect them against inflation and to maximize the value of the Funds for their beneficiaries. Historical Asset Allocation and investment Return June 1992 to June June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% Cash% Averages (0.2) (7.3) (10.4) (3.8) (9.3) (10.7) Plant and Equipment Fund* Averages (0.7) * On May 1, 1999 the Plant and Equipment Fund was re-allocated and invested 100% in the Core Bonds Pool. Thus, the performance for the P&E Fund is different than the other three NMIMT Funds for s 1999 and later. The averages cover the entire period. New Mexico State Investment Council Annual Report 36

43 Agency Clients New Mexico School for the Blind and Visually Impaired The 35th Territorial Legislature approved an act on February 15, 1903 that created the New Mexico School for the Blind in Alamogordo, NM. New Mexico voters in 2004 approved a constitutional amendment to change the name of the School to the New Mexico School for the Blind and Visually Impaired (NMSBVI). The NMSBVI provides special education opportunities on its 35-acre home campus, a satellite early childhood program in Albuquerque, and other outreach locations in the state for those children who, because of the visual impairment and related reasons, cannot be adequately served by local school districts. Individualized educational goals and objectives are prepared for each student. Students are helped with both short-term and long-term special skills needs from birth through 21 years of age. The School is accredited by the Public Education Department and the North Central Association. The New Mexico School for the Blind and Visually Impaired has been a State Investment Office client since April The School is a LGPF beneficiary, and the Fund consists of LGPF distributions that have accumulated from prior years. The NMSBVI s objectives are to maximize returns with reasonable risk, and to use the Fund and future returns to supplement long-term building projects and annual operating budgets. Historical Asset Allocation and Investment Return April 1993 to June 30, June Averages Benchmark (0.4) (5.0) (5.5) Total Fund Investment (2.8) (8.6) (7.4) (millions $) Portfolio Allocations US Equity% Non-US Equity% Core Bonds% High Yield% Bonds Cash% Office of the State Engineer/ Interstate stream Commission The Office of the Territorial Irrigation Engineer was created in 1905 and became the Office of the State Engineer in 1907 with jurisdiction over the surface waters of the state. Confirmed by the New Mexico Constitution of 1912 and expanded by legislation, the State Engineer is responsible for water rights administration, hydrographic surveys, water resource investigations, dam safety, dam and ditch rehabilitation, flood mitigation, county subdivision water supply reviews, and issuing welldrilling licenses. The Interstate Stream Commission was created by the Legislature in 1935 with broad powers to investigate, protect, conserve, and develop New Mexico s water and stream systems, both intra- and interstate. The Office of the State Engineer and the Interstate Stream Commission are separate but companion state agencies. Together they are responsible for the administration, development, conservation, and protection of New Mexico s water resources, and manage two trust funds created by the U.S. Congress under the Fergusson Act of Both trusts are LGPF beneficiaries: 37 New Mexico State Investment Council Annual Report

44 Trust Funds Managed by the SIC Assets, Allocations and Returns The Improvement to the Rio Grande Income Fund The U.S. Congress granted 100,000 acres of land to the Territory, the income from which is earmarked for the improvement of the Rio Grande in New Mexico, and increasing the surface flow of water in the bed of said river. The Irrigation Works Construction Fund The U.S. Congress granted 500,000 acres of land to the Territory, the income from which is credited to the Permanent Reservoirs for Irrigation Purposes Income Fund, one of the 20 LGPF beneficiaries. The Irrigation Works Construction Fund was created in 1955 to hold the expendable distributions from the LGPF. Both the Irrigation Works Construction Fund and the Improvement to the Rio Grande Income Fund are under the administrative responsibility of the Interstate Stream Commission. The New Mexico Interstate Stream Commission began reinvesting the unexpended balances in the two trust funds with the State Investment Office March Historical Asset Allocation and Investment Return March 1994 to June 30,. Improvement to the Rio Grande Fund June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Core Bonds% Cash% Averages (3.5) (6.4) (7.2) (8.9) *Prior to FY99, the Irrigation Works Construction Fund and the Improvement to the Rio Grande Fund were not reported separately, and thus the market values shown for each fund are the sum of both for FY98 and prior years. Historical Asset Allocation and Investment Return March 1994 to June 30,. Irrigation Works Construction Fund June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Core Bonds% Cash% Averages (3.5) (6.4) (11.3) (14.0) New Mexico State Investment Council Annual Report 38

