State Teachers Retirement System of Ohio
State Teachers Retirement System of Ohio
November 2010 The State Teachers Retirement Board and the associates of STRS Ohio are pleased to present our Defined Contribution Investments Annual Report for fiscal 2010. This report is intended to provide you with investment information and results from July 1, 2009–June 30, 2010, for STRS Ohio’s defined contribution account allocation choices. Investment returns in fiscal 2010 saw a solid rebound following one of the worst years on record for investors. The broad-based rally produced positive returns in all asset classes, led by the STRS REIT Choice with a 55.31% return. Equity markets and bonds posted solid gains, though returns were tempered somewhat with a weaker period in May and June. You can read about the specific investment choices in our Performance Section that begins on Page 6, and you will see how each asset class performed in fiscal 2010. At fiscal year end, total assets for the Defined Contribution Plan and the defined contribution portion of the Combined Plan totaled just above $390 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 4.5%) 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.
Tim Myers Chair, State Teachers Retirement Board, 2010–2011
Michael J. Nehf Executive Director
275 East Broad Street Columbus, OH 43215-3771 1-888-227-7877 www.strsoh.org
retirement board chair TIM MYERS retirement board vice chair JAMES MCGREEVY 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, 2010 Annualized Rates of Return
VARIABLE INVESTMENT CHOICES Cash
3 MonthsF
1 Year
3 Years
STRS Money Market A
0.03%
0.06%
1.65%
2.81%
2.65%
Index: 90-day U.S. Treasury bill
0.04%
0.12%
1.18%
2.53%
2.46%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
3.02%
10.15%
6.60%
5.10%
6.26%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
STRS Large-Cap Core Choice
-12.20%
15.03%
-9.56%
-0.34%
N/A
Index: Russell 1000 Index G
-11.45%
15.24%
-9.54%
-0.56%
-2.70%
STRS Russell 1000 Index ReturnC
-11.49%
15.03%
-9.70%
-0.73%
-1.35%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
-9.97%
21.25%
-8.78%
0.17%
2.86%
Bonds STRS Barclays Capital U.S. Universal Bond Index ReturnB Large-Cap
Small-Cap STRS Russell 2000 Index ReturnC Specialty/Real Estate
5 Years
10 Years
3 MonthsF
1 Year
3 Years
5 Years
10 Years
STRS REIT ChoiceA
-3.87%
55.31%
-10.25%
-0.10%
9.27%
Index: Wilshire REIT Index D
-4.23%
55.46%
-10.33%
-0.35%
9.66%
3 MonthsF
1 Year
3 Years
5 Years
10 Years
-13.73%
6.59%
-12.97%
1.07%
0.30%
International STRS MSCI World ex USA Index ReturnC
Since InceptionH
Inception Date 1/1/1970
12/1/1998
2.40%
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 2010 E
5.50%
(For contributions made between July 1, 2005–June 30, 2006 — closed to new investments)
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 2012 E
5.50%
(For contributions made between July 1, 2007–June 30, 2008 — closed to new investments)
E
5.00%
(For contributions made between July 1, 2008–June 30, 2009 — closed to new investments)
STRS Total Guaranteed Return Choice 2014 E
4.00%
(For contributions made between July 1, 2009–June 30, 2010 — closed to new investments)
STRS Total Guaranteed Return Choice 2013
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.
H
Reflects annualized performance since inception if less than 10 years.
1
Economic and Financial Markets Overview July 1, 2009–June 30, 2010
T
he 4.1% plunge in real (inflation-adjusted) economic activity during fiscal 2009 was the largest since World War II. Given the severe drop that preceded it, the economic rebound would normally be broadly robust across most economic sectors for an extended period. Macroeconomic modeling predicted a surge in broad-based economic activity through the end of fiscal 2010 before real gross domestic product (GDP) growth would begin to moderate in fiscal 2011. The macroeconomic models were largely driven higher by financial market gains like the nearly 80% advance from the March 2009 low in the S&P 500 through late April and the extraordinary narrowing of credit spreads in the bond market as the economy moved away from its worst quarters. However, 8% or better real GDP year-over-year growth as forecast by such macroeconomic models significantly overstated the actual growth rate for the economy. Nonetheless, the National Bureau of Economic Research — the arbiter for recession and expansion dating — announced that the recession ended in June 2009, as growth returned to a number of economic sectors.
