Investment Plan 2009 - OPERSInvestment Plan 2009 Ohio Public Employees Retirement System 277 East...

Investment Plan 2009Ohio Publ ic Employees Ret irement System

277 East Town Street Columbus, Ohio 43215 www.opers.org 800-222-7377

OPERS 2009 Investment Plan Table of Contents

Table of Contents Investment Program 01

Report from the Director of Investments

Organizational Structure

Resources

Fund Strategies 13

Defined Benefit

Health Care

Defined Contribution

Asset Class Strategies 35

Tactical Outlook

U.S. Equity

Opportunistic

Private Equity

Non-U.S. Equity

Real Estate

Global Bonds

Resources and Initiatives 71

Office of the Director of Investments

U.S. Equity Internal Management

Global Bonds Internal Management

External Management

Fund Management

Investment Administration

Appendix A 89

Consultants’ Reviews

Appendix B 93

Economic Outlook

Appendix C 101

Investment Staffing

TABLE OF CONTENTS

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OPERS 2009 Investment Plan

OPERS 2009 Investment Plan page 1

INVESTMENT PROGRAM

Report from theDirector ofInvestments

Dear Members of the OPERS Board of Trustees:

It is an honor to present to you the 2009 Investment Plan, which is a collaborative effort of the

management and staff of the Investment Division and discussed in detail with OPERS investment

consultants. Developing a plan instills a discipline to remain focused on our investment goals and

objectives against which the Division’s performance is benchmarked and measured.

In our industry, value is created through tested tenets – by generating target returns for the total fund

through each asset class and portfolio and by maintaining a competitive cost structure relative to our

peers. Performance will be driven by the quality of our staff and our ability to hire and retain key

investment professionals who are aligned not just with our investment goals but more importantly,

with the Investment Division’s core values and OPERS strategic objectives.

Review of 2008

As I write this letter, we are experiencing a turbulent global bear market marked by head snapping

swings in the market and a lamentable loss of investor confidence. Although we tactically address

the challenges in the capital markets, we remain long-term institutional investors with a strategic

asset allocation designed to meet our plan objectives. Our strategy is not predicated on short-term

economic cycles but rather on a long-term time horizon appropriate to our pension liabilities and

health care commitments.

In order to provide the context against which the 2009 strategy can be fully appreciated, it is

appropriate to frame our plan within the 2008 Investment Division’s accomplishments through

October. Detailed information of the Investment Division’s actual 2008 accomplishments will be

reported in the 2008 OPERS Comprehensive Annual Financial Report.

In reviewing the information garnered through the third quarter, there were many key

accomplishments during the year, including:

The proactive actions taken to reduce the impact of the severe financial crisis to the total fund.

This included tactical positioning of the asset classes, active management of our financial sector

exposure, vigilant monitoring of all our portfolios and active dialogue with our investment partners.

The execution of the strategic asset allocation for the Health Care fund. This transition resulted in

a higher allocation for equity-like assets relative to fixed income assets to generate a higher return

while maintaining a reasonable risk parameter.

The increased utilization of derivatives to gain and hedge exposure in various asset classes in a

cost effective and efficient manner. The prudent use of derivatives has likewise allowed the

fund to more efficiently manage Board approved ranges within our target allocation for the various

asset classes.


INVESTMENT PROGRAM

Report from theDirector ofInvestments(continued)

The introduction of the target date lifecycle funds in the Defined Contribution Fund. This option

provides participants the opportunity of “one-stop shopping” to support their retirement plan objectives.

The implementation of a multi-year plan to enhance our portfolio management and trading

capabilities. Bloomberg and Charles River order management systems support the internal

management of our fixed income and U.S. equity portfolios.

Overview of 2009 Investment Plan

As always, the Investment Division’s goals reflect the Board’s ongoing mandate of securing the best

possible excess returns, while managing to an acceptable level of risk. Our goals likewise support

OPERS strategic efforts to go from “Good 2 Great” by providing financial stability for current and

future members and retirees; driving excellence in the delivery of our products and services;

enhancing our end-to-end process and promoting organizational readiness through leadership

development.

Simply put, the primary goals reflecting the Board’s mandate in this 2009 Investment Plan are:

Defined Benefit Fund Asset Allocation: Staff in collaboration with the general investment consultant

will review the strategic asset allocation for the pension plan, which will include return and risk

assumptions for the various asset classes and liability modeling.

Opportunistic Debt Portfolio: An assessment of the creation of an internally managed distressed

debt fund, which will be funded from existing debt portfolios, will be performed. This objective will

allow the fund to take a longer term view of the value of these securities amidst current market

conditions.

External Manager Cost Review: In order to improve efficiencies and manage the costs of the plan,

a study of select costs related to the external public market management program will be

completed.

Private Markets System: The evaluation of a system to support portfolio analysis and performance

reporting for private real estate and private equity is expected to enhance the Investment Division’s

information database.

Our goals supporting OPERS strategic efforts to go from “Good 2 Great” include the following:

Health Care Fund Private Equity Allocation: The strategic allocation to private equity, which began

in 2008, will continue in 2009 and in the subsequent years until the target allocation is reached.

The pacing commitment may vary from year to year depending on market conditions and

opportunities.

Hedge Funds: A strategic research initiative will be performed to assess the future role of hedge

funds for the fund. This will include board education and a potential stand alone asset class with a

dedicated allocation.


INVESTMENT PROGRAM


Non-U.S. Equity Internal Management: Beta exposure to this asset class through the use of

derivatives will be evaluated. This initiative will allow the fund to internally manage our market

exposure to this asset class while reducing cost and being less dependent on external providers.

Defined Contribution Options: A study of an expanded menu of investment options will be made to

offer plan participants the opportunity for higher returns and greater diversification. The

appropriateness of a self-directed mutual fund window will be included in the evaluation as a

potential enhancement to the Defined Contribution Fund.

Asset Management

As prudent stewards of a public fund with a long-term investment horizon, the Investment Division will

continue to monitor and measure three distinct sources of return and risk: policy, tactical and active.

Each source of return and risk plays an integral part toward achieving overall investment results. The

Defined Benefit Fund and Health Care Fund sections presented later in this investment plan provide

details about how policy, tactical and active returns will be generated within a managed risk

framework.

In summary, the 2009 goals established for each source of return and risk for the Defined Benefit and

Health Care Funds are as follows:

The total expected return of the OPERS’ Defined Benefit Fund in 2009 is 4.43% and is comprised

of the expected policy return of 4.10% and active management return of 0.33%. The total risk that

will be taken to achieve this return is 9.98%, which is derived from the combination of the policy

risk of 9.83%, tactical risk of 0.05% and active risk of 0.50%.

The total expected return of the OPERS’ Health Care Fund in 2009 is 4.05% and is comprised of

the expected policy return of 3.71% and active management return of 0.34%. The total risk that will

be taken to achieve this return is approximately 7.34%, which is derived from the combination of

the policy risk of 6.95%, tactical risk of 0.05% and active risk of 0.40%.

Resources

As stated previously, the Investment Division will thoughtfully align its resources against targeted

priorities to ensure the success of our stated goals by year-end 2009. The Investment Division

currently has 55 authorized positions, composed of 45 filled positions and 10 vacancies. We will

continue to evaluate open positions and assess personnel needs to optimize productivity.

The Investment Division submitted an estimated compensation and operating budget of $17.2 million

for 2009. The budget includes an estimate of the 2009 incentive compensation payout, which reflects

2008 investment performance. It also reflects the Division’s effort to maintain internal investment

management where appropriate and to manage related administrative expenses.


INVESTMENT PROGRAM


It should be noted that the estimated total cost to manage the OPERS asset base in 2009 will be

25.9 basis points, or $197.42 million, slightly higher than the previous year. The cost assumes a long

term growth trend in the fund’s asset base. However, to the extent this bear market continues, there

may be an associated short term decline in costs. The breakdown of the budget is discussed in

greater detail throughout this plan.

Summary

The Investment Division’s strategy remains focused on living up to its mission statement, “To fulfill a

secure financial future for public employees.” This noble mission can only be accomplished through

clearly establishing our goals and diligently implementing and monitoring our objectives in the face of

daunting challenges and immense opportunities in the capital markets.

Detailed information regarding how each of the initiatives will be achieved follows in this document,

which is organized into three sections: Fund Strategies, Asset Class Strategies and Resources and

Initiatives.

Finally, I would like thank the OPERS Board members for their trust, support and oversight of the

investment program during these uncertain times. Most especially, I would like to express my

gratitude to the investment staff as we rise to the challenges and continue our journey to become a

great investment organization delivering the best risk-adjusted returns for our plan participants.

Respectfully,

Jennifer C. Hom, CFA

Director of Investments

The Investment Division organizational chart is shown here. Further detail is shown within the

organizational charts included in the individual Resources and Initiatives sections.

Responsibility for oversight of the Investment Division is shared by the director of investments and the

director’s management team. The division utilizes a functional structure, allowing for a focused and

efficient use of resources while providing flexibility and accountability. By department, the

responsibilities are:

U.S. Equity Internal Management: Provides active internal management of U.S. equity large cap

and real estate investment trust (REIT) securities.

Global Bonds Internal Management: Provides active internal management of core, long duration,

short duration, TIPS and cash portfolios.

External Management: Oversees the division’s external managers across all asset classes.

Fund Management: Responsible for asset allocation, U.S. equity trading, index management,

quantitative analysis and derivatives.

Investment Administration: Supports the organization’s investment activities through compliance,

infrastructure, business management, risk management oversight and Defined Contribution Fund

management.

Fund Management /

Global Bonds (Deputy

Director of Investments)

U.S. Equity

Internal

Management

Investment

Administration

and Operations

Director of

Investments


INVESTMENT PROGRAM

OrganizationalStructure

Fund

Management

Global Bonds

Internal

Management

Asset

Allocation

U.S. Equity Index

Management /

Trading

Quantitative

Analysis

Derivatives

Public

Markets

Private

Markets

Private

Equity

Private

Real Estate

Defined

Contribution

Compliance

Risk Management

Oversight

Infrastructure

Business

Management

External Management

(Deputy Director of

Investments)

Core

Long Duration

Short Duration

TIPS

Cash


INVESTMENT PROGRAM

OrganizationalStructure(continued)

Internal Governance

In addition to the organizational structure described above, the director of investments utilizes a variety

of committees, working groups and meeting structures to govern the division’s activities. This internal

governance arrangement enhances collective inputs, promotes transparency, ensures accountability

and formalizes decision-making processes. Internal governance is designed to combine structure and

flexibility to efficiently bring the appropriate decision makers together on a timely basis and maintain a

controlled environment to minimize operational risk.

The schematic below highlights various elements of the internal governance arrangement. The

committees and working groups listed below vary in both the frequency of meetings and the degree of

structure and formality—some provide informal information sharing and some have formal written

charters.

The director of investments and each of the director’s direct reports are responsible for the committees,

working groups or formal meetings listed below.

The following committees and working groups have investment staff representation to facilitate

communication and interaction across OPERS divisions.

U.S. Equity

Internal

Management

Global Bonds

Internal

Management

External

Management

Fund

Management

Investment

Administration

Current Markets**

Cash/Asset Allocation**

Investment Strategy***

Director of

Investments

Portfolio & Markets*

Sectors**

Strategy #


Credit**

Structured Products***

Strategy andOutlook***

External PublicManagers***

Iran/SudanDivestiture**

Private Equity***

Real Estate***


Fund Asset Allocation & Strategy**

Transitions #

Compliance***

DC FundOversight***

Broker Review***+

Internal AuditPlanning #

Risk**Meeting frequency key:

* Meets daily

** Meets weekly

*** Meets once or twice each month

# Meets on an as-needed basis

+ Committee reports to the director of investments

Corporate Governance Working Group

Leadership Team

Managers Meeting

Technology Council


INVESTMENT PROGRAM

Resources

Target Staffing for Year End 2009

Office Global

of U.S. Equity Bonds Total

Director Internal Internal External Fund Invest. Invest.

Invest. Mgmt. Mgmt. Mgmt. Mgmt. Admin. Division

2008 Investment Plan Projected Staffing 3 11 11 12 12 7 56

Current Staffing 2 10 9 8 9 7 45

Vacant Positions - To be filled in 2009 4 1 1 3 1 0 10

Year End 2009 Target Staffing 6 11 10 11 10 7 55

Status of Open Positions During Fourth Quarter 2008

Position Vacant

Office of Director of Investments Investment Analyst 4

U.S. Equity Internal Management Investment Analyst 1

Global Bonds Internal Management Senior Portfolio Manager 1

External Management Deputy Director of Investments 1

External Management Portfolio Manager/Analyst - Private Equity 1

External Management Investment Assistant II 1

Fund Management Investment Assistant II 1

Total 10

Staffing

As stated previously, recruiting and retaining the best and most talented key staff is a critical priority for

the Investment Division. Staff is added only after careful consideration and analysis. Following is a

presentation of anticipated full staffing at the end of 2009:


INVESTMENT PROGRAM

Resources The following chart compares OPERS’ asset size and staffing as of June 30, 2008 to its peer group

using data from www.pfde.org, which is a shared database of peer comparison statistics from members

of the National Association of State Investment Officers (NASIO). Individual peers are listed in the table

below.

The chart above suggests that the Investment Division staffing level is relatively low compared to its

asset base. The focus of the management team continues to be on effectively increasing productivity

and improving results without significantly increasing staff size.

The following table lists the public pension peer group referenced in the chart above and in other

sections of this investment plan. This peer group is composed of the largest public pension funds that

submitted data to NASIO by October 10, 2008.

12 Largest State Plans as of 6/30/2008

$50

$100

$150

$200

$250

0 50 100 150 200 250

Investment Staff

Ass

ets

(b

illi

on

s)

Assets($billions)


Investment Staff

Assets

($ millions)

California Public Employees' Retirement System $239,232 225

California State Teachers' Retirement System $162,226 103

New York State & Local Retirement System $151,814 50

Florida State Board of Administration $126,937 63

New York State Teachers' Retirement System $95,769 60

New Jersey Division of Investment $77,909 71

Ohio Public Employees Retirement System $76,733 50

State of Wisconsin Investment Board $75,050 114

North Carolina Retirement System $72,305 28

Ohio State Teachers Retirement System $70,382 115

Division of Investment Services - State of Georgia $65,487 49


Peers

Investment

Staff

Operating Budget less Total Compensation

Office Global




2008 Operating Budget 0.70 0.62 0.74 2.24 1.16 0.39 5.85

2009 Operating Budget 0.72 0.55 0.76 2.36 1.17 0.47 6.03

Percent Change 3.2% -10.6% 2.3% 5.0% 0.8% 23.0% 3.2%

Percent of Total 11.9% 9.2% 12.6% 39.1% 19.4% 7.9% 100.0%

Average Assets in $ billions NA 7.38 18.38 29.96 20.44 NA 76.16

Operating Budget in Basis Points NA 0.75 0.41 0.79 0.57 NA 0.79

($ millions)


INVESTMENT PROGRAM

Resources(continued)

Staffing costs

Assuming full staffing levels at year-end 2009, the chart below details the annual cost of salaries,

benefits and incentive compensation estimated to be paid in 2009 for the Investment Division.

By comparison, the estimated total compensation costs for 2008 were $11.19 million, or 1.28 basis

points on $87.20 billion in average assets. Total 2009 compensation costs are expected to be similar

to those of 2008 due to the combination of filling budgeted positions, salary increases and the

elimination of one position.

Operating Budget

The Investment Division’s 2009 operating budget less total compensation, as submitted to OPERS

Finance on September 24, 2008, was $6.03 million. (This operating budget is subject to change prior

to its final approval in late 2008.) This operating budget reflects an increase of approximately

$0.18 million, or 3.2%, from the 2008 budget.

Estimated 2009 Total Compensation Costs

Office Global




Salaries 0.94 1.50 1.18 1.66 1.24 0.57 7.09

Benefits 0.31 0.55 0.47 0.60 0.46 0.18 2.58

Incentive Compensation 0.10 0.33 0.37 0.35 0.30 0.05 1.50

Total Compensation 1.35 2.38 2.02 2.61 2.00 0.80 11.16

Average Assets in $ billions NA 7.38 18.38 29.96 20.44 NA 76.16

Compensation in Basis Points NA 3.2 1.1 0.9 1.0 NA 1.47

($ millions)


INVESTMENT PROGRAM


The chart above shows the allocation of the operating budget across major budget categories.

The primary expenses for Audit/Legal/Consulting services are for consulting fees for the Division

and individual asset classes. For 2009, estimated consulting fees total $2.0 million, which is 33%

of the total operating budget.

The primary expenses in the Quotes and Data Feeds category are for data and services provided

by vendors such as Bloomberg, Bloomberg POMS, Thomson Reuters and Factset.

The Analytics category includes tools and analytics provided by BARRA, Wilshire, Yield Book,

Quantitative Services Group, Market QA and JPMorgan Chase.

Research expenses are comprised of independent research services such as Thomson Reuters,

Moody's Credit Reports, MSCI Index Service and Intex.

IT expenses are for the Charles River Trade Order Management System and Eagle PACE data

warehouse.

Training and Travel expenses include all business travel, which is primarily for due diligence on

new investments, monitoring of existing investments, enhancing operational capabilities and

promoting staff’s educational and professional growth.

2009 Operating Budget

Communications

0.00%

IT

5.14%Training & Travel

7.24%

Research

7.74%

Analytics

11.29%

Quotes & Data

Feeds

22.78%

Audit/Legal/

Consulting

Services

45.74%

Office Supplies &

Equipment

0.06%


INVESTMENT PROGRAM


Estimate of External Management Fees in

Dollars and Basis Points

Total for 2009

Average Estimated Fees of

External Annual External

Assets Fee Assets

($ millions) ($ millions) (bps)

U.S. Equity 4,966 14.0 28.3

Private Equity 2,866 69.4 242.1

Non-U.S. Equity 15,785 38.2 24.2

Real Estate 4,469 47.3 105.8

Global Bonds 1,869 6.3 33.5

Total Fund 29,956 175.1 58.5

External Management Fees

Below are the expected annual external management fees by asset class for the Investment Division.

The estimate of fees is based on the 2009 estimated average market value for the Defined Benefit

and Health Care Funds, as detailed in the average assets section below.

Average Assets

The table below shows a summary of actual and estimated assets for the Defined Benefit and Health

Care Funds.