45 Agency Clients New Mexico State Land Office In addition to managing the State Trust Lands, the New Mexico State Land Office (NMSLO) operates an oil and gas royalty program, which oversees the 12,000 oil and gas wells on Trust Lands and an additional 24,000 oil and gas wells that the NMSLO has financial interests in under various agreements. Monthly royalty payments are processed by the NMSLO and transferred to the LGPF. Part of this royalty program is an Advance Royalty Payments Program that is designed to Historical Asset Allocation and Investment Return March 1994 to June 30,. Oil and Gas Advance Royalty Fund ensure timely payment of state royalties due from large remittees. State royalty remittees with an average monthly payment of $25,000 or more are required to maintain an amount on deposit with the SLO equal to that average monthly payment. The deposit amounts are reviewed and adjusted annually. The NMSLO also operates a similar advance royalty program for coal mining. The majority of the advanced royalties have been invested with the State Investment Office since April 1994 in order to increase returns for the educational beneficiaries of the Land Office. June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Core Bonds% Cash% (2.2) (5.1) (3.8) (4.6) Averages New Mexico Highlands University Endowment Fund New Mexico Highlands University is a comprehensive state institution offering programs in liberal arts, sciences and professional disciplines. The university is committed to excellence in teaching, discovering, preserving and applying knowledge, and is responsive to new opportunities for teaching, learning, research, and public service created by a changing environment. NMHU is committed to programs that focus on its multiethnic student body, especially the rich heritage of Hispanic and Native American cultures that is distinctive of the State of New Mexico. The university aspires to develop broadly literate citizens and leaders, educated in analytical and critical thought and in the appreciation of the arts and sciences. In essence, through educational excellence and a dedication to society's needs, the university is committed to the cultivation and enrichment of the human mind and spirit. NMHU began investing with the SIO in March Historical Asset Allocation and Investment Return April 2004 to June 30,. June * Benchmark Total Fund Investment (thousands $) 1,973 2,171 2, Portfolio Allocations US Equity% Non-US Equity% Core Bonds% High Yield Bonds% Cash% Averages * The returns for 2005 represent a three month period. 39 New Mexico State Investment Council Annual Report

46 Trust Funds Managed by the SIC Assets, Allocations and Returns New Mexico Military Institute Founded in 1891, New Mexico Military Institute (NMMI) is a state-supported, coeducational, college preparatory high school and university parallel junior college. Operated as a military boarding school, the Institute provides a quality academic curriculum with a strong character and leadership development program. This mission emphasizes the core values of honor, excellence, service, and responsibility. Annual enrollment capacity is between students. The New Mexico Military Institute is a LGPF beneficiary, and became a SIO client on July 1, 1997 when three separate NMMI Funds were transferred to the Investment Office. These are: The NMMI Scholarship Trust was created through individual donations from individuals and bequests. Earnings from the Fund are used to fund cadet scholarships. The 1989 New Mexico Legislature authorized: The Gen. Richard T. Knowles Legislator Scholarship Fund. Each of New Mexico s 112 legislators may nominate four students (high school or college) from their district to attend NMMI. One student from each district is selected by a NMMI committee to receive a Legislator Scholarship. Each award includes a state gratis scholarship of approximately $1,700 to cover the cost of tuition and fees. In addition, the Fund managed by the Investment Office (created by donations from individuals) provides a supplemental $1,000 to be applied towards room, board and other expenses. The Patterson Memorial Building Fund was a bequest from a NMMI alumnus. The income from the corpus may be used for building projects. Historical Asset Allocation and Investment Return June 1997 to June 30,. June Averages Benchmark (5.4) (6.1) Total Fund Investment (5.7) (5.8) (millions $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% High Yield Bonds% Cash% New Mexico Miner s Colfax Medical Center The Miners Colfax Hospital (MCMC) is an original LGPF beneficiary as designated by the Fergusson Act of 1898, which granted 50,000 acres of land to the Territory for the purpose of creating a miner s hospital for disabled miners. The Enabling Act of 1910 authorized a grant of another 50,000 acres. The hospital opened in 1906 in Raton, NM on 10 acres of land donated for that purpose. Although specifically created by its charter for miners, private patients have been admitted since its inception; however, their presence must not interfere with the trust purpose. MCMC operates a 38-bed acute care hospital, a 49-bed extended care facility, and various outpatient clinics in Raton. In addition, an outreach program serves mining communities throughout the state. Recent developments include the creation of an occupational health research program and satellite clinics. The MCMC is an independent agency reporting directly to the Governor s Office. MCMC operates exclusively on revenue from the LGPF, the Miners Trust, and patients, and is governed by a five-member Board of Trustees appointed by the Governor and confirmed by the Senate. The budget is subject to legislative appropriation, and unexpended income does not revert to the general fund, but rather becomes part of the Miners Trust. The Miners Colfax Hospital began investing the Miners Trust with the SIO in December New Mexico State Investment Council Annual Report 40

