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TRSRISKMANAGEMENT

COMMITTEE

SEPTEMBER 2011
SEPTEMBER2011

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TEACHER RETIREMENT SYSTEM OF TEXAS MEETING


BOARD OF TRUSTEES
AND
RISK MANAGEMENT COMMITTEE
(Committee Chair and Members are Subject to Change at the September Board Meeting:
Mr. McDonald, Committee Chair; Vacant; Mr. Kelly; Mr. Moss; & Vacant, Committee Members)
AGENDA
September 15, 2011
1.

Consider the approval of the proposed minutes of the April 7, 2011 committee meeting Eric McDonald.

2.

Review the Investment Risk Report Jase Auby.

3.

Review the TRS Bubble Monitoring System James Nield.

NOTE: The Board of Trustees (Board) of the Teacher Retirement System of Texas will not consider or act upon any item before the Risk Management
Committee (Committee) at this meeting of the Committee. This meeting is not a regular meeting of the Board. However, because a quorum of the Board
may attend the Committee meeting, the meeting of the Committee is also being posted as a meeting of the Board out of an abundance of caution.

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The Risk Management Committee of the Board of Trustees of the Teacher Retirement System of
Texas met at 11:55 a.m. on April 7, 2011, in Room 345E of the TRS offices. The following
members were present:
Robert Gauntt, Presiding Officer
David Kelly
Philip Mullins
Christopher Moss
The following Committee member was absent:
Eric McDonald, Chairman
Others present:
Ronnie Jung, Executive Director, TRS
Amy Barrett, Chief Audit Executive
T. Britton Harris IV, Chief Investment Officer, TRS
Dr. Keith Brown, Investment Advisor
Steve Huff, Reinhart Boerner Van Deuren
Steve Voss, Hewitt EnnisKnupp + Associates
Brady OConnell, Hewitt EnnisKnupp + Associates
Jerry Albright, Deputy Chief Investment Officer, TRS
Chi Kit Chai, Senior Managing Director, Internal Public Markets, TRS
Steve LeBlanc, Senior Managing Director, External Private Markets, TRS
Eric Lang, Managing Director, Real Assets, TRS
Claudia Williams, Senior Director, Trading Group, TRS
Dale West, Senior Director, External Public Markets, TRS
Jase Auby, Director, Portfolio Strategy and Execution, TRS
Mohan Balachandran, Director, Portfolio Strategy and Execution, TRS
Sylvia Bell, Director, Investment Operations, TRS
Bernie Bozzelli, Director, Trading Group, TRS
Roland Wiederaenders, Assistant General Counsel, TRS
Angela Vogeli, Assistant General Counsel, TRS
Janis Hydak, Internal Public Management, TRS
Matt Robertson, Senior Investment Manager, TRS
Ashley Strange, IMD - Chief of Staff, TRS
Dinah Arce, Senior Auditor, TRS
Nick Bonn, State Street Bank & Trust
Joyce Dardonis, State Street Bank & Trust
John Powell, State Street Bank & Trust
Jeff Lambert, State Street Bank & Trust
Tathata Lohachitkul, Albourne
Ted Melina Raab, Texas American Federation of Teachers
Acting Chairman Robert Gauntt called the meeting to order at 11:55 a.m. As there was a
quorum of the committee present, the meeting proceeded.

1.

Consider the approval of the proposed minutes of the September 16, 2010
committee meeting

On a motion by Mr. Mullins, seconded by Mr. Moss, the minutes of the September 16,
2010 Risk Management Committee meeting were approved unanimously.
2.

Review the Investment Risk Report

Mr. Auby began the presentation regarding the risk report for the TRS portfolio. He first
noted that at all times for the reporting period the portfolio had been in compliance with TRS
Investment Policy Statement (IPS).
Mr. Auby first described the portfolios asset allocation measurements. He stated that for
the reporting period the portfolio was overweighted by 2.9% to global equity; stable value was
underweighted by 1.9%; and real return assets were underweighted by 1.0%. Mr. Auby noted
that within the global equity portfolio, emerging markets assets were overweighted by 2.9%.
Mr. Auby stated that at the close of the 1st quarter of 2011, the portfolios Value at Risk,
or VaR, was 7.90%, which remained well within the VaR range of 5.8% to 9.3% allowed by
the IPS. He stated that 83.5% of the portfolio risk as measured by VaR was from the investment
in global equities, but only 62.9% of the portfolio is invested in this asset class. He noted that
these metrics indicate that on a relative basis, global equity is riskier than both stable value and
real return, and this enhanced risk primarily is derived from the relative volatility of these asset
classes. Mr. Auby noted that stable value investments represent 18.1% of the portfolio but
contributes zero percent of the risk to the portfolio. He stated that real return represents 19% of
the portfolio and represents 16.4% of the risk. Further, within the stable value asset class,
Treasury securities and Treasury Inflation Protected Securities, or TIPS, served as risk
diversifiers to reduce total VaR. Mr. Auby continued, noting that hedge fund investments
represent 3.9% of the portfolios assets but contributes 0.6% of the risk in the portfolio, even
though historically hedge funds have been perceived as very risky investments. Mr. Auby noted
that tracking error of the portfolio was 167 basis points, increasing 20 basis points from the prior
reporting period.
Mr. Auby discussed leverage and the portfolios securities-lending program. He noted
that as the result of the Euro sovereign debt crisis, securities lending activities lessened as there
was reduced demand for the securities in the portfolio. He stated that hedge fund leverage also
decreased as the result of the debt crisis. Mr. Auby noted that leverage ratios increased slightly
in the real estate category, reflecting decreases in valuations, but notwithstanding the paucity of
financing for real estate investments.
Mr. Auby next described the counterparty exposure of the portfolio. He stated that the
portfolios total exposure to derivatives is $168 million comprising trades with eight total
counterparties. He noted that credit ratings of TRSs counterparties in these transactions have
remained stable over time. By derivative type, the portfolio has swap exposure with a gross
notional value of $9.1 billion, which is 8.7% of the trust. Futures exposure is $1.6 billion on a
notional basis which equals 1.6% of the portfolio. Gross notional value of currency forward
swaps is $1.7 billion or 1.7% of the portfolio.
3.

