PEERS Investment Update - October 2, 2009

Investment Update
October 2, 2009

Overview

The S&P 500 bottomed at a 12-year intraday low on March 6, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of September 30, stocks had gained over 56% since the early March low.
The PSRS and PEERS investment portfolios have increased approximately 10% in the first quarter of fiscal year 2010 (July 1, 2009 thru September 30, 2009). This increase follows a decline of approximately 19.2% for PSRS/PEERS in the 1-year period ending June 30, 2009.

The total assets of both PSRS and PEERS were approximately $25.8 billion on September 30, 2009 with over $5 billion invested in high quality bonds including U.S. Treasury securities. Treasury bonds are the safest and most liquid assets in the world today. As such, the Systems have significant assets to cover current liabilities.
PSRS/PEERS is a long-term investor. As the overall markets declined in 2008 and early 2009, the Systems purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems.

Further Information and Frequently Asked Questions

Market overview
Global stock markets collapsed in 2008 with no economy emerging unscathed. The stock market decline continued into calendar year 2009 with the global stock markets (including the U.S.) down approximately 18% for the first two months of the year. The S&P 500 bottomed at a 12-year intraday low on March 6, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of September 30, stocks gained over 56% since the early March low.

Defined benefit plans
PSRS and PEERS are defined benefit plans. Your benefit plan was constructed through Missouri statutes and both the Missouri Constitution and case law indicate that PSRS/PEERS benefits may not be diminished or impaired.

Will I receive my check at the end of the month?
Yes, you will definitely continue to receive your monthly benefit from the Systems. We pay approximately $155 million a month in benefits; however, we receive contributions from members and school districts on a monthly basis to cover much of these benefit payments. Additionally, we have several billion dollars of very liquid assets to meet any monthly cash flow needs.

How much more will the contribution rates continue to increase, especially with the current market issues?
Employee and employer contributions have increased for the last several years as we continually work toward a 100% funding status. On an annual basis, your contribution rate cannot be increased more than 0.5% (0.25% for PEERS members) over the previous year. Rising contribution rates are not in response to the Systems’ inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers and school support staff will inherit a system as strong and reliable as the one we have today. Negative investment returns such as those experienced in fiscal year 2008 and 2009 do have a direct impact on future contribution rate increases.

PSRS/PEERS is a long-term investor
While unpleasant to go through, we generally view the recent market events as a necessary correction to the overall financial system. Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As a large institutional investor, we have the ability to invest over a 30-year time horizon because we have significant assets to cover current liabilities. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems.

What are the PSRS/PEERS funds invested in?
PSRS/PEERS maintains a long-term investment objective to achieve an 8% return over rolling 5-year periods. The asset allocation is highly diversified among bonds (U.S. Treasuries), U.S. stocks, non-U.S. stocks, real estate, absolute return investments and private equity. We have held the view for some time that the credit problems facing the financial sector could unfold over an extended period of time. As such, about 25% of the entire portfolio was transitioned to U.S. Treasury bonds in January 2008. Treasury bonds are the safest and most liquid assets in the world today. As of September 30, 2009, the Systems had approximately 54% of the total assets invested in stocks, 21% in high quality bonds including U.S. Treasury securities, 13% in corporate bonds, and 4% each in absolute return investments, real estate and private equity.

Has the stock market downturn since October 9, 2007 affected the value of the PSRS/PEERS investment portfolio?
Yes. All large institutional investors that are invested in the stock market have been affected by the downturn in the market. Even with the current bear market rally of 52%, the U.S. stock market (S&P 500) has still declined over 32% from October 9, 2007 through September 30, 2009. However, only a portion of the PSRS/PEERS assets are invested in the stock market. This diversification (as described above) provides the Systems with a moderate degree of downside protection in periods when the stock market declines.

