This document is made available electronically by the Minnesota Legislative Reference Library as part of an ongoing digital archiving project. http://www.leg.state.mn.us/lrl/lrl.asp Minnesota State Board of Investment 2010 Annual Report Minnesota State Board of Investment 60 Empire Drive Suite 355 St. Paul, MN 55103 Phone: 651-296-3328 Fax: 651-296-9572 E-mail: [email protected] Website: www.sbi.state.mn.us 2010 Annual Report Table of Contents Introduction .......................................................................................................... 1 Funds Under Management ................................................................................... 2 Combined Funds ................................................................................................... 4 Investment Pools ................................................................................................ 11 Supplemental Investment Fund .......................................................................... 25 State Deferred Compensation Plan (457b Plan) ................................................. 35 Assigned Risk Plan ............................................................................................. 38 Permanent School Fund ...................................................................................... 40 Environmental Trust Fund .................................................................................. 42 Closed Landfill Investment Fund ....................................................................... 44 Cash Management and Related Programs .......................................................... 45 Legislative Investment Initiatives ....................................................................... 47 Investment Restrictions ...................................................................................... 49 Proxy Voting ...................................................................................................... 51 Investment Manager Summaries ........................................................................ 54 Trading Data ....................................................................................................... 83 Section II ............................................................................................................ 93 Auditor’s Report ................................................................................................. 94 Financial Statements ........................................................................................... 96 Footnotes to Financial Statements ...................................................................... 98 Retirement Plans Statements ............................................................................ 104 Non Retirement Funds Statements ................................................................... 122 Manager Fees ................................................................................................... 124 This annual report can be accessed on our website at www.sbi.state.mn.us MINNESOTA December, 2010 STATE BOARD OF INVESTMENT The Minnesota State Board of Investment (SBI) is pleased to present its report for the fiscal year ending June 30, 2010. Investment Environment During fiscal year 2010, the U.S. equity markets returned 15.7% as measured by the Russell 3000 Index. Equity markets rallied during the first three quarters of the year as the economy showed signs of recovery. During the fourth quarter, macroeconomic fears returned with the potential sovereign debt crisis in Europe, fear of a continued economic slowdown in China, continued high unemployment in the U.S. and uncertainty over increased regulation. The Morgan Stanley Capital International (MSCI) All Country World Index excluding the Board Members United States (ACWI ex U.S.), which represents the developed and emerging international Governor markets outside the U.S., returned 10.4% for the fiscal year. The international markets Tim Pawlenty rallied early, but were also affected by the potential sovereign debt crisis and fears of State Auditor economic slowdown throughout the world. Rebecca Otto Secretary of State The U.S. bond market, as measured by the Barclays Capital Aggregate Bond Index, rose Mark Ritchie 9.5% during the fiscal year. As the economy showed signs of recovery during the first three quarters of the fiscal year, the bond market rallied. The rally ended in the fourth Attorney General Lori Swanson quarter due to the European debt concerns, and uncertainty over financial reforms. Fiscal Year 2010 Changes and Results At the end of fiscal year 2010, the operations of the Minneapolis Employees Retirement Fund (MERF) were merged into PERA. For more details on the merger, see page 5. Executive Director Howard Bicker SBI Results Within this investment environment, the retirement assets under the Board’s control performed as follows: • The Combined Funds returned 15.2% during fiscal year 2010. Over the latest ten year period, the Funds experienced an annualized return of 2.9%. (See page 8.) On June 30, 2010, assets under management totaled $52.5 billion. This total is the aggregate of numerous separate pension funds, trust funds and cash accounts, each with different investment objectives. In establishing a comprehensive management program, 60 Empire Drive the Board develops an investment strategy for each fund which reflects its unique Suite 355 St. Paul, MN 55103 requirements. The primary purpose of this annual report is to communicate the (651) 296-3328 investment goals, policies and performance of each fund managed by the Board. FAX (651) 296-9572 Through the investment programs presented in this report, the Minnesota State Board of E-mail: Investment seeks to enhance the management and performance of the assets under its [email protected] www.sbi.state.mn.us control. Sincerely, An Equal Opportunity Employer Howard Bicker Executive Director State Board of Investment Governor Tim Pawlenty, Chair State Auditor Rebecca Otto Secretary of State Mark Ritchie State Attorney General Lori Swanson Investment Advisory Council The Legislature has established Members of the Council a seventeen member Investment Advisory Council (IAC) to Jeffery Bailey, Chair Tom Hanson advise the Board and its staff on Director, Benefits Finance Commissioner investment-related matters. Target Corporation Minnesota Management & Budget The mission statement of the Malcolm W. McDonald IAC is: The IAC fulfills its Vice Chair Heather Johnston statutory duty to the SBI by Director & Corporate Secretary Governor’s Appointee providing advice and (Retired) Active Employee Representative independent due diligence Space Center, Inc. review of the investment policy P. Jay Kiedrowski and implementation Frank Ahrens, II Senior Fellow recommendations that guide the Governor’s Appointee Humphrey Institute SBI’s investment of assets. Active Employee Representative University of MN The Board appoints ten David Bergstrom LeRoy Koppendrayer members experienced in finance Executive Director Governor’s Appointee and investment. These members Mn. State Retirement System Retiree Representative traditionally have come from the Minneapolis and St. Paul John E. Bohan Judith W. Mares corporate investment V.P., Pension Investments Chief Investment Officer community. (Retired) ATK Grand Metropolitan- Pillsbury The Commissioner of Minnesota Gary Martin Management & Budget and the Kerry Brick V.P., Pension Investments Executive Directors of the three Manager, Pension Investments SUPERVALU, Inc. statewide retirement systems are Cargill, Inc. permanent members of the Gary R. Norstrem Council. Dennis Duerst Treasurer, (Retired) Director, Benefits Funds City of St. Paul Two active employee Investment representatives and one retiree 3M Company Mary Vanek representative are appointed to Executive Director the Council by the Governor. Douglas Gorence Public Employees Retirement Chief Investment Officer Association All proposed investment policies U of M Foundation Investment are reviewed by the IAC before Advisors they are presented to the Board for action. Laurie Fiori Hacking Executive Director Teachers Retirement Association As of November 2010 Staff, Consultants & Custodians Howard Bicker Executive Director Teresa J. Richardson Assistant Executive Director Investment Staff Administrative Staff Consultants Public Equities Finance and Accounting General Consultant Tammy Brusehaver Steve Schugel Nuveen Investment Solutions, Mgr., Domestic Equity Administrative Director Inc. Chicago, Illinois Patricia Ammann William J. Nicol Portfolio Mgr., Domestic Equity Accounting Director Special Projects Consultant Pension Consulting Alliance Stephanie Gleeson Kathy Leisz Studio City, California Mgr., International Equity Information Technology Specialist Fixed Income and Nancy L. Wold Internal Investments Accounting Officer, Senior Michael J. Menssen Mgr., Long-Term Debt Wendy Murphy Accounting Officer, Custodian Banks John J. Kirby Intermediate Portfolio Mgr., Long-Term Debt Retirement and Trust Funds Jason White State Street Bank & Trust Co. Accounting Officer, Boston, Massachusetts Alternative Assets Intermediate John N. Griebenow State Cash Accounts Mgr., Alternative Investments Wells Fargo & Company Support Services St. Paul, Minnesota Michael McGirr Charlene Olson Portfolio Mgr., Alternative Administrative Assistant to the Investments Executive Director Cash Management Carol Nelson Steven Kuettel Office Administrative Specialist, Mgr., Short-Term