Review the annual report on Securities Lending Program


Mr. Albright next introduced the presenters from State Street Bank & Trust: Nick Bonn,
2

Executive Vice President and head of Securities Finance; Joyce Dardonis, Managing Director
US Account Management Securities Finance; and John Powell, Vice President, Relationship
Manager Securities Finance.
Mr. Bonn began by noting that from a historical perspective, TRS has adopted best
practices for securities lending programs. Some of these practices include separately managed
collateral and close management of the program by TRS investment team members. He noted
that recent deleveraging in the hedge funds industry has reduced overall demand for securities
lending.
Mr. Bonn noted that the size of State Streets global securities lending program is
approximately $375 billion in securities that are put out on loan, which number has remained
fairly steady for the past 18 months, but down from $650 billion during the height of the credit
crisis during 2008.
Mr. Albright noted that TRS securities lending program regularly has provided income
to the trust of approximately $100 million annually, and that the split of revenue from the
program with State Street is 74% to 26% in TRSs favor, with an increasing percentage for TRS
if certain performance milestones are achieved.
There being no other matters to discuss, Mr. Gauntt adjourned the meeting at 12:30 p.m.

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InvestmentRiskReport
JJaseAuby
A b
ChiefRiskOfficer
September2011

Contents
Summary

Summary

Asset
Allocation

AssetAllocation

ValueatRisk

ValueatRisk(VaR)

TrackingError

TrackingError

Leverage

Counterparty
Risks

Leverage
CounterpartyRisks

Derivatives

Derivatives

Conclusions

Conclusions

Appendix

Appendix
Appendix

Summary
PolicyRequirements
1. AssetAllocation

Description
Incompliancewithpolicy

2.

ValueatRisk(VaR)
(
)

7.8%(36%oftheVaR
(
limit range)
g )

3.

TrackingError

Incompliancewithpolicy

TotalPublicFund
4. Leverages
Total Trust
Net Leverage

TrackingError
181

As%ofMax
61%

GrossLeverage
RealAssets
Loan to Val e
LoantoValue
SecurityLending
Net Leverage

105.5%(Withinhistoricalnorm)

46 6% (Withinhistoricalnorm)
46.6%
(Within historical norm)

100.5%(Withinhistoricalnorm)

GrossLeverage
Hedge
edge Fund
u d
Net Leverage

122.3%(Withinhistoricalnorm)

GrossLeverage
StrategicPartner
Net Leverage

300.1% (Withinhistoricalnorm)

GrossLeverage
5. Counterparty
Exposure

166.3% (Withinhistoricalnorm)

Rating

AssetAllocation

ValueatRisk

100.0%(Withinhistoricalnorm)

50.7% (Withinhistoricalnorm)

109.7% (Withinhistoricalnorm)

Incompliancewithpolicy
Incompliancewithpolicy

6. Derivative Exposures

Summary

InCompliance?

TrackingError

Incompliancewithpolicy

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

AssetAllocation
MarketValue%asofJune30,2011
GroupRelativeAllocation
TopThreeOverweights
Emerging Markets
EmergingMarkets
3 5%
3.5%
RealAssets
0.9%
Commodities
0.8%

5%
2.9%

2.8%

3%

1.6%

1.0%

0.9%

1%
1%

0.8%

3%
3%

1.9%
1 9%

1.9%
1 9%

1.2%

TopThreeUnderweights

0.9% 0.6%

1.9%
1 9%

5%

Q310

Q410

GlobalEquity

Q111
StableValue

Q211

Long Treasuries
LongTreasuries

4.1%
4 1%

NonUSDeveloped

2.3%

PrivateEquities

0.7%

RealReturn

AssetGroup/ClassRelativeAllocation
(InCompliancewithPolicy)
5%

3.5%

3%
1.0%
1%

0.3%

0.9%

0.2%

1%

0.1%

0.7%

3%

AssetAllocation

0.5%

1 9%
1.9%

2.3%

4.1%

5%

Summary

0.2%

0.6%

0.9%

0.8%

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

ValueatRiskAnalysis(VaR)
AsofJune30,2011
VaR asaPercentofMarketValue

VaR History

(OneMonth,95%Confidence)

(asPercentofMarketValue)
9%

7.8

6.7

6%

4%
3%

6.5%

5.3%

5%

9.95
10.2

%
Min=

6.8%

7%

9.7

6.45
6.2

8.1%

8%

7.95 8.2 8.45


7.7
8.7
7.45
8.95
7.2
9.2
6.95
9.45

Max=

6.6%

7.0%
6.9%

7.0%
7.0%

7.3%

7.1%

7.3%
6.7%

8.0%

7.9%

7.8%

7.8%

7.8%

7.7%

7.7%

7.6%

6.6%

TotalFund
Total
Fund
Benchmark

5 3%
5.3%

3.8%
3.8%

2%

10.0%

Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211

VARisexpressedasapercentageoftheFundsMarketValue.Maximumand
VAR
i
d
t
f th F d M k t V l M i
d
MinimumVARvaluesaredeterminedbychangingassetallocationofthe
Benchmarkwithinthemaximumandminimumrangesasoutlinedbythe
InvestmentPolicy. ThegreylinerepresentsVARasofthepriorquarter.

VaR vs.$Allocation Detail


VaRContribution

$AssetAllocation

GLOBALEQUITY

61.0%

VaRContribution

76.5%

STABLEVALUE

26.0%
20.3%

USLargeCap

EmergingMarket
PrivateEquities
0.0%

20.0%

1.3%
3.9%

Cash
40.0%

60.0%

80.0% 100.0%

10.0%

USTIPS

1.3%
2.9%

LongTreasuries 3.8%

Commodities
REITS

10.9%

0.0%

24.8%
20.9%
0.1%
7.8%
4.5%
2.8%
3.3%
1.5%
16.9%

RealAssets

0.4%

0.0%

10.0%

20.0%

$AssetAllocation

REALRETURN

18.1%

AbsoluteReturn

16.6%
12.7%
14.6%
13.5%
11.8%
9.3%

NonUSDeveloped

VaRContribution

1.3%

HedgeFund

7.5%
5.2%

Small Cap
SmallCap

$AssetAllocation

30.0%

5.0%

8.9%

5.0%

15.0%

25.0%

Source:StateStreetBank
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

VaRContributionbyAssetGroups
HistoryofVaR Contribution
100%

80%

91.4%

89.6%

85.2%

82.6%

86.5%

89.6%

87.0%

82.7%

80 7%
80.7%

83.5%

80 6%
80.6%

76.5%

60%

40%

20%

7.8%

11.6%

15.8%

18 3%
18.3%
12.8%

11.8%

12.8%

0%
0.8%

1.3%

1.0%

1.0%

0.7%

1.4%

0.1%

Q308

Q408

Q109

Q209

Q309

Q409

Q110

24.8%

16.4%

0.8%

0.0%

1.8%

1.3%

Q310

Q410

Q111

Q211

12.9%

4.4%

21.2%

18 4%
18.4%

20%

GLOBALEQUITY

Q210

STABLEVALUE

REALRETURN

Source:StateStreetBank
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

RelativeVaR
Onemonth,95%Confidence
Fund&GroupLevel
1%

FundRelativeVaRHistory
Fund More
Risky than the
Benchmark

0.1%

1%
0%

0%
0.2%

1%

0.9%

1.2%

2%

0.2% 0.1% 0.0% 0.3%

1%

Fund Less
Risky than the
Benchmark

0.2% 0.2% 0.1%

0.0% 0.0%

0.1%

0.7% 0.7%

2%

3%

3%

RelativeriskmeasuresthedifferencebetweentheFundsandtheBenchmarksVaR. Forexample,theStableValuewas0.9%lessriskythanthebenchmark.

