Ohio Public Employees Retirement System

Investment Plan 2009

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

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

OPERS 2009 Investment Plan Table of Contents Intentionally left blank

OPERS 2009 Investment Plan INVESTMENT PROGRAM

Report from the Dear Members of the OPERS Board of Trustees: Director of Investments 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.

OPERS 2009 Investment Plan page 1 INVESTMENT PROGRAM

Report from the The introduction of the target date lifecycle funds in the Defined Contribution Fund. This option Director of provides participants the opportunity of “one-stop shopping” to support their retirement plan objectives. Investments (continued) 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.

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Report from the Non-U.S. Equity Internal Management: Beta exposure to this asset class through the use of Director of derivatives will be evaluated. This initiative will allow the fund to internally manage our market Investments exposure to this asset class while reducing cost and being less dependent on external providers. (continued) 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.

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Report from the It should be noted that the estimated total cost to manage the OPERS asset base in 2009 will be Director of 25.9 basis points, or $197.42 million, slightly higher than the previous year. The cost assumes a long Investments term growth trend in the fund’s asset base. However, to the extent this bear market continues, there (continued) 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

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Organizational The Investment Division organizational chart is shown here. Further detail is shown within the Structure organizational charts included in the individual Resources and Initiatives sections.

Director of Investments

Fund Management / External Management U.S. Equity Investment Global Bonds (Deputy (Deputy Director of Internal Administration Director of Investments) Investments) Management and Operations

Defined Global Bonds Contribution Fund Public Internal Management Markets Management

Compliance Asset Private Core Allocation Markets

Risk Management U.S. Equity Index Oversight Management / Long Duration Private Trading Equity

Quantitative Infrastructure Short Duration Private Analysis Real Estate

Business Derivatives TIPS Management

Cash

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.

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Organizational Internal Governance Structure In addition to the organizational structure described above, the director of investments utilizes a variety (continued) 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.

Director of Investments

Current Markets** Cash/Asset Allocation** Investment Strategy***

U.S. Equity Global Bonds External Fund Investment Internal Internal Management Management Administration Management Management

Portfolio & Markets* Portfolio & Markets* External Public Portfolio & Markets* Compliance*** Managers*** Sectors** Credit** Fund Asset DC Fund Iran/Sudan Allocation & Strategy** Oversight*** Strategy # Structured Products*** Divestiture** Transitions # Broker Review***+ Strategy and Private Equity*** Outlook*** Internal Audit Real Estate*** Planning #

Meeting frequency key: Risk** * Meets daily ** Meets weekly *** Meets once or twice each month # Meets on an as-needed basis + Committee reports to the director of investments

The following committees and working groups have investment staff representation to facilitate communication and interaction across OPERS divisions.

Corporate Governance Working Group Managers Meeting Leadership Team Technology Council

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Resources 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:

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 311111212756 Current Staffing 210989745 Vacant Positions - To be filled in 2009 41131010 Year End 2009 Target Staffing 611101110755

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

OPERS 2009 Investment Plan page 7 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.

11 Largest State Plans as of 6/30/2008 12 Largest State Plans as of 6/30/2008

$250

Assets $200 ($ billions) $150

$100 Assets (billions) $50 0 50 100 150 200 250

InvestmentInves tment Staff S taff

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.

11 Largest State Plans as of 6/30/2008 Assets Investment Peers ($ millions) Staff 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

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Resources Staffing costs (continued) 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.

Estimated 2009 Total Compensation Costs ($ millions) Office Global of U.S. Equity Bonds Total Director Internal Internal External Fund Invest. Invest. Invest. Mgmt. Mgmt. Mgmt. Mgmt. Admin. Division 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

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.

Operating Budget less Total Compensation ($ millions) Office Global of U.S. Equity Bonds Total Director Internal Internal External Fund Invest. Invest. Invest. Mgmt. Mgmt. Mgmt. Mgmt. Admin. Division 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

OPERS 2009 Investment Plan page 9 INVESTMENT PROGRAM

Resources (continued) 2009 Operating Budget

Quotes & Data Audit/Legal/ Feeds Consulting 22.78% Services 45.74%

Analytics 11.29%

Office Supplies & Research IT Equipment Training & Travel 7.74% 5.14% 0.06% 7.24% Communications 0.00%

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.

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Resources External Management Fees (continued) 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.

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

Average Assets The table below shows a summary of actual and estimated assets for the Defined Benefit and Health Care Funds.

