Defined Contribution Investments Annual Report for Fiscal Year Ended June 30, 2011
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State Teachers Retirement System of Ohio February 2012 The State Teachers Retirement Board and the associates of STRS Ohio are pleased to present our Defined Contribution Investments Annual Report for fiscal 2011. This report is intended to provide you with investment information and results from July 1, 2010–June 30, 2011, for STRS Ohio’s defined contribution account allocation choices. Fiscal year 2011 investment returns were led by outstanding performance in the domestic and international equity markets. The STRS Russell 2000 Index Return led all performers with a 37.13% return for the year. All other equitybased allocation choices had returns of 29% or higher. The STRS REIT Choice was another stellar performer, posting a 35.37% return. You can read about the specific investment choices in our Performance Section that begins on Page 6. At fiscal year end, total assets for the Defined Contribution Plan and the defined contribution portion of the Combined Plan totaled nearly $520 million. Under these plans, STRS Ohio provides allocation choices that members can select to determine the accumulation of their account based on their individual time horizon and risk tolerance. Members enrolled in these plans have eight allocation options — all managed by STRS Ohio — ranging from the conservative STRS Money Market to a small capitalization and international equity index. The choices allow Defined Contribution Plan and Combined Plan participants to diversify their allocations among various asset classes. STRS Ohio also continues to offer the STRS Total Guaranteed Return Choice. This option offers a guaranteed annual rate of return (currently 4.25%) for all allocations made during a given year. In exchange for this protection against market volatility, members must lock in contributions made during the year until the end of a five-year term. The Defined Contribution Investments Annual Report is divided into four sections: (1) the Introductory Section includes this letter and annualized rates of return; (2) the Economic Commentary Section describes economic changes that potentially affected the investment market; (3) the Performance Section describes each allocation choice and covers its annual performance; and (4) the Disclosure Section includes key rules, concepts and definitions. As you plan your financial future, we hope you take full advantage of the resources — including this report — that STRS Ohio and Nationwide Retirement Solutions provide. We at STRS Ohio look forward to working with you throughout your career.
James McGreevy Chair, State Teachers Retirement Board, 2011–2012
Michael J. Nehf Executive Director
275 East Broad Street Columbus, OH 43215-3771 1-888-227-7877 www.strsoh.org
retirement board chair JAMES MCGREEVY retirement board vice chair MARK HILL executive director MICHAEL J. NEHF
Table of Contents Introduction ................................................................................. 1 Economic and Financial Markets Overview .................................. 2 Performance STRS Money Market .................................................................... 6 STRS Barclays Capital U.S. Universal Bond Index Return............... 7 STRS Large-Cap Core Choice ....................................................... 8 STRS Russell 1000 Index Return ................................................ 10 STRS Russell 2000 Index Return ................................................ 12 STRS REIT Choice ...................................................................... 14 STRS MSCI World ex USA Index Return ..................................... 16 STRS Total Guaranteed Return Choice........................................ 18 Disclosures ................................................................................. 19 Glossary of Terms....................................................................... 21
Introduction
Investment Performance Report as of June 30, 2011 Annualized Rates of Return VARIABLE INVESTMENT CHOICES Cash
3 MonthsF
1 Year
3 Years
5 Years
10 Years
STRS Money MarketA
0.03%
0.05%
0.39%
2.02%
2.05%
Index: 90-day U.S. Treasury bill
0.04%
0.16%
0.28%
1.73%
1.95%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
2.14%
4.75%
6.27%
6.19%
5.67%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
STRS Large-Cap Core Choice
-1.30%
29.67%
5.02%
3.47%
N/A
Index: Russell 1000 IndexG
0.12%
31.94%
3.68%
3.30%
2.21%
STRS Russell 1000 Index ReturnC
0.08%
31.70%
3.49%
3.11%
3.06%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
-1.66%
37.13%
7.56%
3.87%
6.10%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
4.10%
35.37%
4.76%
1.92%
10.52%
3.88%
35.57%
4.88%
1.76%
10.61%
Bonds
STRS Barclays Capital U.S. Universal Bond Index ReturnB Large-Cap
Small-Cap
STRS Russell 2000 Index Return
C
Specialty/Real Estate
STRS REIT Choice
A
Index: Wilshire REIT IndexD International
STRS MSCI World ex USA Index ReturnC
3 MonthsF
1 Year
3 Years
5 Years
10 Years
0.76%
29.82%
-1.97%
1.61%
5.79%
Since InceptionH
Inception Date
1/1/1970
12/1/1998
5.47%
7/1/2003
12/31/1978
12/31/1978
1/1/1994
12/31/1969
TOTAL CONTRIBUTION CHOICE Current Rate
Balanced STRS Total Guaranteed Return Choice 2011E
5.50%
(For contributions made between July 1, 2006–June 30, 2007 — closed to new investments)
STRS Total Guaranteed Return Choice 2012E
5.50%
(For contributions made between July 1, 2007–June 30, 2008 — closed to new investments)
STRS Total Guaranteed Return Choice 2013E
5.00%
(For contributions made between July 1, 2008–June 30, 2009 — closed to new investments)
E
4.00%
(For contributions made between July 1, 2009–June 30, 2010 — closed to new investments)
STRS Total Guaranteed Return Choice 2015E
4.50%
(For contributions made between July 1, 2010–June 30, 2011 — closed to new investments)
STRS Total Guaranteed Return Choice 2014
Historic performance is not necessarily indicative of actual future investment performance, which could differ substantially. A member’s units, when redeemed, may be worth more or less than their original cost. All performance figures after June 30, 2001, are provided net of annual fees. All returns are calculated in U.S. dollars. Current performance may be lower or higher than the performance data indicated above. For current performance data, call Nationwide Retirement Solutions toll-free at 1-866-332-3342 or visit www.strsoh.org. The performance shown is based on the defined benefit assets until June 30, 2001, without fees, and the performance of the defined contribution assets after that date, with fees. A
The performance shown is based on the underlying index until June 30, 2001, without fees, and the performance of the defined contribution assets after that date, with fees. Inception date noted is for the underlying index. Effective Nov. 3, 2008, the Lehman Brothers indexes were rebranded to the Barclays Capital indexes. B
The performance is based on the underlying index until June 30, 2003, without fees, and the performance of the defined contribution assets after that date, with fees. Inception date noted is for the underlying index. C
Wilshire REIT float-adjusted index is effective beginning July 1, 2007. From July 1, 2002, through June 30, 2007, the Dow Jones Wilshire REIT full-cap index was used. Prior to July 1, 2002, the NAREIT equity index was used. D
E
There is no annual asset management fee for this choice. See Page 14 in the Investment Options Guide.
F
Returns are not annualized.
G
The performance is based on the Russell 200 Index until June 30, 2005, and the performance of the Russell 1000 Index after that date.
Reflects annualized performance since inception if less than 10 years. Performance of the benchmark is for the same time period noted for the corresponding STRS Ohio allocation choice. H
1
Economic and Financial Markets Overview July 1, 2010–June 30, 2011
D
uring the first six quarters of the economic expansion that began in mid-2009, real gross domestic product grew at a solid 3% rate. However, business inventory growth accounted for roughly 40% of the advance in the economy — a situation that normally is not conducive to future economic growth because of the mismatch it creates between supply and demand. Growth in real final sales (economic activity excluding the change in inventories) was very weak at only 1.8%.
threatened to stall the global economy. Domestic political impasses over raising the federal debt ceiling and reducing federal spending added to the shaky economic confidence in the United States, driving business and consumer confidence even lower as the fiscal year ended. Because the housing sector will likely continue to see only slow progress into fiscal 2012 and government bodies increasingly face fiscal austerity, U.S. economic prospects will continue to be heavily dependent upon consumer spending, business fixed investment, and, to some extent, international trade. The most important economic sector will be consumer spending and it will largely depend upon stronger employment and income gains. The unemployment rate remains very high and job growth needs to be much stronger to significantly improve labor conditions. However, because of ongoing deleveraging in the consumer and business sectors and the need to rebuild lost wealth from the housing and financial market collapses, growth in consumer spending will likely remain tepid in the coming fiscal year.