GlobalEquity

StableValue

1%
0%
0.0%
1%

0.1%

0.3%

0.0%

0.2%

RealReturn

1%

1%

0%

0%

0.2%

0.2%
1%

0.7%
1.2%

0.9%

0.9%

1%
1.3%
1.3%

1 3%
1.3%

2%

2%

2%

3%

3%

3%

Q110

Q210

Q310

Q410

Q111

Q211

Q110

Q210

Q310

Q410

Q111

Q211

1.0%

1.2%

1.6%

2.7%
Q110

2.6%
Q210

Q310

Q410

Q111

Q211

Source:StateStreetBank
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

PolicyTrackingError
Annualized
ActualTrackingErrorLevelvs.PolicyRequirement
150

TotalPublicFund

100

183
300

125
146
100

InternalGlobalBestIdeas
22

GlobalInflationLinked
Bonds

Current Forecast TE
CurrentForecastTE

165
200
217

ExternalUSLargeCap(1)

3YearRealizedTE
PolicyNeutral
248

292
300

ExternalWorldEquity(1)

PolicyMaximum

300
352

275

ExternalEmerging
Market(1)

300
323

ExternalNonUSDeveloped

300

373

397
411

ExternalHedgeFunds

693

400
445

ExternalSmallCap(1)
0

100

200

300

400

519
500

500

600

700

800

(1):Realizedtrackingerrorwascalculatedwithdataoflessthan3years.
Source:StateStreetBank,TRScalculation
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

TrackingError
Annualized
PolicyAssetClassTrackingError
MktValue
(Billions)

PolicyAssets
USLargeCap
USSmallCap
NonUSDeveloped
EmergingMarket
USTreasuries
Cash
HedgeFunds
GlobalInflationLinkedBonds
REITS
Commodities

TotalPublicFund
l bli
d
PrivateEquity
RealAssets

TotalPrivateFund
TotalTRSPolicyAssets
y

US $22.4
Sm 5.7
No 13.9
Em 14.9
US 12.0
Cas 0.4
Ext 4.3
Glo 8.5
REI 1.6
Co 3.1
T t 86.8
Tot
86 8
Pri 10.2
Rea 9.7
Pri 19.9
Gra $
$106.7

Current
Forecast
(bps)

128
456
170
240
29
17
411
22
141
744
150
(2)
(2)
(2)
((2))

3Year
Realized
(bps)

207
375
143
309
136
210
693
165
401
390
183 (1)
388 (3)
622 (3)
258 (3)
190

(1):Policymaximumis300
(2):Notmodeledduetolackoftransparencyforthebenchmarks
(3):TrackingErrorassumingcurrentbenchmarkforentireperiod.Trackingerrorusingoldbenchmarksis1879forPrivateEquity and590forRealAssets

Source:StateStreetBank
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

Leverage
AsofJune30,2011
TrustLevelLeverage
(ExcludesSecurityLending)
130%
120%
110%

98.9%

104.0%

99.2%

98.8%

98.5%

99.3%

99.4%

99.8%

99.6%

102.1%

104.2%

98.2%

98.5%

97.6%

97.3%

97.0%

98.1%

98.1%

98.6%

98.3%

98.4%

98.7%

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

120.0%

120.2%

100%
90%

98.3%

95.9%

Q308

Q408

80%

SecuritiesLendingLeverage
130%

124.9%

123.2%

120.8%

118.7%

123.5%

127.5%

127.9%

125.6%

121.9%

122.3%

120%
110%
100%
100.5%

100.6%

100.9%

100.6%

100.6%

100.7%

100.7%

100.6%

100.5%

100.3%

100.4%

100.5%

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

90%
80%

GrossLeverage

NetLeverage

Source:StateStreetBank

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

10

Leverage
AsofJune30,2011
HedgeFundLeverage
400%
300%
200%
100%

316.0%

285.2%

314.3%
272.8%

262.2%

206.2%

209.0%

49.8%

63.7%

56.1%

63.8%

63.6%

62.1%

71.3%

Q308

Q408

Q109

Q209

Q309

Q409

Q110

176.0%

270.3%

273.3%

300.1%

228.9%

52.8%

54.6%

46.9%

48.2%

50.7%

Q210

Q310

Q410

Q111

Q211

0%

Strategic Partners Leverage


StrategicPartnersLeverage
250%
200%
150%

170.6%

148.8%

160.3%

166.6%

166.0%

170.5%

166.5%

161.7%

166.3%

124.7%

118.6%

102.1%

105.5%

112.4%

111.9%

114.5%

116.2%

114.9%

114.7%

118.7%

114.6%

110.8%

109.7%

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

100%
50%

181.9%

0%

GrossLeverage

NetLeverage

Note:GrossLeverageisdefinedasthesumoflongexposureandshortexposureandNetLeverageisdefinedasthedifferencebetweenlongexposureandshortexposure.
Source:StateStreetBank

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

11

Leverage
AsofMarch31,2011
RealAssetsLeverage
80%
70%
ValueAddPortfolio

60%

OpportunisticPortfolio

50%

TotalRealEstate

40%

TotalRealEstate
(Median)
OtherRealAssets

30%

CorePortfolio

20%
10%
0%
Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Source:TheTownsendGroup

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

12

CounterpartyExposure
AsofJune30,2011
CounterpartyExposure1,2
C
Counterparty
t
t

Barclays Bank
Citibank
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank
Morgan Stanley
Societe Generale
UBS
Grand Total

