Investment Update

Investment Update
June 2, 2009

Overview

The S&P 500 bottomed at a 12-year intraday low on March 6th, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of June 1st, stocks had gained over 38% since the early March low.
The PSRS and PEERS investment portfolios declined approximately 22.8% for the 1-year period ending May 31, 2009, while the U.S. stock market declined 32.6% and international stock markets declined over 36%.
PSRS/PEERS investments performed better than the average public fund for the current fiscal year (11 months) and for the last 1-year period.
The total assets of both PSRS and PEERS were approximately $23.6 billion on May 31, 2009 with over $6 billion invested in high quality bonds including U.S. Treasury securities. Treasury bonds are the safest and most liquid assets in the world today. As such, the Systems have significant assets to cover current liabilities.
PSRS/PEERS is a long-term investor. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems.

Further Information and Frequently Asked Questions

Market overview
Global stock markets collapsed in 2008 with no economy emerging unscathed. The stock market decline continued into calendar year 2009 with the global stock markets (including the U.S.) down approximately 18% for the first two months of the year. The S&P 500 bottomed at a 12-year intraday low on March 6th, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of June 1st, stocks had gained over 38% since the early March low.

Defined benefit plans
PSRS and PEERS are defined benefit plans. Your benefit plan was constructed through Missouri statutes and both the Missouri Constitution and case law indicate that PSRS/PEERS benefits may not be diminished or impaired.

Will I receive my check at the end of the month?
Yes, you will definitely continue to receive your monthly benefit from the Systems. We pay approximately $145 million a month in benefits; however, we receive contributions from members and school districts on a monthly basis to cover much of these benefit payments. Additionally, we have several billion dollars of very liquid assets to meet any monthly cash flow needs.

How much more will the contribution rates continue to increase, especially with the current market issues?
Employee and employer contributions have increased for the last several years as we continually work toward a 100% funding status. On an annual basis, your contribution rate cannot be increased more than 0.5% (0.25% for PEERS’ members) over the previous year. Rising contribution rates are not in response to the Systems’ inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers and school support staff will inherit a system as strong and reliable as the one we have today. Negative investment returns such as those experienced in fiscal year 2008 and 2009 do have a direct impact on future contribution rate increases.

PSRS/PEERS is a long-term investor
While unpleasant to go through, we generally view the recent market events as a necessary correction to the overall financial system. Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As a large institutional investor, we have the ability to invest over a 30-year time horizon because we have significant assets to cover current liabilities. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems.

What are the PSRS/PEERS funds invested in?
PSRS/PEERS maintains a long-term investment objective to achieve an 8% return over rolling 5-year periods. The asset allocation is highly diversified among bonds (U.S. Treasuries), U.S. stocks, non-U.S. stocks, real estate, absolute return investments and private equity. We have held the view for some time that the credit problems facing the financial sector could unfold over an extended period of time. As such, about 25% of the entire portfolio was transitioned to U.S. Treasury bonds in January 2008. Treasury bonds are the safest and most liquid assets in the world today. As of May 31, 2009, the Systems had approximately 53% of the total assets invested in stocks, 25% in high quality bonds including U.S. Treasury securities, 11% in absolute return investments, 6% in real estate and 5% in private equity.

Has the stock market downturn since October 9, 2007 affected the value of the PSRS/PEERS investment portfolio?
Yes. All large institutional investors that are invested in the stock market have been affected by the downturn in the market. Even with the current bear market rally of 38%, the U.S. stock market (S&P 500) has still declined over 37% from October 9, 2007 through June 1, 2009. However, only a portion of the PSRS/PEERS assets are invested in the stock market. This diversification (as described above) provides the Systems with a moderate degree of downside protection in periods when the stock market declines.

Have you changed your investment strategy in the recent market downturn?
Our long-term investment strategy has not changed: investing the Systems’ assets in a manner to earn the 8% actuarial assumed rate of return over a long time horizon. As such, we have continued to deploy assets in attractive investment opportunities that are expected to perform over the long-term. However, early on in the midst of the bear market we lowered the total risk profile of the Systems. Specifically, we maintained a high allocation to U.S. Treasury bonds. The Systems have cautiously sold Treasury securities and added to equity positions and corporate bonds in the last several months.