47 Agency Clients Historical Asset Allocation and Investment Return December 1997 to June 30,. June 30 Benchmark Total Fund Investment (millions $) Portfolio Allocations US Equity% Core bonds% US Bonds% 1998* Averages (2.2) (5.1) (6.8) (7.6) * The returns for 1998 represent a seven month period. New Mexico Department of Game and Fish The State Legislature created the New Mexico Department of Game and Fish (NMDGF) in 1912, although the origins of NMDGF operations date back to the enactment of game protection laws in 1895 and the creation of a Territorial Game Warden in The Department's principal obligation is to provide and maintain an adequate supply of wildlife and fish within the state of New Mexico. The Department s flexible management system provides for game and fish protection, propagation, regulation, and conservation, as well as for public recreation and food supply. The Department's primary responsibilities are (1) to meet the wildlife-related interests of New Mexicans, now and in the future, and (2) to assure that the Game Protection Fund and other fund sources are wisely used for the protection, propagation, conservation, management and enhancement of the state's wildlife and its habitat. Created by the New Mexico State Legislature in 1981, Share with Wildlife is an NMDGF program dedicated to the preservation of all of New Mexico's wildlife. Although it is administered by NMDGF, it is supported solely by donations, designated state tax refunds, return on investment of principal and from federal reimbursements. The program funds four general categories of work: scientific research, habitat preservation, wildlife rehabilitation and public education about wildlife. Share with Wildlife is committed to helping "wildlife in need" - those species with little or no other source of funding. The NMDGF invested with the State Investment Office in December Historical Asset Allocation and Investment Return December 1998 to June 30,. June * Averages Benchmark (3.9) (5.1) Total Fund Investment (4.8) (4.9) * The returns for 1999 represent a seven month period. (thousands $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% High Yield Bonds% Cash% 41 New Mexico State Investment Council Annual Report

48 Trust Funds Managed by the SIC Assets, Allocations and Returns Eastern New Mexico University The Eastern New Mexico University (ENMU) educational system is composed of two campuses and an instruction center. The four-year parent campus in Portales opened in The two-year campus, ENMU-Roswell, was established in The ENMU-Ruidoso Instruction Center opened in The North Central Association of Colleges and Secondary Schools separately accredits each campus. In 1927, the New Mexico Legislature designated Portales as the location for ENMU and made the first appropriation for buildings in The University operated as a two-year junior college from the 1934 opening until 1940 when the upperdivision curriculum was added. The North Central Association of Colleges and Secondary Schools awarded accreditation as a four-year liberal arts institution in and master s level graduate work began with accreditation in The Portales campus offers associates, bachelors, and masters degrees to students from all 50 states and around the world by traditional classes as well as classes by instructional television and through the Internet. There are 49 undergraduate major areas of study offered through four colleges and 15 majors in the graduate school. The Portales-campus operating budget is approximately $50 million, and there are about 680 employees including 280 faculty. More than 31,551 students have graduated from ENMU in its 68-year history. Historical Asset Allocation and Investment Return January 1999 to June 30,. June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% Cash% 1999* (4.0) (5.1) (0.1) (4.7) Averages * The returns for 1999 represent a six month period. Springer Municipal School District The Town of Springer is located in the northeastern highlands of New Mexico, on Interstate 25 about 50 miles south of the Colorado border. The community of Springer is very supportive of their schools and children, and has established the Sim Brown Scholarship Fund. The Springer School District has selected the State Investment Office to invest the assets of the Sim Brown Fund. The purpose of the Fund is to provide scholarships for deserving graduates of Springer High School to assist in funding their college educations. Springer began investing with the SIO in March Historical Asset Allocation and Investment Return March 1999 to June 30,. June * Benchmark (4.1) (5.2) Total Fund Investment (4.9) (5.3) (thousands $) US Equity% Non-US Equity% Core Bonds% Portfolio Allocations High Yield Bonds% Cash% Averages * The returns for 1999 represent a four month period. 42