Total
Counterparty
Swaps
ForwardsNumber
N
Numberof
b
f
Exposureless
E
l
ofContracts
Contracts
CollateralHeld
(millions)
3
24 $
3
21
28
34
69
34
52
26
13
52
3
50
1
0
3
93
9
94
361 $
63

InCompliance
p
withPolicy
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Source:StateStreetBank

CounterpartyRatings3 andCapitalAssessment
Counterparty

S&P
Rating

Moody's
Rating

Fitch
Rating

BarclaysBank
Citibank
DeutscheBank
GoldmanSachs
JPMorgan
Morgan Stanley
MorganStanley
SocieteGenerale
UBS

A+
A+
A+
A
A+
A
A+
A+

A1
A1
Aa3
A1
Aa3
A2
Aa2
Aa3

AA
A+
AA
A+
AA
A
A+
A+

Tier1
Capital

Common
Capital

13.5%
12.9%
12.3%
16.0%
12.1%
16.1%
10.6%
17.8%

10.6%
13.2%
9.6%
14.6%
9.8%
11.0%
9.2%
18.6%

Source:RatingAgency&Bloomberg
1CounterpartyexposuresincludeTRSinternallymanagedportfoliosandexternallymanagedseparateaccounts
2
3

CounterpartyexposureisdefinedaspositivemarketvalueofallOTCderivativepositionslesscollateralposted.Policylimitsthisvalueto$500millionpercounterparty.
d f d
k
l
f ll
d
l
ll
l
d
l l
h
l
$
ll
Ratingofcreditsupportprovider
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

13

DerivativeExposure
AsofJune30,2011
SwapExposure1

SwapsbyAssetClass
Commodities
Small Cap
Non-US
Non
US Developed
Other
Grand Total

b
f
Numberof
Contracts
22
8
5
59
94

GrossExposure
Gross
Exposure GrossExposure
Gross Exposure
as%ofAsset
as%ofTotal
Class
Trust

GrossExposure
(millions)
$

2,624
2,552
1 481
1,481
342
6,999

94.2%
43.7%
9 4%
9.4%
0.6%
8.1%

2.5%
2.4%
1 4%
1.4%
0.3%
6.6%

FutureExposure1
FuturesbyAssetClass
Non-US Developed
Small Cap
Emerging Market
US Long Treasuries
Large Cap Growth
Absolute Return
Other
Grand Total

Numberof
Contracts
45
7
7
21
9
48
27
164

GrossExposure GrossExposure
as%ofAsset
as%ofTotal
Class
Trust
13.1%
1.9%
28.3%
1.6%
12.1%
1.5%
15.9%
1.4%
9.4%
0.8%
108.3%
0.4%
0 9%
0.9%
0 5%
0.5%
7.6%
8.1%

GrossExposure
(millions)
$

2,059
1,657
1,589
1,482
849
473
549
8,658

ExposuresincludeTRSinternallymanagedportfoliosandexternallymanagedseparateaccounts

Source:TRSAdministrativeCenter

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

14

DerivativeExposure
AsofJune30,2011

CurrencyForwardExposure
Currency
Forward Exposure1

ForwardsbyAssetClass
EURO
O Dollar
British Pound
Japenese Yen
Hong Kong Dollar
South Korean Won
South African Rand
Australian Dollar
Swedish Krona
Swiss Franc
Norwegian Krone
Canadian Dollar
Chinese Renminbi
Other
Grand Total

Numberof
Contracts
69
43
40
6
5
4
29
28
32
20
28
6
51
361

GrossExposure
(millions)
$

931
828
707
617
465
454
361
296
231
124
117
109
228
5,468

GrossExposure
as%ofTotal
Trust
0.9%
%
0.8%
0.7%
0.6%
0.4%
0 4%
0.4%
0.3%
0.3%
0.2%
0.1%
0.1%
0.1%
0.2%
4.9%

ExposuresincludeTRSinternallymanagedportfoliosandexternallymanagedseparateaccounts

Source: TRS Administrative Center


Source:TRSAdministrativeCenter

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

15

Conclusions
TRSinvestmentexposuresareincompliancewiththeInvestmentPolicy

Attheendofsecondquarter,TRSwasslightlyoverweightGlobalEquity
andRealReturnsleeveswhileunderweightStableValuesleeve

Attheassetclasslevel,TRSwasoverweightEmergingMarkets,
At
the asset class level TRS was overweight Emerging Markets
CommoditiesandRealAssetswhileunderweightNonUSDevelopedand
USTreasuries

The
TheTrust
TrustssoverallValueatRisk(VaR)remainedstableversusfirstquarter
overall Value at Risk (VaR) remained stable versus first quarter
2011

Summary

TheTrustlevelVaR insecondquarter2011isslightlyhigherthanthe
Trustbenchmark(7.8%vs.7.6%)primarilyduetotheoverweightin
(
)
GlobalEquity

Attheassetgrouplevel,allassetgroupshaveVaR slightlylowerthanthe
correspondingbenchmarks

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

16

APPENDIX

PortfolioWeightsvs.LongTermPolicyWeights
AsofJune30,2011
70.00%
61%

60%

60 00%
60.00%
50.00%
40.00%
30.00%
20% 20%

20.00%

13%

18%

15%
14%

10.00%

5%

10%

21% 20%

20%
11%

9% 10%

5%

15%
8%

4%

4%

0%

9%

8%
3%

1%

2%

1%

8%

2%

0.00%

Legend(Darkershade:Portfolio/Lightershade:Benchmark):
GlobalEquityPortfolio
GlobalEquitySubAssets
Stable Value Portfolio
StableValuePortfolio
Stable Value Sub Assets
StableValueSubAssets
RealReturnPortfolio
RealReturnSubAssets
GlobalEquityBenchmark
StableValueBenchmark
RealReturnBenchmark

Source: TRS Investments Administrative Center


Source:TRSInvestmentsAdministrativeCenter

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

GlobalEquitySubAssetsBenchmark
StableValueSubAssetsBenchmark
RealReturnSubAssetsBenchmark

Derivatives

Conclusions

Appendix

18

SectorAllocation:Beta&ScenarioAnalysis
EquitySectorAllocation
20%

TRS
Benchmark

15%
10%
5%
0%

Source:StateStreetBank

ScenarioAnalysis
y

BetaAnalysis
y
MSCIWorldIndex
0.85
0.80
0.75
0.70
0.65
0.60

0.76

0.78 0.79 0.78 0.80

(%Gain/LossinMarketValue)
0.83

0.790.79

0.78 0.79 0.770.77


0.71 0.72
0
69 0.71
0.69
0
74 0.75
0.74
0.74
0.71
0.72
0.63
0.69
0.69

10%

7.5%

8.2%
7.3%

7.0%
3.6%

5%

3.0%

0%
5%
-5.4% -5.1%
-6.9%
-8.4% -8.7% -8.6%

10%

0.63

0.55

15%

0.50

20%
Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211

Fund

Benchmark

AssetAllocation

ValueatRisk

TrackingError

-13.2% -12.8%

Benchmark

IR
Emerging
Nasdaq
Steepening: Markets
Rally:Nov
Sept98 Rally:Jan99 99 Jan00
Nov98
May99

