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Defined Contribution

Investments Annual Report for Fiscal Year Ended June 30, 2012


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December 2012 The State Teachers Retirement Board and the associates of STRS Ohio are pleased to present our Defined Contribution Investments Annual Report for fiscal year 2012. This report includes investment information and results from July 1, 2011–June 30, 2012, for STRS Ohio’s defined contribution account allocation choices. Fiscal year 2012 investment returns varied widely among the different asset classes. The STRS REIT Choice led all performers with a 13.09% return for the year. The STRS Barclays U.S Universal Bond Index Return was another solid performer with a return of 7.16%. Fiscal 2012 was a difficult year in the international markets, with the STRS MSCI World ex USA Index Return posting a loss of 14.47%. You can read about the specific allocation 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 more than $560 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 (3.75% for contributions made in fiscal year 2013) 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.

Mark Hill Chair, State Teachers Retirement Board, 2012–2013

Michael J. Nehf Executive Director


Table of Contents Introduction............................................................................................................... 1 Economic and Financial Markets Overview .................................................... 2 Performance STRS Money Market ............................................................................................. 6 STRS Barclays 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, 2012 Annualized Rates of Return VARIABLE ALLOCATION CHOICES Since InceptionG

Cash

1 Year

3 Years

5 Years

10 Years

STRS Money MarketA

0.10%

0.07%

1.02%

1.84%

Index: 90-day U.S. Treasury bill

0.05%

0.11%

0.75%

1.74%

Bonds

1 Year

3 Years

5 Years

10 Years

STRS Barclays U.S. Universal Bond Index ReturnB

7.16%

7.33%

6.34%

5.62%

Large-Cap

1 Year

3 Years

5 Years

10 Years

STRS Large-Cap Core Choice

-2.26%

13.39%

-1.28%

N/A

4.58%

Index: Russell 1000 IndexF

4.37%

16.64%

0.39%

5.03%

5.56%

STRS Russell 1000 Index ReturnC

4.19%

16.43%

0.21%

5.55%

Small-Cap

1 Year

3 Years

5 Years

10 Years

-2.27%

17.56%

0.34%

6.81%

1 Year

3 Years

5 Years

10 Years

13.09%

33.47%

2.05%

10.53%

13.21%

33.62%

2.05%

10.32%

1 Year

3 Years

5 Years

10 Years

-14.47%

5.78%

-6.05%

5.19%

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

Inception Date

1/1/1970

12/1/1998

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 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)

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 2015

E

4.50%

(For contributions made between July 1, 2010–June 30, 2011 — closed to new investments)

STRS Total Guaranteed Return Choice 2016E

4.25%

(For contributions made between July 1, 2011–June 30, 2012 — closed to new investments)

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 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

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. G

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Economic and Financial Markets Overview July 1, 2011–June 30, 2012 Following three quarters of subpar real economic growth averaging only an annualized 1.3%, the U.S. economy rebounded to a 4.1% annualized growth rate in the second quarter of the fiscal year before easing back to a modest 1.6% growth rate in the second half of fiscal 2012. That left fiscal year growth at just 2.1% — lower than the economy’s longer-term potential growth of roughly 2.5% and similar to fiscal 2011’s disappointing 1.9% growth rate. Economic activity has remained in a relatively narrow band of 1.5% to 2.5% for more than two years and should continue in that range in fiscal 2013.

spending reductions that the United States is quickly approaching. Without changes, the two sets of tax bracket cuts during the Bush administration that covered nearly all taxpayers, the alternative minimum tax adjustment that prevents more taxpayers from paying the AMT, the 2% payroll tax cut on wages, and other tax incentives and reductions would end after Dec. 31. In addition, emergency unemployment benefits and the adjustments to Medicare doctor reimbursement rates that keep doctors seeing Medicare patients would stop while the acrossthe-board spending reductions in domestic and, particularly, defense spending agreed to in last year’s Budget Control Act would go into effect.

There remain many potential shocks that could disrupt even a modest-to-moderately growing economy — much like what the United States and global economies experienced a year-and-a-half ago when the Greek debt crisis exploded, Japan lost significant production from an earthquake and tsunami, the Arab Spring led to soaring oil and gasoline prices, and poor winter and spring weather in the United States played havoc on industrial and agricultural production. One foreseeable hurdle in fiscal 2013 is the “fiscal cliff” of tax hikes and federal

If Congress and the president do nothing between now and the end of calendar year 2012 to alleviate the economic impact from current fiscal policy plans, the U.S. economy could easily fall into another recession. Some estimates project that the abrupt tax increases and spending reductions would equal roughly 3.5% of the nation’s gross domestic product (GDP) in calendar year 2013.