The combined assets are based on 2009 target portfolio and asset class allocations for the Defined

Benefit and Health Care Funds. The estimated assets reflect Defined Benefit and Health Care

estimated market values, returns and cash flows as detailed in the Defined Benefit and Health Care

Fund Strategies section of this plan.

Office Global




July 31, 2008 Actual Unaudited NA $7.3 $19.6 $29.4 $19.4 NA $75.6

December 31, 2008 Estimated NA $7.4 $18.3 $29.5 $20.4 NA $75.6

Average 2009 Estimated NA $7.4 $18.4 $30.0 $20.4 NA $76.2

December 31, 2009 Estimated NA $7.4 $18.5 $30.4 $20.4 NA $76.7

Actual and Estimated Assets

Combined Defined Benefit and Health Care Funds

($ billions)


INVESTMENT PROGRAM


Total Costs

The estimated total cost of the investment program in 2009 will be $197.42 million or 25.9 basis

points of assets under management. This compares to the total costs in the 2008 Investment Plan of

$185.9 million, or 21.3 basis points of assets under management. The growth in the size of the

private equity fund has generated a commensurate increase in external management fees.

CEM Benchmarking, Inc. is an independent benchmarking firm for pension plans and provides an

assessment of OPERS investment operations relative to a global set of peers. In 2007, OPERS

actual cost of 19.2 basis points was below the benchmark cost of 23.5 basis points, highlighting

OPERS’ more efficient use of staff and consistent emphasis on productivity.

Estimated 2009 Total Costs

Office Global


Director Internal Internal External Fund Invest. Invest. % of

Invest. Mgmt. Mgmt. Mgmt. Mgmt. Admin. Division Total

Total Compensation 1.35 2.38 2.02 2.61 2.00 0.80 11.16 5.7%

Operating Budget less Compensation 0.72 0.55 0.76 2.36 1.17 0.47 6.03 3.1%

Manager Fees 175.13 175.13 88.7%

Custody and Overhead 5.10 2.6%

Total Costs 2.07 2.93 2.78 180.09 3.17 1.28 197.42 100.0%

Percent of Total 1.1% 1.5% 1.4% 91.2% 1.6% 0.6%

Average 2009 Asset Size ($ b) NA 7.38 18.38 29.96 20.44 NA 76.16

Costs in Basis Points to Functional Unit NA 4.0 1.5 60.1 1.6 NA NA

Costs in Basis Points to Total Fund 0.3 0.4 0.4 23.6 0.4 0.2 25.9

($ millions)


FUND STRATEGIES

Defined Benefit Expected Asset Growth

The table below summarizes a probability estimate and confidence interval for the ending value of

the Defined Benefit Fund at December 31, 2009. The pessimistic and optimistic estimates are based

on the 2009 Return and Risk assumptions listed in the table in the Return and Risk section of the

Defined Benefit Fund strategy section.

The anticipated market value of $63.2 billion for December 31, 2008 is derived by a smoothing

projection that incorporates both the actual Defined Benefit Fund return through July 31, 2008 and

the expected full year return for 2008 presented in the 2008 Investment Plan.

The OPERS Defined Benefit Fund Asset Allocation study, which was most recently completed in

2006, indicated that the 15-year projected average annual return for the OPERS Defined Benefit

asset mix will be 8.5% with an expected volatility of 12.8%. An updated study is planned to be

completed in 2009.

Defined Benefit Fund

2009 Expected Asset Growth

Pessimistic Base Optimistic

Case Case Case

12/31/08 Market Value ($ billions) $63.2 $63.2 $63.2

Expected Total Return -7.12% 4.43% 9.54%

Expected Investment Gain ($ billions) ($4.5) $2.8 $6.0

Expected Cash Flow ($ billions) ($1.6) ($1.6) ($1.6)



FUND STRATEGIES

Defined Benefit(continued)

Asset Allocation

The 2009 target asset allocation and ranges for the Defined Benefit Fund are listed below along with

actual allocations of comparable peers as of June 30, 2008:

*Peer group defined previously in the Investment Program Section.

The U.S. Equity asset class includes opportunistic assets. The Real Estate asset class includes

Private and Public Real Estate. The Global Bonds asset class within the Defined Benefit Fund

includes universal bonds and long-duration bonds.

Throughout 2009 and beyond, staff will work with OPERS’ consultants to recommend certain

enhancements to the asset mix and asset management strategies targeted at raising the expected

return within acceptable risk levels. While not all of these strategies have been clearly defined,

several are described in the following Asset Class Strategies and Resources and Initiatives sections.

Estimated assets for December 31, 2009 are listed below and are based on December 31, 2009

target allocations and associated total Defined Benefit Fund estimated assets.

12/31/09 Peer

Target Range Group*

U.S. Equity 43.3% +/- 4% 37.5%

Private Equity 4.7% 1% - 9% 5.3%

Non-U.S. Equity 20.0% +/- 4% 19.3%

Real Estate 8.0% +/- 4% 7.1%

Subtotal Equity 76.0% 69.2%

Global Bonds 24.0% +/- 4% 30.8%

Subtotal Debt 24.0% 30.8%

Total Health Care Fund 100.0% 100.0%

Asset Class

Actual

Assets Target

($billions) Allocation

7/31/2008 12/31/2008 2009 Average 12/31/2009 12/31/2009

U.S. Equity $27.0 $27.8 $27.8 $27.9 43.3%

Private Equity $2.5 $2.6 $2.8 $3.0 4.7%

Non-U.S. Equity $11.9 $12.6 $12.8 $12.9 20.0%

Real Estate $5.7 $5.1 $5.1 $5.2 8.0%

Global Bonds $16.2 $15.2 $15.3 $15.5 24.0%

Total Defined Benefit Fund $63.3 $63.2 $63.8 $64.5 100.0%

Estimated

($ billions)

Assets


FUND STRATEGIES


Composition of Investment Portfolio

The table below shows the Defined Benefit Fund’s projected June 30, 2009 allocation between

internal and external asset management by asset class along with actual allocations of comparable

peers as of June 30, 2008.


The table shows that OPERS is similar to its peer group in the higher use of internal management for

U.S. Equity and Global Bonds and the higher use of external management for the private market

asset classes such as Private Equity and Real Estate. OPERS’ internal management of real estate is

through real estate investment trust securities (REITs). OPERS is somewhat dissimilar to its peer

group in using external asset management exclusively in the Non-U.S. Equity asset class. As noted

in the Report from the Director of Investments, during 2009 staff will further explore managing

passive Non-U.S. Equity assets internally.

The table below shows the Defined Benefit Fund’s projected June 30, 2009 allocation between active

and passive asset management by asset class along with actual allocations of comparable peers as

of June 30, 2008. The U.S. Equity, Non-U.S. Equity, Global Bonds and REIT asset classes are

managed identically for the Health Care and Defined Benefit Funds.


OPERS Peer Group* OPERS Peer Group*

U.S. Equity 84.8% 68.9% 15.3% 31.1%

Private Equity 0.0% 26.1% 100.0% 73.9%

Non-U.S. Equity 0.0% 29.1% 100.0% 70.9%

Real Estate 12.5% 31.9% 87.5% 68.1%

Global Bonds 89.2% 79.6% 10.8% 20.4%

Weighted Averages 59.3% 59.6% 40.7% 40.4%

Asset Class

Internal Management External Management

OPERS Peer Group* OPERS Peer Group*

U.S. Equity 34.5% 50.3% 65.5% 49.7%

Private Equity 100.0% 100.0% 0.0% 0.0%

Non-U.S. Equity 79.7% 85.9% 20.3% 14.1%

Real Estate 100.0% 99.8% 0.0% 0.2%

Global Bonds 99.3% 84.3% 0.7% 15.7%

Weighted Averages 67.3% 73.8% 32.7% 26.2%

Asset Class

Active Management Passive Management


FUND STRATEGIES


OPERS’ use of internal asset management provides many advantages including:

Flexibility: Rebalancing decisions are executed efficiently and cost effectively. Control over the

assets enables OPERS to reposition its portfolios as opportunities arise and as market conditions

change.

Cost control: External asset management is a high-margin business, and over the long-term, asset

management fees can create a material drag on net returns. Where internally managed portfolios

meet or exceed expected excess return targets, there is a material benefit to OPERS in

performance and cost savings. External asset management fees typically range from a multiple of

six to 20 times the cost of managing assets internally.

Market insight: Internal asset management provides important information across asset classes to

help in decision-making processes such as:

External manager hiring and oversight—Staff is better able to assess external manager

strengths and weaknesses.

Across markets—Frequently, staff can leverage information garnered from one asset class to

support decision-making in another asset class.


FUND STRATEGIES


Strategies

Return and Risk

The Defined Benefit Fund’s performance objective is to earn a long-term rate of return that meets or

exceeds the return of the Defined Benefit Fund policy benchmark. Where markets are generally

efficient, such as U.S. Equity and Global Bonds, the outperformance goals are modest. In less

efficient markets, such as Non-U.S. Equity and Private Equity, the goals for incremental return above

the indices are more aggressive.

The return estimates below were derived from the asset class return expectations developed by

internal staff. The single-point estimate return of 4.43% is comprised of an expected return of 4.10%

from the policy mix and an additional contribution of 0.33% through active management within the

asset classes and individual portfolios.

Due to rounding, the Total Return may not appear to sum correctly from the sources of return.

Variability Risk is measured by standard deviation for Policy and Total Risk and by tracking error for Active Risk.

The Information Ratio is derived by dividing the Active Return by its associated tracking error and is an appropriate

measure of the relationship between Active Returns and Risks. The Sharpe Ratio is derived by subtracting the Cash

Return from the Policy and Total Returns, respectively, and dividing the difference by the associated standard deviation.

The Sharpe Ratio is an appropriate measure of the relationship between Policy and Total Returns and Risks.

Asset Classes Pessimistic Base Optimistic

U.S. Equity -11.00% 4.00% 9.00%

Private Equity 0.00% 4.00% 8.00%

Non-U.S. Equity -8.00% 6.00% 13.00%

Real Estate -8.75% 4.00% 8.00%

Global Bonds 0.75% 2.75% 4.75%

Sources of Return

Policy -6.91% 4.10% 8.66%

Tactical -0.05% 0.00% 0.05%

Active -0.17% 0.33% 0.83%

Total Return -7.12% 4.43% 9.54%

Variability Information Sharpe

Risk Ratio Ratio

9.83% 0.16

0.05%

0.50% 0.67

9.98% 0.19

2009 Return Assumptions

Sources of Risk

Policy

Tactical

Active

Total Risk


FUND STRATEGIES


As stated in the Report from the Director of Investments, fund investments are measured and

monitored within a specific framework, which identifies return and risk from three sources:

Policy: The return and risk inherent in the policy asset mix adopted by the OPERS Retirement

Board. The mix has expected return and variability characteristics that come from the underlying

asset classes. The expected return of the OPERS Defined Benefit Fund policy mix is 4.10% for

2009 with an estimated risk, or variability, of 9.83%. As such, approximately two-thirds of the time,

actual annual policy returns are expected to be within a range of –5.73% to +13.93%.

Tactical: The added return and risk introduced by allowing the actual asset mix to deviate from the

policy asset mix. The table above does not show any excess expected return from tactical asset

allocation activities.

Active: The return and risk introduced through the use of active management within asset classes

and portfolios, arising from asset class and portfolio compositions that are different than that of

their benchmarks.

In summary, the total expected return of the Defined Benefit Fund in 2009 is the expected policy

return of 4.10% and active return of 0.33%, for a total of 4.43%. The estimated risk anticipated to

achieve this return is the combination of the policy, tactical and active risk, which is 9.98%


FUND STRATEGIES


Schedule of Expected Performance and Volatility

Average Active Return Active Return Target

Policy Performance Performance Tracking Target

Allocation Objectives Contribution Error Information

in Percent (bps) (bps) (bps) Ratio

U.S. Equity 43.5% 22 9.5 34 0.64

Private Equity 4.5% 100 4.5 NA NA

Non-U.S. Equity 20.0% 65 12.9 130 0.50

Real Estate 8.0% 6 0.5 NA NA

Global Bonds 24.0% 26 6.1 50 0.51

Total Defined Benefit Fund 100.0% NA 33 50 0.67

Active Return and Risk

The table below details the expected excess performance, or active return, and the tracking error

(volatility of active returns) for each asset class, as well as the overall fund. Tracking error is a

meaningful measure for public market asset classes.

The table above shows an anticipated active management contribution of 33 basis points to the

fund’s return. The 50 basis points of estimated tracking error indicates a 68% probability that the

active return (measured only for public market assets) will be in a range of -17 basis points to +83

basis points. This confidence interval is arrived at by subtracting the tracking error from, and adding

the tracking error to, the expected active return. The target contribution to fund performance of 33

basis points is equal to the 33 basis points projected for 2008.

The figures shown in the table above are aggregated from the component portfolios in each of the

asset classes. The tracking error that results at the fund level is lower than would be suggested by a

simple weighted average due to the diversifying effects of the active return interaction among the

asset classes.


FUND STRATEGIES

Health Care Expected Asset Growth

The table below summarizes a probability estimate and confidence interval for the ending value of

the Health Care Fund at December 31, 2009. The pessimistic and optimistic estimates are based on

the 2009 Return and Risk assumptions listed in the table in the Return and Risk section of the Health

Care Fund strategy section.

The anticipated market value of $12.3 billion for December 31, 2008 is derived by a smoothing

projection that incorporates both the actual Health Care Fund return through July 31, 2008 and the

expected full year return for 2008 presented in the 2008 Investment Plan.

The OPERS Health Care Fund Asset Allocation study, which was most recently completed in 2007,

indicated that the 15-year projected average annual return for the OPERS Health Care asset mix will

be 7.5% with an expected volatility of 10.7%.

Health Care Fund

2009 Expected Asset Growth

Pessimistic Base Optimistic

Case Case Case


Expected Total Return -4.76% 4.05% 8.37%

Expected Investment Gain ($ billions) ($0.6) $0.5 $1.0

Expected Cash Flow ($ billions) ($0.6) ($0.6) ($0.6)



FUND STRATEGIES

Health Care(continued)

Asset Allocation

The 2009 target asset allocation and ranges for the Health Care Fund are listed below:

There is no peer universe for comparable health care funds run by comparable large public pension

funds. The U.S. Equity asset class includes Opportunistic and the Global Bonds asset class within

the Health Care Fund includes universal bonds, short duration bonds and Treasury Inflation

Protected Securities (TIPS).

The asset mix shown above was developed based on an asset-liability study completed in 2007,

which established that the level of risk assumed in the asset mix is appropriate for OPERS’

characteristics and circumstances.

Estimated assets for December 31, 2009 are listed below and are based on December 31, 2009

target allocations and associated total Health Care Fund estimated assets.

12/31/09

Target Range

U.S. Equity 28.6% +/- 4%

Private Equity 0.9% 0 - 5%

Non-U.S. Equity 24.5% +/- 4%

REITs 6.0% +/- 4%

Subtotal Equity 60.0%

Global Bonds 40.0% +/- 4%

Subtotal Debt 40.0%

Total Health Care Fund 100.0%

Asset Class

Actual

Assets Target

($billions) Allocation

7/31/2008 12/31/2008 2009 Average 12/31/2009 12/31/2009

U.S. Equity $3.4 $3.6 $3.6 $3.5 28.6%

Private Equity $0.0 $0.0 $0.1 $0.1 0.9%

Non-U.S. Equity $2.8 $3.0 $3.0 $3.0 24.5%

REITs $0.7 $0.7 $0.7 $0.7 6.0%

Global Bonds $5.3 $4.9 $4.9 $4.9 40.0%

Total Health Care Fund $12.3 $12.3 $12.3 $12.3 100.0%

Estimated

($ billions)

Assets


FUND STRATEGIES


Composition of Investment Portfolio

The table below shows the Health Care Fund’s allocation between internal and external asset

management by asset class.

There is no peer universe for health care funds run by large public pension plans. OPERS utilizes

internal management for the Health Care Fund, except for the Non-U.S. Equity and Private Equity

components, which are managed exclusively by external managers. Furthermore, the Health Care

Fund utilizes:

A higher proportion of more liquid securities and no private real estate securities due to the greater

need for liquidity and the shorter duration of this fund, relative to the Defined Benefit Fund.

Treasury inflation protected securities (TIPS) as a hedge against observed high inflation in health

care costs.

The U.S. Equity, Non-U.S. Equity, Global Bonds and REIT asset classes are managed identically for

the Health Care and Defined Benefit Funds. The table below shows the Health Care Fund’s active

and passive asset management by asset class.

There is no peer universe for comparable health care funds run by large public pension plans. Passive

management is utilized in the more-efficient U.S. Equity asset class and to a lesser extent in the less-

efficient Non-U.S. Equity asset class. The remainder of the fund is substantially actively managed.

U.S. Equity

Private Equity

Non-U.S. Equity

REITs

Global Bonds

Weighted Averages

Asset Class

Internal Management

95.5%

External Management

OPERS

0.0%

0.0%

70.6%

OPERS

15.3%

100.0%

100.0%

0.0%

4.5%

29.4%

84.8%

100.0%

U.S. Equity

Private Equity

Non-U.S. Equity

REITs

Global Bonds

Weighted Averages

Asset Class

Active Management

99.3%

Passive Management

OPERS

100.0%

79.7%

76.0%

OPERS

65.5%

0.0%

20.3%

0.0%

0.7%

24.0%

34.5%

100.0%


FUND STRATEGIES


OPERS’ use of internal asset management provides many advantages including:

Flexibility: Rebalancing decisions are executed efficiently and cost effectively. Control over the

assets enables OPERS to reposition its portfolios as opportunities arise and as market conditions

change.

Cost control: External asset management is a high-margin business, and over the long-term, asset

management fees can create a material drag on net returns. Where internally managed portfolios

meet or exceed expected excess return targets, there is a material benefit to OPERS in

performance and cost savings. External asset management fees typically range from a multiple of

six to 20 times the cost of managing assets internally.

Market insight: Internal asset management provides important information across asset classes

to help in decision-making processes such as:

External manager hiring and oversight—Staff is better able to assess external manager

strengths and weaknesses.

Across markets—Frequently, staff can leverage information garnered from one asset class to

support decision-making in another asset class.


