Executive Summary of Performance - Tacomacms.cityoftacoma.org/retirement/QuarterlyMeetings/2009/2nd...

Executive Summary of Performance

Prepared for Tacoma Employes’ Retirement System

Second Quarter 2009

Wilshire Consulting Executive Summary of Performance – June 30, 2009 Prepared for Tacoma Employes’ Retirement System

Capital Market Overview

The second quarter of 2009 found global equity markets staging a dramatic rally as investors reassessed their portfolios and reversed the flight to safety that drove sovereign bond yields to historic lows. The global recession churned onward, driving the US unemployment rate up to a June rate of 9.7% (source: Bureau of Labor Statistics). However, economists pointed to leading indicators of a possible upcoming recovery; improved corporate earnings, a slowdown in the decrease of US real estate prices, and the Federal Reserve’s maintenance of its 0.0-0.25% overnight rate targets spurred investor optimism regarding hopes of economic growth for the rest of 2009 and 2010. Even given guarded investor optimism, the US economy was far from in full recovery mode; the Commerce Department projected a contraction in real US GDP of -5.5% (annualized) in the first quarter of 2009. The good news: This was an improvement over the -6.3% real GDP contraction in the fourth quarter of 2008. Investors placed their hopes in the emerging global economies to lead the upcoming recovery; projections of increased demand on raw commodities pushed bellwether crude oil contract prices to recent-term highs (one-month benchmark NYMEX light sweet crude closes: $49.66 on 3/31/2009, $69.89 on 6/30/2009). The resultant rise in consumer-level gasoline prices pushed US consumer inflation upward over the quarter (US CPI, All Urban Consumers, 1.40%). This spike in inflation, combined with investor rotation out of sovereign paper into riskier fixed income and stocks, drove longer-term interest rates higher while simultaneously tightening credit spreads and driving rallies in corporate debt issuance, especially high-yield paper. The market rallies proved resilient enough to weather the Chapter 11 bankruptcy filings of Chrysler Corporation on April 30 and General Motors on June 1; these actions were expected, and the subsequent deals struck with creditors, labor and investors allowed both companies to structure quick emergence from bankruptcy. Given investor sentiment pointing to the global economic recovery being led by developing countries, the US dollar lost strength relative to major world currencies, leading to dampened global market performance when converted to dollar terms. U.S. Equity Market US stock markets saw fit to reward just about every sector with positive performance in the second quarter of 2009, but some sections of the market clearly benefited more from investor favor. The S&P 500’s 15.93% return was outdistanced by the Wilshire 5000’s 16.79%. Befitting a market in bargain-hunting mode, investors sought out fresh opportunities and snapped up small-cap stocks; the Wilshire US Large Cap Index’s strong 15.57% return pales in comparison to the Wilshire US Small Cap Index’s stunning 26.32% return, but both were outdistanced by the Wilshire US Micro Cap Index’s 38.50%. Turning to economic sectors of the S&P 500 (GICS classification), Financials led the charge for the second quarter (35.77%) as this long-depressed sector exhibited improved earnings; however, profit prospects for the near-term are still considered iffy as loss write-offs continue. The Information Technology sector was a distant second place at 19.73%; these stocks benefited from hopes that a global recovery would rely on technological infrastructure investment to increase productivity. The worst-performing sector of the S&P 500 was Telecomm Services, with a still-respectable 3.47% return; Health Care was the second-worst performing sector at a strong 8.90%. Investor optimism extended to the Real Estate Securities sector as well; the Wilshire Real Estate Securities Index yielded a stunning 31.91%


return, as slowing declines in property values hinted at markets finally finding a bottom to their ongoing slump. Fixed Income Market With investors looking for new opportunities in the capital markets and willing to assume more risk in their portfolios, the fixed income markets saw a net sell-off of US Treasury and agency-related debt (Barclays US Government, -2.21%) that pushed benchmark yields higher over the quarter. The yield on two-year Treasuries pushed up to 1.14% as of June 30, 2009, a 39-basis point rise from March 31, while the yield on thirty-year Treasuries rose to 4.32%, a 77-b.p. jump over the quarter. Unsurprisingly, short- and long-term Treasuries all lost ground, longer paper quite dramatically (Barclays 1-3 Year Treasury, -0.14%; Barclays Long Treasury, -7.15%). Spreads on US corporate credits relative to Treasuries continued to tighten over the second quarter; with credit yield spreads falling from approximately 600 b.p. as of March 31 to approximately 330 b.p. as of June 30, the market has arrived at spreads not seen since Lehman Brothers’ collapse, when spreads stood at roughly 340 b.p. Although consumer-level credit did become more liquid during the quarter, mortgage-backed securities’ recovery relative to corporate credit was still held back by depressed real estate markets (Barclays MBS, 0.69%; Barclays Credit, 8.81%). Yield spreads in the Below Investment-Grade sector of the bond market also contracted dramatically over the quarter from 1,700 b.p. to 1,100 b.p., spurring this sector to strong outperformance over investment-grade paper (Barclays High Yield, 23.07%; Barclays US Aggregate, 1.79%). Non-U.S. Markets The second quarter of 2009 saw investors lured back to emerging markets securities by the siren song of higher growth prospects relative to developed markets. For US dollar-based investors, the returns were even stronger as the US dollar weakened against all major world currencies. Although developed markets did participate in the global stock rally, economists foresee continued recession in these markets for the near term. However, with Japanese stocks still perceived as bargain-basement specials and the Asia region projected to experience good relative growth over the near term, investors favored Pacific region stocks over European equity as a whole (MSCI Pacific, Net Dividends, 19.76% local currency, 25.72% US Dollar; MSCI Europe Net, 15.54% local currency, 25.26% USD). Emerging economies such as China and Brazil attracted strong investor interest, driving emerging markets as a whole to excellent performance relative to developed markets (MSCI Emerging Markets Net, 24.47% local, 34.73% USD; MSCI EAFE Net, 16.92% local, 25.43% USD; MSCI All Country World ex-US Net, 18.67% local, 27.59% USD). Global fixed income markets presented a mixed performance record for the second quarter. Developed market bonds were relative underperformers as investors sold out of local-market sovereign debt to move into riskier assets, but improved corporate credit markets and a weak US dollar led to positive results for this sector (Barclays Global Aggregate, 4.93% USD). Emerging market debt experienced a bit of a rally as market players re-embraced risk (JP Morgan Emerging Markets Bond Plus, 9.95% USD).


Summary of Index Returns For Periods Ended June 30, 2009

One Three Five Ten

Quarter Year Years Years Years Domestic Equity

Standard & Poor's 500 15.93% -26.22% -8.21% -2.24% -2.22% Wilshire 5000 16.79 -26.40 -8.13 -1.60 -1.32 Wilshire 4500 20.80 -27.52 -8.39 -0.10 1.48 Wilshire Large Cap 15.57 -26.67 -7.89 -1.66 -1.87 Wilshire Small Cap 26.32 -24.04 -8.69 -0.43 3.20 Wilshire Micro Cap 38.50 -19.64 -12.24 -4.12 6.04

Domestic Equity Wilshire Large Value 14.76% -27.57% -10.19% -2.29% 0.03% Wilshire Large Growth 16.46 -25.53 -5.75 -1.27 -3.96 Wilshire Mid Value 19.81 -27.42 -10.65 -2.46 3.94 Wilshire Mid Growth 21.94 -27.58 -6.14 1.98 1.31 Wilshire Small Value 23.64 -22.49 -10.11 -1.40 5.23 Wilshire Small Growth 28.92 -25.33 -7.29 0.50 0.45

International Equity MSCI All World ex U.S. (USD) 27.59% -30.92% -5.80% 4.48% 2.57% MSCI All World ex U.S. (local currency) 18.67 -24.54 -7.03 2.98 -.- MSCI EAFE 25.43 -31.35 -7.98 2.31 1.18 MSCI Europe 25.26 -34.53 -8.39 2.31 1.30 MSCI Pacific 25.72 -24.52 -7.34 2.13 0.79 MSCI EMF Index 34.73 -28.07 2.95 14.71 8.70

Domestic Fixed Income Barclays Aggregate Bond 1.79% 6.06% 6.43% 5.02% 5.98% Barclays Credit 8.81 4.07 4.86 4.08 5.80 Barclays Mortgage 0.69 9.37 7.86 5.98 6.29 Barclays Treasury -3.02 6.47 7.41 5.46 6.07 Citigroup High Yield Cash Pay 21.55 -2.65 2.11 4.06 4.93 Barclays US TIPS 0.65 -1.11 5.77 4.94 7.24 91-Day Treasury Bill 0.05 0.96 3.24 3.17 3.24

International Fixed Income Citigroup Non-U.S. Gov. Bond 5.44% 3.53% 7.90% 6.24% 6.53% Citigroup World Gov. Bond 3.48 4.00 7.77 6.06 6.53 Citigroup Hedged Non-U.S. Gov. 0.15 8.54 5.70 5.28 5.29

Currency* Euro vs. $ 5.65% -10.97% 3.13% 2.89% 3.12% Yen vs. $ 2.37 9.87 5.82 2.49 2.29 Pound vs. $ 14.90 -17.25 -3.80 -1.91 0.44

Real Estate Wilshire REIT Index 31.66% -45.26% -19.69% -3.25% 5.54% Wilshire RESI 31.91 -45.65 -19.92 -3.41 5.19 NCREIF Property Index -5.20 -19.57 0.98 7.60 8.50

________________________________ *Positive values indicate dollar depreciation.


Total Fund Overview

Asset Allocation Asset Growth

($Mil.)3Q07 1,163.9 16.4 -21.7 -1.0 26.2 1,183.8 2.18%4Q07 1,183.8 21.9 -23.3 -0.9 -32.0 1,149.5 -2.78%1Q08 1,149.5 14.5 -23.3 -0.8 -60.7 1,079.1 -5.21%2Q08 1,079.1 9.3 -13.4 -0.8 -16.2 1,058.0 -1.45%3Q08 1,058.0 10.1 -15.3 -1.1 -93.7 958.0 -8.91%4Q08 958.0 13.7 -14.6 -0.7 -188.9 767.4 -19.10%1Q09 767.4 7.8 -19.0 -0.2 -56.2 699.7 -4.70%2Q09 699.7 13.0 -12.2 -0.4 105.6 805.6 15.76%

Invest. Gain/Loss

End. Mkt Value

Total Return

Beg. Mkt Value

Net Contrib.

Net Distrib.

