Fiscal Year 2016 Investment Plan

Transcription

1 IRE ME N SY IVERSITIES ET T R LI NO E UN S T E M OF IL SURS Fiscal Year 2016 Investment Plan State Universities Retirement System September 2015 I S S TA T

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3 August 28, 2015 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) Investment Department Board of Trustees State Universities Retirement System 1901 Fox Drive Champaign, IL RE: Fiscal Year 2016 Investment Plan Dear Board of Trustees: The Investment Staff is pleased to provide the SURS Investment Plan for Fiscal Year This document was developed in order to formalize the strategic plans for the investment portfolio for the coming year and provide transparency of the planning process. The Investment Plan for Fiscal Year 2016 marks the fifth year of the formal plan for the SURS investment program. The Investment Plan reviews the results of Fiscal Year 2015 and defines the strategy for Fiscal Year 2016 in accordance with the Board-approved asset/liability study and Investment Policy. Since financial markets are dynamic, revisions to the plan may be required and will be communicated to the Board in a timely manner. The SURS portfolio returned 2.9% during Fiscal Year 2015, net of fees, matching the policy portfolio return. Exposure to direct real estate, the best performing asset class for the period, proved beneficial, as evidenced by the +11.1% return of the NCREIF ODCE Index, an index of open end direct real estate funds. Strong relative investment manager performance, particularly in U.S., non-u.s. equity, global equity and direct real estate, also was additive to performance. Although private equity provided modest returns during the year, it lagged the public equity market benchmark, detracting from relative returns during the period. From a long term perspective, the SURS portfolio has performed well, earning an 8.3% annualized rate of return over the past 25 years, well in excess of both the policy portfolio return and the 7.25% assumed rate of return. When compared to a universe of other large public funds, the SURS return ranks near median for the year ending June 30, The portfolio ranks in the top third of large public plans over the five- and ten-year periods. As of June 30, 2015, the defined benefit plan is valued at approximately $17.2 billion while the Self-Managed Plan (SMP) is valued at approximately $1.7 billion. Many of the projects completed during FY 2015 focused on continuing implementation of the asset allocation policy targets approved by the SURS Board in June The new policy targets focus on increased portfolio diversification, with a reduction in the equity allocation

4 and new commitments to emerging market debt, commodities and hedged strategies. SURS completed searches in emerging market debt and non-core real estate. In addition, SURS took steps to continue its longstanding presence in the alternative investment marketplace, with additional commitments of approximately $250 million to private equity investments during the year. In total, asset reallocations of approximately $1 billion took place during the fiscal year. Asset allocation implementation will continue to drive many of the projects slated for Fiscal Year Searches are either underway or planned for qualified providers in hedged strategies, commodities, and emerging manager private equity. In total, asset reallocations of approximately $1.5 billion are anticipated during FY The Manager Diversity Program (MDP), which focuses on qualified investment management firms owned by minorities, females, and persons with a disability (MFDB), continues to be a high priority. As of June 30, 2015, the MDP is valued at approximately $2.6 billion. In total, assets under management with MFDB firms are approaching $4.5 billion or 25.9% of the Total Fund. The continuing challenge to SURS remains the funding status of the Plan. Despite strong long term returns, SURS remains substantially underfunded. SURS is approximately 44.6% funded as of June 30, The unfunded liability is estimated to be approximately $21.5 billion. It is important to note, however, that since FY 2011, SURS has received the full annual statutory contribution from the State of Illinois. The System s cash needs are projected to increase during the coming fiscal year. SURS expects to pay approximately $2.31 billion in benefit payments in Fiscal Year 2016 per the Fiscal Year 2014 actuarial valuation report prepared by SURS actuary, Gabriel Roeder Smith & Company. Investment performance alone cannot bridge the funding gap. The Investment Plan for Fiscal Year 2016 contains additional details on Fiscal Year 2015 accomplishments and investment strategies for Fiscal Year The investment team is focused on implementing the long term strategic policy targets and prudently positioning the portfolio for the future. A long term focus is of utmost importance. I look forward to discussing the Fiscal Year 2016 Investment Plan at future meetings. Sincerely, Daniel L. Allen Chief Investment Officer cc: W. Bryan Lewis, Executive Director

5 FY 2016 Investment Plan Table of Contents Page I. Purpose...1 II. Overview 2 Background Fiscal Year 2015 Performance Review Fiscal Year 2015 Accomplishments Challenges Trustee Education Corporate Governanace Investment Management Fees Staffing Outreach III. Long Term Vision Evolution of Investment Portfolio Strategies for Further Consideration IV. Asset Allocation / Risk Management 14 V. Economic Outlook..21 VI. Fiscal Year 2016 Portfolio Strategies Total Fund Equity Fixed Income Real Estate Private Equity Hedged Strategies Opportunity Fund Commodities VII. Manager Diversity Program 32 VIII. Self-Managed Plan SURS Investment Update (June 30, 2015).....APPENDIX A Summary of Investment Projects APPENDIX B

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7 I. Purpose The Investment Plan reviews the results of Fiscal Year 2015 and defines the strategy for Fiscal Year 2016 in accordance with the Board-approved asset/liability study and Investment Policy 1. This Plan is intended to be a living document. Since financial markets are dynamic, revisions to the plan may be required during the year. In the event of changing circumstances or opportunities during the year, items will be discussed with the Board as necessary. 1 The SURS Investment Policies can be found at 1 F Y2016 Investment Plan

8 II. Overview Background The State Universities Retirement System (SURS) is the administrator of a cost-sharing, multiple employer public employee retirement system. SURS membership includes employees of the public universities and other affiliated organizations. Currently, SURS membership totals more than 229,000 active, inactive and retired participants. SURS maintains both a defined benefit and a defined contribution plan, known as the Self-Managed Plan (SMP). As of June 30, 2015, the defined benefit plan is valued at approximately $17.2 billion while the SMP is valued at approximately $1.7 billion. The investment portfolio is broadly diversified across equities, fixed income, real estate, private equity, commodities and other opportunistic investments. Approximately 44% of the portfolio is currently managed in passive or structured active strategies while the remaining 56% is managed in active strategies. Fiscal Year 2015 Performance Review Global financial markets provided mixed performance amid increasing volatility over the course of the fiscal year. Improving economic fundamentals in the United States helped to propel domestic equity markets higher for the year, returning 7.2%, as measured by the Dow Jones U.S. Total Stock Market Index. However, non-u.s. equity markets struggled due to political and economic turmoil, returning -5.3%, as measured by the MSCI All Country World ex-u.s. Index. Interest rates remain at low levels globally although the consensus appears to be that the Federal Reserve will tighten rates in the U.S. later in Core fixed income returned 1.9% during FY 2015 while Treasury Inflation Protected Securities declined by 1.7% during the fiscal year period. The table below illustrates the performance of the overall SURS investment portfolio relative to the policy portfolio, as of June 30, Investment Performance* As of June 30, Year 3 Years 5 Years 10 Years 20 Years 25 Years SURS 2.9% 11.0% 11.2% 7.1% 8.2% 8.3% Policy Portfolio 2.9% 10.9% 11.3% 7.1% 8.0% 7.9% *Net of investment management fees The SURS portfolio returned 2.9% during Fiscal Year 2015, matching the policy portfolio return. Exposure to direct real estate, the best performing asset class for the period, proved beneficial, as evidenced by the +11.1% return of the NCREIF ODCE Index, an index of open end direct real estate funds. Strong relative investment manager performance, particularly in U.S. equity, non- U.S. equity, global equity and direct real estate, also was additive to performance. Although private equity provided modest returns during the year, it lagged the public equity market benchmark, detracting from relative returns during the period. From a long term perspective, the 2 FY2016 Investment Plan

