Annual Report PDF file 2009 - State of Illinois

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Figure 2Investment Returns June 30, 2009(Annualized)2009 2008 2007 2006 2005 3 Yrs. 5 Yrs. 10 Yrs.% % % % % % % %Total Fund (20.1) (6.2) 17.1 11.0 10.1 (4.3) 1.4 1.9Composite Benchmark* (17.0) (4.6) 16.4 11.5 10.9 (2.7) 2.7 2.7Consumer Price Index (1.4) 5.0 2.7 4.2 2.5 2.1 2.6 2.6U.S. Equities (22.0) (11.6) 19.9 10.7 9.3 (6.2) 0.0 0.2Russell 3000 Index (26.6) (12.5) 20.1 9.6 8.1 (8.4) (1.8) (1.5)International Equities (29.1) (10.3) 28.8 28.9 14.8 (6.4) 3.9 2.4MSCI-EAFE Index (31.0) (10.2) 27.5 27.1 14.1 7.5 2.8 1.6Fixed Income (2.4) 5.3 6.9 0.8 6.9 3.3 3.5 4.5Barclay’s Capital U.S.Universal Index 4.9 6.2 6.6 (0.3) 7.4 5.9 5.0 6.0Real Estate (31.7) 2.6 15.3 19.5 14.8 (6.9) 2.1 4.4NCRIEF Real Estate Index (19.6) 9.2 17.2 18.7 15.6 1.0 7.6 8.5Private Equity (18.8) (4.9) 31.7 21.3 29.6 0.6 9.9 7.3* Composite Benchmark:Effective 11/08:Effective 04/08:Effective 12/03:Effective 4/02:Prior to 4/02:30% Russell 3000; 20% MSCI-EAFE; 25% Barclays U.S. Capital Universal; 10% NCRIEF;5% Venture Economic all Private Equity Index; 10% HFR Equity Hedged Index.30% Russell 3000; 20% MSCI-EAFE; 25% Lehman Universal; 10% NCRIEF;5% Venture Economic all Private Equity Index; 10% HFR Equity Hedged Index.45% Wilshire 5000; 10% MSCI-EAFE; 25% Lehman Universal; 10% NCRIEF;5% Venture Economic all Private Equity Index; 5% HFR Equity Hedged Index.46% Russell 3000; 15% MS-AC Free ex US; 23% Lehman Universal;8% NCRIEF; 8% Russell 2000 + 3.0%.43% Russell 3000; 20% MS-AC Free ex US; 22% Lehman Aggregate;7% NCRIEF; 8% absolute return of 12%.International EquitiesThe Morgan Stanley EAFE Index returned negative 31.0% forthe fiscal year ended June 30, 2009, or 4.4% below the U.S.return. ISBI’s International equity portfolio was down 29.1%,1.9% above the EAFE Index. As with the U.S. equity portfolio,the Board has the twin objectives of limiting tracking errorrelative to the benchmark and adding value with activemanagement. The returns for longer time periods are shown inFigure 2.Fixed IncomeThe ISBI Fixed Income portfolio had a negative return of 2.4%for the fiscal year ended June 30, 2009, compared to thepositive 4.9% for the Barclay’s Universal Bond Index. Anunderweighting to Government bonds coupled with anassociated overweight to investment grade, mortgage-backedsecurities, when compared to the index, was the reason forthe under-performance. Figure 2 shows the long-term resultsfor Fixed Income.Real EstateIn FY 2009, ISBI’s real estate portfolio earned a return ofnegative 31.7 %. The NCREIF Real Estate Index, a measure ofcore, operating, non-leveraged real estate, earned a negative19.6%. The portfolio’s underperformance relative to thisbenchmark can be attributed to ISBI’s prompt writing down ofreal estate assets, and a general lag on the part of the indexfor similar write downs. Further, while ISBI, as well as mostinstitutional investors, utilizes a prudent amount of leveragedin its real estate portfolio, the NCREIF Real Estate Index iscompletely un-levered. Over the last five years, the Boardincreased the real estate strategic allocation from 5% to 10%of the total fund with the new allocation targeting 70% of itsreal estate to core, income producing real estate, with thebalance in higher return strategies. The increased Real Estateallocation resulted in the addition of two core, separate realestate accounts. Originally, it was planned to have the newseparate accounts fully invested by the end of calendar year2008. However, as a result of challenging market conditions,ILLINOIS STATE BOARD OF INVESTMENT5