16 5%
-16.5%
-17.1%

AsianCrisis BondCrash:
9798 5
Feb94
day
May94

Russian
Crisis 5
Day

Nasdaq
October
Correction: 2008Crisis
July98
Aug98

IfthemarketsexperiencedanotherNasdaq25%correctionidenticaltotheoneinJuly1998,the
F d
Fundmay
l
lose13.2%ofitsmarketvalue.TheeffectsontheFundandBenchmarkarequantified
13 2% f it
k t l
Th ff t
th F d d B h
k
tifi d
foreachscenarioindicated.
Source:StateStreetBank

Forevery1%theMSCIWorldIndexrises,theFundmayriseby0.8%.
Source:StateStreetBank
Summary

Fund

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

19

RealEstateDiversification
AsofMarch31,2011

GeographicDiversification

PropertyTypeDiversification

Apartment,
13%

Other,21%

NorthEast,
16%

ExUS,20%

MidEast,8%
Hotel,9%

EastNorth
Central,5%
C
t l 5%
WestNorth
Central,2%

Retail,12%

Pacific,27%

Office, 35%
Office,35%

i
Mountain,
5%

Industrial,
11%

SouthWest,
7%

SouthEast,
11%

Source:TownsendGroup

Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

20

Leverage
AsofJune30,2011(PublicMarkets)
ManagerName
HedgeFund

Gross

Net

Wolverine
l i
TudorBVI
AQRGlobalStockSelectionOffshoreFund
BridgewaterPureAlphaFund,Ltd
BlueTrend
BlackDiamondRelativeValueLtd
NuWaveCombinedFutures
BGIGlobalAscent

974.7%
760.0%
598.3%
437.1%
427.4%
418.3%
374.4%
344.0%

61.7%
150.0%
3.3%
210.2%
394.3%
0.3%
106.5%
14.8%

AleutianFundLTD

342.2%
335.5%
319.4%
309.1%
303.7%
302.9%

22.4%
153.0%
2.8%
44.9%
51.7%
0.7%
126.9%

BridgewaterPureAlphaMajorMarketsFund,Ltd
ACIMultiStrategyMarketNeutralFundLtd
MKPCreditOffshoreLtd.
d ff h
d
DoubleBlackDiamondLtd
OConnorGlobalFundamentalLong/ShortStrategy
ForeMultiStrategyFundLtd
COMACGlobalMacro
Investcorp Silverback Arbitrage Fund LTD
InvestcorpSilverbackArbitrageFundLTD
NorthwestFundLtd
BlueMountainLong/ShortCRFD
ZaxisOffshoreLimited
AmiciFundInternationalLtd
GSOSpecialSituations
WalkerSmithIntlFundLtd
InvestcorpStoneworks
HalcyonOffshoreFundLtd

284.3%
281.0%
280 7%
280.7%
258.6%
207.0%
188.8%
185.3%
143.7%
128.0%
116.9%
115.4%

47.0%
82 1%
82.1%
30.0%
27.0%
39.4%
74.6%
83.7%
33.0%
71.9%
79.4%

ManagerName
HedgeFund
PerryPartnersInternationalInc
i l
HendersonAsiaPacificAbsoluteReturnFund
IvoryOffshoreFlagshipFundLtd.
HendersonJapanAbsoluteReturnFund
LongacreInternationalLtd
KingStreet

Gross

Net

111.4%
110.8%
107.9%
98.8%
80.1%
76.0%

55.1%
26.5%
24.4%
42.6%
65.6%
38.0%

214.3%
164.8%
142.3%
139.7%

110.5%
103.4%
116.4%
108.4%

SPN
JPMorgan
MorganStanley
NeubergerBerman
BlackRock

ExternalPublicManagers

DFAInternationalValue
JennisonLargeCapGrowth
AcadianNonUSConcentrated

159.8%
100 8%
100.8%
100.2%
100.0%
99.4%
99.4%
99.3%
99.0%
99.0%

100.0%
77 3%
77.3%
97.6%
100.0%
99.4%
99.4%
99.3%
99.0%
99.0%

Gross

Net

BrandesJapanEquity
RockCreekLimestoneEmergingMarket
EatonVanceStructuredEmergingMarkets
NBRMBS
LazardEmergingMarkets
PENNCapitalMicroCapEquity
p
p q y
GoldmanSachs
VaughnNelsonInvestmentManagement

98.7%
98.7%
98.6%
98.6%
98.1%
96.9%
96.7%
96.6%

98.7%
97.3%
98.6%
98.6%
98.1%
96.9%
96.7%
96.6%

StephensInvestmentManagementGroup

96.5%
96.5%
96.4%
96.3%
96.2%
96.2%

96.5%
96.5%
96.4%
96.3%
96.2%
96.2%

96.2%
96.1%
96 1%
96.1%
95.8%
95.5%
95.3%
94.8%
85.6%

96.2%
96.1%
96 1%
96.1%
95.8%
95.5%
95.3%
80.2%
85.6%

BaringsFocusedInternational
JPMorganGlobalEM
SascoContrarianValue
AllianceBernstein
MarathonActiveInternational
ArtisanPartnersEmergingMarkets

DEShawBMCAESpecialFund
Platinum Asset Management
PlatinumAssetManagement
GMOGlobalAllCountryEquityAllocation
P2Capital
DFAEmergingMarkets
DePrinceRace&ZolloLargeCapValue

ManagerName
ExternalPublicManagers

KnightVinkeInstitutionalPartners
Westwood Large Cap Value
WestwoodLargeCapValue
CantillonGlobalEquity
WellingtonGlobalSelectCapitalAppreciation
MorganStanleyEmergingMarkets
Lansdowne
OmegaEquityInvestors