There have been numerous recent headlines concerning investor fraud. Has PSRS/PEERS invested with any of the management firms under investigation?
PSRS and PEERS had no exposure to Bernard L. Madoff Investment Securities, Stanford Financial Group or Westridge Capital Management.

Investment returns and level of assets
The PSRS/PEERS investment return for the 1-year period ending May 31, 2009 was approximately -22.8%. The investment return for the first eleven months of fiscal year 2009 (July 1, 2008 through May 31, 2009) was approximately -18.9%. The total assets of both PSRS and PEERS were approximately $23.6 billion on May 31, 2009. PSRS/PEERS performed better than the average public fund for the current fiscal year (11 months) and for the last 1-year period.

Investment markets
As the economy and investment environment continue to evolve, we are mindful of the day-to-day volatility within the markets and are in communication with various market participants to evaluate potential developments. There has been better economic data reported recently which has helped to stabilize the markets. However, the negative news is also prevalent. The swine flu outbreak, 1st quarter GDP declining 6.1% and rising job losses have dominated the news lately. In fact, Fed Chairman Bernanke recently commented that, even after a recovery gets underway, economic activity is likely to remain subpar. Thus, we remain cautious and mindful that we may be in the midst of a bear market rally. The markets could continue to be stressed because we would expect it to take longer than 18 months to unwind the excesses of the last 25 years.

Your benefit
Again, we want to emphasize to all of our members that your PSRS/PEERS benefit is secure. PSRS/PEERS is a long-term investor and has the ability to withstand market volatility. The Board and professional staff are committed to managing the Systems’ assets in a prudent manner that will ensure the viability of your pension.

Continue to visit our Web site for additional updates...

If you have questions about this topic or would like more information, please contact us by calling our toll free telephone number (800) 392-6848 or emailing us at psrspeers@psrspeers.org.

