Investment Committee Quarterly Activity Report 4. FIXED INCOME

Investment Committee Quarterly Activity Report 4. FIXED INCOME

FIXED INCOME MARKET RISK DASHBOARD As of 6/30/2015 Monetary Policy 3.88% U.S. Unemployment Rate 6.10% 0.25% 0% 9.75% The Fed Funds target rate remains range bound at 0-0.25 percent. The risk is that the unwinding of the extreme accommodation will lead to higher inflation and then much higher interest rates in the longer-term. 5.30% 3.80% 10.00% The U.S. Unemployment Rate declined from 5.5 percent to 5.3 percent during the quarter. The risk is that a high part-time employment number could hinder economic U.S. Treasury Yield 5.43% recovery, keeping consumers on the sideline and impacting growth in the U.S. 2.35% 1.45% 10.65% Current Inflation 2.70% During the quarter, the U.S. 10-Year Treasury Yield swung 62bps, before ending the quarter higher at 2.35%. The risk is that a sharp rise in yields will lead to declines in fixed income assets. Cost of Corporate Credit 1.51% 1.37% 0% 5.45% Corporate credit spreads rose 13bps from 1.24 percent to 1.37 percent during the quarter. The risk is that the economy overheats and the quality of earnings declines, thus increasing the cost of credit to corporations. 0.10% 0% 6.30% According to the U.S. Consumer Price Index, the annual rate of inflation increased 0.2 percent during the quarter, to 0.1 percent. Over the last twelve months, energy declined 15 percent, food rose 1.8 percent and all other items rose 1.8 percent. The risk is that the extremely accommodative monetary policy will push inflation higher and erode the dollar's purchasing power. Denotes long-term (30-yr) average value, with the exception of Cost of Corporate Credit, for which data is only available since August 1988. FOR THE QUARTER ENDING JUNE 30, 2015 1

Portfolio Benchmark Comparison as of 6/30/2015 Assets Under Management $30.1 Billion Our investment philosophy is to maximize diversification across the portfolio, yet optimize the number of securities vs. the benchmark. CalSTRS Benchmark 1 Difference # of Issues/Bonds 5,757 11,644-5,887 Average Coupon (%) 3.38 3.37 0.01 Average Quality Aa3/A+ Aa2/AA- n/a Average Yield to Maturity (%) 2.81 2.50 0.31 Option-Adjusted Duration* (Yrs) 5.19 5.18 0.01 * Duration: a standard measure of the portfolio s sensitivity to risk or volatility to interest rates, relative to the benchmark. Portfolio yield remains modestly higher than the benchmark, reflecting our spread product (i.e. non-treasury) overweight with an emphasis on higher quality securities. With heightened volatility in the markets, we remained close to home, taking advantage of opportunities to increase the quality of the portfolios. CalSTRS Quality Summary vs. Benchmark 1 80.00 70.00 60.00 50.00 The portfolio remains underweight AAA-rated securities, which is consistent with an underweight to government securities. CalSTRS Benchmark 40.00 30.00 20.00 10.00 0.00 AAA AA A BBB BB B CCC Other FOR THE QUARTER ENDING JUNE 30, 2015 2

CalSTRS Sector Weighting vs. Benchmark 1 40.00% 35.00% 30.00% The portfolio includes a blend of core and opportunistic (internally- and externally-managed) strategies structured to achieve a long-term total return representative of the fixed income markets. 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% High Bank Govt. IG Credit MBS CMBS ABS Yield Loan Other* CalSTRS Beginning of Qtr 31.38% 28.60% 24.01% 3.09% 0.69% 7.55% 2.51% 2.17% CalSTRS End of Qtr 31.61% 28.99% 24.37% 3.18% 0.72% 7.42% 2.53% 1.18% Benchmark 37.44% 28.16% 26.34% 1.86% 0.55% 4.88% 0.00% 0.77% Difference -5.83% 0.83% -1.97% 1.32% 0.17% 2.54% 2.53% 0.41% *Includes other investments such as International Sovereign Bonds, Derivatives and Cash During the quarter, we continued to opportunistically reduce our allocations to spread product as volatility remained with concerns over the timing of rate hikes, the impact of lower oil prices, and the uncertainty surrounding Greece. FOR THE QUARTER ENDING JUNE 30, 2015 3

