Report on Investment Activity

Transcription

1 Investment

2 Report on Investment Activity 104 TMRS Comprehensive Annual Financial Report 2012

3 Report on Investment Activity Continued TMRS Comprehensive Annual Financial Report

4 Outline of Investment Policies The TMRS Board of Trustees approves the Investment Policy Statement (IPS), which governs the investment of assets for TMRS and is established to provide a framework for the management of those assets. It sets forth the Board s investment objectives and tolerance for investment risk. The IPS outlines objectives, benchmarks, restrictions, and responsibilities so that members of the Board, TMRS staff, investment managers, consultants, and TMRS stakeholders clearly understand the policies, goals and objectives, and risks connected with the TMRS investment program. Investment Objectives The overall objective of TMRS investment program is to ensure that members, retirees, and beneficiaries are provided with the benefits they have been promised by their employers at a reasonable and predictable cost to the employers. Assets will be invested for total return with appropriate consideration for portfolio volatility (risk) and liquidity. Emphasis is on both capital appreciation as well as the production of income in order to satisfy the short-term and long-term funding needs of TMRS. Total return includes dividends, interest, and realized and unrealized capital appreciation. General Investment Policies A. Standard of Prudence Applicable. All participants in the investment process will act responsibly. The standard of prudence to be applied by the Board and investment staff is as follows: 1. The Board and staff shall exercise the degree of judgment and care, under the circumstances that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, considering the probable income from the securities and probable safety of their capital and in consideration of the purposes, terms, distribution requirements, and other circumstances of the trust. 2. Investment and management decisions respecting individual assets will be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. B. Conflict of Interest Prohibited. Members of the Board of Trustees, investment staff, investment managers, and consultants involved in the investment of TMRS assets will refrain from personal business activity that could conflict with the proper execution and management of the TMRS investment program, or that could impair their ability to make impartial recommendations and decisions. These parties are required to reveal all relationships that could create or appear to create a conflict of interest in their unbiased involvement in the investment process. Portfolio Management The Board of Trustees recognizes that the most important determinant of long-term return and risk is the asset allocation decision. The Board s strategic target allocation is intended to reflect, and be consistent with, the return objective and risk tolerance expressed in the IPS. It is designed to provide the highest probability of meeting or exceeding the Board s objectives at a controlled level of risk and liquidity that is acceptable to the 106 TMRS Comprehensive Annual Financial Report 2012

5 Outline of Investment Policies Continued Board. In establishing its risk tolerance, the Board considers its ability to withstand short and intermediate-term volatility in investment performance and fluctuations in the financial condition of the fund. The strategic target allocation and acceptable ranges as determined by the Board to facilitate the achievement of long-term investment objectives within acceptable risk parameters are as follows: Asset Allocation Table Strategic Targets Asset Class Minimum % Target % Maximum % U.S. Equities 12.5% 17.5% 22.5% International Equities 12.5% 17.5% 22.5% Core Fixed Income 25.0% 30.0% 40.0% Non-Core Fixed Income 5.0% 10.0% 15.0% Real Estate 5.0% 10.0% 15.0% Real Return 2.0% 5.0% 10.0% Absolute Return 0.0% 5.0% 10.0% Private Equity 0.0% 5.0% 10.0% Cash Equivalents 0.0% 0.0% 10.0% The Board will authorize implementation to this strategic target allocation in stages. To ensure that the risk tolerance remains appropriate, the strategic target allocation will be reviewed at least annually for reasonableness relative to significant economic and market changes or to changes in the Board s long-term goals and objectives. A formal asset allocation study will be conducted at least every three years to verify or amend the targets and a formal pension financial (asset-liability) study will be conducted at least every five years. The Board has chosen to adopt a re-balancing policy that is governed by allocation ranges rather than time periods. The ranges, specified in the table above, are a function of the volatility of each asset class and the proportion of the total fund allocated to the asset class. While the allocation to all asset classes remains within these limits, staff will allocate available cash flow to underweighted asset classes according to current market conditions. When any one of the asset classes hits a trigger point (i.e., falls outside the minimum or maximum limits), the entire fund will be re-balanced back to asset class target allocations, or halfway to the target allocation, as market conditions permit. TMRS Comprehensive Annual Financial Report