Source:StateStreetBank
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

21

Leverage
AsofMarch31,2011(RealAssets)
FundName
CorePortfolio
ParkwayPropertiesOfficeFundII
LionstoneCashFlowRealEstateOne
PrincipalRealEstateStrategicEquityFund
USAAUSGovernmentBuildingFund
InvescoSanJacintoCoreFund
PrimePropertyFund
LaSalleUSPropertyFund
PRISA
TLFLogisticsSeparateAccount
JP Morgan Strategic Property Fund
JPMorganStrategicPropertyFund
USAAUSRepublicCoreFund
HeitmanAmericaRealEstateTrust
AEWCorePropertyTrust
CIMUrbanREIT
PrincipalDebtFund
CorePortfolio

LTV
48.1%
48.0%
46.9%
42.1%
39.3%
35.4%
33.4%
33.4%
33.0%
29 3%
29.3%
28.3%
18.6%
14.0%
12.5%
11.0%
32.6%

ValueAddedPortfolio
TRECAP(GMAC)CommercialRealtyPartnersII
TRECAPCommercialRealtyPartnersIII
BlackRockDiamondPropertyFund
RREEFAmericaREITIII
Camden Multifamily Value Added Fund
CamdenMultifamilyValueAddedFund
L&BDiversifiedStrategies
AMBU.S.LogisticsFund
FiveArrowsRealtySecuritiesVCoInvestment
ProLogisMexicoIndustrialFundI
PRISAII
CBREStrategicParntersUSValueV
AEWSeniorHousingInvestors
LaSalle(Ranger)CoInvestment
FiveArrowsFundV
Hunt(AkardStreet)OpcoI
SecurityCapitalIncomeOpportunitySeparateA
ValueAddedPortfolio

86.9%
84.3%
73.6%
72.4%
67 1%
67.1%
66.9%
56.0%
54.0%
53.7%
49.5%
46.9%
44.0%
41.0%
0.0%
0.0%
0.0%
62.6%

FundName
OpportunisticPortfolio
WaltonVSidecarFund
MacFarlaneUrbanRealEstateFundII
WaltonStreetRealEstateFundV
BlackstoneRealEstatePartnersEuropeIII(Eu
WaltonStreetRealEstateFundVI
BlackstoneFundV
PrincipalGreenPropertyFundI
StockbridgeRealEstateFundII
ColonyVIII
Fudo Capital II
FudoCapitalII
BlackstoneRealEstatePartnersVI
CapriUrbanInvestors
CarlyleEuropeRealEstatePartnersIII(USD)
StockbridgeRealEstateFundIIIL.P.
CarlyleRealtyPartnersV
PrincipalGreenPropertyFundSidecar
ThayerHotelInvestorsV
ARAAsiaDragonFund
BlackRockRetailOpportunityFund
SquareMilePartnersIII
PrudentialLatinAmericaRetailFund(USD)
RLJRealEstateFundIII
CIM Real Estate Fund III
CIMRealEstateFundIII
ForumEuropeanRealtyIncomeIII
CanyonJohnsonUrbanFundIII
FiveMileCapitalPartnersII
ColonyCreditOpportunityFund
IronPointRealEstatePartners
CBREStrategicPartnersUSOpportunityV
WestbrookRealEstateFundVIII
PLAResidentialFundIII(USD)
BrocktonCapitalFundII(USD)
CapmarkStructuredRealEstate
Colony(FC)CoInvestment
CSFBEmergingOpportunitiesFund

LTV
104.9%
88.0%
86.1%
75.7%
71.1%
69.5%
65.2%
64.3%
63.0%
63 0%
63.0%
62.7%
61.8%
59.1%
57.0%
53.0%
52.6%
52.0%
47.7%
46.8%
40.0%
38.9%
38.3%
35 2%
35.2%
34.6%
24.4%
17.7%
17.0%
16.1%
15.1%
7.6%
7.0%
0.0%
0.0%
0.0%
0.0%

FundName
OpportunisticPortfolio
PLAResidentialFundIV(USD)
TriconIX
ForumAsianRealtyIncomeIII
ForumAsianRealtyIncomeII
OpportunisticPortfolio

OtherRealAssets
FirstReserveEnergyInfrastructureFund
Energy & Infrastructure Group Energy Fund XV
Energy&InfrastructureGroupEnergyFundXV
ZachryHastingsInfrastructurePartners
SteelRiverInfrastructureFundNorthAmerica
BrookfieldAmericasInfrastructureFund
KKRNaturalResourcesI
MorganStanleyInfrastructureFund
AlternaCoreCapitalAssetsFund
TeaysRiver(Ag)RealValueFund
MorganStanleyMezzaninePartners
EnCapEnergyInfrastructureFund
EnCap(TTEEIF)CoInvestments
StratfordLandFundIII
PCCPMezzanineRecoveryPartnersII
PREI Mezzanine Fund I
PREIMezzanineFundI
StratfordLandFundIV
ORAPortfolio

LTV
0.0%
0.0%
0.0%
0.0%
63.7%

ni
ni
70.6%
60.0%
57.8%
52.4%
52.0%
45.9%
35.0%
18.7%
8.9%
8.9%
2.2%
0.0%
0 0%
0.0%
0.0%
43.8%

ni:Notyetinvested;

