The FRS Select U.S. Bond Enhanced Index Fund was developed for the FRS Investment Plan and may use multiple institutional investment managers that serve in a fiduciary capacity. Each manager has a target share, which may be periodically changed based on funding levels and other considerations. Index managers are expected to be used as the primary liquidity vehicle to facilitate initial funding, daily transfers and rebalancing.

The historical performance and fee data for the FRS Select Funds was derived using the following approach. The FRS received historical monthly gross of fees return data for the individual investment managers or bundled provider products (for the FRS Select Balanced Funds.) Historical monthly gross returns for the individual managers were adjusted for the fees applicable to the FRS.

The fees used to calculate net returns were based on the highest fee tier, representing the fees charged against the first dollar invested in the Fund. This "worst case" fee scenario was also used in other fee presentations (e.g. Fund Profile, Investment Funds Summary, etc.). For the FRS Select Enhanced Index Funds (i.e. with multiple investment managers), the FRS calculated a weighted average of the underlying managers' historical net returns according to the target manager allocations identified in the Detailed Fund Operations below.

Details for Investment Manager #1
Investment Manager

BlackRock

45 Fremont Street, 34th Floor
San Francisco, CA 94105
Targeted Share of Fund 50% (actual share will vary)
Asset Class and Objective Core Bond Fund
Product Benchmark Barclays Capital Aggregate Bond Index
Management Type Passively Managed
Restrictions on Transfers Investment funds in the FRS Investment Plan are subject to excessive trading restrictions as detailed in the FRS Investment Plan Summary Plan Description and FRS Excessive Fund Trading Policy.
Fees and Expenses Fees and expenses are only one of several factors that should be considered when making investment decisions. More information on fees and expenses can be found in the FAQs on the MyFRS.com website.
Investment Philosophy BlackRock' (BTC) objective in managing the fund is to deliver a high quality and cost-effective index-based portfolio to institutional investors.
Research Process See Security Selection and Portfolio Construction
Security Selection Optimization is used to select a subset of the index securities to minimize tracking error while controlling rebalancing costs.
Portfolio Construction The U.S. Debt Bond Index Fund shall be invested and reinvested primarily in a portfolio of debt securities with the objective of approximating as closely as practicable the total rate of return of the market for debt securities as defined by the Barclays Capital Aggregate Bond Index. Debt securities shall include obligations issued or guaranteed by the United States government, its agencies or instrumentalities; investment grade obligations of United States corporations and dollar denominated debt obligations of other issuers included in the Index; mortgage-backed securities issued or guaranteed by the United States government or its agencies or instrumentalities; commercial mortgage-backed securities; and, investment grade asset-backed securities. When deemed appropriate by BTC, BTC may invest a portion of the Fund in interest rate futures contracts for the purpose of acting as a temporary substitute for investment in debt securities. No Fund will engage in speculative futures transaction.

The U.S. Debt Bond Index funds are "superfunds" which invest in six underlying funds: long corporate, long government, intermediate corporate, intermediate government, mortgage-backed securities and asset-backed securities funds.

Futures and Options
BTC does not use futures to add value; futures are used only to decrease tracking error. Futures contracts are employed within the collective funds to "equitize" cash flows. These flows are generated from dividends and other cash flows associated with securities in the portfolio. Futures contracts are purchased to provide immediate market exposure proportionate to the size of both cash flows and residual cash within the portfolio. The goal is to reduce the overall portfolio tracking error that would be incurred should cash remain unvested in the portfolio. Cash in excess of 0.15% would be equitized using futures contracts.

Securities Lending:
This fund participates in securities lending. BTC lends all major asset classes and is present in all major markets. As part of the Global Index and Markets Group (GIMG), the securities lending activities are closely linked to the index management services, cash management, trading and risk management groups.