Have you changed your investment strategy in the recent market downturn?
Our long-term investment strategy has not changed: investing the Systems’ assets in a manner to earn the 8% actuarial assumed rate of return over a long time horizon. As such, we have continued to deploy assets in attractive investment opportunities that are expected to perform over the long-term. However, early on in the midst of the bear market we lowered the total risk profile of the Systems. Specifically, we maintained a high allocation to U.S. Treasury bonds. The Systems have cautiously sold Treasury securities and added to equity positions and corporate bonds in the last several months.

There have been numerous recent headlines concerning investor fraud. Has PSRS/PEERS invested with any of the management firms under investigation?
PSRS and PEERS had no exposure to Bernard L. Madoff Investment Securities, Stanford Financial Group or Westridge Capital Management.

Investment returns and level of assets
The PSRS/PEERS investment portfolios have increased approximately 10% in the first quarter of fiscal year 2010 (July 1, 2009 thru September 30, 2009). The return for the 1-year period ending June 30, 2009 was approximately -19.2%. The total assets of both PSRS and PEERS were approximately $25.8 billion on September 30, 2009.

Investment markets
As the economy and investment environment continue to evolve, we are mindful of the day-to-day volatility within the markets and are in communication with various market participants to evaluate potential developments. There has been better economic data reported recently which has helped to stabilize the markets. However, the negative news is also prevalent. The unemployment rate increased .1% in September 2009 to 9.8% - its highest level since 1983. Thus, 7.2 million jobs have been lost since the recession began in December 2007 (the most since the Great Depression). As such, we remain cautious and mindful that the markets could continue to be stressed because we would expect it to take longer than 18 months to unwind the excesses of the last 25 years.

Your benefit
Again, we want to emphasize to all of our members that your PSRS/PEERS benefit is secure. PSRS/PEERS is a long-term investor and has the ability to withstand market volatility. The Board and professional staff are committed to managing the Systems’ assets in a prudent manner that will ensure the viability of your pension.

If you have questions about this topic or would like more information, please contact us by calling our toll free telephone number (800) 392-6848 or emailing us at psrspeers@psrspeers.org.

Continue to visit our Web site for additional updates...