Gross Domestic Product/Consumer Price Index 1990–2012 Year-Over-Year Growth Rates 8% 6% 4% 2% 0% -2% -4% -6%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Gross Domestic Product Note: Shaded areas denote a recession.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Consumer Price Index

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics/Haver Analytics

Despite a strong second quarter, the GDP grew by only 2.1% in fiscal 2012. The CPI shows that consumer prices remained in check — drifiting slightly lower during the year.

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Barclays calculates that the tax and spending changes would deduct 2.8 percentage points from the first calendar quarter real GDP growth which, in the latest Blue Chip Economic Indicators, is currently projected to be about 1.7% — producing the first negative growth rate quarter since the Great Recession. Morgan Stanley estimates fiscal tightening in calendar 2013 would actually amount to about 5% of GDP rather than the commonly cited 3.5%. The United States has never faced a similar 5% of GDP fiscal change in such a short period of time. The closest example would be fiscal tightening in federal fiscal year 1969 when the Congressional Budget Office estimates the changes amounted to 3.1% of potential GDP or about 3.75% of GDP in calendar 1969. Most economists agree that the fiscal tightening was the primary factor triggering a recession from what had been real GDP growth at about 5% and an unemployment rate below 4% throughout most of 1968 and into early 1969. In the current situation, the Congress and president likely will find a way to prevent such a severe and immediate fiscal tightening by extending some of the fiscal programs. Nonetheless, fewer policy changes and smaller fiscal policy tightening will still slow next calendar year’s economic growth from what it would be without the changes. In the STRS Ohio economic forecast, we expect a similar growth pattern to that forecasted in the Blue Chip for the first calendar quarter. In the United States, the fiscal cliff arose out of concern for the country’s longer-term fiscal deficit and debt imbalances. While it is likely that most of the fiscal restraint will not occur in calendar 2013, continuing the large deficits and debts have costs attached to them that will reverberate through the U.S. economy for years to come. A recent study at the National Bureau of Economic Research from the authors of 2009’s “This Time is Different: Eight Centuries of Financial Folly” — the highly praised and rigorous analysis of financial crises over eight centuries — suggests real economic activity is slashed by an average 1.2 percentage points and remains that way for an average of 23 years when a country enters an extended public debt overhang period. Carmen and Vincent Reinhart and Ken Rogoff define a debt overhang, or a prolonged period of exceptionally high public debt, as one where the gross public debt to gross domestic product ratio exceeds 90% for five or more years. In the United

States, the seven years from 1944–1950 did have such a debt overhang from financing World War II. Real economic growth plunged at the same time in response to both the heavy indebtedness and end to the war that led to significant spending cuts for the federal government. The future trend for the United States, as entitlement spending on Medicare and Social Security for Baby Boomers likely will require ever greater debt financing, is more troubling than the debt position from financing such a major war. The country is already in its fourth year of gross public debt to GDP ratios above 90% and, as the Office of Management and Budget 10-year forecast (which has overly optimistic economic assumptions built into it) shows, it will remain above that level for at least the coming decade. While the researchers are concerned about countries not only facing public debt problems but also “quadruple debt overhang problems” from the public sector, the private sector, external sector and pensions, they do not recommend that developed countries go through a period of “rapid public debt deleveraging in an environment of extremely weak growth and high unemployment.” Nonetheless, the debt problems will continue to mount for countries with weak economies, requiring significant revenue and expenditure changes in better times that will weigh on future economic growth. It likely will lead to an even tougher economic background for the next few decades in addition to the significant demographic changes of Baby Boomers reaching their retirement years that should lower long-term potential economic growth to around 2.5% from the 3% to 3.5% growth experienced in recent decades in the United States. Since the end of the Great Recession in mid-2009, real economic growth in the United States has advanced at a disappointing 2.2% annualized rate. That growth rate is quite a bit slower than what would normally be expected following a severe recession where real gross domestic product fell an annualized 3.2% over a year-and-a-half or 4.7% non-annualized peak-to-trough. Because the Great Recession was triggered by a financial crisis instead of by more traditional factors (like higher inflation leading to restrictive monetary policy or an overbuilding of inventories leading to a significant cutback in production), the damage done has and will continue to be felt through aftershocks for many quarters to come.

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Economic and Financial Markets Overview (continued) July 1, 2011–June 30, 2012

Defined Contribution Asset Value by Allocation Choice As of June 30, 2012

STRS Total Guaranteed Return Choice 2016 $9,948,207

STRS Money Market $83,027,652

1.75% STRS Total Guaranteed Return Choice 2015 1.54% $8,754,404

STRS Total Guaranteed Return Choice 2014 $9,013,463

STRS Total Guaranteed Return Choice 2012 $6,445,996

12.53%

14.62%

Total assets $567,804,816

1.59% STRS Total Guaranteed Return Choice 2013 $12,203,901

2.15%

STRS Barclays U.S. Universal Bond Index Return $71,168,609

14.62%

STRS Large Cap Core Choice $83,010,808

14.83%

STRS Russell 1000 Index Return $84,205,641

16.04%

STRS Russell 2000 Index Return $91,088,485

9.35%

STRS REIT Choice $53,080,518

1.14% STRS MSCI World ex USA Index Return $55,857,125

9.84%

The chart above displays STRS Ohio’s defined contribution holdings and percentage of total assets for the fiscal year ending June 30, 2012. More information on these options can be found in the Performance Section beginning on Page 6.