Invest. Fees

Asset Class Performance

Total Fund 15.76 -18.71 -4.01 2.54 4.49 7.36Asset Allocation Policy 1 16.25 -20.63 -4.93 1.21 2.58 6.74Actuarial Rate 1.88 7.75 7.75 7.75 7.76 7.58Policy Expected Return 2.04 8.40 8.40 8.40 8.52 8.96

U.S. Equity 16.22 -28.59 -9.17 -1.97 0.56 6.85International Equity 25.34 -33.28 -7.06 3.41 1.68 3.31Fixed Income 5.39 3.61 5.96 5.21 6.01 6.77High Yield 11.98 -3.17 2.30 -.- -.- -.-Real Estate 32.05 -49.08 -21.77 -4.27 5.37 5.04Private Equity 16.23 -.- -.- -.- -.- -.-Cash 1.18 -33.30 -10.08 -5.04 -0.92 0.89

S&P 500 Index 15.93 -26.22 -8.21 -2.24 -2.22 6.93Wilshire 5000 Index 16.79 -26.40 -8.13 -1.60 -1.32 6.97MSCI ACWI x US Index 27.59 -30.92 -5.80 4.48 2.57 -.-Barclays Aggregate Bond Inde 1.79 6.06 6.43 5.02 5.98 6.59DJ Wilshire REIT Index 31.66 -45.26 -19.69 -3.25 5.54 6.9591-Day Treasury Bill 0.05 0.96 3.24 3.17 3.24 3.94

15-yearPerformance (% )

10-yearQuarter 1-year 3-year 5-year

1 The total fund policy had two component changes during 1Q2003: the real estate component changed from the Dow Jones

Wilshire Real Estate Securities Index to the Dow Jones Wilshire REIT Index and the fixed income component changed from the Citigroup LPF Index to the Barclays Aggregate Bond Index. In addition, starting 2Q09, the international equity component changed from MSCI ACWI x-US to 40% MSCI EAFE/40% MSCI EAFE Currency Hedged/20% MSCI Emerging Markets.

U.S. Equity20.5%

Int'l Equity23.0%

Fixed Income22.7%

High Yield15.8%

Real Estate6.4%

Private Equity10.5%

Cash1.2%

U.S. Equity 20.5% 21.0% -0.5%Int'l Equity 23.0% 21.0% 2.0%Fixed Income 22.7% 25.0% -2.3%High Yield 15.8% 15.0% 0.8%Real Estate 6.4% 8.0% -1.6%Private Equity 10.5% 10.0% 0.5%Cash 1.2% 0.0% 1.2%

100.0% 100.0% 0.0%

Actual Policy Difference

Policy vs. Actual Allocation


Total Fund Overview (Continued)

Total Fund ♦ The Tacoma Employes’ Retirement System (“TERS, the System”) generated a solid return of 15.8%

for the second quarter of 2009, beating its actuarial rate of return of 1.9% but trailed its asset allocation policy benchmark’s return of 16.3%. The System has outperformed its policy benchmark for all longer-term periods, though against the actuarial rate of return it has lagged over all measured periods shown.

♦ As of June 30, 2009, the System’s market value was approximately $806 million, which represented

an increase of $106 million from the beginning of the quarter. The change in market value consisted of $13 million in net contributions, $12 million in net distribution and administrative fees, $0.4 million in investment fees, and $106 million in net investment gains.

♦ At the end of the quarter, the System was overweight in international equity (+2.0%), high yield

(+0.8%), private equity (+0.5%) and cash (+1.2%) while underweight in domestic equity (-0.5%), investment grade fixed income (-2.3%) and real estate (-1.6%).


Total Fund Overview (Continued)

Total Fund Attribution

U.S. Equity 3.34 -0.42 0.05 2.97International Equity 4.91 0.09 0.40 5.42Fixed Income 0.45 0.03 0.95 1.43High Yield 3.48 0.52 -1.87 2.08Real Estate 2.53 -0.74 0.02 1.80Cash 0.00 0.00 0.00 0.00Private Equity 1.54 0.00 0.08 1.63Total Fund 16.25 -0.51 0.01 15.76

Total Fund Return Contribution (% )

Strategic Policy

Actual Allocation

Active Mgmt

Actual Return

♦ The total fund attribution table above displays the return contribution of each asset class to the total

fund. This table will allow the Board to see if tactical allocation and active management within asset classes helped or hurt performance during the quarter.

− Strategic Policy: The policy return for each of the asset classes. − Actual Allocation: The return contribution during the quarter due to differences in the actual

allocation from the policy allocation (i.e. the actual allocation to fixed income was lower than the policy allocation). A positive number would indicate the overweight or underweight helped performance and vice versa.

− Active Management: The return contribution from active management. The number would be positive if the asset class outperformed the designated policy index and vice versa (i.e. the domestic equity segment outperformed the policy index, the S&P 500, during the quarter).

− Actual Return: The actual return of the asset classes if allocations to them were static during the quarter. These returns will not match exactly with the actual segment returns since asset class allocations change during the quarter due to market movement, cash flows, etc.

♦ TERS underperformed its asset allocation policy this quarter primarily due to its allocation

differences relative to policy targets. This can primarily be attributed to the System’s notable underweight in real estate throughout the quarter, as real estate securities was the highest returning asset class on an absolute basis. In addition, the System’s high yield asset class produced a large underperformance (by 1121 bps versus its benchmark) which also weighed heavily on its relative performance.


Domestic Equity Overview Domestic Equity Structure Total Domestic Equity vs. S&P 500 Rolling 3-Year Excess Return Composite

QuarterDomestic Equity 164.9 16.22 -28.59 -9.17 -1.97 0.56S&P 500 Index 15.93 -26.22 -8.21 -2.24 -2.22 Value Added vs Index 0.29 -2.37 -0.96 0.27 2.78

Wilshire 5000 Index 16.79 -26.40 -8.13 -1.60 -1.32S&P 500 Index 15.93 -26.22 -8.21 -2.24 -2.22

Assets Performance (% )($Millions) 1-year 3-year 5-year 10-year

Managers

Large Cap Core - PassiveNorthern Trust S&P 500-Large Core 47.9 16.34 -26.70 -8.46 -2.39 7.84 12/90 S&P 500 Index 15.93 -26.22 -8.21 -2.24 7.90 12/90 Index Tracking Error 0.41 -0.48 -0.25 -0.15 -0.06

Northern Trust S&P500 NonLending 15.7 -.- -.- -.- -.- -.- 6/09 S&P 500 Index -.- -.- -.- -.- -.- 6/09 Value Added vs Benchmark -.- -.- -.- -.- -.-

Large Cap Growth - PassiveNorthern Trust Large Cap Growth 21.1 16.34 -.- -.- -.- 16.34 3/09 Russell 1000 Growth Index 16.32 -.- -.- -.- 16.32 3/09 Index Tracking Error 0.02 -.- -.- -.- 0.02

Small Cap Core - PassiveNorthern Trust Small Cap Core 22.0 20.71 -25.24 -9.91 -1.73 9.13 12/90 Russell 2000 Index 20.68 -25.01 -9.88 -1.70 9.07 12/90 Index Tracking Error 0.03 -0.23 -0.03 -0.03 0.06

Inception($Millions)Assets Performance (% )

DateQuarter 1-year 3-year 5-year

Large Growth13%

Enhanced Index35%

Large Core39%

Small Core13%

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Domestic Equity Overview (Continued)

Managers

Mid Cap Growth - Active Denver Investment 0.02 -.- -.- -.- -.- -.- 3/83

Enhanced IndexBGI Alpha Tilts 18.4 15.74 -28.01 -.- -.- -17.37 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -15.68 3/07 Value Added vs Benchmark -0.19 -1.79 -.- -.- -1.69 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -14.68 3/07 Value Added vs Objective -0.44 -2.79 -.- -.- -2.69

INTECH 18.3 15.31 -26.62 -.- -.- -15.79 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -15.68 3/07 Value Added vs Benchmark -0.62 -0.40 -.- -.- -0.11 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -14.68 3/07 Value Added vs Objective -0.87 -1.40 -.- -.- -1.11

Research Affiliates 21.5 16.82 -27.01 -.- -.- -17.60 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -15.68 3/07 Value Added vs Benchmark 0.89 -0.79 -.- -.- -1.92 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -14.68 3/07 Value Added vs Objective 0.64 -1.79 -.- -.- -2.92

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year Inception Date

♦ TERS’ domestic equity composite generated a return of 16.2% for the second quarter, beating its benchmark, the S&P 500 Index. This quarter’s outperformance can primarily be attributed to the composite’s higher small cap exposure: the composite’s smaller-than-benchmark average market cap had a positive impact on return as small cap stocks outpaced their large cap counterpart (Wilshire U.S. Small Cap, +26.3% vs. Wilshire U.S. Large Cap, +15.6%). The domestic equity composite trailed the S&P 500 Index over the one- and three-year periods, but has outperformed over longer-term periods.

♦ Northern Trust manages three index funds for the system, including a large cap core fund, a large cap

growth fund, and a small cap core fund, designed to track the S&P 500 Index, the Russell 1000 Growth Index, and the Russell 2000 Index, respectively. The large core fund and the small core fund outpaced their respective benchmarks for the quarter and continue to do well over the long term. The large cap growth fund, which the System added during the first quarter as part of its newly adopted asset allocation, also posted small positive tracking error relative to the Russell 1000 Growth Index return for the quarter.

♦ Russell Investments, who manages a large cap mandate that is a blend of two of Russell’s “best-idea” strategies for the System, elected to close the fund during the 2Q due to product restructuring. The fund was completely liquidated at the end of June, and the System’s proceeds were transferred into a new Northern Trust S&P 500 Index Fund that does not participate in security lending. Wilshire will begin reporting on this new fund in next quarter’s reports.


Domestic Equity Overview (Continued)

Managers ♦ Due to on-going performance concerns, the System decided to terminate its mid-cap growth manager,

Denver Investment Advisors, during the first quarter. The timing of the termination coincided with the implementation of the new global equity implementation and Denver’s assets were used to fund the expansion of TERS’ existing international equity portfolios. The Denver assets shown above represent residual cash and are expected to be transferred out in the coming quarters.

♦ Barclays Global Investors manages the Alpha Tilts Fund, an enhanced index strategy, for the System.

The Alpha Tilts Fund produced a return of 15.7% for the second quarter, underperforming its benchmark, the S&P 500 Index, and its performance objective, benchmark + 1%. BGI’s overweight to the lower returning sectors during the quarter had a negative impact on its return: Health Care (16.0% BGI vs. 15.3% benchmark), Consumer Staples (13.1% BGI vs. 12.8% benchmark), Utilities (4.7% BGI vs. 4.3% benchmark). Furthermore, weak trading results this quarter also detracted from the fund’s performance. Over the one-year and since-inception periods, BGI has underperformed both the S&P 500 Index and its performance objective.

