Iowa Public Employees Retirement System

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Iowa Public Employees Retirement System

• Fixed Income
• Performance and Strategy
• Presented to the IPERS Investment Board
• April 6th, 2001

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PRESENTATION OUTLINE
A) Role of Global Fixed Income In IPERS
Portfolio B) IPERS Objective Strategy C)
IPERS Implementation D) Performance Review
Summary E) Individual Global Fixed Income
Manager Reviews
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ROLE OF GLOBAL FIXED INCOME IN IPERS
PORTFOLIO 1. Provide current income to fund
benefit payments. 2. Diversify equity risk by
serving as a lower risk asset class. 3. Provide
hedge against deflation. 4. Provide incremental
return by investing in inefficient markets
(such as High Yield).
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• IPERS OBJECTIVE STRATEGY
• Fixed Income Objective - IPERS stated objective
  is to outperform the Lehman U.S. Universal Bond
  Index by 50 basis points over a full market
  cycle.
• Fixed Income Strategy - IPERS strategy is to
  create a well diversified portfolio of fixed
  income securities by investing in instruments
  with varied characteristics. Specific strategies
  utilized include but are not limited to
• Tactical Exposure- The U. S. Universal Index
  includes allocations to Non-U.S., High Yield,
  CMBS, Emerging Markets and 144A securities.
  Managers are allowed to tactically under/over
  weight these sectors within specific guidelines.
  
• Strategic Exposure- Typically, IPERS
  systematically over-weights mortgage and high
  yield bonds and under-weights Treasury
  securities. These sectors are deemed less
  efficient and can provide attractive returns on a
  risk-adjusted basis.
• Sector IPERS Actual Lehman
  U.S. Universal
• Govt/Agencies 23 33
• Corporates 21 21
• Mortgages 44 33
• High Yield 8 5
• Non - U. S. 4 8
• Percentages are as of December 31, 2000

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• IPERS OBJECTIVE STRATEGY
• Passive Core- IPERS currently has 33 of its
  portfolio managed passively. This passive core
  limits active management risk in the domestic
  fixed income portfolio.
• Non-Dollar Exposure- Some IPERS fixed income
  managers are allowed to invest in non-dollar
  bonds on a tactical basis to add incremental
  return.
• Duration Neutral- IPERS maintains an overall
  portfolio duration close to the market duration.
  Each Managers discretion to vary the duration
  relative to their benchmark is controlled.
• Duration
• IPERS Portfolio 4.76 years
• Lehman U.S. Universal 4.53 years
• Difference 0.23 years

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IPERS IMPLEMENTATION IPERS has implemented the
following investment strategies and built the
following manager team
(12-31-00) TARGET
ACTUAL STRATEGY MANAGER PRODUCT
WEIGHT WEIGHT Passive Mellon
Capital Lehman Aggregate 33.0
32.2 Total Passive 33.0
32.2 Active Heitman Private Mortgage
1.0 .60 Active J.P. Morgan U.S.
Universal 17.0 17.6
Active BlackRock U.S. Universal 17.0
17.6 Active Western Asset U.S. Universal
17.0 17.6 Active Miller
Anderson Mortgages 8.0
8.2 Active Oaktree Capital High Yield
7.0 6.2 Total Active 67
67.8 Total Portfolio
100.0 100.0
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• IPERS Core Plus Portfolios
• Approximately 53 of IPERS Fixed Income
  portfolio is mandated to Core Plus accounts
  that track the Lehman U.S. Universal Index
• Three managers currently follow this strategy
• BlackRock
• J.P. Morgan
• Western Asset
• Core Plus - allows managers to
  opportunistically change portfolio weightings
  relative to the benchmark
• Contractual constraints control risk
• Examples
• Mortgage Backed Securities at least 50 and not
  more than 200 of index weight
• Emerging Market Debt 0 to 200 of index weight

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FIXED INCOME COMPOSITE PERFORMANCE SUMMARY
Annualized Performance (as of 12/00)

1Yr. 3Yr.
5Yr. 10Yr. IPERS Fixed Income
Portfolio 10.13 6.25 6.64 8.63 Lehman U. S.
Universal 10.83 6.02 6.44 7.97 Lehman
Aggregate 11.63 6.36 6.46 7.96
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GLOBAL FIXED INCOME PROGRAM SUMMARY

• Over the last 10 years, the IPERS fixed income
  composite performance has performed well against
  the market benchmark. This performance is
  primarily attributable to three factors
• Implementation of strategic decisions to
  over-weight the less efficient market sectors and
  under-weight efficient sectors
• Longer-than-market average duration exposure
  during period when interest rates generally fell
• Value-adding skill by majority of IPERS fixed
  income managers.
• Over the last year, performance was hampered due
  to a flight to quality in the marketplace.
  Investors opted for safer investments, such as
  U.S. Treasuries, in more efficient markets. This
  resulted in relative poor performance in less
  efficient markets, such as High Yield, where
  IPERS has maintained a strategic overweight.

