Executive Summary Performance & Implementation Review Fixed Income Market Update 7... · 2018. 4. 4. · Marathon CLO - $50mm . Beach Point - $200mm . PIMCO COF II - $200mm . Columbia

I. Executive Summary II. Performance & Implementation Review III. Fixed Income Market Update IV. Appendix: Manager Scorecards

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Section I

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IPS Stated Objective for Core Fixed Income “Diversify the risk of the overall investment portfolio with a secondary goal of capital preservation”

The performance objective is to exceed the Barclays US Aggregate Bond Index net of fees over rolling five-year periods.

IPS Stated Objective for Non-Core Fixed Income “Diversify the risk of the overall investment program and provide both income and capital appreciation”

The performance objective is to exceed the returns of a blended benchmark comprised of the Barclays US Corporate High Yield Index 50%, the JPM GBI-EM Global Diversified Index (USD Unhedged) 25%, and JPM CEMBI Broad Diversified Index 25%, net of fees over rolling five-year periods.

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Why do we conduct annual reviews? Per the TMRS IPS, comprehensive reviews are to be conducted and documented at least annually. The goal is to formally review managers’ performance, current investment strategy or style relative to that which was communicated, and other issues related to the managers’ organization, personnel, or investment philosophy. The annual review process is part of the IPS manager retention framework. The annual review & ongoing monitoring processes may include but are not limited to:

SEC Form ADV reviews SSAE16 and other operational audit reviews Compliance Certifications Detailed Performance Analyses Manager Meetings Quarterly Monitoring Manager Annual Meetings Limited Partnership Advisory Committees Strategic Portfolio Reviews Meetings with comparable managers Market Research Attending Conferences

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The Annual Review process holds TMRS accountable for

being self-critical of its portfolio management

process in order to preempt manager specific, strategic, or other potential problems.

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• Board approved 2 Emerging Market Debt Manager Recommendations for $480 million May 2015

• Board approved 4 Direct Lending Manager Recommendations for $950 million

December 2015

• Board approved 3 Opportunistic Credit Manager Recommendations (5 strategies) for $700 million June 2016

• Board approved 2 High Yield Manager Recommendations for $600 million

September 2016

• Board approved 3 Opportunistic Credit & 1 Direct Lending Manager Recommendations for $700 million

December 2016

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• Core fixed income continues to fund diversification of the TMRS portfolio into non-core fixed income and other asset classes.

• Board approved 11managers in 2016 that will largely complete the non-core fixed income allocation.

• Staff will continuously evaluate existing managers to optimize allocations within the non-core portfolio.

19.2%

8.3%

72.5%

TMRS Portfolio

Core Fixed Income

Non-Core Fixed Income

Other

10.0%

20.0%

70.0%

TMRS Target Portfolio

Core Fixed Income


Other

*TMRS Portfolio as of 12/31/16

*

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2016 Allocation Activity: Marathon SPS - $150mm Marathon ECO - $100mm Marathon CLO - $50mm Beach Point - $200mm PIMCO COF II - $200mm Columbia - $300mm Neuberger Berman - $300mm Adams Street – $200mm Bain - $100mm GoldenTree - $200mm Waterfall - $200mm TOTAL - $2 Billion

Non-Core Fixed Income Allocation

Bank Loan/CLO (BL/CLO) Direct Lending (DL)

Emerging Markets Debt (EMD) High Yield (HY) Opp. Credit RMBS/CMBS

Guggenheim Adams Street Alliance Bernstein Columbia Bain Ellington

Highland Golub Bluebay Neuberger Berman Beach Point Voya

H.I.G. Whitehorse GoldenTree

TCW Marathon SPS

White Oak Marathon ECO

Marathon CLO

PIMCO COF II Waterfall

The highlighted managers were recommended and approved in 2016. *Partially funded

**Approved, funding pending

8%

8%3%

4%

4%

6%

6%

5%5%6%

6%

1%2%

2%3%

4%

4%

4%

4%

8%

8%

HighlandGuggenheimH.I.G. Whitehorse*White Oak*Adams Street**Golub*TCW*Alliance Bernstein**Bluebay**Columbia**Neuberger Berman**Marathon CLO*Marathon ECO*Bain**Marathon SPS*PIMCO COF II*GoldenTree**Waterfall**Beach PointEllingtonVoya