♦ INTECH, one of the three enhanced index managers funded during the first quarter of 2007,

generated a return of 15.3%, underperforming its benchmark, the S&P 500 Index, and its performance objective, benchmark + 1%. The portfolio’s negative stock selection effect was this quarter’s main detractor, among the notables included banking services provider KeyCorp (-33.3%), home builder Pulte Homes Corp (-19.2%), and biopharmaceutical company Cephalon Inc (-16.8%). In addition, the portfolio’s higher-than-benchmark exposure to Consumer Staples (15.3% INTECH vs. 12.8% benchmark) and Telecom (4.7% INTECH vs. 3.9% benchmark), the lowest returning sectors in the S&P 500 Index during the second quarter, also hurt performance. INTECH’s performance has continued to trail the S&P 500 Index and its performance objective over the one-year and since-inception periods.

♦ Research Affiliates, the largest of TERS’ three enhanced index portfolios, returned 16.8% for the

quarter and beat its benchmark, the S&P 500 Index, and performance objective, benchmark + 1%. The portfolio’s sector allocation was the primary driver of this quarter’s outperformance, as it maintained a notable overweight in Financials (17.6% portfolio vs. 10.8% benchmark), which was the highest returning sector during the quarter. Favorable stock-specific gains, particularly reported by some of the portfolio’s Consumer Discretionary holdings, also aided Research Affiliates’ relative performance: automotive parts manufacturer/supplier Tenneco Inc and ArvinMeritor Inc, +550.3% and +455.7%, respectively. Over the one-year period and since inception, Research Affiliate has underperformed the S&P 500 and its performance objective.


International Equity Overview

International Equity Structure Total Int’l Equity vs. MSCI EAFE Index Rolling 3-Year Excess Return

Composite

QuarterInternational Equity 185.3 25.34 -33.28 -7.06 3.41 1.68 Custom Benchmark 2 23.37 -33.20 -6.85 2.91 1.48 Value Added vs Benchmark 1.97 -0.08 -0.21 0.50 0.20

Performance (% )($Millions) 1-year 3-year 5-year 10-year

Assets

Managers

ActiveTT International 71.2 22.72 -37.14 -9.08 2.52 1.70 3/99 MSCI EAFE Index 25.43 -31.35 -7.98 2.31 1.40 3/99 Value Added vs Benchmark -2.71 -5.79 -1.10 0.21 0.30 MSCI EAFE Index + 2.6% 26.08 -28.75 -5.38 4.91 4.00 3/99 Value Added vs Objective -3.36 -8.39 -3.70 -2.39 -2.30

PassiveNorthern Trust EAFE Index Fund 67.3 25.65 -.- -.- -.- 25.65 3/09 MSCI EAFE Index 25.43 -.- -.- -.- 25.43 3/09 Index Tracking Error 0.22 -.- -.- -.- 0.22

NT EAFE Fund w/ Currency Overlay 22.21 -.- -.- -.- 22.21 3/09 Custom Benchmark 3 20.61 -.- -.- -.- 20.61 3/09 Index Tracking Error 1.60 -.- -.- -.- 1.60

Northern Trust EM Index Fund 46.7 34.50 -.- -.- -.- 34.50 3/09 MSCI Emerging Markets Index 34.73 -.- -.- -.- 34.73 3/09 Index Tracking Error -0.23 -.- -.- -.- -0.23

Performance (% )($Millions) Quarter 1-year 3-year 5-year Inception Date

Assets

2 International Equity Composite Custom Benchmark: 4/2009-current, 40% MSCI EAFE Index/40% MSCI EAFE Index

Currency Hedged/20% MSCI EM Index. 4/2006-3/2009, MSCI ACWI x-US Index. 4/1988-3/2006, MSCI EAFE Index. 3 NT EAFE w/ Currency Overlay Custom Benchmark: 50% MSCI EAFE Index/50% MSCI EAFE Index Currency Hedged.

Active38%

Passive62%

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International Equity Overview (Continued)

Managers ♦ TERS’ international equity composite generated a return of 25.3% for the second quarter of 2009,

outperforming its custom benchmark, which is partially currency hedged. The composite benefited from its slightly higher-than-policy target weighting to Emerging Markets, as the equity price rebound in this region significantly outpaced its developed country counterpart. The composite’s EAFE Index Fund also produced solid absolute return and helped contribute to this quarter’s relative outperformance. Over the one-, three-, five- and ten-year marks, TERS’ international equity composite has beat its custom benchmark.

♦ TT International, the System’s active EAFE manager, returned 22.7% for the quarter and

underperformed its benchmark, the MSCI EAFE Index, and its performance objective, benchmark + 2.6%. Unfavorable stock selection was a large detractor to TT’s performance, including Switzerland drug maker Roche Holding AG (2.8% weight, -1.1% return) and Japanese chemical manufacturing company Shin-Etsu Chemical Co (0.4% weight, -3.9% return) reporting large sub-par returns relative to the EAFE markets. The portfolio’s country allocation effect was also negative, due to its lower-than-benchmark weighting to countries like Hong Kong, Italy, Netherland, and Sweden, which were some of the higher returning countries within the MSCI EAFE Index during the second quarter. While TT’s portfolio still added value over the long term, it has underperformed its performance objective over all measured periods.

♦ As part of the newly adopted global equity approach, the System transitioned from a single

international equity allocation to have separate EAFE and emerging markets mandates during the first quarter. The System selected the Northern Trust EAFE Index Fund and the Northern Trust Emerging markets Index Fund to achieve this exposure; they are managed against the MSCI EAFE Index and the MSCI EM Index, respectively. For the second quarter of 2009, the EAFE Index Fund produced positive tracking error while the Emerging Markets Index Fund lagged its benchmark.


Fixed Income Overview

Total Fixed Income vs. Lehman Aggregate Rolling 3-Year Excess Return

-5%-4%-3%-2%-1%0%1%2%3%4%5%

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Composite

Core Fixed Income 182.7 5.39 3.61 5.96 5.21 6.01 Barclays Aggregate Bond Index 1.79 6.06 6.43 5.02 5.98 Value Added vs Index 3.60 -2.45 -0.47 0.19 0.03Citigroup LPF Index 0.93 7.34 7.34 5.89 6.78Merrill Lynch High Yield Master II 23.19 -3.53 1.81 4.09 4.44

Assets($Millions) Quarter

Performance (% )1-year 3-year 5-year 10-year

Managers

Metropolitan West 182.7 5.39 3.61 5.96 5.21 5.75 3/02 Barclays Aggregate Bond Index 1.79 6.06 6.43 5.02 5.43 3/02 Value Added vs Benchmark 3.60 -2.45 -0.47 0.19 0.32 Barclays Aggregate + 0.75% 1.98 6.81 7.18 5.77 6.18 3/02 Value Added vs Objective 3.41 -3.20 -1.22 -0.56 -0.43

Assets Performance (% )5-year Inception Date($Millions) Quarter 1-year 3-year

♦ Metropolitan West, the System’s core fixed income manager, returned 5.4% for the quarter and

outperformed its benchmark, the Barclays Aggregate Bond Index, and its performance objective, benchmark + 0.75%. The portfolio’s sector positioning drove this quarter’s outperformance: MetWest held a large overweight to Credit issues (26% MetWest vs. 7% benchmark) and was significantly underweight to Treasuries (5% MetWest vs. 35% benchmark), which were the best and worst performing investment grade fixed income sectors, respectively, as market sentiment stabilized and investor’s risk appetite recovered during the second quarter. Over the long term, MetWest has outperformed the Barclays Aggregate Bond Index over the five- and ten-year periods, but continues to trail its performance objective for all measured periods.


Fixed Income Overview (Continued)

Composite

High Yield 127.0 11.98 -3.17 2.30 -.- -.-Merrill Lynch High Yield Master II 23.19 -3.53 1.81 -.- -.- Value Added vs Index -11.21 0.36 0.49 -.- -.-

Merrill Lynch High Yield Master II 23.19 -3.53 1.81 4.09 4.44

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year 10-year

Managers

Post Advisory Group 127.0 11.98 -3.17 2.30 -.- 2.76 9/05 ML High Yield Master II 23.19 -3.53 1.81 -.- 2.44 9/05 Value Added vs Benchmark -11.21 0.36 0.49 -.- 0.32 ML High Yield Master II + 1.75% 23.63 -1.78 3.56 -.- 4.19 9/05 Value Added vs Objective -11.65 -1.39 -1.26 -.- -1.43

1-year 3-yearAssets Performance (% )

5-year Inception Date($Millions) Quarter

♦ Post Advisory Group, the Plan’s high yield manager, underperformed its benchmark, the Merrill

Lynch High Yield Master II Index, and its performance objective, benchmark + 1.75%, for the quarter. Duration positioning hurt performance, as Post’s lower-than-benchmark effective duration (3.1 Years Post vs. 4.1 Years benchmark) was a large drag on performance when yields fell sharply during the quarter, driven by investor’s renewed interests in spread products in search for better returns. Poor issue-specific performance was also a factor that weighed on the portfolio’s relative return. Over the one-year, three-year and since-inception marks, Post has outperformed the Merrill Lynch High Yield Master II Index but still trails its performance objective.


Real Estate Overview

Composite

Real Estate 51.9 32.05 -49.08 -21.77 -4.27 5.37 Wilshire REIT Index 31.66 -45.26 -19.69 -3.25 5.54 Value Added vs Index 0.39 -3.82 -2.08 -1.02 -0.17

Wilshire Real Estate Securities Index 31.91 -45.65 -19.92 -3.41 5.19

10-yearAssets Performance (% )

($Millions) Quarter 1-year 3-year 5-year

Managers

Adelante Capital Management 51.9 32.05 -49.08 -21.77 -4.27 4.00 12/97 Wilshire REIT Index 31.66 -45.26 -19.69 -3.25 3.64 12/97 Value Added vs Benchmark 0.39 -3.82 -2.08 -1.02 0.36 Wilshire REIT Index + 1% 31.91 -44.26 -18.69 -2.25 4.64 12/97 Value Added vs Objective 0.14 -4.82 -3.08 -2.02 -0.64

Assets($Millions) Quarter 1-year

Performance (% )Date3-year 5-year Inception

♦ Adelante Capital, the System’s real estate securities manager, produced a return of 32.1% for the

quarter, outperforming its benchmark, the Wilshire REIT Index, and its performance objective, benchmark + 1%. The portfolio’s outperformance was primarily driven by outsize gains reported by some of its retail REIT holdings, among the notables included regional mall operators Simon Property Group (+50.2%), Taubman Centers (+60.1%), and The Macerich Company (+190.8%). The portfolio’s underweight in Health Care REITs (4.2% Adelante vs. 7.0% benchmark), the lowest returning sector during the quarter, also helped its relative performance. While Adelante has added value over the since-inception period relative to its benchmark, it has trailed its performance objective for all measured periods.