6 Summary of Investments Short-term Investments As of December 31, 2012 As of December 31, 2011 Fair Value Percent of Total Fair Value Fair Value Percent of Total Fair Value Short-term investment funds $ 55,943, % $ 99,028, % U.S. Treasury bills 332,596, ,399, Broker collateral (965,000) (0.0) - - Repurchase agreements ,600, Total short-term investments 387,575, ,028, Core Fixed Income U.S. Treasury bonds/notes 3,006,942, ,315,305, U.S. Treasury inflation-protected 140,209, ,185, U.S. government agency 495,270, ,345, Municipal 179,165, ,201, Corporate 2,640,220, ,819,745, Residential mortgage-backed 3,427,666, ,917,382, Commercial mortgage-backed 100,749, ,552, Other asset-backed 50,349, ,866, Foreign government 111,053, ,467, Total core fixed income 10,151,625, ,751,052, Real Return - Global Inflation-linked Bonds U.S. Treasury bonds/notes 9,865, ,714, U.S. Treasury inflation-protected 237,906, ,942, Foreign government inflation-linked 414,123, ,776, Foreign government 321,639, ,841, Corporate 2,945, Forward currency contracts (1,536,236) (0.0) 1,856, Total real return 984,943, ,130, U.S Equities 4,416,058, ,796,989, International Equities 4,299,049, ,668,624, Real Estate Real estate securities 49,617, Real estate funds 338,688, ,000, Total real estate 388,305, ,000, TOTAL INVESTMENTS $ 20,627,559, % $ 18,464,825, % Note: The above table reflects assets in categories consistent with the strategic target allocation, and therefore may differ from the NOTE: The above table reflects investment assets in categories consistent with the strategic target allocation, and therefore may differ from the presentation within the Notes to the Financial Statements. presentation within the Notes to the Financial Statements. 108 TMRS Comprehensive Annual Financial Report 2012

7 2012 Asset Allocation International Equities 20.8% Real Estate 1.9% Short-Term Investments 1.9% U.S. Equities 21.4% Core Fixed Income 49.2% Real Return 4.8% Largest Holdings (by Fair Value) Fixed Income Securities As of December 31, 2012 Par Value Description Fair Value $ 706,025,000 U.S. Treasury Note: 0.375%, due 11/15/2015, Rating AAA $ 706,688, ,620,000 U.S. Treasury Note: 0.25%, due 11/30/2014, Rating AAA 697,647, ,885,000 U.S. Treasury Note: 0.625%, due 11/30/2017, Rating AAA 492,225, ,645,460 Federal Home Loan PC Pool A95825: 4.000%, due 12/01/2040, Rating AAA 204,771, ,700,000 U.S. Treasury Note: 0.875%, due 12/31/2016, Rating AAA 182,170, ,594,700 U.S. Treasury Note: 2.750%, due 08/15/2042, Rating AAA 131,899, ,762,153 FNMA Pool AL1711: 4.500%, due 08/01/2041, Rating AAA 130,415, ,500,000 FHLMC Gold TBA: 4.500%, Jan 30-Year, Rating AAA 121,782, ,243,747 GNMA II Pool MA0534: 3.500%, due 11/20/2042, Rating AAA 114,492, ,000,000 U.S. Treasury Note: 2.000%, due 11/15/2021, Rating AAA 110,016,340 Equity Index Funds As of December 31, 2012 Shares/Units Description Fair Value 222,564, NTGI - QM Collective Daily Russell 3000 Index Fund - Non Lending $ 4,216,921,393 36,101, NTGI - QM Collective Daily All Country World Ex US IMI Index Fund - Non Lending 4,098,555,872 1,999, UBS World (Ex-U.S.) Equity Minimum Volatility Index Collective Fund 200,494,105 2,000, UBS U.S. Equity Minimum Volatility Index Collective Fund 199,137,400 TMRS Comprehensive Annual Financial Report

8 Largest Holdings (by Fair Value) Continued Real Estate Securities As of December 31, 2012 Shares/Units Description Fair Value 33, Simon Property Group Inc REIT $ 5,216,970 53, American Tower Corp REIT 4,149,399 66, Health Care Inc REIT 4,045,140 34, SL Green Realty Corp REIT 2,621,430 86, Weyerhaeuser Co REIT 2,414,776 22, Boston Properties Inc REIT 2,327, , Medical Properties Trust Inc REIT 1,925,560 90, KIMCO Realty Corp REIT 1,738,800 80, General Growth Properties REIT 1,588,000 58, Apartment Investment and Management Co REIT 1,569,480 Note: Space and cost restrictions make it impractical to print a detailed listing of the investment portfolio in this report; however, a portfolio listing is available and will be mailed upon request Investment Results 1 Year 3 Years 5 Years 10 Years TMRS Total Return 10.11% 7.13% 5.99% 6.32% Total Fund Active Weighted Benchmark 9.39% 6.84% 5.79% 5.80% TMRS Fixed Income Return 4.94% 6.48% 5.57% 6.10% Fixed Income Benchmark 4.21% 6.19% 5.42% 5.61% TMRS Real Return (1) 10.83% Barclay's World Government Inflation-Linked Index (1) 6.95% CPI + 4% (1) 5.80% TMRS Domestic Equity Return (2) 16.33% 11.17% - - Russell 3000 Index (2) 16.42% 11.20% - - TMRS Non-US Equity Return (3) 17.23% 3.25% - - Non-US Equity Benchmark (3) 17.04% 3.07% - - TMRS Real Estate Return (4) 12.63% NCREIF-ODCE (4) 10.94% (1) The inception date of this portfolio is 2/1/2011, and therefore three-year, five-year, and ten-year returns are not provided. As of 12/31/2012, inception-to-date returns were 9.02% and 8.86% for TMRS Real Return and the Barclays World Government Inflation-Linked Index, respectively. The policy benchmark for the Real Return asset class is the CPI + 4%; however, until further diversification within the asset class occurs, the portfolio benchmark for global inflation-linked bonds is used. (2) The inception date of this portfolio is 1/4/2008, and therefore five-year and ten-year returns are not provided. As of 12/31/2012, inception-to-date returns were 2.89% and 2.90% for TMRS Domestic Equity return and the Russell 3000 Index, respectively. 110 TMRS Comprehensive Annual Financial Report 2012

