investment management committee documents/imc_committee... · 2019-12-12 · mr. colonnetta noted a...

INVESTMENT MANAGEMENT COMMITTEE

December 2019

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

TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES

AND INVESTMENT MANAGEMENT COMMITTEE

(Committee Chair and Members are Subject to Change at the December Board Meeting)

All or part of the December 12, 2019, meeting of the TRS Investment Management Committee and Board of Trustees may be held by telephone or video conference call as authorized under Sections 551.130 and 551.127 of the Texas Government Code. The Board intends to have a quorum and the presiding officer of the meeting physically present at the following location, which will be open to the public during the open portions of the meeting: 1000 Red River, Austin, Texas 78701 in the TRS East Building, 5th Floor, Boardroom. The open portions of the December 12, 2019, meeting are being broadcast over the Internet. Access to the Internet broadcast is provided at www.trs.texas.gov.

AGENDA

December 12, 2019 – 10:45 a.m. TRS East Building, 5th Floor, Boardroom

1. Call roll of Committee members.

2. Consider the approval of the proposed minutes of the September 2019 committee meeting – Committee Chair.

3. CIO Update including Fleet Strategy; Talent Management; Accomplishments; Notices and Key Dates and Upcoming Events – Jerry Albright.

4. Discuss the Third Quarter 2019 Performance Review – Steve Voss, Mike McCormick and Mike Comstock, Aon Hewitt.

5. Update on the Trading Group – Bernie Bozzelli.

6. Annual Update on the Risk Group – James Nield.

7. Annual Update on the Multi-Asset Strategies Group – Mohan Balachandran.

8. Assessment of TRS Quantitative Equity Portfolio – Steve Voss, Aon Hewitt.

9. Review of Proxy Voting at TRS – Joel Hinkhouse.

Minutes of the Investment Management Committee

September 19, 2019

The Investment Management Committee of the Board of Trustees of the Teacher Retirement System of Texas met on September 19, 2019, in the boardroom located on the fifth floor of the TRS East Building offices at 1000 Red River Street, Austin, Texas.

Committee Members present: Mr. Joe Colonnetta, Chair Mr. David Corpus Mr. Jarvis V. Hollingsworth Mr. Chris Moss Ms. Dolores Ramirez Other Board Members present: Mr. John Elliott Dr. Greg Gibson Mr. James D. Nance Ms. Nanette Sissney Others present: Brian Guthrie, TRS Steve Voss, Aon Hewitt Andrew Roth, TRS Mike McCormick, Aon Hewitt Don Green, TRS Dr. Keith Brown, Board Investment Advisor Carolina de Onis, TRS Ann Fickel, TCTA Jerry Albright, TRS Jase Auby, TRS Amanda Jenami, TRS James Nield, TRS Stephen Kim, TRS Michael Pia, TRS Heather Traeger, TRS Katherine Farrell, TRS Tiffany Reeves, Fiduciary Counsel, Reinhart Boerner Van Deuren s.c. Investment Management Committee Chair Mr. Colonnetta called the meeting to order at 11:13 a.m.

1. Call roll of Committee members.

Ms. Farrell called the roll. A quorum was present.

2. Consider the approval of the proposed minutes of the July 2019 committee meeting – Committee Chair.

Mr. Colonnetta noted a correction needed within Agenda Item 3. On a motion by Ms. Ramirez, seconded by Mr. Corpus, the committee voted to approve the proposed minutes for the July 2019 Investment Management Committee meeting as presented with the correction noted.

3. CIO Update including Fleet Strategy; Talent Management; Global Offices; General

Contractor for finish out of leased space at Austin Office (Indeed Tower); Accomplishments; Notices and Key Dates and Upcoming Events – Jerry Albright.

Mr. Jerry Albright announced the value of the Trust as of the second quarter in 2019 was $156.4 billion. He reported they continue to hire for build the fleet. He noted the turnover for the past two years was significantly down from 12 percent to around four percent which has helped with the success of build the fleet. He reported the successful move of the London office to its new location. He stated they continue to look at the opportunities in Singapore. For the Austin office, he said procurement for the general contractors is underway and near completion, with the selection to be made in September.

4. Discuss the Second Quarter 2019 Performance Review – Steve Voss and Mike McCormick, Aon Hewitt.

Mr. Steve Voss provided market highlights for the quarter. He noted U.S. equity and long Treasury were the largest contributing asset classes. He said TRS has systematically been underweight in those particular segments causing a modest relative underperformance. He said for the one-year period. TRS has a roughly 6.4 percent return, ending the period with $156.4 billion. Mr. Mike McCormick provided analysis of the 6.45 percent return to the Trust versus the benchmark of 6.74 percent.

5. Market Update – Jase Auby.

Mr. Jase Auby noted the last time he provided the update, the market was in a drawdown, 13.5 percent negative in the fourth quarter of last year. He reported six months later there is a complete recovery from that drawdown and the markets are up 18.5 percent. He said geopolitical topics continue to weigh on the markets. He said looking forward many leading indicators are in the red, seeing a weaker economic environment. He discussed how the performance of the Trust where a highly diversified portfolio has outperformed the US 60-40 by 2 percent a year for the last 80 years. He also noted the active has outperformed the passible benchmark as well. Mr. Auby concluded his remarks by discussing value investing.

6. Review of the Public and Private Strategic Partnership Network – Michael Pia.

Mr. Mike Pia provided an overview of the Public and Private Strategic Partnership Network (SPN). He stated the group’s main activity is managing the investments and relationships of the six strategic partners, four public and two private. He said the total SPN aggregate portfolio is 9.4 percent of the Trust, or $14.8 billion. He noted the public SPN has added value of $665 million since inception. For the private SPN since inception, it has returned 11.1 percent. Mr. Pia said a key element of the strategic partnership concept is customized research. He described two of the projects commissioned in 2019. The first was about the strategic asset allocation (SAA) process and governance which confirmed TRS’ current process is best practice. The second project was on the hedge fund overlay concept. Mr. Pia concluded by discussing the value beyond assets that the private SPN brings to the Trust through principal investment deal flow.

7. Semi-Annual Risk Report – James Nield and Stephen Kim. Mr. James Nield began his semi-annual risk report by stating TRS is in compliance with the eight key risk metrics. He noted there was an underweight to public equities in the second quarter. There was a passive breach to the 39 percent target to public equities due to a market sell-off in May which has since been corrected. Mr. Stephen Kim discussed drawdown risk. He said to measure drawdown risk they review the Value at Risk (VAR) measures and stress tests. He noted that the new SAA offers better diversification for a broader range of negative economic environments.

Without further discussion, the meeting adjourned at 12:50 p.m. APPROVED BY THE INVESTMENT MANAGEMENT COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE 12th DAY OF DECEMBER 2019.

______________________________ _________________ Katherine H. Farrell Date Secretary of the TRS Board of Trustees

Investment Management Division

Chief Investment Officer Update

Jerry AlbrightChief Investment Officer

December 2019

CIO Update

Trust Value is $157.6 billion as of Q3 2019

• Fleet Strategyo 27 of 63 planned Phase 1 and 2 Fleet hire offers accepted and/or extended to dateo 7 current vacancies; hiring in process

• Talent Managemento Participated in two Howard University recruiting events; Career Panel and Cohort Adoption Dinnero Launched leadership development program in collaboration with the McCombs School of Business o Completed career development and coaching conversations between IMD employees and managerso Conducted interviews for 2020 Summer Intern Program; planning to extend offers over next two months

• Internal Prioritieso Implementing Board approved changes to Strategic Asset Allocation; expected completion by end of Decembero Continued engagement with Sunset Commissiono Hosted SPN Public and Private Summits in Austin, Texaso Finalized 2020 annual Management Committee priorities

2

Appendix

Metrics ReportingAs of September 30, 2019

4

Metric Objective Target Q4 2018 Q1 2019 Q2 2019 Q3 2019

Total Trust Excess Return Return in excess of the benchmark return for the Total Trust (3 Year Rolling) +100 bp +71 bp +68 bp +67 bp +69 bp

Private Markets Excess Return

Return in excess of the benchmark return for Private Markets investments (3 Year Rolling) +155 bp +210 bp +206 bp +203 bp +215 bp

Active Public Markets Excess Return

Return in excess of the benchmark return for Active Public Markets investments (Rolling Annualized) +100 bp 1-Yr: -32 bp 1-Yr: -98 bp 1-Yr: -103 bp 2-Yr: -37 bp

Principal Investments Percent of portfolio capital plan in principal investments approved (cumulative year-to-date)1

2018: 33%2019: 35% 2018: 44% 2019 YTD: 15% 2019 YTD: 27% 2019 YTD: 37%

Public Equity Allocation Percent of internal public equity allocation2 55% 54% 57% 59% 59%

EstimatedFee Savings External manager annual fee savings 2018: $53M

2019: $64M2018: $46M

2019: To be reported April 2020

1 – Q4 represents actual capital commitments vs. approvals and actual capital plan vs. budgeted plan2 – Target will be adjusted to 50% going forward due to Strategic Asset Allocation changes

Source: State Street Bank, TRS IMDNote: Data shown as calendar-year. Public equity allocation excludes SPN

CIO UpdateUpcoming IMD Events

5

• Key Dates & Upcoming Eventso Council of Institutional Investors (CII) Board Meetings (Pasadena, California) – January 21-22, 2020o IMD Town Hall (Austin, Texas) – January 23, 2020 (Tentative)o TRS Hedge Fund Conference (Austin, Texas) – February 6, 2020o TRS Emerging Manager Conference (Austin, Texas) – February 26, 2020

• February Board Meetingo CIO Updateo Market Update and Special Topic on Diversificationo Annual Update on the Emerging Manager Programo ESG Education Sessiono ISS – Proxy Advisor Teach-In

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.