9 SURS portfolio has performed well, earning an 8.3% annualized rate of return over the past 25 years, well in excess of both the policy portfolio return and the 7.25% assumed rate of return 2. When compared to a universe of other large public funds, the SURS return ranks near median for the year ending June 30, 2015, as illustrated in the chart below. The portfolio ranks even more favorably in the peer universe over longer time periods. SURS Total Fund vs. Public Funds > $1 Billion Periods Ending 6/30/15 (1 = Best, 100 = Worst) Universe Ranking th 55th 39th 37th 27th 31st 18th 15th Year 3 Years 5 Years 10 Years TUCS Universe > $1B (GOF) InvestorForce Public DB > $1B Fiscal Year 2015 Accomplishments The following projects were completed during Fiscal Year In total, asset reallocations of approximately $1 billion took place during the fiscal year. Cash Overlay Program - Parametric Portfolio Associates was selected by the Board in March 2014 to manage the cash overlay program. The strategy was initiated in September As discussed at the September 2014 Investment Committee meeting, Parametric implemented a 2% passive commodities allocation until such time as a search for active commodities managers can be completed. The cash overlay manager assists in managing daily portfolio cash flows and efficiently rebalancing the portfolio. Self-Managed Plan (SMP) A Request for Proposal was released in May 2015 to identify two or more qualified SMP service providers. The process is currently ongoing and is expected to conclude in the fall of Private Equity SURS committed $125 million each to Pantheon Ventures and Adams Street Partners to continue SURS investment in global private equity. These commitments, made in accordance with the current private equity funding plan, allow for 2 On June 13, 2014, the SURS Board of Trustees approved lowering the System s assumed rate of investment return to 7.25% from 7.75%. The rate was effective as of June 30, (July 2, 2015 was the effective date for the change in the Money Purchase Factors.) 3 F Y2016 Investment Plan

10 consistent funding by vintage year and further enhance the diversification of the private equity portfolio. Emerging Market Debt (EMD) A search was completed for qualified emerging market debt managers, which resulted in the hiring of three investment managers and expansion of the mandate with Progress Investment Management Company, SURS manager of emerging managers provider. BlueBay Asset Management, Colchester Global Investors, and Prudential Fixed Income were retained to manage EMD portfolios. Full funding of the 3% emerging market debt allocation, totaling approximately $520 million, was completed during FY Real Estate A search was completed for qualified non-core real estate managers, resulting in the hiring of one fund-of-funds provider and three direct real estate investment managers. Franklin Real Asset Advisors was awarded a $90 million commitment to identify minority-, female- and persons with a disability-owned real estate investment managers. In addition, SURS committed $35 million each to Blue Vista Capital Management, Brookfield Asset Management and Crow Holdings Capital. Commitments to the four managers totaled $195 million and are in accordance with the current real estate funding plan approved during Fiscal Year Hedged Strategies A search was initiated to identify diversified, multi-strategy Fund of Hedge Fund providers. This search represents phase I of the implementation of the 5% hedged strategies allocation approved at the June 2014 meeting. The search process is currently underway and is expected to be completed in the fall of Commodities In June 2015, the Board approved a search to identify qualified active commodities managers. The search is currently underway and is tentatively expected to conclude in December Alternative Investments SURS made net contributions of $103 million to the alternative investments program during calendar 2014, as shown in the following table. In total, the combined alternative investments program made $432 million in contributions and received $329 million in distributions during calendar year Asset Class Alternative Investment Cash Flows Calendar Year 2014 Cash Distributions ($MM) Cash Contributions ($MM) Net Flows ($MM) Private Equity $ 290 $ (124) $ 166 Direct Real Estate 35 (300) (265) Infrastructure 4 (8) (4) Total Alternative Investments $ 329 $ (432) $ (103) *Totals may not add due to rounding. 4 FY2016 Investment Plan

11 Commitment to Diversity SURS continues to be strongly committed to diversity throughout the investment program. In total, 21 firms owned by minorities, females, or persons with a disability (MFDB) directly manage a total of $4.5 billion, or 25.9% of the Total Fund, as of June 30, SURS employs a multi-strategy approach designed to maximize opportunities for qualified firms. The Manager Diversity Program (MDP) is a SURS-sponsored initiative designed to identify and provide opportunities to highly successful MFDB investment management firms. Managers in the MDP contract directly with SURS. As of June 30, the MDP totals $2.6 billion and includes 19 minorityor female-owned investment managers. Increase in MDP assets of approximately $763 million during fiscal year Second, SURS has retained Progress Investment Management (Progress), a minority-owned firm, to serve as a manager of emerging managers. This collaboration with Progress allows SURS to extend its reach into the minority manager universe. As of June 30, the Progress program includes 24 minority- or female-owned investment managers and has total assets of $752 million. Increase of $81 million during Fiscal Year It is important to note that SURS commitment to diversity extends beyond the bounds of the MDP and the Manager of Emerging Managers Program. In addition to the firms previously mentioned, SURS contracts with two other MFDB firms, bringing the total number of MFDB firms in direct partnership with SURS to 21. As mentioned previously, assets managed for SURS by these 21 firms are approaching $4.5 billion, or 25.9% of the Total Fund, as of June 30, Increase of over $228 million from last year s level of $4.3 billion. Slight increase in percentage terms, from 24.5% to 25.9%. Trustee Education Various educational topics were addressed during FY 2015, including the Diversity Workshop in September 2014, which included a panel forum discussing actions taken and suggesting potential steps SURS can pursue to further increase diversity within the Investment Program, and a Trustee Educational Forum in February Challenges The continuing challenge to SURS remains the funding status of the Plan. Despite strong long term returns, SURS remains substantially underfunded. SURS is approximately 44.6% funded, as of June 30, 2015 (using the market value of assets method and a 7.25% return assumption), a slight decrease from 46.5% funded, as of June 30, F Y2016 Investment Plan

12 Funding Ratio 100.0% 80.0% 60.0% 40.0% 20.0% 88.2% SURS Funding Ratio* FY2000 to FY % 65.4% 72.1% 65.6% 68.4% 58.5% 58.9% 53.9% 40.2% 41.3% 45.3% 41.9% 43.7% 46.5% 44.6% 0.0% Fiscal Year *Using market value of assets The unfunded liability is estimated to be approximately $21.5 billion. It is important to note, however, that since FY 2011, SURS has received the full annual statutory contribution from the State of Illinois. The FY 2015 contribution is $1.5 billion. During FY 2015, the Illinois Supreme Court declared the pension reforms passed during FY 2014 unconstitutional. Although the ruling provided clarity on this particular reform package, uncertainty continues as the Illinois legislature continues to discuss pension reform measures. Such uncertainty complicates the long-term planning of both the SURS organization and the investment portfolio. Any reforms that are upheld by the courts will likely result in an improvement to the funded status; however, the impact on cash needs for benefit payments and future state contributions is less certain. $2,500 $2,000 $1,500 Total Benefit Expenditures (in $ Millions) The Plan s cash needs continue to increase. SURS expects to pay approximately $2.31 billion in benefit payments in Fiscal Year 2016, per the Fiscal Year 2014 actuarial valuation report prepared by SURS actuary, Gabriel Roeder Smith & Company. $1,000 $500 $0 6 FY2016 Investment Plan

