investment management committee book - april 2021

April 2021

Investment Management

Teach er Retirement System of Texas 10 0 0 Red River S treet Austin, Texas 7 8 7 0 1-26 9 8

Minutes of the Investment Management Committee

December 9, 2020

The Investment Management Committee of the Board of Trustees of the Teacher Retirement System of Texas met on December 12, 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. David Corpus, Chair Mr. Jarvis V. Hollingsworth Mr. Christopher Moss Ms. Nanette Sissney Mr. Robert H. Walls, Jr. Other Board Members present: Mr. John Elliott Mr. James D. Nance Ms. Nanette Sissney Others present: Brian Guthrie, TRS Steve Voss, Aon Andrew Roth, TRS Mike McCormick, Aon Don Green, TRS Dr. Keith Brown, Board Investment Advisor Heather Traeger, TRS Jase Auby, TRS Amanda Jenami, TRS James Nield, TRS Bernie Bozzelli, TRS Ashley Baum, TRS Katherine Farrell, TRS Suzanne Dugan, Cohen Milstein Investment Management Committee Chair Mr. Corpus called the meeting to order at 9:30 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 September 2020 committee meeting – David Corpus, Chair.

On a motion by Mr. Moss, seconded by Mr. Hollingsworth, the committee unanimously voted to approve the proposed minutes for the September 2020 Investment Management Committee meeting as presented.

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

Mr. Jase Auby stated that the Investment Management Division (IMD) continues to operate well through the COVID crisis. He said as Austin entered Phase 3 there is up to 25 percent of IMD personnel to be on-site at 816 Congress. He announced the expansion of the Management Committee. With the new year ahead, he said they have engaged in the annual priority-setting process for the upcoming year. He reported the hiring for Phase 2 of Building the Fleet remains on hold until the end of the calendar year.

4. Discuss the Third Quarter 2020 Performance Review – Steve Voss, Mike Comstock and Mike McCormick, Aon.

Mr. Mike McCormick provided background on the market returns experienced for the quarter. He provided an update on where they see the end of the quarter and TRS performance and results. He noted global equities continue to rally during the third quarter due to the Central Bank intervention, positive information on coronavirus vaccines and the reopening of the economy. For the most recent quarter was up 8.6 percent, representing the equity portion of the TRS benchmark. He said the stable value, the risk reduction portion of the TRS portfolio saw phenomenal returns over the one-year period, 13.4 percent, due to the long-duration bonds. For the third quarter, he said, there was a muted return, up only 0.7 percent. He said rates will not continue to fall materially. He reported TRS had a return of about 5.4 percent for the quarter, capturing the global equity performance.

Mr. McCormick stated for the period, stable value portfolio has a very modest underweight to global equity, about 0.7 percent, a slight overweight to stable value, as well as very slight overweight to risk parity. He said this was a very modest difference relative to the policy in the portfolio. He noted the portfolio was in line with the policy as desired.

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

Mr. James Nield began his annual update by discussing how the Risk Group not only reports on key risk metrics but has five mandates that to handle risk strategies and risk management. He said this is done by managing a number of portfolios, the two key ones being government bonds and risk parity. He said while the interim Strategic Asset Allocation study involves asset allocation, between the five-year studies, there is research performed to ensure the world does not change too much that requires an update to that policy. He reported the group also performs market intelligence to look at the rest of the world to ensure staying up to date with market trends and peer groups. Mr. Nield provided further detail for each of the five mandates. The history of risk parity and its purpose within the TRS portfolio was discussed.

6. Annual Update on the Trading Group – Bernie Bozzelli.

Mr. Bernie Bozzelli provided an overview and major functions of the Trading Group. He said the group’s primary mandate is to optimally implement the IMD investment decisions. He said having a high-performing trading operation is the result of having three factors in place: having a fully engaged, knowledgeable team; having top-notch systems, processes and technology; and having the trading partners with the right skill sets. He stated having to shut operations in the office and moving to work from home was a true test of processes. He reported for the year ending September

30, 2020, the group executed $414 billion in value and outperformed the peer trading benchmark by over 10 bps. He noted the increase in trading was related to risk parity and recent changes in the strategic asset allocation. Mr. Demetrius Pope provided a review of the Emerging Broker Program. He said TRS Trading has a dedicated program to engage with the work of high-performing minority, women, and disabled veteran broker/dealers. He noted that eight out of the 46 TRS trading brokers are emerging firms. He said they have outperformed their peer median desk by 13 basis points, trading around $12 million in savings versus their peer trading benchmark. He said TRS has worked with emerging firms for over 23 years.

7. Review of the Absolute Return Portfolio – Ashley Baum. Ms. Ashley Baum provided a review of the Absolute Return Portfolio and noted this was the first time to be featured by itself. She said absolute return is defined as a broad, multi-asset category of investments that have a high chance of making a positive return in all market environments after one to three years. She reported the portfolio is 3.7 percent or has about $6 billion of assets invested in this area. She noted this portfolio looks at investments that will produce target returns within three years while the industry generally focuses on monthly or quarterly results. She also noted the absolute return band in policy is from zero to 20 percent, with a zero percent target weight. This allows IMD to use the absolute return portfolio opportunistically and the actual weight will go up and down, depending on the opportunities available. She provided a review of the intentional deployment history of success in multi-strategy and illiquid credits since 2013. She said today there is about $2.8 billion available to deploy if TRS and the external managers agree an opportunity is compelling, allowing for TRS to be quick and nimble in capturing investments for the Trust. There being no more business before the committee, the meeting adjourned at 1:55 p.m. APPROVED BY THE INVESTMENT MANAGEMENT COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE __th DAY OF APRIL 2021.

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

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Jase Auby, Chief Investment Officer

CIO Update

April 2021

2

CIO UpdateIMD at a Glance

Priorities Our People

Snapshot as of March 2021IMD FTEs 189Shared-Services 15Contractors 24Secondees 7

Activity Phase I Phase IIHired 30 17Recruiting 2 5Pipeline 0 9

32 31

Key Dates and Upcoming EventsEvent Location Dates

Strategic Partnership Network (SPN) Summits Virtual May 27, 2021

GCM Grosvenor Consortium – Diverse + Women Managers Conference Virtual June 8-10, 2021

• Alpha. Total Trust outperformance versus the benchmark in Q4 2020 and year-to-date 2021

• Compensation. Conducting biennial base compensation study. Results to be presented in July.

• Portfolio Reviews. Completed semi-annual portfolio review process across all investment teams

• Legislative. Actively engaged with Texas Legislators to offer IMD subject matter expertise during House and Senate Hearings

• Recruiting. Actively recruiting for 20 positions across IMD due to recent increase in turnover and vacancies

• Spotlight Award. Austin Anderson, Patricia Cantú, Andrea Drummond, Barb Forssell - Return to Office (RTO) & Work From Home (WFH) Team

• Excellence in Investing Award. Michael Poustovoi and Jared Ryan – Internal Japanese Take Out Subsidiaries Strategy Team

• Industry Leadership.

o Katy Hoffman elected to Council of Institutional Investors (CII) Board of Directors

o Jase Auby elected to Standards Board for Alternative Investments (SBAI) Culture and Diversity North American Advisory Committee

3

The Return to Office (RTO) &Work From Home (WFH) Team

IMD Award Recipients

Internal Japanese Take Out Subsidiaries Strategy Team

AustinAnderson

Patricia Cantú

Andrea Drummond

Barb Forssell

Michael Poustovoi

Jared Ryan

IMD Spotlight Award RecipientsIMD Excellence in Investing

Award Recipients

4

CIO UpdateMetrics Reporting – As of December 31, 2020

Metric Objective Target Q1 2020 Q2 2020 Q3 2020 Q4 2020

Total Trust Excess Return Return in excess of the benchmark return for the Total Trust (3 Year Rolling) +100 bp -9 bp -38 bp -44 bp -32 bp

Private Markets Excess Return

Return in excess of the benchmark return for Private Markets investments (3 Year Rolling) +155 bp +173 bp +97 bp +53 bp +95 bp

Active Public Markets Excess Return

Return in excess of the benchmark return for Active Public Markets investments (3 Year Rolling) +100 bp -126 bp -104 bp -84 bp -89 bp

Principal Investments Percent of portfolio capital plan in principal investments approved (cumulative year-to-date)1 2020: 38% 49% 36% 38% 38%

Public Equity Allocation Percent of internal public equity allocation 45% 50% 46% 49% 50%

Estimated Net Fee Savings External manager annual net fee savings2

2018: $53M2019: $64M2020: $80M

2018: $46M2019: $65M 2020: $93M

Total: $204M

Source: State Street Bank, TRS IMD1 – Q4 represents actual capital commitments vs. approvals and actual capital plan vs. budgeted plan2 – Estimated net fee savings presented net of inception to date marginal direct and overhead costs attributed to employees hired as part of the Building the Fleet initiative. CY2020 estimated net fee savings includes any cumulative prior period adjustments.

