Market Summaries

September 2016

Table of Contents
Domestic Equity Market Summary......................................1
International Equity Market Summary.................................3
Public Real Estate Market Summary...................................4
Private Real Estate Market Summary.................................6
Private Equity Market Summary.........................................7
Fixed Income Market Summary.........................................8
Hedge Fund Market Summary.........................................9
Private Infrastructure Market Summary............................10

Domestic Equity Market Summary

September 2016

Volatility returned to the U.S. equity markets in

September as most of the major indices posted
gains early in the month, only to sell-off because
of interest rate concerns as the prospect of the
Federal Reserve (Fed) raising the discount rate
in September came back into play. Hawkish
commentary, particularly commentary coming
from the dovish head of the Boston Fed,
instigated an equity market sell-off on September
9th as the S&P 500 declined 2.5% on this day.
Markets recovered in late September when
the Fed did not raise rates, but the recovery
was tempered by U.S. Presidential election
jitters finally starting to impact equity markets.
The Dow posted a loss of 0.5% to close at
18,308.15 while the S&P 500 posted a slight loss
of 0.12% to close at 2,168.27. Breadth within
the S&P 500 was negative in September as 233
of the components increased with an average
gain of 3.6%, but this was outweighed by 270
issues falling with an average loss of 3.4%.
The technology-heavy NASDAQ and small cap
stocks both fared better in September. Both of
these indices hit new all-time highs in September,
slightly besting the marks set in August. The
NASDAQ set a new high of 5,339.50 on the 22nd
before it declined slightly the rest of September.

The NASDAQ posted a gain of 1.91% to close at

5,312.00. Domestically-oriented small cap stocks
continued to outperform large cap stocks as the
U.S. economys prospects were expected to remain
somewhat more favorable than those of the rest
of the world. The benchmark S&P 600 hit an alltime high of 765.47 on the 7th before it declined
and recovered the rest of September. The S&P
600 posted a gain of 0.51% to close at 756.90.
Another influence on equity markets in
September was crude oil, which strengthened
6.5% in September. The strengthening helped
boost energy stocks. This was largely caused
by OPEC agreeing to drop cartel crude
production, the first production cut in eight years.
Sector breadth within the S&P 500 was also
negative in September as only three of the
eleven economic sectors had a positive return.
Energy and Information Technology, particularly
hard disk drive and semiconductor companies,
led the way with both sectors rising well over
two percent. Utilities were also slightly positive.
Financials, Consumer Staples, and Real Estate (in
its debut as a new GICS economic sector) turned
in the worst returns in September. Financials
declined almost three percent as the prospect of
rates remaining low for a longer period of time

Benchmark Returns
September 2016
Index
Dow Jones Industrial Avg.
S&P 500
S&P 500 Value

Price
Change (%)

18308.15

-0.50

2168.27
938.80

Total
Return (%)

Price
Change (%)

Total
Return (%)

-0.41

5.07

7.21

-0.12

0.02

6.08

7.84

-0.53

-0.37

7.16

9.36

S&P 500 Growth

1222.53

0.28

0.40

5.05

6.38

S&P 400 Mid Cap

1552.26

-0.80

-0.64

10.99

12.40

756.90

0.51

0.64

12.68

13.86

5312.00

1.89

1.96

6.08

7.15

S&P 600 Small Cap

NASDAQ

Close

Calendar Year To Date

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas

Domestic Equity Market Summary (Concluded)

September 2016

S&P 500 Economic Sector Returns

September 2016
Sector
Energy
Information Technology
Utilities
Industrials
Consumer Discretionary
Health Care
Telecom Services
Materials
Consumer Staples
Real Estate

Calendar Year To Date

Price
Change (%)

2.95
2.40
0.12
-0.27
-0.42
-0.65
-0.95
-1.48
-1.75
-1.81

Sector

Energy
Telecom Services
Utilities
Information Technology
Materials
Industrials
Real Estate
Consumer Staples
Consumer Discretionary
Health Care

Price
Change (%)