49 Agency Clients City of Albuquerque The City of Albuquerque is a home rule charter municipality, chartered as a town in Today it is New Mexico s largest city, proving a full range of services for almost 500,000 citizens. Since those early days, the City has become a major municipal government providing a full range of services to approximately 450,000 citizens. Included in these services are traditional city functions such as police and fire protection, culture and recreation, public works, road and traffic signal maintenance, and basic utilities services. In addition, the City operates parking facilities, a transit system, an international airport, a convention center, corrections and detention facilities, and a housing authority. In 1983 the City Council passed an ordinance establishing a permanent trust fund of $8.0 million for urban enhancement. The principal of the trust fund is to be maintained intact, and the earnings are to be used to finance urban enhancement improvement projects which will enhance the beauty of common usage areas of the City or enrich the City's cultural life. In 1984 the City Council passed an ordinance establishing a trust fund of $14.0 million for the purchase and maintenance of open space areas in and around the city. Earnings from the investment of the trust fund are used for the acquisition of additional open space land and the maintenance of the open space network in the metro area. The City of Albuquerque began investing with the SIO in April Historical Asset Allocation and Investment Return April 2000 to June 30,. Open Space Management Fund June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Non-US Equity% US Bonds% Cash% 2000* (0.8) Averages * The returns for 2000 represent a three month period. Historical Asset Allocation and Investment Return April 2000 to June 30,. Urban Enhancement Trust Fund June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% US Bonds% Cash% 2000* (0.8) Averages * The returns for 2000 represent a three month period. Los Alamos County In 1949 Los Alamos County was formed from parts of three other existing counties as a separate political subdivision by the New Mexico legislature. It was incorporated on Dec. 10, 1968 when County voters adopted a Charter. The County has the rights and responsibilities of both a county and a municipality under the County's Charter and NM State law. 43 New Mexico State Investment Council Annual Report

50 Trust Funds Managed by the SIC Assets, Allocations and Returns The County is located on the Pajarito Plateau in northern New Mexico, about 35 miles northwest of Santa Fe, the capital of New Mexico. The County covers about 112 square miles. The National Forest Service owns 41.3% of the County's area, the United States Department of Energy (DOE) owns 33.4%, the County and its citizens own 14.6%, Bandelier National Monument owns 9%, and 1.7% is held by the United States General Services Administration for federal disposal. Before the establishment of the Los Alamos Natl. Laboratory in 1943, a few isolated ranches and a preparatory school for boys occupied the County. This isolated area became the home for scientists and military personnel working as the key part of the Manhattan Project, which resulted in ending World War II. Initially, the Laboratory and the surrounding area were owned and controlled by the federal government. Under the Atomic Energy Communities Act of 1955, the government sold most commercial real estate, residential lots, and housing units to private owners. Churches and institutional properties, including hospitals, schools, municipal offices, the electric, gas, and water distribution systems, and the wastewater collection system were transferred to private institutions, the school system, or municipal ownership. The County has two permanent funds that it invests with the SIO. The two funds are the Capital Projects Permanent Fund and the Cemetery Trust Fund. The Capital Projects Permanent Fund was established with funds received under a settlement of prior years' gross receipts taxes. The County Council and the County Charter set this settlement aside specifically for capital projects. The principal is maintained as a permanent fund and a portion of the investment earnings is used to help pay for capital projects. The Cemetery Trust Fund is set aside for the perpetual care of the Guaje Pines Cemetery. Over time, other long-term funds will be considered for investment with the SIO. Los Alamos County was approved as a client by the State Investment Council in March 2000, and began investing with the SIO in October Historical Asset Allocation and Investment Return October 2000 to June 30,. CIP Permanent Fund June * Averages Benchmark (5.0) (7.0) Total Fund Investment (5.5) (6.6) (millions $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% * The returns for 2001 represent a nine month period. High Yield Bonds% Cash% Historical Asset Allocation and Investment Return October 2000 to June 30,. Cemetery Fund June * Averages Benchmark (5.0) (7.0) Total Fund Investment (5.5) (6.6) (thousands $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% * The returns for 2001 represent a nine month period. High Yield Bonds% Cash% New Mexico State Investment Council Annual Report 44

51 Agency Clients Historical Asset Allocation and Investment Return September 2001 to June 30,. General Fund June * Averages Benchmar k (3.3) Total Fund Investment (5.0) (millions $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% * The returns for 2001 represent a nine month period. High Yield Bonds% Cash% Public Regulation Commission The New Mexico Public Regulation Commission (PRC) is a constitutionally created entity, formed as a result of the merger of the former State Corporation Commission and the former Public Utility Commission on January 1, The PRC is charged with regulating public utilities, telecommunications companies and insurance companies to the extent necessary to provide just and reasonable rates and to assure reasonable, adequate and efficient service for the public. In addition, the PRC is charged with the duties of assuring pipeline and fire safety, and with the registration of corporations and compliance with applicable laws. The State Investment Council invests agency trust funds from the Patients' Compensation Fund (PCF). The PCF was created to cover medical malpractice claims that are over and above the coverage held by health care providers. These health care providers must be qualified under the Medical Malpractice Act. To be qualified under the Medical Malpractice Act, health care providers must provide proof of malpractice liability insurance and pay the surcharge assessed on health care providers by the superintendent of insurance pursuant to Section NMSA The PRC began investing with the SIO in October Historical Asset Allocation and Investment Return October 2000 to June 30,. June * Averages Benchmark (0.2) (1.1) Total Fund Investment (0.7) (0.9) (millions $) US Equity% Non-US Equity% Portfolio Allocations US Bonds% * The returns for 2001 represent a nine month period. High Yield Bonds% Cash% Luna County Luna County is located in the southwestern corner of New Mexico, an area that is rich in history, atmosphere, and sunshine. The desert and the Florida Mountains offer amazing views year round. Luna County's state parks are also scenic and diverse, from desert to the mountains of the Black Range. Water and agricultural activity make Luna County an oasis in the desert. Economic development has been an active part of Luna County since On February 12, 1999 USDA Rural Development State Director Stephanie Gonzales presented a plaque to County and City Officials officially designating Deming/Luna County an Enterprise Community as of January This designation will make Deming and Luna County eligible for special economic assistance from the U.S. Department of Agriculture. It is one of 20 new rural Enterprise Communities in the U.S. As an Enterprise Community, Luna County now 45 New Mexico State Investment Council Annual Report