Investment advice and consulting services provided by Aon Investments USA 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.

Teacher Retirement System of TexasPerformance Review: Fourth Quarter 2020

Proprietary & Confidential

Investment advice and consulting services provided by Aon Investments USA Inc., an Aon Company. 2

Summary

• Global equity markets continued to rise for the third consecutive quarter, ending the calendar year above their pre-pandemic levels.

Supportive monetary and fiscal policy, dwindling uncertainties regarding the U.S. elections, and the news of vaccines receiving

approval outweighed the continued surge of COVID-19 cases globally. with global equities returning 14.9% for the quarter.

• The U.S. nominal yield curve steepened over the quarter with yields at the short end of the curve remaining virtually unchanged while

yields at the longer end rose, resulting in the modestly negative returns shown for the Stable Value component The U.S. Federal

Reserve kept its interest rate unchanged and will continue to buy $120bn of debt per month until “substantial further progress has been

made” towards its employment and inflation targets.

• TRS returned 9.5% for the quarter which was 0.4 percentage points above its benchmark

− Outperformance at the asset class level for Stable Value and Real Return were the primary drivers for relative results.

▪ For the trailing twelve months, TRS returned 11.6% versus the benchmark return of 12.6%

− Active management in Total USA, along with Stable Value and Risk Parity performance were the primary detractors from relative

results

14.9%

-1.0%

0.8%

11.3%

15.3% 15.4%

-1.2%

10.1%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Global Equity Policy Benchmark Stable Value Policy Benchmark Real Return Policy Benchmark Risk Parity Benchmark

Fourth Quarter One-Year

Proprietary & Confidential Investment advice and consulting services provided by Aon Investments USA Inc., an Aon Company. 3

1. Market Summary – Fourth Quarter 2020



2. Market Value Change



3. Asset Allocation Detail

Market Value $ in millions)as of 12/31/2020 Interim

PolicyTarget

Relative toInterimPolicy Target

Long TermPolicy Target

Long TermPolicy

Ranges($) (%)

Investment Exposure -- 105.2% 104.0% +1.2% 104.0% 99-115%

Total U.S.A. $31,947 18.1% 19.0% -0.9% 18.0 13-23%

Non-U.S. Developed $24,720 14.0% 13.3% +0.7% 13.0 8-18%

Emerging Markets $16,711 9.4% 9.0% +0.4% 9.0 4-14%

Private Equity $26,301 14.9% 14.6% +0.2% 14.0 9-19%

Global Equity $99,679 56.3% 55.9% +0.4% 54.0 47-61%

Government Bonds $25,486 14.4% 16.3% -1.9% 16.0 0-21%

Stable Value Hedge Funds $9,121 5.2% 5.0% +0.2% 5.0 0-10%

Absolute Return $6,112 3.5% 0.0% +3.5% 0.0 0-20%

Stable Value $40,720 23.0% 21.3% +1.7% 21.0 14-28%

Real Estate $22,913 12.9% 13.7% -0.7% 15.0 10-20%

Energy, Natural Resource and Inf. $8,377 4.7% 5.1% -0.4% 6.0 1-11%

Commodities $345 0.2% 0.0% +0.2% 0.0 0-5%

Real Return $31,635 17.9% 18.8% -0.9% 21.0 14-28%

Risk Parity $14,197 8.0% 8.0% 0.0% 8.0 0-13%

Risk Parity $14,197 8.0% 8.0% 0.0% 8.0 0-13%

Cash $3,526 2.0% 2.0% 0.0% 2.0 0-7%

Asset Allocation Leverage -$12,812 -7.2% -6.0% -1.2% -6.0 --

Net Asset Allocation -$9,286 -5.2% -4.0% -1.2% -4.0 --

Total Fund $176,945 100.0% --- 100.0% --

Note: Asset allocation information shown above is based upon MOPAR 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 12/31/2020



Commodities

Real Estate

Cash Equivalents

Total Fund Performance Total Value Added: 0.46 %

Total Asset Allocation: 0.11% Total Security Selection Value Added: 0.26%

Total Fund vs. Total Fund Benchmark

0.00%

-0.03%

0.00%

0.00%

0.39%

0.01%

0.00%

0.05%

-0.01%

0.09%

-0.12%

-0.25%

0.13%

-0.8% -0.4% 0.0% 0.4% 0.8%

9.51%

9.05%

0.46%

0.0% 4.0% 8.0% 12.0% 16.0%

Total Fund

Total Fund Benchmark

Total Value Added

0.09%

0.26%

0.11%

-0.2% 0.0% 0.2% 0.4%

Other

Security Selection Value Added

Asset Allocation

-0.77%

0.07%

-0.06%

0.24%

-0.06%

-0.50%

3.57%

0.07%

-1.91%

0.33%

0.12%

0.26%

-1.36%

-6.0% 0.0% 6.0% 12.0%

Asset Allocation Leverage

Risk Parity

ENRI

Commodities

Real Estate

Cash Equivalents

Absolute Returns

Stable Value Hedge Funds

Long Treasuries

Private Equity

Emerging Markets

Non-U.S. Developed

Total U.S.A

0.00%

0.00%

0.00%

0.00%

0.00%

0.03%

-0.06%

-0.01%

0.25%

0.00%

0.01%

-0.02%

-0.10%

-0.3% 0.0% 0.3% 0.6%

5. Total Fund Attribution – One Quarter Ending 12/31/2020



Commodities

Real Estate

Cash Equivalents

Total Fund vs. Total Fund BenchmarkTotal Fund Performance Total Value Added: -1.06 %

Total Asset Allocation: 0.36% Total Security Selection Value Added: -1.32%

0.05%

-0.61%

-0.29%

0.00%

0.30%

0.01%

0.00%

0.15%

0.01%

-0.34%

0.01%

0.23%

-0.84%

-1.6% -0.8% 0.0% 0.8%

11.59%

12.64%

-1.06%

-8.0% 0.0% 8.0% 16.0% 24.0%

Total Fund


Total Value Added

-0.10%

-1.32%

0.36%

-4.0% -2.0% 0.0% 2.0%

Other

Security Selection Value Added

Asset Allocation

-1.36%

-0.03%

-0.13%

0.19%

-0.19%

0.09%

3.56%

-0.03%

-1.37%

0.00%

0.22%

0.34%

-1.27%

-5.0% 0.0% 5.0% 10.0%

Asset Allocation Leverage

Risk Parity

ENRI

Commodities

Real Estate

Cash Equivalents

Absolute Returns

Stable Value Hedge Funds

Long Treasuries

Private Equity

Emerging Markets

Non-U.S. Developed

Total U.S.A

0.00%

0.01%

0.10%

0.02%

0.06%

-0.02%

-0.20%

-0.01%

-0.02%

0.32%

0.03%

0.05%

0.04%

-0.4% 0.0% 0.4% 0.8%

5. Total Fund Attribution – One Year Ending 12/31/2020



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

Note: Public Plan peer group composed of 18 public funds with total assets in excess of $10B as of 12/31/2020 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 12/31/2020

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.