Teacher Retirement System of TexasPerformance Review: Third Quarter 2019

Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2

Summary

Global equities were slightly up for the quarter despite concerns of slowing global growth and the trade war ramping up, withglobal equities returning 0.2% during the period

The U.S. nominal yields fell across all maturities with the yield curve flattening over the quarter as longer-term yields decreased by more than short-term yields, resulting in the strong returns shown for the Stable Value and Risk Parity components

TRS returned 1.6% for the quarter which was 0.3 percentage points above its benchmark− Active management in Non-U.S. Developed and Emerging Markets, along with performance within Real Estate and Long

Treasuries were the primary drivers of outperformance.

For the trailing twelve months, TRS returned 5.9% versus the benchmark return of 6.0%− Active management in Total USA and Non-U.S. Developed, along with Private Equity performance were the primary

detractors from relative results


1. Market Summary – Third Quarter 2019


2. Market Value Change


3. Asset Allocation DetailMarket Value $ in millions)

as of 09/30/2019 InterimPolicyTarget

Relative toInterimPolicy Target

Long TermPolicy Target

Long TermPolicy

Ranges($) (%)Investment Exposure -- 99.4% 99.0% 0.0% 99.0% 99-110%Total U.S.A. $23,986 15.2% 17.7% -2.5% 18.0 13-23%Non-U.S. Developed $20,894 13.3% 12.7% +0.5% 13.0 8-18%Emerging Markets $13,880 8.8% 8.7% +0.1% 9.0 4-14%Directional Hedge Funds $453 0.3% 4.0% -3.7% 4.0 0-10%Private Equity $23,121 14.7% 14.4% +0.3% 13.0 8-18%Global Equity $82,333 52.2% 57.6% -5.4% 57.0 50-64%Long Treasuries $19,430 12.3% 10.7% +1.6% 11.0 0-20%Stable Value Hedge Funds $7,236 4.6% 4.0% +0.6% 4.0 0-10%Absolute Return (including OAR) $4,610 2.9% 0.0% +2.9% 0.0 0-20%Stable Value $31,275 19.8% 14.7% +5.1% 15.0 11-21%TIPS $3,345 2.1% 2.7% -0.6% 3.0 0-8%Real Estate $21,650 13.7% 13.2% +0.5% 14.0 9-19%Energy, Natural Resource and Inf. $9,023 5.7% 5.8% 0.0% 5.0 0-10%Commodities $122 0.1% 0.0% +0.1% 0.0 0-5%Real Return $34,140 21.7% 21.7% +0.0% 22.0 17-27%Risk Parity $8,994 5.7% 5.0% +0.7% 5.0 0-10%Risk Parity $8,994 5.7% 5.0% +0.7% 5.0 0-10%Cash $3,746 2.4% 1.0% +1.4% 1.0 0-5%Asset Allocation Leverage -$2,855 -1.8% 0.0% -1.8% -- --Net Asset Allocation $890 0.6% 1.0% -0.4% 1.0 --Total Fund $157,632 100.0% --- 100.0% --

Note: Asset allocation information shown above is based upon PureView reporting. The excess returns shown above may not be a perfect difference between the actual and benchmark returns due entirely to rounding.


4. Total TRS Performance Ending 09/30/2019


5. Total Fund Attribution – One Quarter Ending 09/30/2019

* Negative value represents average leverage exposure during the period


5. Total Fund Attribution – One Year Ending 09/30/2019

* Negative value represents average leverage exposure during the period


6. Risk Profile: Total Fund Risk-Return vs. Peers

Note: Public Plan peer group composed of 49 and 48 public funds with total assets in excess of $10B as of 09/30/2019 respectively for the periods above. An exhibit outlining the asset allocation of the peer portfolios is provided in the appendix of this report.


6. Risk Profile: Trailing 3-Year and 5-Year Risk Metrics Peer Comparison


7. Global Equity: Performance Summary Ending 09/30/2019

Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.

Third Quarter YTD One Year

Three Years

Total Global Equity 0.2% 11.0% 1.7% 9.6%Global Equity Benchmark 0.2 12.1 2.9 9.9Difference 0.0 -1.1 -1.1 -0.4Total U.S. Equity 1.0 18.2 1.4 11.6Total U.S. Equity Benchmark 1.2 20.2 3.0 12.9Difference -0.3 -2.0 -1.6 -1.3Non-U.S. Equity -1.8 10.9 -1.7 6.3Non-U.S. Benchmark -2.3 10.4 -1.3 6.4Difference +0.5 +0.5 -0.5 0.0Non-U.S. Developed -0.7 13.0 -2.7 6.1MSCI EAFE + Canada -0.9 13.6 -1.0 6.5Difference +0.3 -0.5 -1.8 -0.4

Emerging Markets -3.4 7.7 -0.4 6.6MSCI Emerging Markets -4.2 5.8 -2.0 6.0Difference +0.8 +1.9 +1.5 +0.6

Five Years

6.8%7.0

-0.2

8.810.5-1.7

3.52.9

+0.6

3.73.1

+0.6

3.2

2.3

+0.9


7. Global Equity: Performance Summary Ending 09/30/2019 (cont’d)Third

Quarter YTD One Year Three Years Five Years

Directional Hedge Funds 0.3% 8.5% 1.0% 4.8% 2.2%

HFRI Fund of Funds Composite Index -0.9 5.2 0.0 3.2 1.9

Difference +1.2 +3.3 +1.0 +1.6 +0.2

Total Public Equity -0.6 13.3 -0.3 8.3 5.5

Public Equity Benchmark -0.7 13.9 0.7 8.8 5.9

Difference +0.1 -0.6 -1.0 -0.5 -0.4

Total Private Equity 2.4 5.1 8.0 13.6 11.2

Private Equity Benchmark 2.9 6.9 10.0 13.6 10.6

Difference -0.6 -1.8 -2.0 +0.1 +0.6



8. Stable Value: Performance Summary Ending 09/30/2019Third Quarter YTD One Year Three Years

Total Stable Value 5.5% 13.9% 16.2% 4.6%Total Stable Value Benchmark 5.8 15.6 18.2 4.0Difference -0.3 -1.7 -2.0 +0.6Long Treasuries 8.8 21.2 26.2 4.3

Treasury Benchmark 7.9 19.8 24.8 4.1

Difference +0.8 +1.4 +1.4 +0.3

Stable Value Hedge Funds 0.5 3.1 1.5 4.9Hedge Funds Benchmark -0.1 4.6 1.2 3.1

Difference +0.6 -1.5 +0.4 +1.7

Other Absolute Return 2.1 7.2 7.8 6.2

Other Absolute Return Benchmark 1.0 3.4 4.6 4.0

Difference +1.1 +3.9 +3.3 +2.3


Five Years

6.7%5.6

+1.17.4

6.8

+0.6

4.42.0

+2.4

5.8

3.4

+2.5


9. Real Return: Performance Summary Ending 09/30/2019Third Quarter YTD One Year Three Years Five Years

Total Real Return 1.7% 5.7% 7.2% 8.9% 8.2%Real Return Benchmark 0.7 3.2 4.7 5.8 6.3Difference +1.1 +2.6 +2.5 +3.1 +1.9

TIPS 1.4 7.7 7.2 2.3 2.6TIPS Benchmark 1.3 7.6 7.1 2.2 2.4

Difference 0.0 +0.1 0.0 +0.1 +0.1

Real Estate 2.6 6.1 8.5 10.7 11.3Real Estate Benchmark 0.8 3.5 5.5 6.6 8.8

Difference +1.8 +2.6 +3.1 +4.1 +2.6Energy, Natural Resource and Infrastructure

-0.2 3.7 4.7 10.1 --

Energy and Natural Resources Benchmark 0.0 0.3 2.3 7.5 --

Difference -0.3 +3.4 +2.4 2.6 --



10. Risk Parity: Performance Summary Ending 09/30/2019Third

Quarter YTD One YearThree Years

Total Risk Parity 2.1% 18.1% 10.8% 8.1%

Risk Parity Benchmark 2.1 17.8 11.1 7.4

Difference 0.0 +0.3 -0.4 +0.7


Five Years

6.1%

5.3

+0.8


11.Asset Allocation Leverage: Performance Summary Ending 09/30/2019Third

Quarter YTD One YearThree Years

Cash Equivalents -0.4% 0.6% 1.0% 1.9%

Cash Benchmark 0.6 1.8 2.4 1.5

Difference -1.0 -1.2 -1.4 +0.4


Five Years

2.2%

1.0

+1.2


Appendix – Supplemental Reporting


TRS Commitment Levels vs. Peers (>$10 Billion) as of 09/30/2019

Note: The Public Plan peer universe had 50 observations for the third quarter 2019. TRS allocations may not sum to 100.0% which is entirely due to the impact of rounding

The chart below depicts the asset allocation of peer public funds with assets greater than $10 billion.

− The ends of each line represent the 95th and 5th percentile of exposures, the middle light blue and grey lines represent the 25th and 75th percentile of exposures, the purple square represents the median, and the green dot represents TRS exposure.


