Stock Market Volatility and Your Benefit

If the recent volatility of the stock market has raised concerns about your PSRS or PEERS retirement benefit, don’t worry. Your retirement benefit is safe. Our professional investment staff is comprised of experienced long-term investors with a plan for times such as these. And although our portfolio is down, it is not down as much as the overall U.S. stock market, and the pre-funded status of the Systems is still very good.

Current Market Environment
Thus far in 2008, continued weakness in the housing market compounded by multi-billion dollar losses on sub prime related investments at major bank and investment firms have increased fears of an impending recession. As a result, the stock market has begun the year in a negative fashion, with the S&P 500 down almost 10% year-to-date and almost 15% from the high reached last October. A stock market correction is defined as a 10% decline from a recent high, while a bear market is commonly assumed to have begun when the market falls 20%. As such, we are currently residing somewhere in the neighborhood between a correction and bear market. While unpleasant to go through, we generally view this movement as a healthy and necessary correction to the overall financial markets.

Your Defined Benefit
As a matter of practice, the benefits promised to each member are as good as insured and will be there when he or she retires. Thus, any fluctuation in the stock market should not concern a member of the System. A defined benefit plan, from a member standpoint, should mean unique security. The System is committed to paying a certain level of benefits over a defined period of time to each member based on the number of years of service and a final average salary of that member. By definition, the member (or their spouse) receives the benefit as long as they live. The point is that members do not (or should not) have to worry about the existence of their monthly benefit regardless of the volatility in the markets.

Financial Markets in 2008
We expect further volatility in the financial markets for much of 2008. It appears that a recession (defined as two consecutive quarters of negative GDP growth), or at the very least a significant economic slowdown, is upon us. The market is not a perfect forecaster of the economy, and is greatly influenced by investor emotions, both in good times and in bad. However, a stock market decline such as the one we have seen can often times become a self-fulfilling prophecy, as falling stock prices lead to lower levels of consumer and business confidence, which results in reduced spending and ultimately, a significant economic slowdown.

Contribution Rate Increases
Employee and employer contributions have increased for the last several years. Rising contribution rates are not in response to the System’s inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers will inherit a system as strong and reliable as the one we have today. Short-term declines in the stock market (such as experienced this year) could cause contribution rate increases to continue longer than expected. As you know from previous newsletters, we expect to earn 8.0% per year (long-term) on the investment portfolio. While we earned well in excess of the 8.0% in fiscal year 2007 (+16.6%), the Systems return for the first 6 months of fiscal year 2008 was just 1.6%. This investment return could decline further with the market downturn in January. The low (or negative) returns in fiscal year 2008 will have a direct impact on future contribution rate increases.

PSRS and PEERS Investment Portfolios
The Systems continue to focus on a well diversified and disciplined investment program as the best course of action for the long-term. Five years ago, the Systems’ portfolio was completely dependent on stocks and bonds. Today, the portfolio includes allocations to real estate, private equity and absolute return investments. This diversification provides the Systems with some downside protection in periods where the stock market declines. Thus, although the U.S. stock market is down almost 10% in January, the PSRS and PEERS portfolio are down much less (about half as much). Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As such, the Systems’ investment staff will continue to analyze all investment opportunities within a total portfolio context to allow PSRS/PEERS to maintain a well-diversified and prudent portfolio. Over the long-term, we believe this approach will provide consistent and meaningful investment returns for all members of both PSRS and PEERS.

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	*Message from the Chief Investment Officer –* Stock Market Volatility and Your Benefit If the recent volatility of the stock market has raised concerns about your PSRS or PEERS retirement benefit, don’t worry. Your retirement benefit is safe. Our professional investment staff is comprised of experienced long-term investors with a plan for times such as these. And although our portfolio is down, it is not down as much as the overall U.S. stock market, and the pre-funded status of the Systems is still very good. Current Market Environment Thus far in 2008, continued weakness in the housing market compounded by multi-billion dollar losses on sub prime related investments at major bank and investment firms have increased fears of an impending recession. As a result, the stock market has begun the year in a negative fashion, with the S&P 500 down almost 10% year-to-date and almost 15% from the high reached last October. A stock market correction is defined as a 10% decline from a recent high, while a bear market is commonly assumed to have begun when the market falls 20%. As such, we are currently residing somewhere in the neighborhood between a correction and bear market. While unpleasant to go through, we generally view this movement as a healthy and necessary correction to the overall financial markets. Your Defined Benefit As a matter of practice, the benefits promised to each member are as good as insured and will be there when he or she retires. Thus, any fluctuation in the stock market should not concern a member of the System. A defined benefit plan, from a member standpoint, should mean unique security. The System is committed to paying a certain level of benefits over a defined period of time to each member based on the number of years of service and a final average salary of that member. By definition, the member (or their spouse) receives the benefit as long as they live. The point is that members do not (or should not) have to worry about the existence of their monthly benefit regardless of the volatility in the markets. Financial Markets in 2008 We expect further volatility in the financial markets for much of 2008. It appears that a recession (defined as two consecutive quarters of negative GDP growth), or at the very least a significant economic slowdown, is upon us. The market is not a perfect forecaster of the economy, and is greatly influenced by investor emotions, both in good times and in bad. However, a stock market decline such as the one we have seen can often times become a self-fulfilling prophecy, as falling stock prices lead to lower levels of consumer and business confidence, which results in reduced spending and ultimately, a significant economic slowdown. Contribution Rate Increases Employee and employer contributions have increased for the last several years. Rising contribution rates are not in response to the System’s inability to provide promised benefits for the foreseeable future. Instead, it is about ensuring that future generations of Missouri’s teachers will inherit a system as strong and reliable as the one we have today. Short-term declines in the stock market (such as experienced this year) could cause contribution rate increases to continue longer than expected. As you know from previous newsletters, we expect to earn 8.0% per year (long-term) on the investment portfolio. While we earned well in excess of the 8.0% in fiscal year 2007 (+16.6%), the Systems return for the first 6 months of fiscal year 2008 was just 1.6%. This investment return could decline further with the market downturn in January. The low (or negative) returns in fiscal year 2008 will have a direct impact on future contribution rate increases. *PSRS and PEERS Investment Portfolios* The Systems continue to focus on a well diversified and disciplined investment program as the best course of action for the long-term. Five years ago, the Systems’ portfolio was completely dependent on stocks and bonds. Today, the portfolio includes allocations to real estate, private equity and absolute return investments. This diversification provides the Systems with some downside protection in periods where the stock market declines. Thus, although the U.S. stock market is down almost 10% in January, the PSRS and PEERS portfolio are down much less (about half as much). Ultimately, we believe that the investment environment will offer opportunities for patient, long-term investors such as PSRS and PEERS. As such, the Systems’ investment staff will continue to analyze all investment opportunities within a total portfolio context to allow PSRS/PEERS to maintain a well-diversified and prudent portfolio. Over the long-term, we believe this approach will provide consistent and meaningful investment returns for all members of both PSRS and PEERS. Craig Husting PSRS/PEERS Chief Investment Officer