16.04
13.79
13.09
11.12
9.59
8.92
5.57
5.42
2.41
0.07

Daily Price Change S&P 500 Index - September 2016

Source: Bloomberg, Wall Street Journal, New York Times

Employees Retirement System of Texas September 2016 Investment Summary Market Comments & Risk Reports

International Equity Market Summary

September 2016

The International stock markets, as measured

by the Morgan Stanley Capital International
(MSCI) ACWI ex U.S. Index, improved 1.0% in
September, following a slight increase in August
(+0.4%) and an increase in July (+4.6%).
International Indices
MSCI ACWI ex U.S.
MSCI Europe
MSCI Pacific
MSCI Emerging Markets

Monthly
Return %
1.0%
0.8%
1.3%
1.1%

MSCI ACWI ex U.S. - %

Information Technology
Materials
Energy
Cosumer Staples
Industrials
Utilities
Consumer Discretionary
Health Care
Financials
Telecom Services

3.2%
2.9%
2.3%
1.8%
0.7%
0.5%
0.4%
0.3%
-0.2%
-0.6%

Information Technology (3.2%) led all sectors

in September, followed by Energy (2.3%) and
Material (2.0%). Telecom Services (-0.6%) and

Financials (-0.2%) were the laggards. Brent

crude increased 4.3% to finish at $49 a barrel.
OPEC met in Algiers on September 28, 2016
and prospectively agreed to modest output cuts.
EUROPE: The European Central Bank kept
policy rates unchanged and did not extend its
asset purchase program, which pushed yields
higher and markets down. In sector movement,
Technology (+4.4%) was the leader and
Telecom Services (-0.8%) the laggard (-.8%).
PACIFIC: Bank of Japan committed to expand
the monetary base while keeping purchases at
the same level and introducing quantitative easing
with yield curve control. In sector movement,
Consumer Staples (+6.0%) was the leader and
Consumer Discretionary (-1.1%) the laggard.
EMERGING MARKETS: Chinas economic data
continued to improve throughout the quarter.
India passed the Goods and Services Tax
Bill, signaling conviction in Indias 8% Gross
Domestic Product growth projection. At the
same time, geopolitical tensions increased as
the Indian government announced strikes on
terrorist camps in Pakistan occupied Kashmir.
Moodys downgraded Turkeys credit rating to
Ba1. In sector movement, Technology (+3.6%)
was the leader and Utilities (-3.2%) the laggard.

MSCI Index September 2016

Source: Bloomberg, Morgan Stanley

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas

Public Real Estate Market Summary

September 2016

The global real estate securities markets, as

measured by the FTSE EPRA / NAREIT Developed
Index, had a volatile month and dropped 0.9% in
September, following last months decrease of
2.6%. The markets underperformed the broader
equity market (MSCI World), which gained
0.6% in September. Asia (USD +1.3%, local
+0.0%) was the best performing region, which
benefited from stronger foreign currencies.
Continental Europe (USD -1.1%, local -2.0%),
North America (-1.8%), and the United Kingdom
(USD -2.5%, local -1.7%) lagged. Central
bank policy continued to dominate investor
sentiment. The European Central Bank left
policy on hold in early September and its
commentary was overall less dovish than the
market expected. The U.S. Federal Reserve
officials sent mixed signals regarding possible
interest rate increases and global bond yields
subsequently backed up and equities sold off
until around mid-September. The U.S. Federal
Reserve left interest rates unchanged in
late September as expected and bond yields
settled lower. Subsequently the global real
estate securities staged a moderate recovery.
In the Asia market, the Bank of Japan refrained
from cutting interest rates further and instead
unveiled a plan to anchor yields on 10-year bonds
around zero. Sentiment toward the JREIT market
was weak because of uncertainty surrounding
the interest rate policy. Japan declined 0.8% in
local currency terms and increased 1.3% in USD
terms in September. Australia (USD -2.6%, local
-2.4%) sold off in September on concerns of bond
yield increases on the back of U.S. interest rate
speculations. The AREIT market clawed back
some of the losses in late September. Australia
posted a decent second quarter Gross Domestic
Product at 3.3% year-over-year. The Australian
Dollar strengthened in September. Hong Kong
posted a decent return of 4.0% in September.
Hong Kong enjoyed a strong rally of 43% since
its February lows and returned 20.0% year-todate. Further appreciation might be challenging
because of concerns about rising U.S. interest
rates. Singapore had a decent gain of 2.8%
in September. The Singapore office names
performed well thanks to the pick-up in leasing
activity among the new office projects, which
was better than expected. The rental decline
was slower than expected while the third
quarter rental markets continued to deteriorate.