Actual and Estimated Assets Combined Defined Benefit and Health Care Funds ($ billions) Office Global of U.S. Equity Bonds Total Director Internal Internal External Fund Invest. Invest. Invest. Mgmt. Mgmt. Mgmt. Mgmt. Admin. Division 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

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.

OPERS 2009 Investment Plan page 11 INVESTMENT PROGRAM

Resources Total Costs (continued) 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.

Estimated 2009 Total Costs ($ millions) Office Global of U.S. Equity Bonds Total 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

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.

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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.

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) ($1.6) 12/31/09 Market Value ($ billions) $57.2 $64.5 $67.7

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.

OPERS 2009 Investment Plan page 13 FUND STRATEGIES

Defined Benefit Asset Allocation (continued) 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:

12/31/09 Peer Asset Class 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%

*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.

Actual Estimated AssetsAssets Target ($billions)($ 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%

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Defined Benefit Composition of Investment Portfolio (continued) 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.

Internal Management External Management Asset Class 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% *Peer group defined previously in the Investment Program Section.

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.

Active Management Passive Management Asset Class 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%

*Peer group defined previously in the Investment Program Section.

OPERS 2009 Investment Plan page 15 FUND STRATEGIES

Defined Benefit OPERS’ use of internal asset management provides many advantages including: (continued) 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.

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Defined Benefit Strategies (continued) 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.

2009 Return Assumptions Asse t Cla sse s Pe ssimistic Ba se 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 Sources of Risk Risk Ratio Ratio Policy 9.83% 0.16 Tactical 0.05% Active 0.50% 0.67 Total Risk 9.98% 0.19

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.

OPERS 2009 Investment Plan page 17 FUND STRATEGIES

Defined Benefit As stated in the Report from the Director of Investments, fund investments are measured and (continued) 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%

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Defined Benefit Active Return and Risk (continued) 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.

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

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.

OPERS 2009 Investment Plan page 19 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.

Health Care Fund 2009 Expected Asset Growth Pessimistic Base Optimistic Case Case Case 12/31/08 Market Value ($ billions) $12.3 $12.3 $12.3 Expected Total Return -4.76% 4.05% 8.37% Expected Investment Gain ($ billions) ($0.6) $0.5 $1.0 Expected Cash Flow ($ billions) ($0.6) ($0.6) ($0.6) 12/31/09 Market Value ($ billions) $11.2 $12.3 $12.8

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%.

page 20 OPERS 2009 Investment Plan FUND STRATEGIES

Health Care Asset Allocation (continued) The 2009 target asset allocation and ranges for the Health Care Fund are listed below:

12/31/09 Asset Class 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%

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.

Actual Estimated AssetsAssets Target ($billions)($ 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%

OPERS 2009 Investment Plan page 21 FUND STRATEGIES

Health Care Composition of Investment Portfolio (continued) The table below shows the Health Care Fund’s allocation between internal and external asset management by asset class.

Internal Management External Management Asset Class OPERS OPERS U.S. Equity 84.8% 15.3% Private Equity 0.0% 100.0% Non-U.S. Equity 0.0% 100.0% REITs 100.0% 0.0% Global Bonds 95.5% 4.5% Weighted Averages 70.6% 29.4%

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.

Active Management Passive Management Asset Class OPERS OPERS U.S. Equity 34.5% 65.5% Private Equity 100.0% 0.0% Non-U.S. Equity 79.7% 20.3% REITs 100.0% 0.0% Global Bonds 99.3% 0.7% Weighted Averages 76.0% 24.0%

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.

page 22 OPERS 2009 Investment Plan FUND STRATEGIES

Health Care OPERS’ use of internal asset management provides many advantages including: (continued) 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.

Across markets—Frequently, staff can leverage information garnered from one asset class to support decision-making in another asset class.

OPERS 2009 Investment Plan page 23 FUND STRATEGIES

Health Care Strategies (continued) 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.

2009 Return Assumptions Asse t Cla sse s Pe ssimistic Ba se 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 Sources of Risk Risk Ratio Ratio Policy 6.95% 0.17 Tactical 0.05% Active 0.40% 0.86 Total Risk 7.34% 0.21

page 24 OPERS 2009 Investment Plan FUND STRATEGIES

Health Care As stated in the Report from the Director of Investments, fund investments are measured and (continued) 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.

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%.

OPERS 2009 Investment Plan page 25 FUND STRATEGIES

Health Care Active Return and Risk (continued) 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.

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 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

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.

page 26 OPERS 2009 Investment Plan FUND STRATEGIES

Defined Asset Management Contribution 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.