Source:TheTownsendGroup
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

22

Glossary&Notes
Glossary
Beta isameasureofanassetsvolatilityinrelationtoaspecificmarketorriskfactor.Betaisthemeasureofanasset'srisk inrelationtothemarket(forexample,theS&P500)ortoanalternative benchmark
orfactors.Roughlyspeaking,asecuritywithabetaof1.5willmove,onaverage,1.5timesthemarketreturn.
Collateral isassetspledgedtosecurepaymentofapartysobligationunderatransaction.Collateralisariskreductiontoolwhichmitigatesriskbyreducingcreditexposure.
Counterparty istheoffsettingpartyinanexchangeagreement.
Forward Contract isanon
ForwardContract
is a nonstandardized
standardizedcontractforthephysicalorelectronic(bookkeepingentry)deliveryofacommodityorfinancialinstrumentataspecifiedpriceatsomepointinthefuture.
contract for the physical or electronic (bookkeeping entry) delivery of a commodity or financial instrument at a specified price at some point in the future
FuturesContract isastandardizedcontractforeitherthephysicaldeliveryofaninstrumentataspecifiedpriceatsomepointinthefuture,orafinancialsettlementderivedfromthechangeinmarketprice
ofthecommodityorfinancialinstrumentduringthetermofthecontract.
Leverage isaconditionwherethenetpotentialmonetaryexposureofanobligationexceedsthevalueoftheunderlyingassetswhichsupporttheobligation.
GrossLeverage: Additionalinvestmentassetsownedbythetrustwhicharedirectlyfundedbyliabilities(shortsales). Forsecuritieslendingthiswouldbethevalueforthecollateraltakeninagainst
loans.
Net Leverage: Additionalinvestmentassetsnetoftheliabilities.Forsecuritieslendingthiswouldbetheexcesscollateral(the 102%or105%collateralization)netoftheshortpositions.Generally,
leverage allows greater potential return to the investor than otherwise would have been available. The potential for loss is also greater because if the investment becomes worthless, not only is that
leverageallowsgreaterpotentialreturntotheinvestorthanotherwisewouldhavebeenavailable.Thepotentialforlossisalsogreaterbecauseiftheinvestmentbecomesworthless,notonlyisthat
moneylost,buttheloanstillneedstoberepaid.
NotionalValue isthevalueofaderivativesunderlyingassetsatthespotprice.Inthecaseofaswap,thisistheagreedprincipalamountonwhichtheswapisbased,butwhichneitherpartyisobligatedto
paytotheother.
Operationalrisk isdefinedastheriskoflossresultingfrominadequateorfailedinternalprocesses,models,people,andsystems,orfromexternalevents.Overdraftsaccountsforlossesfromfailed
transactionprocessingorprocessmanagement.
Settlementrisk istheriskthatacounterpartyfailstoperform,causingatradefailure.Generally,thishappensbecauseonepartydefaults on itsclearingobligationstooneormorecounterparties.Assuch,
settlement risk comprises both credit and liquidity risks. The former arises when a counterparty cannot meet an obligation for full value on due date and thereafter because it is insolvent. Liquidity risk
settlementriskcomprisesbothcreditandliquidityrisks.Theformerariseswhenacounterpartycannotmeetanobligationforfullvalueonduedateandthereafterbecauseitisinsolvent.Liquidityrisk
referstotheriskthatacounterpartywillnotsettleforfullvalueattheduedatebutcoulddosoatsomeunspecifiedtimethereafter,causingthepartywhichdidnotreceiveitsexpectedpaymenttofinance
theshortfallonshortnotice.
TotalReturnSwap isabilateralfinancialcontractinwhichonecounterpartypaysoutthetotalreturnoftheindex,includingitsdividendsand capitalappreciationordepreciation,andinreturn,receivesa
regularfixedorfloatingcashflow.
TrackingError predictsthedifferenceinreturnsbetweenthemanagedportfolioandanequalinvestmentinthemarket.Trackingerrorincludes theeffectofresidualrisk(risknotattributabletomarket
influences)andmarketorsystematicrisk(betaisameasureofmarketrisk).
Value at Risk (VAR)
ValueatRisk(
VAR ) isanestablishedmethodofmeasuringeconomicexposureofrisk.Themeasureconveysthemaximumpotentialloss(indollarsorpercentoftotalassets)foraparticularinvestment
is an established method of measuring economic exposure of risk. The measure conveys the maximum potential loss (in dollars or percent of total assets) for a particular investment
position,foraparticularperiodoftime,foraparticularlevelofconfidence.VARisbasedonhistoricalmarkettrends,correlationsandvolatilities.Confidencelevelisexpressedasapercentageandseeksto
indicatethepercentlikelihoodthatanyresult(loss)willnotexceedtheVAR.
Notes
StateStreetIFSproducestheirriskmeasuresusinghistoricalsimulations.TheyhavefoundhistoricsimulationisthemostdirecttechniqueforcomputingVARandiswidelyfavoredbecauseitprovides
universalcoverageofallinstrumentsandalltypesofmarketrisk amajorstrength.Statistically,inhistoricsimulation,VARisderivedfromthedistributionofportfoliovaluesoveragiventimehorizon,
givenaseriesofhistoricalmarketdataprices.Thedistributionofportfoliovaluesiscalculatedbyrevaluingtheportfoliomanytimesusingatimeseriesofmarketprices.Theportfoliototalreturnis
g
,
y
g
y
,
y
y
p g
y
measuredasthechangeinmarketvaluebetweenonedateandthenext,asdeterminedbythelengthofthetimehorizon.TRSusesa5yearlookback,monthlyhorizonwithweeklysampling.Nodecay
factorisapplied,thusallperiodsareequallyweighted.TheHedgeFund,RealEstate,RealAssets,andPrivateEquityportfoliosareproxiedintheStateStreetIFSriskmodel.PriortoOctober2007,Bear
Measuriskwasourriskprovider.
LiquidityAnalysis:Fortheequityportfolio,ourholdingswereanalyzedrelativetotheaverageofthelast20daytradingvolumes.Weassumedliquidationwouldbe12%perday.FortheHedgeFund
portfolio,weanalyzedcontractualtermssuchaslockup,period,redemptionnotificationrequirements,andthepresenceofgatecontractualtermforourcalculation.FortheFixedIncomeinstruments,
weassumedstaticliquidationassumptionsperassetclassandmarketvalue(i.e.$XBillionofTSYcouldbeliquidatedin1day).WeassumedtheRealEstateandPrivateEquitycouldbeliquidatednosooner
thansevenyears.ThesizeoftheOTCmarketwastakenintoaccountforeachTotalReturnSwap.Liquidationwasassumedtohappenoverseveraldays.
Beginningon3/31/08,themodelingoftheemergingmarketETFwasupdatedtobettercapturethetrueeconomicrisksoftheportfolio. Beginning6/30/08,trackingerrormethodologywaschangedto
measurethestandarddeviationofthedifferenceinthebenchmarkandtheportfoliosreturns.Priorto6/30/08,onlythedownsidevolatilitywasreported.
Summary

AssetAllocation

ValueatRisk

TrackingError

Leverage

Counterparty
Risks

Derivatives

Conclusions

Appendix

23

PageIntentionallyLeftBlank

Tab 3

Thi page
This
intentionally left
blank.