13 Trustee & Staff Education SURS strives to provide high quality continuing education for the Board of Trustees and the staff. Educational topics are routinely included on Investment Committee agendas. In addition, longer, more in-depth educational sessions, often faciliated by guest speakers, are provided in periodic Investment Forums. These sessions provide both staff and Trustees the opportunity to expand their investment knowledge and keep current with new trends in the marketplace. Input is sought from Trustees on topics of interest for future educational sessions. A key focus is on identifying potential investment opportunities that could positively impact the investment portfolio. Potential educational topics being considered for the coming year include: Asset Allocation & Portfolio Strategy Commodities Hedged Strategies Private Equity Real Estate Fee Considerations Fixed Income Public Equity Board Governance relating to Investment Committee Corporate Governance SURS continues to place a high priority on corporate governance. Proxy voting is one important component of the System s corporate governance responsibilities. SURS has retained an industry expert, Marco Consulting Group, to ensure that all domestic proxy ballots are voted in accordance with the proxy voting guidelines approved by the Board. Proxies of non-domestic shares are voted by SURS investment managers in the exclusive interests of System participants and beneficiaries. During fiscal year 2015, Marco Consulting Group provided an annual summary of the 2015 proxy season to the SURS Board. The Board also conducted an annual review and approval of the SURS Proxy Policy Statement. A search for a provider of proxy voting services will likely be considered during the Summer of Additional actions pertaining to corporate governance include membership in the Council for Institutional Investors (CII), a nonprofit organization of pension funds, foundations, and endowments with combined assets of over $3 trillion. CII s mission is to educate its members, policymakers and the public about corporate governance, shareowner rights and related investment issues, and to advocate on members behalf. In addition, SURS is a signatory to the United Nations-backed Principles for Responsible Investment (PRI) initiative. The PRI initiatives are voluntary principles that acknowledge the importance of environmental, social and corporate governance (ESG) issues to company performance. SURS strives to keep abreast of trends and issues in this area and continues to explore efforts that might safeguard the value of the investment portfolio. SURS seeks to raise awareness of PRI with others in the investment management industry. Currently, NEPC, SURS investment consultant, and 14 of SURS investment managers are signatories to PRI, representing over half of the SURS assets. 7 F Y2016 Investment Plan

14 Investment Management Fees SURS pays close attention to the level of investment management fees paid to its external investment managers. Fees are negotiated with investment managers prior to the commencement of the relationship with SURS and may be subsequently renegotiated, if appropriate, especially in instances where an investment manager receives an additional allocation(s). Fees vary significantly among investment managers, with the services of private markets managers, such as those in real estate, private equity, infrastructure, etc., being generally higher than those of public markets managers. During fiscal year 2015, staff negotiated more favorable fee arrangements with four new and existing investment managers. In aggregate, these fee reductions are expected to result in approximately $1.2 million in fee savings. In total, SURS paid $54.9 million or approximately 32 basis points in investment management fees and administrative expenses for fiscal year Total investment management fees for fiscal year 2016 are projected to increase by approximately $10.1 million from fiscal year 2015 budgeted fees. Staffing The Investment Department is made up of seven investment professionals. The Senior Investment Accounting Officer also works in tandem with the Investment Department and is an integral part of overall investment operations. In the past year, SURS experienced the departure of one Investment Officer and is currently in the process of filling the resulting vacant position. SURS Investment Team members have an average of over 20 years investment experience. All investment team members have undergraduate degrees, with the majority also holding graduate degrees. Professional certifications among the team members include two Certified Public Accountants (CPA), three Chartered Financial Analysts (CFA), and one Chartered Alternative Investment Analyst (CAIA). During the past several years, SURS has been increasing the portfolio s allocation to alternative investments. While alternative assets offer the benefits of diversification and potential return enhancement, they also require more intensive staff resources for administration and monitoring. Accordingly, as allocations to private market investments have increased, the investment staff has grown modestly in response. During Fiscal Year 2014, approval was granted to add two net new positions to the investment staff. One of the positions has been filled while the other position is currently vacant and in the process of being filled. These new hires will augment staff resources to monitor and administer the investment portfolio. Staffing needs will continue to be assessed going forward. The SURS Investment Department employed two interns for the summer of 2015 from Eastern Illinois University. The interns were placed with the assistance of the Toigo Foundation. SURS is committed to staff development and training to assist employees in realizing their maximum potential. In addition, SURS continues to strive to maintain competitive compensation and promote a positive workplace environment for all employees. 8 FY2016 Investment Plan

15 The table below lists the individuals on the SURS Investment Team and their tenure with SURS. Name Title Years with SURS Daniel L. Allen Chief Investment Officer 15 Douglas C. Wesley, CPA, CFA Deputy Chief Investment Officer 18 Kimberly K. Pollitt, CFA Senior Investment Officer 12 Joseph M. Duncan Senior Investment Officer 5 Shane P. Willoughby, CFA, CAIA Investment Officer 1 Alex Ramos Investment Officer 1 Vacant Investment Officer - Lou Ann Fillingham, CPA Senior Investment Accounting Officer 10 Kelly Valle Graduate Investment Intern <1 Sumesh Regmi Graduate Investment Intern <1 An organizational chart of the Investment Department is shown on the following page. 9 F Y2016 Investment Plan

16 SURS Investment Department Organization Chart June 30, 2015 Senior Investment Accounting Officer 10 FY2016 Investment Plan

17 Outreach SURS believes active involvement in the investment community is beneficial at both the individual and organizational levels. Continuing education, networking opportunities and increased organizational visibility are a few of the many benefits. The list below highlights the various organizations of which SURS or SURS investment staff are members: American Institute of CPAs (AICPA) CFA Institute CFA Institute of Chicago Chartered Alternative Investment Analyst Association Council of Compliance Officers Council of Institutional Investors Institutional Limited Partners Association (ILPA) Institutional Society of Risk Professionals (ISRP) National Association of Securities Professionals (NASP) National Association of State Investment Officers (NASIO) National Association of State Investment Professionals (NASIP) New America Alliance Pension Real Estate Association Robert Toigo Foundation Board of Directors United Nations Principles for Responsible Investment (UNPRI) In addition, SURS staff attended and/or participated as panelists in several investment-related conferences throughout the fiscal year. SURS staff also attended a myriad of advisory council and annual meetings for SURS investment managers as part of annual due diligence efforts. 11 F Y2016 Investment Plan

18 III. Long Term Vision Evolution of SURS Investment Program Investment Portfolio The investment portfolio has undergone meaningful change over the past several years as a result of the availability of new investment strategies and changes in capital market assumptions. The table and chart below highlights the migration of the Plan s asset allocation since July July 1, 2003 Strategic Policy % June 30, 2015 Strategic Policy % Difference (%) U.S. Equity 42.0% 23.0% -19.0% Non-U.S. Equity 19.0% 19.0% +0.0% Global Equity 0.0% 8.0% +8.0% Total Public Equity 61.0% 50.0% -11.0% Core Fixed Income 29.0% 19.0% -10.0% Emerging Market Debt 0.0% 3.0% +3.0% TIPS 0.0% 4.0% +4.0% Total Fixed Income 29.0% 26.0% -3.0% Private Equity 3.0% 6.0% +3.0% Real Estate 2.0% 10.0% +8.0% Hedged Strategies 0.0% 5.0% +5.0% Opportunity Fund 5.0% 1.0% -4.0% Commodities 0.0% 2.0% +2.0% Total Alternatives 10.0% 24.0% +14.0% Total Fund 100.0% 100.0% % of Portfolio Evolution of SURS Asset Allocation Total Equity Total Fixed Income July 1, 2003 June 30, 2015 Total Alternatives The most notable differences include a decrease in the policy targets for total public equities (from 61.0% to 50.0%) and core fixed income (from 29.0% to 19.0%). The reduction in public equities and core fixed income has lead to increased allocations to alternatives, including private equity (+3.0%) and real estate (+8.0%). To further diversify the portfolio, new strategic policy allocations to TIPS (4.0%), emerging market debt (3.0%), hedged strategies (5.0%) and commodities (2.0%) have been established. SURS entered the TIPS marketplace in 2004 while the Board approved allocations to emerging market debt, hedged strategies and commodities in Another notable difference is the increasingly global nature of the total public equity portfolio. Since July 1, 2003, U.S. exposure has declined from 69% to 54% of the total public equity exposure, reducing the home country bias. SURS first invested in global equity mandates in The reduced strategic policy allocation to public equities and core fixed income is a result of lower return expectations in these asset classes after periods of above trend returns. By allocating assets from public equities and core fixed income to other areas such as TIPS, 12 FY2016 Investment Plan