Historical Excess Performance Ending 09/30/2019

Quarterly and Cumulative Excess Performance Total Fund vs. Total Fund Benchmark


TRS Asset Growth

-10

10

30

50

70

90

110

130

150

170

Mar

ket V

alue

(Billi

ons)

Total Fund Historical Growth (September 1997 - September 2019)

$157.6


External Manager Program: Public Equity Performance as of 09/30/2019

Allocation ($ in billions)

ThirdQuarter YTD One

YearEP Total Global Equity $24.9 -0.3% 13.5% 0.9%EP Global Equity Benchmark -- -0.9 12.3 0.8Difference -- +0.6 +1.2 +0.2EP U.S.A. $8.8 1.2 19.2 2.6EP U.S.A. Benchmark -- 1.2 20.2 3.0Difference -- 0.0 -1.1 -0.4EP Non-U.S. Developed $4.6 -0.4 13.4 -3.8MSCI EAFE + Canada Policy Index -- -0.9 13.6 -1.0Difference -- +0.5 -0.2 -2.8EP Emerging Markets $5.0 -3.1 9.1 0.6MSCI Emerging Markets Policy Index -- -4.2 5.8 -2.0Difference -- +1.1 +3.3 +2.6EP World Equity $6.0 0.4 17.2 2.3EP World Equity Benchmark -- 0.1 16.5 1.7Difference -- +0.3 +0.7 +0.6EP Directional Hedge Funds $0.5 0.3 8.5 1.0HFRI Fund of Funds Composite Index -- -0.9 5.2 0.0Difference -- +1.2 +3.3 +1.0


Three Years8.0%7.9

+0.111.412.9-1.46.26.5-0.26.56.0

+0.510.610.1+0.54.83.2

+1.6


External Manager Program: Stable Value/Total Program Performance as of 09/30/2019


ThirdQuarter YTD One Year Three

Years

EP Total Stable Value $7.2 0.5% 3.1% 1.5% 4.9%

EP Stable Value Benchmark -- -0.1 4.6 1.2 3.1

Difference -- +0.6 -1.5 +0.4 +1.8

EP Stable Value Hedge Funds $7.2 0.5 3.1 1.5 4.9

EP Stable Value Hedge Funds Benchmark -- -0.1 4.6 1.2 3.1

Difference -- +0.6 -1.5 +0.4 +1.8

Total External Public Program $32.1 -0.1 11.4 1.0 7.5

EP External Public Benchmark -- -0.7 10.7 0.7 7.1

Difference -- +0.6 +0.7 +0.2 +0.4



Public Strategic Partnership Program (SPN): Performance Summary as of 09/30/2019

The Public SPNs in aggregate underperformed the benchmark during the third quarter and also over the trailing one year period while outperforming over the trailing three-year period.


ThirdQuarter YTD One

YearThree Years

Public Strategic Partnership $8.7 0.8% 16.1% 5.9% 8.4%Public SPN Benchmark -- 1.5% 15.5% 6.6% 7.9%Difference -- -0.6 +0.6 -0.6 +0.5

Blackrock $2.3 0.9% 16.3% 6.0% 9.4%J.P. Morgan $2.3 1.0% 16.1% 4.8% 7.8%Neuberger Berman $2.1 1.8% 17.0% 6.4% 8.3%Morgan Stanley $2.1 -0.3% 14.8% 6.6% 8.2%



Total Fund Performance Benchmark – 17.7% MSCI U.S.A. IMI, 12.7% MSCI EAFE plus Canada Index, 8.7% MSCI Emerging Markets Index, 4.0% HFRI FoF Composite Index, 14.4% State Street Private Equity Index (1 quarter lagged), 10.7% Blmb. Barc. Long Term Treasury Index, 4.0% HFRI FoF Conservative Index, 1.0% Citigroup 3 Mo. T-Bill Index, 2.7% Blmb. Barc. U.S. TIPS Index, 13.2% NCREIF ODCE Index (1 quarter lagged), 5.8% Energy and Natural Resources Benchmark, and 5.0% Risk Parity Benchmark

Global Equity Benchmark – 30.8% MSCI U.S.A. IMI, 22.1% MSCI EAFE plus Canada Index, 15.2% MSCI Emerging Markets Index, 6.9% HFRI FoF Composite Index, and 25.0% State Street Private Equity Index (1 quarter lagged)– TF U.S. Equity Benchmark - MSCI U.S.A. Investable Markets Index (IMI)– Emerging Markets Equity Benchmark – MSCI Emerging Markets Index– Non-US Developed Equity Benchmark– MSCI EAFE + Canada Index– Directional Hedge Funds – HFRI Fund of Funds (FoF) Composite Index– Private Equity Benchmark - State Street Private Equity Index (1 quarter lagged)

Benchmarks

Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.


Benchmarks (cont’d) Stable Value Benchmark – 72.8% Blmb. Barc. Long Term Treasury Index and 27.2% HFRI FoF Conservative Index

– US Treasuries Benchmark – Bloomberg Barclays Long Term Treasury Index– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index– Other Absolute Return Benchmark - 3 Mo. LIBOR + 2%– Cash Benchmark - Citigroup 3 Mo. Treasury Bill Index

Real Return Benchmark – 60.9% NCREIF ODCE Index, 12.6% Blmb. Barc. U.S. TIPS Index, and 26.6% Energy & Natural Resources Benchmark– Real Estate Benchmark – NCREIF ODCE Index (1 quarter lagged) – US TIPS Benchmark – Bloomberg Barclays U.S. TIPS Index– Energy and Natural Resources Benchmark – 75% Cambridge Associates Natural Resources Index (reweighted) and 25%

quarterly Seasonally-Adjusted Consumer Price Index (1 quarter lagged) – Commodities Benchmark – Goldman Sachs Commodity Index

Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.


Description of Performance Attribution A measure of the source of the deviation of a fund's performance from that of its policy benchmark. Each bar on the attribution

graph represents the contribution made by the asset class to the total difference in performance. A positive value for a component indicates a positive contribution to the aggregate relative performance. A negative value indicates a detrimental impact. Themagnitude of each component's contribution is a function of (1) the performance of the component relative to its benchmark, and (2) the weight (beginning of period) of the component in the aggregate.

The individual Asset Class effect, also called Selection Effect, is calculated as Actual Weight of Asset Class x (Actual Asset Class Return – Asset Class Benchmark Return)

The bar labeled Allocation Effect illustrates the effect that a Total Fund's asset allocation has on its relative performance. Allocation Effect calculation = (Asset Class Benchmark Return –Total Benchmark Return) x (Actual Weight of Asset Class –Target Policy Weight of Asset Class).

The bar labeled Other is a combination of Cash Flow Effect and Benchmark Effect:– Cash Flow Effect describes the impact of asset movements on the Total Fund results. Cash Flow Effect calculation = (Total

Fund Actual Return – Total Fund Policy Return) – Current Selection Effect – Current Allocation Effect– Benchmark Effect results from the weighted average return of the asset classes' benchmarks being different from the Total

Funds’ policy benchmark return. Benchmark Effect calculation = Total Fund Policy Return – (Asset Class Benchmark Return x Target Policy Weight of Asset Class)

Cumulative EffectCumulative Effect calculation = Current Effect t *(1+Cumulative Total Fund Actual Return t-1) +Cumulative Effect t-1*(1+Total Fund Benchmark Return t)


Disclaimers and Notes


Disclaimers and NotesDisclaimers:

Please review this report and notify Aon Hewitt Investment Consulting (AHIC) with any issues or questions you may have with respect to investment performance or any other matter set forth herein.

The client portfolio data presented in this report have been obtained from the custodian. AHIC has compared this information to the investment managers’ reported returns and believes the information to be accurate. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice.

Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for more information on HFR indices

Notes:

The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time weighted. Returns for periods longer than one year are annualized.

Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.

Due to rounding throughout the report, percentage totals displayed may not sum up to 100.0%. Additionally, individual fund totals in dollar terms may not sum up to the plan totals.

http://www.hedgefundresearch.com/


Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information containedherein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.

© Aon plc 2019. All rights reserved.


Trading Annual Review

Bernie Bozzelli,Senior Managing Director

December 2019

Agenda

2

I. Mandate

I. Team Profile

II. Whom We Serve

III. Trading Partner Network

IV. Trading Activity

V. Equity Trading Performance

VI. Special Topic

VII. Accomplishments and Priorities

Trading Mandate

3For year ended September 30, 2019Source: TRS IMD

Implementation

• Total Trust Execution: Global execution across multiple asset classes totaled $252 billion over past 12 months

• Network: Manage a global network of 42 brokerage firms

• Outperformance: Outperformed the median peer equity trading desk by 5.7 basis points over past 12 months, placing us in the 1st quartile. We have performed in-line with the median peer desk or better for 11 straight years.

Index Management

• Index Portfolio: Manage U.S., EAFE+Canada, and Emerging Markets Passive Equity Portfolios which totaled $289 million as of 9/30/19

• Full Replication: Benchmark indices are fully replicated in the portfolio in real-time to achieve tight tracking error and in-line performance

Market Intelligence

• Collaboration: Collaborate across the IMD to provide implementation solutions

• Committees: Co-Chair IMD Management Committee, Ambassadors

Trading Group

4

Demetrius PopeSenior Investment ManagerGlobal Equity - EuropeBBA, Sam Houston12 years TRS18 years experience

Don StanleyAssociateGlobal Equity - Asia BBA, UT Austin6 years TRS11 years experience

Sean Letcher, CFAInvestment ManagerUS Equity and Futures BS, Business, Texas A & M7 years TRS12 years experience

Jaime LlanoDirectorFutures and Currency MBA, Finance, St. Edwards 14 years TRS20 years experience

Bernie Bozzelli, CFASenior Managing DirectorMPA, Accounting, UT Austin24 years TRS

Pat BarkerSenior Trading Analyst30 years TRS42 years experience2 time Golden Apple Award winner

Steve PetersonSenior Investment ManagerUS Equity MBA, California Lutheran University11 years TRS24 years experience

Paige DouthitAdministrative AssistantTeam Support5 years TRS10 years experience

2 MBAs2 CFAs

1 Masters of Accounting20 Years Average Experience

Whom We ServeCross-Divisional Collaboration

5

• Stock DistributionLiquidation Strategies

• FX Hedging

ForeignExchange$57.6 billion

traded

Transactions in public markets with customized implementation strategies across profit centers

