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2013 Final Performance Memo

Based on the final performance report (with updated private valuations) issued by NEPC, the
System returned 4.4% net of fees in 2013. Several factors contributed to this underperformance:

Public Equity Allocation
At year-end our allocation to Public Equity was 19.5% of assets, much lower than most public
pension funds which often have 40% or more in public equity
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. Global equity markets performed
extremely well in 2013, with the MSCI All Country World Index returning 22.8%. Our
underweight to equities was by design and intended to better diversify the portfolio and reduce
overall volatility.
Private Equity Performance
Certain of our largest private equity managers did not perform well in 2013. Huff Energy
returned negative 29.7% in 2013, as our investment was written down from $200 million at
9/30/2013 to $142.9 million at 12/31/13. Huff Energy was written down primarily because of
declines in oil prices at year-end. Additionally, our largest private equity investment, Red
Consolidated Holdings, was essentially flat for the year. Combined, these two investments make
up approximately 45% of our private equity portfolio and were large contributors to the
portfolios underperformance
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.




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Texas Public Pension plans have average of 46% allocation to equities based on Report on the Asset Allocation
and Investment Performance of Texas Public Employee Retirement Systems TEXPERS
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Average 2013 Private Equity Return was 13.8% per Cambridge and Associates database for All Private Equity
Vintage Years and Strategies
2013 Rates of Return by Asset Class
Asset Class 2013 Return Asset Allocation
Global Public Equity 23.3% 19.5%
Global Private Equity -7.3% 19.3%
Global Fixed Income 5.1% 15.3%
Global Natural Resources 14.6% 11.9%
Global Asset Allocation 3.2% 11.3%
Global Infrastructure 6.0% 4.7%
Global Real Estate -4.2% 17.5%
Cash - 0.5%
Total Portfolio 4.4% 100.0%


Real Estate Performance
Certain properties experienced declines in value based on updated valuations as of 12/31/13,
which was a driving factor in the poor performance of the real estate portfolio. Additionally, our
real estate portfolio has a large concentration of land and development properties, which
underperformed our core and value-added real estate assets in 2013.


Infrastructure: J-Curve
DPFPs 10% allocation to Global Infrastructure was established in 2012. About half of the
current infrastructure asset class, or $73 million in market value, is dedicated to the regional
managed lanes projects, which produce zero returns during construction and will not distribute
cash for several years. However, these long J-curve investments are expected to produce low
double-digit returns over the longer term. The flat returns of these investments during the infancy
of the infrastructure portfolio were expected when the allocation was created. The remaining
infrastructure portfolio, which consists of private infrastructure funds further along the J-curve, is
performing generally as expected overall.