FUND STRATEGIES


Strategies

Return and Risk

The Health Care Fund’s performance objective is to earn a long-term rate of return that meets or

exceeds the return of the Health Care Fund policy benchmark. Where markets are generally efficient,

such as U.S. Equity and Global Bonds, the outperformance goals are modest. In less efficient

markets, such as Non-U.S. Equity and Private Equity, the goals for incremental return above the

indices are more aggressive.

The return estimates below were derived from the asset class return expectations developed by

internal staff. The single-point estimate of return of 4.05% is comprised of an expected return of

3.71% from the policy mix and an additional contribution of 0.34% through active management within

the asset classes and individual portfolios.

Due to rounding, the Total Return may not appear to sum correctly from the sources of return.

Variability Risk is measured by standard deviation for Policy and Total Risk and by tracking error for Active Risk.

The Information Ratio is derived by dividing the Active Return by its associated tracking error and is an appropriate

measure of the relationship between Active Returns and Risks. The Sharpe Ratio is derived by subtracting the Cash

Return from the Policy and Total Returns, respectively, and dividing the difference by the associated standard deviation.

The Sharpe Ratio is an appropriate measure of the relationship between Policy and Total Returns and Risks.

Asset Classes Pessimistic Base Optimistic

U.S. Equity -11.00% 4.00% 9.00%

Private Equity NA NA NA

Non-U.S. Equity -8.00% 6.00% 13.00%

REITs 0.00% 3.00% 8.00%

Global Bonds 1.25% 2.25% 3.25%

Sources of Return

Policy -4.65% 3.71% 7.58%

Tactical -0.05% 0.00% 0.05%

Active -0.06% 0.34% 0.74%

Total Return -4.76% 4.05% 8.37%

Variability Information Sharpe

Risk Ratio Ratio

6.95% 0.17

0.05%

0.40% 0.86

7.34% 0.21

2009 Return Assumptions

Sources of Risk

Policy

Tactical

Active

Total Risk


FUND STRATEGIES


As stated in the Report from the Director of Investments, fund investments are measured and

monitored within a specified framework, which identifies return and risk from three sources:

Policy: The return and risk inherent in the policy asset mix adopted by the OPERS Retirement

Board of Trustees. The mix has expected return and variability characteristics that come from the

underlying asset classes. The expected return of the OPERS Health Care Fund policy mix is

3.71% for 2009 with an estimated risk, or variability, of 6.95%. As such, approximately two-thirds of

the time, actual annual policy returns are expected to be within a range of –3.24% to +10.66%.

Tactical: The added return and risk introduced by allowing the actual asset mix to deviate from the

policy asset mix. The table above does not show excess expected return from tactical asset

allocation activities.

Active: The return and risk introduced through the use of active management within asset classes

and portfolios, arising from asset class and portfolio compositions that are different than that of

their benchmarks.

In summary, the total expected return of the Health Care Fund in 2009 is the expected policy return

of 3.71% and active return of 0.34%, for a total of 4.05%. The estimated risk anticipated to achieve

this return is the combination of the policy, tactical and active risk, which is 7.34%.


FUND STRATEGIES



The table below details the expected excess performance, or active return, and the tracking error

(volatility of active returns) for each asset class, as well as the overall fund.

The table above shows an anticipated active management contribution of 34 basis points to the

fund’s return. The 40 basis points of estimated tracking error indicates a 68% probability that the

active return (measured only for public market assets) will be in a range of -6 basis points to +74

basis points. This confidence interval is arrived at by subtracting the tracking error from, and adding

the tracking error to, the expected active return. The target contribution to fund performance of 34

basis points is slightly higher than the 33 basis points projected for 2008 due to a higher allocation to

the Non-U.S. Equity asset class.

The figures shown in the table above are aggregated from the component portfolios in each of the

asset classes. The tracking error that results at the fund level is lower than would be suggested by a

simple weighted average due to the diversifying effects of the active return interaction among the

asset classes.


Average Active Return Active Return Target

Policy Performance Performance Tracking Target

Allocation Objectives Contribution Error Information

in Percent (bps) (bps) (bps) Ratio

U.S. Equity 29.0% 22 6.2 34 0.63

Private Equity 0.5% NA NA NA NA

Non-U.S. Equity 24.5% 65 15.8 130 0.50

REITs 6.0% 50 3.0 200 0.25

Global Bonds 40.0% 22 8.8 30 0.73

Total Health Care Fund 100.0% NA 34 40 0.86


FUND STRATEGIES

DefinedContribution

Asset Management

From its inception on January 2, 2003 through July 31, 2008, the Defined Contribution Fund’s assets

have grown to nearly $250 million. Asset growth has averaged approximately $50 million every 12

months. Future growth of the Defined Contribution Fund assets is expected to be equal to, or slightly

above, historical averages due to the addition of nearly 2,000 new participants each year. The

OPERS Target Date Funds were introduced on October 1, 2008.

Asset Allocation

The target asset allocation and ranges for the target date funds are shown in the table below. Target

asset allocations for the target date funds change over time with the ratio of equities to fixed income

becoming more conservative as the target date approaches. The assets of the target date funds are

allocated across the six OPERS Funds.

OPERS Investment Options

Assets Under

Management

($ millions)

7/31/06

Assets Under

Management

($ millions)

7/31/07

Assets Under

Management

($ millions)

7/31/08

Stable Value $7.7 $9.3 $16.0

Bond 5.7 7.5 10.4

Stock Index 13.7 20.4 22.6

Large Cap 10.3 14.2 15.6

Small Cap 8.8 12.1 13.6

Non-U.S. Stock 8.3 17.1 19.8

OPERS Target Payout Fund 0.0 0.0 0.0

OPERS Target 2010 Fund 0.0 0.0 0.0









Conservative 8.8 11.8 15.7

Moderate 45.0 63.2 74.1

Aggressive 36.7 54.0 62.0

Total $145.0 $209.6 $249.8

Defined Contribution Fund Assets

OPERS Funds

Stable Value Bond Stock Index Large Cap Small Cap Non-U.S. Stock

OPERS Target Date Funds Target Range Target Range Target Range Target Range Target Range Target Range

OPERS Target Payout Fund 40% +/- 4% 30% +/- 6% 8% +/- 2% 3% +/- 1% 4% +/- 1% 15% +/- 2%

OPERS Target 2010 Fund 29% +/- 3% 26% +/- 4% 12% +/- 2% 4% +/- 1% 6% +/- 1% 23% +/- 2%










FUND STRATEGIES

DefinedContribution(continued)

Composition of Investment Portfolios

In 2002, OPERS staff and external consultants recommended a Defined Contribution Fund

investment structure that includes a multi-tiered investment option line up with asset allocation funds

and core investment options. As of October 1, 2008, target date funds were introduced to offer a

solution to those who would rather not pick their own mix of individual OPERS funds or actively

manage their allocation over time.

The investment structure is designed to satisfy the investment objective of the Defined Contribution

Fund, which is to offer an array of funds that provide participants the ability to construct a portfolio

that:

Is diversified by asset class and investment style,

Spans the risk-return spectrum,

Outperforms appropriate benchmarks, and

Avoids excessive risk

1) The Custom Stable Value Index is 5% Merrill Lynch 3-Month Treasury Bills, 45% Lehman 1-5 Year

Government/Corporate Bond, 35% Lehman Intermediate Government/Corporate and 15% Lehman Aggregate

smoothed over three year periods.

2) The Target Date Custom Indexes are composed of benchmarks of the underlying OPERS Funds using the same

target allocations as the respective OPERS Target Date Fund target allocation.

OPERS Investment Options Benchmark Index Benchmark Peers

Stable Value Custom Stable Value (1) Evestments

Bond Lehman Brothers U.S. Universal Russell/Mellon Active Fixed Income

Stock Index Russell 3000 Russell/Mellon Active U.S. Equity

Large Cap Russell 1000 Russell/Mellon Active U.S. Equity

Small Cap Russell 2000 Russell/Mellon Active Small Cap U.S. Equity

Non-U.S. Stock MSCI ACWI x U.S. Russell/Mellon Active Non-U.S. Equity

OPERS Target Payout Fund Custom (2) Russell/Mellon Active Balanced

OPERS Target 2010 Fund Custom (2) Russell/Mellon Active Balanced









Defined Contribution Fund Portfolio Structure


FUND STRATEGIES


Plan Structure

The Defined Contribution Fund is composed of investments, which are directed by the members of the

Member-Directed and Combined Plans. As of September 30, 2008, participation in the Member-Directed

Plan included approximately 9,300 members, while participation in the Combined Plan included

approximately 7,200 members. Over the last 12 months, most new members (81%) have defaulted to

the Traditional Pension Plan. Of the new members who have actively selected a retirement plan, 71%

have selected the Traditional Pension Plan, 18% the Member-Directed Plan and 11% the Combined

Plan.

Periodically, staff compares the OPERS Defined Contribution Fund to peers that provide defined

contribution investment options to participants to stay abreast of best practices and monitor industry

trends. Current findings on marketplace trends include:

Many plan sponsors continue to offer a large number of investment options (15 or more options).

However, some plan sponsors are reducing the number of investment options to simplify the

account management process for participants.

Many plan sponsors offer a multi-tiered investment structure of balanced lifestyle and/or Life Cycle

funds and individual funds.

Self-directed brokerage accounts are used by a small number of corporate plan sponsors.

However, participants do not typically utilize this service when it is available.


FUND STRATEGIES


Expected Fees

The tables below show the expected asset management fees for each investment option and the

associated underlying investment managers. The estimates of fees are based on a projected average

of assets and expected basis points of fees for 2009 and reflect the benefit of consolidating portfolios

across the Defined Benefit, Health Care and Defined Contribution Funds.

OPERS Investment Options

Average Assets

($ millions)

Estimated

Annual Fees

($ millions)

Estimated

Annual Fees

(bps)

Stable Value $19.4 $0.04 23.0

Bond 11.9 0.02 20.0

Stock Index 23.7 0.01 3.0

Large Cap 16.3 0.01 5.0

Small Cap 14.4 0.01 8.0

Non-U.S. Stock 21.2 0.07 32.0

OPERS Target Payout Fund 3.3 0.01 20.7










Total $270.1 $0.47 17.4

Total for 2009

Estimate of External Management Fees in Dollars and Basis Points

Underlying Investment Manager

Average

Assets

($ millions)

Estimated

Annual Fees

($ millions)

Estimated

Annual Fees

(bps)

Invesco Stable Value $17.8 $0.03 18

Goode Stable Value 7.7 0.03 35

Pyramis Broad Market Duration 16.8 0.03 20

Smith Breeden Core 15.5 0.03 17

Fort Washington High Yield 3.6 0.01 25

Capital Guardian Emerging Market Debt 1.1 0.01 47

Stock Index BGI Russell 3000 Index 56.8 0.02 3

Large Cap BGI Russell 1000 Index 46.3 0.02 5

Small Cap BGI Russell 2000 Index 17.3 0.01 8

Alliance Bernstein ACWI x U.S. Active 52.3 0.17 33

Acadian ACWI x U.S. Active 26.2 0.09 34

BGI ACWI x U.S. Index 8.7 0.01 15

Non-U.S. Stock

Estimate of Fees by Manager in Dollars and Basis Points

OPERS Investment

Options

Stable Value

Bond


FUND STRATEGIES


Strategies

Asset Class Return and Risk

Mercer Investment Consulting provided the asset class returns listed below, which are based on their

capital markets modeling assumptions. Those assumptions are based on forward looking total

returns, fundamental data and valuation levels. The returns listed for the Target Date Funds reflect

both asset class returns and the active returns of the underlying OPERS Funds. The Investment staff

does not incur tactical risk and rebalances the investment options quarterly if their allocations are

outside their policy range. The returns listed below are neither predictions of, nor guarantees for, future

performance.

*Risk is defined in this table as the forward looking annualized standard deviation.

Asset Classes Return Risk*

Stable Value 4.5% 3.0%

Bond 4.9% 5.5%

Stock Index 8.2% 18.6%

Large Cap 8.0% 18.0%

Small Cap 8.4% 21.7%

Non-U.S. Stock 8.4% 18.4%

Payout Total 6.3% 5.8%

2010 Total 6.6% 6.9%

2015 Total 7.5% 10.6%

2020 Total 8.1% 12.7%

2025 Total 8.3% 13.7%

2030 Total 8.4% 14.2%

2035 Total 8.5% 14.6%

2040 Total 8.5% 14.9%

2045 Total 8.6% 15.4%

2050 Total 8.6% 15.5%

Asset Class and Target Date Fund Expected Return and Risk

Target Date Funds


FUND STRATEGIES



Active returns are estimated by applying the performance objectives listed on the subsequent table of

the Member-Directed Funds to the target asset allocation of each Target Date Fund as listed

previously in the Target Date Fund asset allocation section.

Performance

Objective

Tracking

Error

Information

Ratio

OPERS Target Payout Fund 21 46 0.46

OPERS Target 2010 Fund 21 54 0.39









Expected Active Return and Risk

Target Date Funds


FUND STRATEGIES


Performance Objectives and Risk Control

The performance objectives and tracking errors listed below are neither predictions of, nor

guarantees for, future performance. The performance objectives of the Member-Directed Funds are

defined by the Member-Directed Fund policy, which provides a framework for the Investment staff to

manage the funds.

*Custom SV benchmark is previously defined in the Defined Contribution Composition of Investment Portfolio section.


Average Assets Under Management

($ millions) Target

Allocation Benchmark

Performance Objectives

(bps)

Target Tracking

Error (bps)

Target Information

Ratio

OPERS Stable Value

Invesco Stable Value 17.8 70% Custom SV* 10 NA NA

Goode Stable Value 7.7 30% Custom SV* 10 NA NA

Total Stable Value $25.5 100% Custom SV* 10 NA NA

OPERS Bond

Pyramis Broad Market Duration 16.8 45% LB Aggregate 50 60 0.83

Smith Breeden Core 15.5 45% LB Aggregate 50 60 0.83

Fort Washington High Yield 3.6 7% LB Corp Ba/B HY 3% 100 400 0.25

Capital Guardian Emerging Market Debt 1.1 3% JPM EMD 100 400 0.25

Total Bond $37.0 100% LB U.S. Universal 30 70 0.43

OPERS Stock Index

BGI Russell 3000 Index 56.8 100% Russell 3000 0 15 0.00

Total Stock Index $56.8 100% Russell 3000 0 15 0.00

OPERS Large Cap


Total Large Cap $46.3 100% Russell 1000 0 25 0.00

OPERS Small Cap


Total Small Cap $17.3 100% Russell 2000 0 75 0.00

OPERS Non-U.S. Stock

Alliance Bernstein ACWI x U.S. Active 52.3 60% MSCI ACWI x U.S. 200 400 0.50

Acadian ACWI x U.S. Active 26.2 30% MSCI ACWI x U.S. 350 600 0.58

BGI ACWI x U.S. Index 8.7 10% MSCI ACWI x U.S. 0 125 0.00

Total Non-U.S. Stock $87.2 100% MSCI ACWI x U.S. 50 250 0.20


Intentionally left blank


ASSET CLASS STRATEGIES

Tactical Outlook This tactical outlook provides the background and context for the following asset class strategies and for

the consideration of biases between the asset classes for the Defined Benefit and Health Care Funds.

Following are overviews of the two components of the tactical outlook: The economic outlook and the

investment outlook. The economic outlook was provided by the Board’s investment consultant,

Mercer Investment Consulting, in November of 2008. The investment outlook, provided by OPERS’

Investment staff, is summarized by asset class.

Economic Outlook

Global economic prospects, already weak, collapsed in September and October as the financial

crises spread worldwide. Recession risks in the US and Europe are a near certainty, while the

growth in emerging markets will slide considerably.

We expect recession level growth (-1.0% to 0.0%) into the middle part of next year. We expect

slight recovery growth (1.0% to 2.0%) in the second half of 2009.

Although deflationary pressures are considerable over the next few months, the extraordinary

liquidity will kick in and keep inflation in the 1.0% to 2.0% range for 2009. Over the longer term,

we have increased our inflation expectations as the central banks will not let up on monetary policy

for quite some time.

Employment growth will lag considerably and hamper any rebound in the economy or the capital

markets. We expect unemployment to reach 8.0% in late 2009. Employment is always a lagging

indicator for the economy.

Many of the imbalances that affected the dollar in previous years—high trade deficits, higher

energy prices, excessive US consumption—have moderated and are correcting.

Treasury rates at the short end will remain low throughout much of 2009. The yield curve is

relatively steep, auguring economic improvement in 2009. We expect credit spreads to narrow, but

remain above historic averages well into 2010.



Tactical Outlook(continued)

Investment Outlook

Information gathered from a variety of sources was used to determine the investment outlook for

2009. Information considered includes Mercer Investment Consulting’s outlook, research from

investment banks, discussions with and research by external investment managers, feedback from

generalist and specialized consultants, discussions with peers and industry experts, and academic

and informational periodicals.

U.S. Equity Outlook

Expected return is in the range of -11% to 9% with a target of 4%.

A new White House administration and associated policies are likely to be focused on change,

uncertainty regarding the potential of any plan passed by Capitol Hill to aid the banking system,

threatened tax hikes from Capitol Hill, diminished exports due to an improving dollar, record home

foreclosures and substantial increases in unemployment.

However, the U.S. TARP program has a number of elegant characteristics that, if effective, may

change the outlook substantially in the coming months. For example, the plan is focused on

removing toxic assets from bank balance sheets which may actually create a backstop to toxic

assets and create demand from other institutions which may benefit the entire financial system. If

the government plan is successful, economic activity may reignite far faster than anyone expects.

If the plan is not successful, another much larger package is likely to be required from the Federal

government that will insure an end to the housing market correction, the source of the lion’s share

of the toxic assets currently locking up the flow of liquidity.

Private Equity Outlook

Expected return is in the range of 0% to 8% with a target return of 4%.

Corporate finance investments should experience more modest returns as multiples contract with

the economy, which should then create compelling opportunities for investors with a long-term

horizon. New deals will be smaller and largely financed with equity as the availability of credit is

non-existent in the near to intermediate term. The focus has shifted from doing new deals and

financial engineering to maximizing value through operational enhancements and paying down debt.

The most attractive opportunities will be found in distressed securities and in corporate

restructurings as the supply of available opportunities far outstrips demand.

Venture capital investments are more likely to have losses than gains in 2009, as the IPO market

remains weak and investor fear and fatigue take hold.