Section II

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10

Core Fixed Income

MKT VAL % of Plan 1 Mo. QTR YTD 1 Yr. 3 Yrs. 5 Yrs. 7 Yrs. 10 Yrs. ITD Incept Date

TMRS - TOTAL CORE FIXED INCOME 4,809,721,532.25 19.16 0.17 -2.86 2.89 2.89 3.08 2.4 3.74 4.23 7.82 1/1/1989 TMRS - Total Fixed Income Index (Daily) 0.14 -2.98 2.65 2.65 3.03 2.23 3.63 4.05 7.27 1/1/1989 EXCESS 0.03 0.11 0.25 0.25 0.05 0.16 0.12 0.18 0.55 TMRS - BLACKROCK CORE FIXED INCOME 3,088,424,493.18 12.3 0.21 -2.79 2.94 2.94 3.19 2.43 3.74 3.64 10/1/2009 TMRS-Custom Core Fixed Income Index (Dai 0.14 -2.98 2.65 2.65 3.03 2.23 3.63 3.53 10/1/2009 EXCESS 0.06 0.18 0.29 0.29 0.16 0.19 0.12 0.11 TMRS PIMCO CORE PLUS FIXED INC 1,721,297,039.05 6.86 0.11 -2.98 2.83 2.83 2.75 2.37 3.65 2/1/2010 Barclays Aggregate (Daily) 0.14 -2.98 2.65 2.65 3.03 2.23 3.44 2/1/2010 EXCESS -0.03 -0.01 0.19 0.19 -0.28 0.14 0.21

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MKT VAL % of Plan 1 Mo. QTR YTD 1 Yr. 3 Yrs. 5 Yrs. 7 Yrs. 10 Yrs. ITD Incept Date

TOTAL NON-CORE FIXED INCOME 2,092,565,799.99 8.34 1.09 2.19 7.62 7.62 3.81 10/1/2014 TOT NON-CORE FIXED INCOME INDEX 1.59 -0.99 13.56 13.56 2.18 10/1/2014 EXCESS -0.49 3.18 -5.94 -5.94 1.64 BANDERA II - GUGGENHEIM 407,591,448.77 1.62 0.85 1.76 8.33 8.33 4.25 10/1/2014 CS Leveraged Loan Index 1.15 2.25 9.88 9.88 3.92 10/1/2014 EXCESS -0.29 -0.49 -1.55 -1.55 0.32 BANDERA I - HIGHLAND 407,970,649.26 1.63 1.98 3.73 12.57 12.57 4.52 10/1/2014 CS Leveraged Loan Index 1.15 2.25 9.88 9.88 3.92 10/1/2014 EXCESS 0.83 1.48 2.69 2.69 0.59 VOYA NON CORE FIXED INCOME 401,097,579.03 1.6 0.51 1.65 4.75 4.75 3.61 1/1/2015 Non Agency RMBS/CMBS Strategy Index 1.46 0.23 13.41 13.41 4.78 1/1/2015 EXCESS -0.95 1.43 -8.66 -8.66 -1.18 ELLINGTON NON CORE FIXED INC 399,825,599.06 1.59 0.58 1.54 5.42 5.42 3.47 1/1/2015 Non Agency RMBS/CMBS Strategy Index 1.46 0.23 13.41 13.41 4.78 1/1/2015 EXCESS -0.88 1.31 -7.99 -7.99 -1.32 GOLUB CAPITAL PEARLS DLP LP 51,765,132.73 0.21 0.28 1.91 4.53 7/1/2016 WHITE OAK SUMMIT FUND, L.P 90,210,750.57 0.36 1.81 1.88 3.54 5/1/2016 TCW Asset Management LLC 9,900,000.01 0.04 12/1/2016 H.I.G. WHITEHORSE CAPITAL, LLC 9,912,500.01 0.04 12/1/2016 MARATHON SPS 66,851,822.25 0.27 -0.25 3.06 4.01 8/1/2016 MARATHON ECO 11,070,389.37 0.04 -0.27 -0.24 -0.24 10/1/2016 MARATHON CLO 4,621,579.21 0.02 0 -0.02 11/1/2016 PIMCO COF II 25,657,149.72 0.1 6.9 4.31 4.31 10/1/2016 BEACH POINT 206,091,200.00 0.82 1.7 2.56 2.56 10/1/2016

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Core Weighting vs. Target

19.2%

10.0%

9.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Actual Target Difference

Core Fixed Income continues to fund non-core fixed income and other asset classes.