FTSE EPRA/NAREIT
Developed Index Country
Total Return (USD)
September Calendar Year
Country
2016 %
To Date %
Norway
Austria
Hong Kong
Singapore
Netherlands
Japan
Spain
Belgium
Israel*
Switzerland
Ireland
Canada
Global
France
Finland
USA
Sweden
United Kingdom
Australia
Germany
New Zealand
Italy

5.80
4.10
4.00
2.80
1.40
1.30
1.10
0.60
0.50
0.40
-0.30
-0.60
-0.90
-1.00
-1.00
-1.80
-2.10
-2.50
-2.60
-2.70
-3.00
-3.80

41.10
19.80
20.00
15.80
-1.20
8.60
-3.50
16.70
20.30
16.20
-1.00
24.10
11.00
13.10
14.50
11.60
12.90
-19.80
20.20
22.20
21.00
-18.20

*Index contains only one name.

United Kingdom REITs underperformed their
global peers again, which declined 2.5% in
September and declined 19.8% year-to-date.
The sentiment was weak with the possibility of a
hard exit from the European Union. Continental
Europe declined 1.1% in USD terms and declined
2.0% in local currency terms. The German names
saw some profit taking on valuations and were
among the worst performers in the region. Austria
(+4.1%) was among the strongest performers in
the region as the relative valuation gap widened
between Austria and Germany. Italy (-3.8%)
lagged in September as affected by the macro
concerns of its banking sector. Spains news
flow relatively improved, where the likelihood
of a new government forming has increased.

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas

Public Real Estate Market Summary (Concluded)

September 2016

T h e U . S . R E I Ts d e c l i n e d 1 . 8 % i n S e p t e m b e r a s
hawkish rhetoric from several members of the
Federal Reserve earlier in September prompted
investors to take profits. Nevertheless,
the market recovered from the lows after
the Federal Reserve decided to remain on
hold and left interest rates unchanged. The
market continued to exhibit volatility as two
of the worst performing sectors on a calendar
year-to-date basis, Residential (+1.2%) and
Self-Storage
(+0.1%),
outperformed
the
broader REIT market as investors sought
to gain exposure to lower duration and
less interest rate sensitive REIT names.
The Industrial (+1.0%) and Data Center (Data
Centers are within the Diversified sector, which
declined 1.2% in September) REITs offered
medium to long-term duration exposure. The
two sectors have some of the most attractive
earnings revisions trends, which was no
surprise why the REIT sectors outperformed in
September. The Lodging/Resorts (-9.1%) sector
was the worst performing sector in September
as investors looked to reduce exposure going
into earnings season in October after the sector
had a relief rally subsequent to a fairly resilient
performance post second quarter earnings. The
Healthcare (-2.1%), Retail (-2.8%), and Office
(-3.0%) REITs underperformed the market.

The Retail sector came under pressure when

Simon Property Group (SPG) and General
Growth Properties (GGP) decided to invest
capital into Aeropostale, a distressed retailer,
in order to help it avoid liquidation. Although the
investment was quite small relative to the market
capitalization of the two Class A mall REITs,
the transaction went against management
messaging that demand for Class A mall space is
quite robust. Despite strong quarterly earnings
results (especially in the context of S&P 500
earnings revisions expectations) year-to-date
and favorable supply/demand dynamics in the
real estate sector, diverging central bank policy,
the U.S. elections, and credit market concerns
continued to create volatility in the REIT space.
US Sector Total Return
September Calendar Year
Sector
2016 %
To Date %
Residential
Industrial
Self Storage
Diversified
US All Sectors
Healthcare
Retail
Office
Lodging/Resorts