the first quarter — for the first time since early in the recession that began December 2007. However, the mix of growth was still disappointing. Real final sales of domestic product (i.e., real GDP less the change in inventories) grew a weak 0.4% during the quarter. In other words, the change in inventories (which was still falling by a huge amount) actually contributed 1.2 percentage points to real GDP growth because it was falling by a lesser amount than the historic collapse recorded at the end of fiscal 2009. Underlying domestic demand found in real final sales remained soft, largely because business investment in structures continued to collapse and the relative trade position turned against the United States as other countries trailed our nation’s improvement. Consumer spending grew a soft 2%, led by spending on autos from the short-term “cashfor-clunkers” federal government program, while residential investment surged 10.6% due to the first-time homebuyer program. Real GDP growth in the second fiscal quarter was strong — again, largely due to a smaller inventory contraction compared to the previous quarter. Economic activity grew at an annual rate of 5% during the quarter, but real
Fiscal 2010 began largely as expected. Real GDP moved higher — 1.6% at an annual rate in
Gross Domestic Product/Consumer Price Index 1990–2010 Year-Over-Year Growth Rates
8%
6%
4%
2%
0%
-2%
-4%
-6% 1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Gross Domestic Product Note: Shaded areas denote a recession.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Consumer Price Index
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics/Haver Analytics
Monetary and fiscal policies in 2009–2010 jump-started financial markets, allowing an anticipation of profit recovery and improved consumer sentiment to push GDP back into expansion. Diminished by continued high unemployment, however, the “jobless recovery” indicates protracted growth into the future. 2
final sales advanced just 2.1% — still well below the economy’s longer-term potential growth rate of roughly 2.75%. The change in inventories added an enormous 2.9 percentage points to real GDP growth, while domestic demand was supported by a weak 0.9% advance in consumer spending, a 14.6% surge in business investment in equipment (even as business investment in structures continued to plummet by 29.2%), and a continuation of marginal housing improvements from the federal homebuyer program.
The current expansion still faces headwinds from the aftermath of the financial crisis and from the fading of fiscal and monetary stimulus in coming quarters. Gains in private employment have averaged only 95,000 a month during the first eight months of calendar 2010. Though the degree of unemployment is not as severe as what the country experienced in the Great Depression, it approached the prior post-World War II peak of 10.8% at the end of the severe 1981–1982 recession. The unemployment rate was at a high 9.6% level in August, while the underemployment rate stood at 16.7%. The initial inventory-led turnaround and surge in business spending on equipment reflect the improving manufacturing environment that had collapsed during the recession as companies slashed costs. However, companies have been relatively slow to rehire laid off workers as they continue to face a blurred economic future.
In the third fiscal quarter, solid economic growth was still heavily dependent on the improving inventory cycle. The economy decelerated from 5% real GDP growth in the second fiscal quarter to 3.7% real GDP growth in the third fiscal quarter. Real final sales of domestic product grew only an annualized 1.1% during the quarter — down significantly from the 2.1% annualized advance in the prior quarter.
On the inflation front, while energy costs again soared in fiscal 2010 (up 11.5% in the Consumer Price Index), other prices were well behaved. Consumer prices excluding energy rose only 0.9% in fiscal 2010 — slightly below the Federal Reserve’s preferred range of 1% to 2%. Broader measures of inflation, like the GDP price index rising only 0.8%, showed how little price pressure there was over the same period. Even a moderately growing U.S. economy will put only modest pressure on prices. As a result, the Federal Reserve in fiscal 2011 will not likely move shortterm interest rates higher from the historically low 0% to 0.25% range it is currently using. If there was a change in monetary policy during fiscal 2011, it would likely be only a marginal change to reflect ongoing moderate economic growth amid low inflation.
The final fiscal quarter repeated many of the elements that appeared in the prior quarters — a sluggish turnaround in domestic demand, led by an improving inventory situation, but only slow growth elsewhere. Real GDP grew a moderate 1.6% during the quarter, while real final sales of domestic product edged higher by an annual rate of just 1%. The weak start to real final sales in the current expansion is similar to the slow recoveries of the prior two expansions. Each of those recoveries from short and mild recessions was characterized by a “jobless recovery,” where job growth was initially stagnant or growing only slowly. Similar to today’s environment of 1.1% real final sales growth during fiscal 2010, real final sales grew only an annualized 0.8% and 2.3% in the initial stages of the two prior expansions.
The sluggish start to the current economic expansion will likely continue with a moderate “U-shaped” recovery and expansion instead of a sharp “V-shaped” one. Though the recession plunge we experienced would typically lead to a “V-shaped” recovery, there are lingering restrictive effects from the credit crunch that will continue to force consumers and businesses to lower debt. Potential economic growth has been reduced after the financial market crisis and businesses will be cautious in expanding production and hiring. Fears that sovereign debt problems in European countries will spread to the United States will also weigh on potential growth.
After extended and steep recessions like the most recent one, real final sales typically soar. Real final sales growth following the best comparable recession to the most recent one — the dual recessions of 1980 through 1982 — grew an annualized 5.8% in the first year of the subsequent expansion. The average first year growth of real final sales during the seven expansions before 1991 was 6%, with a minimum growth of 4.1% and a maximum advance of 8.5%. Today’s recovery of only 1.1% in real final sales is quite a bit softer than would typically be expected following a severe recession.