Mandate Market Value % of Total Fund

CORE FIXED INCOME

BlackRock $3,088,424,493 12.30%

PIMCO $1,721,297,039 6.86%

TOTAL $4,809,721,532 19.16%

3.1%

3.2%

2.0%

4.0%

7.6%

Non-Core Fixed Income Dec-15(including unfunded allocations)

BL/CLO

RMBS/CMBS

EMD*

DL*

Unallocated

3.1%

3.2%

13.6%

Non-Core Fixed Income Dec-15

BL/CLO

RMBS/CMBS

Unfunded/Unallocated

13 * Committed, funding pending

• Non-core fixed income investments represented approximately 6% of TMRS portfolio as of December 2015.

2015 Key Allocations: • May: EMD Manager recommendation approved for $480 mill. (2% approx.) • June: New Asset Target Allocation approved increasing non-core to 20%. Core

fixed income reduced to 10% • Dec: Direct Lending Manager recommendation approved for $950 mill. (4%

approx.)

3.1%

3.2%

2.0%

4.0%

7.6%


BL/CLO

RMBS/CMBS

EMD*

DL*

Unallocated

3.2%

4.6%

1.9%2.4%

4.8%

3.2%


BL/CLO

DL**

EMD*

HY*

Opp.Credit**RMBS/CMBS

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*Committed, funding pending ** Partially funded

2016 Key Allocations: • June: Opportunistic Credit Manager recommendation approved for $700 mill.

(3% approx.) • September: High Yield Manager recommendation approved for $600 mill. (2%

approx.) • December: Opportunistic Credit & Direct Lending Manager recommendation

approved for $700 mill. (3% approx.)

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In addition to expected return and volatility, investment staff is constantly evaluating additional factors such as: • Liquidity • Fund structure • Strategy

Capital Preservation Income Capital Appreciation

Core

RMBS/CMBS

BL/CLO

HY DL

EMD

Opportunistic Credit

Expected Volatility

Expe

cted

Ret

urn

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*Partially funded **Committed, funding pending

Non-Core Fixed Portfolio

Capital Preservation Income Capital Appreciation

RMBS/CMBS (16%) • Ellington • Voya

BL/CLO (16%) • Guggenheim • Highland

Direct Lending (23%) • Adams Street** • Golub* • H.I.G. Whitehorse* • TCW* • White Oak*

HY (12%) • Columbia** • Neuberger Berman**

Opportunistic Credit (23%) • Bain** • BeachPoint • GoldenTree** • Marathon SPS* • Marathon ECO* • Marathon CLO* • PIMCO COF II* • Waterfall**

EMD (10%) • Alliance Bernstein** • Bluebay**

Total non-core fixed income portfolio allocation will reach approximately $5 billion upon funding.

8%

8%3%

4%

4%

6%

6%

5%5%6%

6%

1%2%

2%3%

4%

4%

4%

4%

8%

8%

HighlandGuggenheimH.I.G. Whitehorse*White Oak*Adams Street**Golub*TCW*Alliance Bernstein**Bluebay**Columbia**Neuberger Berman**Marathon CLO*Marathon ECO*Bain**Marathon SPS*PIMCO COF II*GoldenTree**Waterfall**Beach PointEllingtonVoya

Section III

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18 Source: Bloomberg

Treasury yields increased from record lows as investors reassessed their inflationary outlook.

0

1

2

3

4

5

6

%

U.S. Treasury Yields

10yr 30yr

Maturity 7/8/2016 8/30/2016 2/28/2017

10yr 1.36 1.57 2.39

30yr 2.10 2.23 3.00

19 Source: Bianco Research

Treasury yields are near record lows as a result of global central bank policies. Long term interest rates remain near historic lows.


The stock of negative-yielding sovereign debt tumbled by more than $2.5 trillion since the summer of 2016.

Update on Negative Interest Rates


Inflation reached 2.1% by the end of 2016.


Wage growth could be a major driver of higher inflation expectations.


Recent U.S. Dollar strength could have a substantial effect on the domestic economy.

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Summary

• Interest rates have moved higher as investors have adjusted their inflation expectations.

• Investors continue to diversify into other asset classes to mitigate rising interest rate risk and capture attractive yields.

