Investment Section
Report by Investment Consultant
Letter from TCRS Chief Investment Officer
Statutory Investment Authority
Investment Performance Review
Asset Allocation
Largest Holdings
Investment Summary
Schedules of Investment Fees and Commissions

 REPORT BY INVESTMENT CONSULTANT

October 8, 2018
Attn: Mr. Jamie Wayman, Director
Tennessee Consolidated Retirement System
Andrew Jackson Building
Nashville, TN 37243-0230
Re: 2018 CAFR Performance Letter
Dear Jamie:
For the year ended June 30, 2018, TCRS earned a return of 8.19%, beating its policy index (7.76%) and its as-allocated index
(7.40%). Strong absolute returns in Private Equity (19.63%), U.S. Equity (14.97%), Real Estate (10.28%), and International
Equity (7.66%) were most additive to the portfolio for the fiscal year, whereas, U.S. Fixed Income (-0.47%) detracted from
returns. TCRS met or exceeded all of its benchmarks at the asset class level except for Emerging Markets Equity.
During a fiscal year where equity returns remained strong and risk was rewarded across markets, TCRS’ generally conservative
positioning and long duration bias in fixed income impacted its near-term peer rankings. Longer term, the Plan remained
above median in its peer group (InvestorForce’s Public DB > $1 billion) for the three, five and ten-year periods ended June.
As of June 30, 2018, the System’s asset allocation and one-year respective returns were:
Asset Class
Domestic Equity
Canada Index Fund
International Developed Market
International Emerging Market
Domestic Fixed Income
Inflation-Indexed Fixed Income
Real Estate
Private Equity
Strategic Lending
Cash and Cash Equivalents
Total

% of Assets
32.4%
2.1%
13.9%
3.9%
26.4%
2.4%
8.3%
5.0%
5.0%
0.6%
100.0%

One Year Return
14.97%
10.12%
9.70%
1.00%
-0.47%
2.29%
10.28%
19.63%
7.34%
1.16%
8.19%

Important events in the U.S. occurring during fiscal year 2018 included significant corporate tax reform, the beginnings of an
unwind of quantitative easing and the initiation of changes to trade policy. International markets, particularly in the second
half of the fiscal year, faced a strong U.S. Dollar and more moderate economic and earnings growth. Short-term U.S. Treasury
yields rose steadily over the fiscal year, outpacing increases in longer term yields and resulting in a flat yield curve.
TCRS’ well-funded, cost-effective Plan incorporates sensible diversification to weather a variety of market environments.
Verus anticipates an eventual end to the 9+ year current economic expansion, and we are more closely monitoring the
portfolio’s ability to withstand a less friendly investment environment.
Best Regards,
Margaret S. Jadallah
Managing Director

SEATTLE

 

LOS ANGELES

 

SAN FRANCISCO

 

VERUSINVESTMENTS.COM

Investment Section - 57

 LETTER FROM TCRS CHIEF INVESTMENT OFFICER
DAVID H. LILLARD, JR.
STATE TREASURER
MICHAEL BRAKEBILL
CHIEF INVESTMENT OFFICER