19 emerging market debt, hedged strategies and commodities, SURS is able to reduce the overall expected risk of the portfolio while maintaining the target level of expected return. Funded Status Although the investment portfolio returned 8.2% annually, net of fees, during the twelve years ending June 30, 2015, the funded status of the Plan has declined over the same time period. On June 30, 2003, the funded ratio based on the market value of assets was 53.9%, compared to the June 30, 2015 estimated funded ratio of 44.6%. The decline in funded ratio can be attributed primarily to inadequate historical funding from the State of Ilinois. It is important to note, however, that since, FY 2011, SURS has received the full annual statutory contribution from the State of Illinois. Strategies for Further Consideration While the development of an annual Investment Plan is important, long term strategic vision is even more critical. It is important to step back periodically and examine the portfolio from a macro perspective. The Investment Consultant and SURS staff work collectively in an attempt to anticipate needs of the Plan well in advance and then proactively consider how to best fulfill the needs. Current discussions have centered around the following topics: How can SURS more effectively monitor and manage the volatility of the total portfolio? SURS is in the process of meaningfully expanding its presence in the alternatives arena. o What, if any, changes should be made to take advantage of SURS increasing scale in this area? o Are current staffing levels sufficient to effectively monitor and administer a growing private markets program? o How can costs be managed or potentially reduced? How should expenses be recorded? How can SURS best structure the fixed income portfolio in the face of rising interest rates? Is the existing public equity manager structure optimal in the current market environment? SURS staff will continue to work with the Board and Investment Consultant to thoughtfully address these and other questions. A proactive approach focused on risk management is key in order to adapt to changing market conditions. 13 F Y2016 Investment Plan

20 IV. Asset Allocation / Risk Management Asset Allocation The purpose of the asset allocation policy is to establish an Investment Policy framework for SURS with a high likelihood, in the Board s judgment, of realizing SURS investment objective. The most recent asset/liability study was completed in June 2014 with the assistance of NEPC. When selecting the optimal asset mix for SURS, the following considerations are key. Investment policy alone cannot close the SURS plan deficit. The deficit is too large. SURS faces the real risk that the assets could be depleted in less than ten years. The investment and contribution experience in the next five years will be crucial in determining whether the Plan will remain sustainable or shift to depletion. On a positive note, over the past three years, financial markets have been relatively favorable, and funding from the State of Illinois has been more consistent. The asset allocation decision depends, in large part, on expected State contributions. Statutory rate contributions are expected to sustain the funded ratio; flat rate contributions will not. Differing expectations lead to dramatically different asset allocation decisions. Major risks to the level of statutory contributions are asset performance and assumed rates of return. A large drawdown would push the level of contributions drastically higher. Persistent actual performance higher or lower than assumed rates will impact the level of contributions. Liquidity Considerations Investment portfolios can benefit from a portion of assets in illiquid investments. However, illiquid investments add another dimension to liquidity management. Liquidity to pay benefits and respond to adverse funding or financial market downturns is critical. As part of the recent asset-liability study, NEPC conducted a liquidity analysis to determine how the SURS investment portfolio would respond to a stressed market scenario. The study projected sound liquidity of the portfolio in the base case environment but acknowledged that, in a stressed case, the Plan would consume a significant portion of liquidity sources over six years. Overall, NEPC determined the SURS portfolio would likely continue to benefit from maintaining diversified exposure to illiquid assets. Although it is reasonable to plan to receive the statutory contributions from the State, it is important to acknowledge there is a risk of receiving a level of contributions less than the required amount. As mentioned previously, SURS funding experience over the next several years is critical in determining the future financial health of the System. The certified contribution for FY 2016 is approximately $1.6 billion. Capital Market Assumptions The projected return and risk assumptions used in the process were developed by NEPC. NEPC s most recent capital market projections, which are refreshed annually, are shown in the tables on the following pages and generally reflect lower return expectations compared to last year s 5-7 year return assumptions. Capital market expectations represent passive exposure (i.e., beta only). Return expectations are net of passive fees. 14 FY2016 Investment Plan

21 NEPC Capital Market Projections Projected Risk and Return 5-7 Year Return Assumptions 30 Year Return Assumptions Asset Class Cash 1.50% 1.75% 0.25% 3.75% 3.25% -0.50% Treasuries 2.00% 1.75% -0.25% 4.00% 3.50% -0.50% IG Corp Credit 3.50% 3.25% -0.25% 5.25% 4.75% -0.50% MBS 2.25% 2.00% -0.25% 4.25% 3.75% -0.50% Core Bonds* 2.53% 2.30% -0.23% 4.40% 3.98% -0.42% TIPS 2.50% 2.25% -0.25% 4.50% 4.00% -0.50% High-Yield Bonds 4.50% 4.00% -0.50% 6.00% 5.75% -0.25% Bank Loans 5.00% 4.50% -0.50% 6.25% 6.00% -0.25% Global Bonds (Unhedged) 1.25% 1.00% -0.25% 3.00% 2.25% -0.75% Global Bonds (Hedged) 1.38% 1.17% -0.21% 3.13% 2.42% -0.71% EMD External 5.00% 4.50% -0.50% 7.00% 6.00% -1.00% EMD Local Currency 5.75% 5.50% -0.25% 7.25% 6.75% -0.50% Large Cap Equities 6.25% 6.00% -0.25% 7.75% 7.50% -0.25% Small/Mid Cap Equities 6.25% 6.00% -0.25% 8.00% 7.75% -0.25% Int'l Equities (Unhedged) 7.25% 7.00% -0.25% 8.25% 8.00% -0.25% Int'l Equities (Hedged) 7.50% 7.50% 0.00% 8.50% 8.49% -0.01% Emerging Int'l Equities 9.50% 9.00% -0.50% 9.50% 9.25% -0.25% Private Equity 8.75% 8.50% -0.25% 9.75% 9.50% -0.25% Private Debt 8.00% 7.50% -0.50% 8.25% 8.00% -0.25% Private Real Assets 7.75% 8.00% 0.25% 7.75% 7.75% 0.00% Real Estate 6.25% 6.50% 0.25% 6.50% 6.50% 0.00% Commodities 5.00% 5.25% 0.25% 6.00% 5.75% -0.25% Hedge Funds 5.50% 5.75% 0.25% 7.00% 6.75% -0.25% Return assumptions are geometric. *Core Bond assumptions are based on market weighted blend of components of Aggregate Index (Treasuries, IG Corporate Credit, and MBS). 15 F Y2016 Investment Plan