TRS
BubbleMonitoringSystem
JamesNield
InvestmentManager
PortfolioStrategyandExecution
September2011

Agenda
Background

Background

TRSMonitor

TRSBubbleMonitor

Findings

Findings

Summary

Summary

TRSBubbleMonitor
1. Objective
Systematicallymonitorassetclassesto
S t
ti ll
it
t l
t identifyabnormalpricebehavior
id tif b
l i b h i

2 Result
2.
R l
ImproveriskmanagementoftheTrust
Institutionalizeaprocess
I tit ti
li
t d t t b bbl
todetectbubbles

Theonlythingsthatreallymatterininvestingarethebubblesandthebusts.
JeremyGrantham,GMO

Background

TRSMonitor

Findings

Summary
2

BubblePhases
1. Birth
Alogicalreason/storyforbubbletoinitially
g
/
y
y form

Market innovation:Theinternet

Policychange:RepealofGlassSteagallAct

2. Sustenance
Sufficientliquidity tosupportbuyers

Low ratesoreasieraccesstocapitalcanfuelspeculation

Herdbehavior:OKtobewrong,justdontbetheonlyonewrong

3 BurstingofBubble
3.
Bursting of Bubble

5,000

DotComBubble:NasdaqIndex
NasdaqIndex

4,500

Nomorebuyers

4,000
3,500
3,000

Change in liquidity
Changeinliquidity

2 500
2,500
2,000

NewInformation

1,500
1,000
500
0

Background

TRSMonitor

Findings

Summary
3

WhatistheTRSBubbleMonitor?
Internallydevelopedwithinputfromexternalpartners
100differentassetsmonitoredmonthly
100 diff
t
t
it d
thl

Equities,FixedIncome,Currencies,RealEstate,Commodities,HedgeFunds

S t
SystematicProcess
ti P

Threefactorsusedtoscreenforpotentialbubbles:
1
1.

Rolling 7 year Z score of price levels


Rolling7yearZscoreofpricelevels

2.

Changeincorrelationtoabenchmark
g

3.

Howdifferentisthepricetodayfromtherecentpast?

Istheassetpricebehavingdifferentlyrelativetootherassets?

Absolutechangefromlowestprice

Haveweseenalargeabsolutechangeinvalueoverthepast7years?

Iffactors1and3meetthethreshold,thenanassetwillgenerateabubblesignal

Background

TRSMonitor

Findings

Summary
4

TRSBubbleMonitor:SampleReport
August2011
Top5CurrentBubbleSignals(ifany)
Index
SILVERSPOT$/OZ
GOLDSPOT$/OZ

1
2

10

Score
2.7
1.1

Bubble
eScore

PriorMonth

SILVERSPOT$/OZ

2.7

Rolling 7 Year Z Scores


Rolling7YearZScores
Index
1
2
3
4
5

ZScore

Silver
Gold
SwissFranc
U.K.10YrGov'tBonds
U.S.LongTreasuries

3.2
3.0
2.6
2.5
2.4

SILVERSPOT
$/OZ
$/OZ

GOLDSPOT
$/OZ

Correlation Changes (Z score)


CorrelationChanges(Zscore)
Index
GermanEquities
AaaCorporateSpreads
p
p
EmergingMarketDebt
MortgageBackedSec.
CanadianREITS

NumberofPotentialBubbles

ZScore
2.9
2.6
2.6
2.1
2.0

Changes from 7 year minimum


Changesfrom7yearminimum
Index
2YrU.S.Treasury
AssetBackedSecurities
Silver
TIPS
AaaCorporateSpreads

%Change
2464% *
718% *
518%
375% *
368% *

*Inordertobetterdetectfixedincomebubbles,wefocusonachangeinyieldandnotindexlevelswhicharemorestable.For example,2YrTreasuries
yielded5.27%in2006andnowyield0.21%.Thisdropinyieldsrepresentsa2464%changeinyieldsrelativetotodayslevel (5.27% 0.21%)/0.21%

Background

TRSMonitor

Findings

Summary
5

HistoricalBubbleSignalsIndicatedbyModel
MonthlyBubbleSignalsbyAssetClass

14

NumberrofBubbles

12
10
8
6
4
2

Equities

FixedIncome

Commodities

Currencies

J11

F11

O10

J10

F10

O09

J09

F09

O08

J08

F08

O07

J07

F07

O06

J06

F06

O05

J05

F05

O04

J04

F04

O03

J03

F03

O02

J02

F02

O01

J01

F01

O00

J00

F00

O99

J99

F99

Alternatives

Largesystemicrisk(multiplebubblesinmultipleassetclasses)wasidentified
in2000andfrom2005 2008

Bubble signals can persist for prolonged period of time


Bubblesignalscanpersistforprolongedperiodoftime

FixedIncomebubblestendtooccurafterequity/commoditybubbles
Themostrecentbubblesignalshavecomefromcommodities
The most recent bubble signals have come from commodities
Background

TRSMonitor

Findings

Summary
6

ActualBubblesObservedOverTime
Percentageofyearsinwhichabubbleactuallyoccurredbyassetclass

Actualbubbledefinedasadeclineof50%ormorewithinathreeyearperiod

23%

Energy
11%
8%

Real
Estate

Agriculture

7%

Global
Equities

6%

6%

5%

5%

Metals

U.S.
Sectors

Currency

U.S.
Equities

Commoditiesaremoresusceptibletobubblesgivensmallermarketsize

U.S.equitieshavebeenmorestablethanEmergingMarketequities

Background

TRSMonitor

Findings

Summary
7

ModelAccuracy
Roughly30%ofthebubblesignalsgeneratedwereassociatedwith
an actual bubble
anactualbubble

Signalsthatprovenottobeassociatedwithanactualbubbleare
stillvaluabletomonitor

Externalresearchindicatesthatassetsthatgenerateabubblesignal
experienceincreasedvolatility
TRSBubbleMonitorprovidedabubblesignalforallofthemajor
historicalstockandcommoditybubblesthatwereidentifiedbyGMO

Background

TRSMonitor

Findings

Summary
8

Actions
CommunicatebubblesignalstoIICandappropriateportfolio
manager(s)

Reportisdistributedmonthly

New bubbles are discussed at the monthly IIC meeting


NewbubblesarediscussedatthemonthlyIICmeeting

RiskManagementmeetswithportfoliomanagertoreviewmarket
fundamentals

MinimizepotentialnegativeimpactontheTrust

RiskManagementwilllooktoreducetheimpactoftheburstingofanybubbles
by implementing drawdown controls as appropriate
byimplementingdrawdowncontrolsasappropriate

Background

Example:TrailingstoplossonGold

TRSMonitor

Findings

Summary
9

Conclusion
Asystematicbubblemonitoringtoolisinplace
Bubblesoccurmoreoftenthanmanythinkandcanbeanindication
bbl
f
h
h k d
b
d
ofsystematicrisk
Bubblesignalscanpersistforaprolongedperiodoftime
Bubble signals can persist for a prolonged period of time
Asappropriate,drawdownriskcontrolswillbeimplementedto
reduce the impact of potential bubbles
reducetheimpactofpotentialbubbles

Background

TRSMonitor

Findings

Summary
10

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