STATE OF TENNESSEE

TREASURY DEPARTMENT
STATE CAPITOL
NASHVILLE, TENNESSEE 37243-0225

MARYJO PRICE
CHIEF OPERATING OFFICER
JAMIE WAYMAN
DIRECTOR OF TCRS

November 7, 2018
Dear Members,
I am pleased to present the Investment Section of the TCRS Comprehensive Annual Financial Report for the fiscal
year ended June 30, 2018.
The Tennessee Retiree Group Trust (TRGT) was established in 2015 and contained $49.8 billion in assets as of June
30, 2018. Assets for the TCRS are comingled in the TRGT for investment purposes and TCRS represents $49.6
billion, or 99.73%, of the TRGT.
TRGT assets are invested to preserve principal value, to achieve a superior rate of return within acceptable risk
levels and to provide the liquidity necessary to pay beneficiaries in a timely manner. The portfolio is diversified
among domestic and international stocks and bonds, real estate, private equity and short term securities. A
diversified portfolio is used to manage risk and to minimize significant exposure to unpredictable events. Staff
consults with the TRGT general investment consultant periodically to determine the optimal, long-term mix of
assets to best meet the plan’s investment objectives. The investment performance for TCRS was computed using a
market value based, time-weighted rate of return and is based on it being a sub-component of the TRGT.
The 2018 fiscal year was a good year for investors and the TRGT gained 8.19% for the fiscal year with an annualized
gain of 8.35% for the trailing five-year period. The one-year and the five-year returns each exceeded the actuarial
required return and the portfolio was managed in a manner to protect capital in an adverse environment.
The experienced investment staff of the Tennessee Treasury is committed to providing superior investment returns
in a financially-sound manner with the highest ethical and professional standards. With the leadership of our
Board, our Treasurer and our dedicated staff, this goal will be met.
Sincerely,

Michael Brakebill
Chief Investment Officer

58 - Investment Section

 STATUTORY INVESTMENT AUTHORITY
Statutory Investment Authority
The investment authority for the Board of Trustees
of TCRS is set out in Tennessee Code Annotated,
Section 8-37-104. Pursuant to this authority and the
investment terms, conditions and limitations outlined
therein, the Board of Trustees approves the TCRS’
investment policy. The Board approved TCRS’ revised
and restated investment policy on November 18, 2016.
The Tennessee Retiree Group Trust (TRGT) was
established in 2015 by a statutory enactment of the
Tennessee General Assembly. The provisions of the
TRGT are codified in Tennessee Code Annotated (TCA)
Title 8, Chapters 34-37. Pursuant to this statute the
Tennessee Consolidated Retirement System (TCRS)
and its Board of Trustees with the State Treasurer
(Treasurer) as custodian, authorized by TCA 8-37-104
adopted this group trust for the purpose of pooling
funds of TCRS with other assets in the custody of
the Treasurer, solely for investment purposes. The
Custodian shall be responsible for the managing and
directing the investment of the Group Trust Funds in
accordance with the investment policies of the TCRS.
TCRS’ primary investment objective, as set by the
Board, is to establish a stable, diversified investment
portfolio that, in the long-term, will meet or exceed
the assumed actuarial rate of return, as adopted by the
Board, in order to provide sufficient liquidity to pay
beneficiaries in a timely manner.
TCRS’ policies and the strategies implemented by the
Treasury Investment Division staff serve to benefit
plan members in several ways. The emphasis on a
conservative asset allocation and high quality securities
helps to ensure the soundness of the system and the
ability to provide the needed funds upon a member’s
retirement.
Funds in the retirement system are actively managed,
primarily by the Treasury Investment Division,
through a diversified portfolio of high-quality
domestic and international bonds, domestic and
international stocks, real estate, private equity, and
short-term instruments. Pursuant to Tennessee Code
Annotated, Section 8-37-114, the Treasury Investment
Division engages outside investment managers. In
those instances, the Investment Division endeavors
to use emerging investment managers to the greatest
extent feasible within the bounds of financial and
fiduciary prudence, as prescribed under Tennessee