3
Economic and Financial Markets Overview
(continued)
July 1, 2009–June 30, 2010
Defined Contribution Asset Value by Allocation Choice As of June 30, 2010
STRS Large-Cap Core Choice $54,534,933 13.96%
Total assets: $390,782,696
STRS Money Market $66,338,963 16.98%
STRS Barclays Capital U.S. Universal Bond Index Return $50,772,375 12.99% STRS Total Guaranteed Return Choice 2014 $9,135,747 2.34% STRS Total Guaranteed Return Choice 2013 $12,055,577 3.08%
STRS MSCI World ex USA Index Return $41,897,527 10.72%
STRS Total Guaranteed Return Choice 2012 $6,516,849 1.67% STRS Total Guaranteed Return Choice 2011 $6,819,867 1.74% STRS Total Guaranteed Return Choice 2010 $1,778,148 0.45%
STRS Russell 1000 Index Return $51,842,035 13.27%
STRS REIT Choice $30,906,145 7.91%
STRS Russell 2000 Index Return $58,184,530 14.89%
The chart above displays STRS Ohio’s defined contribution holdings and percentage of total assets for the fiscal year ending June 30, 2010. More information on these options can be found in the Performance Section beginning on Page 6.
Money Market Growth Limited by Low Federal Funds Rate
U.S. Stocks Post Solid Gains in Fiscal 2010
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. There were still some liquidity concerns at the beginning of the fiscal year and demand for U.S. Treasury bills remained high. Yields stayed at historically low levels as indicated by the benchmark return of 0.12% for the 90-day U.S. Treasury bill.
The U.S. equity market rebounded strongly in fiscal 2010 from the poor showing in 2009 in the wake of the financial crisis. The U.S. equity market, as measured by the Russell 1000 Index, rose 15.2% during the fiscal year. The consumer discretionary and industrials sectors were the best performers, up 28.1% and 27.5% respectively, as would be expected in an economic and market recovery. The energy and telecommunications sectors performed the worst, albeit still resulting in positive returns of 2.1% and 3.9%, respectively.
Bond Market Improves as Credit Stabilizes
The rise in the equity index was the result of the U.S. economy returning to health and marked the end of the global financial crisis experienced in fiscal 2009. For fiscal 2011, we expect a gradually improving economy to lead to positive, but more moderate, stock returns.
Fiscal 2010 was a strong year for fixed-income market returns as credit conditions recovered and valuations normalized. In response to the ongoing credit crisis and the severe economic downturn, the Federal Reserve maintained short-term interest rates effectively at 0.0% for the fiscal year. The 10-year U.S. Treasury bond yield fell from 3.5% at the beginning of the fiscal year to 2.9% at the end of the fiscal year. 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 fixed-income index returns of 10.60% in fiscal 2010. 4
REIT Market Rebounds, Still Room for Growth
International Markets Show Resilience in 2010
After the REIT bear market from February 2007 to March 2009, it was not unreasonable to expect a nice recovery in the stocks, even with weak property fundamentals. What we got, however, was a bounce with a capital “B.� In the first half of the fiscal year, the REIT index rose more or less steadily as an increasing number of investors became convinced that the world was not ending and there were bargains to be had. In the second half of the year, the stocks moved in a fairly broad trading range as investors awaited clearer indications of the strength of the economic recovery. The 55%-plus return for REITs over the last fiscal year was nice, but in the investment world, it is important to look forward.
After a well-documented and extremely weak year in fiscal 2009, the international markets rebounded in fiscal 2010. The World ex USA Index (50% hedged) for developed markets rose 7.0% as it rebounded sharply from the market low of early March 2009 before a portion of those gains succumbed to a strengthening U.S. dollar in the last several months. The financial turmoil initiated by the implosion of U.S. sub-prime housing loans transitioned into further uncertainty when sovereign debts were seriously questioned in spring 2010. The sovereign debt problems and concerns about the impact to global economic growth brought volatility back into the markets. Though these factors weighed heavily on the markets in May and June, the overall result was a positive year for the international asset class.
The strong recovery to date in REIT prices still has the index some 40% below its peak of 2007. What will it take to get back to that level? Put simply: A stronger economic recovery than has occurred to date. The first leg of the REIT rally has been driven by the recovery of the capital markets. Both debt and equity are plentiful for the companies, unlike at the worst part of the credit crunch. Strong returns going forward will depend on a strengthening of the underlying property markets.
