Kristin Finney-Cooke
10 South Wacker Drive, Suite 1700 Chicago, IL 60606 312 902 7378 Fax 312 902 7640 Kristin.FinneyCooke@mercer.com www.mercer.com
January 21, 2009 Board of Trustees Public School Teachers' Pension and Retirement Fund of Chicago 203 North LaSalle, Suite 2600 Chicago, IL 60601-1210
Dear Trustees: Mercer Investment Consulting is pleased to present the Public School Teachers’ Pension and Retirement Fund (“Fund”) results for the fiscal year ended June 30, 2008. As of June 30, 2008, the Fund’s market value totaled $11.4 billion, an approximate $1.35 billion decrease since June 30, 2007, due to net withdrawals and investment performance. During the past twelve month period:
Domestic equity markets struggled. The S&P 500 Index, an index of domestic large capitalization stocks, declined 13.1% during the one year period while smaller stocks, as measured by the Russell 2000 Index, returned -16.2%. The largest negative contributor to performance was in the financials sector while the energy sector posted strong results. Growth stocks outperformed value stocks by a wide margin.
Developed international equity markets outperformed their domestic equity counterparts during the one year period, declining 10.1% as measured by the MSCI EAFE (Europe, Australasia, Far East) Index. Emerging markets performed relatively well, advancing 4.9%, as measured by the MSCI Emerging Markets Index.
The Fixed income market produced strong results during the year, gaining 7.1% as measured by the Barclays Aggregate Bond Index (Formally known as the Lehman Brothers Aggregate Bond Index). The fixed income credit crisis began during the fiscal year 2008 and was marked by a flight to quality as inflation-linked bonds (or TIPS issues) and Treasuries lead corporate and asset-backed securities by wide margins.
Within this environment, the Fund declined 5.3% during the 12 month period ending June 30, 2008. The Fund outperformed its benchmark but trailed the peer group during the fiscal year. Over longer periods the Fund is ahead of the benchmark for both the three and five year time frames and slightly trailed its peer group over the same time periods. Since inception, the Fund outperformed its benchmark by 80 basis points, annually. The Fund’s domestic equity managers declined 10.8% during the fiscal year, leading the Russell 3000 Index return of -12.7%. The domestic equity segment of the Fund outperformed despite holding a value tilt during this growth market. In general, the Fund’s large cap managers performed well while the smaller cap managers struggled. Services provided by Mercer Investment Consulting, Inc. The Fund’s international equity allocation outperformed domestic equity, declining 7.2%, but trailed its benchmark index. Active management struggled during the year as most of the Fund’s managers outperformed their peers, but trailed the index. This segment of the fund has struggled to keep pace with the market over the past few years but long-term international equity results have been positive.
The fixed income portfolio produced positive results during the fiscal year, gaining 5.8%, but trailed the index. The flight to quality in the market place negatively impacted the opportunistic managers in the portfolio. In contrast, the Fund’s allocation to the Government/Credit Index fund bolstered results. The flight to quality’s impact on performance was great enough to drive relative results over the longer time periods below the index. The Public School Teachers’ Pension & Retirement Fund of Chicago maintains an appropriately diversified strategy, designed to maximize return with an acceptable risk level. Mercer supports the Fund’s ongoing efforts to enhance investment results and its continued due diligence activities. There are many challenges to the Fund over the next year and Mercer will continue to review the Fund’s strategy in light of current events. All performance returns for the Public School Teachers’ Pension & Retirement Fund of Chicago presented in this report have been calculated by Mercer Investment Consulting based upon a Modified Dietz methodology. Sincerely,
Kristin R. Finney-Cooke
Douglas J. Kryscio, CFA
Investments
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