Defined Contribution Fund Assets Asse ts Unde r Asse ts Unde r Asse ts Unde r Management Management Management ($ millions) ($ millions) ($ millions) OPERS Investment Options 7/31/06 7/31/07 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 OPERS Target 2015 Fund 0.0 0.0 0.0 OPERS Target 2020 Fund 0.0 0.0 0.0 OPERS Target 2025 Fund 0.0 0.0 0.0 OPERS Target 2030 Fund 0.0 0.0 0.0 OPERS Target 2035 Fund 0.0 0.0 0.0 OPERS Target 2040 Fund 0.0 0.0 0.0 OPERS Target 2045 Fund 0.0 0.0 0.0 OPERS Target 2050 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

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 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% OPERS Target 2015 Fund 15% +/- 2% 20% +/- 3% 16% +/- 2% 7% +/- 2% 10% +/- 2% 32% +/- 2% OPERS Target 2020 Fund 5% +/- 2% 20% +/- 2% 18% +/- 2% 8% +/- 2% 11% +/- 2% 38% +/- 2% OPERS Target 2025 Fund 0% +/- 0% 20% +/- 2% 20% +/- 2% 8% +/- 2% 12% +/- 2% 40% +/- 3% OPERS Target 2030 Fund 0% +/- 0% 17% +/- 2% 21% +/- 2% 9% +/- 2% 12% +/- 2% 41% +/- 3% OPERS Target 2035 Fund 0% +/- 0% 15% +/- 2% 22% +/- 2% 8% +/- 2% 13% +/- 2% 42% +/- 3% OPERS Target 2040 Fund 0% +/- 0% 13% +/- 2% 22% +/- 2% 8% +/- 2% 13% +/- 2% 44% +/- 3% OPERS Target 2045 Fund 0% +/- 0% 10% +/- 2% 23% +/- 2% 9% +/- 2% 13% +/- 2% 45% +/- 3% OPERS Target 2050 Fund 0% +/- 0% 10% +/- 2% 23% +/- 2% 9% +/- 2% 13% +/- 2% 45% +/- 3%

OPERS 2009 Investment Plan page 27 FUND STRATEGIES

Defined Composition of Investment Portfolios Contribution In 2002, OPERS staff and external consultants recommended a Defined Contribution Fund (continued) 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

Defined Contribution Fund Portfolio Structure 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 OPERS Target 2015 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2020 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2025 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2030 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2035 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2040 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2045 Fund Custom (2) Russell/Mellon Active Balanced OPERS Target 2050 Fund Custom (2) Russell/Mellon Active Balanced

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.

page 28 OPERS 2009 Investment Plan FUND STRATEGIES

Defined Plan Structure Contribution The Defined Contribution Fund is composed of investments, which are directed by the members of the (continued) 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.

OPERS 2009 Investment Plan page 29 FUND STRATEGIES

Defined Expected Fees Contribution The tables below show the expected asset management fees for each investment option and the (continued) 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.

Estimate of External Management Fees in Dollars and Basis Points Total for 2009 Estimated Estimated Average Assets Annual Fees Annual Fees OPERS Investment Options ($ millions) ($ millions) (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 OPERS Target 2010 Fund 6.5 0.01 20.5 OPERS Target 2015 Fund 6.5 0.01 19.6 OPERS Target 2020 Fund 16.3 0.03 19.1 OPERS Target 2025 Fund 16.3 0.03 18.8 OPERS Target 2030 Fund 16.3 0.03 18.7 OPERS Target 2035 Fund 16.3 0.03 18.7 OPERS Target 2040 Fund 32.7 0.06 18.7 OPERS Target 2045 Fund 32.7 0.06 18.6 OPERS Target 2050 Fund 16.3 0.03 18.6 Total $270.1 $0.47 17.4

Estimate of Fees by Manager in Dollars and Basis Points Average Estimated Estimated OPERS Investment Asse ts Annual Fees Annual Fees Options Underlying Investment Manager ($ millions) ($ millions) (bps) Stable Value Invesco Stable Value $17.8 $0.03 18 Goode Stable Value 7.7 0.03 35 Bond 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 Non-U.S. Stock 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

page 30 OPERS 2009 Investment Plan FUND STRATEGIES

Defined Strategies Contribution (continued) 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.

Asset Class and Target Date Fund Expected Return and Risk Asse t Cla sse s Re turn 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% Target Date Funds 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%

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

OPERS 2009 Investment Plan page 31 FUND STRATEGIES

Defined Active Return and Risk Contribution Active returns are estimated by applying the performance objectives listed on the subsequent table of (continued) 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.