Private Equity Overview Periods ending June 30, 2009

Composite

Private Equity 84.3 16.23 -.- -.- -.- -.- Custom Benchmark 4 15.42 -.- -.- -.- -.- Value Added vs Index 0.81 -.- -.- -.- -.-

Assets Performance (% )($Millions) Quarter 1-year 3-year 5-year 10-year

Funds

Private Equity Parking FundNorthern Trust Large Cap Core 81.0 16.32 -.- -.- -.- 16.32 3/09 S&P 500 Index 15.93 -.- -.- -.- 15.93 3/09 Value Added vs Index 0.39 -.- -.- -.- 0.39

Private Equity Investments 5

HarbourVest Dover Street VII 3.3 -3.63 -.- -.- -.- -3.63 3/09 Capital Commitment 20.0 Unfunded Capital Commitment 16.6

Pantheon Global Secondary IV -.- -.- -.- -.- -.- -.-

1-year 3-year 5-year Inception DateAssets Performance (% )

($Millions) Quarter

♦ Based on asset allocation policy adopted in 2008, the System started a Private Equity investment program during 1Q 2009. The Plan selected HarbourVest and Pantheon to be the first managers for this program and will use the existing Northern Trust Large Cap Core Fund as the source to fund future capital calls.

♦ For the second quarter of 2009, the Northern Trust Large Cap Core Fund, produced positive tracking

error relative to its benchmark, the S&P 500 Index.

4 Private Equity Composite Custom Benchmark: dynamically calculated based on the actual weights of the private equity investments and the private equity source fund. To coincide with private equity investments reporting, 1-quarter lagged market values are used for the private equity component in the custom benchmark calculation.

5 Performance, fund size, and capital called down for private equity investments are presented on a 1-quarter lag basis.


Tacoma Historical Investment Performance Periods Ending June 30, 2009

Total Fund

5-year 10-year Date

Total Fund 15.76 -18.71 -4.01 2.54 4.49 8.84 6/79 Policy Return 16.25 -20.63 -4.93 1.21 2.58 -.- 6/79

Quarter 1-year 3-year Inception

Domestic Equity Total Domestic Equity 16.22 -28.59 -9.17 -1.97 0.56 9.93 9/84

Northern Trust Large Cap Core 16.34 -26.70 -8.46 -2.39 -2.28 7.84 12/90 S&P 500 Index 15.93 -26.22 -8.21 -2.24 -2.22 7.90 12/90

Northern Trust Large Cap Core (NonLending -.- -.- -.- -.- -.- -.- 6/09 S&P 500 Index -.- -.- -.- -.- -.- -.- 6/09

Northern Trust Russell 1000 Growth 16.34 -.- -.- -.- -.- 16.34 3/09 Russell 1000 Growth Index 16.32 -.- -.- -.- -.- 16.32 3/09

Northern Trust Small Cap Core 20.71 -25.24 -9.91 -1.73 2.40 9.13 12/90 Russell 2000 Index 20.68 -25.01 -9.88 -1.70 2.38 9.07 12/90

BGI Alpha Tilts 15.74 -28.01 -.- -.- -.- -17.37 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -.- -15.68 3/07 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -.- -14.68 3/07

INTECH 15.31 -26.62 -.- -.- -.- -15.79 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -.- -15.68 3/07 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -.- -14.68 3/07

Research Affilliates 16.82 -27.01 -.- -.- -.- -17.60 3/07 S&P 500 Index 15.93 -26.22 -.- -.- -.- -15.68 3/07 S&P 500 Index + 1% 16.18 -25.22 -.- -.- -.- -14.68 3/07

S&P 500 Index 15.93 -26.22 -8.21 -2.24 -2.22 9.82 9/84Wilshire 5000 16.79 -26.40 -8.13 -1.60 -1.32 9.63 9/84 International Equity Total International Equity 25.34 -33.28 -7.06 3.41 1.68 3.92 3/88

Northern Trust EAFE Index Fund 25.65 -.- -.- -.- -.- 25.65 3/09 MSCI EAFE Index 25.43 -.- -.- -.- -.- 25.43 3/09

Northern Trust EM Index Fund 34.50 -.- -.- -.- -.- 34.50 3/09 MSCI Emerging Markets Index 34.73 -.- -.- -.- -.- 34.73 3/09

TT International 22.72 -37.14 -9.08 2.52 1.13 1.70 3/99 MSCI EAFE Index 25.43 -31.35 -7.98 2.31 1.18 1.40 3/99 MSCI EAFE Index + 2.6% 26.08 -28.75 -5.38 4.91 3.78 4.00 3/99

MSCI EAFE Index 25.43 -31.35 -7.98 2.31 1.18 3.85 3/88MSCI Emerging Markets Index 34.73 -28.07 2.95 14.71 8.70 -.- 3/88


Tacoma Historical Investment Performance (Continued) Periods Ending June 30, 2009

Core Fixed Income

5-year 10-year Date

Total Core Fixed Income 5.39 3.61 5.96 5.21 6.01 9.80 9/81

Metropolitan West 5.39 3.61 5.96 5.21 -.- 5.75 3/02 Barclays Aggregate Bond Index 1.79 6.06 6.43 5.02 -.- 5.43 3/02 Barclays Aggregate Bond + 0.75% 1.98 6.81 7.18 5.77 -.- 6.18 3/02

Barclays Aggregate Bond Index 1.79 6.06 6.43 5.02 5.98 9.43 9/81

Quarter 1-year 3-year Inception

High Yield Total High Yield 11.98 -3.17 2.30 -.- -.- 2.76 9/05

Post Advisory Group 11.98 -3.17 2.30 -.- -.- 2.76 9/05 ML High Yield Master II 23.19 -3.53 1.81 -.- -.- 2.44 9/05 ML High Yield Master II + 1.75% 23.63 -1.78 3.56 -.- -.- 4.19 9/05

ML High Yield Master II 23.19 -3.53 1.81 -.- -.- 2.44 9/05 Real Estate Total Real Estate 32.05 -49.08 -21.77 -4.27 5.37 2.41 3/88

Adelante Capital Management 32.05 -49.08 -21.77 -4.27 5.34 4.00 12/97 Wilshire REIT Index 31.66 -45.26 -19.69 -3.25 5.54 3.64 12/97 Wilshire REIT Index + 1% 31.91 -44.26 -18.69 -2.25 6.54 4.64 12/97

Wilshire REIT Index 31.66 -45.26 -19.69 -3.25 5.54 6.61 3/88Wilshire RE Securities Index 31.91 -45.65 -19.92 -3.41 5.19 5.51 3/88 Private Equity Total Private Equity 16.23 -.- -.- -.- -.- 16.23 3/09

Northern Trust S&P 500 16.32 -.- -.- -.- -.- 16.32 3/09 S&P 500 Index 15.93 -.- -.- -.- -.- 15.93 3/09

Harbour Vest Partners -3.63 -.- -.- -.- -.- -3.63 3/09

Pantheon Ventures -.- -.- -.- -.- -.- -.-

Manager Guideline Compliance Affirmation

Client: Tacoma Employes’ Retirement System Manager: Adelante Capital Management Date: July 17, 2009 Time Period: Quarter Ended June 30, 2009 Please check one of the following: The portfolio referenced above was in compliance with its investment guidelines over the

time period stated above. The portfolio referenced above was not in compliance with its investment guidelines over

the time period stated above. The following describes in detail the nature of the noncompliance and quantifies any economic harm to the portfolio as a result of this noncompliance:

Yes The firm is currently in full compliance with the SEC. If the SEC has issued any

disciplinary actions against the firm during the time period stated above, please provide detailed explanation in Exhibit A.

No According to the firm’s knowledge, have any holdings, whose securities are held by the

portfolio referenced above, failed to timely file any reports to stay in compliance with the Sarbanes-Oxley Act? If the answer is YES, please check the box at the beginning of this paragraph and provide the company name and information regarding the late-filing report in Exhibit B.

Signed: _______________ Name (typed): Mark A. Hoopes Date: July 17, 2009

Performance Review: Tacoma - BGI Alpha Tilts

Investment Philosophy:

Sources of Value Added:% Style% Sector% Stock Selection

Contact:Phone:E-Mail:

Open for New Business:Product Inception:

Assets Under Management:% Active Asset Allocation

Investment Philosophy:Annualized Ended 06/30/2009 Annual Returns

Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-28.02 -9.97 -2.37 N/ABgi Alpha Tilts -36.62 0.66 16.17 9.07 10.91 29.21 N/A N/A N/A N/A-26.20 -8.21 -2.23 -2.22S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation28.63 18.97 15.71 N/ABgi Alpha Tilts 21.46 10.25 6.14 8.04 8.10 10.75 N/A N/A N/A N/A28.49 18.97 15.50 16.04S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance21.01 15.10 12.75 N/ABgi Alpha Tilts 16.71 7.58 5.06 5.23 6.44 6.92 N/A N/A N/A N/A20.75 15.07 12.50 12.14S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns-1.82 -1.77 -0.13 N/AArithmetic Excess 0.37 -4.88 0.37 4.18 0.04 0.52 N/A N/A N/A N/A-2.47 -1.93 -0.14 N/AGeometric Excess 0.59 -4.62 0.32 3.99 0.03 0.41 N/A N/A N/A N/A

1 Year 3 Years 5 Years 10 YearsExcess StatisticsManager vs. Benchmark

Annualized Ended 06/30/2009

Tracking Error 1.44Information Ratio -1.71Downside Deviation 1.07Skewness -0.43Kurtosis 0.12Alpha -2.25

1.65

Beta 1.00

-1.17

Residual Risk 1.38

1.06

R Squared 1.00

0.610.26

-1.94

0.99

1.69

0.10-0.65-0.071.011.670.99

1.001.62

-0.081.17

N/AN/AN/AN/AN/AN/AN/AN/AN/A

Page 1

Holdings Analysis: Tacoma Employes' Retirement System - BGI Alpha Tilts June 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Style Focus:


Assets Under Management:

Capitalization Focus:

< Unknown >< Unknown >< Unknown >

Period EndALPHA S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

06/30/2009 -17.97 98.89 -13.40 103.2903/31/2009 -23.69 103.04 -13.89 105.2612/31/2008 -11.74 102.14 -7.35 104.3909/30/2008 -8.43 99.83 -5.84 105.2506/30/2008 -7.73 101.33 -0.02 105.9903/31/2008 -16.91 101.66 -5.69 106.0912/31/2007 -13.57 100.32 -4.08 105.1909/30/2007 -19.66 101.84 -8.89 106.3606/30/2007 -23.43 102.24 -9.80 102.7103/31/2007 -15.29 100.11 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.3209/30/2004 15.38 105.36

Min -23.69 98.89 -14.44 102.71Max -7.73 103.04 24.22 106.78Avg -15.84 101.14 -3.08 105.44

Median -16.10 101.50 -6.60 105.49Stddev 5.60 1.30 11.02 1.01

Page 2

Performance Review: Tacoma - INTECH







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-26.62 -8.27 -1.10 N/AIntech -36.58 6.92 14.64 9.18 15.58 28.82 N/A N/A N/A N/A-26.20 -8.21 -2.23 -2.22S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation27.96 18.85 15.48 N/AIntech 21.82 9.15 5.82 7.54 7.57 10.76 N/A N/A N/A N/A28.49 18.97 15.50 16.04S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance20.72 15.23 12.71 N/AIntech 16.90 6.89 4.54 5.14 5.87 7.07 N/A N/A N/A N/A20.75 15.07 12.50 12.14S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns-0.42 -0.06 1.14 N/AArithmetic Excess 0.40 1.38 -1.16 4.29 4.71 0.13 N/A N/A N/A N/A-0.56 -0.07 1.16 N/AGeometric Excess 0.64 1.31 -1.00 4.09 4.25 0.10 N/A N/A N/A N/A



Tracking Error 1.42Information Ratio -0.40Downside Deviation 1.01Skewness 0.03Kurtosis -1.00Alpha -1.19

2.03

Beta 0.98

-0.03

Residual Risk 1.36

1.55

R Squared 1.00

-0.681.30

-0.19

0.99

1.90

-0.541.421.130.991.890.99

0.992.00

0.611.41


Page 3

Holdings Analysis: Tacoma Employes' Retirement System - INTECH June 30, 2009






Period EndTACINTECH S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

06/30/2009 -19.74 94.33 -13.40 103.2903/31/2009 -18.86 97.64 -13.89 105.2612/31/2008 3.55 96.05 -7.35 104.3909/30/2008 7.87 97.13 -5.84 105.2506/30/2008 6.09 99.72 -0.02 105.9903/31/2008 5.47 100.02 -5.69 106.0912/31/2007 5.90 97.55 -4.08 105.1909/30/2007 -2.62 97.12 -8.89 106.3606/30/2007 -9.67 86.39 -9.80 102.7103/31/2007 -9.81 85.56 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.3209/30/2004 15.38 105.36

Min -19.74 85.56 -14.44 102.71Max 7.87 100.02 24.22 106.78Avg -3.18 95.15 -3.08 105.44

Median 0.47 97.13 -6.60 105.49Stddev 10.63 5.11 11.02 1.01

Page 4

Performance Review: Tacoma - RAFI







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-27.03 -9.19 N/A N/ARafi -37.49 4.00 20.17 6.94 N/A N/A N/A N/A N/A N/A-26.20 -8.21 -2.23 -2.22S&P 500 -36.99 5.54 15.81 4.89 10.87 28.69 -22.12 -11.88 -9.12 20.99

Risk - Standard Deviation31.15 20.27 N/A N/ARafi 22.28 9.42 5.02 8.35 N/A N/A N/A N/A N/A N/A28.49 18.97 15.50 16.04S&P 500 21.01 9.65 5.63 7.91 7.30 11.40 20.64 19.88 17.22 13.02

Risk - Semi-Variance22.67 16.10 N/A N/ARafi 17.45 7.10 4.10 5.72 N/A N/A N/A N/A N/A N/A20.75 15.07 12.50 12.14S&P 500 16.33 7.12 4.61 5.20 5.68 7.46 13.85 14.02 10.55 9.63

Excess Returns-0.83 -0.98 N/A N/AArithmetic Excess -0.50 -1.54 4.36 2.05 N/A N/A N/A N/A N/A N/A-1.12 -1.07 N/A N/AGeometric Excess -0.80 -1.46 3.77 1.96 N/A N/A N/A N/A N/A N/A



Tracking Error 4.05Information Ratio -0.28Downside Deviation 2.73Skewness 0.26Kurtosis -0.75Alpha 2.03

2.92

Beta 1.09

-0.37

Residual Risk 3.11

1.94

R Squared 0.99

0.480.76

-0.22

0.98

N/A

N/AN/AN/AN/AN/AN/A

1.062.62

N/AN/A


Page 5

Holdings Analysis: Tacoma Employes' Retirement System - Research Affiliates June 30, 2009






Period EndTACRAF S&P 500

StyleScore

SizeScore

StyleScore

SizeScore

06/30/2009 -48.66 74.16 -13.40 103.2903/31/2009 -56.29 78.59 -13.89 105.2612/31/2008 -50.01 74.30 -7.35 104.3909/30/2008 -52.01 71.61 -5.84 105.2506/30/2008 -36.75 74.73 -0.02 105.9903/31/2008 -38.90 75.81 -5.69 106.0912/31/2007 -41.86 83.47 -4.08 105.1909/30/2007 -46.26 94.35 -8.89 106.3606/30/2007 -46.09 95.42 -9.80 102.7103/31/2007 -46.62 94.28 -9.31 106.3812/31/2006 -12.75 106.1309/30/2006 -13.51 106.5006/30/2006 -9.39 105.7603/31/2006 -14.44 106.7812/31/2005 11.19 105.4709/30/2005 10.97 105.5706/30/2005 0.86 105.4903/31/2005 4.05 105.4912/31/2004 24.22 105.3209/30/2004 15.38 105.36

Min -56.29 71.61 -14.44 102.71Max -36.75 95.42 24.22 106.78Avg -46.35 81.67 -3.08 105.44

Median -46.44 77.20 -6.60 105.49Stddev 5.94 9.52 11.02 1.01

Page 6

Performance Review: Tacoma - TT International







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-37.14 -9.08 2.52 1.13Tt International -47.87 15.15 29.29 21.44 13.17 34.89 -17.32 -29.64 -11.71 N/A-31.36 -7.98 2.31 1.18MSCI EAFE $N -43.39 11.18 26.35 13.56 20.24 38.59 -15.94 -21.45 -14.16 26.97

Risk - Standard Deviation37.66 24.94 21.41 19.93Tt International 30.67 11.29 12.94 12.33 12.25 17.02 16.14 17.69 16.43 N/A35.79 23.20 19.45 17.77MSCI EAFE $N 27.02 9.62 9.40 10.06 9.50 14.57 18.95 17.12 13.57 12.65

Risk - Semi-Variance27.46 20.04 17.28 15.09Tt International 24.32 7.78 9.66 9.54 8.79 11.34 11.85 13.68 10.69 N/A24.99 18.17 15.49 13.77MSCI EAFE $N 20.73 6.64 7.24 7.45 6.77 10.41 14.41 11.94 9.05 9.43

Excess Returns-5.78 -1.10 0.21 -0.06Arithmetic Excess -4.49 3.98 2.94 7.89 -7.06 -3.70 -1.38 -8.19 2.45 N/A-8.42 -1.20 0.20 -0.06Geometric Excess -7.92 3.58 2.32 6.95 -5.88 -2.67 -1.64 -10.43 2.85 N/A




4.53

Beta 1.04

-0.26

Residual Risk 5.24

3.81

R Squared 0.98

-1.945.92

-0.16

0.98

4.38

-1.313.840.561.083.870.97

1.063.90

0.053.49

6.06-0.014.020.783.840.391.075.930.91

Page 7

Holdings Analysis: Tacoma Employes' Retirement System - TT International June 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Regional Focus:


Assets Under Management:< Unknown >< Unknown >

MS EAFETACTT

Country Allocation (% of Equity Holding)

EUROPE0.3--AUSTRIA0.9--BELGIUM0.90.9DENMARK1.3--FINLAND

10.46.3FRANCE7.810.0GERMANY0.3--IRELAND3.5--ITALY2.3--NETHERLANDS0.71.6NORWAY4.54.0SPAIN2.40.9SWEDEN7.59.8SWITZERLAND

21.032.4UNITED KINGDOMAMERICAS

0.0--CANADA0.0--UNITED STATES

PACIFIC BASIN7.46.1AUSTRALIA2.41.6HONG KONG

24.124.2JAPAN0.0--MALAYSIA0.10.2NEW ZEALAND1.41.1SINGAPORE

0.9OTHER COUNTRIES 0.8

Structural Characteristics# Stocks 136 957% Cash -- --% Stocks -- --

Page 8

Performance Review: Tacoma - Metropolitan West







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 19993.63 5.96 5.21 N/AMetropolitan West -1.46 7.17 6.60 2.81 5.59 13.70 N/A N/A N/A N/A6.06 6.43 5.02 5.98BC Aggregate 5.24 6.96 4.33 2.43 4.34 4.11 10.27 8.42 11.63 -0.83

Risk - Standard Deviation6.98 4.54 3.79 N/AMetropolitan West 6.11 2.69 2.34 2.46 2.93 4.65 N/A N/A N/A N/A6.06 4.04 3.63 3.78BC Aggregate 6.09 2.64 2.70 3.14 4.04 5.26 3.75 3.79 2.84 2.70

Risk - Semi-Variance4.89 3.28 2.71 N/AMetropolitan West 3.86 1.90 1.61 1.89 2.38 3.83 N/A N/A N/A N/A4.00 2.74 2.47 2.80BC Aggregate 3.83 1.89 1.90 2.31 3.42 4.17 3.05 2.83 2.13 2.05

Excess Returns-2.43 -0.47 0.19 N/AArithmetic Excess -6.70 0.21 2.27 0.38 1.25 9.60 N/A N/A N/A N/A-2.29 -0.44 0.19 N/AGeometric Excess -6.37 0.20 2.17 0.37 1.20 9.22 N/A N/A N/A N/A