52 Trust Funds Managed by the SIC Assets, Allocations and Returns is responsible for establishing its own economic development plan and chartering its own economic future. The current plan for Deming and Luna County focuses on creating partnerships Historical Asset Allocation and Investment Return October 2000 to June 30,. between all levels of government, community groups, private businesses, and local residents to bring new economic life to southwestern New Mexico. Luna County began investing with the SIO in October June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% Cash% 2001* (7.6) (9.2) (6.2) (9.8) ,128 1, (1.2) Averages * The returns for 2001 represent a nine month period. New Mexico Public Schools Insurance Authority The New Mexico Public Schools Insurance Authority (NMPSIA) was created by the State Legislature in 1986 as a purchasing agency for public school districts, post-secondary educational entities and charter Schools. Through NMPSIA, member schools are afforded the opportunity to offer quality employee benefit and risk coverage. Because of the purchasing power of our large group, covering over 30,000 educational employees and their Historical Asset Allocation and Investment Return April 2004 to June 30,. Benefit Fund families, we are able to negotiate better premiums and better benefits than an individual school district. Coverage includes basic life and accidental death, dismemberment, voluntary life, long-term disability, five medical plans, a dental plan with basic and comprehensive coverage, and a vision plan. NMPSIA currently provides benefit and risk coverage to 88 school districts (all districts except for Albuquerque Public Schools) 40 Charter Schools and 15 educational entities. NMPSIA began investing with the SIC in April June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% Cash% 2004* Averages Historical Asset Allocation and Investment Return April 2004 to June 30,. Risk Fund June 30 Benchmark Total Fund Investment (millions $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% Cash% 2004* Averages * For both the Benefit Fund and Risk Fund the returns for 2004 represent a two month period. 46

53 Agency Clients New Mexico Mortgage Finance Authority The New Mexico Mortgage Finance Authority (MFA) is a quasi-public entity financing housing and related services for low to moderate income and underserved families throughout the state. MFA Provides a variety of affordable housing programs that range from assistance to homeless individuals and families, to developing new housing projects, to providing opportunities for homeownership. Created by the state of New Mexico, the MFA is a fully self-supporting, not-for-profit enterprise and does not receive any state funds for its operations. Since its inception in 1975, the MFA has provided more than $3.2 billion in affordable housing for families in New Mexico. MFA invested with the SIC in the fourth quarter of FY. NMMFA General Fund June 30, to June 30,. Historical Asset Allocation and Investment Return June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% HY Bonds * ,033 17, Children Youth & Families Department The New Mexico Children Youth and Families Department works diligently to address a number of significant issues facing the children youth and families of New Mexico, including juvenile justice reform, child care and early childhood education as well as child protection. CYFD respectfully serves and supports children and families and supervises youth in a responsive, community-based system of care that is client centered, family focused and culturally competent. CYFD invested with the SIC in the 4th quarter of FY. CYFD Trust Fund June 30, to June 30,. Historical Asset Allocation and Investment Return June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% HY Bonds * ,000 1, CYFD Next Generation June 30, to June 30,. Historical Asset Allocation and Investment Return June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% HY Bonds * ,000 1, New Mexico Higher Education Department The New Mexico Higher Education Department (NMHED) works to encourage all New Mexicans to pursue a college education by making it more accessible and affordable. NMHED, in collaboration with New Mexico s public colleges and universities, has created a statewide vision in which all New Mexicans may achieve the highest level of education they desire, can succeed once enrolled, and will be prepared to participate in New Mexico s high-wage workforce. NMHED invested with the SIC in the 4th quarter of FY. NM Higher Education Fund June 30, to June 30,. Historical Asset Allocation and Investment Return June 30 Benchmark Total Fund Investment (thousands $) US Equity% Portfolio Allocations Non-US Equity% Core Bonds% HY Bonds 47 * * * Time invested not sufficient to establish meaningful benchmark/return