As soft as the underlying productive economy was during the first year-and-a-half of the economic expansion, it was about to worsen. Soaring energy and food costs ate away at discretionary consumer spending and geopolitical crises played out in the oil-producing Middle East. A severe earthquake and tsunami in Japan late in the third fiscal quarter contributed additional shocks to the U.S. and global economies. Real GDP and real final sales grew just 0.8% at an annual rate in the second half of fiscal 2011. Increasingly, headline inflation was hurting real economic growth and damaging consumer confidence while the ongoing sovereign debt crisis in Europe
Gross Domestic Product/Consumer Price Index 1991–2011 Year-Over-Year Growth Rates 8%
6%
4%
2%
0%
-2%
-4%
-6% 1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Gross Domestic Product Note: Shaded areas denote a recession.
2002
2003
2004
2005
2006
2007
2008
2009
2010
Consumer Price Index
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics/Haver Analytics
An increase in commodity prices led to the rising production costs and drove the CPI higher in 2010–2011. Higher inflation kept a lid on economic growth, pushing the GDP growth lower during fiscal year 2011.
2
2011
Along with a renewed focus at the federal, state and local government levels toward fiscal austerity, the Federal Reserve’s campaign to support economic activity through more and more accommodative monetary policies is reaching an end. Interest rates will not likely be raised in fiscal 2012 because the unemployment rate will remain elevated and core inflation should stay below the Federal Reserve’s preferred rate of roughly 2%. Nevertheless, further quantitative easing will not extend into fiscal 2012 unless another crisis develops in major economies that then renews deflationary concerns. Regardless, a concerted move toward monetary policy tightening is likely about a year away given the expected slow improvement in economic fundamentals and the lack of a sustained threat to core inflation measures from energy and food costs.
Business fixed investment will also need to be a major contributor to economic activity in the upcoming fiscal year. Though investment in structures will not likely add a great deal to economic activity, business spending on capital equipment has been robust and will need to continue being so. After the broad-based slowdown in fiscal 2010, both manufacturing and non-manufacturing activity soared for most of fiscal 2011. Larger companies did better than smaller companies, but even among small companies optimism moved into expansion territory before the end of the fiscal year. However, those strengths began to evaporate toward the end of the fiscal year from continuing shaky consumer and business confidence. Foreign trade could improve modestly in fiscal 2012 after the trade-weighted dollar depreciated significantly during fiscal 2011. Though the terms of trade have improved from a U.S. perspective, economic growth is going to be relatively slow across countries. Most developed countries face ongoing structural constraints that should limit their potential economic growth, while rapid growth in most emerging countries is softening because developed consumer markets are growing only slowly.
There continues to be a variety of downside risks that will keep a lid on the economy’s expansion into fiscal 2012 — among them, the weak housing industry, continued deleveraging, modest hiring and bank lending, fiscal restraint and developments abroad — but cyclical growth prospects should improve from the very slow pace in the second half of fiscal 2011 toward a more moderate 2–2.5% trend around the economy’s longer-term potential. Yet, longer-term structural problems remain from developed countries that are adapting to slower longer-term growth prospects, leaving the global economy vulnerable to additional shocks from Europe’s and America’s debt problems, political unrest in the Middle East and even natural disasters like Japan has faced. As a result, positive cyclical trends and developments need to be tempered by longer-term concerns that could lead to further disappointment in economic growth.
On the inflation front, commodity prices moved broadly higher, even accelerating the pace during the current fiscal year. Much of the increase can be attributed to the return of foreign demand for scarce energy, industrial and agricultural commodities to feed more rapidly-growing emerging economies. The increase in commodity prices led to a surge in producer prices, but it was only sparingly passed through to core consumer prices (CPI excluding volatile food and energy costs) or broader economy-wide measures of inflation. The threat from swelling commodity prices was offset somewhat by a huge output gap and low wage expectations. There is a great deal of excess capacity in the economy that has yet to be swallowed up by growing demand that would allow inflation pressures to stick. The recent surge in headline inflation indicators from largely energy and food costs should ease as the economy moves through fiscal 2012. Though there may continue to be geopolitical shocks in sensitive energyproducing regions in the upcoming year, core inflation will likely remain behaved.
Low interest rates mute money market returns The federal funds rate, the key rate indicator for money markets and one controlled by the Federal Reserve, remained at the targeted rate of 0% to 0.25% throughout the fiscal year. The effective rate was closer to 0% for most of the year. Demand for U.S. Treasury bills remained high, which in turn pushed yields down to historically low levels as indicated by the benchmark return of 0.16% for the 90-day U.S. Treasury bill.
3
Economic and Financial Markets Overview (continued) July 1, 2010–June 30, 2011
Defined Contribution Asset Value by Allocation Choice As of June 30, 2011 STRS Large-Cap Core Choice $78,566,618 15.12%
Total assets: $519,554,279 STRS Total Guaranteed Return Choice 2015 $6,608,695 1.27%
STRS Russell 2000 Index Return $87,530,009 16.85%
STRS Russell 1000 Index Return $75,087,514 14.45%
STRS Total Guaranteed Return Choice 2014 $9,179,775 1.77% STRS Total Guaranteed Return Choice 2013 $12,111,612 2.33% STRS Total Guaranteed Return Choice 2012 $8,755,637 1.69% STRS Total Guaranteed Return Choice 2011 $3,331,559 0.64%
STRS Money Market $75,024,334 14.44%
STRS REIT Choice $45,042,887 8.67% STRS Barclays Capital U.S. Universal Bond Index Return $58,785,778 11.31%
STRS MSCI World ex USA Index Return $59,529,859 11.46%
The chart above displays STRS Ohio’s defined contribution holdings and percentage of total assets for the fiscal year ending June 30, 2011. More information on these options can be found in the Performance Section beginning on Page 6.
Fixed-income performance steady in fiscal year 2011
Domestic equities enjoy stellar year Fiscal year 2011 saw the U.S. equity market rise dramatically for the second consecutive year, as the economy and financial markets returned to health from the unprecedented declines caused by the 2008–2009 financial crises. The rise in the equity index outpaced only moderate U.S. economic growth. The strong market returns were largely driven by a continuation of excellent corporate earnings growth that primarily resulted from better margins rather than strong top-line growth. Earnings were buoyed by corporate cost controls, as companies continued to do an exemplary job of belt-tightening and improving efficiency.
Fiscal 2011 was a solid year for fixed-income market returns as interest rates remained low, credit conditions improved and valuations normalized. In response to continued high unemployment and below potential economic growth, the U.S. Federal Reserve maintained short-term interest rates effectively at 0.0% for the fiscal year. The 10-year U.S. Treasury bond yield rose from 2.95% at the beginning of the fiscal year, to a high of 3.72% in the third quarter of the fiscal year, before settling at 3.16% by fiscal year end. Over the course of the entire fiscal year, the sectors of the bond market with the highest returns were the credit-sensitive sectors. The net result was a fixed-income return of 4.75% in fiscal 2011.
For fiscal year 2012, the STRS Ohio U.S. economic forecast calls for sluggish economic growth and a potentially volatile equity market. The considerable obstacles of federal, state and local budget deficits, combined with global sovereign debt problems will likely result in extensive government cutbacks and/or tax increases which would act as a drag to the U.S. economy for an extended period — potentially hampering economic growth and market appreciation. These issues should be somewhat offset by strong corporate balance sheets, continued earnings growth and strength seen by emerging economies. 4
REIT returns “supersized” again in fiscal year 2011
International markets continue recovery in 2011
The overall themes and trends for the REIT sector during the last year have been remarkably similar to those of the year before. In essence, outsized returns for the stocks were once again driven by strong capital markets while property fundamentals, outside of apartments, were characterized by anemic or stable demand coupled with very low levels of new construction.