However, an alternative measure of real economic growth — real gross domestic income (GDI) — is signaling a more trend-like economic environment since the recession’s end. Annualized real GDI growth has grown 2.4% — still short of the recovery normally seen after severe recessions, but more accurately matching the growth trend expected when the unemployment rate dropped from its 10% peak in October 2009 to 7.8% in September. Much of the difference in the two measures of economic activity can be attributed to the robust growth in corporate profits. Nominal after-tax corporate profits with inventory valuation and capital consumption adjustments peaked in the third quarter of 2006 and then troughed in the fourth quarter of 2008. Since that trough, that measure of corporate profits has grown 98% or an annualized 21.5% — the second strongest 14-quarter growth rate in U.S. profits in the postWorld War II period. Adjusted for inflation, corporate profits have grown 88%, or an annualized 19.8% — the strongest 14-quarter growth rate in real profits during the postwar period. Because GDI includes corporate profits and other types of income

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while gross domestic product attempts to measure output of goods and services, the real GDI measure of economic activity sometimes leads the real GDP calculation — particularly during periods of extreme income losses or gains like those experienced before and after the Great Recession. It suggests that a disappointing recovery from the Great Recession could move into a better growth phase in coming years.

Interest rates keep money market returns low Money market returns remained at historically low levels during the fiscal year. The Federal Reserve kept the short-term target rate of 0% to 0.25% throughout the fiscal year. The effective rate was closer to 0% as evidenced by the benchmark return of 0.05% for the 90-day U.S. Treasury bill. Government issued bills and notes were the core component of most money market funds while there was a slight increase in corporations issuing commercial paper.


Credit conditions, interest rates buoy bond markets Fiscal 2012 was a good year for fixed-income market returns as interest rates declined and credit conditions, while volatile, generally improved. 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 entire fiscal year. The 10-year U.S. Treasury bond yield fell from 3.16% at the beginning of the fiscal year to 1.66% at fiscal year-end. Over the course of the entire fiscal year, the sectors of the bond market with the highest returns were U.S. Treasury securities and the credit-sensitive sectors. The net result was a fixed income return of 7.16% in fiscal year 2012.

Strong fundamentals spur REIT growth Fiscal 2012 was another solid year for REIT returns, and STRS Ohio’s REIT portfolio generated a total return above 13%. As expected, this was down from the phenomenal returns of the previous two years — but still a healthy level. The recovery in property fundamentals, coupled with robust capital markets, provided the environment enabling these returns. There was considerable variation across property sectors with the Self-storage and Malls sectors leading the way with total returns greater than 30%. The hotels and office sectors were the laggards with -0.10% and -0.53% returns respectively. After trading sideways for the first several months of the fiscal year, the stocks began a multi-month rally in December 2011 that continued right through the end of the fiscal year.

Domestic equities’ strong run moderates in fiscal year 2012 Fiscal year 2012 saw the U.S. equity market rise for the third consecutive year as the economy and the financial markets continued to rebound from the 2008–2009 financial crisis. Despite a continuation of strong corporate profits, the earnings growth rate declined in 2012. The decelerating profit growth and muted equity market gains reflected only moderate U.S. economic growth. Corporate earnings growth continued to result from better margins rather than strong top-line growth as companies continued to focus on corporate cost controls.

For fiscal year 2013, we expect a gradually improving economy to lead to positive, albeit somewhat anemic, stock returns. There is high degree of uncertainty in our projection because of variable global economic and financial conditions. 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.

International markets post negative return in 2012 Developed markets have wavered over the last 11 years but have essentially moved sideways. Dividend income provided the main source of upside, given that the overall equity price component is essentially unchanged. An additional source of investor confusion concerns increasing correlation between asset classes. The “risk on/risk off” trading frenzy has shredded the concept of diversification as returns associated with equities, commodities and higher yielding fixed income instruments moved in a similar pattern. Higher return correlation between asset classes is likely a function of uncertainty directly related to systemic macro risks. None of the larger macro risks — various sovereign debt crises or inflation/deflation debate — have been resolved. This state of affairs is likely to continue in the next couple of years. Returns for the 12 months were generally weak among the developed markets. The best performers were Ireland (+1.9%), New Zealand (+1.7%) and Belgium (-0.5%). The three weakest markets were seen in Greece (-68.1%), Austria (-41.2%) and Portugal (-40.6%). The bulk of the decline came in the first half of the fiscal year while the second half remained in a trading range with little progress seen. The largest variable on a regional basis was the weakness of the Euro. Its weakness was the primary factor in pulling European regional returns down below the level of the other regions in the developed markets. Additionally, roughly 25% of the decline for the fiscal year is attributable to the strength of the U.S. dollar. Concerns over the sovereign debt issues in Greece, Spain, and Italy have boosted the dollar as a safe haven, which negatively impacted the returns of dollar-based investors such as STRS Ohio.