54 V. Biographies - SIC Profiles New Mexico State Investment Council Annual Report 48

55 Biographies - SIC Profiles Bill Richardson, Governor Bill Richardson was re-elected to a second term as Governor of New Mexico in with the support of 69 percent of voters, representing the largest margin of victory for any governor in state history. New Mexicans overwhelmingly endorsed Governor Richardson's aggressive efforts to move the state forward. During his first term as Governor, Richardson made good on his campaign promises to improve education, cut taxes, build a high-wage economy, develop a statewide water plan and make New Mexico safer by getting tough on DWI, domestic violence and sex crimes. New Mexico continues to be a national leader in job growth and economic momentum, with more than 83,000 more New Mexicans working since Governor Richardson took office. Under Governor Richardson's leadership, the state has a balanced budget and the highest budget reserves in the state's history. During the 2002 campaign for Governor, Bill Richardson broke a world record. He shook 13,392 hands in an 8-hour period, shattering the record that former president Theodore Roosevelt set on inauguration day in With his wife, Barbara, at his side, Governor Richardson was sworn into office January 1, 2003 at the historic Palace of the Governors in Santa Fe, the nation's oldest seat of government. Prior to being elected governor, Bill Richardson enjoyed a very successful and fulfilling career in public service, academia and the private sector - few can match his wide-ranging experience and his level of dedication to protecting the rights and improving the quality of life of people in New Mexico, the United States and around the world. Richardson has met face-to-face with some of the world's most intimidating leaders. He negotiated the release of prisoners from Saddam Hussein, convinced corrupt foreign heads of state to step down, and oversaw and reformed one of the most challenging and unmanageable agencies in government, the Department of Energy. In recognition of his concern for human rights abuses and his diplomatic work throughout the world, Richardson was nominated several times for the Nobel Peace Prize. Gary Bland, State Investment Officer Governor Bill Richardson appointed Gary Bland as New Mexico's State Investment Officer in Bland has extensive experience in real estate development, venture capital and private-equity investing, and came to New Mexico after 28 years at The Boeing Company in Seattle, the last 16 of those years as Vice President of Trust Investments. At Boeing he oversaw investment of Boeing's $62 billion employee trust funds, and established a track record for innovative efforts to involve minority communities in the aviation giant's investment strategy. Before his time at Boeing, he attended University at Washington State and served a tour of duty for the Army in Vietnam. Bland is a history buff and an avid outdoorsman. He and his wife Susan and daughter Julia, currently donate volunteer time to "Challenge New Mexico," a local organization which offers therapeutic and recreational horseback riding for differently- abled children. Patrick Lyons, State Land Commissioner New Mexico s Commissioner of Public Lands, Patrick Lyons, recently made history by being the only Republican to hold the office for two consecutive terms. Mr. Lyons was first elected in November 2002, and is the highest ranking Republican in the state of New Mexico s Executive Branch. Prior to being elected as Commissioner of Public Lands, Pat served in the New Mexico Senate from 1992 through 2002 representing six counties in the northeastern quarter of the state. He is a third-generation New Mexican from Cuervo. His expertise includes land management, and water and natural resource issues. As manager of New Mexico s school trust lands, Commissioner Lyons has implemented innovative policies to diversify the Land Office s portfolio, increase assets, improve conservation efforts, and create dynamic and competitive communities. Pat has taken the lead in developing environmentally sensitive sources of energy and is the first land commissioner to lease trust lands for wind, solar and biofuel energy development. Mr. Lyons is a 1972 graduate from Clovis High School. He attended New Mexico State University where he earned a bachelor s degree in agricultural economics and then went on to receive a master s in the same field from Colorado State University. Pat and Sandy, his wife of 22 years, own and operate the Lyons family ranch near Cuervo, and Sandy teaches in the nearby House school district. They have three children, Amy, Kimberly and Daniel. James Lewis, State Treasurer James B. Lewis was elected as Treasurer in November. A native New Mexican, Treasurer Lewis previously served as State Treasurer when he was appointed to the office in 1985 by Governor Toney Anaya, and was subsequently elected for a four-year term from During his tenure, Treasurer Lewis automated the warrant and collateral compliance system, established the Remote Electronic Banking System, and created the Office of the State Cash Manager 49 New Mexico State Investment Council Annual Report