Fourth Quarter

One

Year

Three

Years

Total Global Equity 14.5% 14.1% 8.9%

Global Equity Benchmark 14.9 15.3 9.9

Difference -0.4 -1.2 -1.0

Total U.S. Equity 15.5 15.7 11.3

Total U.S. Equity Benchmark 14.7 21.1 14.6

Difference +0.8 -5.4 -3.3

Non-U.S. Equity 15.7 13.0 5.4

Non-U.S. Benchmark 17.4 12.1 5.2

Difference -1.8 +0.9 +0.3

Non-U.S. Developed 13.9 9.3 4.4

MSCI EAFE + Canada 15.8 7.6 4.2


Emerging Markets 18.4 18.6 6.8

MSCI Emerging Markets 19.7 18.4 6.3


Five

Years

Ten

Years

11.2% 8.8%

12.0 9.0

-0.8 -0.1

13.0 11.9

15.5 13.8

-2.6 -1.9

9.6 5.1

9.9 4.7

-0.2 +0.4

7.2 5.9

7.6 5.2

-0.5 +0.7

13.3 4.3

12.9 3.7

+0.4 +0.6



7. Global Equity: Performance Summary Ending 12/31/2020 (cont’d)

Fourth

Quarter

One

Year

Three

Years

Five

Years

Ten

Years

Total Public Equity 15.6% 14.2% 8.0% 10.8% 7.8%

Public Equity Benchmark 16.2 16.1 9.3 12.0 8.3

Difference -0.6 -1.9 -1.4 -1.2 -0.5

Total Private Equity 11.6 13.9 12.0 12.4 13.6

Private Equity Benchmark 10.6 13.9 12.4 12.3 11.9

Difference +1.0 0.0 -0.5 +0.1 +1.6





8. Stable Value: Performance Summary Ending 12/31/2020

Fourth

Quarter

One

Year

Three

Years

Total Stable Value 0.6% 14.8% 8.5%

Total Stable Value Benchmark -1.0 15.4 8.7

Difference +1.5 -0.6 -0.1

Total Government Bonds -3.1 17.7 10.3

Treasury Benchmark -3.0 17.7 9.9

Difference -0.1 0.0 +0.4

Stable Value Hedge Funds 6.8 9.4 5.4

Hedge Funds Benchmark 5.8 6.5 3.9

Difference +1.0 +2.9 +1.5

Absolute Return 7.2 7.3 7.4

Absolute Return Benchmark 0.6 2.6 3.8

Difference +6.6 +4.7 +3.6



Five

Years

Ten

Years

7.5% 7.3%

6.9 6.8

+0.6 +0.6

8.3 8.3

7.8 7.8

+0.5 +0.5

5.6 4.3

3.5 3.5

+2.0 +0.8

7.6 9.6

3.5 2.9

+4.1 +6.7



9. Real Return: Performance Summary Ending 12/31/2020

Fourth

Quarter

One

Year

Three

Years

Five

Years

Ten

years

Total Real Return 2.9% -0.4% 4.8% 7.0% 7.6%

Real Return Benchmark 0.8 -1.2 2.9 4.6 6.7

Difference +2.1 +0.8 +1.9 +2.4 +0.9

Real Estate 3.0 2.8 7.1 9.0 10.9

Real Estate Benchmark 0.3 0.5 4.2 5.7 9.3

Difference +2.7 +2.3 +2.8 +3.3 +1.7

Energy, Natural Resource and

Infrastructure2.3 -8.7 1.0 -- --

Energy and Natural Res. Benchmark 2.3 -5.5 0.8 -- --

Difference 0.0 -3.2 +0.2 -- --





10. Risk Parity: Performance Summary Ending 12/31/2020

Fourth

Quarter

One

Year

Three

Years

Five

Years

Ten

years

Total Risk Parity 10.9% 2.4% 5.6% 9.2% --

Risk Parity Benchmark 11.3 10.1 8.0 10.2 --

Difference -0.4 -7.7 -2.4 -0.9 --





11.Cash Equivalents: Performance Summary Ending 12/31/2020

Fourth

Quarter

One

Year

Three

Years

Five

Years

Ten

Years

Cash Equivalents 0.3% 1.2% 1.7% 1.7% 1.9%

Cash Benchmark 0.0 0.7 1.6 1.2 0.6

Difference +0.3 +0.5 0.0 +0.5 +1.2





Appendix – Supplemental Reporting



TRS Commitment Levels vs. Peers (>$10 Billion) as of 12/31/2020

Note: The Public Plan peer universe had 18 observations for the fourth quarter 2020. 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 12/31/2020

Quarterly and Cumulative Excess Performance

Total Fund vs. Total Fund Benchmark



TRS Asset Growth

0

20

40

60

80

100

120

140

160

180

200

Ma

rket V

alu

e(B

illio

ns)

Total Fund Historical Growth (September 1997 - December 2020)

$176.9



External Manager Program:

Public Equity Performance as of 12/31/2020Allocation

($ in billions)

Fourth

Quarter

One

Year

EP Total Global Equity $30.0 17.5% 19.0%

EP Global Equity Benchmark -- 15.9 17.3Difference -- +1.6 +1.7

EP U.S.A. $10.8 17.8 20.4

EP U.S.A. Benchmark -- 14.7 21.1

Difference -- +3.1 -0.7

EP Non-U.S. Developed $6.5 15.0 18.5

MSCI EAFE + Canada Policy Index -- 15.8 7.6

Difference -- -0.8 +10.9

EP Emerging Markets $6.2 20.8 22.3

MSCI Emerging Markets Policy Index -- 19.7 18.4

Difference -- +1.1 +3.8

EP World Equity $6.6 16.5 15.4

EP World Equity Benchmark -- 14.7 16.6Difference -- +1.8 -1.3



Three

Years

9.5%

9.2

+0.3

13.4

14.6

-1.2

7.5

4.2

+3.3

7.9

6.3

+1.6

9.7

10.4

-0.7



External Manager Program:

Stable Value/Total Program Performance as of 12/31/2020

Allocation

($ in billions)

Fourth

QuarterOne Year

Three

Years

EP Total Stable Value $9.1 6.8% 9.4% 5.4%

EP Stable Value Benchmark -- 5.8 6.5 3.9

Difference -- +1.0 +2.9 +1.5

EP Stable Value Hedge Funds $9.1 6.8 9.4 5.4

EP Stable Value Hedge Funds Benchmark -- 5.8 6.5 3.9

Difference -- +1.0 +2.9 +1.5

Total External Public Program $39.2 15.0 16.8 8.5

EP External Public Benchmark -- 13.6 15.2 8.1

Difference -- +1.4 +1.7 +0.5





Public Strategic Partnership Program (SPN):

Performance Summary as of 12/31/2020

The Public SPNs in aggregate outperformed the benchmark during the fourth quarter and outperformed

over the trailing one-year period and over the trailing three-year period.

Allocation

($ in billions)

Fourth

Quarter

One

Year

Three

Years

Five

Years

Public Strategic Partnership $7.6 13.0% 20.1% 10.6% 11.9%

Public SPN Benchmark -- 10.3% 17.9% 10.1% 11.3%

Difference -- +2.7 +2.2 +0.5 +0.6

Blackrock $2.6 12.6% 19.8% 11.3% --

J.P. Morgan $2.7 13.7% 22.5% 10.3% --

Morgan Stanley $2.3 12.8% 16.9% 10.1% --





▪ Total Fund Performance Benchmark – 19.0% MSCI U.S.A. IMI, 13.3% MSCI EAFE plus Canada Index, 9.0% MSCI Emerging

Markets Index, 14.6% State Street Private Equity Index (1 quarter lagged), 16.3% Blmb. Barc. Long Term Treasury Index, 5.0%

HFRI FoF Conservative Index, 2.0% Citigroup 3 Mo. T-Bill Index, 13.7% NCREIF ODCE Index (1 quarter lagged), 5.1% Energy

and Natural Resources Benchmark, 8.0% Risk Parity Benchmark, and -6.0% Asset Allocation Leverage Benchmark.