• The Fed raised rates in December and suggested they could increase short term interest rates three times in 2017.

• Effective fiscal policy could have a significant impact on the future level of interest rates.

Section IV

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Excellent In Good Standing Fair (working with manager)

Unsatisfactory (remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization No recent material organizational or structural changes. No additional disclosures made since last review.

People No changes

Philosophy/Strategy/Process No changes

Portfolio(s) No changes

Performance YTD 2.94%; outperformed versus portfolio benchmark for 2016

Compliance No issues

Guideline Changes No changes

Risk Management No issues

Operations No issues

Client Service Client service and portfolio management teams are very accessible and responsive

Other N/A

Performance as of 12/31/16.

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Organization PIMCO has transitioned effectively after the CEO departure. PIMCO has maintained a strong and experienced management team and performance has been in line with expectations. TMRS staff removed PIMCO from our watch list in September, 2016.

People No personnel changes regarding TMRS portfolio.

Philosophy/Strategy/Process PIMCO has continued to add key advisors to its Board of Experts.


Performance YTD: 2.83%; outperformed versus portfolio benchmark for 2016





Client Service Client service is extremely responsive and proactive.

Other N/A


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Assessment Area Grade Update & Comments Organization No material changes since last review.

People No departures related to TMRS. Strong portfolio management team.

Philosophy/Strategy/Process Strategy focuses on security selection and scenario analysis. Firm utilizes proprietary models to uncover value in the securitized credit market.


Performance YTD: 5.42%; underperformance versus benchmark, mainly due to benchmark mismatch.


Guideline Changes In discussions to expand mandate and benchmark.



Client Service No issues

Other N/A


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Organization

On August 31, 2016 Voya announced that its CEO was stepping down. The CEO will be replaced by current CIO, who at the same time will be replaced by current Head of Public Fixed Income. The transition shows staff that Voya was prepared for this kind of event. Staff believes there is no immediate impact to TMRS portfolio. Staff will continue to monitor the situation.

People No changes

Philosophy/Strategy/Process Micro-level collateral analysis. Macro themes expressed through asset allocation.


Performance YTD: 4.75%; underperformance versus benchmark, mainly due to benchmark mismatch.

Compliance No changes

Guideline Changes In discussions to expand mandate and benchmark



Client Service Client service and portfolio management teams are very accessible and responsive.

Other N/A


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Organization No additional disclosures made since last review. Guggenheim has undertaken some organizational restructuring. Staff believes there are no material changes regarding TMRS portfolio.

People No material changes regarding TMRS portfolio.

Philosophy/Strategy/Process Strategy relies on fundamental analysis and proactive relative value security selection.


Performance YTD:8.33%; performance lagged due to under weight to energy sector. ITD still outperformed vs. benchmark.

Compliance Restriction on non-rated securities miscoded on compliance program. Error corrected.



Operations No changes

Client Service New team in place. Global restructuring of client service area.

Other N/A


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Organization Independent. 100% employee-owned. In 2015, formed “Highland Alternative Investors” a liquid alternatives platform.

People CLO Portfolio Manager was terminated and replaced.

Philosophy/Strategy/Process Strategy includes fundamental analysis, proactive due diligence and exploiting price inefficiencies.


Performance YTD: 12.57%; outperformance versus benchmark. CLO and energy exposure contributed to strong 2016 performance.




Operations No changes


Other N/A


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Assessment Area Grade Update & Comments Organization No changes

People No changes



Performance Recent investment. No issues to report.






Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


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People No changes









Other N/A


DISCLOSURES

TMRS periodically discloses public information that is not excepted from disclosure under Section 552.0225(b) of the Texas Public Information Act. Information provided by a

manager, a Managing General Partner (GP), any of its Associates or other data provider to TMRS or a TMRS service provider, and contained in these materials (i) may have been

independently produced or modified by TMRS or the TMRS service provider; (ii) has not been reviewed or approved by the manager, Managing GP or any of its Associates; and (iii)

may not reflect the historical performance or asset value reflected in the manager’s, Managing GP’s or any of its Associates’ records and, therefore, should not be used for

comparative purposes.

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Documents

Executive Summary Performance & Implementation Review Fixed Income Market Update 7... · 2018. 4. 4. · Marathon CLO - $50mm . Beach Point - $200mm . PIMCO COF II - $200mm . Columbia