Returns for the 12 months were generally strong across the developed markets with a few notable exceptions. The strongest were Sweden (+30.8%), Singapore (+29.4%) and Denmark (+19.4%). The three biggest losses were seen in Greece (-46.7%), Spain (-12.6%) and Austria (-10.0%). Currency played a large role in returns for fiscal 2010, as the euro fell nearly 13% versus the dollar and the Japanese yen rose 9%. On a regional basis, Europe was slightly weaker than the Far East, but both had positive returns, as did North America (Canada). The top-performing sector for the year ending June 30, 2010, was the consumer staples sector for the second consecutive year, rising 19%. This was followed by the materials and industrials sectors, up 16% and 15%, respectively. On the other end of the spectrum, the worst performer was the energy sector, which dropped 4% — primarily in reaction to the oil spill in the Gulf of Mexico.
Multifamily markets have already turned the corner, with rent growth returning in the last few quarters. Hotels have also hit bottom. Sectors with longer lease terms (e.g., office, retail and industrial) are still signing new leases at lower rates than the leases being replaced. These property types are not likely to experience a material improvement in spot rates until the second half of 2011 or longer, if the economy stalls again. However, with new construction well under control going into the downturn, and nearly nonexistent now, returning demand will translate into a stronger rental market once it does begin. It is clear that sustained recovery in REITs is closely linked to a stronger economic recovery at this point.
5
Defined Contribution Investments — Performance STRS Money Market ........................................................................................................Cash Structure
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. dollardenominated 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 0.06%, after fees, for the year. Yields tend to reflect current short-term interest rates, which remained at the targeted rate of 0% to 0.25% throughout the fiscal year. With a higher allocation to agency notes, the yields earned were generally higher than those of the Treasury bill benchmark. The table below shows the STRS Money Market investment allocation:
Sector Weightings as of June 30, 2010 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 0.06%, after fees, for the year, compared to the benchmark 90-day U.S. Treasury bill that returned 0.12%. The STRS Money Market return before fees was 0.24%. Investing in agency notes and floating rate corporate bonds, which tended to have higher yields than the benchmark, generated the additional yield. When possible, the STRS Money Market also held longer maturities than the benchmark, allowing for increased yield.
STRS Money Market
Historical Performance as of June 30, 2010 2.81%
3% 1.65%
1% 0%
0.06%
2.53%
2.65%
2.46%
1.18%
0.12%
1 Year STRS Money Market
6.0%
Money Market & Repurchase Agreements 1.5%
Performance
2%
92.5%
3 Years
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, 2010
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. dollar-denominated securities. A significant portion of the index includes debt issued by the U.S. government and governmentrelated entities, mortgage-backed 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:
Sector
12,334
Average Yield
3.26%
Average Maturity
6.56 Years
Market Value
$16.80 Trillion
33%
U.S. Government
28%
Investment Grade Corporates
20%
Government-Related
11%
High Yield
5%
Emerging Market
3% 100%
Market Drivers Price appreciation of fixed-income securities, combined with income from interest payments, led to the high positive returns for the Barclays Capital U.S. Universal Bond Index. During the fiscal year, the Federal Reserve maintained a highly accommodative monetary policy in response to the various challenges of the financial crisis. The policy supported the economy and the financial system by providing liquidity and maintaining low short-term and long-term interest rates. The federal funds rate has remained effectively at 0.0% for 18 months, anchoring short-term interest rates. The Federal Reserve’s quantitative easing program directly purchased $1.7 trillion of U.S. Treasury securities, agency mortgage-backed securities and agency debt. This program impacted longer-term rates and provided support to the mortgage and housing markets. Various liquidity facilities improved overall conditions in consumer and commercial credit markets and credit risk premiums narrowed sharply, helping bond prices to rise. Thus, price appreciation for all sectors of the fixedincome market enhanced returns in fiscal 2010.
Performance For the fiscal year ending June 30, 2010, the STRS Barclays Capital U.S. Universal Bond Index Return choice returned a positive 10.15%, after fees. This section details the performance of the Barclays Capital U.S. Universal Bond Index. Fiscal 2010 was a strong year for fixed-income market returns as credit conditions recovered and valuations normalized. The credit-sensitive sector returns outpaced all other sectors, led by commercial mortgage-backed securities (+30.5%), high yield (+26.8%), emerging market debt (+20.4%) and investment grade corporate bonds (+15.9%). The non-credit sectors had lower, but still attractive, returns with agency mortgage-backed securities (+7.5%), U.S. government (+6.7%) and government-related (+6.7%).
Mortgage- and Asset-Backed
Total Barclays Capital U.S. Universal Bond Index
Index Statistics as of June 30, 2010 Number of Issues
Weight
STRS Barclays Capital U.S. Universal Bond Index Return Historical Performance as of June 30, 2010
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.