22 2015 Volatility Forecasts Volatility Asset Class Cash 1.00% 1.00% Treasuries 6.00% 5.50% -0.50% IG Corp Credit 7.50% 7.50% MBS 7.00% 7.00% Core Bonds* 6.32% 6.03% -0.29% TIPS 7.50% 7.50% High-Yield Bonds 13.00% 13.00% Bank Loans 8.00% 8.00% Global Bonds (Unhedged) 8.50% 9.00% 0.50% Global Bonds (Hedged) 5.00% 5.00% EMD External 12.00% 12.00% EMD Local Currency 15.00% 15.00% Large Cap Equities 17.50% 17.50% Small/Mid Cap Equities 21.00% 21.00% Int'l Equities (Unhedged) 20.50% 21.00% 0.50% Int'l Equities (Hedged) 18.50% 17.50% -1.00% Emerging Int'l Equities 26.00% 26.00% Private Equity 27.00% 27.00% Private Debt 19.00% 17.00% -2.00% Private Real Assets 23.00% 23.00% Real Estate 17.00% 15.00% -2.00% Commodities 18.00% 18.00% Hedge Funds 9.00% 9.00% Volatility defined as standard deviation of investment returns. *Core Bonds assumption based on market weighted blend of components of Aggregate Index (Treasuries, IG Corporate Credit, and MBS). 16 FY2016 Investment Plan

23 Strategic Policy Targets The strategic policy targets resulting from the most recent asset/liability study are shown in the following table. Using NEPC s 2015 risk and return projections, a passive portfolio composed in such a manner is projected to produce a geometric return of 6.2% over the five to seven year period, falling short of the 7.25% actuarial rate of investment return 3. (Note: SURS returns have significantly exceeded the actuarial rate of return over the long term, as evidenced by the 8.3% 25-year return). Over the long term, however, the projected return is 7.4%, higher than the return assumption. Also, it is important to note active management is projected to add additional value over and above passive implementation. SURS periodically reviews the actuarial return assumption for reasonableness. Asset/Liability Study Results Strategic Policy % Asset Class (Approved June 2014) U.S. Equity 23% Non-U.S. Equity 19% Global Equity 8% Total Public Equity 50% Core Fixed Income 19% Emerging Market Debt 3% TIPS 4% Total Fixed Income 26% Private Equity 6% Real Estate 6% REITs 4% Hedged Strategies 5% Opportunity Fund 1% Commodities 2% Total Alternatives 24% Total 100% 5-7 Yr. Expected Return 6.2% Standard Deviation 13.2% 30 Yr. Expected Return 7.5% Sharpe Ratio 0.34 Compared to the return projections using NEPC s 2014 capital market assumptions, the 2015 return projection is slightly lower (6.2% in 2015 vs. 6.5% in 2014). The modest decline in the return projection is a result of slightly lower return expectations across most asset classes, as shown in the Capital Market Projections table on page On June 13, 2014, the SURS Board of Trustees approved lowering the System s assumed rate of investment return to 7.25% from 7.75%. The rate is effective as of June 30, F Y2016 Investment Plan

24 Risk Management Risk is monitored through various forms of analysis and reporting in an attempt to understand risks within the Fund, and to ensure adequate compensation for the level of risk assumed. Analysis will occur at various levels of detail, which include individual manager, asset class and total Fund. In addition to relative performance evaluation, an analysis of diversification, benchmark risk, active risk, total risk, value at risk, and other risk measures will be reported. Analysis will be conducted on an ex-post and ex-ante basis to identify and quantify both forward looking and backward looking risk metrics. Staff will review portfolios, asset classes, and total Fund information on an ongoing basis in order to maintain an understanding of potential risks within the portfolio. Individual manager portfolios or asset classes demonstrating higher than expected levels of risk will be examined in greater detail and any necessary adjustments will be made immediately, or a plan for doing so will be developed. Alternatively, justification for maintaining the exposure will be provided to the Investment Committee. Shown below and on the following pages is a sampling of risk analytics produced by NEPC and The Northern Trust Company, SURS custodian, to assist SURS in monitoring the risk profile of the Total Fund. Total Fund Risk and Return Source: NEPC 18 FY2016 Investment Plan

25 Total Fund vs. InvestorForce Public DB > $1B Gross + 5 Years Ending 6/30/15 Source: NEPC 19 F Y2016 Investment Plan

26 Risk Trends and Overview Source: The Northern Trust Company 20 FY2016 Investment Plan

27 V. Economic Outlook A variety of sources were used to develop this outlook for Fiscal Year Consideration was given to information from investment consultants, investment managers, discussions with peers and informational publications. Summary: The outlook for the U.S. is mixed; stronger consumption and moderating manufacturing output are expected. Recent growth of GDP has been exceptional. It is expected that U.S. economic momentum and subdued inflation will be sustained. The U.S. economy is expected to grow roughly 3% in The unemployment rate of 5.3%, as of July 2015, is close to the Federal Reserve s estimate of full employment, with sustained wage growth the only missing element. The threat of the Greek crisis appears to be contained as the Eurozone is in a stronger position today compared to five years ago. Bond yields in Italy and Spain are showing modest gains. Germany is looking at growth of around 1.6% this year. Spain has returned to growth after austerity and structural reform, but the unemployment rate of 24% remains high which will continue to weigh down on the economy. France and Italy struggle with rising public debt and increasingly uncompetitive economies. Lower oil prices will benefit the Eurozone by lowering the cost of energy imports but will increase the risk of outright inflation. China s growth is expected to fall to 6.8% in 2015, as previous excesses in real estate, credit, and investment continue to unwind. Japan s GDP is expected to pick up from -0.1% to 1% in 2015, reflecting support from the weaker yen, higher real wages, and higher equity prices due to the Bank of Japan s quantitative and qualitative easing. Inflation continues to undershoot forecasts; this will lead to further divergence in central bank policy and a likely impact on currencies. In the U.S. inflation remains subdued and far below the Fed s 2% inflation target. In Japan, with the higher value-added tax fading and energy prices declining, inflation is expected to undershoot BOJ s 2% target. Disinflation is widespread in Japan and Europe, where the 2% target is also far from sustained. The first increase in short-term interest rates since 2006 may occur after the September FOMC meeting. Although a modest rate increase is likely, the market s expectation of the Fed s pace and magnitude of the increase is aggressive. Long-term interest rates continue to move higher.