Value Creation for TRS

MembersRisk• Risk Parity • Low-Vol Equity

• Alternative Risk Premia• Quantitative Equity• Special Opportunities

• Fundamental Equity• Corporate Action analysis

• Transition Management

Equities$61.0 billion

tradedFutures/

Derivatives$133.5 billion

traded

External Public Markets

Multi-Asset Strategies

Internal Fundamental

Private Markets Trading

For year ended September 30, 2019Source: TRS IMD

Trading Partner NetworkAs of September 30, 2019

6

4 Firms• Deliver focused and high capacity global relationships across all asset classes• Highly integrated with TRS trading, risk management, administrative systems, etc.• Leading providers of investment services – TRS is a preferred client, receiving the

highest level of service available

5 Firms• Well established firms with overall world class global services capabilities• World renowned for research and technology• Best-of-breed product process development

26 Firms• Includes firms who have a specialty in finding liquidity for hard-to-trade names or

firms who have a niche in electronic trading• Firms who have a core competency of trading internationally in particular regions

are also included

7 Firms• All newly approved firms doing business with TRS

Premier (40-60%)3-5 Firms

Core (20-30%)5-10 Firms

Execution (20-30%)15-30 Firms

Pilot(1-10%)

5-10Firms

Annual Trading Activity

7For year ended September 30, 2019Source: TRS IMD

JPMorgan$33.3

Morgan Stanley$32.3

Citigroup$25.7

Goldman Sachs$12.5

UBS$28.3

Credit Suisse$14.4

Deutsche Bank$13.0

Merrill Lynch/BofA$7.3

Barclays$6.4

Remaining Execution (26 firms)

$25.9

Quantitative Brokers$18.6

Societe Generale$18.2

BNP$10.0

Pilot$6.3

Total Notional Trade by Broker($, billions)

Internal Fundamental

$11.5 Passive

$2.7

Quant$105.4

Trust Rebalance$13.7

Transition$16.7

Private Markets$11.6

Risk$90.6

Total Notional Traded By Strategy($, billions)

Equity Trading Performance

8

• TRS has performed in-line with the median peer desk or better for 11 straight years

• Trading retained $403 million of TRS alpha over this time

• TRS equity execution is measured against the ITG peer universe of institutional investors. The median performance of our peer universe is our benchmark.

TRS Trading Performancevs. Peer

BenchmarkQuartile Ranking

2019 + 6 bp 1st2018 + 6 2nd2017 + 3 2nd2016 + 6 2nd2015 + 8 1st2014 0 2nd2013 + 11 1st2012 + 10 1st2011 + 2 2nd2010 + 27 1st2009 + 15 1st

Target + 8 bp 1st x

Year

End

ed S

ept 3

0th

Source: ITG/Virtu

Special Topic: TRS Trading vs. External Quant Firm

9

• TRS Trading was presented the opportunity to benchmark our execution capabilities vs. a best in class execution arm of one of our quant external managers

• Launched a six-month trial period based on quant firm projection they could reduce our execution cost by a least 4 bps

• We further broke down TRS Trading into TRS Systematic and TRS Discretionary to create a three tiered testing environment where each group was randomly allocated groups of trades

• TRS Systematic represents systematic trading strategies developed by TRS Traders based on back testing several years of actual TRS trade data

• TRS Discretionary represents TRS Trader’s discretion

• Over the six-month trial period TRS Trading significantly outperformed the external quant firm by minimizing trading costs

Source: TRS IMD

Accomplishments and Priorities

10

2019 Accomplishments

• Outperformed the median equity trading desk of our peers by 6 bps resulting in $33 million in savings compared to the peer median desk

• Continued to enhance and refine systematic trading strategies for all US quantitative flow

• In conjunction with Operations and Public Markets, we successfully managed $40 Billion in transitions between TRS external managers and TRS internal strategies

• Effectively managed all the passive equity portfolios

2020 Priorities

• Continue to outperform our peer trading benchmark

• Develop and implement systematic trading strategies for European quantitative flow

• Continue to effectively oversee a set of global trading relationships to ensure we have relationships with the top global firms

• Improve the quality of feedback to our brokers by significantly enhancing the amount of Transaction Cost Analysis (TCA) data included in our quarterly broker report card

• Continue to effectively manage transitions and passive equity portfolios on behalf of the Trust

Appendix

Broker Certification Process

12

Phase 1 - Certification Process for New Firms

Procedures for New Firms• Broker qualifications

questionnaire• Minimum standard

requirements

Evaluation Period• 6 to 18 month process• Identify valued services• Transaction cost analysis

review• Recommendations• Category fit

Annual Review• Adds/Deletions• Promotions/Demotions• Qualitative review• On-Site visit

Certification Process• Senior management review

If acceptable, then …Phase 2 - Broker added to Pilot Program

Pilot Program• Pilot brokers evaluated

quarterly using same criteria as all TRS brokers

Quarterly Review Process• Trader vote• Transaction cost analysis• Quarterly report card to

each broker

Two Year Process• Pilot brokers typically have up to a 2

year evaluation process to qualify for advancement toexecution category

Completion of Pilot Program• Advance to execution /core

category or remove from broker list

• Broker has opportunity toadvance based on performance after 1 year

13

This slide was intentionally left blank.

14



Risk and Portfolio Management Annual Review

James Nield, CFA, FRMChief Risk Officer

December 2019

Overview

2

Agenda

• Mandate and Team Members

• Risk and Portfolio Management Group (RPM)

1. Risk Management

2. Portfolio Management

3. RPM Strategies

• 2020 Priorities

Key Points:

1. Assumed Trust portfolio managementresponsibilities

2. Delivered positive three-year returns andalpha

3. Developed eight portfolios including threeresearch portfolios

4. Manage roughly 25% of Trust assets

5. Hired two of three planned fleet additions

Group Mandate: Risk and Portfolio Management (RPM)

3

Risk Management

Portfolio Management

RPM Strategies

Enable efficient risk usage

Manage Trust as one portfolio

Improve Trust risk and return

informing informing

Risk and Portfolio Management Group

4

James Nield, CFA, FRMChief Risk OfficerMBA, Finance, New York UniversityBS, Finance, Pennsylvania State University

Pierre PfarrSenior AnalystBA, Economics,University of TexasCFA Level III Candidate

Mike Simmons, CFA Investment ManagerMPA, Accounting, University of TexasBBA, Finance,Texas A&M University

Paul WaclawskyAnalystBS, Accounting,University of MarylandCFA Level III Candidate

Stephen Kim Senior Investment ManagerMBA, Finance, University of TexasBS, Computer Science,Dartmouth College

Steven LambertSenior AssociateMBA, Finance, Northeastern UniversityBS, Business Management,Saint Joseph’s College

Elona Rika, Ph.D.AssociatePh.D. Economics & Finance,Brandeis University

Mark Telschow, CFASenior Investment ManagerBS, Civil Engineering, University of Texas

8Advanced degrees,

four CFAs, two FRM, two Ph.D.s

10Years of average

investment experience

3Fleet Hires

Teresa Lwin, Ph.D.Senior AssociatePh.D., Finance MBA, Chicago Booth School of BusinessStart Date: Oct 1

Eric Morris, CFASenior AssociateMBA, UT Austin

Hasim Mardin, FRMInvestment ManagerMS, Economics, UT Austin

Ercole VolonninoInvestment ManagerBS, EconomicsWharton SchoolStart Date: Dec 2

Fleet HireAnalystInterviews Ongoing

Risk Management: Enable Efficient Risk Usage

5

Battle Plans

Risk Monthly

Board Report

Risk Certifications

Monthly report that highlights Trust, macro and portfolio

risks

Risk Signals

Fleet Reports

Action plans to prepare for

potential risk events

Semi-annual report to the Board on key

metrics

Independent analysis on risk

metrics of external public

investments

Daily monitoring of

signals to identify key

changes

Initiative to ensure each

group is executing as

planned

6

Risk Management: Efficient Daily Oversight via Risk Signals

Source: TRS IMD

250+Signals

monitored daily

-

10

20

30

40

50

60

70

Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19

# Si

gnal

s

Liquidity Leverage Relative Weight Market ReturnCounterparty Economic Market Signal Credit Ratings

8Categories of risk metrics

1-2Signals

generated daily

Example: SPN Derivative Signal

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

Jan-19 Mar-19 May-19 Jul-19 Sep-19

Billi

ons

Signal SPN Derivative Usage Threshold

Risk Signals

Portfolio Management: Manage Trust as One Portfolio

7

Source Leverage

Implementation Government Bonds

ReportingRebalance

Identify cost effective means

to source financing needs

Reduce implementation

costs

Ensure the Trust is positioned as intended on a

daily basis

Provide Trust positioning and analysis to Asset

Allocation Committee

Manage Trust’s bond allocation

and provide desired liquidity

Portfolio Management: Government Bonds Meeting ObjectivesAs of September 30, 2019

8

Bond Portfolio Objectives

Performance shown for total Government Bond Portfolio

Source: State Street

Assets 1-Year 3-YearPortfolio $, billion Return Alpha (bp) Return Alpha (bp)Long Treasuries $16.0 24.8% -1 4.3% +20TIPS 2.5 7.1% -3 2.4% +15

Total Government Bonds $18.5 22.4% -1 4.0% +19

1 Realize a low tracking error 3 Generate

positive alpha-15%

-10%

-5%

0%

5%

10%

15%

20%

Sep-

16

Dec-

16

Mar

-17

Jun-

17

Sep-

17

Dec-

17

Mar

-18

Jun-

18

Sep-

18

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Cumulative Return Cumulative Alpha