Non-U.S. Equity Outlook

Expected return is in the range of -8% to 13% with a target of 6%.

Continued downside risk is forecasted in 2009 due to continuing investor risk aversion, the impact

of the U.S. recession on the global economy, reduced corporate profitability and the tightening of

credit.

Emerging markets remain fundamentally attractive with long-term advantages in terms of growth,

profitability and valuation. But these markets will continue to underperform if global risk aversion

remains high. In particular, developing markets that are commodity producers could face more

downside risk if global demand continues to contract. Timing these markets is difficult and staff

seeks to maintain a neutral weighting to emerging markets in 2009.

In the short term, the U.S. dollar may continue to serve as a “safe haven” in volatile markets.

However, U.S. dollar weakness, triggered by increased U.S. government debt issuance, is likely to

dominate longer-term.

Real Estate Outlook

Expected return is in the range of -8.75% to 8% with a target of 4%.

Current cash returns remain fairly stable, but a global economic slowdown weakens property

fundamentals.

Disruptions in the capital markets continue to affect transaction volume and property valuations.

The property fundamentals have been relatively strong in 2008, the turmoil in the debt market and

the global economic slowdown are affecting commercial real estate pricing.

There were relatively few transactions completed during the first half of 2008, but the consensus

view is that cap rates have increased at least 50 bps.

Since the NPI is an appraisal-based index, it is not surprising that the index returns have not yet

reflected any decrease in value.

Staff anticipates that the NPI may reflect value declines in the second half of 2008 and throughout

2009, with value declines offsetting income returns.




Global Bonds Outlook

Expected return is in the range of 0.75% to 4.75% and 1.25% to 3.25% with 2.75% and 2.25%

target returns for the Defined Benefit and Health Care plans, respectively.

The Federal Open Market Committee reduced the Funds rate from 5.25% in August, 2007 to 1% in

October, 2008 in response to the continuing difficult conditions in the credit markets and fears

of further slowdowns in economic growth. There are few expectations that the Federal Funds

rate will be increased in 2009.

Credit quality concerns that initially manifested in the residential mortgage market have spread

broadly through other fixed income sectors, causing yield spreads to widen dramatically during

2008. Actions taken by the Federal Reserve, the U.S. Treasury and foreign governments have not

contained the liquidity squeeze that is gripping the bond market. The recent Congressional

passage of the U.S. TARP program will provide additional funds to attempt to restore liquidity and

improve bond valuations. Bond valuations are likely to remain under pressure during 2009.

Expectations of increasing corporate defaults due to slower economic growth and challenging

funding conditions may weaken the high yield sector in tandem with investment grade bonds.

Emerging market debt fundamentals, where the underlying economy relies on resource extraction,

are coming under pressure due to the recent fall of commodity prices, which are in response to

slower global economic growth expectations.



U.S. Equity Strategy

The U.S. Equity Policy classifies equity investment strategies into one of three categories: index,

enhanced index or active. The following table shows the ranges and targets for this policy.

Index 50 – 80% 65%

Enhanced Index 0 – 35% NA

Active 0 – 15% NA

The structure for the U.S. Equity strategy provides flexibility for managing assets between categories

and for managing allocations to managers with similar risk levels in the same category. This

approach also specifically acknowledges that different types of strategies entail different levels of risk.

It facilitates building portfolios of managers with a high probability of achieving return targets rather

than only focusing on risk control. The strategy also allows for an opportunistic approach for

identifying managers with high alpha potential within the active management category.

Portfolio Allocation

The 65% target allocation to the index category is a key risk control component of the asset class.

Index or passive management is a portfolio management approach for gaining index or beta

exposure to the asset class and exhibits very low tracking error of 0 to 50 basis points, or 0.50%.

Tracking error is a measure of a portfolio’s variability of returns relative to that of its benchmark.

Enhanced index managers employ a risk-controlled approach with the portfolios exhibiting low to

moderate levels of tracking error. The tracking error of an enhanced index strategy is generally

expected to be in the 50 basis point (0.50%) to 250 basis point (2.50%) range. The enhanced index

category

is comprised of managers that have diversified sources of alpha from three general strategic

approaches. Three portfolios are managed in a risk-controlled, quantitative fashion (Goldman,

Barclays, Piedmont). Another portfolio is a synthetic enhanced index portfolio, which invests in

fixed income securities and uses equity index futures to gain equity market exposure. The internal

enhanced portfolio is a low risk fundamental analysis strategy managed by internal U.S. Equity staff.

Active managers have tracking error levels of 250 basis points (2.50%) to 800 basis points (8.00%)

or more. The Active category is currently allocated among five managers with two managers being

funded in 2007 for the manager of minority manager program. Leading Edge and Progress both

manage portfolios of underlying minority managers and were funded with allocations of $75 million

and $50 million, respectively. Leading Edge and Progress have manager selection and allocation

authority and currently use eight and seven managers in their line-ups, respectively.

Categories Ranges Ranges



U.S. Equity(continued)


The U.S. Equity asset class benchmark is the Russell 3000 Index, which is a broad-based index

representing the U.S. Equity universe. Allocations among the index, enhanced index and active

management categories are managed to optimize the risk and return profile of the asset class

portfolio. The composition of the asset class will continue to be assessed to determine the

appropriate managers and the optimal allocations to achieve the performance objective while working

within the allotted risk budget.

The outperformance objective or alpha expectation for 2009 for the aggregate U.S. Equity asset

class composite is 22 basis points as shown in the accompanying table. This objective is lowered from

the 2008 level due to the termination of Alliance Bernstein and reallocation to the Russell 1000 Index

portfolio. The allocation strategy among the portfolios, which have varying degrees of expected alpha,

determines the aggregate alpha expectation. The primary sources of outperformance are from the

enhanced index and active management categories. The expected alphas for these managers fall in

the 47 to 150 basis point range. The alpha expectations are based on the confidence level with each

manager as well as the outlook for the specific strategy that each employs.

The asset class tracking error is determined by a risk budgeting process and model and is expected

to be less than 70 basis points per annum. A tracking error target is established for each portfolio and

each category of portfolios with the expectation that the overall asset class tracking error typically

remains below 70 basis points (approximately 85% of the time), which is the U.S. Equity policy limit.

The diversification benefit results in a lower tracking error estimate than would be computed by a

simple weighted average of the individual portfolio tracking errors. Therefore, despite tracking error

estimates for a manager of up to 800 basis points, the resulting tracking error target is quite modest.

For 2009, the asset class tracking error is targeted at 34 basis points. The tracking errors of the asset

class, categories and individual portfolios are monitored on a regular basis to assure compliance with

portfolio guidelines as well as with the targets described in this Investment Plan.

The Internal Russell 2000 and Internal Russell 1000 accounts are used in tandem for tactical asset

allocation and for adjusting imbalances between small capitalization and large capitalization exposure

within the asset class. The accounts are also used for conducting transition activity in a cost effective

and operationally efficient manner.




The portfolio composition and strategic allocation are managed to optimize the risk-return trade-off

and achieve an attractive risk-adjusted return. A measure of the risk-return efficiency of a portfolio is

the information ratio. The aggregate portfolio outperformance projection and tracking error are used

to calculate the information ratio. The calculation is expected alpha divided by tracking error. The

2009 U.S. Equity portfolio is expected to have an information ratio of 0.66. The following schedule

shows this metric, the tracking error target for each portfolio and the corresponding active return

expectations.

Average % Performance Target

Assets Under of Objectives Tracking Target

Management Total (net of fees) Error Information

($ millions) U.S. Equity Benchmark (bps) (bps) Ratio

Index

Internal R3000 $19,767 63.4% Russell 3000 5 9 0.56

Internal R2000 181 0.6% Russell 2000 0 15 0.00

Internal R1000 493 1.6% Russell 1000 0 35 0.00

Total Index 20,441 65.5% Russell 3000 5 10 0.50

Enhanced Index

Internal Enhanced 6,004 19.2% Russell 1000 47 125 0.38

BGI 1,822 5.8% Russell 1000 53 100 0.53

Piedmont 97 0.3% S&P 500 60 165 0.36

Goldman Sachs 1,229 3.9% S&P 500 60 200 0.30

PIMCO 805 2.6% S&P 500 50 125 0.40

Total Enhanced Index 9,957 31.9% 50 100 0.50

Active

Leading Edge MOMM 72 0.2% Russell 3000 60 250 0.24

Progress MOMM 47 0.2% Russell 3000 60 250 0.24

Invesco 306 1.0% Russell 2000 120 500 0.24

Pyramis 381 1.2% Russell 2000 150 800 0.19

Total Active 805 2.6% 125 300 0.42

Total U.S. Equity $31,204 100.0% Russell 3000 22 34 0.66

Schedule of Expected Performance and Tracking Error

Est. Mid-Year 2008 Est. Mid-Year 2009

Active Passive Total Active Passive Total

Internal 19.4% 63.9% 83.3% 19.2% 65.5% 84.8%

External 16.7% 0.0% 16.7% 15.3% 0.0% 15.3%

Total 36.1% 63.9% 100.0% 34.5% 65.5% 100.0%

Estimate of Internal/External and Active/Passive Composition

page 42 OPERS 2009 Investment Plan



Portfolio Composition and Fees

The table below is a summary of the allocations for the U.S. Equity portfolio, showing the internal and

external management and the active and passive management components.

The following table details the average assets under management by portfolio and the expected costs

associated with each. For internally managed portfolios, cost components consist of the unit's total

compensation and operating budget for 2009. The time spent by each staff member on the respective

internal portfolios is the metric used to allocate costs.

Benchmark

Average

Assets Under

Management

($ millions)

Estimated

Annual Fee

($ millions)

Estimated

Annual Fee

(bps)

Index

Internal R3000 Russell 3000 $19,767 $0.3 0.1

Internal R2000 Russell 2000 181 0.0 1.9

Internal R1000 Russell 1000 493 0.0 0.7

Total Index Russell 3000 20,441 0.4 0.2

Enhanced Index

Internal Enhanced Russell 1000 6,004 2.5 4.1

BGI Russell 1000 1,822 3.0 16.4

Piedmont S&P 500 97 0.2 18.9

Goldman Sachs S&P 500 1,229 1.9 15.8

PIMCO S&P 500 805 2.3 28.0

Total Enhanced Index 9,957 9.9 9.9

Active

Leading Edge MOMM Russell 3000 72 0.4 60.0

Progress MOMM Russell 3000 47 0.3 60.0

Invesco Russell 2000 306 1.3 43.1

Pyramis Russell 2000 381 2.3 61.4

Total Active 805 4.4 54.2

Total U.S. Equity Russell 3000 $31,204 $14.6 4.7

Schedule of Portfolio, Size and Estimated Fees



Opportunistic Strategy

Opportunistic investing allows OPERS to access investment strategies and new instruments that do

not fit within one of the traditional asset class categories. There is no overall strategy for the asset

class. Each potential strategy, such as those described below, will be evaluated on its own merit and

whether the strategy is feasible and scalable.

Hedge Funds

This strategy is 100% externally managed by Crestline Investors, Inc. and Pacific Alternative Asset

Management Company. Each was initially funded with $25 million in early 2006. In May 2007, the

Board of Trustees approved, and staff completed, an additional funding of $25 million for each

manager. In 2009 a strategic research initiative will be done to study the future role of hedge funds

for the plan.

Active Currency

The hiring of external managers to manage active currency mandates was approved by the board in

August 2006. It is anticipated that a portion of this $100 million mandate will be funded in late 2008.

Commodities

Staff completed all due diligence and related legal and operational activities in early 2008 and

purchased $50 million of commodity exposure on January 31, 2008. In July, after the run up in

commodity prices, $40 million of commodity exposure was reduced, leaving a resulting exposure of

$25 million. Staff will continue to monitor this exposure and evaluate other alternative approaches for

gaining/managing commodity exposure in 2009.

Opportunistic Debt Portfolio

Staff is currently evaluating and may likely propose the creation of “distressed debt-like” funds which

would be managed internally by staff. The portfolios would be funded with securities held in the

existing internally managed fixed income portfolios that currently are disrupting the effective

management of the existing portfolios. Transferring those securities to stand alone portfolios would

allow OPERS to realize longer term value from holding those securities while allowing the other

internally managed fixed income funds to be managed more effectively and to the longer-term benefit

to OPERS.


The limited size of the Opportunistic strategies is the primary risk-control mechanism. It is envisioned

that once the asset class is mature, no single program or strategy will account for more than 35% of

the total market value of the Opportunistic asset class. Performance objectives will be set for each

program or strategy and is limited to a maximum of $100 million as an initial funding with a target

initial funding of $25 million to $50 million. During 2009, the Defined Benefit strategic asset allocation

and Investment Policy will be reviewed and may result in proposed changes to the Opportunistic

Policy.



Opportunistic(continued)

The following schedule details the tracking error target for each portfolio and the corresponding active

return expectations.


The following schedule details the average assets under management by individual portfolio along

with the expected fees or costs associated with each of the portfolios.




($ millions) Opportunistic Benchmark (bps) (bps) Ratio

Crestline Partners $54 26.0% LIBOR + 400 BPS 0 400 0.00

PAAMCO 60 29.0% LIBOR + 400 BPS 0 400 0.00

Active Currency 50 24.0% 8.0% 200 400 0.50

Commodities 22 10.5% DJ AIG 0 0 0.00

Commodities 22 10.5% GSCI 0 0 0.00

Total Opportunistic $208 100.0% Custom Benchmark* 50 250 0.20


Benchmark

Average

Assets Under

Management

($ millions)

Estimated

Annual Fee

($ millions)

Estimated

Annual Fee

(bps)

Crestline Partners LIBOR + 400 BPS 54$ 0.7$ 125.0

PAAMCO LIBOR + 400 BPS 60$ 0.6$ 100.0

Active Currency 8.0% 50$ 1.0$ 200.0

Commodities DJ AIG 22$ 0.0$ 10.5

Commodities GSCI 22$ 0.0$ 10.5

Total Opportunistic Custom Benchmark* 208$ 2.3$ 123.6


*The Custom Benchmark is the weighted average of the benchmarks for each opportunistic strategy.

*The Custom Benchmark is the weighted average of the benchmarks for each opportunistic strategy.



Private Equity Strategy

OPERS seeks to maintain a top-tier Private Equity program that generates attractive, risk-adjusted

long-term returns. The following information details the short and long-term strategic efforts for

achieving this objective.

From inception of the new private equity program in 2001, only the Defined Benefit Fund contained

an allocation to the Private Equity asset class, which is currently targeted at 5%. Beginning in 2008,

the OPERS Board approved a 5% target allocation for Private Equity in the Health Care Fund. The

strategy is to invest on a pro-rata basis alongside with the Defined Benefit Fund with a goal of

reaching the Health Care Fund 5% target in five to six years. In 2009, staff plans to increase the size

of commitments to the Health Care Fund relative to 2008 commitments made in order to reflect a

slower than expected deployment of capital in its first year. In addition, Heath Care pacing to Private

Equity has been made a strategic initiative for 2009. Pacing for the Defined Benefit Fund is expected

to slacken a bit in 2009 as the 5% target to Private Equity was reached in October 2008.


The Private Equity Policy establishes the asset class objective, which is restated below:

OPERS Private Equity performance is benchmarked on a long-term, 7-10 year, rolling basis againstthe Russell 3000 plus 300 basis points using the internal rate of return (IRR) cash flow methodology.

The Private Equity Policy establishes the program risk controls listed below. The Private Equity Policy

provides complete portfolio details.

Risk Management

Securities and Restricted Investments

Liquidity

Vintage Risk

Manager Risk

Firm Risk

Currency

Industry

Geography

Leverage

Investment Types

Co-Investments and Direct Placements

Hedge Funds

Derivatives

Real Estate

Ohio and Regional

Stock Distributions

Child Labor

Privatization



Private Equity(continued)

Portfolio Composition

The Private Equity portfolio had an unaudited market value of $2,475 million as of June 30, 2008.

However, there are sections of the Investment Plan that reference private equity market values,

which are computed monthly, with the most recent dated July 31, 2008. The following is an overview

of the portfolio’s market value by geography and type:

Actual Portfolio Fair Market Value vs. Target Fair Market Value at the Partnership (or Fund) Level

Domestic International Corporate Finance Venture Capital Special Situations

Dollar Amounts Domestic International Total

Actual Target Actual Target Actual Target

FMV FMV Difference FMV FMV Difference FMV FMV Difference

Corporate Finance $1,168.9 $1,113.7 $55.2 $730.3 $742.5 ($12.2) $1,899.2 $1,856.2 $43.0

Venture Capital $234.8 $247.5 ($12.7) $22.8 $0.0 $22.8 $257.6 $247.5 $10.1

Special Situations $232.8 $247.5 ($14.7) $85.3 $123.7 ($38.5) $318.1 $371.2 ($53.1)

Total $1,636.5 $1,608.7 $27.8 $838.4 $866.2 ($27.8) $2,475.0 $2,475.0 ($0.0)

Percentage Amounts Domestic International Total

Actual % Target % Difference % Actual % Target % Difference % Actual % Target % Difference %

Corporate Finance 47.2% 45.0% 2.2% 29.5% 30.0% -0.5% 76.7% 75.0% 1.7%

Venture Capital 9.5% 10.0% -0.5% 0.9% 0.0% 0.9% 10.4% 10.0% 0.4%

Special Situations 9.4% 10.0% -0.6% 3.4% 5.0% -1.6% 12.9% 15.0% -2.1%

Total 66.1% 65.0% 1.1% 33.9% 35.0% -1.1% 100.0% 100.0% 0.0%

Geographic Distribution by Market Value as of

June 30, 2008

Type Distribution by Market Value as of

June 30, 2008

34%

66%77%

10%

13%




Targeted Portfolio Structure

The Private Equity portfolio will continue to be built over time and balances the need for exposure

with investment opportunities and vintage risk. The figures presented within this section are best

approximations and are designed to maintain a 5% Private Equity target allocation for the Defined

Benefit Fund while building the Heath Care Fund’s 5% targeted exposure to Private Equity by 2015.

Targets by Percentage

The Private Equity policy target of the 5% private equity market value established by the asset

allocation and the long-term target portfolio structure is shown in the following table, which also

shows long-term targeted portfolio exposure by type class.

The chart below shows the long-term targeted portfolio exposure by type class and geography. These

targets are each bounded by plus or minus 10%.