3.16

Beta 0.77

-0.14

Residual Risk 5.33

2.62

R Squared 0.44

-2.2011.85

0.18

0.52

2.57

-2.5216.66

0.590.782.500.57

0.813.13

0.072.12


Page 9

Holdings Analysis: Tacoma Employes' Retirement System - Metropolitan West June 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Duration Focus:



Sector Focus:


Period EndTACMW BC Aggregate

AverageQuality

EffctvDuration

AverageQuality

EffctvDuration

06/30/2009 7.00 4.34 6.54 4.1903/31/2009 7.00 5.66 6.58 3.7312/31/2008 7.00 4.48 6.58 3.7109/30/2008 6.26 4.57 6.58 4.4706/30/2008 6.66 5.38 6.55 4.6803/31/2008 6.64 5.04 6.57 4.3812/31/2007 6.11 5.62 6.57 4.4109/30/2007 5.87 5.79 6.43 4.6206/30/2007 5.77 5.18 6.45 4.7003/31/2007 6.67 4.96 6.44 4.5012/31/2006 6.75 4.91 6.42 4.4609/30/2006 7.00 4.72 6.41 4.6106/30/2006 7.00 5.07 6.43 4.8003/31/2006 7.00 4.93 6.42 4.6812/31/2005 7.00 4.56 6.40 4.5709/30/2005 7.00 4.77 6.53 4.4406/30/2005 7.00 4.81 6.40 4.1603/31/2005 7.00 4.92 6.37 4.5012/31/2004 7.00 4.18 6.30 4.3409/30/2004 7.00 3.44 6.29 4.45

Min 5.77 3.44 6.29 3.71Max 7.00 5.79 6.58 4.80Avg 6.74 4.87 6.46 4.42

Median 7.00 4.92 6.44 4.47Stddev 0.41 0.55 0.09 0.29

Page 10

Performance Review: Tacoma - Post Advisory Group







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-3.17 2.30 4.08 N/APost Advisory Group -19.95 4.17 8.58 3.66 9.70 18.84 N/A N/A N/A N/A-3.54 1.80 4.09 4.41ML HY Master II -26.39 2.21 11.72 2.73 10.80 28.07 -1.91 4.49 -5.23 2.49

Risk - Standard Deviation19.66 11.68 9.23 N/APost Advisory Group 16.21 4.59 1.89 3.87 2.69 3.07 N/A N/A N/A N/A27.93 16.38 12.88 11.05ML HY Master II 21.59 5.68 2.28 4.92 3.84 5.78 12.20 11.99 6.37 3.46

Risk - Semi-Variance16.19 9.76 7.78 N/APost Advisory Group 13.63 3.78 1.59 3.07 2.30 2.31 N/A N/A N/A N/A21.51 12.81 10.19 8.60ML HY Master II 17.10 4.63 1.80 3.78 3.23 4.00 9.18 9.02 4.80 2.30

Excess Returns0.37 0.50 -0.01 N/AArithmetic Excess 6.45 1.96 -3.14 0.93 -1.10 -9.23 N/A N/A N/A N/A0.39 0.49 -0.01 N/AGeometric Excess 8.76 1.92 -2.81 0.90 -0.99 -7.21 N/A N/A N/A N/A



Tracking Error 11.00Information Ratio 0.04Downside Deviation 7.90Skewness -0.07Kurtosis -1.39Alpha -1.72

6.27

Beta 0.67

0.08

Residual Risk 6.08

4.47

R Squared 0.91

-0.072.09

-0.18

0.91

4.90

0.024.790.130.692.760.91

0.683.51

0.003.45


Page 11

Holdings Analysis: Tacoma Employes' Retirement System - Post Advisory Group June 30, 2009

Most Appropriate Benchmark:Investment Philosophy:Duration Focus:



Sector Focus:


Period EndTACPOST ML HIYLD MSTR II

AverageQuality

EffctvDuration

AverageQuality

EffctvDuration

06/30/2009 7.00 3.1103/31/2009 7.00 3.04 2.23 3.7912/31/2008 7.00 3.56 2.24 3.8309/30/2008 7.00 3.66 2.23 4.2406/30/2008 7.00 3.80 2.24 4.5003/31/2008 7.00 4.07 2.24 4.5212/31/2007 7.00 4.02 2.21 4.7409/30/2007 7.00 3.91 2.24 4.8306/30/2007 7.00 4.00 2.23 4.8903/31/2007 7.00 3.68 2.23 4.6712/31/2006 7.00 3.48 2.22 4.6809/30/2006 7.00 3.40 2.26 4.6606/30/2006 7.00 3.67 2.26 4.7103/31/2006 7.00 3.84 2.24 4.6612/31/2005 7.00 4.19 2.27 4.6209/30/2005 7.00 4.34 2.31 4.7606/30/2005 2.30 4.7303/31/2005 2.25 4.8212/31/2004 2.24 4.5209/30/2004 2.23 4.55

Min 7.00 3.04 2.21 3.79Max 7.00 4.34 2.31 4.89Avg 7.00 3.74 2.25 4.56

Median 7.00 3.74 2.24 4.66Stddev 0.00 0.36 0.03 0.30

Page 12

Performance Review: Tacoma - Adelante







Historical Returns 1 Year 3 Years 5 Years 10 Years 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999-49.08 -21.77 -4.26 5.35Adelante -45.30 -17.31 37.16 16.00 35.42 35.34 3.81 10.88 33.04 -0.88-45.25 -19.69 -3.25 5.54WIL REIT -39.20 -17.56 35.99 13.82 33.14 36.18 3.60 12.36 31.04 -2.57

Risk - Standard Deviation59.71 37.68 31.30 24.32Adelante 43.24 20.95 12.22 18.01 21.31 7.89 13.34 10.62 14.78 14.4664.08 39.60 32.45 25.02WIL REIT 47.69 20.64 13.09 16.41 20.93 7.97 12.91 11.89 14.77 13.36

Risk - Semi-Variance41.54 28.29 24.30 19.16Adelante 35.73 14.75 9.39 13.91 18.64 6.35 9.81 7.26 11.13 7.8345.12 29.63 25.04 19.58WIL REIT 38.88 14.41 10.23 12.60 18.44 6.28 9.65 8.50 10.49 6.97

Excess Returns-3.83 -2.08 -1.01 -0.20Arithmetic Excess -6.10 0.25 1.17 2.18 2.28 -0.84 0.21 -1.48 2.00 1.69-6.99 -2.59 -1.04 -0.19Geometric Excess -10.03 0.30 0.86 1.92 1.71 -0.62 0.20 -1.32 1.53 1.73




5.10

Beta 0.93

-0.51

Residual Risk 6.90

4.24

R Squared 0.99

-1.714.64

-4.20

0.98

4.18

-2.047.54

-1.460.964.080.98

0.944.76

-0.253.48

3.50-0.052.78

-1.738.21

-0.160.963.470.98

Page 13

Holdings Analysis: Tacoma Employes' Retirement System - Adelante Capital Mgmnt June 30, 2009






Period EndTACROSWC Wil REIT

StyleScore

SizeScore

StyleScore

SizeScore

06/30/2009 -86.22 7.14 -86.58 -4.1203/31/2009 -87.87 -2.67 -81.84 -12.3112/31/2008 -63.32 3.37 -74.96 -2.0709/30/2008 -69.84 20.65 -78.33 10.3806/30/2008 -69.73 15.83 -98.32 -0.9603/31/2008 -64.07 25.26 -96.50 4.2512/31/2007 -58.24 15.32 -74.13 -9.0109/30/2007 -44.11 22.85 -81.04 2.4306/30/2007 -37.94 19.54 -70.56 -1.6503/31/2007 -19.82 28.72 -45.01 9.5012/31/2006 -1.58 29.94 -58.53 10.3309/30/2006 -7.39 24.87 -60.90 9.0806/30/2006 -53.42 24.65 20.42 22.5703/31/2006 16.08 59.09 18.73 18.7612/31/2005 22.19 28.04 22.39 11.5009/30/2005 23.53 23.80 23.75 11.3206/30/2005 27.20 22.31 26.58 11.2603/31/2005 29.17 12.55 28.79 3.1912/31/2004 8.79 17.45 8.22 7.8709/30/2004 -36.64 11.36 -36.63 9.80

Min -87.87 -2.67 -98.32 -12.31Max 29.17 59.09 28.79 22.57Avg -28.66 20.50 -39.72 5.61

Median -37.29 21.48 -59.72 8.48Stddev 40.38 12.56 48.31 8.76

Page 14

Tacoma Managers

Domestic Equities: common stock represents equity ownership in a public traded US corporation. Wilshire’s long term expected return for US equities is 8.25%, unchanged from the past two years.

A. Index Managers‐ Index Managers seek to build portfolios that replicate the movement of the index being tracked. Tracking can be achieved by holding all of the securities in the index, or by holding representative securities. Index portfolios should earn the return of the index and have the risk characteristics of the index. This is a passive approach to investing and is attractive because of its lower fees and tracking error.

1. Northern Trust – S&P 500 Index Inception Date: 12/1990

This manager seeks to earn the return and have the risk characteristics of the S&P 500 Index.

3. Northern Trust – Russell 1000 Growth Index Inception Date: 3/2009

This manager seeks to earn the return and have the risk characteristics of the Russell 1000 Growth Index.

2. Northern Trust – Small‐cap Core Index Inception Date: 12/1990

This manager seeks to earn the return and have the risk characteristics of the Russell 2000 Index. The Russell 2000 Index is used as a performance benchmark by small cap managers.

B. Enhanced Index Managers‐Enhanced Index Managers seeks to add small amounts of incremental return above a specified benchmark by creating portfolios that have more attractive characteristics than the index without taking significant “bets” against the benchmark in terms of sector weightings, style, or market cap size.

1. Barclays Global Investors: Alpha Tilts Fund (2% risk) Inception Date: 3/2007

This quantitative manager seeks to outperform the S&P 500 Index by 1%‐2% annually with a tracking error of less than 2%. BGI’s strategy is to gather data and process this information into forecasts for excess returns. BGI looks at 1200 stocks and uses 30 signals, or factors (relative value, earnings quality, and sentiment) to rank each stock. This ranking is converted into a score. The portfolio is constructed by optimizing the score against the marginal risk active positions introduce. The portfolio typically holds about 300 positions and the maximum an individual security can be is +/‐ 3% of benchmark weight.

