Annual Report PDF file 2009 - State of Illinois

International Equity 17%U.S. Equity 30%Fixed Income 16%Private Equity 5%Bank Loans 2%Infrastructure 3%Cash 3%Commingled Funds 4%Real Estate 10%U.S. Equity Hedge Funds 10%ABS to maturity, thus limiting the liquidity of the fund. However,even as liquidity in the pool was constrained, revenue to theISBI portfolio through the securities lending program was atan all time high. For FY 2009 ISBI’s securities lending revenuewas $17,578,263.Despite the increased revenue generated by ISBI’s securitieslending program, the Board remains concerned about the riskassociated with the continued utilization of Quality Fund D. InSeptember of 2008 the Board directed State Street Bank andTrust to transfer ISBI’s exposure away from Quality Fund D tothe Navigator Fund, a regulated money market fund.Unfortunately, as of fiscal year end 2009, State Street hasdeclined to make that transfer citing continued liquidityconstraints within Quality Fund D. It is anticipated that suchchanges will be made in FY 2010.Beyond the challenges presented in the securities lendingprogram, the Board also addressed issues within its fixedincome portfolio. A sizable portion of that portfolio wasmanaged by Western Asset Management (Western) in a CorePlus mandate. Consistent with that mandate, Western wasmarkedly exposed to investment grade mortgage backedsecurities. Further, in August of 2008, ISBI was advised thatWestern was buying for ISBI’s portfolio the bonds of financialservices companies. Both of these actions ultimately weredeleterious to the portfolio and caused the Board to lose itsconfidence in Western. As a result, ISBI terminated itsrelationship with the firm and transferred those assets to anexisting manager, Chicago Equity Partners. In so doing itchanged the mandate away from Core Plus to a moreconservative Core mandate. Further, the Board added a shortbond allocation to reduce risk and increase liquidity.Investment ResultsIn fiscal year 2009, investors suffered from double digitdeclines in U.S. equity, international equity, private equity andreal estate as measured by market indices. Fixed income, asmeasured by Barclay’s Universal Index had a positive return.The ISBI total fund was down 20.1% for fiscal year 2009, net ofexpenses. This follows a negative return of 6.2% for fiscal year2008, and positive returns of 17.1%, 11.0% and 10.1% for 2007,2006 and 2005, respectively.The Board continues to be concerned by some underperformanceby specific managers, but most of the currentmanagers have exceeded their individual benchmarks sinceinception. Figure 2 shows results over the three, five and tenyear time periods.U.S. EquitiesFor the twelve months ended June 30, 2009, the Russell 3000Index, a broad representation of the U.S. market was down26.6%. Growth stocks exceeded value stocks; with the Russell3000 Growth Index down 24.5%, compared to the Russell 3000Value Index down 28.7%. Small capitalization stocksoutperformed large capitalization stocks; with the S&P 500declining 26.2% compared to a 25.0% decline for the Russell2000. ISBI’s U.S. equity portfolio was down 22.0% for fiscalyear 2009, 4.6% above the Russell 3000.Figure 2 shows ISBI’s U.S. stock portfolio performance forthree, five and ten year time periods. The Board, throughstructure analysis, rebalancing and risk management,continues tracking the market with predictable consistency toachieve its objective.ILLINOIS STATE BOARD OF INVESTMENT4