Peer Group Comparison Across all periods, the portfolio outperformed the benchmark and ranked in the top two quartiles compared to the evestment peer universe of core fixed income managers. As of June 30, 2015 Latest Quarter 1 year 3 years 5 years 5th Percentile -0.32 2.94 4.09 5.44 25th Percentile -1.18 2.30 2.82 4.41 Median -1.53 2.00 2.43 3.99 75th Percentile -1.71 1.66 2.04 3.55 95th Percentile -2.09 1.08 1.56 2.92 # of Observations* 237 237 236 231 Latest Quarter 1 year 3 years 5 years Return Rank Return Rank Return Rank Return Rank CalSTRS -1.50 46 2.10 42 2.92 22 4.29 30 Benchmark 1-1.59 59 1.75 69 2.07 73 3.61 73 SOURCE: evestment Analytics * As of June 30, 2015, there are 251 active investment managers and 272 active products that conform to the evestment U.S. Core Fixed Income style, as their primary style objective. FOR THE QUARTER ENDING JUNE 30, 2015 4

Executive Summary The second quarter looked a lot like the first quarter with continued volatility as investors dealt with market uncertainty here in the U.S. and abroad. With the Federal Reserve being data dependent and with mixed economic numbers, the question still remains when will they increase interest rates and how will higher rates impact the U.S. recovery. Along with this, there are uncertainties surrounding Greece s future in the Eurozone and the impact if other countries follow suit. Going forward we expect volatility to remain elevated as investors try to navigate through the Federal Reserve s monetary policy decisions, the impact of lower oil prices and decreased liquidity in the markets. The charts and tables for the second quarter of 2015 on the previous pages compare the structure and risk profile of the CalSTRS Fixed Income Portfolio to the policy benchmark and our relevant peer group. We continue to opportunistically trim back some of our overweight to spread (non-government) product. With a strong U.S. dollar and expectations of interest rates eventually increasing, securities that are less sensitive to interest rate risk (for example, bank loans and shorter duration bonds) should generate a better relative return over the benchmark. Performance As reflected in the Peer Group Comparison on the previous page, the Fixed Income portfolio outperformed the benchmark by 9 bps over the latest quarter, generating a negative return of 1.50 percent. Over the last twelve months, fixed income strategies have produced positive absolute returns versus their benchmarks: Total Debt (2.10%, +35 bps in alpha); Core (internal) Strategy (2.31%, +45 bps in alpha); Core Plus (external) Opportunistic Strategy (1.13%, -49 bps in alpha); High Yield (external and internal) Opportunistic Strategy (1.48%, +186 bps in alpha); and Bank Loans (external) Opportunistic Strategy (2.95%, +113 bps in alpha). Activity Updates The following updates are intended to keep the Board informed as to the status of ongoing projects and activities that have been previously approved or included in the current business plan. From the Securities Lending request for proposal process, staff awarded mandates to five lending agents; however, one of the five lending agents decided to exit the Securities Lending business. Staff has started the contract process with the remaining four firms and will work with all of the chosen agents to form the structure of the Securities Lending Program going forward. Staff is in the process of reviewing Alternative Solicitation Process (ASP) questionnaires to refresh both Fixed Income Core Plus and High Yield manager pools. The ASP is expected to be completed later this year. 1 Benchmark: (95%) Barclays Capital Aggregate Index + (5%) Barclays Capital U.S. High Yield Cash Pay 2% Issuer Constrained (ex-tobacco/ex-firearms) Index FOR THE QUARTER ENDING JUNE 30, 2015 5