12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
10.15%
6.60%
1 Year
3 Years
6.26% 5.10%
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 broad-based 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 rebounded from a difficult year in 2009, gaining 15.0%, after fees, for the fiscal year ending June 30. The fund slightly trailed the Russell 1000 benchmark, which rose 15.2% over the same period. Relative performance of the portfolio benefited from overweight positions in both the industrials and the consumer discretionary sectors, which were the best performing sectors in fiscal 2010. Positioning in the energy sector hurt the portfolio. While STRS Ohio was correct in its underweight position in the sector and did not own BP, the oil spill in the Gulf of Mexico resulted in collateral damage to the stocks owned within the sector. Transocean and Exxon were two of the stocks that were negatively impacted by the oil spill.
STRS Large-Cap Core Choice
Historical Performance as of June 30, 2010
25% 20% 15%
15.03% 15.24%
10% 5% 0%
–9.56% –9.54%
–0.34% –0.56%
3 Years
5 Years
N/A*
–2.70%
–5% –10% –15%
1 Year 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, 2010
The U.S. equity market rebounded strongly in fiscal 2010 from the 2009 financial crisis. The U.S. equity market, as measured by the Russell 1000 Index, rose 15.2% during the fiscal year.
Information Technology
20.90% 18.37%
c
16.32% 16.69%
Financials
The rise in the equity index was the result of the U.S. economy returning to health and marked the end of the global financial crisis experienced in fiscal 2009. For fiscal 2011, a gradually improving economy should lead to positive, albeit more moderate, stock returns.
11.88% 10.89%
Industrials
11.61% 12.19%
Health Care
11.26% 10.69%
Consumer Discretionary
The rebound from the financial crisis in 2009 led to a sharp recovery in earnings in fiscal 2010. Earnings across all sectors were better than anticipated as companies did an exemplary job at belt tightening and becoming more efficient coming out of the recession. Stronger corporate earnings have primarily come from better margins rather than from strong gains in revenues.
Consumer Staples
10.11% 10.32%
Energy
8.33% 10.34% 4.44% 3.78%
Materials
2.70% 3.81%
Utilities Telecommunication Services
2.45% 2.92% 0%
All sectors in the index were up for the year. The industrials and consumer discretionary sectors were the best performers, up 26.5% and 25.6%, respectively, as would be expected in an economic and market recovery. The energy and utilities sectors performed the worst, although still recording positive returns of 3.2% and 4.9%, respectively.
5%
10%
15%
20%
25%
STRS Large-Cap Core Choice Russell 1000 Index
Composition as of June 30, 2010 Top 10 Holdings
% of Total Investment Choice
Apple Inc. (AAPL)
3.89%
Exxon Mobil Corp. (XOM)
3.57%
Microsoft Corp. (MSFT)
2.66%
General Electric Co. (GE)
1.84%
Cisco Systems (CSCO)
1.81%
Hewlett-Packard Co. (HPQ)
1.70%
Nuance Communications (NUAN) 1.67% The Coca-Cola Co. (KO)
1.63%
Chevron Corp. (CVX)
1.61%
Philip Morris International (PM)
1.55%
Top 10 holdings represent 21.93% 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, 2010
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
$10.64 Trillion
Mean Market Value
$11.69 Billion
Weighted Average Market Value $66.28 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
$290.86 Billion
Smallest Company Market Value $968 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
$31.09
P/E Ratio
14.7
Dividend Yield
2.10%
Performance The STRS Russell 1000 Index Return posted a 15.0% gain, after fees, for the fiscal year ending June 30, 2010. This section details the performance of the Russell 1000 Index, which is the benchmark for the STRS Russell 1000 Index Return.
Ibbotson Associates recommends holding a large-cap equity choice as part of a welldiversified 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 Russell 1000 Index was up more than 30% by the end of April, before fears of another economic slowdown resulted in a sharp pullback in May and June 2010.
Russell 1000 Index Values For Fiscal Year 2010
Value 3,400
3,200
3,000
2,800
2,600
2,400
2,200
20 10
10 Ju
ne
20 M ay
10 A
ch ar M
pr il
20
20
10
10 20 y
y
br ua r Fe
nu ar Ja
em
be
r2
20
10
00 9
09 20 be r
ec D
N
ov e
m
r2 00
9
9 00
ct ob e O
be r2 m
Se
pt e
ug us t A
Ju ly
20
09
20 09
2,000
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, 2010
On the heels of a tumultuous 2009, the U.S. equity market rallied in fiscal 2010 and posted solid returns. The Russell 1000 Index return of 15.2% was no exception.
Top 10 Holdings
% of Total Index
Exxon Mobil Corp. (XOM)
2.73%
Apple Inc. (AAPL)
2.15%
It is estimated that consumer spending fuels about 70% of the economy. However, with unemployment still hovering near 10%, consumers didn’t lead the recovery in 2010. Instead, many large U.S. companies saw their way through the recession by improving operating efficiencies to increase profit margins. This helped fuel a rise in the equity index, as earnings beat expectations across all industry sectors. The industrials sector led the way with a 26.5% return, followed by consumer discretionary with 25.6%.
