Moving Forward to Better Serve Our Members

Last Five / Next Five

Britt Harris, Chief Investment Officer

2

TRS IMD: Last Five Years

As of 9/30/2016 Last 5-Years Target

Return 9.2% 8.0%

Risk 5.9% 11.0%

Inflation 1.2% 2.5%

Sharpe Ratio 1.5 0.7

Real Return 8.0% 5.0%

Rank (%-ile)

Return 32 50

Risk1 35 50

Return/Risk 10 50

Actual ($, B) Projected ($, B)

Trust Value2 134.0 133.9

Investment Returns 51.8 46.6

Total Contributions 25.3 24.0

Members 13.0 12.0

State/District 12.3 12.0

Payouts 45.0 43.9

TRS Peer Average3

Funded Status

2016 79.7% 75.8%

2011 82.7% 77.0%

Contributions(Employer/ Member)

15.4% (7.7%/ 7.7%)

~31% (~20%/~11%)

Benefits4 52% 82%

Duration 22.6 Years 13-20 Years

Source: Aon Hewitt, TRS IMD, GRS1 Risk-rank shown in inverse2Trust Market Value3Funded status Peers include all public plans greater than $20 B, Contribution/Benefit Peers include all Teacher retirement systems that do not make contributions to Social Security4Source: TRS 2012 Pension Benefit Design Study. Reflects Relative Benefit Index, a measure of the value of retirement income provided to a prototypical career employee from retirement until the member no longer receives benefits. An index score

indicates a plan provides a benefit with a value equal to the full salary replacement and cost living adjustments consistent with inflation. The impact of social security benefits are included as well, if applicable.

3

TRS IMD: Last Five Years

Stable Value

Global Equity

Real Return

Long Treasury 6.3%

Stable Value Hedge Fund 3.9%

Absolute Return 14.4%

US Equity 15.1%

Non-US Dev 8.0%

Em Markets 4.2%

Dir Hedge Fund 4.4%

Private Equity 12.5%

TIPS 2.0%

Real Assets 12.9%

ENRI1 -4.3%

Risk Parity1 5.5%

6.4% 10.2% 8.3%

8.5% 7.7% 2.3%

1.3 0.8 3.6

(-0.4) 1.0 0.3

Return

Risk

Sharpe

Corr. to GE

Source: TRS IMD, State Street Bank, Aon Hewitt13- Year results, Risk Parity and ENRI do not yet have 5-year track records

Annualized Return vs. Annualized Standard Deviation

5 Years Ending September 30, 2016As of 9/30/2016

0.0

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Fed Funds Rate (LHS, %) Fed Balance Sheet (RHS, $Tn)

4

Global Equity Regime: Monetary Policy Supported Markets

-4

-3

-2

-1

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US Real GDP, YOY Growth

-3

-2

-1

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US Inflation, YOY Change

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US Unemployment Rate

-4-3-2-101234567

19

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Personal Consumption, YOY Change

80

90

100

110

120

130

140

20

00

20

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US Labor Productivity Pre-GFC Trend

Central Bank Policy GDP Growth Inflation

Unemployment Private Spending Labor Productivity

Source: Bloomberg, Bureau of Labor Statistics, OECD

Easy monetary policy has fueled a prolonged market rally

Growth is steady, but lowInflation remains below normal

Labor markets have recovered Growth in private spending remains subdued Labor Productivity is below-trend

5

Last 5 Years: Top Priorities

6

Preferred Destination: Principal Investments

Ability to ActCircle of

Competence

Repeatable

PracticesBubble Risk

Strong Pricing

skills

Private Equity Real Assets Total

Count 25 36 61

Commitment ($,B) $ 4.265 $ 9.620 $ 13.885

NAV ($,B) $ 2.966 $ 5.485 $ 8.451

5 Year IRR 17.4% 15.0% 15.7%

Median Peer 9.6% 11.3% 10.8%

Value Added 7.7% 3.7% 4.9%

Dollars Earned ($,B) $ 1.230 $ 2.563 $ 3.793

Value Added ($,MM) $ 394.6 $ 454.4 $ 848.9

Source: State Street Bank , TRS IMD and TUCS as of 9/30/2016. Median Peer Total represents a weighted average based on TRS allocation.