Expected Active Return and Risk Target Date Funds Performance Tracking Information Objective Error Ratio OPERS Target Payout Fund 21 46 0.46 OPERS Target 2010 Fund 21 54 0.39 OPERS Target 2015 Fund 23 81 0.28 OPERS Target 2020 Fund 25 96 0.26 OPERS Target 2025 Fund 26 104 0.25 OPERS Target 2030 Fund 26 107 0.24 OPERS Target 2035 Fund 26 110 0.24 OPERS Target 2040 Fund 26 113 0.23 OPERS Target 2045 Fund 26 116 0.22 OPERS Target 2050 Fund 30 117 0.26

page 32 OPERS 2009 Investment Plan FUND STRATEGIES

Defined Performance Objectives and Risk Control Contribution The performance objectives and tracking errors listed below are neither predictions of, nor (continued) 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.

Schedule of Expected Performance and Volatility Target Average Assets Performance Tracking Target Under Management Target Objectives Error Information ($ millions) Allocation Benchmark (bps) (bps) 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 BGI Russell 1000 Index 46.3 100% Russell 1000 0 25 0.00 Total Large Cap $46.3 100% Russell 1000 0 25 0.00 OPERS Small Cap BGI Russell 2000 Index 17.3 100% Russell 2000 0 75 0.00 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

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

OPERS 2009 Investment Plan page 33 Intentionally left blank

page 34 OPERS 2009 Investment Plan 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.

OPERS 2009 Investment Plan page 35 ASSET CLASS STRATEGIES

Tactical Outlook Investment Outlook (continued) 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.

page 36 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Tactical Outlook Non-U.S. Equity Outlook (continued) 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.

OPERS 2009 Investment Plan page 37 ASSET CLASS STRATEGIES

Tactical Outlook Global Bonds Outlook (continued) 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.

page 38 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

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.

Categories Ranges Ranges

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.

OPERS 2009 Investment Plan page 39 ASSET CLASS STRATEGIES

U.S. Equity Performance Objectives and Risk Control (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.

page 40 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

U.S. Equity The portfolio composition and strategic allocation are managed to optimize the risk-return trade-off (continued) 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.

Schedule of Expected Performance and Tracking Error 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 0150.00 Internal R1000 493 1.6% Russell 1000 0350.00 Total Index 20,441 65.5% Russell 3000 5100.50 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

OPERS 2009 Investment Plan page 41 ASSET CLASS STRATEGIES

U.S. Equity Portfolio Composition and Fees (continued) 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.

Estimate of Internal/External and Active/Passive Composition 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%

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.

Schedule of Portfolio, Size and Estimated Fees Average Assets Under Estimated Estimated Management Annual Fee Annual Fee Benchmark ($ millions) ($ millions) (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

page 42 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

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.

Performance Objectives and Risk Control 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.

OPERS 2009 Investment Plan page 43 ASSET CLASS STRATEGIES

Opportunistic The following schedule details the tracking error target for each portfolio and the corresponding active (continued) return expectations.

Schedule of Expected Performance and Tracking Error Average % Performance Target Assets Under of Objectives Tracking Target Management Total (net of fees) Error Information ($ 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

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

Portfolio Composition and Fees 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.

Schedule of Portfolio, Size and Estimated Fees Average Assets Under Estimated Estimated Management Annual Fee Annual Fee Benchmark ($ millions) ($ millions) (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.

page 44 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

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.

Performance Objectives and Risk Control 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 against the 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 Liquidity Currency Vintage Risk Industry Manager Risk Geography Firm Risk Leverage

Securities and Restricted Investments Investment Types Ohio and Regional Co-Investments and Direct Placements Stock Distributions Hedge Funds Child Labor Derivatives Privatization Real Estate

OPERS 2009 Investment Plan page 45 ASSET CLASS STRATEGIES

Private Equity Portfolio Composition (continued) 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:

Geographic Distribution by Market Value as of Type Distribution by Market Value as of June 30, 2008 June 30, 2008 13% 34% 10%

66% 77%

Domestic International Corporate Finance Venture Capital Special Situations

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

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%

page 46 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Private Equity Targeted Portfolio Structure (continued) 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.

Target Portfolio Structure

15% 10% Corporate Finance Venture Capital Special Situations 75%

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%.

