a complete copy of the 2012 CAFR Report! - PSERs

Notes to Financial Statements (continued)
FINANCIAL SECTION
(Unhedged) Index composed of primarily investment
grade, relatively liquid non-U.S. public bonds with an
overall weighted-average NRSRO credit rating of A or
better.
• An allocation of 2.0% of the portfolio has been
made to the emerging markets fixed income asset
class benchmarked to the Barclays Capital EM Local
Currency-Government-MV Weighted (Unhedged) -10%
Country Cap Index composed of primarily investment
grade, relatively liquid non-U.S. public bonds with an
overall weighted-average NRSRO credit rating of BBor
better.
• An allocation of 5.0% of the portfolio has been made to
cash benchmarked to the Merrill Lynch U.S. Treasury
Bill 0-3 Months Index composed of primarily investment
grade, relatively liquid U.S. and non-U.S. public bonds
with an overall weighted-average NRSRO credit rating
of AA or better.
The following table discloses aggregate market value by
credit quality rating category. Many securities have ratings
from more than one NRSRO and sometimes those ratings
differ from one NRSRO to another. The data listed below
uses the rating (expressed as S&P equivalent) available
from Fitch, Moody’s and/or S&P that indicates the lowest
credit quality at June 30, 2012 and 2011.
(Dollar Amounts in Thousands)
2012 2011
Quality Rating Fair Value Fair Value
AAA $ 764,417 $ $1,397,723
AA 473,928 489,305
A 705,148 1,063,433
BBB 702,523 844,735
BB and Below 971,777 1,222,225
NR* 8,055,914 5,183,904
Total Exposed to
Credit Risk 11,673,707 10,201,325
US Government
Guaranteed** 3,638,615 8,342,563
Total Fixed Income and
Short-Term Investments $ 15,312,322 $ 18,543,888
For derivatives exposed to credit risk, the table below
presents aggregate market value by the least favorable
credit rating provided by NRSROs at June 30, 2012 and
2011.
(Dollar Amounts in
Thousands)
2012 2011
Quality Rating Fair Value Fair Value
AA $ (11,394) $ 29,005
A (11,866) (211)
Total Swaps - Total Return $ (23,260) $ 28,794
(d) Interest Rate Risk
Interest rate risk is the risk that changes in interest rates
will adversely affect the fair value of a fixed income
investment. The System manages its interest rate risk by
diversifying the fixed income portfolio and maintaining
the fixed income portfolio at a Board-approved effective
duration range of the benchmark index.
Duration is a measure of the approximate sensitivity of
a bond’s value to interest rate changes. The higher the
duration, the greater the changes in fair value when interest
rates change. For example, a duration of 4.0 would mean
that, given a 100-basis point change up/down in rates, a
bond’s price would move down/up approximately 4.0
percent. PSERS measures interest rate risk using optionadjusted
duration, which recognizes the fact that yield
changes may change the expected cash flows due to
embedded options.
* Not Rated securities include $5,455,269 and $4,202,834 in collective trust funds at
June 30, 2012 and 2011 respectively.
** Comprised of U.S. government and agency obligations explicitly guaranteed by
the U.S. government and not considered to have credit risk.
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