2 Provide liquidity

RP Trend

IRP Global Equity

Reinsurance

RPM Strategies: Improve Trust Risk and ReturnAs of September 30, 2019

9

Risk Parity

Diversified portfolio that uses leverage to target risk

10

30

Collect insurance

premium to diversify the

Trust

Provide additional

bond diversification

and carry

Global BondFutures

Add exposure to those assets

with strong recent

performance

Capitalize on the tendency

of similar assets to

mean revert

Mean Reversion

Diversified equity

portfolio with enhanced liquidity

$9.0B

2013

Equity-like returns with less risk by

capitalizing on behavioral

biases

Low Vol

$4.6B

2013

Tilts

Adjust Risk Parity weights

based on market

conditions

Overlay

2017

$0.6B

2013

$0.1B

2019 2018 2018 2019

Active Portfolios Research Portfolios

Source: State Street; Note: Years listed above are portfolio inception dates and dollar values are AUM

RPM Strategies: Risk Parity Growing to 8% of TrustAs of September 30, 2019

10Source: State Street, TRS IMD; Note: Low Volatility and Reinsurance are joint ventures also reported by Active Public Markets

10

RPM Strategy Objectives

-5%

0%

5%

10%

15%

20%

25%

30%

Sep-

16

Dec-

16

Mar

-17

Jun-

17

Sep-

17

Dec-

17

Mar

-18

Jun-

18

Sep-

18

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Cumulative Return Cumulative Alpha Assets 1-Year 3-YearPortfolio $, billion Return Alpha (bp) Return Alpha (bp)Internal Risk Parity $5.6 11.1% -3 9.5% +205External Risk Parity 3.4 10.3% -89 6.8% -64

Risk Parity Subtotal $9.0 10.8% -38 8.1% +71Low Volatility 4.6 0.6% +17 10.8% +79Reinsurance 0.6 -0.4% -161 -3.2% -632

Total RPM Strategies $14.2 6.7% -43 6.5% +55

Performance shown for total RPM Strategies

Generate positive alpha1 2 Create scalable

innovations 3 Internalize as appropriate

1 2 3

Expect the following in 2020

11

Further develop and create RPM portfolios

Improve data management to enable dynamic

reporting

Certification Program

Strategy Innovation

Dynamic Reports

Define and replicate best practices for internal portfolio

management

4Implementation

Alpha

Fully integrate portfolio and risk management to improve returns

Appendix

The Internal Risk Parity portfolio seeks balance to growth and inflation factors:

Rising Growth

Falling Growth

Rising Inflation

Falling Inflation

Risk Parity is a Diversified Portfolio with Leverage

1 23 4

Rising Inflation

Commodities

Inflation Linked Bonds

Rising Growth

Equities

Credit

Base Metals/Energy

Falling Growth

Nominal Bonds

Inflation Linked Bonds

Falling Inflation

Nominal Bonds

Equities

Risk Parity risk profile

Traditional 60/40 portfolio risk profile

Rising Growth

Falling Growth

Rising Inflation

Falling Inflation

0%

5%

10%

Unlevered Volatility

0%

4%

8%

12%

Levered VolatilityUnlevered VolatilitySource: TRS IMD

13


Multi-Asset Strategies GroupAnnual Review

Mohan Balachandran, Ph.D.Senior Managing Director

December 2019

Executive Summary: Focus on Public Markets Alpha

2

321Quantitative Equity

Invest systematically in equity with continual improvement and innovation

Provide strategic factor exposure and diversifying alpha for Public Markets

Alternative Risk Premia

Invest in a multi-asset class portfolio of alternative risk premia such as value, carry, and momentum

TRS recognized as an innovator in ARP investing

Special Opportunities

Invest opportunistically across all asset classes including credit

Program outperforming funding source and 8% target IRR since inception (10.8% IRR)

Source: State Street, TRS IMD; as of 9/30/2019

Multi-Asset Strategies Group

3

Mohan Balachandran, PhDSenior Managing DirectorPhD, Physics, Brown University

Wayne Speer, CFASenior Investment ManagerMBA, SMU

Anthony Paolini, CPAAssociateMPA Accounting, UT Austin

Shruti SureshContractorMS, StatisticsColumbia University

Solomon GoldInvestment ManagerMS, Economics, UT Austin

ANALYTICS/ RESEARCH

Mark Albert, CFASenior DirectorMBA, University of Michigan

Ashley Baum, CFA, CPASenior Investment ManagerMPA Accounting, UT Austin

Matt Talbert, PhDSenior Investment Manager PhD, Economics, UT Austin

Michael Phillips, CFAInvestment ManagerMA, Music, Cambridge

Christopher White, CFASenior AssociateMBA, Finance UT Austin

Ryan LearySenior AssociateMBA, Rice University

Paul WaclawskyAnalystBS, AccountingUniversity of Maryland

Gabriel Salinas, PhDSenior AssociatePhD, Economics UT Austin

Kyle SchmidtSenior Investment ManagerMBA, SMU

Sudhanshu Pathak “Sunny”Senior AssociateMS, Operations ResearchColumbia University

3 PhDs, 11 Masters, 6 CFAs, 2 CPAs

Staten Hudson, CFABlackrock SecondeeWhitman College

Performance Executive SummaryAs of September 30, 2019

4

Source: State Street, TRS IMDNote: Quantitative Equity Alpha results are based on MSCI USA Standard, MSCI EAFE+Canada, and MSCI Emerging Markets benchmarks, with Inception date 6/11/2009. The Special Opportunities benchmark is a blend of the underlying trust benchmarks weighted by the NAV of the underlying investments against the relevant benchmark, with Inception date 6/4/2012.Returns on Alternative Risk Premia overlay portfolio scaled to 12% volatility on $1.1B NAV, equivalent to 9 bp of Trust risk, with inception date 9/30/2015.

Multi-Asset Strategies Group

PortfolioTotal Assets Return Alpha

$, bn % Trust 1-Year 3-Year Since Inception

1-Year 3-Year Since Inception

Global Equity

Quantitative Equity $17.2 10.9% -1.7% 9.9% 11.7% -275 bp -30 bp +125 bp

Stable Value

Special Opportunities 2.2 1.4% 8.3% 9.6% 20.3% +417 bp +416 bp +1478 bp

Overlay

Alternative Risk Premia 0 0% -4.4% 5.9% 6.6% -441 bp +590 bp +665 bp

Total $19.4 12.3% 0

Quantitative EquityAs of September 30, 2019

5

Provide strategic factor exposure and diversifying alpha

for Public Markets

Invest systematically in equity with continual

improvement and innovation

Approximately 1/3 of Active Public Equity portfolio

Outperformed 125 bp annually since inception

Source: State StreetNote: Alpha results are based on MSCI USA Standard, MSCI EAFE+Canada, and MSCI Emerging Markets benchmarks, with inception date 6/11/2009.

Total Assets Return Alpha

$, bn % Trust 1-Year 3-Year Since Inception


USA $8.1 5.1% 0.6% 12.5% 15.0% -351 bp -74 bp +94 bp

Non-US Developed 6.1 3.9% -2.8% 6.7% 7.5% -185 bp +18 bp +142 bp

Emerging Markets 3.0 1.9% -3.6% 6.6% 5.2% -162 bp +59 bp +42 bp

Quantitative Equity $17.2 10.9% -1.7% 9.9% 11.7% -275 bp -30 bp +125 bp

Strategic Factor Premia Performance Challenged

6

So far in 2019 Momentum has failed to diversify Value

Posi

tive

Neg

ativ

e

Source: MSCI Barra, as of 9/30/2019

Best in Class Quantitative Equity Peers have Underperformed

7Source: Bloomberg, Evestments, TRS IMD

Quantitative Equity managers have broadly struggled as long-term factors have been challenged

Long- and short-term alpha of 8 external Quantitative Equity peers

-2000

-1500

-1000

-500

0

500

1000

Alph

a bp

s

External Quantitative Equity Peers

Internal Quantitative Equity Portfolios

10 Years or Since Inception (9/30/2008-9/30/2018)

1 Year ending 9/30/20019

Value Strategies Mean Revert Strongly After Periods of Underperformance

8

• The last three years represent the 3rd worst drawdown of Value factor, a core exposure for Quantitative Equity portfolios.

• After 3 years of underperformance, Value strategies have outperformed 71% of the time over the next calendar year and 84% of the time over the next 3 years.

Source: Ken French, using Fama-French Value factor.Note: 2019 performance is year to date as of 9/30/2019.

Year3 year moving

average return (High B/M - Low B/M)

Next year's returnNext 3 years average

return

1939 -11.8% -0.8% 10.1%1940 -10.7% 11.1% 23.3%2019 -10.2% - -1991 -9.5% 24.3% 14.2%1980 -8.7% 25.0% 19.8%1999 -7.7% 39.7% 22.2%2009 -7.7% -5.3% -1.3%2011 -7.7% 9.8% 3.2%1932 -5.5% 28.5% 3.6%1931 -4.9% 10.2% 3.7%2010 -4.6% -8.4% 1.0%1953 -3.4% 26.2% 10.1%2015 -3.3% 22.9% -0.1%1941 -3.0% 19.9% 24.8%1930 -2.2% -14.3% 8.1%2012 -1.3% 1.5% -3.3%1957 -0.7% 13.2% 3.4%1967 -0.6% 18.5% 10.3%1981 -0.4% 13.6% 18.0%2000 -0.3% 19.5% 10.8%2017 -0.2% -9.2% -2018 -0.1% -7.4% -

Average -4.7% 11.3% 9.6%% > 0 71% 84%

Our Response: Continuous Process Improvement

9

• The environment has been challenging but we maintain confidence in the outperformance of our long-term factors

• We have several projects underway to improve our processes and portfolios

• Signal integration

• Risk model research

• Signal enhancement

• Successfully implemented a new portfolio governance structure

• Requested Aon evaluate TRS Internal Quantitative Equity program

Alternative Risk PremiaAs of September 30, 2019

10

Launched external risk premia implementation collaboration

Invest in a multi-asset class portfolio of alternative risk premia such as value, carry,

and momentum

Overlay program across asset classes including

equities, bonds, currencies and commodities

Source: State Street, TRS IMDNote: Inception date 9/30/2015


Alpha (bp) -441 +590 +665

Cumulative Value Added ($, millions) -$35.4 $44.3 $58.5

Generated $58.5 million in alpha since inception

ARP: Diversified performance across asset types and strategies

11

Balanced 3 Year performanceBalanced risk across asset classes

3 Year Strategy Attribution

Commodities, 29%

Equity Indices, 9%

Bonds, 19%

FX, 22%

Equity Names,

20%

12 Month Risk Contribution

Outperformed peer set

Source: State Street, Bloomberg, TRS IMDNote: Peer composite is SG Multi-Alternative Risk Premia Index.