2. INTECH: Enhanced Plus Index Inception Date: 3/2007

This quantitative manager seeks to outperform the S&P 500 Index by 2% annually with a tracking error of less than 2%. INTECH’s strategy is unique because it is purely mathematical and focuses on volatility and covariance (other quantitative managers look to exploit security mis‐pricing). The portfolio is constructed by weighting stocks based on their expected volatility and covariance but INTECH ensures that this volatility is well diversified within the portfolio, so that the total portfolio does not have volatility that is meaningfully different than the S&P 500. The portfolio is optimized and rebalanced regularly to ensure tracking error is controlled.

3. Research Affiliates – Enhanced Large Company Index Inception Date: 3/2007

This fundamental index manager seeks to outperform the S&P 500 Index by 2% annually. Using data, this manager weights securities based on accounting fundamentals instead of the traditional market capitalization weighting used by most index managers. This manager determines the weight for each security based on: cash flow, total book value, dividends, and sales on a trailing 5 year basis. The portfolio is constructed based on selecting the 1000 US securities with the highest weights determined using the fundamental approach.

C. Active Managers – Active Managers seek to outperform specified benchmarks by forecasting returns for stocks and creating portfolios based on those forecasts. Active managers will typically vary the sector weights, style and market cap size of the portfolio relative to the index, based on the manager’s forecast of expected returns. As such, the active returns (manager return minus index return) for active managers tend to vary more widely than the active returns for enhanced index managers.

1. Denver Investment Advisors: Mid‐Cap Growth manager Inception Date: 3/1983

This is a classic growth manager who seeks to find companies with proprietary products, rapidly growing market share, a strong management team, and improving growth and return opportunities. Initially, DIA screens 1400 companies based on fundamental factors and narrows the list. Then it conducts proprietary research on these companies. Valuation models to support buy and sell recommendations. The portfolio is concentrated with about 70 positions and analysts have a significant input on the names in the portfolio. The portfolio’s industry and sector weights will vary form those of the Mid Cap Index.

2. Russell Investment Group: Select Holdings Inception Date: 12/2007

Russell Investment Group manages a “best ideas” portfolio based on the underlying security selections of several quantitative and fundamental managers. The portfolio is created using the most overweight securities in the underlying managers’ portfolios. The size and style of this portfolio can vary as the underlying managers find and implement different investments.

International Equities‐ common stock represents equity ownership in a non‐US public traded corporation. Wilshire’s long term expected return for International equities is 8.25%, unchanged from last years.

1. TT International – Active International Equity Inception Date: 3/1999

This active global manager utilizes a top down approach to evaluate theme opportunities in the market place and shifts between the value style and growth style based on manager interpretation of market sentiment. Following geopolitical and country policy analysis, this manager evaluates individual securities based on valuation, verification and catalyst for change. The portfolio is benchmarked to the EAFE Index and it is diversified with 100 positions; individual positions are capped at 5% of the portfolio. Tracking error is monitored for risk control.

2. Northern Trust – EAFE Index – Passive International Equity Inception Date: 3/2009

This manager seeks to earn the return and have the risk characteristics of the Morgan Stanley Capital International’s Europe, Australia & Far East Index (MSCI EAFE Index)

3. Northern Trust – Emerging Markets Index – Passive International Equity Inception Date: 3/2009 This manager seeks to earn the return and have the risk characteristics of the Morgan Stanley Capital International’s Emerging Markets Index (MSCI EM Index)

Fixed Income: bonds are debt instruments that are contractually required to be repaid at maturity by the issuer. Wilshire’s long term expected return for US bonds is 5%, a 25bp decline from the prior year.

1. Metropolitan West Asset Management: Total Return Bonds Inception Date: 3/2002

Metropolitan West manages an investment grade fixed income portfolio. This active fixed income manager adds value by 1) varying the duration of the portfolio from the benchmark’s duration, 2) yield curve management, 3) sector rotation, 4) individual security selection, 5) proprietary buy/sell execution strategies. The portfolio is constructed based on macro themes. Duration changes are constrained to be +/‐ 1 year of the benchmark. Individual positions are limited to 1% at purchase and may rise to 2.5% of portfolio over time. This manager typically holds 75 – 95 issues.

2. Post Advisory Group – High Yield Bonds Inception Date: 9/2005

This active high yield bond manager ranks bonds based on 100 point quantitative and qualitative system. Industry position accounts for (20%), Company position (60%), and Security position (20%). The portfolio is constructed by consensus team decision, it is well diversified with individual positions range from 1%‐2% of the portfolio. Post is not allowed to hold CCC rated bonds (very low credit quality) in this portfolio.

US Real Estate Securities (REITS): a REIT is a security that trades like a stock and invests in real estate directly, either through properties or mortgages. Wilshire’s long term expected return for REITS is 5.75%, unchanged from last year.

1. Adelante: Total Return Inception Date: 12/1997

Adelante seeks current income and long term capital growth by investing in companies that are trading at or below the private market value. This manager uses quantitative models to identify relative value opportunities. The portfolio is fairly concentrated with 25‐35 issues; individual position limits of 10%. The property type limitation prevents this manager from having more than two times benchmark weight.

STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES

FOR

TACOMA EMPLOYES’ RETIREMENT SYSTEM

March 5, 2007 Effective March 5, 2007

STATEMENT OF INVESTMENT POLICIES AND OBJECTIVES FOR THE TACOMA EMPLOYES’ RETIREMENT SYSTEM

March 2007

I. Introduction The investment policies and objectives of the Tacoma Employes’ Retirement System (TERS) are intended to allow for sufficient flexibility in the management process to capture investment opportunities, yet provide parameters that will ensure prudence and care in the execution of the investment program. The Retirement Board in investing TERS’ assets shall act with the care, skill, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Definition of Terms

1. Allocated Cash - Funds allocated to the Investment Managers. These funds are generated by income (interest, dividends) and monies earned as a result of the sales of a security. The investment manager’s allocated cash is invested in cash equivalents as per the short-term investment policy and is readily available for investment by the investment manager.

2. Cost - Book value or purchase price of the security. 3. Fair Value - Current price of the security if sold on the open market as of a given date. 4. Policy - Definite course or method of action selected from among alternatives, in light of

given conditions to guide and determine present and future decisions. 5. Strategic Asset Allocation - The long range asset allocation of a plan designed to obtain a

reasonable long-term total return consistent with the degree of risk assumed while emphasizing the preservation of long-term capital.

6. Tactical Asset Allocation - The procedural and implementation aspects of the strategic asset

allocation to include periodic review and on-going adjustment to achieve goals of the plan. Tactical asset allocation will address the issue of unallocated cash.

7. Target Allocation - The percentage of TERS’ portfolio (at fair value) to be allocated to the

specific asset classes. 8. Unallocated Cash - Funds generated by TERS from contributions less administrative

expenses and benefit payments, invested in cash equivalents.

Page 2

II. General Objectives Policies The general objectives are intended to define the goals to be achieved through the management of TERS’ assets. General policies are intended to provide guidelines for the Retirement Board to follow in meeting the general objectives. A. General Objectives:

1. The overall objective of TERS is to provide adequate retirement and death benefits to its plan beneficiaries through the investment of contributions and other TERS assets, utilizing investment policies designed to maintain adequate funding for the plan’s liabilities over time.

2. The general investment objective is to obtain a reasonable long term total return

consistent with the degree of risk assumed while emphasizing the preservation of capital. 3. The Retirement Board will seek to control the cost of funding the plan within prudent

levels of risk through the investment of TERS assets. B. General Policies:

1. All transactions undertaken on behalf of TERS will be for the sole benefit of plan participants.

2. Investments shall be made without distinction between return generated from income as

opposed to capital gains, and that diversification, need for liquidity, and the potential for gain and loss will be monitored on an on-going basis.

3. The allocation of assets among various asset classes shall be approved by the Retirement

Board. The asset allocation policy shall be predicated on the following factors:

a) the historical performance of capital markets adjusted for the perception of the future short and long term capital market performance;

b) the correlation of returns among the relevant asset classes; c) the perception of future economic conditions, including inflation and interest rate

assumptions; d) the projected liability stream of benefits and the costs of funding to both covered

employees and employers; e) the relationship between the current and projected assets of the plans and the

projected actuarial liability stream. This asset allocation policy will identify the target allocation to the classes of assets TERS can utilize and the ranges within which each can fluctuate as a percent of the total portfolio. This policy is expected to provide diversification of assets in an effort to maximize the investment return to TERS consistent with prudent market and economic

Page 3

risk. All assets of TERS are to remain invested at all times in either cash equivalents or other asset classes as designated by this Policy.

4. Professional investment management firms, which are registered investment advisors or

which are appropriately exempt from registration under the Investment Advisers Act of 1940 as may be amended, shall be retained to assist in managing TERS assets. Investments shall be sufficiently diversified so as to minimize the risk of large losses. Each investment manager will function under a formal contract that delineates its responsibilities and appropriate performance expectations. A formal set of investment guidelines and administrative requirements for management of each portfolio is to be provided to each manager. The Retirement Board will review the investment performance of these managers against their stated objectives at least quarterly. The individual managers will be judged according to benchmarks that reflect the objectives and characteristics of the strategic role their portfolio is to fulfill. Investment managers may act at their own discretion provided their actions are in accordance with Washington State RCW Chapter 35.39, and this Policy.

5. The Retirement Board will allocate net pension fund contributions on an on-going basis in

accordance with this Policy to balance the overall asset allocation against target when deviations occur because of capital market fluctuations. Such allocations can be made even if contributions to managers or asset classes, which have recently experienced poor performance, are entailed. If such poor performance is the result of an occurrence other than expected market-related volatility then a reassessment of that investment shall be undertaken.

6. The Retirement Board may utilize the services of an investment consultant for the purpose

of performance review, asset allocation studies, manager screening and selection and topical studies. The comments and recommendations of the consultant will be considered by the Retirement Board in conjunction with other available information for the purpose of making an informed and prudent decision. The pension consultant acts in a fiduciary capacity providing investment advice to the Retirement Board. The Retirement Board, as per RCW 35.39, obtains an annual statement from the Investment Advisory Committee, who act in a fiduciary capacity on the investment activity of the Fund. The Retirement Board and Investment Advisory Committee will review TERS’ investment results, the System’s asset allocation and investment managers. Should the Retirement Board and Investment Advisory Committee deem that the best possible rate of return with prudent risk has not been obtained, over a full economic cycle, the Board may, at its discretion, issue a request for proposal for investment consulting services.

7. The Retirement Board will utilize the services of a master custodian bank that will be

responsible for holding TERS’ assets, settling purchases and sales of securities; identifying and collecting income which becomes due and payable on assets held; and providing a management information/accounting system.