▪ Global Equity Benchmark – 33.9% MSCI U.S.A. IMI, 23.8% MSCI EAFE plus Canada Index, 16.1% MSCI Emerging Markets

Index, and 26.2% 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

– 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 – 76.5% Blmb. Barc. Long Term Treasury Index and 23.5% HFRI FoF Conservative Index

– US Treasuries Benchmark – Bloomberg Barclays Long Term Treasury Index

– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index

– Absolute Return Benchmark - 3 Mo. LIBOR + 2%

– Cash Benchmark - Citigroup 3 Mo. Treasury Bill Index

▪ Real Return Benchmark – 72.9% NCREIF ODCE Index and 27.1% Energy & Natural Resources Benchmark

– Real Estate Benchmark – NCREIF ODCE Index (1 quarter lagged)

– 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

▪ Risk Parity Benchmark – 100% HFR Risk Parity Vol 12 Institutional 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. The

magnitude 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 Effect

Cumulative 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 Notes

Disclaimers:

▪ Please review this report and notify Aon Investments USA Inc. (Aon) 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. Aon has compared this information to the

investment managers’ reported returns and believes the information to be accurate. Aon 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/

Footnote

Investment advice and consulting services provided by Aon Investments USA Inc. 29

Legal Disclosures and Disclaimers

Investment advice and consulting services provided by Aon Investments USA Inc. The information contained herein 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. 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 Aon

Investments’ understanding of current laws and interpretation.

Aon Investments disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon

Investments 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 Aon Investments.

Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aon Investments is also registered with

the Commodity Futures Trading Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures

Association. The Aon Investments ADV Form Part 2A disclosure statement is available upon written request to:

Aon Investments USA Inc.

200 E. Randolph Street

Suite 700

Chicago, IL 60601

ATTN: Aon Investments Compliance Officer

© Aon plc 2020. All rights reserved.

Dale West, Senior Managing Director, Public Markets

Brad Gilbert, Senior Director, External Public Markets

Annual Review of Public Markets

April 2021

2

Agenda

I. Global Equity Update

II. Case Study: Underperforming Strategies

III. Directional Hedge Fund Integration Update

IV. Stable Value Hedge Funds

Source: State Street Bank

3

Philosophy

We believe active management will add value over timeActive Management

Targeting factors that are compensated in the long run, such as value, is a key active strategyFactors

We prefer to manage strategies internally when have the resources and skills to compete with external managersInternal

When we don’t have internal capabilities, we can select external managers who will add value net of feesExternal

Active management is most successful in less efficient markets, including international and small capsEfficient Markets

4

Global Equity Overview


Global Equity’s role in the Trust: Global Equity Breakdown

G l o b a lEq u i t y

5 6 %

Assets Assets

(in billions) (percent of Trust)

External Manager / Public SPN $36.0 20.4 12

Internal Quantitative 18.5 10.5 13

Internal Fundamental 14.5 8.2 23

Passive & Transition 4.3 2.4

Public Market Analytics 6

Total Public Equity $73.4 41.5 54

PUBLIC EQUITY PORTFOLIO

As of 12/31/20Team

Members

5

Global Equity Best Practices: More Internal Management

Source: State Street Bank. Due to different reporting frameworks prior to 2017, asset amounts may vary slightly (<1%) from amounts originally reported.Public SPN numbers only include Global Equity.

• The proportion of internal management has continued to increase

• Internal management troughed at 36% of Public Equity in 2012. At year end it was 51%

• Directional Hedge Funds are no longer a separate allocation, and are included in External Public Equity

Public Equity Split by Strategy Group

6

Public Equity Performance


• Public equity portfolios had strong absolute performance in 2020, but lagged benchmarks in the USA

• International portfolios outperformed their benchmarks

• Quantitative and factor strategies detracted from performance in all regions

Assets

(percent of Trust)14.4 14.2 -688 10.8 -385

21.1 14.6

11.7 9.5 188 4.2 -3

7.6 4.2

8.3 18.9 43 6.7 44

MSCI Emerging Markets 18.4 6.3

World Equity 3.9 15.4 -127 9.8 -65

MSCI AC World 16.6 10.4

Total Public Equity 38.3 13.9 -199 7.8 -132

15.9 9.1

MSCI EAFE + Canada

Emerging Markets 14,770

Public Equity Portfolios ex-Strategic Partnership

As of 12/31/20

1-Year

US $25,453

Assets

(in millions) Return (%)

Public Equity Policy Benchmark

6,946

$67,833

MSCI US IMI

Non-US Developed 20,664

3-Year

Return (%) Alpha (bp) Alpha (bp)

7

Public Equity Performance by Strategy Group

• External strategies added value over the 1- and 3-year periods

• Internal Fundamental Non-US Developed portfolios and research portfolios performed well in 2020, offset partially by Emerging Market and US Small/Midcap portfolios

• Underperformance was driven primarily by internal quantitative strategies facing an unfavorable factor environment


Public Equity Contribution to Excess Return (bp)

as of 12/31/2020 1 yr 3 yr

-199 -132

+64 +10

+5 -8

-271 -131

+3 -3

Total

Passive & Transition

Internal Fundamental

Internal Quantitative

External Manager (ex-Strategic Partnership)

8

Case Study: Underperforming StrategiesHow do we judge investment portfolios that are below expectations?

• Two strategies have generated negative results in the Public Equity portfolio since October 2017

o Quantitative Factor Strategies

o Internal Pre-IPO

• They provide a case study on our approach to underperformance in internal and external portfolios


9

Case Study: Underperforming StrategiesDuration and degree of underperformance only provide a starting point

• Goyal and Wahal (2008) found that investors frequently detract from their portfolios through impatient hiring and firing.2

• The Tech Bubble of the late 1990s provides an example where a successful investment strategy – value investing – underperformed by a large margin

over an extended period. The graphs show relative performance of two value managers on the Premier List, with each line charting performance as if

the investment started on that date. Ultimately, holding on to value managers was the right strategy.

Premier List Value Manager 1Performance from Different Investment Dates1

Premier List Value Manager 2Performance from Different Investment Dates1

Source: Bloomberg1 Returns represent the performance of market-hedged portfolios scaled to a 10% volatility level and rebalanced monthly. Manager #2 returns include backfilled data.2 “The Selection and Termination of Investment Management Firms by Plan Sponsors,” The Journal of Finance, Vol LXIII, No. 4. August 2008.

10

Case Study: Underperforming StrategiesBackward- and forward-looking considerations inform a decision

Internal Pre-IPO Quant Factor Strategies

Trailing Performance - - -

Strategy Rationale /“Need to Believes”

- +

In- and Out-of-Sample Historical Performance

- +

Implementation Versus Peers - +

Mitigating Environment - +

Valuation/Outlook - +

Diversification Role + +

Decision Wind down Continue

Source: Bloomberg, State Street Bank

11

Directional Hedge Fund Integration UpdateOverview of Changes

• In the 2019 SAA review, Directional Hedge Funds (DHF) were integrated within the Public Equity portfolio

• Two regional sub-portfolios (US & Non-US Developed) were created based on manager holdings

• The IMD uses an overlay portfolio to achieve full portfolio risk (Beta 1.0 to policy benchmarks)

o The Risk & Portfolio Management Team (RPM) helped design the overlay and currently manages it

• The Public Markets Portfolio Construction Team incorporates DHF manager allocations and risk contributions into portfolio decisions


As of 12/31/2020

12

Directional Hedge Fund Integration UpdateResults to Date

• The DHF + Overlay portfolio generated $187 million in value added since inception (October 2019)

o These results are included in overall Public Equity performance

o The DHF + Overlay portfolios have outperformed traditional Long-Oriented peers in the portfolio since inception, an early validation of TRS's ability to harvest the hedge fund managers' alpha through the overlay program

• Non-US Developed DHF + Overlay has consistently generated strong alpha over the last 15 months

• The overlay has made the DHF allocation more efficient by bringing equity risk up to full target


DHF + Overlay

(ann.)

Benchmark

(ann.)