8.8%

11.3% 10.9%

-4.4%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2016 2017 2018 2019

Years ending 9/30

TRS

Peers

Performance by Year

Equity Names

Equity Indices Bonds FX Commods Total

Value -5.2% 3.1% 0.9% 7.7% 6.5%Carry 1.9% 3.8% -2.2% 3.5%Momentum 3.3% -3.2% -0.2% -2.8% -3.3% -6.2%Quality 4.5% 4.5%Residual -2.8% -0.3% 0.4% -0.6% 0.9% -2.4%Total -0.2% -0.4% 2.1% 1.2% 3.0% 5.9%

Special OpportunitiesAs of September 30, 2019

12

Source: State Street, TRS IMDNote: Inception date is 06/04/12. Formal Special Opportunities program started May 2013. The Special Opportunities benchmark is a blend of the underlying trust benchmarks weighted by the NAV of the underlying investments against the relevant benchmark. Historically, the benchmark has included weighted contributions from real estate, energy and natural resources. Funding source is equivalent IRR using public market equivalent methodology and cash flows. All investments were funded from 50% Long Treasuries and 50% MSCI ACWI until 10/01/2017, thereafter all investments are 100% funded from USA Equities.

Oversee implementation of Tactical Illiquid Credit Allocation

14 manager relationships and $3 billion deployed

Invest opportunistically across all asset classes including credit

Since Inception Return Alpha

IRR MOIC 1-Year 3-Year Since Inception


Special Opportunities 10.8% 1.1x 8.3% 9.6% 20.3% +417 bp +416 bp +1478 bp

Current Holdings 8.0% 1.1x

Realized Investments 20.5% 1.2x

Outperformed funding source by 160 bp annually since inception

Special Opportunities: Continual Innovation

13

Source: State Street, TRS IMD; as of 9/30/2019Deal Funnel as of August 2019

• Executed ~15% of opportunities received

• $3.2 billion deployed

• $1.4 billion realized

• 13 fully-realized investments at 20.5% IRR and 1.2x MOIC

• Outperformed 8% target IRR by 280 bp annually

• Generated profits of $349 million since inception

Since Inception

273 Sourced

179 Diligenced/ Referred

51 Approved

41Invested

14


Priorities

15

• Accomplishments

• Completed SAA Study

• Launched JPMorgan Risk Premia Collaboration

• iQuant Vision 2020

• Fully integrated dynamic platform

o Efficient and collaborative resource allocation

o Superior execution and implementation

o Capital efficiency

• Build out Special Opportunities team

• Explore debt capital markets strategy with Private Equity partners

• Improve Special Opportunities platform scalability

Appendix

MSCI Barra Value: Deeper Dive

Value components negative for past 4 of 5 years

Neg

ativ

ePo

sitiv

e

Source: MSCI Barra, as of 9/30/2019

18


Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon.

Review of Internally Managed Quantitative StrategiesTeacher Retirement System of TexasDecember 2019


Table of Contents

Section 1 Evaluation Review Appendix I Internal Quantitative Investment Team Appendix II Performance Review


Section 1:Evaluation Review


Scope of Review

IMD requested AHIC review the internally managed portfolios overseen by the internal quantitative investment team and provide an assessment of the reasonableness of the investment team, process, sources of data used to manage the portfolios, and performance relative to peers and appropriate benchmarks

– Analysis conducted to institutional standards, with best practice representing the practice of premier investment managers in the space

Our review included the following suite of products1:

From a philosophical standpoint, we do not believe there are any fundamental issues with how the approaches are designed and implemented

Relative to peers within the public fund universe that employ internal management, the approach used appears to be more robust than the average internally managed quantitative platform

– The team has extended their offerings to more disciplines over time

The review included the following:

– Information gathering with quantitative team providing materials and a diligence questionnaire

– Analytical review and analysis of data

– In person meeting with internal quantitative investment team in Austin on October 28th

1 Market value data as of 9/30/2019. Represent the total assets in the US, Non-US and Emerging Markets versions of the strategies

Strategy Assets (billions) Percentage of TrustQuantitative Equity Strategy (QES) Strategic $2.9 1.8%Dynamic $1.7 1.1%Macro Distance $1.7 1.1%Multi Factor $6.3 4.0%Low Volatility $4.6 2.9%Total $17.2 10.9%


AHIC Equity Research Team

The review was conducted by AHIC’s equity research team

– This team is responsible for evaluating the public equity universe and maintaining an inventory of best ideas (Buy rated strategies) across a variety of equity universes

– The team’s research focus includes the evaluation of quantitatively based investment strategies

Over the last 3 years our team has evaluated approximately 75 firms/strategies implementing quantitative investment strategies, and maintain a buy rating with 20

The team maintains views on factor based strategies (passive and active)

– Review passive universe to determine single and multi factor indices that are efficient factor representations

– Identify Buy rated active factor strategies

– Work with managers/Index providers/clients to modify products based on our beliefs

The team routinely reviews internally managed investment strategies


Findings Summary

The table above summarizes our findings from the review, and represents a comparison to premier investment managers in the space

Additional executive summary level detail is provided on the following slides

QES Low Volatility Multi FactorEvaluated Item Strategic Dynamic Macro U.S. Non-U.S. Emerging U.S. Non-U.S. Emerging

Internal Quantitative Portfolio Team AttributesTeam CohesivenessExperienceTeam SizeStructure of team

Investment Process ConsiderationsQuantitative FrameworkRobustness of DataSelected Factors/Alpha SignalsReview of Process/DataResources

Presence of Desired Factors Primary Factor 1 -- -- -- -- -- --Primary Factor 2 -- -- -- -- -- --Primary Factor 3 -- -- -- -- -- --Primary Factor 4 -- -- --

Performance EvaluationDesired Exposure Achieved -- -- --Performance Relative to Factor IndexPerformance Relative to Peers --

In-line With Best PracticeBeing Enhanced to Be In-Line With Best PracticeCommon PracticeBelow Premier Institutional Standards


Executive Summary – Internal Quantitative Investment Team

Senior members have been involved with the strategies since their inception

Little turnover within the team at the senior level

The team has a strong understanding of underlying aspects of the quantitative approach

The team has a mixture of backgrounds

The notable difference between the internal quantitative investment team and premier managers is the percentage of the team with advanced degrees/PhDs versus their external quantitative peers

The team is smaller in size than other quantitative teams tasked with running similar investment approaches

Internal Quantitative Investment Team

Attributes Considerations


Executive Summary – Investment ProcessQES Strategies – Investment Process

Built on sound fundamentals

Reliance on an outside research partner for alpha signals

- The Macro Distance and Dynamic strategy is fully dependent on this data

The approach appears to be more robust than the average peer public funds with an internally managed quantitative platform

We would like to see more structured reviews of the quantitative factors and data vendors utilized

- The quantitative investment team is about to embark on this process

- At best-in-class quantitative firms, this occurs routinely


Multi Factor and Low Volatility Strategies – Investment Process

We believe the factors that the Multi-Factor strategy is based upon were well researched and based on academic literature

The Multi Factors portfolios are 130/30, which allow for the shorting of factors, which has been beneficial

We questioned the applicability of the process in emerging markets as our own research, and other prominent factor suppliers, has found the evidence of factor returns to be less robust in emerging markets

- Small Cap is eliminated from the opportunity set for this reason



Appendix IInternal Quantitative Investment Team


IMD Investment Team – QES Strategies

On the following slides we evaluate the team, and the team factors that we believe drive success;

– Team Cohesiveness

– Experience

– Team Size

– Structure


Investment Team – Observations

Team Cohesiveness

There is cohesiveness at the senior levels. Senior members with portfolio management roles on the strategies have been with the products since their respective inceptions. Two of the three have been part of the broader quantitative effort within TRST since it was formalized

Turnover within the team appears to be minimal with departures from the investment team often remaining within IMD in other capacities or rotating off portfolios while remaining within the quantitative team

Experience

Relative to other quantitative investment professionals, the team’s background is differentiated. From the materials we have received, there are less individuals with PhDs or advanced degrees in mathematics, engineering, data science, or computer science than we often see on the investment staff of traditional quantitative management firms

With the exception of the most senior levels, the research and support staff appear to be junior or rotating staff members


Investment Team – Observations

Team Size

Relative to other quantitative investment management organizations, the team is small and senior team members appear to be involved in most stages of the process

Team structure in quantitative investment firms has become more delineated with separate groups dedicated to data sources, factor or alpha signal generation, portfolio management, and trading. Given the size of the team, it doesn’t appear to be possible to structure the internal quantitative investment team in this manner

Structure

The internal quantitative investment team was shifted from the equity team to the Multi-Asset Strategies Group as there is a shared philosophy and better sharing of resources. Given the process used, this structure is appropriate

The team began its existence for the creation of screens to assist the active public equity management effort. This continues despite the restructuring and it appears that these screens have become more robust in recent years


Process Observations Overview

The internal quantitative investment team utilizes a quantitative framework for the implementation of the strategies under review

From a philosophical standpoint, we do not believe there are any fundamental issues with how the approaches are designed and implemented

Relative to peers within the public fund universe that employ internal management, the approach used appears to be more robust than the average internally managed quantitative platform