Developed markets continued appreciating, up nearly 30% in dollar terms, during fiscal year 2011. Slightly more than half of the gain came from strength in local markets and the remaining portion from a weakening U.S. dollar. The bulk of the appreciation came in the first six months of the past year while the second half remained in a trading range with little progress. None of the risks identified last year — whether it be European Union sovereign debt crises, U.S. mortgage crisis or the inflation/deflation debate have been resolved. If anything, all risks have become more acute and it is actually becoming even more difficult to see any kind of benign resolution. Oddly, market volatility was relatively tame in the last 12 months — could this be the proverbial calm before the storm?
Apartments were once again the beneficiary of the housing bust. Many former homeowners have been forced back into the rental market and many young, would-be first-time home buyers have chosen to remain renters or cannot buy homes given the new, tougher mortgage environment. While apartment construction is starting to trend upward, it is still at a level far below the pre-credit crunch years. As a result, apartment landlords have enjoyed high occupancy and robust rent increases.
Returns for the 12 months were generally strong among the developed markets. The strongest markets were Austria (+55.3%), Norway (+53.0%) and New Zealand (+47.4%). The three smallest gains were seen in Greece (+3.0%), Israel (+8.2%) and Japan (+13.2%). Currency played a major role in boosting U.S. dollar-based returns in fiscal 2011 with the euro and yen appreciating by 19% and 9%, respectively. On a regional basis, Europe was the star, gaining more than 30% with one-third from market appreciation and the other two-thirds from currency strength relative to the U.S. dollar. The Far East region experienced tepid growth, but achieved high single-digit returns through currency strength while North America (Canada) saw about 20% returns, split 50/50 between currency and market appreciation. The economically sensitive sectors — energy, materials, industrials and consumer discretionary — all generated superior returns to the overall market. The worst-performing sectors were financials and utilities, which together only appreciated about half of the overall market gain.
For the rest of the property sectors, demand has improved slightly but the longer-lease duration sectors are still replacing higher rents signed during the go-go years. The result is somewhat stagnant occupancy but, in many cases, at lower rent levels. Last year at this time, we wrote that continued robust returns would need a better property fundamental picture. While this has improved slightly, the real driver of returns in the past year has once again been readily available capital in the form of equity and debt raised at very attractive rates along with strong share demand from yieldhungry investors. As we entered the new fiscal year, REITs had moved into a slightly rich range. It is difficult to see the capital markets getting much better for REITs than they have been over the past year so we once again feel that property fundamentals need to improve to keep the share recovery going. If the economy avoids slipping back into recession, a gradual increase in rent prices will likely provide enough momentum for another year of decent, albeit more modest, returns.
5
Defined Contribution Investments — Performance STRS Money Market ........................................................................................................Cash Structure
Market Drivers
The STRS Money Market is intended to obtain a high level of current income consistent with the preservation of principal and liquidity. The performance objective is to exceed the 90-day U.S. Treasury bill return, before fees. Investments will generally consist of U.S. dollar-denominated commercial paper and other short-term corporate obligations that are rated in the highest category (A1/P1 rating) by the rating organizations, as well as securities that are guaranteed by the U.S. government or one of its related agencies. Credit quality is emphasized for preservation of principal and liquidity.
STRS Money Market performance was 0.05%, after fees, for the year. Yields follow the current shortterm interest rates, which remained at the targeted rate of 0% to 0.25% throughout the fiscal year. Few high quality corporations issued commercial paper in this low rate environment. U.S. Government and Agency Notes made up the bulk of the investable universe. The table below shows the STRS Money Market investment allocation:
Sector Weightings as of June 30, 2011 Sector
Weight
U.S. Government and Agency Notes
Securities selected for investment offer competitive yields and meet the policy objectives pertaining to credit quality, maturity and diversification. Interest rates and the maturity of the individual securities relative to the maturity of the portfolio as a whole are also considered.
Floating Rate Corporate Bonds Total STRS Money Market
The STRS Money Market returned 0.05%, after fees, for the year, compared to the benchmark 90-day U.S. Treasury bill that returned 0.16%. The STRS Money Market return before fees was 0.2%. Investing in Floating Rate Corporate Bonds with maturities within 12 months and holding longer maturities than the benchmark contributed to the higher yield versus the benchmark.
STRS Money Market Historical Performance as of June 30, 2011
2.02%
2.05% 1.73%
2% 1% 0%
0.05%
0.16%
1 Year STRS Money Market
0.39%
1.95%
0.28%
3 Years
4.7%
Money Market & Repurchase Agreements 3.5%
Performance
3%
91.8%
5 Years
10 Years
Index: 90-day U.S. Treasury bill
The performance shown is based on the defined benefit assets until June 30, 2001, without fees, and the performance of the defined contribution assets after that date, with fees.
6
100.0%
STRS Barclays Capital U.S. Universal Bond Index Return .......Bonds Structure
Sector Weightings as of June 30, 2011 Sector
The STRS Barclays Capital U.S. Universal Bond Index Return is a choice intended to closely match the return of the Barclays Capital U.S. Universal Bond Index, before fees. Total returns are comprised of changes in principal values plus interest income earned. The index consists entirely of U.S. dollardenominated securities. A significant portion of the index includes debt issued by the U.S. government and government-related entities, mortgagebacked securities and investment grade corporate bonds. A small portion of the index is high-yield debt with ratings below the BBB category. Also included is debt from emerging market countries and other foreign issuers. The STRS Barclays Capital U.S. Universal Bond Index Return choice provides members an opportunity to earn the return of a diversified portfolio of fixed-income securities. Below are summary statistics for the Barclays Capital U.S. Universal Bond Index Return:
12,181
Average Yield
3.20%
Average Maturity Market Value
31%
U.S. Government
28%
Investment Grade Corporates
23%
Government-Related
10%
High Yield
6%
Emerging Market
2% 100%
Market Drivers Price appreciation of fixed-income securities, combined with income from interest payments, led to the positive returns for the Barclays Capital U.S. Universal Bond Index. The federal funds rate has remained effectively at 0.0% for 30 months, anchoring short-term interest rates. During the fiscal year, in response to continued high unemployment and below potential economic growth, the Federal Reserve continued its highly accommodative monetary policy with a second round of quantitative easing. The Federal Reserve purchased $850 billion in U.S. Treasury securities, nearly equivalent to the net issuance of the U.S. Treasury for an eight-month period. The policy contributed to the price appreciation of risk assets, arrested deflation concerns and stimulated the economy. Consequently, the credit-sensitive sectors of the fixed-income market improved and price appreciation ensued, benefiting fixed-income returns.
7.37 Years $17.65 Trillion
Performance For the fiscal year ending June 30, 2011, the STRS Barclays Capital U.S. Universal Bond Index Return choice returned a positive 4.75%, after fees. This section details the performance of the Barclays Capital U.S. Universal Bond Index. Fiscal 2011 was a solid year for fixed-income market returns as interest rates remained low, credit conditions improved and valuations normalized. The credit-sensitive sectors of the fixed income market performed relatively well for a second consecutive year, consistent with the strong performance of risk assets in other asset classes. This group was led by high yield (+15.63%), emerging market debt (+12.14%), commercial mortgage-backed securities (+11.36%) and investment grade corporate bonds (+6.29%). The non-credit sectors had lower returns with agency mortgage-backed securities (+3.81%), government-related (+3.72%) and U.S. Treasuries (+2.24%).
