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WASHINGTON STATE INVESTMENT BOARD THIRTYFOURTH ANNUAL REPORT OVERVIEW • TWOTHOUSAND AND FIFTEEN INTRODUCTION Lett er of Transmitt al ( 3 ) Message from the Chair ( 4 ) Board Members and Committ ees ( 5 ) Executi ve Management and Consultants ( 6 ) Commingled Trust Fund (CTF) Partners and Fund Managers ( 7 ) Corporate Governance ( 9 ) Enterprise Risk Management ( 10 ) Annual Budget ( 11 ) LETTER OF TRANSMITTAL This past year has been a stark reminder that we operate in a global economy. The debt crisis in Greece and other European countries left investors nervous and cauti ous. Falling oil prices and the on-going debate over whether and/or when the Federal Reserve will take the lid off interest rates has created concern not only among U.S. investors, but our European partners as well. Like the wild fi res that also took their toll this summer, even a small gust of wind was enough to reignite smoldering embers. But for bett er or worse, risk and reward are intrinsically linked. For the Washington State Investment Board, it’s not so much a questi on of whether we accept a certain amount of risk, but more importantly how we manage that risk. One of the most important ways we manage risk is by diversifi cati on in our alternati ve asset classes. The WSIB has been investi ng in private equity and real estate since the early 80’s. Our private equity portf olio is well diversifi ed by fund, by general partner, by geography and by industry. Our real estate portf olio is very broadly diversifi ed in many hundreds of properti es in a lot of markets that act diff erently. It’s important when building a diversifi ed portf olio that you have asset returns that move in diff erent directi ons. This help to off set the impact of poor market performance. Rebalancing is the key to maintaining risk levels over ti me. We conti nuously review and rebalance our asset balances as appropriate and the strategic asset allocati ons are reviewed at least every four years. This ensures that the asset mix is within the appropriate risk levels. The WSIB’s long-term, diversifi ed investment strategy has made Washington’s public pension fund among the top 10 best performing pension funds in the nati on. While the money we earn for the reti rement funds makes up the lion’s share of our assets under management and att racts the most att enti on, the WSIB has other equally important investment responsibiliti es. We also manage Labor and Industries’ Funds ($14.7 billion) to help the state meet its fi nancial obligati ons to injured workers and their employers, the Guaranteed Educati on Trust (GET) Fund ($2.7 billion) that was created to invest money received from the sale of pre-paid college tuiti on credits to off set the future cost of a college educati on, the Developmental Disabiliti es Endowment Fund ($49 million) which was created as a means to support families as they plan for the long- term care needs of individuals with disabiliti es, and what are called the Permanent Funds ($983.4 million), the majority of which was established through land grants from the federal government to benefi t Washington schools, colleges and universiti es. We also were given investment responsibility for a new fund this year, the Washington State Opportunity Scholarship (WSOS) Fund ($43.8 million) which was created by the Washington State Legislature to encourage student parti cipati on in high employer-demand programs of study. I am extremely proud of the WSIB and its many accomplishments. In the end, it is the strong and capable Board and the highly professional staff that have earned the WSIB the reputati on and success it enjoys. This report describes in detail all of our portf olios, performance, operati ons and fi nance. I am proud to note that whether the economic outlook is rosy or cloudy, the WSIB conti nues to not only meet, but exceed the high standards our benefi ciaries expect and deserve. Sincerely, Theresa Whitmarsh, Executi ve Director Page 3 MESSAGE FROM THE CHAIR Throughout its 34-year history, the Washington State Investment Board (WSIB) has conti nued to deliver excellent investment performance and impeccable accountability. Washingtonians should expect and deserve nothing less from an organizati on entrusted to manage billions of dollars of pension and other public fund assets that serve to benefi t thousands of people statewide. Everyone who works for the WSIB or serves on its 15-member, independent Board of Trustees fully recognizes our fi duciary duty to prudently manage investments for the exclusive benefi t of the more than 467,000 members, reti rees and benefi ciaries in the state’s reti rement systems. These are the people who devote their lives to serving the public, educati ng our children, maintaining our schools, fi ghti ng fi res, enforcing