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	Investment Update October 2, 2009 Overview The S&P 500 bottomed at a 12-year intraday low on March 6, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of September 30, stocks had gained over 56% since the early March low. The PSRS and PEERS investment portfolios have increased approximately 10% in the first quarter of fiscal year 2010 (July 1, 2009 thru September 30, 2009). This increase follows a decline of approximately 19.2% for PSRS/PEERS in the 1-year period ending June 30, 2009. The total assets of both PSRS and PEERS were approximately $25.8 billion on September 30, 2009 with over $5 billion invested in high quality bonds including U.S. Treasury securities. Treasury bonds are the safest and most liquid assets in the world today. As such, the Systems have significant assets to cover current liabilities. PSRS/PEERS is a long-term investor. As the overall markets declined in 2008 and early 2009, the Systems purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems. Further Information and Frequently Asked Questions *Market overview* Global stock markets collapsed in 2008 with no economy emerging unscathed. The stock market decline continued into calendar year 2009 with the global stock markets (including the U.S.) down approximately 18% for the first two months of the year. The S&P 500 bottomed at a 12-year intraday low on March 6, making this bear market, with a decline of 57%, the third worst in history. The market has rallied since that point and, as of September 30, stocks gained over 56% since the early March low. Defined benefit plans PSRS and PEERS are defined benefit plans. Your benefit plan was constructed through Missouri statutes and both the Missouri Constitution and case law indicate that PSRS/PEERS benefits may not be diminished or impaired. Will I receive my check at the end of the month? Yes, you will definitely continue to receive your monthly benefit from the Systems. We pay approximately $155 million a month in benefits; however, we receive contributions from members and school districts on a monthly basis to cover much of these benefit payments. Additionally, we have several billion dollars of very liquid assets to meet any monthly cash flow needs. How much more will the contribution rates continue to increase, especially with the current market issues? Employee and employer contributions have increased for the last several years as we continually work toward a 100% funding status. On an annual basis, your contribution rate cannot be increased more than 0.5% (0.25% for PEERS members) over the previous year. Rising contribution rates are not in response to the Systems’ inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers and school support staff will inherit a system as strong and reliable as the one we have today. Negative investment returns such as those experienced in fiscal year 2008 and 2009 do have a direct impact on future contribution rate increases. PSRS/PEERS is a long-term investor While unpleasant to go through, we generally view the recent market events as a necessary correction to the overall financial system. Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As a large institutional investor, we have the ability to invest over a 30-year time horizon because we have significant assets to cover current liabilities. As the overall markets have declined, the Systems have purchased assets at fundamentally sound prices. Over the long-term, we believe this ability to prudently buy inexpensive assets through various market environments will provide consistent and meaningful investment returns for the Systems. What are the PSRS/PEERS funds invested in? PSRS/PEERS maintains a long-term investment objective to achieve an 8% return over rolling 5-year periods. The asset allocation is highly diversified among bonds (U.S. Treasuries), U.S. stocks, non-U.S. stocks, real estate, absolute return investments and private equity. We have held the view for some time that the credit problems facing the financial sector could unfold over an extended period of time. As such, about 25% of the entire portfolio was transitioned to U.S. Treasury bonds in January 2008. Treasury bonds are the safest and most liquid assets in the world today. As of September 30, 2009, the Systems had approximately 54% of the total assets invested in stocks, 21% in high quality bonds including U.S. Treasury securities, 13% in corporate bonds, and 4% each in absolute return investments, real estate and private equity. *Has the stock market downturn since October 9, 2007 affected the value of the PSRS/PEERS investment portfolio?* Yes. All large institutional investors that are invested in the stock market have been affected by the downturn in the market. Even with the current bear market rally of 52%, the U.S. stock market (S&P 500) has still declined over 32% from October 9, 2007 through September 30, 2009. However, only a portion of the PSRS/PEERS assets are invested in the stock market. This diversification (as described above) provides the Systems with a moderate degree of downside protection in periods when the stock market declines. *Have you changed your investment strategy in the recent market downturn?* Our long-term investment strategy has not changed: investing the Systems’ assets in a manner to earn the 8% actuarial assumed rate of return over a long time horizon. As such, we have continued to deploy assets in attractive investment opportunities that are expected to perform over the long-term. However, early on in the midst of the bear market we lowered the total risk profile of the Systems. Specifically, we maintained a high allocation to U.S. Treasury bonds. The Systems have cautiously sold Treasury securities and added to equity positions and corporate bonds in the last several months. *There have been numerous recent headlines concerning investor fraud. Has PSRS/PEERS invested with any of the management firms under investigation?* PSRS and PEERS had no exposure to Bernard L. Madoff Investment Securities, Stanford Financial Group or Westridge Capital Management. Investment returns and level of assets The PSRS/PEERS investment portfolios have increased approximately 10% in the first quarter of fiscal year 2010 (July 1, 2009 thru September 30, 2009). The return for the 1-year period ending June 30, 2009 was approximately -19.2%. The total assets of both PSRS and PEERS were approximately $25.8 billion on September 30, 2009. Investment markets As the economy and investment environment continue to evolve, we are mindful of the day-to-day volatility within the markets and are in communication with various market participants to evaluate potential developments. There has been better economic data reported recently which has helped to stabilize the markets. However, the negative news is also prevalent. The unemployment rate increased .1% in September 2009 to 9.8% - its highest level since 1983. Thus, 7.2 million jobs have been lost since the recession began in December 2007 (the most since the Great Depression). As such, we remain cautious and mindful that the markets could continue to be stressed because we would expect it to take longer than 18 months to unwind the excesses of the last 25 years. Your benefit Again, we want to emphasize to all of our members that your PSRS/PEERS benefit is secure. PSRS/PEERS is a long-term investor and has the ability to withstand market volatility. The Board and professional staff are committed to managing the Systems’ assets in a prudent manner that will ensure the viability of your pension. If you have questions about this topic or would like more information, please contact us by calling our toll free telephone number (800) 392-6848 or emailing us at psrspeers@psrspeers.org. *Continue to visit our Web site for additional updates...*