Ann. Excess

Return (bp)

Dollar Value Added

(millions)

US 24.9% 24.9% (9) -$102.5

Non-US Developed 31.1% 12.6% 1849 $289.6

$187.1

DHF + Overlay PerformanceInception to Date (Oct 19 - Dec 20)

13

Stable Value Overview


S t a b l e Va l u e2 3 %

Stable Value’s role in the Trust: Stable Value Breakdown

As of 12/31/20Assets

(in billions USD)

Assets

(percent of Trust)

Equity Market Neutral 2.9 1.6

Macro and Commodities 2.1 1.2

Fixed Income 1.3 0.7

Multi-Strategy 1.1 0.6

Trends and Volatil ity 1.0 0.6

Reinsurance 0.7 0.4

Total Portfolio 9.1 5.1

STABLE VALUE HEDGE FUND PORTFOLIO

14

Stable Value Hedge Fund Performance

• The target allocation to Stable Value Hedge Funds (SVHF) increased from 4% to 5% in 2019, and the portfolio finished scaling in Q1 2020

• SVHF outperformance in 2020 was driven by superior performance in negative equity environments compared to the benchmark

o The SVHF portfolio is designed to have little to no correlation to equity

• SVHF have been a consistent outperformer over longer time periods

o Over 3 years, SVHF added $291 million in value versus the policy benchmark

o Since inception, SVHF added $738 million in value versus the policy benchmark


Stable Value Hedge Fund Portfolio

As of 12/31/2020

Assets

(in Millions)Return (%) Alpha (bp) Return (%) Alpha (bp) Return (%) Alpha (bp)

Stable Value Hedge Funds $9,086 9.4 +291 5.4 +146 4.9 +128

HFRI Fund of Funds Conservative Index 6.5 3.9 3.6

1 Year 3 Year Since Inception (Oct. 2011)

15

Stable Value Hedge Fund Portfolio

Sources: State Street Bank, BloombergNote: Performance is annualized and is net of fees1Dates: October 2011 (inception) to December 20202MSCI All Country World Index3Bloomberg Barclays US Long Treasury Total Return Index4HFRI Fund of Funds Conservative Index

Stable Value Hedge Fund Objectives Status Details

Hedge Fund TypesFocus on absolute return hedge funds

• Return: 4.9%1

• Sharpe Ratio: 1.3

Market Sensitivity and Risk Core strategies have low to negative market sensitivity

• Correlation to Global Equities2: 0.4• Beta to Global Equities: 0.1

Market Regime PerformanceExpected to have positive returns when markets are down

• Outperformed equities in every down month for stocks, by an average of 3.2%

• Positive returns in 61% of 36 down equity months since October 2011

Performance versus US Treasuries Expected to outperform US Treasuries over the long term

• 4.9% return versus Treasuries3 5.6%; • 3.2% volatility versus Treasuries 11.0%• 12/31/20 10-year Treasury yield-to-maturity: 0.9%

Performance versus BenchmarkStable Value HF benchmark4 with target tracking error of 4%

• 1.3% ahead of Stable Value HF benchmark since inception

• Tracking Error: 2.5%

16

Stable Value Hedge Funds and Treasuries

Source: State Street Bank, Federal Reserve Bank of St. Louis (Treasury data begins January 1962)

1 Dates: October 2011 (inception) to December 20202 Return of Bloomberg Barclays US Long Treasury Total Return Index3 Return of Citigroup 3-month Treasury Bill

Risk-Adjusted Returns1

US Treasuries2

Sharpe = 0.3

Stable Value Hedge Funds Sharpe = 1.5

Cash3

Sharpe = 0

0%

1%

2%

3%

4%

5%

6%

0% 2% 4% 6% 8% 10% 12%

An

nu

aliz

ed

Re

turn

Annualized Volatility

Less Risk

LessReturn

More Risk

MoreReturn

• Stable Value Hedge Funds have underperformed Treasuries since the inception of the portfolio but delivered superior risk-reward

• The compensation for taking 10-year Treasury risk at the end of 2020 was at a multi-decade low

• In 2021 through February, the return for 10 Year Treasuries was -9.0% versus +1.0% for Stable Value Hedge Funds

17

This slide was intentionally left blank.

18

Public Markets 2021 Priorities

• Taking advantage of opportunities resulting from market turbulence and change in the investment regime

• Managing an active internal portfolio R&D pipeline

• Continuing to integrate ESG in the investment process

• Developing rotational analyst program for long-term recruiting

• Improving Analytics function and integration with the middle office

APPENDIX

20

Public Markets Senior Leadership Team

Brad Gilbert, CFA, CAIASr. DirectorBBA, UT Austin

Joel Hinkhouse, CFADirectorMBA, University of Chicago

KJ Van Ackeren, CFA Sr. Director MBA, Texas Christian University

Patrick Cosgrove, CFA Sr. Director MBA, St. Mary’s University

Mohan Balachandran, PhDSr. Managing DirectorPhD, Physics, Brown University

Dale West, CFASr. Managing DirectorMBA, Stanford

Ashley Baum, CFA, CPADirectorMPA, UT Austin

Matt Talbert, PhDDirector PhD, Economics, UT Austin

Mark Albert, CFADirectorMBA, University of Michigan

Jean-Benoit Daumerie, CFADirectorMBA, Rice University

Kyle Wynne, CFA, FRMInvestment ManagerMS, University of Chicago

• Four distinct groups with one leadership team

• One comprehensive view of portfolio construction

• Improved communication and alignment

21

External Public Markets

Brad Gilbert, CFA, CAIASr. Director, Head of External Public MarketsBBA, UT Austin

Joel Hinkhouse, CFADirectorMBA, University of Chicago

Lulu Llano, CFADirectorBBA, UT Austin

Steven Wilson, CAIADirectorMBA, Rice University

Jon KlekmanAnalystBA, SUNY Binghamton

Relationship Management

Michael Ijeh CAIAAssociateBBA, Texas Tech

John Hall, CFAInvestment ManagerMBA, London Business School

Lauren Gellhaus, CAIA AssociateBBA, UT Austin

Broc GomesSr. AssociateBS, Florida State University

Jean-Benoit Daumerie, CFA DirectorMBA, Rice University

Scott Gonsoulin, CFADirectorMS, Texas A&M

Sibei Wen, CFA, FRMSr. AssociateMS, UT Austin

EXPERIENCE SUMMARY

7 CFA Charterholders6 Master’s Degrees4 CAIA Charterholders1 Certified FRM

22

Multi-Asset Strategies

Mohan Balachandran, PhDSr. Managing DirectorPhD, Physics, Brown University

Wayne Speer, CFADirectorMBA, SMU

Anthony Paolini, CPASr. AssociateMPA Accounting, UT Austin

Solomon GoldInvestment ManagerMS, Economics, UT Austin

ANALYTICS / RESEARCH

Mark Albert, CFADirectorMBA, University of Michigan

Matt Talbert, PhDDirectorPhD, Economics, UT Austin

Ryan Leary, CFAInvestment ManagerMBA, Rice University

Gabriel Salinas, PhDSr. AssociatePhD, Economics UT Austin

Kyle SchmidtDirectorMBA, SMU

Sudhanshu Pathak “Sunny”Sr. AssociateMS, Operations ResearchColumbia University

Taylor GordonAdministrative Assistant BS, Hospitality AdministrationBoston University

Eddie Pluhar, PhDAssociatePhD, PhysicsUniversity of Missouri

Chris SteevesSr. AnalystMS, Business Analytics UT Austin

EXPERIENCE SUMMARY

4 PhDs8 Master’s Degrees3 CFA Charterholders1 CPA

23

Internal Fundamental Management

PORTFOLIO MANAGEMENT FUNDAMENTAL RESEARCH

Patrick Cosgrove, CFA Sr. Director MBA, St. Mary’s University

KJ Van Ackeren, CFA Sr. Director MBA, Texas Christian University

David DeStefano, CFA Director MBA, UT Austin

Ralph Linn, CFA Director MBA & JD, Tulane University

Shayne McGuire Director MBA & MA, UT Austin

Michael Poustovoi, CFA DirectorMBA, OCU

Jared Ryan Investment ManagerBS, Trinity University

Monica LarsonExecutive Assistant

Jeremy Aston, CFA Sr. Associate MBA, UT Austin

Mark Cassens, CFA DirectorMBA, UT Austin

Ran Huo, CFA Sr. Associate MBA, Rice University

Derek Sbrogna, CFA DirectorMBA, UT Austin

Joseph Vaughan, CFA AssociateBA, UT Austin

Richard Campbell, CFA DirectorMBA, UT Austin

Lee Carter, CFA Director MBA, Rice University

Frank Crown, CFA DirectorBAA, Georgia State University

Marissa Hogan DirectorMBA, Babson College

Adam Kogler, CFA Sr. AssociateMSF, University of Florida

Trevor ThompsonSr. Analyst MSF, Ohio St University

John Watkins DirectorMS, Johns Hopkins MBA, UT Austin

Stacey Peot, CFA DirectorMBA, UT Austin

Khoi Tran Investment Manager BA, UT Austin

Jackson Wu DirectorMBA, Rice University

EXPERIENCE SUMMARY

15 CFA Charterholders21 Master’s Degrees

24

Public Markets Analytics

Kyle Wynne, CFA, FRM Head of Public Markets AnalyticsMS, University of Chicago

Kevin TaylorSr. AssociateMS, UT Austin

Chad White Sr. AssociateMSF, TulsaMS, MS&T

Lamont Colter Sr. AnalystBS, Texas State University

Irma Martinez AnalystBBA, St. Edwards

John Onyango ContractorBBA, Texas State University

EXPERIENCE SUMMARY

1 CFA Charterholder3 Master’s Degrees1 Certified FRM

25

Legislative Authority Detail for Agency AgreementsAs of December 31, 2020


• TRS is limited by law to 30% Agency Agreement authority. 17.4% is currently utilized.