1.2
1.0
0.1
-1.2
-1.8
-2.1
-2.8
-3.0
-9.1

4.0
28.9
-8.6
21.2
11.6
19.2
13.1
12.5
3.2

FTSE EPRA/NAREIT Index Daily Price Change - September 2016

Source: Bloomberg

Employees Retirement System of Texas September 2016 Investment Summary Market Comments & Risk Reports

Private Real Estate Market Summary

September 2016

The net asset value as of September 30,

2016, was approximately $1.73 billion. For
the month, the private real estate program
called in approximately $35 million in
capital. Since inception of the program to
date, total capital called is approximately
$2.3 billion. General partners returned
approximately $1.3 billion in the form of
income, capital gain or return of capital.
The
new

System did not close on any

commitments
in
S e p t e m b e r.

The commitment target for fiscal year 2017

is $0 with a range of $0 to $250 million. The

private real estate portfolio is at 6.8% of the
o v e r a l l S y s t e m s a s s e t s , w h i c h i s j u s t b e l o w
the 7% allocation. The near term focus
continues to be on renewed commitments
to fund managers in which the System
has investments, commingled club funds
with significant potential to drive terms
and conditions, niche property sectors,
co-investments, and select international
i n v e s t m e n t s . S i n c e i n c e p t i o n , t h e S y s t e m s
total commitment in the private real estate
program is approximately $2.9 billion.

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas

Private Equity Market Summary

September 2016

The System closed on one new investment

during September (Deal 1 in the table below).
The System committed $25 million through
September 30, 2016. The Systems target
for commitments for fiscal year 2017 is $750
million with a range of $563 million to $938
million. As of September 30, 2016, the Private
Equity portfolio Net Asset Value was $2.64
billion, or 10.3% of the Systems assets.

From program inception through September

30, 2016, the System closed on 74 funds
and 25 co-investments with commitments
totaling $6.2 billion (adjusted for currency
exchange rates). In addition, ERS holds LP
Advisory Committee seats on 44 active funds
and two fund LP Advisory Observer seats.

ERS Private Equity - Deals Closed During Fiscal Year 2017

Deal
#
1

Fund Name
Co-Investment #25

Fiscal Year
2017

Total PE Commitments - FY 2017

Geography / Strategy
SS - Energy

Commitment

Commitment
(Local Currency)
$

25,000,000

(USD)

(1)

25,000,000

25,000,000

Footnotes:
(1) Foreign exchange rates as of:

September 30, 2016

EURO / USD:

1.120

GBP / USD:

1.300

Employees Retirement System of Texas September 2016 Investment Summary Market Comments & Risk Reports

Fixed Income Market Summary

September 2016
Economy
The Citi economic surprise index declined 18 points
to end at -5.10 in September, indicating that broad
economic data generally missed consensus estimates.
However, the data continued to show improvements
in the overall economy. Investors expectations for a
rate increase remained firm in September. The market
implied probability of a December Federal Funds
rate increase remained at 59% as of September
30th. Going forward the Federal Reserve will remain
particularly focused on the labor market and inflation
when considering whether to raise rates in December.

in rates led intermediate treasuries to outperform

longer treasuries. The Intermediate Treasury Index
returned 0.17% while the longer duration U.S. Treasury
Index returned -0.17%. Credit returns were skewed
towards riskier credit. U.S. IG Corporates returned
-0.25% while Emerging Markets and High Yield
returned 0.19% and 0.67%, respectively. For High
Yield this marks the 8th consecutive month of positive
returns. The calendar year-to-date return is 15.11%.

Labor Market:: The U.S. economy added 156k

jobs in September, slightly below the median

survey of 172k. The unemployment rate
unexpectedly increased from 4.9% to 5% as
there was an increase in labor force participation.
The report did show continued improvement
in the labor market and positions the Federal
Reserve for a rate increase in December.

Inflation: The Federal Reserves broader gauge

of inflation, Core PCE, met expectations of

a 1.7% yearly increase. The figure marked a
slight uptick from the 1.6% August number.
However, the September number was still
below the Federal Reserves 2% target.