Target Portfolio Geographic Exposure

CF Domestic 0% 5% VC Domestic SS Domestic 30% 45% CF International VC International 10% 10% SS International

OPERS 2009 Investment Plan page 47 ASSET CLASS STRATEGIES

Private Equity Investment Pacing (continued) 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

1,000

900 5.8% 5.3% 800

700 4.3% 4.4%

600 3.2% 500 3.4%

$ in Millions 400 2.1% 300 2.1% 1.4% 200 0.7% 0.7% 0.8% 0.6% 1.0% 100 0.2% 0 0.0% 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E

page 48 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Private Equity The graph below illustrates aggregate commitments and fair market value for the Private Equity (continued) portfolio, based on the actual and projected commitment schedule.

Projected Fair Market Value and Aggregate Commitments

0.00 9.00 7.95 8.00 6.95 7.00 5.95 6.00 4.75 5.00 3.80 4.02 4.00 3.45 2.88 2.50 2.68 3.00 2.12 2.25 2.00 1.42 1.39 0.71 0.79 1.00 0.25 0.26 0.33 0.45 0.00 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E

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

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.

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.

OPERS 2009 Investment Plan page 49 ASSET CLASS STRATEGIES

Private Equity Commitment Size (continued) This table shows the typical commitment range for primary partnerships and discretionary mandates.

Typical Commitments

Type Typical Commitment Range ($ millions)

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:

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

*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.

Discretionary Mandate Commitment ($ millions) Year

Broad Market $100 2004 Venture Capital $125 2004, 2007 Ohio/Midwest $100 2005, 2007 Total $325

page 50 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Private Equity General Partners (continued) 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.

OPERS 2009 Investment Plan page 51 ASSET CLASS STRATEGIES

Private Equity Asset Management Fees (continued) 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.

Estimate of Management Fees - 2009 ($ millions) 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

page 52 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

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:

Target Portfolio Allocation 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%

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.

OPERS 2009 Investment Plan page 53 ASSET CLASS STRATEGIES

Non-U.S. Equity The current Non-U.S. Equity program has: (continued) 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.

page 54 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Non-U.S. Equity Performance Objectives and Risk Control (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:

n Schedule of Expected Performance and Tracking Error Average % 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

OPERS 2009 Investment Plan page 55 ASSET CLASS STRATEGIES

Non-U.S. Equity Portfolio Composition and Fees (continued) The structure and risk profile of the program has remained virtually the same as that outlined in the 2008 Investment Plan.

Estimate of Internal/External and Active/Passive Composition Est. Mid-Year 2008 Est. Mid-Year 2009 Active Passive Total Active Passive Total 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%

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

Schedule of Portfolio, Size and Estimated Fees Average Assets Under Estimated Estimated Management Annual Fee Annual Fee Benchmark ($ millions) ($ millions) (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

page 56 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Real Estate – Investment Strategy Private Markets 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.

OPERS 2009 Investment Plan page 57 ASSET CLASS STRATEGIES

Real Estate – Performance Objective Private Markets The Real Estate Policy establishes the performance objective of the private market real estate (continued) 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.

page 58 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Real Estate – Anticipated Separate Account Investment Activity for 2009 ($ millions) Private Markets Projected Market Value 2009 2009 2009 Market Value* (continued) Property Type June 30, 2008 Dispositions Income Acquisitions December 31, 2009 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

* Includes 2nd half 2008 acquisitions, dispositions and cumulative appreciation/(depreciation) as of 12/31/2009. (subject to change)

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.

Anticipated Open End Fund Investment Activity for 2009 ($ millions) 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)

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.

OPERS 2009 Investment Plan page 59 ASSET CLASS STRATEGIES

Real Estate – Anticipated Closed End Fund Investment Activity for 2009 ($ millions) Private Markets Projected Market Value 2009 2009 2009 Market Value* (continued) 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

* Includes 2nd half 2008 acquisitions, dispositions and cumulative appreciation/(depreciation) as of 12/31/2009. ** Income from closed end funds not meaningful (subject to change)

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.

Anticipated Closed End Fund Commitment Activity for 2009 ($ millions)

Domestic International Total Amount $75 - $125 $125 - $175 $225 - $275 Relationships 1 - 3 2 - 4 4 - 6 (subject to change)

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.

Anticipated Total Private Market Real Estate Investment Activity for 2009 ($ millions) Projected Market Value 2009 2009 2009 Market Value* Property Type June 30, 2008 Dispositions Income Acquisitions December 31, 2009 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

* Includes 2nd half 2008 acquisitions, dispositions and cumulative appreciation/(depreciation) as of 12/31/2009. (subject to change)

page 60 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Real Estate – Anticipated Sources and Uses of Capital in 2009 ($ millions) Private Markets (continued) Capital Sources Capital Uses Stable Portfolio Dispositions $352 Acquisitions $387 Income $139 Total Sources $491 Total Uses $387 (subject to change)

Property Type The graph below shows the projected portfolio construction by property type as of year-end 2009.