• TRS is limited by law to 10% hedge funds. 9.1% is currently utilized.

External Managers Agency LP Total Agency LP Total Agency LP Total

US Portfolio 2 12 14 $1.5 $4.6 $6.1 0.8% 2.6% 3.4%

Non-US Developed 4 2 6 $2.6 $2.1 $4.7 1.5% 1.2% 2.7%

Emerging Markets 5 5 10 $3.1 $2.4 $5.5 1.7% 1.4% 3.1%

World Equity 2 5 7 $1.7 $4.8 $6.6 1.0% 2.7% 3.7%

Total Equity 13 24 37 $8.9 $14.0 $22.9 5.0% 7.9% 12.9%

Public Markets SPN 3 3 $7.6 $7.6 4.3% 4.3%

RE/ENRI 3 3 $0.3 $0.3 0.2% 0.2%

Totals 19 24 43 $16.8 $14.0 $30.8 9.5% 7.9% 17.4%

Hedge Funds

Public Equity $6.5 3.7%

Stable Value $9.1 5.2%

Spec Opps/RP $0.6 0.3%

Totals $16.1 9.1%

# of Portfolios Assets ($ billion) Percentage of Trust

17.4%

0.3%

9.1%

26


27


28


29


30

Long-term Quantitative Equity Strategies (QES) Portfolio PerformanceAs of December 31, 2020

Source: State Street BankInception Date: 6/11/2009; includes legacy GBI and AA accounts

31

Internal / External Decision Tree for Investment Strategies

Does a strategy provide meaningful alpha or diversification relative to what we already do internally and externally?

Is this strategy rules-based and non-proprietary? Examples: passive or other indices that can be licensed or replicated internally.

Are people or technology resources important to the strategy, such that external parties have an overwhelming advantage that TRS is unlikely to match? Examples: quantitative strategies requiring large investments in systems; strategies requiring a worldwide presence or a large number of staff.

Can the strategy be implemented in sufficient size to be material to TRS?

Does TRS currently have internal capability to implement the strategy?

Could TRS develop the internal capability to implement the strategy in a cost-effective way?

NO STOPDon’t do

NOSTOP

Don’t do

Does this strategy present insurmountable legal, operational or agency issues? This would include non-security investments or investments where control of an entity would bring it under TRS’ regulatory framework. Examples: private equity, distressed-for-control, real estate, China A-shares requiring QFII.

YES EXTERNAL MANAGEMENT

YES INTERNAL MANAGEMENT


YES INTERNAL MANAGEMENT


EXTERNAL MANAGEMENT

Develop internal capability

INTERNAL MANAGEMENT

NO

YES

NO

NO

NO

NO

YES

32

Developing New Internal Portfolios

Source: TRS Investment Management Division IIC Recommended Guidelines for Developing New Internal Portfolios, Rev. 6/2019

Development

•Design of strategy including source of return, implementation and time horizon

•MC sponsor

•Coordination with IMD Operations and Trading on resource needs

•Strategy description document

Paper Portfolio

Stage

•Simulation of strategy with trade decisions documented but not implemented

•Independent oversight of performance calculation during test period

•Monthly reporting package to Management Committee

•Typically 4+ months

R&D Portfolio Stage

•Presentation to Internal Investment Committee (IIC)

•IIC approves an initial allocation, typically $100m-$250m

•IIC approves a ramp-up plan with timeline and milestones

•IMD Operations assists with account set-up, systems and infrastructure

•Compliance review of policy issues

Ramp-Up•Monthly reporting on performance and milestones

•Detailed commentary during bi-annual portfolios reviews

• At the discretion of the CIO, the process and timeline may be shortened, for instance:

• Minor extensions of existing strategies• Timely opportunities such as market dislocations

33

External Manager Critical ProcessesTexas Way

Pre-IIC Negotiations

Manager fees negotiated

Near-final terms negotiated

IIC Review and Approval

Investments presented to IIC for approval

External consultant provides ratings

Additional requirements met as needed

Final Legal Review

Finalize terms

Contracts signed

Funding Execution

Coordinate with Investment Operations, Portfolio Construction

Team and Legal & Compliance

Portfolio Monitoring

Monitor manager performance, positioning

and risk

Investigate risk signals and report analysis to TRS Risk

Group

Portfolio Management

Evaluate portfolio to maintain optimal risk

Implement portfolio decisions

Reporting

Generate Board, Management Committee

and policy reporting

Generate ad hoc reporting as needed

Strategic Planning

Review asset allocation

Evaluate Premier List needs

Premier List Development

Initial firm diligence and proposal

Collaborative review by TRS & Albourne

Add/reject/removeproposed firm

Initial Legal Document Review

Preliminary discussion of legal terms and non-

negotiables

Preliminary review of financial terms and

alignment

Investment Certification

Onsite visit

Review consultant report

TRS Certification Questionnaire

Conduct reference & background checks

Prepare certification report

Risk Certification

Quantitative analysis

Review of current portfolio (characteristics

& valuations)

Assessment of firm risk systems and processes

Hedge Fund Test

Portfolio Fit Analysis

Risk and return characteristics

Diversification benefits

Determine initial and optimal investment size

Portfolio impact

34


35


36


Jean-Benoit Daumerie, Director

Public Markets SPN Portfolio

April 2021

2

Agenda

I. Performance

II. Special Topic: Integration with Public Markets

III. Priorities and Projects

3

Public Markets SPNPerformance as of December 31, 2020

1 Periods prior to September 30, 2020 include performance and AUM of all managers. 2 Redemption of manager and rebalance across remaining partners on September 30, 2020.Source: State Street Bank and TRS IMD.Inception of Public SPN: June 2008.

Program

Assets Annualized Return Annualized Alpha Tracking Error Information Ratio

NAV($, millions)

% of Trust 1-Year 3-YearSince

Incept.1-Year 3-Year

Since Incept.

1-Year 3-YearSince

Incept.1-Year 3-Year

Since Incept.

BlackRock $2,583 1.5% 19.8% 11.3% 8.5% +192bp +122bp +113bp 299bp 228bp 205bp 0.6 0.5 0.6

JP Morgan 2,657 1.5 22.5 10.3 8.6 +457 +15 +126 441 298 233 1.0 0.1 0.5

Morgan Stanley 2,329 1.3 16.9 10.1 7.7 -104 0 +33 543 339 236 -0.2 0.0 0.1

Total Public SPN1 $7,570 4.3% 20.1% 10.6% 8.2% +219bp +50bp +83bp 355bp 221bp 162bp 0.6 0.2 0.5

Public Markets SPN Assets Under Management2 Total Public SPN Cumulative Alpha

4

Alpha by Public Markets SPNReturn by Public Markets SPN

Public Markets SPNPerformance as of December 31, 2020

Source: State Street Bank and TRS IMD.Note: Fiscal year for the Public Markets SPN runs from July to June due to inception of the structure in June 2008.