Code Annotated, Section 8-37-113. During fiscal
year 2017-2018, no assets were under the control of
emerging investment managers.
To assist in the fiduciary responsibility for managing
the TRGT portfolio during fiscal year 2018, Verus
served as the general investment consultant for
TRGT. The Townsend Group served as the real estate
investment consultant and Torrey Cove served as the
private equity consultant.
State Street Bank and Trust Company was the master
bank custodian for TRGT, providing safekeeping
and accounting services for the investment portfolio
during fiscal year 2018.
Cost of Investment Operation
The cost to operate the investment program for
TRGT is about thirteen basis points (0.13%). This cost
includes the cost of personnel, operational cost, master
bank custodian cost, record keeping, and external
manager fees. Commission costs for publicly listed
securities and management fees for private equity
investments are capitalized, meaning commission
costs and management fees are not included in the
expenses, but are recorded in the value of the assets.
Recent peer comparisons of investment management
fees and expenses indicate the investment program is
managed very cost effectively.
Performance Measurement
Verus provided performance measurement for the
TRGT, which had a total return of 8.19% during the
fiscal year. Private Equity and Domestic stocks led the
performance for the year with a return of 19.63% and
14.97% respectively. Fixed income returns trailed due
to rising interest rates. The Domestic Fixed Income
portfolio fell 0.47% while the Inflation Hedged Bond
fund rose 2.29%. International equity returns were
strong with a return of 10.12% for the Canadian equity
portfolio and 7.66% for the International portfolio.
International returns did lag domestic returns due to
a rising dollar. The Real Estate portfolio gained 10.28%
for the year which was considerably better than
the 7.13% return for the benchmark. Similarly, the
Strategic Lending portfolio gained 7.34% versus 3.64%
for the benchmark.

Investment Section - 59

 INVESTMENT PERFORMANCE REVIEW

TRGT INVESTMENT PERFORMANCE REVIEW
Periods Ending June 30, 2018
Annualized Returns
Current Year

3-Year

Pension Plan Portfolio

8.19%

7.41%

8.35%

Policy Index (1)

7.76%

7.50%

8.37%

As-Allocated Index

7.40%

7.34%

8.14%

Domestic Equity

14.97%

10.42%

12.90%

S & P 1500 Index

14.04%

11.90%

13.40%

Canadian Equity

10.12%

5.93%

5.34%

S & P TSX 60 Index

10.03%

5.79%

5.27%

Domestic Fixed Income

-0.47%

2.98%

3.87%

Citigroup LPF Index

-0.70%

2.69%

3.55%

Inflation Hedge Bonds

2.29%

2.11%

1.87%

Citigroup TIPS Index

2.23%

2.03%

1.79%

International Equity

7.66%

6.48%

7.04%

International Equity Custom Index

6.34%

5.45%

6.11%

10.28%

10.59%

11.07%

NCREIF Index

7.13%

8.73%

10.00%

Private Equity

19.63%

15.80%

17.24%

S & P 500 + 3%

16.99%

13.78%

16.31%

Strategic Lending Portfolio

7.34%

6.68%

SL Benchmark

3.64%

4.95%

Real Estate

5-Year

Verus
Percentile Rankings

Risk Adjusted
Basis

Last three years

37

32

Last five years

40

30

Ranking of TCRS Portfolio

The percentile ranking is the position of the TRGT portfolio as compared with other public funds with one being the best and 100 being the worst.
The investment performance for TRGT was computed using a market, time weighted rate of return by an independent consultant.
(1) Effective 1/1/17, Policy Index is 31% S&P 1500/ 2% S&P TSX 60/ 13% MSCI EAFE IMI net/ 4% MSCI Emerging Markets net/ 25%
Citigroup LPF/ 10% NCREIF 1Q Lag/ 7% S&P 500 + 3% 1Q Lag/ / 7% Strategic Lending/ 1% 91 Day T-Bill.

60 - Investment Section

 ASSET ALLOCATION

TRGT ASSET ALLOCATION
As of June 30, 2018
Expressed in Thousands
Asset Class
Domestic Equity

Fair Value
$

Percentage

15,382,953,801

31%

14,558,721,699

29%

7,333,130,584

15%

33,250,847

0%

Short-Term Securities

2,876,812,549

6%

Real Estate

4,452,048,359

9%

Private Equities & Strategic Lending

4,928,734,870

10%

49,565,652,709

100%

Domestic Fixed Income
International Equity
International Fixed Income

Totals

$

This table describes the asset allocation of the entire TRGT investment portfolio. TCRS is
comingled with the TRGT portfolio and owns 99.73% of net asset value in TRGT.
This schedule classifies Canadian investments as domestic securities, convertible bonds as fixed
income securities and preferred stock as fixed income securities. For investment purposes, convertible
bonds and preferred stock are considered equity securities. Accordingly, the asset allocation
percentages in this schedule will vary from the investment consultant’s asset allocation percentages.