Mortgage- and Asset-Backed
Total Barclays Capital U.S. Universal Bond Index
Index Statistics as of June 30, 2011 Number of Issues
Weight
STRS Barclays Capital U.S. Universal Bond Index Return Historical Performance as of June 30, 2011 The performance shown is based on the underlying index until June 30, 2001, without fees, and the performance of the defined contribution assets after that date, with fees. Effective Nov. 3, 2008, the Lehman Brothers indexes were rebranded to the Barclays Capital indexes.
7%
6.27%
6% 5%
6.19%
5.67%
4.75%
4% 3% 2% 1% 0%
1 Year
3 Years
5 Years
10 Years
STRS Barclays Capital U.S. Universal Bond Index Return
7
Defined Contribution Investments — Performance (continued) STRS Large-Cap Core Choice .................................................................... Large-Cap Structure
Performance
The STRS Large-Cap Core Choice seeks long-term capital appreciation by investing in a diversified portfolio of large-capitalization U.S. equities. The goal of the portfolio is to generate returns in excess of the Russell 1000 Index, before fees. The Russell 1000 Index represents the 1,000 largest companies traded in the U.S. markets. This choice is broadbased and well-diversified, making it suitable as a core equity holding within a portfolio. Keeping in mind that each investor’s risk tolerance is different, the amount of large-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals. The excess return for this choice is expected to come largely from stock selection and, to a lesser extent, industry or sector allocation.
The STRS Large-Cap Core Choice was up strongly in 2011, gaining 29.7%, after fees, for the fiscal year ending June 30. The fund, slightly trailed the Russell 1000 benchmark, which rose 31.9% over the same period. The portfolio was hurt by the market retreat late in the fiscal year. The decline resulted in underperformance by positions in the more cyclical sectors such as consumer discretionary, materials, and information technology sectors.
STRS Large-Cap Core Choice Historical Performance as of June 30, 2011
35% 31.94% 30%
29.67%
25% 20% 15% 10% 5.02%
5% 0%
3.68%
3.47%
2.21%
3.30% N/A
1 Year
3 Years
5 Years
STRS Large-Cap Core Choice
10 Years
Index: Russell 1000 Index
The performance of the benchmark is based on the Russell 200 Index until June 30, 2005, and the performance of the Russell 1000 Index after that date. *The inception date of the STRS Large-Cap Core Choice was 7/1/2003. Since inception, the performance for this choice is 2.40%.
8
Market Drivers
Sector Weightings as of June 30, 2011
The Russell 1000 Index gained 32.0% in fiscal year 2011. This marked the second consecutive year of outsized gains for the U.S. equity market and was somewhat surprising given only moderate U.S. economic growth.
22.54% 17.72%
Information Technology
14.52% 15.44%
Financials
The strong market returns were driven by investors adding to equity exposure as corporate earnings continued to grow at a strong rate. Earnings were primarily buoyed by corporate cost controls, as companies continued to do an exemplary job of belt-tightening and improving efficiency. For fiscal year 2012, the STRS Ohio U.S. economic forecast calls for sluggish economic growth and a potentially volatile equity market. The considerable headwinds of federal, state and local budget deficits, combined with global sovereign debt problems will likely result in extensive government cutbacks and/or tax increases which would act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation. These issues should be somewhat offset by strong corporate balance sheets, continued earnings growth and strength seen by emerging economies.
Consumer Discretionary
13.78% 11.50%
Industrials
13.29% 11.43%
Health Care
10.92% 11.62%
Energy
10.17% 11.98% 6.75% 9.48%
Consumer Staples
4.54% 4.41%
Materials
1.44% 3.47%
Utilities Telecommunications Services
2.04% 2.95% 0%
5%
10%
15%
20%
25%
STRS Large-Cap Core Choice Russell 1000 Index
Composition as of June 30, 2011 Top 10 Holdings
% of Total Investment Choice
Apple Inc. (AAPL)
4.18%
Exxon Mobil Corp. (XOM)
3.76%
Chevron Corp. (CVX)
2.01%
Oracle Systems Corp (ORCL)
2.01%
General Electric Co. (GE)
1.78%
Nuance Communications (NUAN)
1.78%
Pepsico Inc (PEP)
1.64%
Philip Morris International (PM)
1.59%
Visa Inc (V)
1.56%
Omnivision Technologies Inc (OVTI) 1.33% Top 10 holdings represent 21.65% of the total investment choice.
9
Defined Contribution Investments — Performance (continued) STRS Russell 1000 Index Return .............................................................. Large-Cap Structure
Index Statistics as of June 30, 2011
The STRS Russell 1000 Index Return is an allocation choice designed to replicate the holdings and return of the Russell 1000 Index.
Total Market Value
$13.79 Trillion
Mean Market Value
$15.12 Billion
Weighted Average Market Value $78.97 Billion
As the name implies, the Russell 1000 Index is comprised of approximately 1,000 U.S. companies selected for their large market capitalization, liquidity and industry classifications. These stocks represent 92% of the characteristics of the U.S. market.
Largest Company Market Value
$400.89 Billion
Smallest Company Market Value $76 Million
The STRS Russell 1000 Index Return is a large-cap choice designed to diversify portfolio holdings and is intended to be a long-term investment option.
Median Share Price
$38.81
P/E Ratio
15.7
Dividend Yield
1.88%
Performance
Ibbotson Associates recommends holding a largecap equity choice as part of a well-diversified investment portfolio to maximize return potential while reducing risk. Keeping in mind that each investor’s risk tolerance is different, the amount of large-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals.
The STRS Russell 1000 Index Return was up strongly in 2011, gaining 31.7%, after fees, for the fiscal year ending June 30. The Russell 1000 Index was up more than 35% by the end of April, before fears of global sovereign debt problems and a slowing U.S. economy resulted in a market decline in both May and June of 2011.
Russell 1000 Index Values For Fiscal Year 2011 Value
3,800
3,600
3,400
3,200
3,000
2,800
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20 10
2,600
Note: Figures in the chart above are based on Russell non-intraday values utilized for reporting in Russell index products and services. The Russell U.S. equity index values shown on most financial sites and in the media began at a later date and at a different beginning value than the original set of values shown above.
10
Market Drivers
Top 10 Holdings as of June 30, 2011
The U.S. equity market was up strongly in fiscal year 2011 for the second consecutive year, as the economy and financial markets returned to health from the unprecedented declines caused by the 2008–2009 financial crises. The U.S. equity market as measured by the Russell 1000 Index rose 32.0%.
Top 10 Holdings
The rise in the equity index outpaced only moderate U.S. economic growth. The strong market returns were largely driven by a continuation of strong corporate earnings growth. Stronger corporate earnings primarily resulted from better margins rather than strong top-line growth. Earnings were buoyed by corporate cost controls, as companies continued to do an exemplary job of belt-tightening and improving efficiency. For fiscal year 2012, the STRS Ohio U.S. economic forecast calls for sluggish economic growth and a potentially volatile equity market. The considerable headwinds of federal, state and local budget deficits, combined with global sovereign debt problems will likely result in extensive government cutbacks and/or tax increases which would act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation. These issues should be somewhat offset by strong corporate balance sheets, continued earnings growth and strength seen by emerging economies.
% of Total Index
Exxon Mobil Corp. (XOM)
2.91%
Apple Inc. (AAPL)
2.25%
International Business Machines Corp. (IBM)
1.51%
Chevron Corp. (CVX)
1.50%
General Electric Co. (GE)
1.45%
Microsoft Corp. (MSFT)
1.40%
AT&T Inc. (T)
1.35%
Johnson & Johnson (JNJ)
1.32%
Procter & Gamble (PG)
1.29%
Pfizer Inc. (PFE)
1.18%
Top 10 holdings represent 16.16% of the total index.
