Laura Ecklar responds to John Curry's questions...but does she answer them? You be the judge

Laura Ecklar to John Curry, September 15, 2008
Subject: Re: Laura...a question...

Thank you for your patience, Mr. Curry. I am happy to respond to your questions. As you noted, the Sept. 9 article in the Columbus Dispatch was focused on just one day, as exemplified in the headline of the article, "Wild day for public pension funds." The federal government's takeover of Freddie Mac and Fannie Mae had an immediate impact on both the agencies' stocks and bonds - negatively impacting any stock holdings and positively impacting the value of the bonds. (In the case of STRS Ohio, our $4 billion in Freddie Mac/Fannie Mae bond holdings appreciated by about $40 to $50 million in just that one day.)

I would like to make one additional point about the article: the reporter made an error in reporting STRS Ohio's one-day loss on the stocks. When I spoke with him, I told him that the total market value of our stock holdings in both Fannie Mae and Freddie Mac was approximately $10 million on Friday and $2 to $3 million on Monday. Unfortunately, the reporter used that latter number as the "loss" number rather than correctly reporting the loss at $7 to $8 million.

In reply to your questions, the loss in market value on our stock holdings in Fannie Mae from August 2007 through Sept. 8, 2008, is $84.7 million. Of that amount, the loss to shares held in the passive index portfolio is $73.8 million, and the active portfolios' shares market loss is $10.9 million. For the same time period for Freddie Mac, the loss in market value on the stock holdings is $76.7 million, with $45.9 million attributable to the passive index portfolio and $30.8 attributable to the active portfolios. On Sept. 8, we owned about 1,289,900 shares of Fannie Mae and about 1,053,900 shares of Freddie Mac. This represents less than .01% of our total domestic stock holdings.

During the period of time you inquired about, the overall U.S. stock market posted a very steep decline of 22%. Nevertheless, some of STRS Ohio's

holdings fared well. Over the exact same period, STRS Ohio had market gains of $83 million in Wal-Mart, $32 million in McDonald's and $25 million in Anheuser-Busch.

In response to your question about how much we paid for the shares in Freddie Mac and Fannie Mae, we calculate holdings at market value every day. Our Investment staff conducts transactions totaling more than $300 million during a typical day. Shares that are held in Fannie Mae, Freddie Mac or any stock were purchased and sometimes sold at various prices over time. All our investments are carried at current market value and our investment returns reflect changes in market value, not cost, from one period to the next. This is accepted as proper accounting and investment performance measurement.

As noted above, the majority of our stock holdings in Fannie Mae and Freddie Mac are held in passive index portfolios rather than in our actively managed portfolios. You may wonder why STRS Ohio invests in a passive index portfolio - please let me explain.

The Retirement Board's asset mix policy indicates that 95% of STRS Ohio's target return of 8% is expected to come from overall exposure to the investment markets, with the remainder coming from staff's active management of the underlying portfolios. In other words, a significant portion of our expected return from domestic equities, for example, comes from participating in the U.S. stock market - which STRS Ohio defines as the Russell 3000 Index.

A passive index portfolio is a low-cost strategy designed to replicate the holdings, weights and return of the index and to complement the active portfolios. So, for example, our passive index portfolio for our domestic stock holdings includes Fannie Mae and Freddie Mac in the same proportion as the index. This overall exposure to the investment market ensures that our investment dollars are spread throughout all sectors of the markets and not concentrated too heavily or too lightly in any one area. A passive index portfolio experiences all losses for stocks that decline in value, as well as all gains for stocks that increase in value. The passive index strategy is widely used among public and private pension funds, as well as by many individual investors. The Retirement Board's investment consultant, Russell Investments, calls this strategy essential to achieving the board's goals and objectives. Russell Investments has also indicated that it would not be in STRS Ohio's best interests to eliminate the passive index portfolio, or to undermine this investment strategy by choosing not to hold specific stocks like Fannie Mae or Freddie Mac in the passive portfolio.

While we had a full index weighting in our passive portfolio, STRS Ohio was underweighted in our actively managed stock portfolios (including underweighted in Fannie Mae and Freddie Mac) during this time period. This overall underweighting improved our domestic equity performance relative to the benchmark by approximately 7 basis points.

We appreciate that the events surrounding Freddie Mac and Fannie Mae are of interest, due to the significant media coverage covering this unprecedented action by the federal government. However, in times such as these, it is particularly important to remember that STRS Ohio is a long-term investor with a diverse portfolio that allows us to weather significant downturns or losses in an individual stock or sector.

I hope that you find this information helpful. Thanks so much!

Laura Ecklar
Director,
Communication Services

John Curry to Laura Ecklar, September 9, 2008
Subject: Laura...a question...

Laura,

Could you also state how much STRS has lost on its Fannie Mae and Freddie Mac holdings during the last year...and not just the one day that you said we lost "$3 million on Fannie Mae and Freddie Mac stock yesterday" in the quote taken from today's Columbus Dispatch? Retirees would like to know this figure also.

"The State Teachers Retirement System of Ohio lost about $3 million on Fannie Mae and Freddie Mac stock yesterday. However, it made $40 million to $50 million from about $4 billion in bond investments because of the government's move to firm up the balance sheets of the two companies, said Laura Ecklar, spokeswoman for the $70 billion pension fund."

The Dispatch article goes on to say: "The Ohio Police & Fire Pension Fund holds about 5,500 shares of stock in the two companies; the shares were bought months ago at about $28."

If the OP & F can state the amount they paid several months ago for Fannie Mae stocks ("about $28") and the number of shares held ("5,500 shares of stock in the two companies") I would also ask you, "How many shares of Fannie Mae and Freddie Mac stock did STRS own, as of yesterday, and what price(s) did we pay for these?"

Thank you,
John Curry

P.S. So that there will be no confusion let me restate my questions:

1. Could you also state how much STRS has lost on its Fannie Mae and Freddie Mac holdings during the last year...and not just the one day that you said we lost "$3 million on Fannie Mae and Freddie Mac stock yesterday" in the quote taken from today's Columbus Dispatch?

2. How many shares of Fannie Mae and Freddie Mac stock did STRS own, as of yesterday, and what price(s) did we pay for these?