75%

10%

15%Corporate Finance

Venture Capital

Special Situations

45%

10%10%

30%

5%0%

CF Domestic

VC Domestic

SS Domestic

CF International

VC International

SS International

Target Portfolio Structure

Target Portfolio Geographic Exposure




Investment Pacing

Investment pacing controls the commitment budget. Multi-factor models are used to determine the

rate of commitments to achieve the target market value exposure over the target period of time. The

graph below depicts the updated investment-pacing model in millions of dollars per year to achieve a

5% target, plus or minus 4%, for both the Defined Benefit and Health Care Funds. The pacing model

estimates are intended to maintain a 5% target allocation to Private Equity for the Defined Benefit

Fund while allowing the Health Care Fund to reach its 5% target in five to six years. These pacing

estimates may vary from year to year depending on realized performance and market conditions. As

mentioned above, 2008 is the first year for a private equity allocation to the Health Care Fund as

depicted in the chart below. Vintage year is the year in which a partnership makes its first investment;

this sometimes differs from the year in which OPERS makes its commitment. The information below

shows the actual and projected commitments made each year, rather than vintage year commitments.

Vintage Year Commitment Pacing

Annual Commitment Pacing

0.6% 0.7% 0.7% 0.8%

1.4%

2.1%

3.2%

4.3% 4.4%

5.3%

5.8%

0.0%0.2%

1.0%

2.1%

3.4%

0

100

200

300

400

500

600

700

800

900

1,000

2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E

$ in

Mill

ions




The graph below illustrates aggregate commitments and fair market value for the Private Equity

portfolio, based on the actual and projected commitment schedule.

Projected Fair Market Value and Aggregate Commitments

Commitments in 2009

The 2009 investment pacing targets $1,000 million in commitments through both the Defined Benefit

($750 million) and Health Care ($250 million) Funds, with a range of $750 - $1,250 million.

Commitments are expected broadly across primary partnerships including domestic and international

corporate finance, venture capital and special situations. The actual 2009 commitments are

dependent on market opportunities and may vary from the anticipated commitments shown below.

0.250.71

1.42

2.12

2.88

3.80

4.75

5.95

6.95

7.95

0.26 0.33 0.450.79

1.39

2.252.50 2.68

3.45

4.02

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

0.00

2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E

Aggregate Commitments (DB) Aggregate Commitments (HC) FMV (DB) FMV (HC)

Anticipated Commitments in 2009 ($ millions)

Domestic International Total

Corporate Finance 280 - 560 0 - 180 280 - 740

Venture Capital 40 - 140 0 - 0 40 - 140

Special Situations 100 - 360 0 - 180 100 - 540

Fund of Funds 0 - 60 0 - 100 0 - 160

Total 420 - 1120 0 - 460 750 - 1250

*Totals do not add due to interdependence of commitment selections.




Commitment Size

This table shows the typical commitment range for primary partnerships and discretionary mandates.

Typical Commitments

Corporate Finance $40 - $200

Venture Capital $40 - $80

Special Situations $40 - $100

Fund of Funds $40 - $100

Strategic Implementation and Number of Commitments

Capital will be invested through private equity partnerships and discretionary managers investing in

private equity partnerships. Selecting the appropriate mix of partnerships requires balancing several

factors such as maximizing performance, creating appropriate diversification, increasing negotiating

leverage and minimizing the administrative burden. Here are the estimated commitments for 2009:

*Totals do not add due to interdependence of commitment selections.

Funds of Funds

Funds of Funds may be used to gain exposure to relatively small or niche portfolio components. Each

Fund of Funds will make commitments to multiple primary partnerships over several years, which is

expected to further improve portfolio diversification.

Staff completed its first three Funds of Funds commitments in 2004 and 2005 as shown below.

During 2009, staff expects to make its third in a series of commitments to the Ohio Midwest Fund as

that program continues to expand.

Broad Market $100 2004

Venture Capital $125 2004, 2007

Ohio/Midwest $100 2005, 2007

Total $325

Type Typical Commitment Range ($ millions)

Anticipated number of Commitments in 2009

Defined Benefit & Health Care Domestic International Total

Corporate Finance 1 - 5 1 - 3 2 - 8

Venture Capital 2 - 6 0 - 0 2 - 6

Special Situations 1 - 5 0 - 2 1 - 7

Fund of Funds 0 - 1 0 - 1 0 - 2

Defined Benefit & Health Care Total 4 - 14 2 - 4 11 - 17

Discretionary Mandate Commitment ($ millions) Year




General Partners

General partner selection is critical for out-performance and staff proactively seeks relationships with

experienced, top-tier general partners. Working with the Private Equity advisors, peers and all

available resources, staff filters and reviews the general partners in each subclass and initiates a

dialogue regarding potential participation in their new partnerships. Further, staff limits exposure to

first-time general partners. The Private Equity general partner selection procedures describe the due

diligence process and factors for consideration.

The number of general partners is limited for several reasons. OPERS seeks to maximize its

commitment size per general partner to increase the likelihood of advisory roles and improved

negotiating leverage. Meaningful allocations also increase access to general partners, improving

market knowledge and the opportunity for co-investment rights. Containing the number of general

partners also minimizes administrative burdens and allows continued meaningful participation in a

mature program. The vast majority of commitments will be through primary participation in general

partnerships.

Strategic Intangibles

The following items describe additional approaches for maintaining a competitive Private Equity

program:

Staff Development: The Private Equity staff will continue to build core competencies. These will

include performing due diligence, administering advisory roles and monitoring portfolio compliance.

Longer term, staff will continue developing capabilities to capture the economic advantages of co-

investment opportunities.

Networking: Information is critical and staff will maximize its market knowledge by participating in

industry conferences and actively networking with peers, including public and corporate plans,

endowments, foundations and financial institutions.

Active Participation in Partnerships: Partnership rights, including participation in advisory boards

and valuation committees, will be fully exercised. Staff will also participate in all meetings and actively

monitor partnership compliance.

Opportunistic Approach: While operating consistently with the Private Equity Policy, staff will

remain alert and rapidly assess unforeseeable opportunities. As markets evolve, situations may arise

that require timely, critical analysis and contrarian approaches. Staff will remain open to new ideas

and unique investment structures.

Patient Capital: OPERS has a competitive advantage in the marketplace with the ability to provide

long-term capital. OPERS remains committed to its policy and strategy and actively manages

external pressures to disrupt investment pacing or force sales.




Asset Management Fees

The fees for Private Equity consist of two parts, the annual management fee, typically ranging from

1.0% to 2.0% of commitments through the term of the partnership, generally declining as funds

mature and carried interest is taken from realized profits. The management fees are generally paid

through capital calls quarterly or semi-annually. Funds of Funds have an additional layer of fees,

generally about 1%. Partnership management fees may be offset, deferred or waived periodically.

Carried interest varies with time and success. The following table estimates the Private Equity asset

management fees for 2009. Private Equity fees relative to market value are skewed in formative

years due to the lag between commitments and investments. Significant portions of the fees are

recoverable before general partners receive carry.

Estimated Average Commitments $5,552

Estimated Average Market Value $2,866

Estimated Average Fee 1.25%

Estimated Management Fee $69.4

Estimated Management Fee (bps) 242.1

Estimate of Management Fees - 2009 ($ millions)



Non-U.S. Equity Strategy

OPERS seeks to obtain exposure to Non-U.S. equities across developed and emerging markets to

diversify plan assets and enhance expected return. The Non-U.S. Equity asset class utilizes both

index and active management styles. External managers are selected for their expertise and ability to

add excess returns above a benchmark return. All are selected in accordance with OPERS External

Manager Search Policies.

Portfolio Allocation

The Non–U.S. Equity portfolio uses index management to achieve broad market exposure and active

management to achieve excess returns. The active allocation of the portfolio is set at 80% in order to

take advantage of active managers with an ability to generate excess returns. In 2009, staff will be

reviewing this active allocation.

The current target portfolio allocation is the following:

The allocation to the Morgan Stanley Capital International All Country World excluding the United

States Standard Index (“MSCI ACWIxU.S.”) and the Morgan Stanley Capital International Europe,

Australasia and Far East Standard Index (“MSCI EAFE”) managers includes index and active

strategies. Active managers within the ACWIxU.S. category are permitted to invest in emerging

markets on an opportunistic basis up to a prescribed limit. The OPERS Non-U.S. Equity Program

also includes a strategic allocation to dedicated emerging markets that targets 5% of the portfolio

value. However, the combined maximum exposure to emerging markets will be limited to its weight in

the benchmark plus 5% or 15% of the total Non-U.S. equity portfolio, whichever is greater. The

portfolio’s strategic allocation to small cap stocks has a target of 3%. This is also achieved through

the use of dedicated active managers.

Range Target

Active 70%-90% 80.0%

Passive 10%-30% 20.0%

Total Non-U.S. Equity - 100.0%ACWIxU.S. Managers 88%-95% 92.0%

Emerging Market Managers 5%-8% 5.0%

Small Cap Managers 2%-5% 3.0%

Target Portfolio Allocation



Non-U.S. Equity(continued)

The current Non-U.S. Equity program has:

Approximately $14 billion under management as of August 31, 2008,

More than 60% of the portfolio is in passive, enhanced index and core strategies.

In addition, the Non-U.S. Equity program is:

Slightly overweight emerging markets,

Neutral to the program’s dedicated small cap allocation,

Generating a tracking error of under 100 basis points.

An overview of portfolio positioning decisions is below:

Enhanced index/core strategies

The program uses both enhanced index managers and core managers. Enhanced index managers

run portfolios with very controlled risk management; while core strategies remain neutral to major risk

factors such as value and growth investment styles. Core strategies have a somewhat higher tracking

error than enhanced index mandates, but a lower tracking error than pure active strategies. OPERS

continues to adhere to a program centered on enhanced index and core strategies as the proper

match for OPERS’ risk tolerance.

Emerging markets

Emerging markets have generated strong returns over the last five years. Staff continues to believe

emerging markets offer the potential for superior longer-term returns. However, given the greater

market volatility, staff will closely monitor and evaluate its slight emerging market overweight.

Small capitalization

In early 2007 staff became concerned about the valuation of small capitalization (“cap”) companies

and neutralized the portfolio overweight. Longer term, staff expects smaller cap companies will offer

better growth opportunities than larger companies. But given the greater market volatility, staff will

continue to keep the portfolio’s small cap exposure near or slightly under its target allocation.



Non-U.S. Equity(continued)


The benchmark for the total Non-U.S. Equity program is the MSCI ACWIxU.S Index; and the portfolio

is expected to outperform this benchmark by at least 65 basis points (0.65%) over a three-to-five year

market cycle, net of fees. Investment staff, using risk budgeting and other techniques, determines

the asset class tracking error, or active risk. The tracking error is projected to be no greater than

130 basis points (1.3%) in 2009 given the current portfolio positioning and market volatility. As a

result, an information ratio of 0.57 is expected, which is consistent with other asset classes.

The following table illustrates each existing portfolio, expected performance objectives, and

forecasted contribution to the total asset class return:

nAverage % of Performance Target

Assets Under Total Objectives Tracking Target

Management Non U.S. (net of fees) Error Information

($ millions) Equity Benchmark (bps) (bps) Ratio

Index

BGI Index $3,204 20.3% ACWIxU.S. 5 35 0.14

Total Index 3,204 20.3% ACWIxU.S. 5 35 0.14

Enhanced Index

BGI Enhanced 4,186 26.5% ACWIxU.S. 75 100 0.75

Baring 1,148 7.3% ACWIxU.S. 65 250 0.26

QMA 260 1.7% EAFE 50 200 0.25

Total Enhanced Index 5,594 35.4% 72 150 0.48

Active ACWIxU.S./EAFE

Acadian Core 631 4.0% ACWIxU.S. 100 400 0.25

AllianceBernstein 1,358 8.6% ACWIxU.S. 100 400 0.25

Brandes 1,400 8.9% ACWIxU.S. 125 700 0.18

JP Morgan 641 4.1% ACWIxU.S. 100 300 0.33

LSV 333 2.1% EAFE 100 500 0.20

TT International 639 4.1% ACWIxU.S. 100 650 0.15

Walter Scott 589 3.7% ACWIxU.S. 125 800 0.16

Total Active ACWIxU.S./EAFE 5,591 35.4% 109 275 0.40

Active Emerging Markets

Acadian Emerging 208 1.3% Emerging 100 500 0.20

Lazard 338 2.1% Emerging 100 700 0.14

T Rowe Price 363 2.3% Emerging 100 600 0.17

Total Active Emerging Markets 909 5.8% Emerging 100 350 0.29

Active Small Cap

Acadian Small Cap 486 3.1% Small Cap 125 600 0.21

Total Active Small Cap 486 3.1% Small Cap 125 600 0.21

Total Non U.S. Equity $15,785 100.0% ACWIxU.S. 65 130 0.57




Non-U.S. Equity (continued)


The structure and risk profile of the program has remained virtually the same as that outlined in the

2008 Investment Plan.

The following table details the size of, and fees associated with, each manager in the program.



Internal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

External 80.5% 19.5% 100.0% 79.7% 20.3% 100.0%

Total 80.5% 19.5% 100.0% 79.7% 20.3% 100.0%


Benchmark

Average

Assets Under

Management

($ millions)

Estimated

Annual Fee

($ millions)

Estimated

Annual Fee

(bps)

Index

BGI Index ACWIxU.S. 3,204$ 1.0$ 3.0

Total Index ACWIxU.S. 3,204 1.0 3.0

Enhanced Index

BGI Enhanced ACWIxU.S. 4,186 6.2 14.9

Baring ACWIxU.S. 1,148 1.8 15.3

QMA EAFE 260 1.0 39.2

Total Enhanced Index 5,594 9.0 16.1

Active ACWIxU.S./EAFE

Acadian Core ACWIxU.S. 631 2.4 38.7

AllianceBernstein ACWIxU.S. 1,358 4.5 32.9

Brandes ACWIxU.S. 1,400 5.2 36.8

JP Morgan ACWIxU.S. 641 2.5 38.4

LSV EAFE 333 1.7 50.3

TT International ACWIxU.S. 639 2.5 38.9

Walter Scott ACWIxU.S. 589 2.1 36.4

Total Active ACWIxU.S./EAFE 5,591 20.8 37.3

Active Emerging Markets

Acadian Emerging Emerging 208 1.2 59.2

Lazard Emerging 338 1.4 40.0

T Rowe Price Emerging 363 2.7 74.8

Total Active Emerging Markets Emerging 909 5.3 58.3

Active Small Cap

Acadian Small Cap Small Cap 486 1.8 36.7

Total Active Small Cap Small Cap 486 2.1 42.2

Total Non U.S. Equity ACWIxU.S. 15,785$ 38.2$ 24.2




Real Estate –Private Markets

Investment Strategy

The private market Real Estate program consists of a stable portfolio and a high return portfolio. The

objective of the stable portfolio is to mirror the NPI index in property composition and gross returns.

The objective of the high return portfolio is to produce out-performance and generate high absolute

returns.

The stable portfolio of cash-flowing core properties will constitute no less than 65% of the private

market Real Estate portfolio, according to the Real Estate Policy. This stable portfolio is diversified by

property type and geographic location, and is designed to mirror the construction and performance of

the NCREIF Property Index (NPI).

The high-return portfolio consists of all private market real estate investments that are not in the

stable portfolio. The high-return portfolio includes both U.S. and international real estate investments.

The high return strategy may also include investments in non-core real estate activities such as

development, redevelopment or repositioning of all property types. The non-core investments may

constitute up to 35% of the private market portfolio according to the Real Estate Policy. The high-

return portfolio is designed to out-perform the NPI

Strategic Opportunities

While longer term strategic allocations drive the results of the private market Real Estate portfolio,

staff may take advantage of shorter term strategic opportunities to add incremental value. In

particular, staff currently believes that the capital markets have overracted and are now demanding

excessive risk premiums for development, redevelopment and repositioning projects. In 2009, staff

intends to reduce the exposure to stable value assets and redeploy the proceeds into opportunistic

investments where the risk and return characteristics are more favorable.

Over the past three years, staff has capitalized on a strategic opportunity to tilt the private market

Real Estate portfolio toward stable investments, with approximately 80% of the portfolio invested in

stable assets. Staff believed that the capital markets had mispriced real estate operating risk during

the prior three-year period. The conservative portfolio construction contributed positively to OPERS’

performance over the past three years.



Real Estate –Private Markets(continued)

Performance Objective

The Real Estate Policy establishes the performance objective of the private market real estate

program. The private market real estate performance is benchmarked against the National Council

of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI). The NPI is not an investable

index, which means it is not a passive alternative to the private market real estate program, but is the

most appropriate benchmark comparison. The private market real estate performance reflects the

estimated 106 basis points cost associated with investment management fees, while NPI does not.

The private market real estate performance, net of investment management fees, is expected to meet

or exceed NPI, which does not reflect the costs associated with investment management fees.

Projected Investments by Channel

Staff uses a top-down approach to portfolio construction. The stable portfolio is dominated by

separate accounts and open-end commingled core funds. The majority of the high return portfolio

investments are made through closed-end funds. Capital allocation decisions among the three

investment channels are guided by staff’s investment pacing model. Staff works with The Townsend

Group (Townsend) in an iterative process to model multi-year acquisition and disposition activity

among the managers in the three channels. Staff manages the portfolio to maintain compliance with

the Real Estate Policy risk control parameters and performance objectives. The projected investment

activity is subject to change.

The private market real estate portfolio currently exceeds its 7.0% defined Benefit Fund target

allocation, but is within the Real Estate Policy range of 7.0%, plus or minus 3.5 percentage points.

Staff intends to fund new acquisitions from the sale of existing assets, capital distributions from

commingled funds, and the distributed income from open-end funds and separate accounts.

Separate Accounts

In 2009, staff intends to allocate an estimated $125 million to separate account managers to continue the

development, redevelopment and repositioning of existing assets. In addition, staff anticipates an

additional $80 million of sales proceeds from stable properties will be reinvested in higher yielding

opportunities.

Staff reduced the number of separate account relationships as well as the exposure to the separate

account channel by selling assets in a disciplined manner. Staff and the separate account managers

agree that OPERS should postpone the sale of larger assets until the capital markets stabilize and

buyers are able to finance large single asset transactions. By year-end 2009, staff anticipates that the

value of the OPERS’ investments through separate account relationships will be approximately

$2.83 billion.