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Defined Contribution Investments — Performance STRS Money Market .........................................................................................................Cash

Structure 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. 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.

Performance The STRS Money Market returned 0.10%, after fees, for the year, compared to the benchmark 90-day U.S. Treasury bill that returned 0.05%. The choice invested mainly in U.S. government-backed Treasury bills and Agency Notes, but supplemented yields with investments in Floating Rate Corporate Bonds with maturities within 12 months. Holding investments with maturities longer than the 90-day benchmark also contributed to the higher yields.

Market Drivers STRS Money Market performance was 0.10%, after fees, for the year. Yields follow the current short-term interest rates, which remained at the targeted rate of 0% to 0.25% throughout the fiscal year. The real market rate was closer to 0% than 0.25%. U.S. Government and Agency Notes made up the bulk of the investable universe with commercial paper and Floating Rate Corporate Bonds to a lesser extent. The table below shows the STRS Money Market investment allocation:

Sector Weightings as of June 30, 2012 Sector

Weight

U.S. Government and Agency Notes .. 87.2% Commercial Paper ........................................9.2% Floating Rate Corporate Bonds ...............3.4% Money Market ...............................................0.2% Total STRS Money Market

100%

STRS Money Market Historical Performance as of June 30, 2012

1.84% 1.74%

2% 1.5%

1.02%

1% .5% 0%

0.10% 0.05%

0.75%

0.07% 0.11%

1 Year STRS Money Market

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


STRS Barclays U.S. Universal Bond Index Return ......................................................Bonds

Structure The STRS Barclays U.S. Universal Bond Index Return is a choice intended to closely match the return of the Barclays 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 government-related entities, mortgage securities that include agency mortgage-backed, commercial mortgage-backed and asset-backed securities and investment grade corporate bonds. A small portion of the index is highIndex Statistics as of yield debt with ratings below the BBB category. Also included is debt from June 30, 2012 emerging market countries and other foreign issuers. The STRS Barclays U.S. Universal Bond Index Return choice provides members an opportunity Number of Issues ........... 12,078 to earn the return of a diversified portfolio of fixed-income securities. To Average Yield ................... 2.44% the right are summary statistics for the Barclays U.S. Universal Bond Index Average Maturity .....7.06 Years Return: Market Value .....$19.18 Trillion

Performance

For the fiscal year ending June 30, 2012, the STRS Barclays U.S. Universal Bond Index Return choice returned a positive 7.16%, after fees. This section details the performance of the Barclays U.S. Universal Bond Index. Fiscal 2012 was a good year for fixed-income market returns as interest rates moved lower and credit conditions, while volatile, were generally improved. Investors seeking protection from European and economic uncertainty turned to U.S. Treasury securities helping them to outperform most sectors of the index (+9.04%). The creditsensitive sectors of the fixed income market performed relatively well for a third consecutive year, led by investment grade corporate bonds (+9.71%) then emerging market debt (+7.61%) and high yield (+7.27%). The less credit sensitive sectors namely government-related (+6.51) and mortgage securities (+5.07%) also had solid sector returns.

Market Drivers Price appreciation of fixed-income securities, combined with income from interest payments, led to the positive returns for the Barclays U.S. Universal Bond Index. The federal funds rate has remained at 0.0% for 42 months, effectually anchoring short-term interest rates. In response to continued high unemployment and below potential economic growth, the Federal Reserve continued its highly accommodative monetary policy with its maturity extension program (sometimes referred to as “Operation Twist”). Under the maturity extension program, the Federal Reserve sells or redeems shorter-term U.S. Treasury securities and uses the proceeds to buy longer-term U.S. Treasury securities. This has extended the average maturity of the securities in the Federal Reserve’s portfolio and contributed to a large decline in longer-term yields. Consequently, the primary contributor to the strong fiscal year returns was a substantial flattening of the yield curve as 30-year U.S. Treasury yields declined by almost 150 basis points more than 2-year yields. The importance of this factor during fiscal year 2012 is evident when observing returns for the progressive maturity distribution of the index; 1–3 years (+1.26%), 3–5 years (+4.26%), 5–7 years (+6.17%), 7–10 years (+10.61%, and 10+ years (+24.11%).

Sector Weightings as of June 30, 2012 Sector

Weight

U.S. Government............................................31% Mortgage- and Asset-Backed ...................28% Investment Grade Corporates ..................25% Government-Related ..................................... 9% High Yield ........................................................... 5% Emerging Market ............................................. 2% Total Barclays U.S. Universal Bond Index

100%

STRS Barclays U.S. Universal Bond Index Return Historical Performance as of June 30, 2012 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 indexes.