9 2012 Investment Results Continued (3) The inception date of this portfolio is 1/4/2008, and therefore five-year and ten-year returns are not provided. As of 12/31/2012, inception-to-date returns were -3.36% and -3.58% for TMRS Non-U.S. Equity return and the Non-U.S Equity Benchmark, respectively. (4) The inception date of this portfolio is 11/1/2011, and therefore three-year, five-year, and ten-year returns are not provided. Due the treatment of partial periods for performance calculations, inception-to-date returns equal the one-year returns presented. Note: Rates of return presented are calculated using a time-weighted rate of return methodology based upon market values, and are presented gross of investment management fees. Total Fund Active Weighted Benchmark The Total Fund Active Weighted Benchmark is weighted by the average balance of all funds and is comprised of all benchmarks associated with each fund/composite. Fixed Income Benchmark The Fixed Income Benchmark is weighted by the average balance of fixed income funds and is comprised of 100% Barclays Capital U.S. Aggregate Bond Index beginning July 1, 2009, and 100% Barclays Capital Long Government/Credit Index prior to July 1, Barclays Capital U.S. Aggregate Bond Index This index covers the U.S. investment-grade fixed rate bond market, including government and corporate securities, agency mortgage pass-through securities, and asset-backed securities. To be included in the index, these securities must meet certain criteria. Major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. Barclays Capital U.S. Long Government/Credit Index This index measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollardenominated bonds with maturities longer than 10 years. Barclay s World Government Inflation-Linked Index This index includes only government issuers of inflation-linked bonds in the following major markets: Australia, Canada, France, Germany, Italy, Japan, Sweden, U.K., and the U.S. CPI The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Russell 3000 Index This index measures the performance of 3,000 publicly held U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. market. Non-U.S. Equity Benchmark The Non-U.S. Equity Benchmark is weighted by the average balance of international funds applied to each corresponding benchmark (MSCI EAFE and MSCI All Country World ex U.S. Investable Market Index) return. MSCI EAFE Index This is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. MSCI All Country World ex U.S. Investable Market Index This is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging makets, excluding the U.S. NCREIF-ODCE The National Council of Real Estate Fiduciaries - Open End Diversified Core Equity (NCREIF-ODCE) is a capitalization-weighted index of investment returns reporting on both a historical and current basis the results of 28 open-end commingled funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. Presented below is the 5-Year Risk-Adjusted Return of the TMRS Total Return in comparison to that of the Total Fund Active Weighted Benchmark. The Sharpe Ratio is used, which measures excess return per unit of total risk. It is calculated by taking the excess return over the risk-free rate, divided by the standard deviation of the excess return; the higher the value, the better the historical risk-adjusted performance. As of December 31, 2012 TMRS Total Fund Active Weighted Benchmark 5-Year Risk-Adjusted Return TMRS Comprehensive Annual Financial Report

10 Schedule of Investment Expenses For the Year Ended December 31, 2012 Internal operating expenses Staff salaries $ 967,387 Contract labor 1,404 Payroll taxes 59,758 Retirement contributions 154,164 Insurance 80,197 Electronic investment services 603,101 Travel 46,638 Dues, subscriptions, and training 58,552 Other administrative expenses 1,857 Total 1,973,058 Investment management and other external expenses Investment management 11,665,221 Consulting services 693,890 Legal 157,560 Total 12,516,671 TOTAL INVESTMENT EXPENSES $ 14,489,729 Asset Class External Investment Manager Fees Net Assets Under Management at December 31, 2012* Cost Rate (bps)** Core Fixed Income BlackRock Financial Management, Inc. $ 2,898,840 $ 8,313,682, Core Fixed Income Pacific Investment Management Company (PIMCO) 3,854,470 1,981,646, Real Return Colchester Global Investors 1,546, ,322, Equity Index Funds - U.S. Northern Trust Global Investments 843,976 4,216,921, Equity Index Funds - U.S. UBS Global Asset Management Trust Company 7, ,137, Equity Index Funds - International Northern Trust Global Investments 1,690,187 4,098,555, Equity Index Funds - International UBS Global Asset Management Trust Company 5, ,494, Real Estate Securities Harrison Street Securities, LLC 9,802 50,199, TOTALS $ 10,857,501 $ 20,053,960, Note: The above schedule excludes management fees of private real estate funds, which total $5,071,055 in Fees for such funds are typically not paid directly, but are instead incurred and paid through the operations of the funds; however, one fund did have direct payments of $807,720 in * Includes market value of securities, accrued interest, and net receivable/(payable) for open trades. ** Cost rate in basis points (bps) calculated using average monthly net assets under management. 112 TMRS Comprehensive Annual Financial Report 2012