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	Investment Update June 2, 2009 Overview The S&P 500 bottomed at a 12-year intraday low on March 6th, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of June 1st, stocks had gained over 38% since the early March low. The PSRS and PEERS investment portfolios declined approximately 22.8% for the 1-year period ending May 31, 2009, while the U.S. stock market declined 32.6% and international stock markets declined over 36%. PSRS/PEERS investments performed better than the average public fund for the current fiscal year (11 months) and for the last 1-year period. The total assets of both PSRS and PEERS were approximately $23.6 billion on May 31, 2009 with over $6 billion invested in high quality bonds including U.S. Treasury securities. Treasury bonds are the safest and most liquid assets in the world today. As such, the Systems have significant assets to cover current liabilities. PSRS/PEERS is a long-term investor. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems. Further Information and Frequently Asked Questions *Market overview* Global stock markets collapsed in 2008 with no economy emerging unscathed. The stock market decline continued into calendar year 2009 with the global stock markets (including the U.S.) down approximately 18% for the first two months of the year. The S&P 500 bottomed at a 12-year intraday low on March 6th, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of June 1st, stocks had gained over 38% since the early March low. Defined benefit plans PSRS and PEERS are defined benefit plans. Your benefit plan was constructed through Missouri statutes and both the Missouri Constitution and case law indicate that PSRS/PEERS benefits may not be diminished or impaired. Will I receive my check at the end of the month? Yes, you will definitely continue to receive your monthly benefit from the Systems. We pay approximately $145 million a month in benefits; however, we receive contributions from members and school districts on a monthly basis to cover much of these benefit payments. Additionally, we have several billion dollars of very liquid assets to meet any monthly cash flow needs. How much more will the contribution rates continue to increase, especially with the current market issues? Employee and employer contributions have increased for the last several years as we continually work toward a 100% funding status. On an annual basis, your contribution rate cannot be increased more than 0.5% (0.25% for PEERS’ members) over the previous year. Rising contribution rates are not in response to the Systems’ inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers and school support staff will inherit a system as strong and reliable as the one we have today. Negative investment returns such as those experienced in fiscal year 2008 and 2009 do have a direct impact on future contribution rate increases. PSRS/PEERS is a long-term investor While unpleasant to go through, we generally view the recent market events as a necessary correction to the overall financial system. Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As a large institutional investor, we have the ability to invest over a 30-year time horizon because we have significant assets to cover current liabilities. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems. What are the PSRS/PEERS funds invested in? PSRS/PEERS maintains a long-term investment objective to achieve an 8% return over rolling 5-year periods. The asset allocation is highly diversified among bonds (U.S. Treasuries), U.S. stocks, non-U.S. stocks, real estate, absolute return investments and private equity. We have held the view for some time that the credit problems facing the financial sector could unfold over an extended period of time. As such, about 25% of the entire portfolio was transitioned to U.S. Treasury bonds in January 2008. Treasury bonds are the safest and most liquid assets in the world today. As of May 31, 2009, the Systems had approximately 53% of the total assets invested in stocks, 25% in high quality bonds including U.S. Treasury securities, 11% in absolute return investments, 6% in real estate and 5% in private equity. *Has the stock market downturn since October 9, 2007 affected the value of the PSRS/PEERS investment portfolio?* Yes. All large institutional investors that are invested in the stock market have been affected by the downturn in the market. Even with the current bear market rally of 38%, the U.S. stock market (S&P 500) has still declined over 37% from October 9, 2007 through June 1, 2009. However, only a portion of the PSRS/PEERS assets are invested in the stock market. This diversification (as described above) provides the Systems with a moderate degree of downside protection in periods when the stock market declines. *Have you changed your investment strategy in the recent market downturn?* Our long-term investment strategy has not changed: investing the Systems’ assets in a manner to earn the 8% actuarial assumed rate of return over a long time horizon. As such, we have continued to deploy assets in attractive investment opportunities that are expected to perform over the long-term. However, early on in the midst of the bear market we lowered the total risk profile of the Systems. Specifically, we maintained a high allocation to U.S. Treasury bonds. The Systems have cautiously sold Treasury securities and added to equity positions and corporate bonds in the last several months. *There have been numerous recent headlines concerning investor fraud. Has PSRS/PEERS invested with any of the management firms under investigation?* PSRS and PEERS had no exposure to Bernard L. Madoff Investment Securities, Stanford Financial Group or Westridge Capital Management. Investment returns and level of assets The PSRS/PEERS investment return for the 1-year period ending May 31, 2009 was approximately -22.8%. The investment return for the first eleven months of fiscal year 2009 (July 1, 2008 through May 31, 2009) was approximately -18.9%. The total assets of both PSRS and PEERS were approximately $23.6 billion on May 31, 2009. PSRS/PEERS performed better than the average public fund for the current fiscal year (11 months) and for the last 1-year period. Investment markets As the economy and investment environment continue to evolve, we are mindful of the day-to-day volatility within the markets and are in communication with various market participants to evaluate potential developments. There has been better economic data reported recently which has helped to stabilize the markets. However, the negative news is also prevalent. The swine flu outbreak, 1st quarter GDP declining 6.1% and rising job losses have dominated the news lately. In fact, Fed Chairman Bernanke recently commented that, even after a recovery gets underway, economic activity is likely to remain subpar. Thus, we remain cautious and mindful that we may be in the midst of a bear market rally. The markets could continue to be stressed because we would expect it to take longer than 18 months to unwind the excesses of the last 25 years. Your benefit Again, we want to emphasize to all of our members that your PSRS/PEERS benefit is secure. PSRS/PEERS is a long-term investor and has the ability to withstand market volatility. The Board and professional staff are committed to managing the Systems’ assets in a prudent manner that will ensure the viability of your pension. *Continue to visit our Web site for additional updates...* If you have questions about this topic or would like more information, please contact us by calling our toll free telephone number (800) 392-6848 or emailing us at psrspeers@psrspeers.org.