8%

7.16%

7.33%

6%

6.34%

5.62%

4% 2% 0%

1 Year

3 Years

5 Years

10 Years

STRS Barclays U.S. Universal Bond Index Return

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Defined Contribution Investments — Performance (continued) STRS Large-Cap Core Choice .................................................................................Large-Cap

Structure 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.

Performance The STRS Large-Cap Core Choice fell 2.26%, after fees, in the fiscal year ending June 30, 2012. The fund trailed the Russell 1000 benchmark, which rose 4.37% over the same period. The portfolio underperformance was attributed primarily to suboptimal stock selection. Stock selection in the more market-sensitive sectors such as information technology, financials, and consumer discretionary hurt performance, especially in the April–May 2012 timeframe, which saw the market correct sharply. Additionally, allocation to the less cyclical consumer staples, telecom services, and utilities sectors was also a drag on performance.

STRS Large-Cap Core Choice Historical Performance as of June 30, 2012 20%

16.64% 13.39%

15% 10%

5.03%

4.37%

5%

0.39%

0% -5% -10%

-1.28%

-2.26% 1 Year

n/a%

3 Years STRS Large-Cap Core Choice

5 Years

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 4.58%.

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Market Drivers The Russell 1000 Index gained 4.37% in fiscal year 2012. This marked the third consecutive year of gains for the U.S. equity market; however, it was muted relative to the outsized gains seen in both fiscal years 2010 and 2011, which saw market gains of 15.24% and 31.94% respectively. Despite a continuation of strong corporate profits, the earnings growth rate declined in 2012. The decelerating profit growth and muted equity market gains reflected only moderate U.S. economic growth. Employment growth was sluggish and the housing market remained weak. Internationally, several emerging economies experienced slower growth, combined with the widespread sovereign budgetary deficits in Europe, began to hinder global economic growth. For fiscal year 2013, 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 could act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation.

Sector Weightings as of June 30, 2012 22.41% 19.11%

Information Technology

13.68% 10.76% 12.72% 15.44%

Industrials Financials Health Care

11.17% 11.84%

Consumer Discretionary

10.65% 11.88%

Energy

10.31% 10.15%

Consumer Staples

9.84% 10.18%

Telecommunications Services

Microsoft Corp. (MSFT) .......................................... 3.35% Chevron Corp. (CVX) ............................................... 2.32% General Electric Co. (GE)........................................ 2.14% Philip Morris International (PM) ......................... 2.11% Visa Inc (V).................................................................. 2.11% Pfizer Inc. (PFE) ......................................................... 1.74% Altria Group Inc. (MO) ............................................ 1.66% Cisco Systems (CSCO)............................................. 1.63% Top 10 holdings represent 27.45% of the total investment choice.

1.98% 3.00% 0%

5%

% of Total Investment Choice

Exxon Mobil Corp. (XOM)...................................... 4.15%

3.36% 3.76%

Utilities

Top 10 Holdings

Apple Inc. (AAPL) ..................................................... 6.24%

3.87% 3.87%

Materials

Composition as of June 30, 2012

10%

15%

20%

25%

STRS Large-Cap Core Choice Russell 1000 Index

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Defined Contribution Investments — Performance (continued) STRS Russell 1000 Index Return ...........................................................................Large-Cap

Structure Index Statistics as of June 30, 2012

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....... $13.89 Trillion

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.

Mean Market Value ...... $15.18 Billion Weighted Average Market Value ....................$97.9 Billion Largest Company Market Value ................$546.08 Billion

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.

Smallest Company Market Value .....................$1.28 Billion Median Share Price ....................$37.96

Ibbotson Associates recommends holding a large-cap 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.

P/E Ratio..............................................15.1 Dividend Yield ..............................2.12%

Performance The STRS Russell 1000 Index Return gained 4.19% after fees, for the fiscal year ending June 30, 2012. While this marked the third consecutive year of positive returns, it was muted relative to the outsized gains seen in both fiscal years 2010 and 2011, which saw the Russell 1000 Index gain 15.24% and 31.94% respectively.

Russell 1000 Index Values For Fiscal Year 2012 4,000

3,750

3,500

3,250

3,000

7,550

2,500

July 2011

Aug. 2011

Sept. 2011

Oct. 2011

Nov. 2011

Dec. 2011

Jan. 2012

Feb. 2012

March 2012

April 2012

May 2012

June 2012

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 The U.S. equity market gained for the third consecutive year in 2012 as the economy and financial markets continued to recover from the unprecedented declines caused by the 2008–2009 financial crisis. The U.S. equity market, as measured by the Russell 1000 Index, rose 4.37%, below the longterm market average and well-below the gains seen in 2010 and 2011.