Open-End Funds

Open-end commingled core funds provide OPERS with exposure to stable, index-like returns. In

2009, staff intends to reduce the exposure to the open-end funds by an estimated $160 million to

fund commitments to opportunistic real estate. By year-end 2009, staff anticipates that the value of

the OPERS investment in these in open-end funds will be approximately $820 million. It is prudent to

rebalance through open-end commingled funds at this time due to the ability to sell at pricing

indicative of the past, which is favorable relative to selling individual properties in the open market

today at current pricing levels. The following table shows the anticipated 2009 investment activity

through the open-end fund channel.

Closed-End Funds

Staff will suspend committing additional capital to closed-end funds in 2009. Staff is proposing this

step so that the private market real estate portfolio does not exceed the 10.5% maximum allocation

as allowed in the Statement of Investment Objectives and Policies Defined Benefit Fund. Suspending

commitments to closed-end funds will delay the reallocation of capital to the high-return portfolio from

the stable portfolio. With the anticipated funding of the current commitments, staff anticipates that the

value of the portfolio through closed-end funds will be approximately $1.5 billion by year-end 2009.

The following two tables show the anticipated closed-end fund commitment activity and investment

activity planned for 2009.

Projected

Market Value 2009 2009 2009 Market Value*

Property Type June 30, 2008 Dispositions Income Acquisitions December 31, 2009

Apartment $213 $30 $8 $4 $180

Industrial $113 $24 $4 $0 $82

Office $371 $62 $14 $7 $304

Retail $221 $35 $8 $5 $186

Other $74 $8 $3 $4 $68

Total $993 $160 $37 $20 $820

* Includes 2nd half 2008 acquisitions, dispositions and cumulative appreciation/(depreciation) as of 12/31/2009.

(subject to change)

Anticipated Open End Fund Investment Activity for 2009 ($ millions)

Projected



Apartment $573 $0 $18 $10 $492

Industrial $414 $26 $12 $26 $474

Office $1,005 $70 $43 $61 $950

Retail $395 $85 $18 $89 $466

Other $483 $11 $11 $19 $450

Total $2,870 $192 $102 $205 $2,832


(subject to change)

Anticipated Separate Account Investment Activity for 2009 ($ millions)




In 2009, staff will continue to monitor existing funds, research new investment ideas and meet with

potential new managers in anticipation of a recovery in the capital markets. If the capital markets

begin to recover in 2009, staff intends to resume the investment commitment pace of $225 to

$275 million per year.

Projected Portfolio Composition

Staff seeks to assemble a diversified real estate investment portfolio. The table below shows the

projected total portfolio activity for 2009. Staff anticipates that current income, return of capital and

sales proceeds should fund the planned investment activities.

Projected



Apartment $933 $61 $26 $29 $843

Industrial $547 $52 $17 $38 $611

Office $1,882 $226 $56 $124 $1,859

Retail $707 $140 $27 $115 $821

Other $898 $94 $14 $81 $1,020

Total $4,967 $574 $139 $387 $5,154


(subject to change)

Anticipated Total Private Market Real Estate Investment Activity for 2009 ($ millions)

Projected


Property Type June 30, 2008 Dispositions Income** Acquisitions December 31, 2009

Apartment $147 $31 nm $15 $171

Industrial $20 $2 nm $12 $55

Office $506 $94 nm $56 $605

Retail $91 $20 nm $21 $169

Other $341 $75 nm $58 $502

Total $1,105 $222 nm $162 $1,502


** Income from closed end funds not meaningful

(subject to change)

Anticipated Closed End Fund Investment Activity for 2009 ($ millions)

Amount $75 - $125 $125 - $175 $225 - $275

Relationships 1 - 3 2 - 4 4 - 6

(subject to change)

Anticipated Closed End Fund Commitment Activity for 2009 ($ millions)

TotalInternationalDomestic




Property Type

The graph below shows the projected portfolio construction by property type as of year-end 2009.

Risk Control Parameters

The tables below show the anticipated year-end 2009 portfolio construction by the following risk

control parameters: Life Cycle; Geography; and Leverage.

Life Cycle Exposure

Type Policy Limit Projected

Core >65% 76%

Non-Core <35% 24%

Geographic Exposure

Type Policy Limit Projected

United States >75% 88%

International <25% 12%

Portfolio Leverage

Policy Limit Projected

40% 37%

Capital Sources Capital Uses

Stable Portfolio

Dispositions $352 Acquisitions $387

Income $139

Total Sources $491 Total Uses $387

(subject to change)

Anticipated Sources and Uses of Capital in 2009 ($ millions)

Projected 2009 Property Type Exposure and Policy Ranges

Pe

rce

nta

ge

Apartment Industrial Office Retail Other

50%

40%

30%

20%

10%

0%

50%

40%

30%

20%

10%

0%




Strategic Intangibles

The following items describe additional approaches for maintaining a competitive Real Estate

program:

Staff Development: Staff intends to participate in conferences with real estate investors, real estate

operating companies and developers to gain additional professional insights and identify new

investment opportunities.

Active Participation in Partnerships: Staff will participate on advisory boards and valuation

committees, and participate in meetings and actively monitor partnership compliance.

Opportunistic Approach: While working within the policy framework, Real Estate staff will rapidly

assess and act upon unique opportunities. Staff will renew its efforts to seek, critically analyze and

offer contrarian approaches and unique investment structures.

Patient Capital: The policy performance objective for the Real Estate portfolio is to outperform the

policy benchmark over rolling five-year periods. Staff will remain committed to the policy strategies

and actively manage external pressure, caused by short-term performance, to disrupt investment

pacing or force sales.

Asset Management Fees

The Private Market Real Estate portfolio is invested through a combination of separate accounts,

open-end funds and closed-end funds. Separate account fees consist of an asset management fee,

plus an incentive fee based on portfolio returns in excess of a return hurdle. The total of the two

results in an average of 80 basis points on invested capital. The fees charged by the open-end

commingled funds average 100 basis points on invested equity. Fees for closed-end commingled

funds consist of two parts: the annual asset management fee, typically 150 basis points on the

committed equity, and a carried interest taken from realized profits. By year-end 2009, the anticipated

portfolio will consist of 51% separate accounts, 17% open-end funds and 32% closed-end funds. This

mix is subject to change. The following table shows the expected fees, based on the average target

allocation for 2009.

Estimated Average Portfolio Market Value $4,469

Estimated Percentage in Separate Accounts 51%


Estimated Fees to Separate Accounts $18.23

Estimated Percentage in Open-End Funds 17%


Estimated Fees to Open-End Funds $7.60

Estimated Percentage in Closed-End Funds* 32%


Estimated Fees to Closed-End Funds $21.45

Estimated Management Fee $47.28

Estimated Management Fee (bps) 1.06%

*Closed-End Funds based on committed capital

Estimate of Management Fees - 2009 ($ millions)



Real Estate – Public Markets

Strategy

The public real estate securities portfolio will be invested both in an internal, actively managed

domestic portfolio and in an externally managed international portfolio. Staff and the consultants

determine the optimal mix of international and domestic securities for achieving the performance goal

while managing within the risk parameters stated in the Real Estate Policy. Performance objectives,

risk controls, portfolio composition and fees may vary depending upon the results of adding externally

managed international portfolios overtime.

Internal Active REIT Portfolio

The internal active real estate securities Securities Portfolio is managed using a blend of quantitative

and qualitative analysis to identify companies that are trading significantly below their intrinsic value

or are priced inefficiently relative to their peer set. The strategy results in a diversified portfolio that is

able to produce consistent risk-adjusted returns.

Performance Objectives & Risk Control

The internal active real estate securities performance is benchmarked against the Dow Jones

Wilshire Real Estate Securities Index (WRESI). The internal active real estate securities portfolio is

measured net of fees (not including overhead expenses). WRESI is not adjusted for fees. The

internal active real estate securities portfolio is expected to exceed the benchmark returns by 50

basis points annually.

The Real Estate Policy establishes the program risk controls and investable instruments listed below.

Please refer to the Real Estate Policy for details.

Public Market Risk Management Public Market Investable Investments

Liquidity

Portfolio Composition

Single Security Risk

Common Stock

Exchange-Trade Funds

American Depository Receipts

Warrants

Initial Public Offerings

Preferred Securities

Cash & Cash Equivalents, as necessary



Real Estate – Public Markets(continued)

Public market real estate has a targeted 1% allocation to the Defined Benefit Fund and a targeted 6%

allocation to the Health Care Fund. The public market real estate allocation serves as the only real

estate exposure in the Health Care Fund. This plan establishes the short and long-term approaches

for achieving the performance objectives for the internal active real estate securities portfolio.





($ millions) REITs Benchmark (bps) (bps) Ratio

Total Defined Benefit $657 47.7% Dow Jones Wilshire RESI 50 200 0.25

Total Health Care 720 52.3% Dow Jones Wilshire RESI 50 200 0.25

Total REITs $1,377 100.0% Dow Jones Wilshire RESI 50 200 0.25




Internal 100.0% 0.0% 100.0% 100.0% 0.0% 100.0%

External 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total 100.0% 0.0% 100.0% 100.0% 0.0% 100.0%


Benchmark

Average

Assets Under

Management

($ millions)

Estimated

Annual Fee

($ millions)

Estimated

Annual Fee

(bps)

Total Defined Benefit Dow Jones Wilshire RESI 657$ 0.2$ 3.1

Total Health Care Dow Jones Wilshire RESI 720$ 0.2$ 2.8

Total REITs Dow Jones Wilshire RESI 1,377$ 0.4$ 2.9



Global Bonds Strategy

The Global Bonds asset class is composed of one composite, containing multiple underlying

portfolios, and three dedicated portfolios, each with a specific purpose:

Global Bonds Universal composite: Provides broad exposure to fixed income assets through

multiple underlying portfolios,

Long Duration portfolio (managed internally): Dedicated elements of asset-liability matching

against long-term liabilities,

Treasury Inflation Protected Securities (TIPS) portfolio (managed internally): Dedicated hedge

against inflation in healthcare costs; and

Short Duration portfolio (managed internally): Dedicated liquidity for the Health Care Fund.

The Global Bonds asset class uses both internal and external portfolio management. The majority of

assets are internally managed. Internally managed portfolios employ risk-controlled strategies,

focusing on investment-grade securities. External managers are used predominately for the high

yield and emerging market debt sectors.

Global Bonds Universal Composite—Defined Benefit and Health Care

The Global Bonds Universal composite is managed against the Lehman Universal Index and includes

core, high yield, and emerging market debt portfolios. Both the Defined Benefit and Health Care

Funds have assets allocated to the Universal Composite.

Core

Internal staff, using a risk controlled core strategy, manages the majority of the core assets. Core

portfolios seek to outperform the benchmark primarily through sector and security selection and

typically have small duration deviations relative to the index. The internal core portfolio maintains

a high level of issuer diversification and has less than 5% duration deviations relative to the

index. The internal core portfolio has a target return objective of 23 basis points outperformance

and a tracking error limit of 50 basis points relative to its benchmark.

There are three external core bond managers: AFL-CIO, Smith Breeden and Pyramis. The

AFL-CIO portfolio, which focuses on government and mortgage securities, has an objective of

providing 40 basis points of active return over the return of the Lehman Brothers Aggregate Index.

Smith Breeden and Pyramis utilize duration-neutral strategies. The managers use a combination

of quantitative and qualitative analysis with the objective of outperforming the Lehman Aggregate

Index by 50 basis points with a relatively modest level of tracking error.

High-Yield Debt

High-yield securities represent approximately 6% of the Lehman Brothers Universal Index. The

outperformance comes from security selection, which is supported by a labor-intensive credit

research. To take advantage of opportunities in the sector, portfolio guidelines are formulated to

give the managers broad discretion within the high-yield universe.



Global Bonds(continued)

The manager line-up is comprised of four managers: Shenkman, Fort Washington, Goldman

Sachs Asset Management, and Post Advisory. The high-yield allocation also includes an

internally managed passive portfolio consisting primarily of Dow Jones high yield CDX securities.

These securities provide broadly diversified exposure to the high-yield market and allow internal

staff to tactically adjust exposure to the high-yield sector.

Emerging Market Debt

Emerging market debt securities represent approximately 3% of the Lehman Brothers Universal

Index. Emerging market debt managers primarily add value through country selection. OPERS

employs two external managers, Stone Harbor and Capital Guardian.

Dedicated Portfolios

Long Duration—Defined Benefit

The internally managed Long Duration portfolio was implemented in 2007 as a result of the

review of the Defined Benefit Fund asset allocation completed in 2006. The review

recommended that 40% of defined benefit Global Bond assets be in the long duration portfolio,

with the remaining 60% in the Universal composite. The portfolio is designed to meet or exceed

the return of the Lehman Long Government/Credit Index with a low level of tracking error. The

primary source of outperformance for the fund is security selection.

Treasury Inflation Protected Securities (TIPS)—Health Care

The internally managed TIPS portfolio started in 2005 as a result of the segregation of the

pension and health care assets. The portfolio is designed to meet the return of the Lehman TIPS

Index with a low level of tracking error.

Short Duration—Health Care

The Short Duration portfolio was started in 2005 as a result of the segregation of pension and

health care assets. The portfolio is structured to meet or exceed the return of the Lehman 1-3

Year Government Bond Index with a low level of tracking error. The primary source of

outperformance is security selection.


In the Defined Benefit Fund, staff transitioned to a new benchmark in 2007. The benchmark consists

of 60% Lehman Universal Index and 40% Lehman Long Government/Credit Index. Health Care

assets do not have a combined Global Bonds benchmark. Each segment (Global Bonds Universal,

TIPS, and Short Duration) is measured against its own benchmark.

Average % of Performance Target

Assets Under Total Objectives Tracking Target

Management Universal (net of fees) Error Information

($ millions) Bonds Benchmark (bps) (bps) Ratio

Universal Bonds

Internal Core $8,479 81.3% Lehman Aggregate 23 50 0.46

Pyramis 360 3.5% Lehman Aggregate 50 60 0.83

Smith Breeden 346 3.3% Lehman Aggregate 50 60 0.83

AFL-CIO 97 0.9% Lehman Aggregate 40 200 0.20

Goldman Sachs 162 1.6% Lehman Corporate HY 2% 100 250 0.40

Shenkman Capital 146 1.4% Lehman Corporate HY 2% 100 550 0.18

Post 220 2.1% Lehman Corporate HY 2% 100 300 0.33

Fort Washington 109 1.1% Lehman Corporate Ba/B HY 3% 100 400 0.25

Internal Passive HY 77 0.7% Lehman Corporate HY 3% 0 700 0.00

Capital Guardian 217 2.1% JP Morgan Emerging Market Bond 100 400 0.25

Stone Harbor 213 2.0% JP Morgan Emerging Market Bond 100 450 0.22

Total Universal Bonds 10,425 100.0% Lehman U.S. Universal (Univ) 33 60 0.54

Internal TIPS 2,462 Lehman TIPS 15 50 0.30

Internal Short-Dur Bonds 1,231 Lehman 1-3 Year Government 25 50 0.50

Internal Long-Dur Bonds 6,129 Lehman Long Gov/Credit (Long G/C) 15 40 0.38

Total Global Bonds $20,247 0.00

Total Defined Benefit Global Bonds $15,323 60% Univ/40% Long G/C 26 50 0.51

Total Health Care Global Bonds $4,924 NA* 22 30 0.73

*Total Health Care Global Bonds assets do not have a combined Global Bonds benchmark. Each segment is measured against its own benchmark.





In the Health Care Fund, staff transitioned to a new benchmark in 2008. The benchmark consists of

10% Lehman Universal Index, 20% TIPS and 10% short duration bonds (Lehman 1-3 year

Government index).

Benchmark

Average

Assets Under

Management

($ millions)

Estimated

Annual Fee

($ millions)

Estimated

Annual Fee

(bps)

Universal Bonds

Internal Core Lehman Aggregate 8,479$ 0.9$ 1.1

Pyramis Lehman Aggregate 360$ 0.5$ 14.2

Smith Breeden Lehman Aggregate 346$ 0.6$ 17.0

AFL-CIO Lehman Aggregate 97$ 0.3$ 35.0

Goldman Sachs Lehman Corporate HY 2% 162$ 0.9$ 54.4

Shenkman Capital Lehman Corporate HY 2% 146$ 0.6$ 43.4

Post Lehman Corporate HY 2% 220$ 1.1$ 49.6

Fort Washington Lehman Corporate Ba/B HY 3% 109$ 0.3$ 25.0

Internal Passive HY Lehman Corporate HY 3% 77$ 0.0$ 0.8

Capital Guardian JP Morgan Emerging Market Bond 217$ 1.0$ 45.4

Stone Harbor JP Morgan Emerging Market Bond 213$ 1.0$ 45.0

Total Universal Bonds Lehman U.S. Universal (Univ) 10,425$ 7.2$ 6.9

Internal TIPS Lehman TIPS 2,462$ 0.0$ 0.2

Internal Short-Dur Bonds Lehman 1-3 Year Government 1,231$ 0.2$ 1.7

Internal Long-Dur Bonds Lehman Long Gov/Credit (Long G/C) 6,129$ 0.6$ 0.9

Total Global Bonds 20,247$ 8.0$ 4.0

Total Defined Benefit Global Bonds 60% Univ/40% Long G/C 15,323$ 6.9$ 4.5

Total Health Care Global Bonds NA* 4,924$ 1.1$ 2.2

*Total Health Care Global Bonds assets do not have a combined Global Bonds benchmark. Each segment is measured

against its own benchmark.






The following is a summary of the allocation of the Global Bonds portfolio by internal and external

managers:

The following table details the size of, and the fees associated with, each portfolio.



Internal 90.5% 0.7% 91.2% 90.4% 0.4% 90.8%

External 8.8% 0.0% 8.8% 9.2% 0.0% 9.2%

Total 99.3% 0.7% 100.0% 99.6% 0.4% 100.0%





Securities Lending

The Securities Lending program uses a combination of lending agents to optimize the incremental

return from this investment strategy. This move towards the diversification of agents coincides with

the increase in lending revenue for OPERS in recent years. OPERS seeks agents who provide

competitive fee splits, while providing adequate risk controls and segment expertise in the asset class

being loaned.

There is a bias toward lending assets in an auction environment so that borrowers are providing

maximum return in a competitive environment on a regular basis.