56 Biographies - SIC Profiles within the State Treasurer's Office. Lewis, a Democrat, has served with federal, state, county and city agencies in both elected and appointed positions during his career in government management and finance. Most recently, Lewis was the Chief Administrative Officer for the City of Albuquerque. Previous positions include Rio Rancho City Administrator, Director/Assistant Secretary of the U.S. Department of Energy, Director of the Oil, Gas and Mineral Division of the New Mexico Commission of Public Lands, Chief of Staff to Governor Bruce King and Bernalillo County Treasurer. An Army veteran, Lewis also holds undergraduate degrees in education and business administration and a Masters degree in Public Administration. A widower with four adult children, Lewis resides in Albuquerque. Katherine Miller, Secretary Department of Finance & Administration Governor Bill Richardson appointed Katherine Miller as Cabinet Secretary of the Department of Finance and Administration in April. She had previously served as director of the Mortgage Finance Authority; Deputy Chief of Staff of Policy & Projects under Governor Richardson; and Finance Director & Purchasing Manager for Santa Fe County. Secretary Miller has extensive experience in local, state and federal government finance and policy and has worked in the private sector managing finance programs and government contracts. Secretary Miller received her Bachelor of Science degree in business from Wright State University in Dayton, Ohio where she graduated Magna Cum Laude. She is active in numerous community organizations. David Harris, Public Member David W. Harris, Executive Vice President for Administration, joined the University of New Mexico in May Mr. Harris served as the Acting President from January 25, to May 31,. Mr. Harris brings to the University more than 30 years of financial expertise. In 1972, he began his career with New Mexico State Government working for the Legislative Finance Committee. He held various leadership positions in State Government including Director of the New Mexico Legislative Finance Committee from , Secretary of the New Mexico Department of Finance and Administration from , Deputy Chief of Staff in for Governor Bill Richardson, and Executive Director of the New Mexico Finance Authority through Mr. Harris received a B.B.A. in 1971 from Eastern New Mexico University (ENMU), where he focused on Industrial Management and Business Administration. In 2002, Mr. Harris received recognition as the Outstanding Alumnus from ENMU. He currently serves on the boards of the Harwood Museum, New Mexico Manufacturing Extension Program and the NM State Investment Council. Andrew Davis, Public Member Andrew Davis was appointed to the SIC and PEIAC by Governor Richardson in He has been with Davis Advisors since 1993, and is a Portfolio Manager. He has over 15 years of investment management experience. Previously, he was employed at PaineWebber, Inc. as Vice President, managing both its Convertible Security Research and Closed-End Bond Fund Research departments. He is a graduate of Colby College. Jim Rutt, Public Member Jim Rutt was appointed to the State Investment Council in August by Governor Bill Richardson. Mr. Rutt is the former CEO of Network Solutions, Inc. which administered the.com,.net, and.org domain namespaces on the Internet. Network Solutions was acquired by VeriSign in 2000, where Mr. Rutt was chief strategy officer. Mr. Rutt was also an early employee of "The Source", where he invented the company's User Publishing program which allowed customers to publish their own materials on a network, a precursor to today's personal websites. Mr. Rutt was also intimately involved in developing early versions of and online bulletin boards, and has helped develop online information products for the investment community. Mr. Rutt received his bachelor's degree in Management from the Massachusetts Institute of Technology and is a Vice Chairman of the Santa Fe Institute; a member of the Advisory Board of the Krasnow Institute at George Mason University; and a member of the National Advisory Board at the Stanford Institute for the Quantitative Study of Society. Paul Blanchard, Public Member Paul Blanchard was appointed to the State Investment Council by Governor Bill Richardson in December. Blanchard is an experienced businessman and real estate developer and current Chairman and CEO of the Downs of Albuquerque, as well as a Shareholder and Director of Zia Race Track and Casino in Hobbs, NM. Mr. Blanchard has previously served as Secretary on the State Board of Finance. New Mexico State Investment Council Annual Report 50