STRS Russell 1000 Index Return Historical Performance as of June 30, 2011 35% 31.70% 30%
Sector Weightings as of June 30, 2011 Sector
Weight
Information Technology
17.72%
Financials
15.44%
Energy
11.98%
Health Care
11.62%
Consumer Discretionary
11.50%
Industrials
11.43%
Consumer Staples
9.48%
Materials
4.41%
Utilities
3.47%
Telecommunications Services
2.95%
Total Russell 1000 Index
25% 20% 15% 10% 5%
3.49%
3.11%
3.06%
3 Years
5 Years
10 Years
0% 1 Year
STRS Russell 1000 Index Return The performance shown is based on the underlying index until June 30, 2003, without fees, and the performance of the defined contribution assets after that date, with fees.
100.00%
11
Defined Contribution Investments — Performance (continued) STRS Russell 2000 Index Return .............................................................. Small-Cap Structure
Index Statistics as of June 30, 2011
The STRS Russell 2000 Index Return is an allocation choice designed to replicate the holdings and return of the Russell 2000 Index.
Total Market Value
$1.25 Trillion
Mean Market Value
$750 Million
Weighted Average Market Value $1.28 Billion
As the name implies, the Russell 2000 Index is comprised of approximately 2,000 U.S. companies selected for their small market capitalization and industry classifications. The index is reevaluated annually to remove larger companies that may distort the performance characteristics of a smallcap fund.
Largest Company Market Value
$3.12 Billion
Smallest Company Market Value $76 Million Median Share Price
$16.04
P/E Ratio
18.7
Dividend Yield
1.22%
The STRS Russell 2000 Index Return is a small-cap choice designed to diversify investment holdings and is intended to be a long-term investment option.
Performance
Ibbotson Associates recommends holding a smallcap equity choice as part of a well-diversified investment portfolio to maximize return potential while reducing risk. Keeping in mind that each investor’s risk tolerance is different, the amount of small-cap holdings in an investor’s portfolio should be based on risk tolerance and investment goals.
The Russell 2000 Index was up more than 40% by the end of April, before fears of global sovereign debt problems and a slowing U.S. economy resulted in a market decline in both May and June of 2011.
The STRS Russell 2000 Index Return was up strongly in 2011, gaining 37.1%, after fees, for the fiscal year ending June 30.
Russell 2000 Index Values For Fiscal Year 2011 Value 4,000 3,800 3,600 3,400 3,200 3,000 2,800 2,600
11
11
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20 11
1 20 1
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De c
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20 11
01 0
01 0 r2
01 0 r2 ob e ct
No ve m
20 10 O
be r
20 em pt
gu st
Se
Au
Ju
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20
10
10
2,400
Note: Figures in the chart above are based on Russell non-intraday values utilized for reporting in Russell index products and services. The Russell U.S. equity index values shown on most financial sites and in the media began at a later date and at a different beginning value than the original set of values shown above.
12
Market Drivers
Top 10 Holdings as of June 30, 2011
As the U.S. economy recovered in fiscal year 2011, the U.S. equity market rose sharply for the second consecutive year. Investors were eager to hold small-cap stocks through the recovery as the STRS Russell 2000 Index rose 37.4% during the fiscal year, easily beating the larger capitalization focused Russell 1000 Index, up only 32.0% over that same period.
Top 10 Holdings
Berry Petroleum Co. (BRY)
0.22%
The gains in the Russell 2000 Index were very strong given that the U.S. economy grew at only a moderate pace. The strong smaller company returns were largely driven by a continuation of strong corporate earnings growth. Most of the earnings gains, however, were attributed to better margins from cost cutting as opposed to strong top-line growth.
Rosetta Resources Inc. (ROSE)
0.22%
Parametric Technology Corp. (PMTC)
0.22%
CBL & Associates Properties Inc. (CBL)
0.21%
Dana Holding Corp. (DAN)
0.21%
Tenneco Inc. (TEN)
0.21%
Financials
20.64%
Information Technology
18.45%
Industrials
15.44%
Consumer Discretionary
13.33%
Health Care
12.51%
Energy
7.05%
Materials
4.93%
Consumer Staples
3.34%
Utilities
3.23%
Telecommunication Services
0.99%
Total Russell 2000 Index
0.25%
Sotheby’s (BID)
0.23%
MFA Financial Inc. (MFA)
0.23%
Top 10 holdings represent 2.22% of the total index.
STRS Russell 2000 Index Return Historical Performance as of June 30, 2011 40%
37.13%
35% 30%
Sector Weightings as of June 30, 2011 Weight
Healthspring Inc. (HS)
Netlogic Microsystems Inc. (NETL) 0.22%
For fiscal year 2012, the STRS Ohio U.S. economic forecast calls for sluggish economic growth and a potentially volatile equity market. The considerable headwinds of federal, state and local budget deficits, combined with global sovereign debt problems will likely result in extensive government cutbacks and/or tax increases which would act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation. These issues should be somewhat offset by strong corporate balance sheets, continued earnings growth and strength seen by emerging economies.
Sector
% of Total Index
25% 20% 15% 10%
7.56%
5% 0%
6.10% 3.87%
1 Year
3 Years
5 Years
10 Years
STRS Russell 2000 Index Return The performance shown is based on the underlying index until June 30, 2003, without fees, and the performance of the defined contribution assets after that date, with fees.
100.00%
13
Defined Contribution Investments — Performance (continued) STRS REIT Choice ................................................................................................. Real Estate Structure
In all sectors, the well-controlled new construction levels and stabilized demand have combined with an overall higher than average quality for REIT properties/markets, has allowed the companies to capture better returns than the overall commercial real estate market. At the same time, the capital markets have allowed REITs to continue to strengthen their balance sheets and take advantage of accretive acquisition opportunities for future growth.
The STRS REIT Choice is a non-indexed choice that invests in the public securities of real estate companies, primarily real estate investment trusts (REITs). The objective is to provide a long-term total return that exceeds the fund’s benchmark, the Wilshire REIT Index, before fees.
Performance
The vast majority of REITs have been able to refinance and extend out debt maturities at very attractive rates and issue equity at a premium to net asset value for new investments. More than anything, the improvement in capital markets has driven the high total returns for the stocks over the last two years.
The STRS REIT Choice enjoyed a second-straight year of outsized returns in the fiscal year ending June 30, 2011. The Wilshire REIT Index returned 35.57% following last year’s 55.46%. Even with these two excellent years, the REIT Index is still well below its peak from 2007. After fees, the REIT Choice was just below the index performance for the year. The index performance was strong through the first nine months of the period before flattening in the final quarter.
Looking forward, however, it is difficult to see similar returns without a significant improvement in the overall economy. Office and industrial users are very sensitive to economic conditions and demand is beginning to ease. Retailers have held up surprisingly well although smaller local retail is still on its back from lack of credit availability. Our expectation is for decent returns in the next year but well below those of the past two years.
Market Drivers The overriding theme driving returns this year has been much the same as the previous year. Except for apartments, which will be discussed in a moment, the story has been consistent across property sectors: anemic demand but very little new supply has allowed for stabilization in occupancies and rents.
Property sector returns were good across the board although some were very robust:
Apartments have been the exception in terms of fundamentals. A huge number of former homeowners have now been forced back into the rental market and a much higher percentage of those in the 25–35 age cohort are much more skeptical about the desirability of home ownership. While apartment construction has risen from the moribund levels during the credit crunch, it is still far below the levels of the pre-crunch years. The result is very strong growth in rental rates, high occupancy and lower turnover as tenants are increasingly staying put rather than moving to home ownership.