Projected 2009 Property Type Exposure and Policy Ranges

50% 50%

40% 40%

30% 30%

20% 20%

Percentage 10% 10%

0% 0% Apartment Industrial Office Retail Other

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%

OPERS 2009 Investment Plan page 61 ASSET CLASS STRATEGIES

Real Estate – Strategic Intangibles Private Markets The following items describe additional approaches for maintaining a competitive Real Estate (continued) 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.

Estimate of Management Fees - 2009 ($ millions) Estimated Average Portfolio Market Value $4,469 Estimated Percentage in Separate Accounts 51% Estimated Average Fee 0.80% Estimated Fees to Separate Accounts $18.23 Estimated Percentage in Open-End Funds 17% Estimated Average Fee 1.00% Estimated Fees to Open-End Funds $7.60 Estimated Percentage in Closed-End Funds* 32% Estimated Average Fee 1.50% 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

page 62 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Real Estate – Strategy Public Markets 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 Common Stock Portfolio Composition Exchange-Trade Funds Single Security Risk American Depository Receipts Warrants Initial Public Offerings Preferred Securities Cash & Cash Equivalents, as necessary

OPERS 2009 Investment Plan page 63 ASSET CLASS STRATEGIES

Real Estate – Public market real estate has a targeted 1% allocation to the Defined Benefit Fund and a targeted 6% Public Markets allocation to the Health Care Fund. The public market real estate allocation serves as the only real (continued) 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.

Schedule of Expected Performance and Tracking Error Average % Performance Target Assets Under of Objectives Tracking Target Management Total (net of fees) Error Information ($ 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 Portfolio Composition and Fees

Estimate of Internal/External and Active/Passive Composition Est. Mid-Year 2007 Est. Mid-Year 2008 Active Passive Total Active Passive Total 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%

Average Assets Under Estimated Estimated Management Annual Fee Annual Fee Benchmark ($ millions) ($ millions) (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

page 64 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

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.

OPERS 2009 Investment Plan page 65 ASSET CLASS STRATEGIES

Global Bonds The manager line-up is comprised of four managers: Shenkman, Fort Washington, Goldman (continued) 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.

Performance Objectives and Risk Control 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.

page 66 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Global Bonds Schedule of Expected Performance and Tracking Error (continued) 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).

OPERS 2009 Investment Plan page 67 ASSET CLASS STRATEGIES

Global Bonds Portfolio Composition and Fees (continued) The following is a summary of the allocation of the Global Bonds portfolio by internal and external managers:

Estimate of Internal/External and Active/Passive Composition Est. Mid-Year 2008 Est. Mid-Year 2009 Active Passive Total Active Passive Total 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%

The following table details the size of, and the fees associated with, each portfolio.

Schedule of Portfolio, Size and Estimated Fees Average Assets Under Estimated Estimated Management Annual Fee Annual Fee Benchmark ($ millions) ($ millions) (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.

page 68 OPERS 2009 Investment Plan ASSET CLASS STRATEGIES

Global Bonds Securities Lending (continued) 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:

Securities Lending Structure 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

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.

OPERS 2009 Investment Plan page 69 Intentionally left blank

page 70 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Office of the Organizational Structure Director of The current organizational structure is as follows: Investments

Jennifer Hom Director of Investments

Mary Ann Kabbaz Executive Assistant

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 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 Office of the Director of Investments unit.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 0.94 Benefits 0.31 Incentive Compensation 0.10 Total Compensation 1.35 Average Assets ($ billions) NA Cost in Basis Points NA

OPERS 2009 Investment Plan page 71 RESOURCES AND INITIATIVES

Office of the Operating Budget Director of The Office of the Director of Investments unit’s 2008 and 2009 operating budgets and their Investments differences are illustrated in the table below. The Office of the Director of Investments unit continues (continued) to find ways to be more efficient with its resources and to achieve the investment objectives detailed in this annual investment plan.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total 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%

Total Costs The following table lists the estimated total costs for the Office of the Director of Investments.