Top 10 Holdings as of June 30, 2012 % of Total Investment Choice

Top 10 Holdings

Apple Inc. (AAPL) ..................................................... 3.93% Exxon Mobil Corp. (XOM)...................................... 2.88% Microsoft Corp. (MSFT) .......................................... 1.66%

Despite a continuation of strong corporate profits, the earnings growth rate declined in 2012. The decelerating profit growth and muted equity market gains reflected only moderate U.S. economic growth. Employment growth was sluggish and the housing market remained weak. Internationally, several emerging economies experienced slower growth, combined with the widespread sovereign budgetary deficits in Europe, began to hinder global economic growth.

General Electric Co. (GE)........................................ 1.59%

For fiscal year 2013, 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 could act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation.

Top 10 holdings represent 18.40% of the total investment choice.

International Business Machines Corp. (IBM) ............................................. 1.54% AT&T Inc. (T)............................................................... 1.51% Chevron Corp. (CVX) ............................................... 1.50% Johnson & Johnson (JNJ)...................................... 1.34% Pfizer Inc. (PFE) ......................................................... 1.24% Procter & Gamble (PG) ........................................... 1.21%

STRS Russell 1000 Index Return Historical Performance as of June 30, 2012 20%

16.43%

18% 16%

Sector Weightings as of June 30, 2012

14% 12% 10%

Sector

Weight

8%

Information Technology .......................19.11%

6%

Financials ....................................................15.44% Consumer Discretionary .......................11.88% Health Care ................................................11.84% Industrials...................................................10.76% Consumer Staples ...................................10.18% Energy..........................................................10.15%

4%

5.55%

4.19% 0.21%

2% 0%

1 Year

3 Years

5 Years

10 Years

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.

Materials ....................................................... 3.87% Utilities .......................................................... 3.76% Telecommunications Services .............. 3.00% Total Russell 1000 Index

100%

11


Defined Contribution Investments — Performance (continued) STRS Russell 2000 Index Return ............................................................................Small-Cap

Structure The STRS Russell 2000 Index Return is an allocation choice designed to replicate the holdings and return of the Russell 2000 Index. 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. 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. Ibbotson Associates recommends holding a small-cap 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 smallcap holdings in an investor’s portfolio should be based on risk tolerance and investment goals.

Index Statistics as of June 30, 2012 Total Market Value..........$1.15 Trillion Mean Market Value ........ $690 Million Weighted Average Market Value ....................$1.20 Billion Largest Company Market Value .....................$3.77 Billion Smallest Company Market Value .......................$53 Million Median Share Price ....................$14.85 P/E Ratio..............................................16.8 Dividend Yield ..............................1.42%

Performance The STRS Russell 2000 Index Return fell in fiscal year 2012, down 2.27%, after fees. The negative return followed two years of extremely strong gains, up 21.25% in fiscal 2010 and up 37.13% in fiscal 2011.

Russell 2000 Index Values For Fiscal Year 2012 4,000

3,750

3,500

3,250

3,000

7,550

2,500

July 2011

Aug. 2011

Sept. 2011

Oct. 2011

Nov. 2011

Dec. 2011

Jan. 2012

Feb. 2012

March 2012

April 2012

May 2012

June 2012

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, 2012

Slowing corporate earnings growth and an uncertain economic backdrop made investors less eager to hold small-cap stocks in 2012. Domestically, employment growth was sluggish and the housing market remained weak. Internationally, several emerging economies saw slower growth which became a headwind for global demand. Additionally, the widespread sovereign budgetary deficits in Europe also began to hinder global economic growth. As a result, the Russell 2000 Index fell 2.1% for the fiscal year, trailing the 4.37% gain of the Russell 1000 Index. For fiscal year 2013, STRS Ohio’s 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 could act as a drag to the U.S. economy for an extended period, potentially hampering economic growth and market appreciation.

% of Total Investment Choice

Top 10 Holdings

Pharmacyclics Inc. (PCYC)........................................... 0.26% Cepheid (CPHD) ............................................................. 0.26% HMS Holdings Corp. (HMSY) ..................................... 0.25% Questcor Pharmaceuticals Inc. (QCOR) ..................................... 0.25% VIVUS Inc. (VVUS) .......................................................... 0.25% athenahealth Inc. (ATHN)............................................ 0.25% Woodward Inc. (WWD) ................................................ 0.24% United Natural Foods Inc. (UNFI) ............................. 0.23% Dril-Quip Inc. (DRQ) ...................................................... 0.23% Hexcel Corp. (HXL)......................................................... 0.22% Top 10 holdings represent 2.44% of the total index.

STRS Russell 2000 Index Return Sector Weightings as of June 30, 2012

Historical Performance as of June 30, 2012 20%

Sector

Weight

16%

Financials ....................................................21.29%

14%

Information Technology .......................17.48%

12%

Industrials...................................................15.13%

10%

Consumer Discretionary .......................13.83% Health Care ................................................13.46%

6% 2%

Materials ....................................................... 4.66%

Telecommunications Services .............. 0.88% Total Russell 2000 Index

100%

0.34%

4% 0%

Utilities .......................................................... 3.58%

6.81%

8%

Energy............................................................ 5.98% Consumer Staples ..................................... 3.70%

17.56%

18%

-2% -4% -2%

-2.27% 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.