8. TERS considers the active voting of proxies an integral part of the investment process.

The investment managers shall vote the proxies in a prudent manner.

Page 4

9. A formal review of TERS’ investment structure should be conducted annually by the

Retirement Board. Updated financial projections will be developed at least every two years. The information for these reviews shall come from staff, outside consultants and investment managers, as they may be retained.

10. It is the responsibility of the Retirement Board to administer the investments of TERS at

reasonable cost, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to TERS.

11. Any investment or any action pursuant to an investment for TERS which is not expressly

permitted under this Policy is not allowed unless formally reviewed and approved by the Retirement Board.

12. The Retirement Board will operate the pension investment program in compliance with all

applicable state, federal, and local laws and regulations concerning the investment of pension assets (USC section 401 (a) (8), (9), (16) and (25) of the Internal revenue Code; RCW Chapter 35.39, 41.28, and RCW Section 41.04.040 - 04.04.110; and Chapter 1.30 of the City of Tacoma ordinances as attached and may be hereafter amended).

III. Asset Allocation Policy and Objectives Based on the factors identified in the General Policies above, the Retirement Board has established strategic asset allocation targets and ranges for domestic and international equities, domestic fixed income instruments, real estate investment trusts (REITS) and cash or cash equivalents on a fair value basis. Ranges for each asset class are included in the asset allocation policy to provide the Retirement Board with the flexibility to take advantage of market opportunities.

A. The following strategic asset allocation policy was adopted by the Retirement Board in February 2005.

Targets Ranges Domestic Stocks 40% 37-43% International Stocks 15 12-18 Total Equity 55 49-62% Investment-grade Fixed Income 20 17-23% High Yield Fixed Income 10 7-13 Total Fixed Income 30 27-33% REITS 15 12-18%

Page 5

Cash Equivalents 0 0-2% Total Assets 100% While no strategic allocation has been made to cash equivalents, it is expected that some cash balances will exist as a result of the investment process. These asset classes are defined as: Equities - investments representing ownership interest to include public

and private stock, preferred stock, convertible to stock, options on stock, units, participation or partnership shares which represent ownership interests in an underlying investment (excluding real property).

Fixed Income - investments representing instruments with maturities greater than

one year with obligated fixed rate of interest to include public and private debentures, mortgages, investments in life insurance general accounts and guaranteed investment contracts, with maturities greater than one year, and options on debentures.

Cash Equivalents - investments in fixed income securities with maturities of less

than one year including but not limited to Treasury bills and notes, commercial paper, bankers’ acceptances, certificates of deposit, asset backed securities, eurodollar securities and debentures and mortgages with less than one year remaining to maturity.

REITS - investments representing ownership interest in publicly-traded

stock of real estate companies that are registered under the REIT Act of 1960. Also includes investment in publicly-traded non-REITS which are operating companies that may not technically qualify as REITS for legal purposes but derive a majority of their revenue from real estate operations.

The assets of TERS may be rebalanced to target once an allocation reaches the minimum or maximum point in its range. The actual allocation to asset class shall be monitored frequently to ensure adherence to Policy allocations.

Page 6

B. Each asset class shall be suballocated as follows:

New

Asset Class Target Equities Domestic Core 16.0% Domestic Enhanced Core 16.0 Domestic Growth 8.0 International Passive - ACWI ex-US 7.5% Active - EAFE 7.5

Total Equities 55.0%

Investment-grade Fixed Income 20.0% High Yield Fixed Income 10.0% Fixed Income 30.0%

REITS 15.0% Total 100.0%

The strategic role of each asset class and subclass is defined as follows: Equity

Domestic Core - two stock portfolios: one designed to track the return and characteristics of the Russell 2000, and the other designed to track the return and characteristics of the S&P 500.

Domestic Enhanced Core – three stock portfolios: expected to outperform the S&P 500

index over a full market cycle of 3 to 5 years. These portfolios are expected to track the return of the index closely and exhibit characteristics such as P/E ratio and market capitalization similar to the S&P 500.

Domestic Growth - a portfolio of stocks characterized by higher risk, lower dividend

yield and a higher P/E ratio compared to the market. The growth stock portfolio is expected to provide above market performance in rising markets.

International Equity - a portfolio of stocks of non-domestic companies traded on

exchanges outside the U.S. and denominated in non-U.S. currency. The international equity investment is expected to provide diversification from U.S. equity investments. Passive international equity management attempts to replicate performance and

Page 7

characteristics of a predetermined benchmark. Active management attempts to add value over the benchmark through country allocation, stock selection, etc.

Fixed Income Investment Grade - a portfolio of high quality, publicly-traded fixed income securities,

designed to preserve capital, generate cash flow and earn an incremental yield and return to an investment in U.S. Treasury securities.

High Yield – a portfolio of fixed income securities which are rated below investment

grade and therefore harbor higher volatility. They display a low correlation to virtually all asset classes, thereby reducing overall portfolio volatility. High yield bonds exhibit higher yield to maturity than investment grade bonds which improves the System’s net cash flow.

REITS REITS - a portfolio of publicly-traded equity securities of companies primarily engaged

in operating real estate or related mortgage assets in a manner which satisfies the Real Estate Investment Trust Act of 1960. The REIT investment is expected to provide diversification from traditional capital market risk, liquidity, and a strong level of cash flow.

Cash Equivalents - a portfolio of short-term fixed income securities with an average

maturity of less than one year. Its purpose is to provide liquidity and safety of principal from capital market and default risk.

IV. Performance Objectives

The investment performance will be measured on two levels: against objectives for the total TERS and against objectives for individual portfolio components (asset classes and individual managers). Investment performance shall be measured no less than quarterly on a net of fees basis. Because capital markets fluctuate, and given the length of the duration of the liability stream, the performance relative to objectives is to be judged over a period of three to five years.

A. Performance Objectives for the Total Trust

1. To avoid actuarial loss. The actuarial interest rate is 8.0% (7.75% net of fees) Exceed inflation by 3% as measured by the Consumer Price Index, to ensure real asset growth consistent with risk levels assumed.

Page 8

2. To measure the value added by active management: Exceed a policy index calculated by weighting the appropriate indices according to the asset allocation targets as follows: 40% x S&P 500 20% x Lehman Aggregate Bond Index 10% x Merrill Lynch High Yield Master II Index 15% x Morgan Stanley ACWI Ex-US 15% x Wilshire REIT Index 3. Expected return for the asset allocation policy is 7.52%.

B. Performance Objectives for Individual Components

1. Domestic Equities Passive core Return within 20 basis points of the Wilshire 5000

Index over one year. Growth 2% above S&P 500 over a market cycle of three to

five years. Enhanced Core 1.5% above S&P 500 over a market cycle of three

to five years. 2. Fixed Income

Investment Grade 0.75% above the Lehman Aggregate Bond Index over a market cycle of three to five years.

High Yield 1% above the Merrill Lynch High Yield Master II

Index over a market cycle of three to five years. 3. Real Estate Investment Trusts (REITS)

REITS Return to exceed the Wilshire REIT Index by 2% per annum.

4. International Equities

Passive Return within 0.30% of the MSCI ACWI Ex-US Index per year.

Page 9

Active 2% above the MSCI EAFE Index over a three year

period. V. General Investment Manager Guidelines and Requirements

1. Purchases and sales, security selection, and portfolio implementation of investment strategies are delegated to the discretion of the investment manager, subject to compliance with TERS’ investment policies.

2. The following transactions are prohibited: purchase of non-negotiable securities, short

sales, stock and bond transactions on margin, straddles, options (other than covered options where expressly allowed), leverage (other than where expressly allowed) or letter stock.

3. Transactions that involve a broker acting as a “principal” where such broker is also the

investment manager who is making the transaction is prohibited. 4. Transactions shall be executed at a reasonable cost, taking into consideration prevailing

market conditions and services and research provided by the executing broker. 5. TERS considers the active voting of proxies an integral part of the investment process.

The investment managers shall vote the proxies in a prudent manner. 6. No more than 5% of any TERS portfolio at cost may be invested in the securities of a

single issuer or in a single tangible asset, excluding securities issued by the U.S. government or its agencies. Further, no more than 1.5% of any TERS stock or bond portfolio at cost may be invested in the securities of any company with less than $75 million in available market capitalization in that class of security.

7. No fixed income security shall have an equivalent credit quality below investment grade

at the time of purchase unless specified as Authorized Investments within the manager’s guidelines. Below investment grade is defined as:

BBB by Standard & Poor’s for straight bonds and convertibles. Baa by Moody’s Investor Service for straight bonds and convertibles. A3 by Standard & Poor’s for short term securities. P3 by Moody’s Investor Service for short-term securities. 8. The use of U.S. equity index futures is permitted to achieve the following:

a) To reduce the opportunity cost caused by “cash drag” in a rising equity market.

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b) To decrease the transaction costs of equity trading without increasing the risk (volatility) of the equity component of TERS.

c) To increase the manager’s flexibility in meeting the performance objectives set forth

for it while still constraining it to maintain investment style and, therefore, its strategic role.

9. The use of U.S. equity futures is constrained by the following requirements:

a) Futures cannot be used for speculative purposes, or for hedging strategies at this

time. b) The use of futures contemplated is as a substitute for the underlying stocks. c) The use of futures is limited to S&P 500 Index contracts only.

10. Performance objectives are to be met on a net of fees basis. 11. Any investment or action with respect to an investment not expressly allowed is

prohibited, unless presented to and approved prospectively by the Board. All guidelines must be adhered to by the external money managers, however, if from time to time an exception to the guidelines shall be deemed appropriate by a manager, it may seek review and approval by the Board to make such an exception.

VI. Review and Modification of Investment Policy Statement The Retirement Board will review the Policy from time to time to determine if modifications

are necessary or desirable. If modifications are made, they shall be promptly communicated to all investment managers and other interested persons.

Modifications may occur due to:

1. operational problems that become apparent during the investment management process. 2. changes in economic prospects, plan characteristics or sponsoring employer

organizations. VII. Adoption Dated this ____________________ day of ________________________________, 2007. THE CITY OF TACOMA TACOMA EMPLOYES’

RETIREMENT SYSTEM

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Approved as to form: By: __________________________ Chairman, Board of Administration ________________________ Assistant City Attorney By: __________________________ Secretary, Board of Administration THE CITY OF TACOMA TACOMA EMPLOYES’ RETIREMENT SYSTEM ________________________ Patricia F. Pabst Retirement System Director

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Executive Summary of Performance - Tacomacms.cityoftacoma.org/retirement/QuarterlyMeetings/2009/2nd...

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