Estimated 2009 Total Costs ($ millions) Total Compensation 1.35 Operating Budget less Compensation 0.72 Manager Fees - Total Costs 2.07 Average Assets ($ billions) NA Costs in Basis Points NA

page 72 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

U.S. Equity Internal Organizational Structure Management The current organizational structure is as follows:

Deryck Lampe Senior Portfolio Manager

Scott Murray Kevin Martin Portfolio Manager Senior Analyst Chris Gregson Senior Analyst

Tim Swingle Steve Barker Joe Boushelle Jake Lake Senior Analyst Senior Analyst Equity Analyst Equity Analyst

Mike Parker Prabu Kumaran Equity Analyst Senior Analyst

Vacant Equity Analyst

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.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 1.50 Benefits 0.55 Incentive Compensation 0.33 Total Compensation 2.38 Average Assets ($ billions) 7.38 Cost in Basis Points 3.2

OPERS 2009 Investment Plan page 73 RESOURCES AND INITIATIVES

U.S. Equity Internal Operating Budget Management The U.S. Equity Internal Management unit’s 2008 and 2009 operating budgets and their differences (continued) 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.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total 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%

Total Costs The following table lists the estimated total costs for managing the U.S. Equity Internal Management unit.

Estimated 2009 Total Costs ($ millions) Total Compensation 2.38 Operating Budget less Compensation 0.55 Manager Fees - Total Costs 2.93 Average Assets ($ billions) 7,381 Costs in Basis Points 4.0

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.

page 74 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Global Bonds Organizational Structure Internal The current organizational structure is as follows: Management Bill Miller Deputy Director of Investments

Senior Portfolio Manager Vacant

Mark Ehresman Eric France Jerry May Chris Rieddle Senior Investment Portfolio Manager Cash/Securities Portfolio Manager Analyst Lending Manager

Todd Soots Erik Cagnina Teresa Black Senior Investment Portfolio Manager Cash/Securities Analyst Lending Analyst

Tony Enderle JoAnn Yocum Senior Investment Investment Assistant II Analyst

Nick Kotsonis Investment Analyst

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.

OPERS 2009 Investment Plan page 75 RESOURCES AND INITIATIVES

Global Bonds Additional portfolio managers are responsible for the mortgage-backed securities, commercial Internal mortgage-backed securities and asset-backed securities sectors. These two individuals are Management responsible for relative value within the structured sectors, individual security analysis and trading of (continued) 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.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 1.18 Benefits 0.47 Incentive Compensation 0.37 Total Compensation 2.02 Average Assets ($ billions) 18.38 Cost in Basis Points 1.1

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.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total Audit/Legal/Consulting Services $0 $0 $0 0.0% 0.0% Quotes & Data Feeds $274,200 $372,900 $98,700 36.0% 49.2% Research Services $211,360 $196,000 ($15,360) -7.3% 25.9% Analytics $130,000 $120,000 ($10,000) -7.7% 15.8% Communications $0 $0 $0 0.0% 0.0% 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%

page 76 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Global Bonds Total Costs Internal The following table lists the estimated total costs for managing the Global Bonds Internal Management Management unit. (continued) Estimated 2009 Total Costs ($ millions) Total Compensation 2.02 Operating Budget less Compensation 0.76 Manager Fees - Total Costs 2.78 Average Assets ($ billions) 18,378 Costs in Basis Points 1.5

OPERS 2009 Investment Plan page 77 RESOURCES AND INITIATIVES

External Organizational Structure Management The current organizational structure is as follows:

Vacant Deputy Director of Investments

Vacant Investment Assistant II

DeAnne Rau Brad Sturm Vacant Portfolio Manager Portfolio Manager Portfolio Manager

Dan Sarver Stephen Stuckwisch Louis Darmstadter Portfolio Manager Portfolio Manager Portfolio Manager

John Blue Lewis Tracy Samir Sidani Senior Investment Senior Investment Senior Investment Analyst Analyst Analyst

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.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 1.66 Benefits 0.60 Incentive Compensation 0.35 Total Compensation 2.61 Average Assets ($ billions) 29.96 Cost in Basis Points 0.9

page 78 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

External Operating Budget Management The External Management unit’s 2008 and 2009 operating budgets and their differences are illustrated (continued) 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.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total 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% Research Services $50,000 $60,000 $10,000 20.0% 2.5% Analytics $66,000 $80,000 $14,000 21.2% 3.4% Communications $0 $0 $0 0.0% 0.0% Information Technology $30,300 $30,300 $0 0.0% 1.3% Office Equipment & Supplies $217 $200 ($17) 100.0% 0.0% Training & Travel Expenses $137,928 $126,658 ($11,270) -8.2% 5.4% Total $2,244,445 $2,357,158 $112,713 5.0% 100.0%

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.