BTC currently deals with only 34 counterparties. Their philosophy on borrower selection is to concentrate their lending to highest credit quality borrowers of those who meet stringent capital, financial and risk requirements and who are able to meet their obligations within the terms of the lending contract. Their risk management controls include:
  • Credit screening of borrowers to determine capital adequacy, liquidity and operations efficiency.
  • Collateral requirements that govern receipt and monitoring of collateral received in lieu of securities borrowed. BTC accepts only cash, obligations of the U.S. Government and irrevocable letters of credit.
  • A minimum of 102% and 105% of the market value for domestic and international loans is required at the outset, respectively.
  • A daily mark-to-market procedure.
  • Investment policy controls applied to the investment of cash received as collateral.
  • Record-keeping guidelines, written agreements and regulatory reporting managed in compliance with all applicable regulatory controls of the securities lending programs of financial institutions.
Sell Discipline Not applicable.
Portfolio Manager(s)
Name Investment Experience Experience Last 5 Years
Marie Chandoha 27 years Head, U.S. Fixed income, at BTC since 2007
Matt Tucker 16 years Head Fixed Income Solutions, at BTC since 1996
Lee Sterne 21 years Head, Fixed Income Portfolio Management, at BTC since 1996


Details for Investment Manager #2
Investment Manager

Prudential U.S. Fixed Income Enhanced Index Fund

2 Gateway Center, 4th Floor
Newark, New Jersey 07102-5096
Targeted Share of Fund 50% (actual share will vary)
Asset Class and Objective Core broad bond fund
Product Benchmark Barclays Capital Aggregate Bond Index
Management Type Actively Managed
Marketing Company Prudential Retirement Services
Restrictions on Transfers Investment funds in the FRS Investment Plan are subject to excessive trading restrictions as detailed in the FRS Investment Plan Summary Plan Description and FRS Excessive Fund Trading Policy.
Fees and Expenses Fees and expenses are only one of several factors that should be considered when making investment decisions. More information on fees and expenses can be found in the FAQs on the MyFRS.com website.
Investment Philosophy Prudential Fixed Income's objective is to consistently achieve total return of 15-20 bps over a broad market index through active security selection and trading across government, mortgage and corporate bonds.
Research Process Research is a major competitive advantage for Prudential Fixed Income. A 31 person in-house research staff, with senior members averaging 14 years of investment experience, conducts intensive, fundamental credit research.

Fifteen domestic and foreign analysts are dedicated to investment grade corporate research. These analysts cover approximately 40 corporate subsectors as well as structured and asset-backed products. They follow 800 investment grade U.S. and Yankee issuers, with approximately 350 of those receiving priority coverage.
Security Selection The bulk of Prudential Fixed Income's deviations from the benchmark in individual security weightings will be in the corporate market. They begin by assigning priority coverage to the top 350 issuers in the corporate bond market. A financial analysis is developed, with projections, and each analyst assigns a credit score based on their rating option. This credit score is one of six factors loaded into Prudential Fixed Income's corporate Bond Relative Value Matrix. The Matrix also considers yield spread, liquidity, equity performance and equity volatility when assigning an overall ranking to each issue and subsector in their universe. The overall ranking is one of the tools used in security selection.
Portfolio Construction Portfolio Guidelines and Rules: Sector allocation: +/-2% from the benchmark. Corporate subsector allocation: +/-3% from the benchmark. The yield curve is divided into 10 different duration "cells" (1-3 years, 3-5 years, etc.) keeping each within +/-3% of the benchmark. Duration: +/- one-tenth of a year of the benchmark. Individual Issue Weightings: one-half of one percent over or under the (corporates) benchmark weight. Quality: +/-3% for AAA, +/-2% for AA-BAA.
Sell Discipline For corporate bonds, Prudential Fixed Income's sell decisions are generally predicated on one of three factors: 1) A bond has reached its target price set when it was purchased. 2) The company's fundamentals seem likely to deteriorate. 3) There is an opportunity to improve the overall portfolio.

For U.S. Government and mortgage-backed securities, a security is generally sold if the models indicate that the security has become rich to fair value, and a cheaper alternative security can be identified.
Portfolio Manager(s)
Name Investment Experience Experience Last 5 Years
Jim Herbst 22 years Managing Director, Portfolio Manager
Stewart Wong 14 years Principal, Portfolio Manager
Richard Piccirillo 18 years Principal, Portfolio Manager
IMPORTANT NOTE: The information on investment philosophy, research process, security selection, portfolio construction, sell discipline and personnel was provided to the FRS by product marketing companies or investment managers. The FRS has taken this information as given for the purposes of this document.