Note: Principal Investments are either commitments to a single investment and/or a single LP structure.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15

Percentage of Indicators On

Current Level: 22%

Threshold Level: 50%

-

2

4

6

8

10

12

14

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Nu

mb

er o

f Si

gnal

s

Monthly Bubble Signals by Asset ClassEquities Fixed Income Commodities Currencies Alternatives

7

Bubble Risk Dilution

Economic Regime

Political Risk

New Investment Capabilities

• Risk Parity

• Low Volatility

Box 1 Box 2 Box 3

Box 4 Box 5 Box 6

Box 7 Box 8 Box 9

-16%

-11%

-6%

-1%

4%

9%

14%

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8%

Infla

tion

(CPI

QoQ

Ann

ualiz

ed)

Growth (GDP QoQ Annualized)

Signal Forecast 2016 2015 2014 2008-2013

Latest(Q3 2016)

Current1 Year

Forecast

Short > +1.0

Long > +1.0

Long > +0.5

Stable

No Data

This Month

cBubble Monitor

cBear Market Indicators

Source: Bloomberg, TRS IMD

Ability to ActCircle of

Competence

Repeatable

PracticesBubble Risk

Strong Pricing

skills

Productivity

20% Annual Productivity

Improvement

Better,

Cheaper,

Faster

8

Repeatable Practices

Critical Processes

• Valuation

• Risk

Management

• Relationship

Management

• Trading

• Operations

• Culture

• Communications

• Recruitment/

Retention

Strategic Planning

Review asset allocation

Evaluate Premier List

needs

Premier List Development

Initial manager proposal

Perform minimum

criteria analysis

Collaborative review by

TRS, Aon Hewitt

& Albourne

Add/reject

proposed portfolio

Certification

Process

Onsite visit conducted

Receive/review

consultant report

Evaluate 9 critical areas

Prepare certification

report

Risk Analysis

Quantitative analysis

Review of current

portfolio (chars.&

valuations)

Develop optimized asset

class structure

Final Fit Analysis

“Alpha Stacking”

demonstrated

Determine initial and

optimal size

Process Mapping – External Manager Program

Ability to ActCircle of

Competence

Repeatable

PracticesBubble Risk

Strong Pricing

skills

9

Competitive Advantage

Trust Level

• Long-Term

• Large

• Not levered

• Liquid

Policy

• Diversification

• Performance

• Collaboration

• Transparency

Circle of Competence

• Strategic Relationships

• Principal Investing

• Developing New Strategies

• TRS Dislocation Strategy

• Recruit and Retain Top Investor Talent

• World Class Agency Structure

Ability to ActCircle of

Competence

Repeatable

PracticesBubble Risk

Strong Pricing

skills

10

Agency Structure

TRS Accolades

• Top Fund/ Top LP

• CIO: Ranked second in the

World

• CIO: Two Lifetime

Achievement Awards

• Chief Risk Officer: Top

ranked in US

• Best Investors under Forty:

Two

• 144 Full Time Employees

• 13 years of average

investment experience

• 84 Masters Degrees

• 47 CFA’s

Ability to ActCircle of

Competence

Repeatable

PracticesBubble Risk

Strong Pricing

skills

11

Contribution Requirements: Last 5 Years

Last 5-Years Median Peer

Return 9.2% 8.6%

Risk 5.9% 6.4%

Sharpe Ratio 1.5 1.3

TRS Peer Average1

Funded Status

2017 79.7% 74.9%

2011 82.7% 77.0%

Contributions(Employer/ Member)

15.4% (7.7%/ 7.7%)

~31%

(~20%/~11%)

Benefits2 52% 82%

Duration 22.6 Years 13-20 Years

• Over the past 5-years, TRS

delivered Risk-adjusted returns

better than 90% of peerso 1.2% above 8.0% target

• Funded Status fell to 79.7%

• Contribution levels and overall

benefits are well below the

national average

• TRS Duration is longer than most

peers

Source: Aon Hewitt, TRS IMD, GRS1Funded status Peers include all public plans greater than $20 B, Contribution/Benefit Peers include all Teacher retirement systems that do not make contributions to Social Security2Source: GRS. Reflects Relative Benefit Index, a measure of the value of retirement income provided to a prototypical career employee from retirement until the member no longer receives benefits. An index score indicates a plan provides a benefit

with a value equal to the full salary replacement and cost living adjustments consistent with inflation. The impact of social security benefits are included as well, if applicable.