Investment Section - 61

 LARGEST HOLDINGS

TRGT LARGEST STOCK HOLDINGS
As of June 30, 2018
by Fair Value
Shares

Security Name

3,346,355

Fair Value

APPLE INC

247,463

$ 619,443,774

AMAZON.COM INC

420,637,607

4,099,904

MICROSOFT CORP

404,291,533

1,757,676

FACEBOOK INC

341,551,600

2,520,302

JPMORGAN CHASE + CO

262,615,468

ALPHABET INC

451,480,083

BANK OF AMERICA CORP

179,014,647

BERKSHIRE HATHAWAY INC

170,946,016

JOHNSON + JOHNSON

160,677,457

THE BOEING CO

159,632,303

402,379
6,350,289
915,864
1,324,192
475,790

TRGT LARGEST BOND HOLDINGS
As of June 30, 2018
by Fair Value

Security Name

Yield

Maturity

Moody’s
Rating

314,242,672

United States Treasury Index Linked Note

0.74%

1/15/2028

Aaa

$ 307,381,906

251,000,000

United States Treasury Note

2.84%

8/15/2027

Aaa

238,822,579

250,975,000

United States Treasury Note

2.99%

8/15/2046

Aaa

215,916,930

236,336,000

United States Treasury Note

2.99%

2/15/2046

Aaa

214,650,326

192,550,000

United States Treasury Note

2.99%

11/15/2045

Aaa

193,038,896

189,590,000

United States Treasury Note

2.99%

5/15/2045

Aaa

190,145,440

188,700,000

United States Treasury Note

2.99%

11/15/2044

Aaa

189,193,864

150,854,000

FED HOME LN DISCOUNT NT

1.75%

7/2/2018

NR

150,854,000

150,000,000

FED HOME LN DISCOUNT NT

1.75%

8/1/2018

NR

149,760,000

130,135,000

United States Treasury Note

2.85%

2/15/2026

Aaa

119,368,361

Par Value
$

Fair Value

A complete portfolio listing is available upon request.
Key to Ratings: All ratings presented are from Moody’s Investors Service with the exception of some of the government agency
securtities. Moody’s does not rate these securities. Standard & Poor’s does provide rating for the securities (AAA is Standard &
Poor’s highest rating.) Government Securities are not rated per se’ but are considered the best quality securities.
Moody’s rates securities as follows:
Aaa

Best Quality

Aa

High Quality

A

Upper Medium Quality

Baa

Medium Quality

NR

Not Rated

62 - Investment Section

 INVESTMENT SUMMARY

TRGT INVESTMENT SUMMARY
June 30, 2018
Domestic
Fair Value

International
%

Total
%

Fair Value

%

Fixed Income
Government Bonds
Corporate Bonds
Municipal/Provincial Bonds

$ 5,214,297,453

10.52%

4,191,604,056

$

0

0.00%

$ 5,214,297,453

10.52%

8.46%

0

0.00%

4,191,604,056

8.46%

88,513,437

0.18%

0

0.00%

88,513,437

0.18%

9,494,414,946

19.16%

0

0.00%

9,494,414,946

19.16%

Corporate Asset Backed

662,243,807

1.34%

0

0.00%

662,243,807

1.34%

Commercial Mortgage Backed

409,534,052

0.83%

0

0.00%

409,534,052

0.83%

Government Agencies

399,776,109

0.81%

0

0.00%

399,776,109

0.81%

3,544,436,104

7.15%

0

0.00%

3,544,436,104

7.15%

42,160,681

0.09%

0

0.00%

42,160,681

0.09%

6,156,000

0.01%

33,250,847

0.07%

39,406,847

0.08%

14,558,721,699

29.39%

33,250,847

0.07%

14,591,972,546

29.46%

Total Bonds

Government Mortgage Backed Securities
Government Asset Backed
Preferred Stock
Total Fixed Income
Common Stock
Consumer Discretionary

