Executive Summary I. Performance & Implementation Review II. - - PowerPoint PPT Presentation

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Executive Summary I. Performance & Implementation Review II. - - PowerPoint PPT Presentation

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Executive Summary I. Performance & Implementation Review II. Fixed Income Market Update III. Appendix: Manager Scorecards IV. 2 Section I 3 IPS Stated Objective for Core Fixed Income Diversify the risk of the overall investment

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SLIDE 2

I.

Executive Summary

II.

Performance & Implementation Review

III.

Fixed Income Market Update

IV.

Appendix: Manager Scorecards

2

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SLIDE 3

Section I

3

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SLIDE 4

IPS Stated Objective for Core Fixed Income “Diversify the risk of the overall investment portfolio with a secondary goal of capita tal p preserva vati tion

  • n”

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 cap apital ap 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.

4

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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

5

The he A Annu nnual R Review p process holds T TMRS a accountab able f for being se self-crit itic ical o l of its portfol folio m

  • management

t pro rocess in in o

  • rd

rder t r to pre reempt manager s r specif ific ic, s strategic ic,

  • r
  • r ot
  • ther p

pot

  • tential p

prob

  • blems.
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SLIDE 6

6

  • 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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SLIDE 7

7

  • 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 Non-Core Fixed Income Other

*TMRS Portfolio as of 12/31/16

*

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SLIDE 8

8

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-Co Core Fixed ed Inco come e Alloca cation

Ban ank L Loan an/CLO (BL/CLO LO) Direc ect L Lending ( g (DL) Emer ergi ging M g Market kets De Debt bt (EMD) D) High Yi Yield ( (HY) Y)

  • Opp. C

. Credit it RM RMBS/ S/CMBS Guggenheim Adam ams St Street Alliance Bernstein Columb mbia Bai ain Ellington Highland Golub Bluebay Neuberg rger B r Berman Be Beach P Point Voya H.I.G. Whitehorse Golden enTree TCW Mar arat athon SP SPS White Oak Marath thon

  • n E

ECO Marath thon

  • n C

CLO PIMC IMCO COF II II Waterf rfall ll 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%

Highland Guggenheim H.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 Point Ellington Voya

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SLIDE 9

Section II

9

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10

Core Fixed Income

MKT KT VAL % of

  • f

Plan an 1 M Mo.

  • . QTR

TR YTD TD 1 Y Yr. r. 3 Y Yrs. 5 Y Yrs. 7 Y Yrs. 10 Y 10 Yrs. ITD ITD Incept t Date te 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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11

Non-Core Fixed Income

MKT KT VAL % of

  • f

Plan an 1 M Mo.

  • .

QTR TR YTD TD 1 Y Yr. r. 3 Y Yrs. 5 Y Yrs. 7 Y Yrs. 10 Y 10 Yrs. ITD ITD Incept t Date te 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

  • 0.02 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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SLIDE 12

12

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 te Mar arket Val alue % of

  • f Tot
  • tal Fund

CORE FIXED INCOM OME BlackRock $3,088,424,493 12.30% PIMCO $1,721,297,039 6.86% TOT OTAL AL $4, $4,80 809, 9,721 21,532 32 19. 19.16 16%

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SLIDE 13

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 2015 Key ey Alloca cations:

  • 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.)

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SLIDE 14

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 3.2% 4.6% 1.9% 2.4% 4.8% 3.2%

Non-Core Fixed Income Dec-16

(including unfunded allocations)

BL/CLO DL** EMD* HY* Opp. Credit** RMBS/CMBS 14

*Committed, funding pending ** Partially funded

2016 2016 Key ey Alloca cations:

  • 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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15

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 Expected Return

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SLIDE 16

16

*Partially funded **Committed, funding pending

Non-Core F Fix ixed Portfolio io

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%

Highland Guggenheim H.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 Point Ellington Voya

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Section III

17

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18

Source: Bloomberg

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

1 2 3 4 5 6 %

U.S .S. . Tre reasury ry Yie Yield lds

10yr 30yr

Matu turity ty 7/8/ 7/8/20 2016 8/30/ 8/30/2016 16 2/28/ 2/28/2017 17 10yr 1.36 1.57 2.39 30yr 2.10 2.23 3.00

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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.

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20

Source: Bianco Research

The stock of negative-yielding sovereign debt tumbled by more than $2.5 trillion since the summer of 2016. Update o e on Nega egative Inter eres est Rat Rates

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21

Source: Bianco Research

Inflation reached 2.1% by the end of 2016.

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22

Source: Bianco Research

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

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23

Source: Bianco Research

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

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24

Summa ummary

  • 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.

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Section IV

25

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26

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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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Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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. Portfolio(s) No changes Performance YTD: 2.83%; outperformed versus portfolio benchmark for 2016 Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service Client service is extremely responsive and proactive. Other N/A

Performance as of 12/31/16.

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Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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. Portfolio(s) No changes Performance YTD: 5.42%; underperformance versus benchmark, mainly due to benchmark mismatch. Compliance No issues Guideline Changes In discussions to expand mandate and benchmark. Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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29

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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

  • f 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.

Portfolio(s)

No changes

Performance

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

Compliance

No changes

Guideline Changes

In discussions to expand mandate and benchmark

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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30

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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.

Portfolio(s)

No changes

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.

Guideline Changes

No changes

Risk Management

No issues

Operations

No changes

Client Service

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

Other

N/A

Performance as of 12/31/16.

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31

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

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. Portfolio(s) No changes Performance YTD: 12.57%; outperformance versus benchmark. CLO and energy exposure contributed to strong 2016 performance. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No changes Client Service No issues Other N/A

Performance as of 12/31/16.

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32

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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33

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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34

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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35

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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36

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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37

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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38

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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39

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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SLIDE 40

40

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment A t Area Grad ade Upda pdate & & Com

  • mments

Organization No changes People No changes Philosophy/Strategy/Process No changes Portfolio(s) No changes Performance Recent investment. No issues to report. Compliance No issues Guideline Changes No changes Risk Management No issues Operations No issues Client Service No issues Other N/A

Performance as of 12/31/16.

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SLIDE 41

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.

41