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DOMESTIC FIXED INCOME PERFORMANCE RELATIVE
TO PUBLIC FUND PEERS

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INDIVIDUAL GLOBAL FIXED INCOME MANAGER REVIEWS
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Mellon Capital Management - Passive Market Index
Strategy Strategy Passively manage a
portfolio of U.S. fixed income securities that
closely tracks a broad market index.
Benchmark Lehman Aggregate Bond
Index Annualized Performance (as of
12/00) 1Yr 3Yr 5Yr. 10Yr. Inception
(6/90) Mellon Capital
11.79 6.46 6.56 8.05
8.24 Benchmark
11.63 6.36 6.46 7.96 8.16
Excess Returns
.16 .10 .10 .09
.08 Comments Tracking error
positive over all time periods. Continues to
perform very well.
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J.P. Morgan Investment Management -
Active Strategy Invest in a portfolio of
fixed income securities whose characteristics
resemble the overall dollar denominated bond
market. J.P. Morgan will tend to own a variety
of Treasuries, non-dollar bonds, and both public
and private corporate and mortgage securities.
J.P. Morgan has limited discretion to manage
duration and, therefore, seeks to add value
through security selection and rotation among
sectors based on relative value.
Benchmark Lehman U.S. Universal Index since
1/1/00 Lehman Aggregate from 10/15/85 to
1/1/00. Annualized Performance (as of 12/00)
1 Yr. 3 Yr. 5 Yr. 10Yr. Inception(9/85) J.P.
Morgan 11.23 6.65 7.11 8.71
10.07 JPM Custom 10.83 6.35 6.45 8.31
9.68 Excess Returns .50 .30
.66 .40 .39
Comments Continues to perform well over all
time periods.
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BlackRock Financial Management -
Active Strategy Invest in a portfolio of
fixed income securities whose characteristics
resemble the overall dollar denominated bond
market. BlackRock will tend to own a variety
of Treasuries, hedged non-dollar bonds, both
public and private corporate securities, and
public mortgage securities. BlackRock has
limited discretion to manage duration and,
therefore, seeks to add value through security
selection and rotation among sectors based on
relative value. Benchmark
Lehman U.S. Universal Index
Annualized Performance (as of 12/00)
1Yr.
BlackRock 10.69 Lehman Universal
10.83 Excess Returns -0.14

Comments Performance measurement began January
1, 2000.
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Western Asset - Active Strategy Invest in
a portfolio of fixed income securities whose
characteristics resemble the overall dollar
denominated bond market. Western Asset will
tend to own a variety of Treasuries, hedged
non-dollar bonds, both public and private
corporate securities, and public mortgage
securities. Western Asset has limited
discretion to manage duration and, therefore,
seeks to add value through security selection
and rotation among sectors based on relative
value. Benchmark Lehman U.S.
Universal Index
Annualized Performance (as of 12/00)
1Yr. Western
Asset 11.49 Lehman Universal
10.83 Excess Returns 0.66
Comments Performance measurement began January
1, 2000.
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Miller Anderson Sherrerd-Active Mortgage Bond
Strategy Strategy Focuses primarily on high
quality mortgages and mortgage-backed securities
with a secondary emphasis on asset-backed
securities, commercial mortgages, mortgage
derivatives and non-dollar bonds. Miller
Anderson utilizes original economic analysis
and proprietary risk models to forecast interest
rates and build a portfolio with high expected
real returns and low prepayment risk.
Benchmark Lehman Mortgage Index Annualized
Performance (as of 12/00) 1Yr 3Yr
5Yr. 10Yr. Inception (6/85) Miller Anderson
10.11 5.92 6.84 8.28
9.57 Benchmark
11.17 6.59 6.92 7.82 9.14
Excess Returns
-1.06 -0.67 -0.08 .46
.43 Comments Short-term and
mid-term under-performance starting to impact
longer-term performance. Miller Andersons
style is under review to determine if it is
still appropriate within IPERS risk-controlled
fixed income structure.
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Oaktree Capital Management Active U.S. High
Yield Bonds Strategy Focuses on
non-investment grade debt of solvent U.S.
corporations. Oaktrees investment process
utilizes bottom-up, fundamental credit research
and risk- controlled portfolio construction
methods while emphasizing higher quality, cash
yielding, senior debentures and avoiding undue
principal risk. Benchmark
Salomon Cash Pay High Yield Bond Index
Annualized Performance (as of 12/00)
1Yr.
Inception (1/98) Oaktree
-4.34 0.05 Benchmark -4.42
-1.19 Excess Returns
.08 1.24 Comments
Continues to outperform benchmark.
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Heitman Capital Mortgage - Commercial Mortgage
Program Strategy Focuses on high quality
commercial mortgages. Benchmark
Lehman Brothers Corporate Bond Index Annualized
Performance (as of 12/00)

1Yr. 3Yr. 5Yr.
Inception (6/92) Heitman 9.63 8.09 8.2
2 9.00 Lehman Corporate Index 9.40 5.22 5.8
1 7.39 Excess Returns
0.23 2.87 2.41 1.61
Comments All loans continue to perform as
specified in their contracts. Board approved
small add-on loan in 2001. Portfolio will
terminate as existing loans mature.
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Mellon Bond - Active Cash Management Strategy
Actively invests in cash equivalents with
minimal additional risk with the purpose of
earning a yield greater than T- Bills.
Benchmark Merrill Lynch 91-day Treasury
Bill Annualized Performance (as of 12/00)

1Yr. 3Yr.
5Yr. Inception (7/95) Mellon
Bond 7.48 6.08 5.80 5.93 Benchmark 6.18
5.41 5.38 5.41 Excess Returns
1.30 0.67 0.42 0.52
Comments Continues to add value over
benchmark.