57 PEIAC Profiles THOMAS BOFAIR WILLIE GIRON WILLIAM C. ENLOE Thomas Bonafair Governor Bill Richardson appointed Tom Bonafair to the State of New Mexico Private Equity Investment Advisory Committee in Mr. Bonafair came to New Mexico in 1985 as owner of New Mexico Beverage Company, a statewide beer distributor. He currently owns Pella Windows & Doors of New Mexico, is the General Partner of Bonafair Capital Group LLC, is a Partner in Sandia Capital Partners LLC, and is headquartered in Albuquerque. Mr. Bonafair is also very active in ACCION New Mexico, a nonprofit organization. Before coming to New Mexico, Mr. Bonafair worked with Ford Motor Company, General Foods Corporation, Coca Cola Company and was President of Brentano's Book Chain. Mr. Bonafair and his wife Cindy have two children, Phillip and Sara. Mr. Bonafair was a Senior Advisor to Chemical Venture Partners, Chase Capital Partners and J.P. Morgan Chase Capital Partners. Mr. Bonafair played football at the University of Detroit on a football scholarship, and he holds a BS and MBA. Willie Giron Governor Bill Richardson appointed Mr. Giron to the Private Equity Investment Advisory Committee in Mr. Giron has more than 30 years of real estate development experience and continues to be active in this field. He is the retired Chairman of the Board of The Bank of Belen. Under his guidance, the bank's assets grew from $2 million to more than $100 million, and became the first New Mexico bank to achieve "trustee bank" status for the Department of Energy. Mr. Giron is past president of the Belen Chamber of Commerce and founded the Valencia Hispanic Chamber of Commerce. He is past president of the University of New Mexico Valencia Foundation, and chaired the committee that helped establish the UNM Valencia campus. Mr. Giron is also the former president of the Kiwanis Club of Belen. William C. Enloe William C. Enloe is Chairman and Chief Executive Officer of Los Alamos National Bank, a position he has held since Mr. Enloe began his career with Los Alamos National Bank in 1971, and it has spanned over 36 years of the bank's 44-year history. Mr. Enloe has played a key role in developing the bank's strategic and operational focus and maximizing its performance. LANB serves all commercial and consumer deposit and financing needs with an emphasis on commercial and residential real estate development in Northern New Mexico. Over the years Mr. Enloe has been active in helping venture capital business get started in New Mexico and has served on several economic development committees locally, on the state level and nationally. Mr. Enloe was raised in the Los Alamos community and resides there with his wife Kathy; they are the parents of three children. Bill enjoys fishing, skiing and sailing in his spare time. Andrew Davis, Chairman Gary Bland, SIO 51 New Mexico State Investment Council Annual Report

58 VI. Future Initiatives Information Program The State Investment Office believes that the public needs to be fully informed about the State's two large Permanent Endowment Trust Funds and how they are managed. The LGPF and STPF are birthrights for New Mexicans and with proper stewardship will continue to provide significant benefits for many generations to come. The Tobacco Settlement Permanent Fund and Water Trust Permanent Fund may also eventually become trust funds assest large enough to support significant state government programs. Client Services As mentioned in an earlier section, the 1997 legislature further expanded the SIC's authorization to provide investment management services to political subdivisions and the New Mexico Finance Authority. This includes other state agencies as well as cities and counties. The staff of the State Investment Office maintains a policy of informing potential clients of the services offered by the Office. Any political subdivision of the state with longterm funds to invest may be eligible for investment services. These services are offered at a fraction of the cost charged by private investment management firms. Clients are offered the option of investing in most of the pooled funds managed by the SIC. Economically Targeted Investments Under the guidance of Governor Richardson's administration and an increased emphasis through legislative mandate, the State Investment Council is improving its abilities to help grow New Mexico's economy by making investments in quality New Mexico businesses, companies and venture funds. The New Mexico Co-Investment Partnership is central to this program's success and is managed by Sun Mountain Capital. For more information on the New Mexico Private Equity Investment Program, visit the SIC website at the State receives a percentage of the production's post break even revenues. Each project applying for a loan is judged on its individual investment merits and overall potential for financial success, with the likelihood of increased jobs, in-state expenditures, rural economic development, and and local tourism serving as secondary factors in the final investment decision. For more complete information including policies and previous film investments, go to the SIC website. Investment Policies The State Investment Council has established and maintains a number of investment policies that govern the activities of the Investment Office. These policies are reviewed on an annual basis by members of the State Investment Council and will be posted on the SIO web site as each one is updated. Public Information The State Investment Office staff maintains a World Wide Web page on the Internet to provide more information on the Trust Funds to the public. The current web page contains the Annual Report as performance data, information on requests for proposals, investment programs offered by the SIO, meeting information and minutes for the State Investment Council & Private Equity Advisory Group. Additional information is being added to the web site as it becomes available. New Mexico's Film Investment Program The State of New Mexico under the Richardson administration is actively pursuing film and television productions and the State Investment Council's film investment program is a critical element of the very competitive incentive package now being offered by the state of New Mexico. The principal of the State's loan must be guaranteed by a bank or investment grade entity, and in lieu of interest, New Mexico State Investment Council Annual Report 52

59 New Mexico State Investment Council Annual Report New Mexico State Investment Council 2055 South Pacheco Street Suite 100 Santa Fe, NM Tel: Fax: Volume 24 : State Investment Council Annual Report Contributing Editors: Gary Bland Adam Levine Rick Scroggins Charles Wollmann Graphic Design and Printing Godfried Konings, ARGK LLC Printing: GetType, Santa Fe Staff photo: writewithlight.com Photo Credits: NM Dept. of Tourism Dreamstime Stock Images