The Securities Lending program currently has the following structure:

Cash Management

The cash portfolios exhibit a low-to-moderate risk profile that results in principal preservation, while

exceeding the performance of the respective benchmarks. The benchmark of the OPERS Short Term

Investment Funds (STIF) is the 90-day Treasury bill. The benchmark for the Securities Lending STIF

is the Fed Funds Open Rate. Each portfolio is run separately, with staff targeting assets that are most

likely to generate performance above the respective portfolio benchmarks.

Average

Total Assets Lendable

($ billions) ($ billions) Lending Agent Auction

U.S. Equity $30.8 $29.2 eSecLending x

Global Bonds 20.8

Corp Bonds 5.5 eSecLending x

Emerging Market Debt 1.7 State Street

Treasuries 7.6 State Street

Agencies 0.8 State Street

Mortgage-Backed Securities 1.6 Key Bank

Non U.S. Equity 14.1

Commingled Assets 6.1 BGI

Separate Account Assets $4.9 State Street x

Securities Lending Structure


RESOURCES AND INITIATIVES

Office of theDirector ofInvestments


The current organizational structure is as follows:

The Office of the Director of Investments is currently composed of the Director of Investments and

one executive assistant. Four investment analyst vacant positions are budgeted under the Office of

the Director of Investments. The Director of Investments is responsible for allocating resources within

the Division.

Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the Office of the Director of

Investments unit.

Mary Ann Kabbaz

Executive Assistant

Jennifer Hom

Director of

Investments

Salaries 0.94

Benefits 0.31

Incentive Compensation 0.10

Total Compensation 1.35

Average Assets ($ billions) NA

Cost in Basis Points NA


($ millions)



Office of theDirector ofInvestments(continued)

Operating Budget

The Office of the Director of Investments unit’s 2008 and 2009 operating budgets and their

differences are illustrated in the table below. The Office of the Director of Investments unit continues

to find ways to be more efficient with its resources and to achieve the investment objectives detailed

in this annual investment plan.

Total Costs

The following table lists the estimated total costs for the Office of the Director of Investments.


Operating Budget less Compensation 0.72

Manager Fees -

Total Costs 2.07


Costs in Basis Points NA


($ millions)


Audit/Legal/Consulting Services $641,500 $650,000 $8,500 1.3% 90.2%

Quotes & Data Feeds $28,500 $36,000 $7,500 26.3% 5.0%

Research Services $0 $0 $0 0.0% 0.0%

Analytics $0 $0 $0 0.0% 0.0%

Communications $500 $300 ($200) -40.0% 0.0%

Information Technology $0 $0 $0 0.0% 0.0%

Office Equipment & Supplies $1,400 $600 ($800) -57.1% 0.1%

Training & Travel Expenses $25,815 $33,350 $7,535 29.2% 4.6%

Total $697,715 $720,250 $22,535 3.2% 100.0%

Change %Percent

of Total2008 Budget 2009 Budget Change $

Salaries 1.50

Benefits 0.55



Average Assets ($ billions) 7.38

Cost in Basis Points 3.2


($ millions)



The U.S. Equity Internal Management unit is currently organized with a total of nine equity analysts,

one portfolio manager and a senior portfolio manager.

The U.S. Equity Internal Management unit is responsible for the internally managed enhanced index

and REIT portfolios. The enhanced index portfolio has a Russell1000 benchmark and the REIT

portfolio has a Dow Jones Wilshire RESI benchmark. The senior portfolio manager works closely with

each analyst and portfolio manager to assess the relative strengths and weaknesses of each

investment to ascertain and evaluate the best risk adjusted return opportunities.

Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the U.S. Equity Internal

Management unit.



U.S. Equity InternalManagement

Kevin Martin

Senior Analyst

Scott Murray

Portfolio Manager

Deryck Lampe

Senior Portfolio Manager

Jake Lake

Equity Analyst

Tim Swingle

Senior Analyst

Steve Barker

Senior Analyst

Vacant

Equity Analyst

Joe Boushelle

Equity Analyst

Prabu Kumaran

Senior Analyst

Chris Gregson

Senior Analyst

Mike Parker

Equity Analyst



U.S. Equity InternalManagement(continued)

Operating Budget

The U.S. Equity Internal Management unit’s 2008 and 2009 operating budgets and their differences

are illustrated in the table below. The U.S. Equity Internal Management unit continues to find ways to

be more efficient with its resources and to achieve the investment objectives detailed in this annual

investment plan.

Total Costs

The following table lists the estimated total costs for managing the U.S. Equity Internal

Management unit.

Initiatives

Evaluation of Higher Alpha Alternatives

The staff will investigate and evaluate a number of higher return enhancement alternatives including,

but not limited to, concentrated long only portfolios, short extension portfolios, fixed income enhanced

options and higher tracking error deviations of long only portfolios. This evaluation will include the

consideration of potential higher investment returns and the necessary infrastructure and risk

controls.


Audit/Legal/Consulting Services $0 $0 $0 0.0% 0.0%

Quotes & Data Feeds $347,313 $270,400 ($76,913) -22.1% 49.0%

Research Services $57,240 $76,000 $18,760 32.8% 13.8%

Analytics $57,850 $58,000 $150 0.3% 10.5%

Communications $0 $0 $0 0.0% 0.0%

Information Technology $0 $12,300 $12,300 100.0% 2.2%

Office Equipment & Supplies $550 $1,050 $500 90.9% 0.2%

Training & Travel Expenses $154,510 $134,440 ($20,070) -13.0% 24.3%

Total $617,463 $552,190 ($65,273) -10.6% 100.0%

2008 Budget 2009 Budget Change $ Change %Percent

of Total



Manager Fees -

Total Costs 2.93

Average Assets ($ billions) 7,381

Costs in Basis Points 4.0


($ millions)



Global BondsInternalManagement



The Global Bonds Internal Management unit is currently organized with four portfolio managers, five

analysts and an investment assistant II. The senior portfolio manager provides oversight of the unit

and is responsible for the strategic positioning of all the bond portfolios. The senior portfolio manager

is a vacant position.

The leads of the different functional areas are collectively responsible for the Global Bonds Internal

Management investment decision-making process and report to the senior portfolio manager. They

also handle the day-to-day management of the internal portfolios. Authorized individuals in the

Global Bonds Internal Management unit handle trade execution.

One portfolio manager is responsible for corporate bonds, and works with the credit research group

to identify and implement investment ideas within corporate bonds including major themes, sector

weightings, security selection and relative value opportunities.

One senior investment analyst plays a lead role and provides oversight to the credit research group.

The analysts are responsible for assigned industries in the corporate sector, which includes company

analysis and the identification of relative value ideas. The credit analysts, along with the lead

analyst, are responsible for assigned sectors and also provide back up to other sectors. This

organizational structure ensures that all sectors are monitored constantly so that OPERS is in the

position to take advantage of marketplace opportunities.

Eric France

Portfolio Manager

Mark Ehresman

Senior Investment

Analyst

Bill Miller

Deputy Director of Investments

Teresa Black

Cash/Securities

Lending Analyst

Todd Soots

Senior Investment

Analyst

Erik Cagnina

Portfolio Manager

Tony Enderle

Senior Investment

Analyst

JoAnn Yocum

Investment Assistant II

Nick Kotsonis

Investment Analyst

Jerry May

Cash/Securities

Lending Manager

Chris Rieddle

Portfolio Manager

Senior Portfolio

Manager

Vacant



Global BondsInternalManagement(continued)

Additional portfolio managers are responsible for the mortgage-backed securities, commercial

mortgage-backed securities and asset-backed securities sectors. These two individuals are

responsible for relative value within the structured sectors, individual security analysis and trading of

securities within their assigned sectors. As with credit analysts, there are back up responsibilities for

each assigned sector.

The cash securities/lending management staff manages the OPERS cash/securities lending

programs across all asset classes. In addition, these individuals manage the cash portfolios

supporting OPERS’ operating liabilities and cash collateral resulting from securities lending activities.

Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the Global Bonds Internal

Management unit.

Operating Budget

The Global Bonds Internal Management unit’s 2008 and 2009 operating budgets and their differences

are illustrated in the table below. The Global Bonds Internal Management unit continues to find ways

to be more efficient with its resources and to achieve the investment objectives detailed in this annual

investment plan.

Salaries 1.18

Benefits 0.47






($ millions)


Audit/Legal/Consulting Services $0 $0 $0 0.0% 0.0%


Research Services $211,360 $196,000 ($15,360) -7.3% 25.9%

Analytics $130,000 $120,000 ($10,000) -7.7% 15.8%


Information Technology $56,350 $0 ($56,350) -100.0% 0.0%

Office Equipment & Supplies $500 $500 $0 0.0% 0.1%

Training & Travel Expenses $68,220 $68,050 ($170) -0.2% 9.0%

Total $740,630 $757,450 $16,820 2.3% 100.0%


of Total



Manager Fees -

Total Costs 2.78




($ millions)



Global BondsInternalManagement(continued)

Total Costs

The following table lists the estimated total costs for managing the Global Bonds Internal

Management unit.



ExternalManagement



The External Management group consists of the External Public Markets, Private Real Estate and

Private Equity teams. Each of these teams develops investment strategies, performs due diligence,

selects external investment managers, monitors investments with external managers and adjusts

portfolio exposures. The deputy director of investments, portfolio manager and investment assistant

II are vacant positions.

Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the External Management unit.

Vacant


Vacant

Deputy Director of

Investments

Vacant

Portfolio Manager

Brad Sturm

Portfolio Manager

Dan Sarver

Portfolio Manager

John Blue

Senior Investment

Analyst

DeAnne Rau

Portfolio Manager

Stephen Stuckwisch

Portfolio Manager

Louis Darmstadter

Portfolio Manager

Samir Sidani

Senior Investment

Analyst

Salaries 1.66

Benefits 0.60






($ millions)

Lewis Tracy

Senior Investment

Analyst



ExternalManagement(continued)

Operating Budget

The External Management unit’s 2008 and 2009 operating budgets and their differences are illustrated

in the table below. The External Management unit continues to find ways to be more efficient with its

resources and to achieve the investment objectives detailed in this annual investment plan.

Total Costs

The following table lists the estimated total costs for managing the External Management unit. These

figures incorporate both the department’s operating budget as well as projected external

management fees.


Audit/Legal/Consulting Services $1,960,000 $2,060,000 $100,000 5.1% 87.4%

Quotes & Data Feeds $0 $0 $0 0.0% 0.0%


Analytics $66,000 $80,000 $14,000 21.2% 3.4%


Information Technology $30,300 $30,300 $0 0.0% 1.3%

Office Equipment & Supplies $217 $200 ($17) 100.0% 0.0%


Total $2,244,445 $2,357,158 $112,713 5.0% 100.0%


of Total

Internal External Total

Total Compensation 2.61 - 2.61

Operating Budget less Compensation 2.36 - 2.36

Manager Fees - 175.13 175.13

Total Costs 4.97 175.13 180.09

Average Assets ($ billions) - 29,956 29,956

Costs in Basis Points 58.5 60.1


($ millions)



ExternalManagement(continued)

Initiatives

Private Markets Database

Real Estate serves as the business lead for the team that has the responsibility and authority to

evaluate and select a new database for the private market portfolios. Along with Investment staff,

this selection team also includes representatives from Information Technology, Internal Audit and

Investment Accounting. The purpose of this information technology upgrade is to improve data

collection, portfolio analysis and performance reporting for the private market real estate and private

equity portfolios. The selection team envisions that the new database will be selected, installed and

functional by the end of 2009.

International Real Estate Securities Manager Selection

Real Estate will assist External Public Markets in the evaluation of managers for the Non-U.S. real

estate securities portfolio. Manager evaluation and selection are the next steps in the OPERS

strategy to diversify the existing public real estate securities (REIT) portfolio from a domestic to a

global platform. Staff anticipates manager(s) will be selected and funded by mid-2009.

External Public Markets External Manager Cost and Efficiency Review

External Public Markets will review costs associated with the external public management program

with a goal of seeking greater efficiencies. The key cost to be reviewed will be external manager

fees. Work will also be done evaluating the advantages and disadvantages of performance versus

asset-based fees. To improve portfolio performance, staff will update the existing commission

recapture and transition management programs. Other activities include enhanced monitoring of the

quality of foreign currency and equity trading done in the externally managed portfolios.

Health Care Fund Private Equity Allocation

Private Equity pacing to the Healthcare Fund represents a new strategic initiative for the 2009

investment plan. While the first commitments to the OPER’s Healthcare fund were made beginning

in 2008 and were in line with earlier targets, the actual draw down of the capital from those

commitments was slower than expected due to the weakening economy and unfolding credit crisis.

Accordingly, staff intends to redouble its efforts in 2009 to build the Private Equity allocation to the

Healthcare Fund by prudently increasing the size of each commitment allocated for the Healthcare

Fund. Staff would note that progress towards achieving the target allocation in the near term remains

somewhat out of its control, but it is confident that these efforts will prove effective over the longer-

term.

Hedge Fund Strategy

The purpose of this initiative is to perform additional research with the intention of creating a

comprehensive hedge fund strategy. Based on this review, additional allocations to hedge funds

may be recommended. However, any implementation of this initiative is dependent on Board

approval, coordination with outside consultants, and the availability of investment opportunities.



Fund Management

Bill Miller

Deputy Director of

Investments

Joan Stack

Trading Manager

Erick Weis

Fund Manager

Xinyang Gu Quantitative / Research

Roger Tong Quantitative / Research

Cheryl Cade Investment Assistant II

Vacant Investment Assistant II

J.G. Lee

Fund Manager

Matt Sherman

Senior Equity Trader

Christy Ruoff

Equity Trader



Fund Management works closely with other areas of the Division and is responsible for both

investment and non-investment activities. The team is responsible for:

Reviewing, monitoring, and implementing changes to the asset allocations and related risk budgets

for the Defined Benefit and Health Care Funds;

Performing research and analysis on investment allocations to asset classes, sub-asset classes

and portfolios;

Conducting investment risk analysis, assessments and management for the Defined Benefit,

Health Care and Defined Contribution Funds;

Providing quantitative research and analysis in support of internal asset management and other

internal group activities;

Asset class beta management, which includes beta portfolios such as the U.S. Equity Index

Portfolio and passive derivatives portfolios; and

Equity and derivatives trading for internal equity portfolios and asset allocation management.



Fund Management(continued)

The Deputy Director of Investments reports directly to the Director of Investments and is responsible

for assuring all area responsibilities are performed. Assisting the Deputy Director of Investments are

three managers: two fund managers and a trading manager.

One fund manager manages asset allocation activities including beta portfolios such as the U.S.

Equity Index Portfolio and passive derivatives portfolios as well as analytical projects and various

initiatives. The other fund manager is responsible for quantitative research and analytic support for

the entire Investment Division, evaluating the risk-and-return characteristics of the funds and the

asset class composites across the Division.

The two quantitative/research staff and investment assistant II staff support the Fund Management

group under the direction of one of the fund managers.

The trading manager manages two traders and is responsible for executing trades for the Fund

Management group portfolios as well as the Internally Managed Enhanced Index portfolio and REIT

portfolio. Trading activities in support of the Fund Management group include executing trades for

portfolios during transitions. The trading area executes trades using a variety of tools including

electronic algorithmic and program trading systems and, as such, works closely with the investment

portfolio managers and the quantitative research group to incorporate enhancements into the trading

systems. The area also performs and reviews the analysis of internal transactions from a pre-trade

and post-trade perspective using transactions cost-analysis tools and models.

The Fund Management group has ten positions, nine of which are filled. The investment assistant II

position is vacant and is expected to be filled by year-end 2008.




Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the Fund Management unit.

Operating Budget

The Fund Management unit’s 2008 and 2009 operating budgets and their differences are illustrated

in the table below. The increase in research services is due to the addition of risk analytics. With

respect to the other budget categories, the Fund Management unit continues to find ways to be more

efficient with its resources and to achieve the investment objectives detailed in this annual investment

plan.

Total Costs

The following table lists the estimated total costs for managing the Fund Management unit. The

assets under management include the internally managed index portfolios, although the Fund

Management resources will impact asset management decisions across the division. As a percent of

the total Fund Management costs, internally managed assets will account for 100% of costs.


Audit/Legal/Consulting Services $50,000 $50,000 $0 0.0% 4.3%



Analytics $370,100 $293,500 ($76,600) -20.7% 25.0%


Information Technology $107,900 $68,800 ($39,100) -36.2% 5.9%

Office Equipment & Supplies $1,100 $800 ($300) -27.3% 0.1%


Total $1,162,269 $1,172,100 $9,831 0.8% 100.0%


of Total

Salaries 1.24

Benefits 0.46






($ millions)



Manager Fees -

Total Costs 3.17




($ millions)




Initiatives

Defined Benefit Strategic Asset Allocation Review

Staff, working with the Board’s investment consultant, Mercer, will review and propose strategic asset

allocation recommendations to meet projected benefit liabilities in the Defined Benefit Fund.

Internal Non-U.S. Equity Management

Staff will expand the counterparties and further develop the operational capabilities to monitor internal

Non-U.S. Equity investing activities. As background, in 2008, the Board was informed of staff’s plan

to manage exposure to Non-U.S. Equity markets using derivative instruments.



InvestmentAdministration



The Investment Administration department supports the Investment Division’s investment and risk

management strategies by providing appropriate data and systems infrastructure, associated

compliance and controls and business management resources. The department also manages the

investments of the Defined Contribution Fund. The investment administration technician is a vacant

position and is expected to be filled by June 2009.

Infrastructure: The department coordinates activities and resources with the Investment

Accounting and Investment Applications departments to develop and manage the data and

systems necessary to provide accurate, consistent and automated inputs to investment and risk

management strategies and decisions.

Compliance: The department coordinates and documents the development and monitoring of

policies, guidelines and procedures for Investment Division activities. To this end, the department

also coordinates activities related to legal, regulatory, internal audit, business continuity planning

and record retention efforts.

Business Management: The department manages the budget, expense payments, equipment

inventory and associated resources to ensure the investment division has the resources it needs to

meet its investment and risk management objectives.

Defined Contribution: The department manages the investments of the Defined Contribution

Fund by leveraging the investment division resources and coordinating with the Defined

Contribution department.

Risk Management Oversight: The department is responsible for risk management oversight

focusing on market risk, credit risk, operational risk and reputational risk.

