Professional Documents
Culture Documents
Board Meeting Risk Management Committee Sep2011
Board Meeting Risk Management Committee Sep2011
Board Meeting Risk Management Committee Sep2011
COMMITTEE
SEPTEMBER 2011
SEPTEMBER2011
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Consider the approval of the proposed minutes of the April 7, 2011 committee meeting Eric McDonald.
2.
3.
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.
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.
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%
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.
$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%
1%
Fund Less
Risky than the
Benchmark
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%
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
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
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
(%Gain/LossinMarketValue)
0.83
0.790.79
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.
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
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
NumberofPotentialBubbles
ZScore
2.9
2.6
2.6
2.1
2.0
%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
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
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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