– The team has extended their offerings to more disciplines over time

There are several enhancements that are currently being developed or considered:

– The development of more customized risk models

– Additional factor development

– Review of implementation through algorithms and brokers being utilized

– Further development of the IT framework that will enhance their trading processes, potentially to include higher frequency rebalancing


Appendix IIPerformance Review


Executive Summary – Portfolio Performance

QES Strategic, Dynamic, and Macro Distance Portfolio Performance– The QES Strategic strategies compare the poorest relative to the benchmark and peers

• The Dynamic strategy has outperformed the Strategic over time given its ability to incorporate tilts, as we would expect

– The QES Dynamic strategy has performed well versus benchmarks over the longer periods analyzed

• Peer analysis is also favorable for the US and Emerging Markets strategies but less favorable for the QES Dynamic Non-US strategy

– The QES Macro Distance has added value relative to the benchmark over the longer-term periods analyzed


Executive Summary – Portfolio Performance

Multifactor Portfolio Performance We compared the multi factor and low volatility strategies against standard benchmarks and a

customized universe of strategies that have a similar investment approach

The US and Emerging Markets multi factor strategies compare well to standard multi factor benchmarks as well as the peer universe

- The Non-US multi factor has less favorable performance against the benchmarks and peers

Low Volatility Portfolio Performance The US Low Volatility strategy struggled in shorter periods versus the benchmark and peers,

but longer term results are more favorable

The Non-US Low Volatility strategy performed well versus the benchmark and peers for the periods analyzed

The Emerging Markets Low Volatility strategy compares well over the long-term but struggled in the short-term versus the benchmark and peers

Strategies with a low beta have had difficulty producing a return commensurate with the broad market during market advances


QES Performance Evaluation

Source: Aon. For illustrative purposes only

The universe was selected given our experience in evaluating quantitative strategies

– The same peer universe was used for the Strategic and Dynamic as most strategies we evaluate have aspects of both processes included

– We have either rated the mangers or have sufficient knowledge to verify them as appropriate factor oriented strategies

– We are unable to identify a peer universe for the QES Macro Distance strategy. Most quantitative strategies we evaluate would incorporate this into a multi-strategy portfolio rather than build an entire portfolio around the signal

Performance is within expectations given the investment strategies

– The QES Strategic strategies compare the poorest relative to the benchmark and peers. We would expect the Dynamic strategy to outperform the Strategic over time given its ability to incorporate tilts. Over time, this has been the case for all three applications (US, Non-US and Emerging Markets)

– The QES Dynamic strategy has performed well versus benchmarks over the longer periods analyzed. The peer analysis is also favorable for the US and Emerging Markets strategies but less favorable for the QES Dynamic Non-US strategy

– The QES Macro Distance has added value relative to the benchmark over the longer-term periods analyzed


Multi Factor Performance Evaluation

Source: Aon. For illustrative purposes only

The universe was selected given our experience in the factor investing space

– The benchmarks are indices that we have vetted over time

– We have either rated the mangers or have sufficient knowledge to verify them as appropriate factor oriented strategies

Performance is within expectations given the investment strategy

– The performance pattern is fairly consistent across U.S., Non-U.S., and Emerging markets

– There are fewer peers in emerging markets space

– Relative to the standard benchmarks – the MSCI index has a deeper value component and no low vol. SciBeta and RAFI have more quality

– Relative to active factor managers – AQR tends to have more value, while Wells Fargo and Northern Trust has more quality


QES Strategic Performance Evaluation (Relative to Benchmark)Product Name 1 Year 3 Years 5 Years 7 Years

US Strategic - Relative to MSCI USA -7.8 -0.4 -2.6 1.2MSCI USA Index -- -- -- --

US Strategic - Versus Peer Strategies (benchmarked against MSCI USA Index) -7.8 -0.4 -2.6 1.2AQR Large Cap Multi-Style -8.9 -2.0 -2.8 ---BlackRock Alpha Tilts -0.1 1.8 1.3 1.2Arrowstreet US Equity -0.6 -- --- ---DE Shaw Broad Market Core Active -1.2 1.2 0.9 1.1

Non-US Strategic - Relative to MSCI EAFE + Canada -3.8 0.3 -1.7 -0.5MSCI EAFE + Canada Index -- -- -- --

Non-US Strategic - Versus Peer Strategies (benchmarked against MSCI EAFE + Canada) -3.8 0.3 -1.7 -0.5AQR International Equity: EAFE -4.0 -1.3 0.8 1.7Arrowstreet International Equity – EAFE -0.5 0.8 2.0 3.3BlackRock International Alpha Tilts -0.5 1.9 2.2 2.9Investec 4Factor Dynamic Equity 1.2 1.9 1.5 2.1

Emerging Market Strategic - Relative to MSCI Emerging Markets Index 0.3 0.8 0.1 -0.1MSCI Emerging Markets Index -- -- -- --

Emerging Market Strategic - Versus Peer Strategies (benchmarked against MSCI EM) 0.3 0.8 0.1 -0.1AQR Emerging Markets Equity -3.8 0.5 0.1 1.2Arrowstreet Emerging Markets 1.7 -0.3 0.6 0.6BlackRock Emerging Markets Alpha Tilts -1.0 1.4 1.8 1.7Investec 4Factor Emerging Markets Equity -0.5 1.1 0.8 2.0


QES Dynamic Performance Evaluation (Relative to Benchmark)Product Name 1 Year 3 Years 5 Years 7 Years

US Dynamic - Relative to MSCI USA 0.1 0.4 0.4 1.6MSCI USA Index -- -- -- --

US Dynamic - Versus Peer Strategies (benchmarked against MSCI USA Index) 0.1 0.4 0.4 1.6AQR Large Cap Multi-Style -8.9 -2.0 -2.8 ---BlackRock Alpha Tilts -0.1 1.8 1.3 1.2Arrowstreet US Equity -0.6 -- --- ---DE Shaw Broad Market Core Active -1.2 1.2 0.9 1.1

Non-US Dynamic - Relative to MSCI EAFE + Canada -1.1 -0.6 1.2 1.4MSCI EAFE + Canada Index -- -- -- --

Non-US Strategic - Versus Peer Strategies (benchmarked against MSCI EAFE + Canada) -1.1 -0.6 1.2 1.4AQR International Equity: EAFE -4.0 -1.3 0.8 1.7Arrowstreet International Equity – EAFE -0.5 0.8 2.0 3.3BlackRock International Alpha Tilts -0.5 1.9 2.2 2.9Investec 4Factor Dynamic Equity 1.2 1.9 1.5 2.1

Emerging Market Dynamic - Relative to MSCI Emerging Markets Index 0.1 1.2 2.2 2.1MSCI Emerging Markets Index -- -- -- --

Emerging Market Dynamic - Versus Peer Strategies (benchmarked against MSCI EM) 0.1 1.2 2.2 2.1AQR Emerging Markets Equity -3.8 0.5 0.1 1.2Arrowstreet Emerging Markets 1.7 -0.3 0.6 0.6BlackRock Emerging Markets Alpha Tilts -1.0 1.4 1.8 1.7Investec 4Factor Emerging Markets Equity -0.5 1.1 0.8 2.0


Macro Distance Performance Evaluation (Relative to Benchmark)Product Name 1 Year 3 Years 5 Years 7 Years

US Macro Distance - Relative to MSCI USA 1.2 0.5 1.3 1.0MSCI USA Index -- -- -- --

Non-US Macro Distance - Relative to MSCI EAFE + Canada -1.3 -0.6 1.3 1.2MSCI EAFE + Canada Index -- -- -- --

Emerging Market Macro Distance - Relative to MSCI Emerging Markets Index -2.4 0.0 1.7 1.8MSCI Emerging Markets Index -- -- -- --


Multi-Factor Performance Evaluation (Relative to Benchmark)Product Name 1 Year 3 Years 5 Years 7 Years

US Multi Factor - Relative to Standard Benchmarks -3.9 -0.2 0.9 1.2SciBeta United States High-Factor-Exposure Multi-Beta Multi-Strategy Six-Factor EW -1.0 -3.6 0.4 0.3MSCI USA Diversified Multiple-Factor-ND -7.5 -2.2 -1.0 -0.1RAFI Dynamic Multi-Factor U.S. -3.7 -2.7 -0.8 0.2

US Multi Factor - Versus Peer Strategies -3.9 -0.2 0.9 1.2AQR Large Cap Multi-Style -8.5 -2.0 -2.7 ---AQR US Equity Style Premia Beta 1 -3.0 --- --- ---GSAM ActiveBeta US Large Cap -0.2 0.0 --- ---HSBC US Multi Factor Equity 0.3 0.2 0.1 0.3NT Quality Core Portfolio -4.9 -1.4 --- ---Analytic Investors Factor Enhanced US Large Cap Defensive Equity 2.9 --- --- ---

Non-US Multi Factor - Relative to Standard Benchmarks -1.8 -0.2 0.0 0.7SciBeta Developed ex USA HFI Multi-Beta Max Deconcentration -1.3 -0.1 2.6 2.4MSCI EAFE Diversified Multiple-Factor-ND -2.6 0.0 1.8 2.4RAFI Multi-Factor Developed ex-U.S. -1.5 -0.4 1.6 2.2

Non-US Multi Factor - Versus Peer Strategies -1.8 -0.2 0.0 0.7AQR International Multi-Style -0.6 -0.2 -1.1 ---AQR International Style Premia Long Only Beta 1 -1.2 --- --- ---GSAM ActiveBeta World ex-US -0.7 0.6 --- ---Analytic Investors Factor Enhanced International Defensive Equity 0.4 --- --- ---

Emerging Market Multi Factor - Relative to Standard Benchmarks 0.5 1.2 1.4 1.7MSCI EM Diversified Multiple-Factor-ND -7.2 -1.7 -0.1 0.4RAFI Dynamic Multi-Factor Emerging Markets 3.6 -0.3 0.5 1.0SciBeta Emerging MBMS 4 Factor EW 1.0 -3.4 -1.5 -0.3