1,980,211,947

4.00%

933,035,134

1.88%

2,913,247,081

5.88%

Consumer Staples

972,122,343

1.96%

624,267,277

1.26%

1,596,389,620

3.22%

Energy

957,209,342

1.93%

453,590,475

0.92%

1,410,799,817

2.85%

Financials

2,186,822,792

4.41%

1,282,484,664

2.59%

3,469,307,456

7.00%

Healthcare

2,090,732,567

4.22%

820,087,944

1.65%

2,910,820,511

5.87%

Industrials

1,781,586,618

3.59%

1,261,308,985

2.54%

3,042,895,603

6.13%

Information Technology

4,127,767,759

8.33%

688,710,652

1.39%

4,816,478,411

9.72%

501,755,727

1.01%

609,829,182

1.23%

1,111,584,909

2.24%

Private Placements

0

0.00%

37,083,395

0.07%

37,083,395

0.07%

Rights/Warrants

0

0.00%

1,251,436

0.00%

1,251,436

0.00%

Telecommunication Services

264,052,043

0.53%

253,838,431

0.51%

517,890,474

1.04%

Utilities

466,865,893

0.94%

213,780,710

0.43%

680,646,603

1.37%

7,901,622

0.02%

39,874,808

0.08%

47,776,430

0.10%

45,925,148

0.09%

113,987,491

0.23%

159,912,639

0.32%

15,382,953,801

31.03%

7,333,130,584

14.78%

22,716,084,385

45.81%

Materials

Depository Receipts
REITS
Total Common Stock

(continued)
Investment Section - 63

 INVESTMENT SUMMARY (CONTINUED)
TRGT INVESTMENT SUMMARY (CONTINUED)
June 30, 2018
Domestic
Fair Value

International
%

Fair Value

Total
%

Fair Value

%

Short-term investments
Commercial Paper

561,257,129

1.13%

0

0.00%

561,257,129

1.13%

2,315,511,573

4.67%

43,847

0.00%

2,315,555,420

4.67%

Total Short Term Investments

2,876,768,702

5.80%

43,847

0.00%

2,876,812,549

5.80%

Real Estate

4,391,129,562

8.86%

60,918,797

0.12%

4,452,048,359

8.98%

Private Equities & Strategic Lending

4,598,120,680

9.28%

330,614,190

0.67%

4,928,734,870

9.95%

41,807,694,444

84.36%

7,757,958,265

15.64%

49,565,652,709

100.00%

Pooled Funds and Mutual Funds

Total Investments
Derivatives & Options
Short Term Investments
Classified as Cash Equivalents
Total Investments of the Tennessee
Retiree Group Trust

905,444

905,444

(839,604,028)

(839,604,028)

$ 40,968,995,860

$ 7,757,958,265

Note: TCRS owns 99.73% of the net asset value of the Tennessee Retiree Group Trust.

64 - Investment Section

$ 48,726,954,125

 SCHEDULES OF INVESTMENT FEES AND COMMISSIONS
FOR THE YEAR ENDED JUNE 30, 2017
TRGT Schedule of Fees
Average Assets
Under Management
Asset Management
External Investment Manager Fees
Real Estate Asset Management
Private Equities & Strategic Lending Asset Management
Total Asset Management
Other Investment Services Fees
Custodian Bank
General Investment Consultant
Real Estate Investment Consultant
Private Equities & Strategic Lending Investment Consultant
Total Investment Services Fees

$

7.1 Billion
3.9 Billion
4.8 Billion

Fees
$

$

$ 48.9 Billion
48.9 Billion
3.9 Billion
4.8 Billion

$

$

31,109,622
15,862,067
0
46,971,689

2,138,077
361,980
245,864
970,834
3,716,755

(continued)
Investment Section - 65

 SCHEDULES OF INVESTMENT FEES AND COMMISSIONS
FOR THE YEAR ENDED JUNE 30, 2017 (CONTINUED)
TRGT Schedules of Commissions
Domestic Exchange Traded Shares