Estimated 2009 Total Costs ($ millions) 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

OPERS 2009 Investment Plan page 79 RESOURCES AND INITIATIVES

External Initiatives Management (continued) 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.

page 80 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Fund Management Organizational Structure The current organizational structure is as follows:

Bill Miller Deputy Director of Investments

J.G. Lee Erick Weis Joan Stack Fund Manager Fund Manager Trading Manager

Matt Sherman Senior Equity Trader Xinyang Gu Quantitative / Research Roger Tong Quantitative / Research Cheryl Cade Investment Assistant II Vacant Investment Assistant II 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.

OPERS 2009 Investment Plan page 81 RESOURCES AND INITIATIVES

Fund Management The Deputy Director of Investments reports directly to the Director of Investments and is responsible (continued) 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.

page 82 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Fund Management Staffing Costs (continued) 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 Fund Management unit.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 1.24 Benefits 0.46 Incentive Compensation 0.30 Total Compensation 2.00 Average Assets ($ billions) 20.44 Cost in Basis Points 1.0

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.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total Audit/Legal/Consulting Services $50,000 $50,000 $0 0.0% 4.3% Quotes & Data Feeds $515,839 $623,200 $107,361 20.8% 53.2% Research Services $63,000 $85,000 $22,000 34.9% 7.3% Analytics $370,100 $293,500 ($76,600) -20.7% 25.0% Communications $0 $0 $0 0.0% 0.0% Information Technology $107,900 $68,800 ($39,100) -36.2% 5.9% Office Equipment & Supplies $1,100 $800 ($300) -27.3% 0.1% Training & Travel Expenses $54,330 $50,800 ($3,530) -6.5% 4.3% Total $1,162,269 $1,172,100 $9,831 0.8% 100.0%

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.

Estimated 2009 Total Costs ($ millions) Total Compensation 2.00 Operating Budget less Compensation 1.17 Manager Fees - Total Costs 3.17 Average Assets ($ billions) 20,441 Costs in Basis Points 1.6

OPERS 2009 Investment Plan page 83 RESOURCES AND INITIATIVES

Fund Management Initiatives (continued) 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.

page 84 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Investment Organizational Structure Administration The current organizational structure is as follows:

Roger Fox Investment Administration Manager

Vacant Investment Administration Technician

Alan Davidson Dan German Kimberly Van Gundy Melissa Stought Compliance Manager Risk Manager Investment Investment Administration Analyst Administration Analyst

Pat Edgington Investment Reporting Manager

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.

OPERS 2009 Investment Plan page 85 RESOURCES AND INITIATIVES

Investment Staffing Costs Administration Assuming full staffing levels at year-end 2009, the chart below details the annual cost of salaries, (continued) benefits and incentive compensation estimated to be paid in 2009 for the Investment Administration unit.

Estimated 2009 Total Compensation Costs ($ millions) Salaries 0.57 Benefits 0.18 Incentive Compensation 0.05 Total Compensation 0.80 Average Assets ($ billions) NA Cost in Basis Points NA

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.

Operating Budget less Total Compensation Percent 2008 Budget 2009 Budget Change $ Change % of Total 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% Research Services $48,000 $50,000 $2,000 4.2% 10.1% Analytics $125,000 $130,000 $5,000 4.0% 5.9% Communications $0 $0 $0 0.0% 0.0% 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%

page 86 OPERS 2009 Investment Plan RESOURCES AND INITIATIVES

Investment Total Costs Administration The following table lists the estimated total costs for managing the Investment Administration unit. (continued) Estimated 2009 Total Costs ($ millions) Total Compensation 0.80 Operating Budget less Compensation 0.47 Manager Fees - Total Costs 1.28 Average Assets ($ billions) NA Costs in Basis Points NA

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.

OPERS 2009 Investment Plan page 87 Intentionally left blank

page 88 OPERS 2009 Investment Plan APPENDIX A

Consultants’ The Townsend Group International Real Estate Consultants Reviews

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

OPERS 2009 Investment Plan page 89 APPENDIX A

Consultants’ The Townsend Group International Real Estate Consultants Reviews (continued)

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

page 90 OPERS 2009 Investment Plan APPENDIX A

Consultants’ Hamilton Lane Private Equity Consultants Reviews (continued)

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.

One Belmont Avenue, Ninth Floor • Bala Cynwyd, Pennsylvania 19004 P 610 934 2222 • F 610 617 9853 • www.hamiltonlane.com

OPERS 2009 Investment Plan page 91 APPENDIX A

Consultants’ Mercer Investment Consulting Reviews (continued)

page 92 OPERS 2009 Investment Plan APPENDIX B

Economic Outlook Mercer Investment Consulting – Economic Prospects

OPERS 2009 Investment Plan page 93 APPENDIX B