the law, caring for the disabled, protecti ng the environment, and supporti ng our colleges and universiti es. We are proud of their achievements and it’s an honor to play a signifi cant role in helping them build a more fi nancially secure future. Reti rement benefi ts earned by Washington’s public employees result in approximately $3.2 billion in payments each year (about $270 million per month), most of which is distributed in the state of Washington. It’s worth noti ng that returns from investments managed by the WSIB account for 84 cents of every dollar paid out in pension benefi ts. Investment earnings also pay for the 2.58 million workers covered under the state Department of Labor & Industries’ workers’ compensati on program. Last year, benefi ts paid to injured workers totaled $2.13 billion. The WSIB ended fi scal year 2015 with $107 billion in total assets under management, the majority of that being the $81.7 billion Commingled Trust Fund (CTF) portf olio for the state’s defi ned benefi t reti rement systems. The three-, fi ve-, and 10-year return rates for the CTF were 11.34 percent, 11.13 percent, and 7.55 percent respecti vely. The rate of return since incepti on is 8.80 percent. This is one of the best performance records compared to any other public pension fund in the country, and contributes to Washington’s positi on as one of the top 10 best funded pension systems in the nati on. Looking to the future, the WSIB will conti nue to invest prudently, approach complex market and geo-politi cal challenges with responsible, thoughtf ul soluti ons, and pursue new opportuniti es to strengthen and protect all fund investments to the greatest extent possible. In closing, I want to thank our benefi ciaries and parti cipants for their conti nued support and trust, and the enti re Board and staff of the WSIB for their contributi ons throughout the year. In the following pages, we are pleased to present for your review the WSIB’s Annual Report for the fi scal year ending June 30, 2015. Sincerely, Marcie Frost, Chair Page 4 re BOARD ti MEMBERS AND Treasurer James L. McIn Frost Marcie Chair COMMITTEES Joel Sacks The WSIB is an independent Board of Trustees whose fi duciary responsibility is to manage reti rement and public fund investments with the highest standard of professional conduct. The Board’s primary investment objecti ve is to maximize returns at a prudent level of risk for the exclusive benefi t of fund parti cipants George Masten George Judy Kuschel and benefi ciaries. Individual Board members are recommended by the Chair and Fox Kelly Vice-Chair appointed by the Board to serve on any of the Board’s four diff erent committ ees to more effi ciently analyze investment and governance issues. Committ ee recommendati ons are brought to the Board for considerati on and a vote. ve Administrati ve Committ ee ti The Administrati ve Committ ee has oversight of general policy and organizati onal issues: personnel, budget, legislati ve program; legal services; nominati on of non- Representa Timm Ormsby Arlista D. Holman D. Arlista voti ng Board members, and other issues not included in other committ ee charters. Miller Stephen Audit Committ ee The Audit Committ ee has oversight of audits of Board acti viti es and operati ons: compliance, risk management, internal/external audits, fi nancial reporti ng, and internal controls. It is also responsible for development of policies and procedures tt for corporate governance and oversight of the Confl ict of Interest Policy. rey T. Seely T. rey ff Senator Hewi Mike Private Markets Committ ee S. Robert C.P.A. Nakahara, Je The Private Markets Committ ee develops strategy, provides oversight, and makes recommendati ons to the Board for investments in real estate, private equity, tangible assets, and other direct or private transacti ons. Public Markets Committ ee The Public Markets Committ ee develops strategy, provides oversight, and makes recommendati ons to the Board for public markets investments, including the Labor William A. Longbrake Richard Muhlebach & Industries (L&I) portf olio, fi xed income, and equity portf olios. David Nierenberg Page 5 EXECUTIVE MANAGEMENT AND CONSULTANTS Investment Accounti ng Data System Financial Control Systems Master Custodian Bank Theresa J. Whitmarsh – Executi ve Director State Street Bank Appointed in 2009 The WSIB’s executi ve director is appointed by the Board to oversee the staff , develop and recommend agency and investment policies for Board adopti on, and ensure adherence to state Insurance Portf olio Consultant policies and laws. Conning Asset Management Gary Bruebaker, CFA, CPA – Chief Investment Offi cer Private Equity, Real Estate, & Tangibles Appointed in 2001 Consultant Hamilton Lane Advisors, LLC, Courtland Partners, Ltd.

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