Performance Key Drivers:• Global pandemic and the end of previous business cycle created volatile markets in 1H20

• Enormous fiscal and monetary support bolstered the economy

• Positive vaccine news in 2H20 supported an overweight to cyclical equities and credit. Underlying equity security selection also added value

9 of 13 years with positive alpha

5

Special Topic: Integration with Public Markets

• Consistent goals and objectives with Total Public Markets

• Diversity of opinion

• Stronger relationships with team to understand needs

• Enforce common language and analysis

• Diversifying alpha sources

Objective: Understand industry standards and identify best practices in monitoring / re-underwriting

Conclusions:

• Industry standards for quantitative monitoring are undeveloped and judgment-based

• Current TRS techniques are considered advanced

• Minor enhancements can further improve process

Figure 1: Suggested path dependency response (example) for manager re-underwriting

…

…

…

Public SPN portfolio joined External Public Markets on 4/1/20 Example Research Project

6

Priorities and Projects

Diversity, Equity, and Inclusion Summits

Plan, Assess, Measure

• Connect, learn, and adapt with access to industry experts

• Work across the organization for effective collaboration with partners

• Key priority topic for SPN summits

Knowledge Transfer

• Foster environment of competition and debate on challenging investment issues in current environment

• Portfolio review with Management Committee and discuss special topics

• 2020 Topics: COVID Dislocations, Treasuries Strategic Allocation, Inflation

Finding Solutions to Investment Problems

• 72 projects completed since inception

• Develop models, valuation frameworks, risk management, and investment strategies

• Transparency and access to entire partner firms

ResearchAlpha – Portfolio Management

Positioning, Risk, and Performance

• Collaborate with Middle Office and Public Markets Analytics teams

• Use of third-party tools to deep dive into portfolios

• Understand opportunities for ESG investing

Contribute to Trust’s relative return objectives and access total firm capabilities, disseminating information and resources throughout IMD

APPENDIX

8

Public SPN Timeline

2008Public SPN

$4bn approved by TRS Board and allocation made on 6/30

2011Benchmark

Change

2015Benchmark

Change

2017Public SPN portfolio

double in size from original

allocation

2011Barclay’s added

as 5th Public SPN portfolio

2013Barclay’s

removed from Public SPN portfolio

2019Aladdin

Implemented

2013SPR Team spin-off from MSG

2011Risk Parity Research Project

(example)

2013Alternative Risk

PremiaResearch Project

(example)

2016Blank Canvas

Research Project

2015Common Language

Begins

2019Benchmark

Change

2020Public SPN portfolio

integrated into External Public

Markets

2020Neuberger

Berman removed from

Public SPN portfolio

2020Portfolio

Rebalanced

9


10

Setting Alpha Expectations

Source: TRS IMD. ‘Experience’ demonstrates Gross IR.

• Information Ratio (IR) is a key metric used to judge investment skill:

• Individual partners have realized on average a 0.55 IR…a good result, with the total portfolio realizing a 0.7 IR

• 200bp net alpha expectation remains a stretch goal (1.0 IR). A good result (0.5 IR) has been accretive to the overall Trust

IR = Excess Returns Over Benchmark

Tracking Error

IR: 0.0Weak

IR: 0.5Good

IR: 1.0Great

IR: 0.55Individual

partner

IR: 0.70Total

Portfolio

Experience:

Expectations:

11

Public Markets SPN Diversification

Source: TRS IMD.Note: ‘Average Correlation…’ is the daily correlation in 2020 with the other two strategies. YTD return is for listed instrument, assuming position held constant for the holding period.

Partner ImplementationAverage Correlation with

Other InstrumentsInstrument YTD Return

(through 3/31/21)

BlackRock Underweight German Bunds 0.17 +10.7%

JPMorgan Overweight Credit / Underweight US Treasuries 0.20 +1.9%

Morgan Stanley Overweight Value / Underweight Anti-Value 0.19 +5.0%

Example: “Early-Mid Cycle” Theme – Three Different Implementations

One Portfolio...Three Different Perspectives / Processes:

• Long-lasting cultures generate persistent strengths

• Diversifying opinions and processes can lead to similar or dissimilar views of the world

• Different implementations of views result in higher risk adjusted returns

Public SPN

Portfolio

BlackRock(Quantitative,

Systematic)

JPMorgan(Portfolio

Construction, Diversification)

Morgan Stanley

(Fundamental, Thematic)

James Nield, Chief Risk Officer

Stephen Kim, Director

Investment Risk Report

April 2021

2

Risk Metric Value In Compliance? Page(s)

1. Asset Allocation (AA): Overweight Stable Value Overweight 1.7% P 3 - 5

2. Drawdown Risk: VaR estimate stable 6.1% VaR P 6 - 8

3. Tracking Error: Total Trust TE within range 155 bp P 9 - 10

4. Leverage: Trust levered by 5.2% 128.9% Gross, -5.2% Net P 11 - 13

5. Liquidity: Remained strong 5.6 Coverage Ratio P 14

6. Counterparty Risk: Within Policy limit Lowest Rating: BBB+ P 15

7. Derivatives Exposure: Decreased 26.8% Gross P 16 - 17

8. Securities Lending: Earnings Decreased 12.2% Utilization P 18

All metrics in compliance

Unless otherwise noted, data presented as of December 31, 2020

3

55.9% 18.8% -4.0%21.3% 8.0%

-20%

0%

20%

40%

60%

80%

100%

120%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Global Equity Stable Value Real Return Risk Parity Net AA Leverage

56.3%

23.0%17.9%

8.0% -5.2%

-10%

0%

10%

20%

30%

40%

50%

60%

Global Equity Stable Value Real Return Risk Parity Net AALeverage

Benchmark

Benchmark

Trust weights in line with benchmark

Asset Class Weights

Source: State Street Bank; note: Net AA leverage is -5.2%, which indicates the Trust is levered by 5.2%

Asset Class Weights Trend

4

0.4%

1.7%

-0.9%

0.0%

-1.2%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20

Global Equity Stable Value Real Return Risk Parity Net AA Leverage

Trust remained overweight Stable Value

Relative Asset Class Positions Through Time

Source: State Street Bank; relative positions shown in comparison to quarter-end Trust benchmark weights as defined in policy

5

Global Equity OW 0.4% Stable Value OW 1.7% Real Return UW -0.9%

-0.9%

0.7%

0.4%

0.2%

-5.0% 0.0% 5.0%

USA

Non-US Developed

Emerging Markets

Private Equity

-1.9%

0.2%

3.5%

-1.2%

-5.0% 5.0%

Government Bonds

Stable Value HF

Absolute Return

Net AA Leverage*

-0.7%

-0.4%

0.2%

-5.0% 0.0% 5.0%

Real Estate

ENRI

Commodities

Stable Value overweight driven by Absolute Return

Source: State Street Bank Note: private credit allocation included in Absolute Return*Negative Net AA Leverage relative weighting means Trust has more AA Leverage than benchmark

6

6.1%

5.6%

3%

4%

5%

6%

7%

8%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Total Fund Benchmark Policy Max / Min

56.3%

75.8%

0% 50% 100%

% of Assets

% of VaR

Global Equity

23.0%

-6.7%

-30% -15% 0% 15% 30%

% of Assets

% of VaR

Stable Value

8.0%

6.3%

-15% -5% 5% 15% 25%

% of Assets

% of VaR

Risk Parity

17.9%

24.5%

0% 10% 20% 30%

% of Assets

% of VaR

Real Return

VaR estimate remained stable at 6.1%

VaR History


7

0.0%

0.0%

0.3%

3.0%

21.1%

0.0%

0.0%

0.2%

4.7%

12.9%

-15% -5% 5% 15% 25%

Commodities

ENRI *

Real Estate

% of Assets % of VaR

0.0%

22.6%

12.5%

18.2%

22.5%

0.0%

14.9%

9.4%

14.0%

18.1%

-15% -5% 5% 15% 25%

Private Equity

Emerging Markets

Non-US Developed

USA


1.5%

0.9%

-9.1%

-5.2%

3.5%

5.2%

14.4%

-15% -5% 5% 15% 25%

Net AA leverage

Absolute Return *

Stable Value HF *

Government Bonds *


Stable Value assets remain a key source of diversification

* These assets contribute less risk than their dollar allocationSource: State Street Bank; note: Net AA leverage is -5.2%, which indicates the Trust is levered by 5.2%

Global Equity Stable Value Real Return

8

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Worst GFCMonthOct '08

Dot ComCorrection

Jul '98 - Aug '98

Q1 2020 Bond CrashFeb '94 - May

'94

Asian CrisisJul '97

Taper TantrumMay - Jun '13

Sovereign DebtCrisis

Aug '11

Dot Com BubbleNov '99 - Jan '00

Q2 2020 EM Asia RallyJan '99 - May

'99

Best GFC MonthApr '09


Stressed Trust returns expected to perform in line with benchmark

Scenario Analysis

Source: State Street Bank; note: data shown are predicted drawdowns given current allocation, except for Q1 and Q2 2020, which reflects realized performance