Broker Name
Instinet, LLC
Other Brokers-Instinet CCA Balance
Capis
RBC Capital Markets Corporation
Barclays Capital
UBS Securities LLC
RJ Equity Partners
ISI Group INC
OTHER BROKERS*
Totals

Number of
Shares Traded
73,595,110
12,083,128
3,825,230
10,490,223
6,704,535
6,423,774
6,398,963
5,065,095
32,028,813
156,614,871

DOMESTIC
Total
Commissions
$ 1,471,902
241,663
153,009
145,684
134,091
128,475
127,979
101,302
681,938
$ 3,186,043

Commission
per Share
0.0200
0.0200
0.0400
0.0139
0.0200
0.0200
0.0200
0.0200
0.0213

Program Trades where total commission cost includes trading commission, liquidity fees, and market impact fees.

Broker Name
Capis
Barclays Capital
Morgan Stanley & Company, Inc.
Goldman Sachs Group, Inc.
JP Morgan Chase & Company
Instinet, LLC
Bank of America Merrill Lynch
UBS Securities LLC
C S FBCO
OTHER BROKERS*
Totals

Number of
Shares Traded
20,227,059
18,668,116
40,474,452
39,209,820
26,687,985
9,600,062
20,923,737
19,471,821
6,465,051
55,488,187
257,216,290

DOMESTIC
Total
Commissions
$
404,541
362,478
303,560
294,075
200,160
192,001
156,929
146,040
129,301
419,784
$ 2,608,869

Commission
per Share
0.0200
0.0194
0.0075
0.0075
0.0075
0.0200
0.0075
0.0075
0.0200
0.0076

*LESS THAN $100,000 TOTAL COMMISSION PER BROKERAGE FIRM

66 - Investment Section

(continued)

 SCHEDULES OF INVESTMENT FEES AND COMMISSIONS
FOR THE YEAR ENDED JUNE 30, 2017 (CONTINUED)

International Exchange Traded Shares

Broker Name

Number of
Shares Traded

Instinet, LLC

109,687,136

Bank of America Merrill Lynch

INTERNATIONAL
Total
Commissions
1,789,172

0.0163

808,387,043

998,616

0.0012

UBS Securities LLC

4,043,071,181

877,050

0.0002

Goldman Sachs Group, Inc.

2,910,705,334

711,356

0.0002

Morgan Stanley & Company, Inc.

1,029,191,200

612,235

0.0006

Barclays Capital

35,518,039

587,011

0.0165

JP Morgan Chase & Company

58,893,276

568,133

0.0096

Citigroup Global Markets, Inc.

2,576,199,552

547,913

0.0002

Credit Suisse

2,303,636,522

411,956

0.0002

RBC Capital Markets

1,189,107,980

311,258

0.0003

21,554,844

274,148

0.0127

683,385,103

272,927

0.0004

2,145,681,249

225,284

0.0001

22,151,566

180,565

0.0082

8,414,448,034

177,702

0.0000

Sanford C Bernstein

25,522,805

175,250

0.0069

Investment Technology Group

17,356,206

136,776

0.0079

6,239,842

136,724

0.0219

6,650,468
6,845,917
12,424,327
6,544,517

133,309
131,718
107,242
103,615

0.0200
0.0192
0.0086
0.0158

3,769,309,203

1,129,526

0.0003

30,202,511,344

$ 10,599,486

National Financial Services
Deutsche Bank Securities, Inc.
Pershing LLC
Macquarie Group Limited
Jefferies International

Cowan Execution Services
SMBC NIKKO Securities America, Inc.
Raymond James and Associates, Inc.
Exane
Mizuho Securities
OTHER BROKERS*
TOTALS

$

Commission
per Share

Shares for international stocks are based on the actual foreign shares traded while the commission is
expressed in U.S. dollars. Therefore, commissions per share between domestic and international are not
comparable.
*LESS THAN $100,000 TOTAL COMMISSION PER BROKERAGE FIRM

Investment Section - 67