Barclays Capital
Intermediate Credit
Barclays Capital
Intermediate Treasury
U.S. Treasury
U.S. Agency
Corporate
Securitized
U.S. Corporate High
Yield
Emerging Markets

Total Return
September %

Total Return
Calendar Year
2016 %

0.08

5.69

0.17

3.39

-0.13
0.09
-0.25
0.25

5.07
3.42
9.20
3.86

0.67

15.11

0.19

12.82

Housing:

Existing home sales surprisingly

declined 0.9% in September as a lack of supply
continued to weigh on sales. Sales of new single
family homes remained relatively strong and
homebuilder sentiment surveys indicated builders
believe conditions would continue to be supportive.

ISM Non-Manufacturing: The ISM non-manufacturing

report showed a surge in September. The index

increased to 57.1 from 51.4 and beat analyst
expectations of 53. This was a positive sign for
economic growth and jobs in the second half of 2016.

Durable Goods: Durable goods orders increased

0.1% in September, the second consecutive
monthly increase. This was a positive sign
for the factory sector, which has struggled.

Auto Sales: Auto sales rebounded after a month

of losses as sales increased from an annualized
rate of 16.91 million units to 17.7 million units.

Retail Sales:

Retail sales experienced a

disappointing 0.1% decrease in September.
The
negative
figure
highlighted
the
ongoing concern over consumer spending.

The Bond Markets

The yield curve steepened very slightly as the 30 year
key rate moved a couple basis points (bps) wider and
shorter rates compressed. The 2-year note and 10year note yield spreads widened to 83 bps. The move

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas

Hedge Fund Market Summary

September 2016

The Absolute Return Portfolio posted an

estimated gain of +2.10% in September.
The target return of 90-day T-bills + 400bps
reached +0.55% over the same period.

+3.00%, +1.38%, and +1.62%, respectively. The

only loss in September was in Castle Creek, a
convertible bond strategy. The manager posted
an estimated loss of -0.08%, respectively.

September was a mixed month across most

major asset classes. Volatility remained relatively
subdued and most markets traded in a range
bound manner despite a Federal Open Market
Committee meeting, a monetary policy decision by
the European Central Bank, and concerns in the
financial sector regarding a large German bank.
The European Central Bank ultimately elected to
keep their monetary policy unchanged while the
Federal Reserve decided to keep rates on hold.
The two decisions by the respective central banks
caused small reversals in the underlying markets.
Performance during September was positive, but
mixed across strategies. Performance was led
by relative value strategies such as Northwest,
event driven strategies such as Taconic, and
global macro strategies such as Pharo. The
three managers posted estimated gains of

The graphs below indicate current and historical

strategy positioning of the Absolute Return
Portfolio. A clear overweight to Event Driven
and Relative Value strategies remains. There
is a notable underweight to Macro strategies of
9%. This underweight is below the guideline
minimum weight of 10%. The underweight is
both a factor of strategy return weakness as
well as a deliberate underweighting of the
strategy. It is the intention of the hedge fund
team to cover this underweight in Q4 of 2016.

Historical Strategy Exposure

Robert Lee resigned as Director of Hedge

Funds in September. Anthony Curtiss was
promoted to the position of Interim Director
of Hedge Funds and has taken over Robert
Lees responsibilities. The rest of the
Hedge Fund team remained unchanged.

Current Strategy Exposure

Employees Retirement System of Texas September 2016 Investment Summary Market Comments & Risk Reports

Private Infrastructure Market Summary

September 2016

The System closed on one new transaction

during September, a $100 million co-investment.
The System is targeting total commitments
for fiscal year 2017 of $250 million with a
range of $187.5 million to $312.5 million.
Since inception, Private Infrastructure closed

10

on ten co-investments and three funds with

commitments totaling $658.1 million (adjusted
for currency exchange rates). The System
holds an LP Advisory Committee seat on
three funds. As of September 30, 2016, the
Infrastructure portfolio Net Asset Value was
$348.7 million, or 1.4% of the Systems assets.

Market Comments & Risk Reports September 2016 Investment Summary Employees Retirement System of Texas