9

155

100

0

40

80

120

160

200

Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20

bp

Total Trust Forecast Tracking Error Public Market Stand Alone Forecast Tracking Error

Forecasted Trust tracking error within range


10

100

-50

50

150

250

350

450

550

650

750

Total Public GovernmentBonds

Non-USDeveloped

Stable Value HF EmergingMarkets

USA Equity Risk Parity

bp

Current Forecast TE 3-Year Realized TE Policy Maximum Policy Neutral

0

150

300

450

600

750

TotalPrivate

PrivateEquity

ENRI Real Estate

bp

Current Forecast TE 3-Year Realized TE

Public portfolio tracking error forecast at 100 bps, in line with policy neutral

Source: State Street Bank; note: current forecast tracking error uses past experiences from January 1, 2008 to December 31, 2020 and therefore includes the effects of the Global Financial Crisis; External World Equity has a TE of 179 bps realized, 248 bps forecasted with a policy neutral of 300

Public Private

11

-5.2%

128.9%

80%

90%

100%

110%

120%

130%

140%

150%

160%-15%

-10%

-5%

0%

5%

Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20

Total TrustNet AA Leverage Gross Leverage (RHS)

←

Un

leve

red

Leve

red

→

Source: State Street Bank; note: total Trust leverage excludes securities lending which is reported separately; Net AA Leverage includes adjustments for delta-notionalization of options and exclusion of spot forwards of 30 days or less

Trust Gross and Net AA Leverage stable

12

283%

246%

0%

100%

200%

300%

400%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Risk ParityGross Leverage Net Leverage

207%

108%

0%

100%

200%

300%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Public Strategic PartnersGross Leverage Net Leverage

Risk Parity leverage increased to long term average; SPN leverage stable

Source: State Street Bank; note: Risk Parity changed from a 10% to 12% volatility target at the start of Q4 2019

13

36%

49%

44%

59%

23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Q3-20 Q1-20 Q3-19 Q1-19 Q3-18 Q1-18

Real Estate Loan to ValueCore Value-Add Opportunistic RASS Benchmark

481%

86%

0%

200%

400%

600%

800%

Q3-20Q1-20Q3-19Q1-19Q3-18Q1-18

Total Hedge FundsGross Leverage Net Leverage

60%

0%

20%

40%

60%

80%

100%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Hedge Fund OverlayOverlay as % of Directional HF

Hedge Fund and Real Estate strategy leverage range bound

Source: MSCI RiskMetrics, State Street Bank, TRS RE manager data, NCREIF; note: Directional Hedge Fund overlay program began on September 2019 and includes one non-Hedge Fund; Total Real Estate Loan to Value was 45% as of Q3 2020; Real Estate Loan-to-Values are estimates based on self-reported manager data and methodology continues to be enhanced per Audit recommendation

14

Sources of Liquidity

($, billions)

Market

Value

Stressed

Value

Internal Cash 3.4$ 3.4$

Government Bonds 25.4 25.5

Risk Parity 14.3 9.5

Other Liquid Assets (Equity, Commodities) 60.8 26.2

Total Sources of Liquidity 104.0$ 64.6$

Note: Excluded Illiquid Private Assets and Hedge Funds 73.3$ NA

Uses of Liquidity

($, billions)

Market

Value

Stressed

Value

Operational Uses of Liquidity 1.2$ (0.3)$

Stressed Securities Lending (1.4)

Stressed Non-collateralized assets -

Stressed Derivatives (7.1)

Stressed Private Markets (2.7)

Total Uses of Liquidity 1.2$ (11.6)$

Liquidity Ratio

Ratio (Sources/Uses) 5.6

Alert Threshold 2.0

Test Result Pass

Note: Net Stressed Liquidity (Sources less Uses) 53.0$

Note: Past 12 Months of Benefit Payments 4.0$

5.6

0

2

4

6

8

10

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Sou

rces

/ U

ses

Liquidity Ratio

Threshold

Trust liquidity remained strong

Source: State Street Bank, TRS IMDAssumptions: The stress case assumes liquid assets experience 1.5x the worst rolling monthly return since 2008 plus an additional liquidity stress. Operational uses of liquidity reflects the lesser of forecasted cash flows or monthly benefit payments. Stressed securities lending reflects potential costs associated with termination including a liquidity stress. Stressed non-collateralized assets and derivatives reflect margin calls based on the same market stress applied to Liquid Assets. Private Market investments are assumed to return half as much capital as currently planned and experience capital calls equivalent to total unfunded commitments in equal installments over the course of 12 months.

15

FCM Counterparty

Exchange Traded Futures

Credit Suisse Securities (USA) LLC A+ NR NR $672.9

Goldman Sachs & Co A+ NR A+ 331.7

JP Morgan Securities LLC A+ Aa3 AA 83.4

OTC Counterparty

Over the Counter copy from derivaties

Bank of America, N.A. A+ Aa2 AA- $0.1 $0.0

Barclays Bank PLC A A1 A+ 0.0 0.0

BNP Paribas SA A+ Aa3 A+ 0.0 0.0

CIBC A+ Aa2 AA- 2.8 0.0

Citibank N.A. A+ Aa3 A+ 0.0 0.0

Credit Suisse International A+ Aa3 A 0.0 0.0

Deutsche Bank AG BBB+ A3 BBB+ 0.0 0.0

Goldman Sachs International A+ A1 A+ 0.0 77.2

JPMorgan Chase Bank N.A. A+ Aa2 AA 9.0 58.7

Macquarie Bank Limited A+ A2 A 0.0 0.0

Morgan Stanley A+ Aa3 NR 0.0 0.0

Societe Generale A A1 A- 0.0 0.0

The Toronto-Dominion Bank AA- Aa3 AA- 4.0 0.0

UBS AG A- A3U A+ 0.8 0.0

Securities Lending/Custodian

State Street Bank AA- Aa3 AA

S&P Moody's Fitch

S&P Moody's

Exposure

Exposure

RepoS&P Moody's Fitch

Fitch

Paste Into PPT

41

102

-

50

100

150

200

250

300

350

400

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

bp

Average Counterparty CDS Lowest Rated Counterparty CDS

Counterparty Risk within Policy limits

Source: State Street Bank, Bloomberg; Futures Commission Merchant (FCM) counterparty exposure reflects margin posted; OTC counterparty exposure represents positive market value of all OTC derivative positions less collateral posted; Repo exposure reflects excess collateral posted

16

26.8%

0%

20%

40%

60%

Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20

Gross Notional by Instrument (% of Total Trust) Swaps Futures Forwards Options

13.9%

-20%

0%

20%

40%

Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20

Net Notional by Instrument (% of Total Trust) Swaps Futures Forwards Options

Derivative notional exposure decreased

Source: State Street Bank; note: derivative positions represent transactions in which TRS is a counterparty; net leverage includes adjustments for delta-notionalization for options and exclusion of spot forwards of 30 days or less

17

VaR Contribution from Derivatives

● Total Gross = $47.5b ● Total Net = $24.7b

Gross vs Net Derivatives Notional by Portfolio

6.1%

0.6%

0%

1%

2%

3%

4%

5%

6%

7%

Q4-20Q2-20Q4-19Q2-19Q4-18Q2-18

Total Trust VaR Contribution from Derivatives

-$10

$0

$10

$20

$30

$40

$50

RPM SPN APMOverlays

AssetAllocation

PrivateMarkets

ExternalManagers

Total

$, b

illio

ns

Gross Net

Derivatives contributed small portion of drawdown risk

Source: State Street Bank; derivative positions represent transactions in which TRS is a counterparty. Note: net leverage includes adjustments for delta-notionalization of options and exclusion of spot forwards of 30 days or less

19

In conclusion, key points are the following:

• Asset class risk contribution levels remain consistent with SAA objectives

• Strategy leverage has returned to pre-crisis levels

• Securities lending earnings have declined

• Risk metrics are in line with policy guidelines

investment management committee book - april 2021

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