14
Malls
50.19%
Apartments
44.27%
Warehouse
39.39%
Self-storage
35.67%
Office
33.53%
Local Retail
33.13%
Lodging
26.71%
Health Care
20.83%
Sector Weightings as of June 30, 2011
Composition as of June 30, 2011
Retail
24.5% 24.4%
Industrial/Office
24.4% 24.9%
Simon Property Group Inc. (SPG)
18.8% 18.0%
Residential
12.8% 13.1%
Health Care Hotels
7.5% 7.2%
Diversified
6.1% 6.5%
Self-Storage
6.0% 5.8% 0%
5%
% of Total Investment Choice
Top 10 Holdings
10.72%
Equity Residential (EQR)
5.65%
Vornado Realty Trust (VNO)
5.04%
Prologis Inc. (PLD)
5.03%
Boston Properties Inc. (BXP)
4.85%
Public Storage (PSA)
4.62%
HCP Inc. (HCP)
4.07%
Host Hotels & Resorts Inc. (HST)
3.87%
AvalonBay Communities Inc. (AVB) 3.32%
10%
15%
20%
25%
Ventas Inc. (VTR)
30%
STRS REIT Choice
2.92%
Top 10 holdings represent 50.09% of the total investment choice.
Wilshire REIT Index
STRS REIT Choice Historical Performance as of June 30, 2011 40% 35%
35.37%
35.57%
30% 25% 20% 15% 10.52%
10% 4.76%
5%
4.88% 1.92%
0%
1 Year
10.61%
3 Years
1.76%
5 Years
STRS REIT Choice
10 Years
Index: Wilshire REIT Index
The performance shown is based on the defined benefit assets until June 30, 2001, without fees, and the performance of the defined contribution assets after that date, with fees. Wilshire REIT float-adjusted index is effective July 1, 2007. From July 1, 2002, through June 30, 2007, the Dow Jones Wilshire REIT full-cap index was used. Prior to July 1, 2002, the NAREIT equity index was used.
15
Defined Contribution Investments — Performance (continued) STRS MSCI World ex USA Index Return ......................................International Structure
Returns for the 12 months were generally strong among the developed markets. The strongest markets were Austria (+55.3%), Norway (+53.0%) and New Zealand (+47.4%). The three smallest gains were seen in Greece (+3.0%), Israel (+8.2%) and Japan (+13.2%). Currency played a major role in boosting U.S. dollar-based returns in fiscal 2011 with the euro and yen appreciating by 19% and 9%, respectively. On a regional basis, Europe was the star gaining over 30% with one-third from market appreciation and the other two-thirds from currency strength relative to the U.S. dollar. The Far East region was flattish but achieved high single digit returns through currency strength while North America (Canada) saw about 20% returns, split 50/50 between currency and market appreciation. The economically sensitive sectors: energy, materials, industrials and consumer discretionary all generated superior returns to the overall market. The worst performing sectors were the financial and utilities, which together, only appreciated about half of the overall market gain.
This investment choice is intended to closely match the return of the Morgan Stanley Capital International (MSCI) World ex USA Index, before fees. The MSCI World ex USA Index is composed of approximately 1,200 companies listed on stock exchanges in 23 developed countries. The total investment return of the index is comprised of capital appreciation and dividend income. The STRS MSCI World ex USA Index Return is intended as a long-term investment choice due to higher volatility of returns of international stocks over short-term periods. Risks of international investment include, but are not limited to, currency fluctuation, political instability and different security exchange regulations.
Performance The STRS MSCI World ex USA Index Return gained 29.8%, after fees, for the fiscal year ending June 30, 2011. This section details the performance of the MSCI World ex USA Index, which is the benchmark for the STRS MSCI World ex USA Index Return.
MSCI World ex USA Index Values For Fiscal Year 2011 Value
4,800
4,600
4,400
4,200
4,000
3,800
3,600
3,400
16
20 ne Ju
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11
11 20
11 20
11 20 ch
11
M ar
20 ar y ru
Fe b
ar y Ja nu
be r2 ce
m
be De
20
01
11
0
0 01 r2
01 ve m
ct o O
No
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r2 be em
pt
0
0 01
10 20 st Se
Au gu
Ju
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20
10
3,200
Market Drivers
Lastly, inflation is becoming more prevalent in emerging markets while deflation appears likely to persist in the developed markets. The markets can deal with subdued levels of each, but too much of either hurts equity returns. Near-term deflation appears to be the greater concern but a longer view may require one to fear inflation depending on what mechanisms are used to solve the various crises. Valuations are neutral at best but should any of the items discussed above break the wrong way, an expected modest gain for the next year could turn into a decent sized decline.
The developed markets continued the rebound from the previous year, up nearly 30% in dollar terms, during the past fiscal year. Almost half the appreciation came as a result of a weakening U.S. dollar while the remaining gain came from local markets appreciation. For fiscal 2012, the U.S. dollar could again be a big determinant of market returns. If it remains a safe haven, the dollar is likely to appreciate as fears grow over the resolution process concerning Europe sovereign debt. This will tend to reduce potential market returns for U.S. investors. None of the other risks identified last year: U.S. mortgage crisis, global banking crisis or the inflation/deflation debate have been resolved. If anything, all risks have become more acute and it is actually becoming even more difficult to see any kind of benign resolution. Many of these risks are linked, so one breaking the wrong way could start a chain reaction. On top of that, new doubts are beginning to arise over the sustainability of growth rates which had modestly recovered.
Country Weightings as of June 30, 2011 Country
STRS MSCI World ex USA Index Return Historical Performance as of June 30, 2011 30%
29.82%
25% 20% 15% 10% 5.79% 5% -1.97%
0%
1.61%
-5% 1 Year
3 Years
5 Years
10 Years
United Kingdom
19.02%
Japan
17.92%
Canada
10.53%
France
9.36%
Germany
8.08%
Australia
7.71%
Switzerland
7.47%
Spain
3.22%
Sweden
2.80%
Italy
2.48%
Hong Kong
2.44%
Netherlands
2.25%
Singapore
1.54%
Denmark
0.95%
Finland
0.87%
Belgium
0.86%
Norway
0.81%
Israel
0.63%
Austria
0.30%
Ireland
0.23%
Portugal
0.23%
Greece
0.20%
New Zealand
0.11%
Total MSCI World ex USA Index
STRS MSCI World ex USA Index Return The performance shown is based on the underlying index until June 30, 2003, without fees, and the performance of the defined contribution assets after that date, with fees.
17
% of Index
100.00%
Defined Contribution Investments — Performance (continued) STRS Total Guaranteed Return Choice ............................................... Balanced Structure
All contributions are placed into the Total Guaranteed Return Choice for the given fiscal year.
This choice’s diversified assets are divided among domestic and international stocks, real estate, bonds and money market investments. The composition of the STRS Total Guaranteed Return Choice is expected to remain relatively unchanged over time.
t .FNCFST XIP NBLF UIJT JOWFTUNFOU DIPJDF at the beginning of the fiscal year must place all contributions into this choice for the entire fiscal year. t .FNCFST XIP NBLF UIJT JOWFTUNFOU DIPJDF during the fiscal year must transfer their entire STRS Ohio account balance into this choice. Subsequently, the participant must place remaining contributions for the fiscal year into this choice.
Unlike the other allocation options offered by STRS Ohio, this option provides a guaranteed interest rate on contributions and transfers made in a given year. In exchange for this protection against any possible negative returns, participants must “lock in” their contributions and transfers made during the year until the end of a five-year term. The interest rate is paid on the contributions and transfers until the end of the five-year term, and is credited to the account on a daily basis. The five-year term begins with the initial allocation choice and concludes on the last day of the fifth fiscal year, ending June 30. (The STRS Ohio fiscal year runs from July 1–June 30.)
Annual Interest Rate for Allocations Made Between July 1, 2010–June 30, 2011: 4.5% This rate is reviewed and reset on an annual basis.
For example, contributions made between July 1, 2010, and June 30, 2011, are locked in at a 4.5% annual interest rate until June 30, 2015. At the end of the five-year term, the participant may make one of two choices: (1) Roll the accumulated value into a Total Guaranteed Return Choice for another fiveyear term, or (2) Transfer the accumulated value to other STRS Ohio allocation choices. If neither of these options is chosen, the accumulated value of the choice is automatically rolled into the STRS Money Market.