28 VI. Fiscal Year 2016 Portfolio Strategies Financial Goal & Strategic Objectives The assets of the System will be invested solely for the benefit of participants and beneficiaries within the constraints of applicable Illinois Statutes and the guidelines contained in the SURS Investment Policy document and each manager s Investment Management Agreement. In addition, the following financial goal and strategic objectives for the SURS plan have been established: The SURS Financial Goal The financial goal as set forth in the SURS Strategic Plan is: To ensure the financial soundness of the System. The strategic objectives designed to achieve the SURS Financial Goal are as follows: Secure the annual required contribution Achieve long term, sustainable, above average, risk-adjusted returns Manage the risk and volatility of assets and liabilities to assist in maintaining sufficient funds to pay benefits and mitigate the cost of contributions Manage expense at an optimal level to achieve the greatest return on investment. Make modifications to benefit/plan design as required In addition, SURS has a goal of protecting assets through sound risk management and ethical practices. Strategic Policy Asset Allocation Targets After concluding an asset/liability study, the Board approved new strategic policy targets at the June 2014 Board meeting. The new asset mix includes a reduction in public equity exposure by ten percentage points and the introduction of new investments in hedged strategies, emerging market debt and commodities. The following table illustrates the portfolio s current asset allocation (as of June 30, 2015) relative to the new strategic policy targets and also illustrates the progress made implementing the new policy targets since June 30, FY2016 Investment Plan

29 Asset Class Strategic Policy % (Approved June 2014) 6/30/2014 Actual % 6/30/2015 Actual % 6/30/2015 Over / (Under) vs. Policy % U.S. Equity 23.0% 32.6% 29.3% +6.3% Non-U.S. Equity Global Equity Total Public Equity 50.0% 62.9% 56.1% +6.1% Core Fixed Income Emerging Market Debt TIPS Total Fixed Income 26.0% 23.1% 27.1% +1.1% Private Equity Real Estate REITs Hedged Strategies Opportunity Fund Commodities Total Alternatives 24.0% 14.0% 16.8% -7.2% Grand Total* 100.0% 100.0% 100.0% 100.0% *Totals may not add due to rounding. Implementation of the strategic policy targets will gradually occur over the next months. Fiscal Year 2016 Total Fund Strategy The following actions are planned for the coming fiscal year, many of which are designed to continue the migration toward the long-term strategic policy targets. In total, asset reallocations of approximately $1.5 billion are anticipated during FY 2016, including $850 million in hedged strategies, $350 million in commodities, and $300 million in private equity. Fall 2015 / Winter 2016 Hedged Strategies The asset allocation policy mix approved by the Board in June 2014 includes a 5% allocation to hedged strategies. Finalist presentations of the hedge fund-of-funds search are planned to be completed during the fall. Fall 2015 Self-Managed Plan - Finalist presentations for SMP Providers / Investment Options Review Interviews of candidates are currently scheduled for the September 2015 Investment Committee meeting. Fall 2015 / Winter 2016 Commodities - Finalist interviews for actively managed commodities mandates are scheduled to be presented at the December 2015 Investment Committee meeting. The commodities allocation is currently being implemented passively as part of the cash overlay program. A 2% allocation, approximately $350 million, is expected to be transitioned to actively managed strategies during Fiscal Year F Y2016 Investment Plan

30 Fall 2015 / Winter 2016 Private Equity In June 2015, the Board authorized a search for private equity fund of funds providers focusing on funds owned by minorities, females, or persons with a disability, as defined by Illinois statutes. A Request for Proposal will be released in the fall of 2015, with finalist recommendations to the Board tentatively slated for March Throughout the Fiscal Year Additional Private Equity Investments will be evaluated during the year. The Private Equity Funding Plan approved by the Board anticipates total commitments of $300 million during calendar year Issuance of a Request for Proposal for private equity investments may be considered late in FY 2016 or FY Ongoing - Diversity Initiatives SURS will continue to review opportunities in the investment program to consider the utilization of minorities, females and persons with a disability. Investment managers of diversity are always encouraged to participate in the search process if an applicable strategy/mandate is identified. o As of June 30, 2015, the MDP is valued at approximately $2.6 billion and includes 19 MFDB investment management firms and 20 strategies. o Progress Investment Management (Progress), a minority-owned firm, serves as a manager of emerging managers for SURS. As of June 30, the Progress program includes 24 minority- or female-owned investment managers and has total assets of $752 million. SURS commitment to diversity extends beyond the bounds of the MDP. In addition to the programs previously mentioned, SURS contracts with two other MFDB firms, bringing the total number of MFDB firms in direct partnership with SURS to 21. As mentioned previously, assets managed for SURS by these 21 firms are approaching $4.5 billion, or 25.9% of the Total Fund, as of June 30, Ongoing Investment Manager Oversight, Due Diligence and Risk Management A critical duty of the investment team and NEPC is to monitor the numerous investment managers under contract with SURS. Each manager plays a role in the success of the overall program and extensive resources are utilized to ensure the strategies are functioning as desired. Risk management monitoring of the program continues to expand and evolve. Fees and Compliance Oversight SURS continuously strives to obtain the most favorable fee terms from investment providers. Further analysis will be conducted over the coming months. Compliance monitoring efforts includes continuous interaction with NEPC as well as the custodian, Northern Trust. Review of Public Market Program During the coming year, the portfolio modifications approved from the Asset/Liability study are scheduled to be completed. Emerging Market Debt, Hedged Strategies and Commodities allocations were identified to be introduced into the SURS Investment Program, while reducing equity 24 FY2016 Investment Plan

31 exposure within the portfolio. Upon completion, Staff will be working with the Investment Consultant, NEPC, to review the public market program in depth to identify further efficiencies within the SURS Investment Portfolio. Preliminary evaluations of the public market asset classes were conducted after the selection of NEPC in Trustee and staff education will continue to be a priority during Fiscal Year F Y2016 Investment Plan

32 Fiscal Year 2016 Public Equity Strategy The primary focus in fiscal year 2016 will be to complete the portfolio s transition toward the strategic policy targets. The most recent asset-liability study calls for a reduction in public equity exposure and an increase in emerging market debt, hedged strategies and commodities. In the aggregate, the public equity portfolio (U.S., non-u.s. and global equity) is 6.1% overweight relative to the new strategic policy target. Staff will be working with NEPC to conduct a structure analysis for the asset class to determine the most efficient means of reallocating assets and positioning the remaining public equity portfolio. US Equity 23% Non-US Equity 19% Global Equity 8% Continued emphasis will be on monitoring the portfolio and underlying investment managers for performance that meets or exceeds expectations and for compliance with the Investment Policy and investment manager guidelines. NEPC, the general investment consultant for SURS, will assist in the monitoring and strategy efforts. Fiscal Year 2016 Fixed Income Strategy With the funding of the 3% emerging market debt allocation complete, the total fixed income portfolio is very near its strategic policy target. A key focus during Fiscal Year 2016 will be a review and assessment of the core fixed income portfolio to determine the optimal structure in what is likely to be a rising interest rate environment going forward. Alternative Strategies Fiscal Year 2016 Real Estate Strategy As of June 30, 2015, investments in real estate investment trust securities (REITs) comprise 3.7% of the total portfolio, and investments in private real estate investments total 5.0% of the portfolio. The long-term strategic policy target mix allocates 4% to REITs and 6% to private real estate. Commitments to non-core real estate managers during FY 2015 have reduced the underweight to private real estate from 2.4% to 1.0%. The underweight position will continue to be reduced as newly hired non-core real estate managers begin to draw funds during FY In September 2014, the Board approved a three year pacing model totaling $300 million for calendar years Thus far, $195 million in commitments have been approved. The remaining $105 million will be committed over the course of calendar years to stay on course with the Real Estate 10% Emerging TIPS Market Debt 4% 3% real estate pacing analysis and will continue to focus on the non-core segment of the real estate market. Core Fixed Income 19% 26 FY2016 Investment Plan