13


Defined Contribution Investments — Performance (continued) STRS REIT Choice ................................................................................................... Real Estate

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 enjoyed another solid year of performance. While less robust than the previous two years, after-fee returns were still 13.09%, just trailing the Wilshire REIT Index of 13.21%. The index showed steady improvement throughout the fiscal year.

Market Drivers At the property level, most sectors continued to see slowly improving fundamentals. While demand has been modest, new supply has been even lower. Only in apartments have rents, occupancies, and values recovered to their pre-recession highs. In all other sectors, these metrics are lower than they were in 2007, well below in some cases. This provides some comfort about the sustainability of the recovery going forward. Even more than the property level fundamentals, REITs have been able to take advantage of very strong capital markets to further their strategic goals. The wide-open debt markets have provided the opportunity to refinance debt at historically low rates and investors’ appetite for higher yielding stocks has meant a robust market for equity issuance. This capital availability has allowed REITs to continue to strengthen their balance sheets while simultaneously making accretive acquisitions and developments. As in the past two years, we continue to see lower returns going forward as the recovery matures. However, with the Federal Reserve indicating low interest rates for an indefinite period, and property fundamentals continuing to slowly improve, REIT return performance should be very solid at least another year.

Sector Weightings as of June 30, 2012 26.3% 26.0%

Retail

22.4% 23.0%

Industrial/Office

18.7% 18.3%

Residential

14.1% 14.1%

Health Care

6.8% 6.5%

Hotels

6.5% 6.7%

Self-Storage

5.2% 5.3%

Diversified

0%

5%

10%

STRS REIT Choice Wilshire REIT Index

14

15%

20%

25%

30%


Composition as of June 30, 2012 Top 10 Holdings

% of Total Index

Simon Property Group Inc. (SPG) ...............11.13% Equity Residential (EQR) .................................. 4.81% Ventas Inc. (VTR) ................................................ 4.81% Public Storage (PSA) ......................................... 4.68% Boston Properties Inc. (BXP) .......................... 4.43% HCP Inc. (HCP) ..................................................... 4.39% Prologis Inc. (PLD) .............................................. 4.07% AvalonBay Communities Inc. (AVB) ............. 3.62% Vornado Realty Trust (VNO) ........................... 3.52% Health Care REIT Inc. (HCN) ............................ 3.37% Top 10 holdings represent 48.83% of the total investment choice.

STRS REIT Choice Historical Performance as of June 30, 2012

40%

33.47% 33.62%

35% 30% 25% 20% 15%

13.09% 13.21%

10.53% 10.32%

10%

2.05% 2.05%

5% 0% 1 Year STRS REIT Choice

3 Years

5 Years

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 This allocation 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 fell 14.47%, after fees, for the fiscal year ending June 30, 2012. 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 weak among the developed markets. The best performers were Ireland (+1.9%), New Zealand (+1.7%) and Belgium (-0.5%). The three weakest markets were seen in Greece (-68.1%), Austria (-41.2%) and Portugal (-40.6%). The bulk of the decline came in the first half of the fiscal year while the second half remained in a trading range with little progress seen. The largest variable on a regional basis was the weakness of the euro. Its weakness was the primary factor in pulling European regional returns down below the level of the other regions in the developed markets. Additionally, roughly 25% of the decline for the fiscal year is attributable to the strength of the U.S. dollar. Concerns over the sovereign debt issues in Greece, Spain and Italy have boosted the U.S. dollar as a safe haven which negatively impacted the returns of dollar-based investors such as STRS Ohio.

MSCI World ex USA Index Values For Fiscal Year 2012 4,500

4,250

4,000

3,750

3,500

3,250

3,000

16

July 2011

Aug. 2011

Sept. 2011

Oct. 2011

Nov. 2011

Dec. 2011

Jan. 2012

Feb. 2012

March 2012

April 2012

May 2012

June 2012


Market Drivers Developed markets have wavered over the last 11 years but have essentially moved sideways. Dividend income provided the main source of upside given that the overall equity price component is essentially unchanged. An additional source of investor perplexity concerns increasing correlation between asset classes. The “risk on/risk off� trading frenzy has shredded the concept of diversification as returns associated with equities, commodities and higher yielding fixed income instruments coalesced. Higher return correlation between asset classes is likely a function of uncertainty directly related to systemic macro risks. None of the larger macro risks: various sovereign debt crises or inflation/deflation debate have been resolved. This state of affairs is likely to continue in the next couple of years Despite developed markets valuation appearing relatively attractive, earnings growth may prove difficult as economic uncertainty remains rooted in developed markets. Globally, the most significant growth engine over the last few years, China, appears to be slowing. The United States’ growth prospect also appears to be stalling despite some promising data early on. Inflation will continue to be a concern especially in the emerging markets while deflation concerns plague the developed markets. Another major issue is the possible large swings which could take place if one of the major macro concerns moves the wrong way. Using current valuation parameters, a case can be made for relatively normal return expectations, however, given the possibility of a steep stock market decline (i.e., macro dislocation or mild recession), the potential return may fall below normal. There are many measures which act to reduce the rate of return: increased volatility, lower future growth prospects and near-term strength in the U.S. dollar are a few of the items which could hold down dollardenominated returns.