Microsoft Corp. (MSFT)
1.66%
Procter & Gamble (PG)
1.62%
Johnson & Johnson (JNJ)
1.53%
International Business Machines Corp. (IBM)
1.49%
General Electric Co. (GE)
1.45%
JPMorgan Chase & Co. (JPM)
1.37%
Bank of America Corp. (BAC)
1.36%
AT&T Inc. (T)
1.34%
Federal stimulus programs also helped prop up the economy during the fiscal year. These efforts are expected to continue into 2011 and should point to steady, but more muted returns.
Top 10 holdings represent 16.70% of the total index.
Sector Weightings as of June 30, 2010 Sector
Weight
STRS Russell 1000 Index Return
Historical Performance as of June 30, 2010
Information Technology
18.37%
Financials
16.69%
Health Care
12.19%
Industrials
10.89%
Consumer Discretionary
10.69%
Energy
10.34%
10%
Consumer Staples
10.32%
5%
Utilities
3.81%
Materials
3.78%
Telecommunication Services
2.92%
Total Russell 1000 Index
25% 20% 15%
15.03%
0%
–9.70%
–0.73%
–1.35%
3 Years
5 Years
10 Years
–5%
100.00% –10% –15%
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.
11
Defined Contribution Investments — Performance (continued) STRS Russell 2000 Index Return .............................................................. Small-Cap Structure
Index Statistics as of June 30, 2010
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
$935.35 Billion
Mean Market Value
$555 Million
Weighted Average Market Value $920 Million
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 small-cap fund.
Largest Company Market Value
$2.54 Billion
Smallest Company Market Value $39 Million
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.
Median Share Price
$12.71
P/E Ratio
16.8
Dividend Yield
1.29%
Performance The STRS Russell 2000 Index Return gained 21.3%, after fees, for the fiscal year ending June 30, 2010. This section details the performance of the Russell 2000 Index, which is the benchmark for the STRS Russell 2000 Index Return.
Ibbotson Associates recommends holding a small-cap equity choice as part of a welldiversified 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 another economic slowdown resulted in a sharp pullback in May and June 2010.
Russell 2000 Index Values For Fiscal Year 2010
Value 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000
10
10
20 ne Ju
10
20 M ay
20
10 20 ch
A pr il
20 10 ru ar y
20 ry nu a
Fe b
r2 Ja
M ar
10
9 00
9 be em
m ov e N
D ec
be
r2 ob e ct O
r2
00
00
9
9 00 r2 m
be
us t
pt e Se
A ug
Ju
ly
20 09
20 09
1,800
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, 2010
The U.S. equity market rebounded strongly in fiscal 2010 from the 2009 financial crisis. Investors were eager to hold small-cap stocks through the recovery as the STRS Russell 2000 Index rose 21.5% during the fiscal year, easily beating the larger capitalization-focused Russell 1000 Index, which was only up 15.2% over that same period.
Top 10 Holdings
Consumer discretionary and materials contributed most to the returns seen in the Russell 2000 Index during fiscal 2010, up 33.7% and 30.0%, respectively. The rise in the equity market was the result of the U.S. economy returning to health and marked the end of the global financial crisis experienced in fiscal 2009. For fiscal 2011, a gradually improving economy is expected to lead to positive, albeit more moderate, stock returns.
% of Total Index
Salix Pharmaceuticals (SLXP)
0.24%
MFA Financial Inc. (MFA)
0.22%
Henry Jack & Associates (JKHY)
0.22%
Tibco Software Inc. (TIBX)
0.21%
Highwoods Properties Inc. (HIW)
0.21%
Rock-Tenn Co. (RKT)
0.21%
Nordson Corp. (NDSN)
0.20%
Psychiatric Solutions (PSYS)
0.20%
EV3 Inc. (EVVV)
0.20%
Omega Healthcare Investors Inc. (OHI)
0.20%
Top 10 holdings represent 2.11% of the total index.
Sector Weightings as of June 30, 2010 Sector
Weight
Financials
21.43%
Information Technology
17.86%
Industrials
15.41%
Health Care
13.82%
Consumer Discretionary
13.79%
STRS Russell 2000 Index Return
Historical Performance as of June 30, 2010 25% 21.25% 20% 15%
Energy
5.38%
10%
Materials
4.83%
5%
Consumer Staples
3.27%
Utilities
3.22%
Telecommunication Services
0.99%
Total Russell 2000 Index
2.86%
0%
–8.78%
0.17%
3 Years
5 Years
–5%
100.00% –10% –15%
1 Year
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.