12

Investment Outlook: Investment Markets Are Fully Valued

0

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80

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1980

1983

1986

1988

1991

1993

1996

1999

2001

2004

2006

2009

2011

2014

Policy RateEasing/

Tightening

Market-

Expectation

for Dec 2017

USA 0.63% Tightening 1.13%

Japan -0.05% Easing -0.01%

Eurozone -0.40% Easing -0.37%

UK 0.25% Tightening 0.41%10

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15

4%

5%

6%

7%

8%

9%

10%

1996

1997

1999

2000

2002

2003

2005

2006

2008

2009

2011

2012

2014

2015

0

20

40

60

80

100

120

140

160

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

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98

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20

02

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Current PE Above Average

6

7

7

8

8

9

9

10

10

11

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

EBITDA Multiples Near Peak

Cap Rates are at their lows

Oil Prices crashed in 2015, but strengthened

VIX Index low

Interest Rates Very Low

US Dollar Strengthening

Source: Bloomberg, Townsend, S&P Capital Group, TRS IMD

US Stock Market

Private Equity

Interest Rates US Dollar Global Central Banks

Real Estate Cap Rates Energy Markets VIX Volatility Index

0.2%

2.0%

1.6%

1.7%

0.2%

0.4%

1.7%

3.2%

2.0%

2.0%

2.0%

4.8%

5.0%

0.5%

5.0%

0.0%

0.3%

5.0%

5.0%

6.5%

5.1%

0.7%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

US

EAFE

EM

PE

DHF

LT Bonds

SVHF

Cash

TIPS

Real Estate

Infrastructure

Energy

Illiquid Credit

Risk Parity

Blank Canvas Expected Return Review (Alpha)

AVG

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

5.1%

5.3%

5.3%

6.5%

3.3%

1.9%

0.5%

1.7%

4.2%

5.8%

5.9%

4.8%

3.2%

6.5%

7.0%

9.3%

10.7%

6.0%

2.7%

5.0%

2.8%

3.5%

9.1%

8.0%

8.5%

9.9%

8.5%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

US

EAFE

EM

PE

DHF

LT Bonds

SVHF

Cash

TIPS

Real Estate

Infrastructure

Energy

Illiquid Credit

Risk Parity

Blank Canvas Expected Return Review (Beta)

AVG•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

13

Blank Canvas Report: Projected Intermediate Term Returns Have Fallen

Blank Canvas Expected Return Review (Beta) Blank Canvas Expected Return Review (Alpha)

Source: TRS IMD

14

Diversification: Disinflationary Investment Returns Are Low

Total Risk Parity: 5.9%

Total Stable Value

2.3%

Total Real Return

6.1%

Total Global Equity

6.6%

Source: TRS IMD

Next 5-Year Projected Returns from Blank Canvas Study

15

Top Priorities: Next 5 Years

Beta

Management

Alpha

Production

Absolute

Returns

Private

Markets

CIO

Issues

16

Beta

Management

• Reduce

Deflation Hedge

• Re-Allocate

Currency Risk

• Evaluate Use of

Leverage

• Prepare for

Cycle Transition

James

• Global Equity

Best Practices

Transition

• Hedge Funds

Fee Modification

70/30 Gross

Alpha Split

• Rebalance

Hedge Fund

Strategy

Alpha

Production

Jase

• Illiquid Credit

• Evaluate

Internal TAA

• Expand

Alternative Risk

Premia Overlay

Mohan

Private

Markets

• Determine

Conservative

Baselines

• Increase Energy

Exposure

• Improved Access

to GP’s and

Allocations

• Better Fee

Structure (70%

Alpha)

Eric

CIO

Issues

• Modify

Organization

• Evaluate Global

Footprint

• Executive

Management

Growth

• Career Ladder

• Compensation

Alignment

Jerry

Top Priorities

Absolute

Returns

17

TRS IMD: Calculating Funded Status

Liabilities2 Assets3 Contributions4

Current

(4.6% Growth Last 5-Years)

Current

(Last 5-Years: 3.8%)

Current

(15.4% Total)

Projected

(4.2% Growth)

Projected

(4.9% Growth)

Projected

(15.4%)

Funded Ratio1: 79.7% (Plan Assets / Projected Benefit Obligation)

Funding Period: 36 years (Est. Time to Pay Down Unfunded Liability)

FY 2018/19 - Texas Budget5

State $110.6 B

Federal/ Other $103.0 B

Total – Biennium $213.6 B

Total – Annual $106.7 B

Annual TRS Pension System

State Districts Members Trust6

Total Dollars $2.0 B $1.4 B $3.3 B $150 M

% of Budget 1.8%

Source: GRS, TRS IMD1 The Funded Ratio is a measure of Plan Assets relative to the Projected Benefit Obligation at a point in time. If Projected Contributions are included in this calculation, it goes up to 99.3%.2 Current number includes changes in mortality assumptions made in 20153 Asset growth rate reflects Fund Investment Returns (+) Contributions (-) Payouts4 Contributions expressed as a percent of Payroll5Total budget reflects proposal in Senate Bill 1 for the next biennium. State line includes General Revenue and GR-Dedicated line-items.6 TRS Trust operating budget is paid out of the Trust Fund and is not a state expense