18
Defined Contribution Investments — Disclosures
STRS Ohio allocation choices are not publicly traded mutual funds. They are available only through participation in the STRS Ohio Defined Contribution and Combined Plans.
members with account balances of less than $5,000 are assessed a $10 monthly fee taken proportionately from the balance of their account. If this fee is charged, the $10 quarterly account fee is waived.
Asset Management Fee Example
Contributions
Members who participate in the STRS Ohio Defined Contribution or Combined Plan are charged asset management fees annually, with the exception that no separate fee is charged for participation in the Total Guaranteed Return Choice. The following table provides an example of the annual fees you would incur on a hypothetical investment of $1,000 in each STRS Ohio account. The fees are taken from the net asset value of each account each valuation day. For the purpose of this example, to calculate annual fees the total fee is multiplied by the yearend account balance in that option.
The State Teachers Retirement System of Ohio (STRS Ohio) is a statewide pension plan for Ohio educators that operates by the authority of the Ohio General Assembly, and benefits are provided under Chapter 3307 of the Ohio Revised Code. Employers submit member and employer contributions to STRS Ohio after each payroll. For members enrolled in the STRS Ohio Defined Contribution or Combined Plan, member and employer contributions are deposited in each member’s account according to plan design and invested according to the member’s current contribution allocation within five days of receipt.
The table assumes (a) continuation into future years of the applicable STRS Ohio fee; (b) a 5% annual return; and (c) disbursement at each time period shown. This example should not be considered a representation of past or future expenses. Actual expenses may be greater or lesser than shown, depending upon factors such as actual performance.
Allocation Option Composition
STRS Money Market
$2
$6
$10
$24
The top 10 holdings, asset allocation, major market sectors and geographical diversification included for some allocation options are presented to illustrate examples of the diversity of the available choices. The illustrations may not be representative of the choices’ current or future investments. The figures presented are as of date shown and may change at any time.
STRS Barclays Capital U.S. Universal Bond Index Return
$2
$7
$12
$26
Value of Assets/Account Value
STRS Large-Cap Core Choice
$3
$10
$17
$40
STRS Russell 1000 Index Return
$2
$6
$10
$24
STRS Russell 2000 Index Return
$2
$7
$12
$26
STRS REIT Choice
$5
$17
$29
$66
STRS MSCI World ex USA Index Return
$4
$13
$23
$53
STRS Total Guaranteed Return Choice
$0
$0
$0
$0
The performance of the allocation choices made by members is used upon distribution to determine funds accumulated. Each allocation option is valued each valuation day. Each option is determined by unit values. The unit value reflects performance and expenses. The account value is based on the unit value, at the end of each valuation day, and the number of accumulated units of each allocation option. STRS Ohio will use market quotations, amortized cost or “fair value” to determine the unit value of each allocation option. Securities lending, litigation settlement and other miscellaneous income will not be included in the unit value of any allocation choice. Investment return and principal value will fluctuate so that a member’s units, when redeemed, may be worth more or less than their original cost.
1 Year 3 Years 5 Years 10 Years
Account Fee In addition to the fees listed above, a quarterly account fee of $10 is charged to each participant in a Defined Contribution or Combined Plan. The fee is taken proportionately from the member’s account balance on the first business day of the quarter.
Internet Capabilities Nationwide Retirement Solutions (NRS) will maintain an Internet website accessible through www.strsoh.org for the benefit of STRS Ohio members participating in the STRS Ohio Defined Contribution Plan or the defined contribution portion of the Combined Plan. Services and information available to participants include
Maintenance Fee for Inactive Accounts Less Than $5,000 Members who have not contributed to the Defined Contribution Plan or the defined contribution portion of the Combined Plan for a period of 120 consecutive days are deemed inactive. Inactive 19
Defined Contribution Investments — Disclosures (continued)
access to account balance, current contribution allocation, allocation option information and education materials. Members will also be able to change future contribution allocations and perform exchanges among available allocation choices. Members are required to enter a Social Security number and personal password. Written confirmations will normally be mailed to members within two business days of conducting transactions. Members should verify the accuracy of Internet transactions immediately upon receipt of the confirmation. While the website is typically available 24 hours a day, seven days a week for these services, NRS cannot guarantee availability. NRS is not responsible for any gain or loss attributable to these website services being unavailable. Members must accept the NRS Electronic Service Agreement in order to use the site.
Exchange instructions completed by 4 p.m. Eastern Standard Time on a business day are posted to a member’s account at the closing price that day or, if the day of the exchange is not a business day, at the closing price on the next business day. Members may change their future contribution allocation and make exchanges among available allocation options without charge. Members are permitted 20 trade events each calendar year. A trade event is defined as any trade or combination of trades occurring on a given valuation day. NRS also provides these additional safeguards to protect STRS Ohio from illegal lateday trading and improper market-timing trading. t *G TJY PS NPSF USBEF FWFOUT PDDVS JO POF calendar quarter, NRS will notify the participant by U.S. mail that he or she has been identified as engaging in potentially harmful trading practices.
Voice Response NRS will maintain a voice response system for the benefit of members participating in the STRS Ohio Defined Contribution Plan or the defined contribution portion of the Combined Plan. Services and information available to participants include access to account balance, current contribution allocation, allocation option information and how to change your Personal Identification Number (PIN). Members may make exchanges among available allocation options and change future contribution allocations through the voice response system or by speaking to a customer service representative at NRS. Members are required to enter a Social Security number and PIN. Verbal instructions given to a customer service representative will be accepted upon verification of member identity and will be tape-recorded to verify accuracy. Written confirmations will normally be mailed to members within two business days of conducting transactions. Members should verify the accuracy of phone transactions immediately upon receipt of the confirmation. While the voice response system is typically available 24 hours a day, seven days a week for these services, NRS cannot guarantee availability. NRS is not responsible for any gain or loss attributable to these voice response services being unavailable. The tollfree voice response line can be reached by calling 1-866-332-3342.
t 'PMMPXJOH UIJT OPUJGJDBUJPO JG NPSF UIBO trade events occur in two consecutive calendar quarters, NRS will require the participant to submit all future trade requests in paper form only via regular U.S. mail for the remainder of the calendar year. t *G USBEF FWFOUT PDDVS JO B DBMFOEBS ZFBS /34 will require the participant to submit all future trade requests in paper form via U.S. mail for the remainder of the calendar year. Member Reporting Members in the Defined Contribution Plan and the defined contribution portion of the Combined Plan will receive a quarterly statement of their account. Statements are mailed to members by the 20th business day of the month following the end of a quarter. Statements include beginning and ending balances, deposits, gains and losses, transactions, fees, contribution election and asset allocation information. Contributions posted to your account after the close of a quarter will not appear on that quarter’s statement. Each October, members in the Combined Plan will also receive an Annual Statement of Account from STRS Ohio that includes their projected survivor benefit, disability and service credit assuming the member meets or will meet the eligibility requirements for the defined benefit portion of the account. Please review all quarterly statements carefully and inform NRS of any discrepancies within 120 days of the close of the calendar quarter in which the discrepancy occurs. Failure to do so may result in the inability to adjust your account.
Transfers and Allocation Changes Among Investment Options Members may conduct exchanges daily by phone or via the Internet unless exchange restrictions apply. Verbal instructions will be accepted upon verification of member identity and will be taperecorded to verify accuracy.
20
Defined Contribution Investments — Glossary of Terms
Glossary of Terms
Disbursements In accordance with state law, disbursements to members may be made only if the member has terminated STRS Ohio contributing service. Additionally, disbursements may be made only at the times and under the circumstances allowable by the Internal Revenue Code. The Defined Contribution and the Combined Plans do not allow loans or hardship withdrawals.