13
Defined Contribution Investments — Performance (continued) STRS REIT Choice ................................................................................................. Real Estate So what has driven the recovery in the stocks? Quite simply: capital markets. Early in the stock rally, REITs began to issue new equity at fairly low share prices just to stay solvent. With some early success on the equity front, many companies began to see a few lenders reentering the market, and both the equity and debt markets fed on each other to the point that most participants have now found capital to be readily available. At the same time, the overall weak economy has kept interest rates low and REITs have been able to not only replace maturing loans, but also knock down their interest costs at the same time.
Structure 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 STRS REIT Choice returned a robust 55.31%, after fees, for the fiscal year ending June 30, 2010. After plunging more than 75% during the credit crunch, the Wilshire REIT Index enjoyed a very strong rebound during the fiscal year, generating a total return of 55.46% — while the portfolio just outpaced that level with 55.96%, before fees. REITs started off the period quite strongly and then moved into a moderately wide trading range during the second half of the year.
So has the rally in REIT prices made them expensive? It is important to keep in mind that even after the index climbed 55%, it is still significantly below its peak of 2007. Most property sectors are experiencing their trough in earnings in 2010 with steady, albeit moderate, recovery expected from here. At the end of the fiscal year, REITs were in the middle of a moderately wide fair value range. Although no longer at historically cheap levels, a return to the dark days is not expected anytime soon. Instead, it is anticipated the stocks will fluctuate in a trading range with a slow grind upward as the economic recovery moves onto firmer ground.
Market Drivers Unlike the previous two REIT down cycles, which were characterized by oversupply and collapsing demand, this most recent drop was triggered by a freeze of the credit markets that, in turn, caused a falloff in demand. The overbuilding that has characterized previous cycles was remarkably well contained this time around. Accordingly, as credit markets began to move back toward a more normal state, REITs reacted quite favorably — even while demand fundamentals remained soft.
Property sector returns for the index were strong across the board:
Demand has stabilized in most property types, although it is certainly not strong in any sector. Probably the most surprising sector has been multifamily, where job creation has always been a primary driver of rental demand. Apartment REITs began to report strong traffic and leasing this spring, notwithstanding the anemic job market. The duration of this recovery, however, is dependent on the return of a more favorable employment picture. The remainder of the property sectors can only be characterized as stabilizing, not recovering, at this point. 14
Apartments
75.4%
Lodging
68.7%
Malls
64.7%
Health Care
61.7%
Office
59.9%
Warehouse
42.3%
Storage
41.5%
Local Retail
35.0%
Sector Weightings as of June 30, 2010
Composition as of June 30, 2010
Industrial/Office
24.81% 24.49%
Retail
24.34% 24.56%
Simon Property Group Inc. (SPG)
17.53% 17.49%
Residential
12.96% 12.99%
Health Care
7.19% 6.98%
Hotels Self-Storage
6.63% 6.46%
Diversified
6.54% 7.03% 0%
5%
10%
% of Total Investment Choice
Top 10 Holdings
10.57%
Vornado Realty Trust (VNO)
5.56%
Public Storage (PSA)
5.27%
Equity Residential (EQR)
5.05%
Boston Properties Inc. (BXP)
4.43%
HCP Inc. (HCP)
4.17%
Host Hotels & Resorts Inc. (HST)
3.87%
AvalonBay Communities Inc. (AVB) 3.34%
15%
20%
25%
30%
STRS REIT Choice
Ventas Inc. (VTR)
3.11%
Digital Realty Trust Inc. (DLR)
2.50%
Top 10 holdings represent 47.87% of the total investment choice.
Wilshire REIT Index
STRS REIT Choice
Historical Performance as of June 30, 2010 60%
55.31% 55.46%
50% 40% 30% 20% 9.27%
10% 0%
–10.25% –10.33%
–0.10% –0.35%
3 Years
5 Years
9.66%
–10% –20%
1 Year 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
Performance
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 gained 6.59%, after fees, for the fiscal year ending June 30, 2010. 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. Returns for the 12 months were generally strong across the developed markets with a few notable exceptions. The strongest were Sweden (+30.8%), Singapore (+29.4%) and Denmark (+19.4%). The three biggest losses were seen in Greece (-46.7%), Spain (-12.6%) and Austria (-10.0%). Currency was a factor in returns for fiscal 2010, as the euro fell nearly 13% versus the dollar and the Japanese yen rose 9%. Europe was slightly weaker than the Far East, but both had positive returns, as did North America (Canada). The top-performing sector for fiscal 2010 was the consumer staples sector for the second consecutive year, rising 19%. This was followed by the materials and industrials sectors, up 16% and 15%, respectively. The worst performer was the energy sector, which dropped 4%, primarily in reaction to the oil spill in the Gulf of Mexico.