Emerging Market Multi Factor - Versus Peer Strategies 0.5 1.2 1.4 1.7AQR Emerging Multi-Style -1.8 -1.7 -1.3 ---Analytic Investors Factor Enhanced Emerging Markets Defensive Equity 0.2 --- --- ---


U.S. Low Vol Performance Evaluation1 (Relative to Benchmark)

1Nuances of strategy implementation make performance evaluation particularly difficult for this suite of strategies

Product Name 1 Year 3 Years 5 Years 7 YearsUS Low Vol - Relative to Standard Benchmarks -2.3 -0.3 3.5 2.7SciBeta United States High-Factor-Intensity Low-Volatility Diversified Maximum Deconcentration Strategy 6.6 -1.7 2.1 1.7MSCI USA Minimum Volatility-ND 8.4 -1.8 2.4 -0.1

US Low Vol - Versus Peer Strategies -2.3 -0.3 3.5 2.7AQR US Defensive Equity Strategy 6.3 1.7 4.1 2.5NT Quality Low Volatility 7.5 1.6 --- ---TD Emerald Low Volatility U.S. Equity PFT 9.5 0.2 --- ---Analytic Investors US Low Volatility Equity 4.4 -4.6 0.3 -1.3

Non US Low Vol - Relative to Standard Benchmarks 2.0 -0.3 3.4 3.0SciBeta Developed ex USA High-Factor-Intensity Low-Volatility Diversified Maximum DeconcentrationStrategy 1.9 -0.2 2.8 2.2

MSCI EAFE Minimum Volatility-ND 3.9 -2.4 3.1 1.2

Non US Low Vol - Versus Peer Strategies 2.0 -0.3 3.4 3.0International Defensive Equity -0.5 -3.2 0.7 -0.9NT Quality Low Volatility International Strategy 2.1 --- --- ---TD Low Volatility Non-U.S. Equity Strategy --- --- --- ---

Emerging Market Low Vol - Relative to Standard Benchmarks 0.7 -0.1 2.6 4.5SciBeta Emerging High-Factor-Intensity Low-Volatility Diversified Maximum Deconcentration Strategy 0.5 -5.7 -1.4 -0.2MSCI EM Minimum Volatility-ND 2.8 -3.1 -0.2 -0.2

Emerging Market Low Vol - Versus Peer Strategies 0.7 -0.1 2.6 4.5AQR Emerging Defensive Equity 3.3 -4.5 -2.5 ---Unigestion Equity Emerging Markets -0.2 -2.8 -0.8 -0.6Analytic Investors Emerging Markets Low Volatility 4.7 -3.4 0.1 ---


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Proxy Policy Update

Joel Hinkhouse, Director - External Public Markets

December 2019

Agenda

• Current policy and purpose• How policy is implemented at TRS• Where TRS sits on the spectrum of proxy vote engagement

2

TRS Proxy Voting Policy Overview

• The Objective of TRS’s Proxy Voting Policy is “to ensure that TRS proxies are voted prudently and in the best economic interests of the pension plan so as to maximize portfolio returns over time”

• Policy calls for the TRS Board to retain an independent Proxy Advisor to analyze proxy issues, make voting recommendations, and vote proxies as an agent of TRS

• Policy delegates administration duties to the Chief Investment Officer, who appoints Proxy Committee from within the IMD, including three investment professionals as well as members from Legal & Compliance and Investment Operations

• The IMD Proxy Committee implements TRS’s Proxy Voting Policy

3

What is Proxy Voting?

• Companies typically hold shareholder meetings at least once per yearo Most companies hold an Annual General Meeting (AGM), the timing and

location of which are typically specified in a company’s by-lawso Occasionally shareholders will decide it is necessary to schedule a special

shareholder meeting (if shareholders believe a matter is too urgent to leave until the next AGM)

• A proxy vote is a ballot cast on behalf of a shareholder (e.g. TRS) in lieu of attending the shareholder meeting to vote directly

• The right to vote shareholder proxies is a Trust asset. Informed proxy voting ensures that TRS’s proxies are voted prudently and in the best economic interests of the Trust

4

How Proxy Voting Policy is Enacted at TRS

• The TRS Board has ultimate responsibility for the Proxy Voting Policy. The Board delegates voting and administration to the CIO, who appoints a Proxy Committee.

• The Proxy Committee implements TRS Proxy Voting Policyo Manages and reviews Proxy Voting Policy and procedures, recommending changes as

necessary (at least every three years)o Oversees TRS’s relationship with the Proxy Advisoro Monitors Proxy Votes When applicable, instructs Proxy Advisor to vote in line with special TRS Board instructions Instructs Proxy Advisor to vote against standing instructions in exceptional circumstances

o Maintains records and provides proxy transparency to TRS Board of Trustees Record of all proxies voted with all key data and necessary supporting documentation

– Notification of Exceptions to Proxy Advisor vote recommendations– Record of proxies not voted due to special circumstances

Annual review of Proxy Advisor guidelines

5

Exceptions to Proxy Advisor Vote Recommendation

• Process for Exceptionso Corporate vote scheduled, proxy distributed to shareholders and Proxy Advisoro TRS believes Proxy Advisor recommendation(s) is not in best economic interests of

TRS based on: IMD research and/or; External manager recommendation, agreed to by IMD

o Proxy Committee recommends exception to voting Proxy Advisor recommendation(s)

o CIO approves exception recommendation and notifies Executive Director and Chairman of Policy Committee

o Proxy Committee directs Proxy Advisor to vote per TRS recommendation(s)o Proxy Committee provides quarterly report to the Board, including all exceptions to

Proxy Advisor recommendations

6

History of Proxy Policy at TRS

7

Date Policy Details

Prior to 2013 • Board creates specific set of rules that govern how proxies are to be voted, and delegates to IMD the responsibility for executing those votes.

• IMD is authorized to use a third-party proxy voting service (e.g., ISS) in that process. • Policy also addresses proxy voting in situations not specifically covered in policy.

2013 – 2017 • Board-generated recommendations are removed from the policy. • Board delegates to IMD the responsibility for voting all proxies, based on the

recommendations of a third-party proxy voting service (i.e., “Proxy Advisor”), which IMD is responsible for selecting.

• Board creates a Proxy Committee run by IMD.

2017 – 2019 • Board control re-emphasized. • Board selects the Proxy Advisor incorporating a review of the Proxy Advisor’s voting

guidelines to ensure its suitability for TRS’s purposes. • Board codifies its ability to direct Proxy Committee to vote proxies differently than

Proxy Advisor recommendations on matters of special importance.

Institutional Investor Proxy Practices

8

Full delegation to external managers

No direct guidance on standards

Delegate to third party

Utilize third party standards*

Delegate to third partyProvide voting standards

In-House

TRS*

More resources requiredMore active as a shareholder

*While TRS policy typically relies on recommendations/standards of the Proxy Advisor, TRS’s Board is responsible for choosing the Proxy Advisor. Furthermore, TRS may choose to vote in exception to third party standards at the direction of the Board or at the request of internal/external portfolio management when deemed in the best economic Interests of TRS.

Conclusion

9

• The Proxy Committee has reviewed the intent and supporting processes of the Proxy Voting Policy o The Proxy Committee has developed written procedures for Policy implementationo Policy requirements for reporting are comprehensive, routine and reviewedo The relationship with and services of the Proxy Advisor are regularly reviewed o The Policy meets its stated objective

• What’s next?o ISS (Proxy Advisor) Teach-in, TRS Board of Trustees Meeting, February 20th-21st,

2020o RFP for next Proxy Advisor contract (current advisor contract expires in December),

March 2020o Presentation of Proxy Advisor finalists for TRS Board review and approval, TRS Board

of Trustees Meeting, July 16th-17th, 2020

Appendix

Proxy Activity:10/01/2016 to 9/30/2019

11Source: ISS Voting Records

10/16 to 9/17 10/17 to 9/18 10/18 to 9/19

Items Voted 76,327 69,474 60,776

Meetings Voted 7,626 7,072 5,852 Distinct Companies Voted 6,308 5,960 4,935

Countries voted in 86 69 67

Votes Against ISS Recommendations 0 0 0

Technical Exception1 0 0 2

Refer Items2 112 103 125 Votes Against Management 8,887 (11.6%) 7,695 (11.1%) 6,145 (10.1%)

1 Technical Exception: TRS manually voted with ISS original recommendation. ISS changed their recommendation after additional information disclosure. TRS vote not updated to reflect ISS new vote.2 Refer Items: Factual questions where shareholders are expected to provide pre-determined responses (e.g. controlling or institutional shareholder).

Overview of ISS – TRS’s Proxy Advisor

12

• ISS (“Institutional Shareholder Services”) is a provider of corporate governance solutions, including proxy voting and distribution solutions• ISS has been working with institutional investors for 30 years• The firm employs 1800 of which 180 focus on Governance Research• ISS covers 115 markets for ~2000 institutional clients, from 30 offices in 13 countries,

with fluency coverage in ~50 languages• ISS covers 44,000 corporate meetings, executing 10.2 million proxy ballots annually

• ISS publishes their Proxy Voting guidelines for US and International companies, and releases revisions to these guidelines annually (typically in the first quarter)

Proxy Committee

13

Jerry Albright,

CIO

TRS Board of Trustees

Mark Albert, Multi-Asset Strategies

Ran Huo,Internal Public

Markets

Joel Hinkhouse

(Chair), External Public

Markets

Heather Traeger,Legal &

Compliance

LeAnn Gola,Operations

Voting Members Non-voting MembersProxy

Committee

investment management committee documents/imc_committee... · 2019-12-12 · mr. colonnetta noted a...

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