Vacant

Investment Administration

Technician

Roger Fox

Investment

Administration Manager

Alan Davidson

Compliance Manager

Kimberly Van Gundy

Investment

Administration Analyst

Pat Edgington

Investment Reporting

Manager

Melissa Stought

Investment


Dan German

Risk Manager



InvestmentAdministration(continued)

Staffing Costs


benefits and incentive compensation estimated to be paid in 2009 for the Investment Administration

unit.

Operating Budget

The Investment Administration unit’s 2008 and 2009 operating budgets and their differences are

illustrated in the table below. The 2009 budget increase reflects the implementation of front office

systems and associated disaster recovery capabilities. The Investment Administration unit continues

to find ways to be more efficient with its resources and to achieve the investment objectives detailed

in this annual investment plan.


Audit/Legal/Consulting Services $4,000 $0 ($4,000) -100.0% 3.5%

Quotes & Data Feeds $0 $72,000 $72,000 0.0% 0.0%


Analytics $125,000 $130,000 $5,000 4.0% 5.9%


Information Technology $188,550 $199,000 $10,450 5.5% 11.7%

Office Equipment & Supplies $300 $350 $50 100.0% 0.0%

Training & Travel Expenses $20,110 $23,248 $3,138 15.6% 3.7%

Total $385,960 $474,598 $88,638 23.0% 100.0%

Change %Percent

of Total2008 Budget 2009 Budget Change $

Salaries 0.57

Benefits 0.18




Cost in Basis Points NA


($ millions)




Total Costs

The following table lists the estimated total costs for managing the Investment Administration unit.

Initiatives

Enhance Defined Contribution Plan Investment Options

Staff will evaluate options for enhancing investment options primarily through two sub-initiatives.

First, identify options for expanding the active management component of the OPERS Target Date

Funds to increase the potential for higher returns with similar levels of risk. Second, explore the

costs and benefits of expanding the number of investment options to meet the needs of members

seeking more complex investment options through additional options or a mutual fund window.

Front Office Systems Implementation

Staff will complete the implementation of the Bloomberg and Charles River order management

systems and develop associated data enhancements, business continuity processes and total fund

investment and risk analytics.



Manager Fees -

Total Costs 1.28


Costs in Basis Points NA


($ millions)

The Townsend Group

Date: October 28, 2008 Subject: The Annual Plan To: OPERS Board Cc: OPERS Staff From: Terry Ahern The Real Estate Consultant (“Townsend” or “Consultant”) to the Public Employees Retirement System of Ohio ("OPERS") has reviewed the 2009 Real Estate Department Annual Plan ("Annual Plan"). The Annual Plan is consistent with accomplishing the goals and objectives set forth in the OPERS Real Estate Policy ("Policy") which was revised and approved in 2007. We recommend that the board approve the Annual Plan and we offer the following comments. First, the market value of the private real estate program (“Program”) as of June 30, 2008 was approximately $5.0 billion. The Annual Plan projects $387 million of acquisitions and $574 million of strategic dispositions in 2009. These numbers may vary greatly, and are contingent on the future of the capital markets which are currently in a state of severe dislocation. Due to the crisis in the credit markets, transaction volume has slowed significantly within the industry. We note that planned dispositions are strategic property sales, and not fire sales, and that the separate account managers will endeavor to sell when it is in the best interest of OPERS. The expected investment activity will cause the market value at year end 2009 to be $5.1 billion. Second, the Annual Plan intends to reduce exposure to open end commingled funds (“OECFs”) by approximately $160 million. This will bring the approximate year end value committed to and invested in OECFs to approximately $820 million. Rebalancing from the OECFs at this time may provide the ability to redeem at prices indicative of the past as many of the OECFs have not yet realized a significant level of re-pricing. In addition, this reduction is consistent with the intention to tilt the Program towards more opportunistic investments, where the risk and return characteristics are more favorable. We agree with Staff that it is prudent to rebalance the Program through the OECFs. Third, due to the impact of the denominator effect and to the fact that real estate is nearing its policy limit, OPERS has temporarily suspended new commitments to opportunistic funds. Townsend encourages Staff to research new investment ideas and meet with potential managers in anticipation of a recovery in the capital markets. Once the capital markets emerge from the current crisis, it is expected that the plan to commit $225-$275 million per year in the opportunistic funds would resume. Fourth, the Annual Plan intends to allocate an estimated $125 million to separate account managers to continue the development/redevelopment/repositioning of


APPENDIX A

Consultants’Reviews

The Townsend Group International Real Estate Consultants


APPENDIX A

existing assets. In addition $80 million of sales proceeds from stable properties are expected and will be reinvested in higher-yielding opportunities. Fifth, the Annual Plan projects the amount of capital that will be invested by property type for each investment channel (separate accounts, and opened and closed-and commingled funds). We believe that it is important to ensure that the total Program is developed in a manner consistent with the Policy including diversification by property type. We also believe that it is important to have flexibility by investment channel. Staff uses property type targets by investment channel to promote the development of the Program in a manner consistent with Policy. The Policy allows Staff the flexibility to amend targets to capitalize on the best investment opportunities. We encourage the continuance of such a flexible approach, especially in these uncertain times. Sixth, historically the Program had a domestic focus. Consistent with the evolution of the real estate program, the Staff initiated an international real estate securities initiative which was approved by the Board approved in July of 2008. The purpose of including non-US securities is due to the superior diversification benefits and risk-adjusted returns. This addition is expected to total $600 million of assets allocated in two or more actively managed international real estate securities portfolios. It is estimated that up to $250 million may be deployed during 2009. Given the challenging economic environment, it is our opinion that the Annual Plan applies a disciplined and pragmatic approach, which is consistent with the Policy. Current capital market conditions will require diligent oversight and judgment on the part of Staff and Townsend. Please do not hesitate to contact me if there are any questions. Regards, Terry Ahern Principal

Consultants’Reviews(continued)

The Townsend Group International Real Estate Consultants


APPENDIX A

MEMORANDUM

To: Ohio Public Employees Retirement System (“OPERS”)

From: Hamilton Lane

Date: October 28, 2008

Re: 2009 Annual Investment Plan

Hamilton Lane has worked in conjunction with OPERS Staff in developing the 2009 Annual Investment Plan (the “Plan”) with respect to the private equity programs of the Defined Benefit Fund (the “DB Fund”) and the Healthcare Fund (the “HC Fund”). As part of our strategic planning process, we have employed our Horizon Model, a proprietary, multi-stage/multi-period model to plan investment pacing, based on the overall objectives of the DB and HC Funds’ private equity programs, in particular maintaining the targeted private equity allocation of 5% for the DB Fund and achieving the targeted allocation of 5% for the HC Fund within the next five to seven years. The inputs for this analysis, which employs multi-variable modeling, combines over 20 years of historical data in our investment database, Hamilton Lane’s and OPERS’ Staff’s views of the private equity market risk and returns, commitment size, total number of relationships and asset sub-class diversification among other factors. Hamilton Lane believes that the Plan is tailored to meet OPERS’ long- and short-term objectives relative to the private equity asset class and is conformance with Policy restrictions and guidelines.


Hamilton Lane Private Equity Consultants

One Belmont Avenue, Ninth Floor • Bala Cynwyd, Pennsylvania 19004

P 610 934 2222 • F 610 617 9853 • www.hamiltonlane.com



APPENDIX A

Mercer Investment Consulting


APPENDIX B

Economic Outlook Mercer Investment Consulting – Economic Prospects


APPENDIX B

Economic Outlook(continued)

Mercer Investment Consulting – Economic Prospects


APPENDIX B



Hire Date

January 2000

Education

2004: A.S. Business,

Ohio Dominican

University

Designations


Office of theDirector ofInvestments

INVESTMENT STAFFING

Hire Date

June 2002

Education

1975: B.S.

Mathematics, College

of the Holy Spirit

1980: M.S. Mathematics,

Purdue University

Designations

1986: CFA

Charterholder

Name

Jennifer Hom

Title

Director of Investments

Experience

Experience

30 years

Name

Mary Ann Kabbaz

Title

Executive Assistant

Experience

Experience

9 years

Name

Steven Barker

Title

Senior Investment

Analyst

Experience

9 years

Hire Date

June 1999

Education

1993: B.A. Business

Administration, The

Ohio State University

1999: M.B.A., The Ohio

State University

Designations


INVESTMENT STAFFING

U.S. Equity InternalManagement

Name

Deryck Lampe

Title

Senior Portfolio

Manager

Experience

16 years

Hire Date

March 2007

Education

1989: B.S.

Mathematics, Purdue

University

1991: M.S. Statistics,

University of Cincinnati

1992: M.B.A. University

of Cincinnati

Designations

1997: CFA

Charterholder

Name

Christopher Gregson

Title

Senior Investment

Analyst

Experience

8 years

Hire Date

July 2000

Education

1992: B.A. Psychology,

Indiana University

1993: B.S. Business

Finance, Indiana

University

Designations

2001: CFA

Charterholder

Name

Joseph Boushelle

Title

Investment Analyst

Experience

5 years

Hire Date

September 2008

Education

1996: B.A. Economics,

University of Chicago

2006: M.B.A., Cornell

University

Designations

Designations

2006: CFA

Charterholder

Name

Scott Murray

Title

Portfolio Manager

Experience

18 years

Hire Date

June 2005

Education

1985: B.S. Political

Science, University of

Connecticut

1991: M.B.A.

Washington University

Designations

2000: CFA

Charterholder


INVESTMENT STAFFING

U.S. Equity InternalManagement (continued)

Name

Kevin Martin

Title

Senior Investment

Analyst

Experience

10 years

Hire Date

June 1998

Education

1994: B.A. Accounting,

Thomas More College


of Cincinnati

Designations

1999: CPA

Name

Jack Lake

Title

Investment Analyst

Experience

15 years

Hire Date

July 2008

Education

1989: B.S. Business,

Marist College

1999: M.B.A. Finance,

Case Western Reserve

University

Designations

1999: CFA

Charterholder

Name

Prabu Kumaran

Title

Senior Investment

Analyst

Experience

10 years

Hire Date

November 2008

Education

1992: B.Eng. (Mech),

Anna University

1997: M.B.A. Asian

Institute of

Management

Designations

2008: CFA

Charterholder


INVESTMENT STAFFING

U.S. Equity InternalManagement (continued)

Name

Timothy Swingle

Title

Senior Investment

Analyst

Experience

10 years

Hire Date

August 1998

Education

1980: B.S. Business

Administration, The


Designations

Designations

1983: CPA (inactive)

1988: CMA

1995: CFA

Charterholder

2007 CMT

Name

Michael Parker

Title

Investment Analyst

Experience

6 years

Hire Date

October 2008

Education

2002: B.S. Economics,

Wharton School,

University of

Pennsylvania

Designations

Level II candidate in the

CFA program

Designations

Name

Mark Ehresman

Title

Senior Investment

Analyst

Experience

7 years

Hire Date

June 2002

Education

1997: B.S. Finance,

Miami University

2002: M.B.A. Case

Western Reserve

Designations

2005: CFA

Charterholder

Name

Erik Cagnina

Title

Portfolio Manager

Experience

14 years

Hire Date

March 2006

Education

1992: B.S. Finance,

Miami University

1998: M.B.A. Case

Western Reserve

Designations

2008: CFA

Charterholder

Name

Teresa Black

Title

Cash/Securities

Lending Analyst

Experience

13 years

Hire Date

November 2000

Education

1995: B.S. Finance,

The Ohio State

University

Designations


INVESTMENT STAFFING

Global BondsInternalManagement

Name

Tony Enderle

Title

Senior Investment

Analyst

Experience

7 years

Hire Date

January 2002

Education

Education

1994: B.S. Business

Administration, Bowling

Green University

Designations

Designations

2002: CFA

Charterholder

Name

Jerry May

Title

Cash/Securities

Lending Manager

Experience

17 years


INVESTMENT STAFFING

Global BondsInternalManagement (continued)

Name

Eric France

Title

Portfolio Manager

Experience

23 years

Hire Date

January 2004

Education

1968: B.A. European

History, Yale University

1977: M.A. History, Ohio

University

1985: M.A. Finance, The


Designations

1989: CFA

Charterholder

Name

Chris Rieddle

Title

Portfolio Manager

Experience

19 years

Hire Date

November 2007

Education

1979: B.S. Finance,

Indiana University

1982: M.B.A. Indiana

University

Designations

1993: CFA

Charterholder

Name

Nick Kotsonis

Title

Investment Analyst

Experience

4 years

Hire Date

April 2008

Education

2003: B.S. Finance,

Miami (OH) University

Designations

2007: CFA

Charterholder

Hire Date

February 2004

Education

1991: B. Business

Administration, Abilene

Christian University2002: M.B.A. Ashland University

Designations


INVESTMENT STAFFIN

Global BondsInternalManagement (continued)

Name

JoAnn Yocum

Title


Experience

23 years

Hire Date

December 2000

Education

1987: A.S. Business,

Bliss Business College

Designations

Name

Todd Soots

Title

Senior Investment

Analyst

Experience

8 years

Hire Date

May 2002

Education

1995: B.S. Finance,

The Ohio State

University

2002: M.B.A. The Ohio

State University

Designations

2005: CFA

Charterholder


INVESTMENT STAFFING

External PublicMarkets

Name

DeAnne Rau

Title

Portfolio Manager

Experience

14 years

Hire Date

June 2001

Education

1993: B.A. History, Mt.

Holyoke College


The Ohio State

University


State University

Designations


CFA program

Name

Daniel Sarver

Title

Portfolio Manager

Experience

24 years

Hire Date

June 1984

Education

1982: B.S. Business

Administration and

Mathematics, Marietta

College


State University

Designations

1988: CFA

Charterholder

Name

John Blue

Title

Senior Investment

Analyst

Experience

15 years

Hire Date

October 1993

Education

1989: B.S. Business

Administration, The



State University

Designations

1997: CFA

Charterholder


INVESTMENT STAFFING

Real Estate Name

Bradley Sturm

Title

Portfolio Manager

Experience

14 years

Hire Date

February 1988

Education



1982: M.A. Economics,


1982: M.A. Industrial

Relations, University of

Cincinnati


State University

Designations

Name

Stephen Stuckwisch

Title

Portfolio Manager

Experience

13 years

Hire Date

October 1995

Education


Hanover College


State University

Designations

2000: CFA

Charterholder

Name

Lewis Tracy

Title

Senior Investment

Analyst

Experience

8 years

Hire Date

August 2000

Education


U.C. Berkeley

1994: PhD. Russian

Literature, The Ohio

State University


State University

Designations


INVESTMENT STAFFING

Private Equity Name

Louis Darmstadter

Title

Portfolio Manager

Experience

10 years

Hire Date

March 2007

Education

1985: B.A. History,

Tulane University


of Chicago

1992: M.A. Middle

Eastern Studies,

University of Chicago

Designations

2002: CFA

Charterholder

Name

Samir Sidani

Title

Senior Investment

Analyst

Experience

7 years

Hire Date

June 2006

Education


University of Rochester

Designations

2005: CFA

Charterholder

2007: Chartered

Alternative Investment

Analyst SM


INVESTMENT STAFFING

Fund Management Name

William Miller

Title

Deputy Director of

Investments

Experience

27 years

Hire Date

July 2005

Education

1979: B.S. Mechanical

Engineering, Kettering

University


of Pennsylvania

Designations

1985: CFA

Charterholder

Name

Cheryl Cade

Title


Experience

15 years

Hire Date

July 2006

Education

1999: B.A. Finance,

Franklin University

2003: M.B.A. Franklin

University

Designations

Name

Xinyang Gu

Title

Quantitative Analyst

Experience

8 years

Hire Date

October 2000

Education

1982: B.S. Physics,

Nanjing Institute of

Technology China

1989: M.S. Physics,

The Ohio State

University

Designations

Name

J.G. Lee

Title

Fund Manager

Experience

12 years

Hire Date

January 2002

Education

1996: PhD. Economics,

The Ohio State

University

Designations

2001: CFA

Charterholder

2004: Financial Risk

Manager

2004 Professional Risk

Manager


INVESTMENT STAFFING


Name

Christy Ruoff

Title

Equity Trader

Experience

26 years

Hire Date

July 1982

Education Designations

Name

Matthew Sherman

Title

Senior Equity Trader

Experience

14 years

Hire Date

May 2006

Education


The Ohio State

University

2000: M.B.A. Otterbein

College

Designations

Name

Joan Stack

Title

Trading Manager

Experience

33 years

Hire Date

October 2003

Education


Mount Holyoke College

1977: M.B.A. Fordham

University

Designations

Name

Roger Tong

Title

Quantitative Analyst

Experience

14 years

Hire Date

March 2004

Education

1991: M.S. Mathematics,

New Jersey Institute of

Technology

1994: M.B.A. The

college of Insurance

Designations


CFA program

Name

Erick Weis

Title

Fund Manager

Experience

16 years

Hire Date

June 1994

Education

1990: B.S. Business

Administration,

University of Toledo


State University

Designations

2001: CFA

Charterholder


INVESTMENT STAFFING



INVESTMENT STAFFING

InvestmentAdministration

Name

Roger Fox

Title

Investment

Administration Manager

Experience

17 years

Hire Date

July 2000

Education

1989: B.S.

Mathematics, Purdue

University


University

Designations

2001: CFA

Charterholder

Name

Alan Davidson

Title

Investment

Compliance Manager

Experience

44 years

Hire Date

September 2006

Education

1960: B.A. Political

Science, Pennsylvania

State University

1963: J.D. Harvard Law

School

Designations

Attorney

Name

Pat Edgington

Title

Investment Reporting

Manager

Experience

31 years

Hire Date

July 2000

Education

1985: B.S. Finance,

Miami University

Designations

Name

Dan German

Title

Risk Manager

Experience

10 years

Hire Date

April 2008

Education

1989: B.S. Economics,

Allegheny College

1990: M.B.A.,

University of Pittsburgh

Designations

2006: CFA

Charterholder


INVESTMENT STAFFING


Name

Melissa Stought

Title

Investment


Experience

10 years

Hire Date

January 2007

Education

1998: B.A. Psychology,

Drew University

2006: M.B.A. Finance,

New York University

Designations

Name

Kimberly Van Gundy

Title

Investment


Experience

7 years

Hire Date

April 1999

Education

1993: B.S. Accounting,

University of Dayton


University

Designations

Level I candidate in the

CFA program

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