33 The chart that follows illustrates the diversification of the real estate portfolio by type, as of June 30, SURS Real Estate Portfolio Diversification by Type Non-Core Real Estate 26% REITS 37% Core Real Estate 37% *Based on commitment amounts or current market values, as appropriate. Fiscal Year 2016 Private Equity Strategy As of June 30, 2015, the private equity portfolio comprises 5.6% of the total portfolio, slightly under the strategic policy target of 6.0%. The private equity allocation peaked at 11.5% during the financial crisis when total fund assets fell dramatically. As public equity market returns have rebounded and distributions from the private equity portfolio have increased, the private equity allocation has trended down to its current level. The private equity portfolio is broadly diversified by vintage year, sub-class and geography. In June 2014, the Board approved a three-year private equity funding plan for calendar years , totaling $850 million. The plan allows for consistent funding by vintage year to continue the System s quality private equity program. The amounts specified are $250 million for 2015, $300 million for 2016 and $300 million for Private Equity 6% Thus far, a total of $125 million has been committed during calendar In June 2015, the Board authorized a search for fund-of-fund providers focusing on funds owned by MFDB firms, as defined by Illinois statutes. A Request for Proposal will be issued in the fall of Additional commitments will be considered during FY 2016 to reach the levels specified by funding plan. 27 F Y2016 Investment Plan

34 Fiscal Year 2016 Hedged Portfolio Strategy A 5.0% strategic policy allocation to hedged strategies was included as a part of the strategic policy mix approved by the Board in June Implementation of phase I of the hedged strategies portfolio is currently underway via a search for qualified hedge fund-of-funds providers. The search will tentatively conclude in October 2015, with finalists presenting to the Board at that time. Hedged Strategies 5% Fiscal Year 2016 Opportunity Fund Strategy Currently, infrastructure investments are the sole component of the Opportunity Fund. Additional opportunities arising during Fiscal Year 2016 may be brought to the Board s attention, if appropriate. Opportunity Fund 1% Fiscal Year 2016 Commodities Strategy The strategic policy mix approved by the Board in June 2014 includes a 2.0% strategic policy allocation to commodities. This allocation is one element of the plan to reduce SURS public equity exposure and increase the portfolio s diversification. Initial passive commodities exposure has been gained synthetically via the cash overlay manager. A search for qualified active commodities investment managers is currently underway, with finalist interviews tentatively scheduled for the December 2015 Investment Committee meeting. Commodities 2% Fiscal Year 2016 Cash Overlay Strategy A cash overlay program was implemented in September The program is designed to assist the Plan in remaining fully invested consistent with policy targets and to efficiently manage exposure to cash flows. The overlay program also allows efficient implementation of rebalancing and changes to asset allocation targets. Projected Timeline A chart illustrating a projected timeline of the major investment projects slated for Fiscal Year 2016 is shown on the following pages. It should be noted that other projects may arise during the fiscal year, including, but not limited to, potential manager terminations or other ad hoc projects. 28 FY2016 Investment Plan

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36 SURS FY 2016 Investment Timetable Topic Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 SMP Provider Search (start May-15) Contract negotiations Hedge FOF Search (start December-14) Contract negotiations Commodities Search (start June-15) Contract negotiations Private Equity Emerging Manager Fundof-Funds Search (start June-15) Contract negotiations Consideration of FY 2016 Investment Plan Annual Review of Investment Policy Annual Review of Diversity Goals Education on Asset Allocation and Investment Strategy Review of Non-US and Global Equity Asset Classes Education - Topics TBD Annual Broker/Dealer Review Hedged Strategies Search Annual Review of Passive Portfolio Annual Review of Real Estate Asset Class Receipt of Annual Report to the Governor on Utilization of Emerging Firms Education - Topics TBD 30 FY2016 Investment Plan

37 Topic Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Annual Review of 2015 Proxy Season / Approval of SURS Proxy Policy Statement Annual Review of Fixed Income Asset Class Trustee Educational Forum Consideration of Additional Private Equity Commitments Education - Topics TBD Annual Review of U.S. Equity Asset Class Annual Investment Review of SMP Education - Topics TBD Annual Review of Private Equity Asset Class Annual Review of Opportunity Fund Asset Class Consultant Annual Review of MDP SURS FY 2017 Budget Education - Topics TBD SURS FY 2016 Investment Timetable 31 F Y2016 Investment Plan

38 VII. Manager Diversity Program Overview The Manager Diversity Program (MDP) is a SURS-sponsored initiative designed to identify and provide opportunities to highly successful investment management firms owned by minorities, females, and persons with a disability. Key items of note: Developed in 2004 to identify and retain MFDB firms Managers contract directly with SURS Market Value of $2.568 billion, as of June 30, components: Number of MFDB Firms Commitment Amount (Private Equity & Real Estate Only) Market Value* Asset Class as of June 30, 2015 U.S. Equity 6 $972 million N/A Core Fixed Income 4 $502 million N/A TIPS 2 $327 million N/A Non-U.S. Equity 4 $677 million N/A Private Equity 2 $35 million $50 million Real Estate 1 $55 million $75 million** Total 19*** $2,568 million *Totals may not add due to rounding **An additional commitment of $90 million tofranklin Templeton was approved in March 2015, pending completion of contract negotiations. ***19 firms and 20 strategies due to two strategies with one private equity investment manager Performance Objectives The performance objective of the MDP is to seek annualized investment returns, net of investment management fees, in excess of the market goal for 1, 3, 5, and 10 year periods. While individual investment managers may underperform in any given year, the diversification within the program should limit the underperformance at the program level. Fiscal Year 2015 Performance Review The MDP exceeded its benchmark during Fiscal Year 2016 primarily due to manager outperformance in the U.S. equity portfolios led by Piedmont and Channing Capital. Managers in the fixed income portfolio slightly underperformed the benchmark during the period. In addition, the non-u.s. equity portfolio had a negative absolute return but still managed to outperform its benchmark. The MDP pulled ahead of the benchmark for the most recent threeyear period, slightly lags the five-year number, while the program s returns exceed those of the benchmark since inception, as shown in the following table. 32 FY2016 Investment Plan

39 Investment Performance* As of June 30, Year 3 Years 5 Years Since Inception SURS MDP 2.6% 9.7% 9.6% 6.2% Benchmark 1.6% 9.6% 9.8% 6.0% *Net of investment management fees Fiscal Year 2015 MDP Accomplishments As of June 30, 2015, the MDP is valued at approximately $2.6 billion. A summary of MDP activities follows. The Private Equity Emerging Manager Provider continues to make commitments to qualified private equity funds. SURS committed $75 million to this program in June This Board-approved allocation will assist SURS in meeting its goal that 10% of new commitments in alternative investments be awarded to qualified firms owned by minorities, females and persons with a disability, as documented in the Investment Policy. The mandate will focus exclusively on private equity funds with greater than 51% ownership held by minorities, females, or persons with a disability, as defined by statute. The addition of current managers, Piedmont and GlobeFlex, helped increase the value of the MDP program from $1.8 billion to $2.6 billion over the fiscal year. A commitment of $90 million was made to Franklin Templeton for investment in a real estate strategy focused on MFDB firms. The portfolio is expected to begin calling capital in early FY SURS commitment to diversity extends beyond the bounds of the MDP. In addition to the 19 firms utilized in the MDP, SURS contracts with two additional MFDB firms, bringing the total number of MFDB firms in partnership with SURS to 21. Assets managed for SURS by these 21 firms are approaching $4.5 billion, or 25.9% of the Total Fund, as of June 30, Fiscal Year 2016 MDP Strategy Plans for the MDP in FY 2016 include the following: Expand industry outreach efforts Seek to identify qualified MFDB firms through the planned searches in the coming fiscal year (hedged strategies, commodities and private equity) Continue diligent monitoring of the overall program, manager structure, and risk parameters within the program Provide a thorough review of the MDP to the Board at the March 2016 Board meeting Identify potential opportunities to increase funding for existing qualified investment managers Continued interaction with system consultant, NEPC, via more frequent discussions regarding MFDB investment managers 33 F Y2016 Investment Plan