Barclays Capital U.S. Universal Bond Index The Barclays Capital U.S. Universal Bond Index measures publicly issued U.S. dollar-denominated, fixed-rate taxable bonds on a total return basis. It consists of approximately 14,000 different issues and includes fixed-income securities that are rated either investment grade or below investment grade.
Members may take payment from the Defined Contribution Plan or the defined contribution portion of the Combined Plan through a rollover, a lump-sum withdrawal or a variety of annuities. Units will be redeemed from allocation choices on the business day after processing of the payment request is complete. Disbursements can be sent to the member or to the member’s financial institution. Members may request additional information or forms for disbursement by calling an STRS Ohio member service representative toll-free at 1-888-227-7877.
benchmark A standard, usually an unmanaged index, used for comparative purposes in assessing a fund’s performance.
bond A debt instrument issued by a company, city or state, or the U.S. government or its agencies, with a promise to pay regular interest and return the principal on a specified date.
bond credit rating
Members investing in the STRS Total Guaranteed Return Choice are subject to an early-term withdrawal penalty for lump-sum payments of monies that have not reached five years in maturity. Members selecting an annuity option are not subject to an early-term withdrawal penalty for monies in the STRS Total Guaranteed Return Choice.
Independent evaluation of a bond’s creditworthiness. This measurement is usually calculated through an index compiled by companies such as Standard & Poor’s (S&P) or Moody’s. Bonds with a credit rating of BBB or higher by S&P or Baa or higher by Moody’s are generally considered investment grade.
Members who request disbursement should be aware that the unit values of their account will remain subject to changing market conditions pending the receipt and processing of the disbursement.
book/price ratio The current book value of a stock divided by its current market price.
book value The net worth or liquidating value of a business. This is calculated by subtracting all liabilities, including debt and preferred stocks, from total assets.
Members who receive distributions will receive applicable tax statements. Members should file this tax statement with their income tax return. Members should always consult their accountant, lawyer or tax adviser for individual guidance.
bottom-up approach The search for outstanding performance of individual stocks before considering the impact of economic trends. Such companies may be identified from research reports, stock screens or personal knowledge of the products and services.
Inability to Conduct Business NRS is available to execute transactions 24 hours a day, seven days a week through its voice response system and Internet website during normal working conditions. Although NRS has a comprehensive contingency plan for both power failures and phone service interruption, abnormal circumstances could occur due to events such as severe weather conditions, natural disasters or inevitable accidents such that NRS may not be able to execute investment transactions. During this time of emergency, NRS will strive to restore normal business functions in a timely manner.
business day/valuation day A day when market exchanges are open for business.
capital appreciation The increase in the share price and value of an investment.
21
Defined Contribution Investments — Glossary of Terms (continued)
diversification
Information Technology
The strategy of investing in a wide range of companies, industries or investment products to reduce the risk if an individual company or sector suffers losses.
Contains companies primarily involved in technology software and services, hardware and equipment and manufacturers of semiconductors.
dividend yield
Materials
The current or estimated annual dividend divided by the market price per share of a security.
Includes companies that manufacture chemicals, construction materials, glass, paper products, and metals, minerals and mining companies.
Dow Jones Wilshire Real Estate Investment Trust (REIT) Index
Telecommunications Services
This index measures publicly traded U.S. real estate investment trusts (REITs) on a total return basis. The index includes only equity REITs focused generally on the ownership and operation of commercial and residential real estate and excludes health care, mortgage and specialty REITs.
Contains companies involved in communication services, including wireless, cellular and high-bandwidth networks.
Utilities Includes gas, water and electric utilities, as well as companies that operate as independent producers or distributors of power.
economic sectors Consumer Discretionary Includes industries likely to be most sensitive to economic cycles, including automotive, apparel, household durable goods, hotels, restaurants and consumer retailing.
float The number of shares of a corporation that are outstanding and available for trading by the public. A small float means the stock will be volatile, since a large order to buy or sell shares can influence the stock’s price dramatically. A larger float means the stock will be less volatile.
Consumer Staples This sector includes industries that are less sensitive to economic cycles, including food, beverage and tobacco manufacturers, producers of nondurable household goods, and food and drug retailing companies.
index return An investment choice designed to closely match performance and composition of a particular market benchmark, such as the Russell 1000 Index.
Energy Contains companies involved in producing, marketing or refining gas and oil products.
interest rate The rate of interest charged for the use of money, usually expressed as an annual rate.
Financials Includes companies engaged in finance, banking, investment banking and brokerage, insurance, corporate lending and real estate.
liquidity The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds.
Health Care Includes manufacturers of health care equipment and supplies, providers of health care services and producers of pharmaceuticals.
market capitalization (large-cap, mid-cap, small-cap) The market price of a company’s shares multiplied by the number of shares outstanding. Large capitalization (large-cap) companies generally have more than $5 billion in market capitalization; midcap companies between $1.5 billion and $5 billion; and small-cap companies less than $1.5 billion. These capitalization figures may vary depending upon the index being used and/or the guidelines used by the portfolio manager.
Industrials This sector includes companies involved in construction, engineering and building, aerospace and defense, industrial equipment and machinery, and transportation services and infrastructure.
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market value
risk tolerance
The price at which a security is trading and could presumably be purchased or sold. This also refers to what investors believe a firm is worth, calculated by multiplying the number of shares outstanding by the current market price of a firm’s shares.
How sensitive you are to market losses.
Russell Indexes
The market value of a group of securities computed by calculating the arithmetic average of a sample.
These indexes are used as standards for measuring U.S. stock market performance. An example would be the Russell 3000, which is the most widely used broad market index for U.S. institutional investors. It is comprised of the largest 3,000 U.S. stocks, representing 98% of investable U.S. equity.
market value-weighted
stock
The market value of a group of securities computed by calculating a weighted average of the returns on each security in the group, where the weights are proportional to outstanding market value.
An ownership share in a corporation. Each share of stock is a proportional stake in the corporation’s assets and profits, and purchasing a stock should be thought of as owning a proportional share of the successes and failures of that business.
market value-mean
maturity The final date on which the payment of a debt instrument (e.g., bonds, notes, repurchase agreements) becomes due and payable. Short-term bonds generally have maturities of up to five years, intermediate-term bonds between five and 15 years, and long-term bonds more than 15 years.
top-down approach
MSCI World ex USA Index
A portfolio volatility measurement that compares the variation (measured by the standard deviation) of the difference between the performance of the benchmark and a particular fund.
The method in which an investor first looks at trends in the general economy, selects attractive industries and then companies in those industries that should benefit from those trends.
tracking error
The MSCI (Morgan Stanley Capital International) World ex USA Index is a free float-adjusted market capitalization index of approximately 1,200 foreign companies that is designed to measure developed market equity performance, excluding the United States.
Treasury securities Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: bills (maturity of three–12 months), notes (maturity of one–10 years) and bonds (maturity of 10–30 years).
net asset value (NAV) The market value of one unit of an investment option on any given day. It is determined by dividing an investment option’s total net assets by the number of units outstanding.
price/book ratio
volatility
The current market price of a stock divided by its book value or net asset value.
The general variability of a portfolio’s value resulting from price fluctuations of its investments. In most cases, the more diversified a portfolio is, the less volatile it will be.
price/earnings ratio (P/E) The current market price of a stock divided by its earnings per share. Also known as the “multiple,” the price-to-earnings ratio gives investors an idea of how much they are paying for a company’s earning power and is a useful tool for evaluating the costs of different securities.
yield The annual rate of return on an investment, as paid in dividends or interest. It is expressed as a percentage obtained by dividing the market price for a stock or bond into the dividend or interest paid in the preceding 12 months.
price/sales ratio The current market price of a stock divided by total sales.
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