Country Weightings as of June 30, 2012 Country

% of Index

United Kingdom ................................20.73% Japan......................................................19.46% Canada ..................................................10.65% France ...................................................... 8.18% Australia .................................................. 7.80% Switzerland ............................................ 7.61% Germany ................................................. 7.14% Sweden ................................................... 2.79% Hong Kong............................................. 2.67% Spain ........................................................ 2.41% Netherlands ........................................... 2.13% Italy ........................................................... 1.94% Singapore ............................................... 1.67% Denmark ................................................. 1.02% Belgium ................................................... 1.00% Norway .................................................... 0.83% Finland..................................................... 0.64% Israel ......................................................... 0.52% Ireland...................................................... 0.27% Austria ..................................................... 0.24% Portugal .................................................. 0.14% New Zealand ......................................... 0.11% Greece ..................................................... 0.05% Total MSCI World ex USA Index

100.00%

STRS MSCI World ex USA Index Return Historical Performance as of June 30, 2012 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.

10%

5.78%

5.19%

5% 0% -5%

-6.05%

-10% -15%

-14.47%

-20%

1 Year

3 Years

5 Years

10 Years

STRS MSCI World ex USA Index Return

17


Defined Contribution Investments — Performance (continued) STRS Total Guaranteed Return Choice ................................................................. Balanced

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. 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.) For example, contributions made between July 1, 2011, and June 30, 2012, are locked in at a 4.25% annual interest rate until June 30, 2016. 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. All contributions are placed into the Total Guaranteed Return Choice for the given fiscal year. t Members who make this investment choice at the beginning of the fiscal year must place all contributions into this choice for the entire fiscal year. t Members who make this investment choice 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.

Annual Interest Rate for Allocations Made Between July 1, 2011–June 30, 2012: 4.25% This rate is reviewed and reset on an annual basis.

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. Asset Management Fee Example: Members who participate in the STRS Ohio Defined Contribution or Combined Plan are charged asset management fees, 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 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.

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 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: 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. Allocation Option Composition:

STRS Money Market*

$2

$6

$10

$24

STRS Barclays U.S. Universal Bond Index Return

$2

$7

$12

$26

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 Large-Cap Core Choice

$3

$10

$17

$40

Value of Assets/Account Value:

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

*Fee shown for STRS Money Market is the maximum cost for this allocation choice. Actual fee charged could be lower.

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. Maintenance Fee for Inactive Accounts Less Than $5,000: Members who have not contributed to the Defined Contribution Plan or the defined contribution

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

19


Defined Contribution Investments — Disclosures (continued) 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 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. 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 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. 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 recorded to verify accuracy.

20

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 *GTJYPSNPSFUSBEFFWFOUTPDDVSJOPOFDBMFOEBS quarter, NRS will notify the participant by U.S. mail that he or she has been identified as engaging in potentially harmful trading practices. t 'PMMPXJOHUIJTOPUJGJDBUJPO JGNPSFUIBO 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 *GUSBEFFWFOUTPDDVSJOBDBMFOEBSZFBS /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 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 fall, members in the Combined Plan will also receive an Annual Statement of Account from STRS Ohio that includes their projected retirement, 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.


Defined Contribution Investments — Glossary of Terms Disbursements:

Glossary of Terms

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 U.S. Universal Bond 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

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. 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. Inability to Conduct Business: NRS is available to execute transactions 24 hours a day, seven days a week through its voice response system and 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.

The Barclays 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. 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 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.

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.

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.

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 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.

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.

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.

Energy Contains companies involved in producing, marketing or refining gas and oil products.

Financials Includes companies engaged in finance, banking, investment banking and brokerage, insurance, corporate lending and real estate.

Health Care Includes manufacturers of health care equipment and supplies, providers of health care services and producers of pharmaceuticals.

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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Telecommunications Services 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.

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.

index return An investment choice designed to closely match performance and composition of a particular market benchmark, such as the Russell 1000 Index.

interest rate The rate of interest charged for the use of money, usually expressed as an annual rate.

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.

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.


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 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.

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

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

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.

net asset value (NAV)

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.

price/sales ratio

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.

The current market price of a stock divided by total sales.

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60-607, 12/12/20M


2012 Defined Contribution Investments Annual Report