40 VIII. Self-Managed Plan Overview The Self-Managed Plan (SMP) is a defined contribution option available to SURS members. The SMP has grown steadily since the plan s inception in April To date, over 29,500 members have participated in the plan. Highlights of the plan include: Approximately $1.75 billion in assets as of June 30, 2015 (including the SMP forfeiture and disability reserves of more than $94 million) Two Service Providers Fidelity Investments ($984 million in assets) TIAA-CREF ($670 million in assets) 31 investment options as of June 30, 2015 Includes series of lifecycle funds in both TIAA-CREF and Fidelity lineups Over 19,700 Participants currently invested Fiscal Year 2015 SMP Accomplishments During fiscal year 2015, a targeted communications program was implemented in conjunction with the SMP providers to address retirement-related topics specific to various demographic groups of plan participants. In continuing efforts to improve the cost effectiveness of the SMP, the bundled pricing structure in effect with each provider was replaced with fixed dollar pricing and the creation of a revenue credit account to be used for the exclusive benefit of participants. Anticipated annual fee savings are estimated to be in excess of $934 thousand. SURS and the providers worked collaboratively toward implementation of the Choice Election Process, an electronic process allowing members who select the SMP to choose their investment option allocations via the providers, and the SPARK standard layout for electronic submission of information between SURS and each provider. A participant survey was completed and results presented at the October 2014 Board meeting. A search for SMP providers of recordkeeping services was approved by the Board in September 2014, initiated during May 2015 and in process at June 30, Fiscal Year 2016 SMP Strategy Statute requires SURS utilize between two and seven service providers in the SMP. The diversity and number of investment options in the menu of SMP offerings is routinely monitored and is under review as a component of the current SMP provider search. There are no plans to expand the offerings; however, changes may be recommended in order to eliminate duplication of similar offerings, omit weak performing options and adjust the allocation between active and passive strategies. Also, SURS takes into consideration that the SMP is a primary retirement plan, as well as participant inquiries and requests, when determining what funds to potentially include in the lineup. Plans for the SMP in FY 2016 include the following: Conclude the SMP provider search and present recommendations at the September 2015 Board meeting Consider utilizing a lead administrator for SURS multi-provider environment and present recommendation at the September 2015 Board meeting 34 FY2016 Investment Plan

41 Consider changes to the approved investment option menu and present recommendations at the September 2015 Board meeting Continue diligent monitoring of the overall program, providers and investment options Provide a thorough review of the providers, investment options and fees at the April 2016 Board meeting Continue interaction with investment consultant NEPC via frequent discussions regarding the SMP 35 F Y2016 Investment Plan

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43 Appendix A

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45 State Universities Retirement System August 28, 2015 Investment Update rformance Summary Volume June 25, Issue 12 June 2015 Quarter Ended Fiscal Y-T-D 1 Year Ended 1 3 Years Ended 1 5 Years Ended 1 10 Years Ended 1 SURS TOTAL FUND -1.2% 0.3% 2.9% 2.9% 11.0% 11.2% 7.1% SURS Total Fund ex-overlay -1.3% 0.2% 3.0% 3.0% 11.0% 11.2% 7.1% Market Goal / Policy Portfolio -1.3% -0.1% 2.9% 2.9% 10.9% 11.3% 7.1% Public Funds Index -1.6% -0.2% 2.6% 2.6% 10.5% 10.5% 6.5% EQUITIES FIXED INCOME REAL ESTATE SURS U.S. Equity -1.3% 0.4% 7.6% 7.6% 17.9% 17.7% 8.2% Performance Benchmark -1.7% 0.1% 7.2% 7.2% 17.6% 17.5% 8.3% SURS Private Equity 0.6% 0.6% 6.2% 6.2% 10.6% 12.3% 11.1% Performance Benchmark 2.6% 2.6% 15.2% 15.2% 19.4% 17.7% 11.5% SURS Non-U.S. Equity Portfolio -2.4% 1.4% -3.7% -3.7% 10.7% 9.0% 5.5% Performance Benchmark -2.8% 0.5% -5.3% -5.3% 9.4% 7.8% 5.5% SURS Global Equity -1.5% 1.4% 2.7% 2.7% 13.7% 12.5% 6.3% Performance Benchmark -2.4% 0.3% 0.7% 0.7% 13.0% 11.9% 6.2% SURS Core/ Core Plus/ Abs Ret -0.9% -1.3% 1.7% 1.7% 2.3% 3.7% 5.2% Performance Benchmark -1.1% -1.7% 1.9% 1.9% 1.8% 3.3% 4.5% SURS TIPS -0.9% -1.2% -2.4% -2.4% -0.7% 3.4% 4.7% Performance Benchmark -1.0% -1.1% -1.7% -1.7% -0.8% 3.3% 4.1% SURS Emerging Market Debt -1.1% -1.8% -1.8% -1.8% -1.8% -1.8% -1.8% Performance Benchmark -1.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% SURS Direct Real Estate 3.6% 1 7% 3.6% 12.2% 6 5% 12.2% 8 0% 12.0% 9 2% 13.4% 9 7% 6.0% N/A Performance Benchmark 3.0% 3.0% 11.1% 11.1% 11.4% 13.3% 6.0% SURS RE Invest Trust (REITs) -4.2% -8.3% 1.7% 1.7% 8.5% 13.0% 6.2% Performance Benchmark -4.2% -8.2% 1.7% 1.7% 8.3% 12.9% 5.5% Opportunity Fund SURS 0.0% 1.2% 5.4% 5.4% 13.1% 12.6% 10.6% Performance Benchmark 1.0% 1.8% 5.0% 5.0% 7.0% 8.4% 4.9% U.S. Equity Benchmark Dow Jones U.S. Total Stock Market Index; Private Benchmark Dow Jones U.S. Total Stock Market Index +300 bps (reported quarterly in arrears); Non-U.S. Equity Benchmark MSCI All Country World Ex-U.S. Index; Global Equity Benchmark MSCI All Country World Index; Core Fixed Income Benchmark Barclays Capital Aggregate Bond Index; TIPS Benchmark Barclays Capital U.S. TIPS Index; EMD Benchmark Blended combination of benchmarks; Direct Real Estate Benchmark NCREIF Open End Diversified Core Equity (ODCE) Index (reported quarterly in arrears); U.S. Real Estate Investment Trust Securities Benchmark Dow Jones U.S. Select Real Estate Securities Index; Global Real Estate Investment Trust Securities Benchmark FTSE EPRA /NAREIT Developed Index; Opportunity Fund Benchmark Blended combination of the individual portfolio benchmarks. 1 or since inception, whichever is less. Asset Allocation Total Fund $ s Cash Overlay Adjusted Adjusted Asset Interim Strategic and Target % s (millions) Adjustment Asset Alloc Alloc % Policy % Policy % U.S. Equity $ 5,318 $ (227) $ 5, % 29.0% 23.0% Private Equity % 6.0% 6.0% Non-U.S. Equity 3,314 (61) 3, % 19.0% 19.0% Global Equity 1,471 (83) 1, % 8.0% 8.0% Fixed Income 3, , % 19.0% 19.0% TIPS % 4.0% 4.0% Emerging Market Debt % 3.0% 3.0% Real Estate 1,510 (2) 1, % 9.0% 10.0% Overlay / Commodities % 2.0% 2.0% Hedged Strategies % 0.0% 5.0% Opportunity Fund % 1.0% 1.0% Total Fund $ 17,351 $ - $ 17, % 100.0% 100.0%