TMRS Investment Performance Summary as of December 31, 2007 (pdf)

INVESTMENT UPDATE
February 15, 2008 - According to our plan to average into the equity market, TMRS has invested a total of $280 million in equities (2% of the total portfolio) — half in a Russell 3000 Index Fund and half in an EAFE (international, developed country) Index Fund. These investments move us on our way to the 12% allocation approved by the Board for 2008.

TMRS investments are held in trust for the exclusive benefit of members and invested under the provisions of the TMRS Act. The investment guidelines for TMRS are found in the Texas Government Code, Sections 855.301 through 855.303. Here is a copy of the current TMRS investment policy (Investment Policy PDF).

Principles and Objectives
TMRS investments are managed to assure the matching of long-term assets to future benefits in an equitable manner. Investments are made with the degree of judgment and care, under the circumstances that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, considering the probable income and safety of their capital. Current investment objectives include the preservation of principal, the earning of income at least sufficient to pay annual interest on member accounts and pay administrative costs, to maintain an “interest reserve” to ensure interest credits during low-performing market periods and to maintain sufficient liquidity to pay benefits.

Investments in Transition
As of September 30, 2007, the TMRS retirement fund was valued at $13,831,005,991, invested entirely in fixed-income securities. The average years-to-maturity is 21.5 years, and the yield-to-maturity is 5.50%.

For most of the near 60-year history of TMRS, the Board of Trustees has chosen to invest in fixed-income instruments, primarily government and high-quality corporate bonds, and has pursued an income return investment strategy. During the inflationary era of the 1980s, this strategy enabled the granting of annual interest credit rates as high as 11% to member and city accounts.

Now, in a continued period of low interest rates, with 30-year Treasury bonds yielding below 5%, after a period of analysis and on the advice of investment advisors, TMRS has taken the first steps toward diversification of the investment portfolio.

TMRS has traditionally used two economic investment advisors, Hillswick Asset Management, LLC and A. Gary Shilling & Co. to provide the System with additional insight into the broader economic markets while managing the investment portfolio utilizing the TMRS investment staff.  As of October 1, 2007, TMRS hired its first general investment consultant, R.V. Kuhns & Associates, to advise the Board on investment policy and strategy, and this firm is currently working with the Board on the diversification of the portfolio. On November 16, 2007, the Board approved hiring Hillswick Asset Management, LLC to assist investment staff with the fixed-income portion of the portfolio to ensure that the transition is optimal.

Also, on November 16, 2007, the Board approved an initial allocation of 12% of the portfolio to equities by the end of 2008.

In December 2007, the TMRS Board approved the hiring of Northern Trust Global Investments (NTGI) to act as the fund’s passive equity manager.

How Will TMRS Stock Investments Work?

TMRS will make a gradual transition from its current investment policy, focused on minimizing risk and investment cost while improving the potential for future gains. Half of the 12% equities investment will be dedicated to a portfolio of U.S. companies, and the other half to foreign companies. Each of these equity portfolios will be invested passively to track the performance of a specific index. This is a lower cost approach, and TMRS will be using the Russell 3000 Index for domestic equities, which represents about 98% of the stocks in the U.S., and the MSCI-EAFE for international equities, which is a broad representation of the foreign developed markets. The Board has discussed a five-year transition to an asset mix of 60% equities and 40% fixed income.

In the past, the market value of the portfolio was not a priority for TMRS, since the investment strategy was focused on the income return of the portfolio; however, the transition to equities will emphasize a new focus on a total return investment strategy.