% Investment Returns June 30201510Total FundComposite BenchmarkCPI50-5-10-202009 2008 2007 2006 2005those accounts are yet to be fully funded.ISBI’s Real Estate portfolio is invested primarily throughinterests in separate accounts, limited partnerships, trusts,and other forms of pooled investments. Long-term results forreal estate are shown in Figure 2.Private EquityIn FY 2008, ISBI’s Private Equity portfolio returns were negative18.8%. The Private Equity portfolio consists of interests inlimited partnerships and other commingled vehicles that investin management buyouts, venture capital, and other privateplacement equity strategy activities. The Private Equity assetclass was challenged by disruptions in the credit markets andan overall weakness in pricing for the fiscal year period. Inspite of these challenges, long-term results as detailed inFigure 2 show that Private Equity remains the best performingasset class for the ten-year period ended June 30, 2009.Management ExpensesThe resulting expense ratio (expenses divided by average fairvalue of assets) was .44% for fiscal year 2009, as compared to.36% for fiscal year 2008. Total expenses for fiscal year 2009,based on $8.7 billion in total assets were $41.2 million,compared to $41.9 million based on $11.3 billion in total assetsfor fiscal year 2008. Decreased aggregate expenses in fiscal2009 were mainly a result of decreased fees paid to investmentmanagers.Minority/Female ParticipationJust as ISBI seeks prudent diversification within its totalportfolio, the Board continues to seek an appropriate level ofdiversity among the professionals charged with meeting theBoard’s mission. The Board membership itself is comprised of33% minority and 22% women.ISBI operates under its own Minority Brokers and MoneyManagers Policy regarding utilization of minority and femaleowned broker/dealers, minority and female owned moneymanagers, and emerging managers. Since April, 2006, theBoard has achieved its minimum goal of 5% of the totalportfolio being managed by emerging and minority managers.At the end of FY 2009, 25.7% of ISBI’s portfolio was managedby emerging, minority, and female owned firms. During fiscalyear 2009, the Board increased the allocations to three of itsexisting emerging/minority managers: RhumbLine, DecaturCapital, and Rock Creek Capital.At its meeting held in July, 2008, the Board’s Minority Brokerand Money Managers Policy was amended to increase theminority broker/dealer target to 20% from 15%. The policyrequires that such trades be executed directly and prohibitsthe utilization of step-outs. Further, language was addedincorporating ISBI’s international equity portfolio into thepolicy. The Board’s policy also encourages utilization ofIllinois-based broker/dealers and establishes 25% utilization asa minimum.During fiscal year 2009, utilization of minority-ownedILLINOIS STATE BOARD OF INVESTMENT6
Page 1 and 2: 2009ANNUALREPORTILLINOISSTATEBOARDO
Page 3 and 4: BOARD MEMBERSCHAIRMANRonald E. Powe
Page 5: International Equity 17%U.S. Equity
Page 9 and 10: FINANCIAL HIGHLIGHTSFISCAL YEARS EN
Page 11 and 12: FINANCIALSTATEMENTS2009ILLINOIS STA
Page 13 and 14: MANAGEMENT’S DISCUSSION AND ANALY
Page 15 and 16: STATEMENT OF NET ASSETSJUNE 30, 200
Page 18 and 19: Note 2Deposits, Investments, and In
Page 20 and 21: Note 2 (continued)Deposits, Investm
Page 22 and 23: Note 2 (continued)Deposits, Investm
Page 24 and 25: Note 3 General StateMember Systems
Page 26 and 27: Note 4PensionsPlan DescriptionAll o
Page 28 and 29: SUPPLEMENTALFINANCIALINFORMATION200
Page 30 and 31: Moody’s S&P Shares/Quality Qualit
Page 51 and 52: PORTFOLIO OF INVESTMENTSJUNE 30, 20
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PORTFOLIO OF INVESTMENTSJUNE 30, 20
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PORTFOLIO DATAFISCAL YEARS ENDED JU
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INVESTMENT TRANSACTIONS WITH BROKER
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RESTRICTED INVESTMENTSPublic Act 95
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STAFF AND INVESTMENT MANAGERSEXECUT
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