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.
MSCI World ex USA Index Values
Value
For Fiscal Year 2010
5,000
4,500
4,000
3,500
3,000
2,500
16
10 20
10
ne Ju
ay M
A
pr il
20
20
10
10 20 ch ar
M
ar ru Fe b
nu
ar
y
y
20
20
10
10
9 00 Ja
be em
D
ec
m ov e
r2
00 r2 be
ob e ct O
em
9
9 00 r2
20 be r
t2 pt
A
ug
us Se
N
9 00
09 20 ly Ju
09
2,000
Market Drivers
Country Weightings as of June 30, 2010
The developed markets rebounded sharply from the market low of early March 2009 before a portion of those gains gave way to a strengthening U.S. dollar in the last several months. The financial turmoil resulting from the meltdown of U.S. subprime housing loans transitioned into further uncertainty when sovereign debts were seriously questioned in spring 2010. The sovereign debt problems and concerns about their impact on global economic growth brought volatility back into the markets. These extreme market moves, if they continue in the future, may lead to further risk aversion among investors. In addition, future growth rates will likely be lower since many solutions to the current crises involve measures that funnel resources toward debt repayment and away from future growth opportunities. However, the international markets may already be reflecting these negative factors, as valuations remain low on a normalized basis, which could lead to better returns in the future.
Country
STRS MSCI World ex USA Index Return
10% 6.59% 5% –12.97%
0%
1.07%
0.30%
–5% –10% –15%
1 Year
3 Years
5 Years
Japan
20.89%
United Kingdom
18.87%
Canada
10.24%
France
8.78%
Australia
7.27%
Switzerland
7.22%
Germany
7.02%
Spain
3.12%
Sweden
2.63%
Italy
2.55%
Netherlands
2.38%
Hong Kong
2.29%
Singapore
1.52%
Finland
0.93%
Denmark
0.90%
Belgium
0.85%
Israel
0.78%
Norway
0.65%
Austria
0.26%
Ireland
0.26%
Greece
0.25%
Portugal
0.25%
New Zealand
0.09%
Total MSCI World ex USA Index
Historical Performance as of June 30, 2010
10 Years
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 All contributions are placed into the Total Guaranteed Return Choice for the given fiscal year.
Structure 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, 2009– June 30, 2010: 4.0% This rate is reviewed and reset on an annual basis.
For example, contributions made between July 1, 2009, and June 30, 2010, are locked in at a 4.0% annual interest rate until June 30, 2014. 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 five-year 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.
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.
Contributions
Asset Management Fee Example
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.
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 year-end account balance in that option.
Allocation Option Composition
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.
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.
1 Year 3 Years 5 Years 10 Years
STRS Money Market
$2
$6
$10
$24
STRS Barclays Capital U.S. Universal Bond Index Return
$2
$7
$12
$26
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
Value of Assets/Account Value 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.
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 Web site 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 access to account balance, current contribution allocation, allocation option information and education materials. Members will also be able to change future
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 members with account balances of less than $5,000 19
Defined Contribution Investments — Disclosures (continued)
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 Web site 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 Web site services being unavailable. Members must accept the NRS Electronic Service Agreement in order to use the site.
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 late-day trading and improper market-timing trading. t *G TJY PS NPSF USBEF FWFOUT PDDVS JO POF DBMFOEBS 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
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.
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 toll-free voice response line can be reached by calling 1-866-332-3342.
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.
Disbursements
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.
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 20
Defined Contribution Investments — Glossary of Terms
Glossary of Terms
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. Municipal debt, private placements and non-dollar issues are excluded from the index.
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.
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.
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
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. 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.
book/price ratio
The current book value of a stock divided by its current market price.
book value
Inability to Conduct Business
The net worth or liquidating value of a business. This is calculated by subtracting all liabilities, including debt and preferred stocks, from total assets.
NRS is available to execute transactions 24 hours a day, seven days a week through its voice response system and Internet Web site 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.
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.
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.
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Defined Contribution Investments — Glossary of Terms (continued)
diversification
Information Technology
dividend yield
Materials
Dow Jones Wilshire Real Estate Investment Trust (REIT) Index
Telecommunications Services
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.
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.
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 highbandwidth 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
float
Includes industries likely to be most sensitive to economic cycles, including automotive, apparel, household durable goods, hotels, restaurants and consumer retailing.
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
interest rate
Contains companies involved in producing, marketing or refining gas and oil products.
The rate of interest charged for the use of money, usually expressed as an annual rate.
Financials
liquidity
Includes companies engaged in finance, banking, investment banking and brokerage, insurance, corporate lending and real estate.
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
market value-mean
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.
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
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.
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).
price/book ratio
volatility
net asset value (NAV)
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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60-607, 11/10/19M