GMO. Presentation. Fresno County Employees Retirement Association. September 6, 2006 GMO. Wendy Malaspina Tina Vandersteel

Transcription

1 North America Europe Asia-Pacific Fresno County Employees Retirement Association September 6, 2006 Wendy Malaspina Tina Vandersteel Presentation 0

2 Presenters Wendy Malaspina Ms. Malaspina is engaged in client relations. Prior to joining in 2003, she worked at Montgomery Asset Management / Wells Capital Management, most recently as a director in institutional client service and marketing. Previously, she worked as a director of client service, marketing and investor relations at Draper Advisers. Ms. Malaspina received her B.A. in International Trade from Clemson University. Tina Vandersteel Ms. Vandersteel is a member of the global fixed income group, focusing on product management and research. Prior to joining in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee University. She is a CFA charterholder. 1

3 Overview Distinctive Approach We apply a blend of proven traditional judgments and innovative quantitative methods to find undervalued securities. Our success is based on a disciplined, value-oriented, riskcontrolled investment philosophy and a commitment to investment research. San Francisco London Boston Zurich Singapore Sydney Rotorua Experience has successfully managed money since our founding in People 86 investment professionals More than 300 employees worldwide Assets of $121 Billion* $106 billion in global equities ($78 billion non-u.s.) $15 billion in fixed income $36 billion in asset allocation** $7 billion in absolute return strategies** Defining Characteristics Motivation We are a private partnership Focus Investment management is our only business Discipline We carefully manage risk, seeking long-term capital appreciation Stability We have exceptionally low turnover of investment professionals * As of 6/30/2006 ** Asset allocation and absolute return assets are accounted for within underlying strategies and should not be double-counted. 2

4 Investment Strategies U.S. Core North America Offices U.S. Equities International Equities Tobacco-Free Core U.S. Value Intrinsic Value U.S. Quality Growth Small/Mid Cap Value Small/Mid Cap Growth Real Estate Investment Trusts Tax-Managed U.S. Equities Tax-Managed Small/Mid Cap Global Equities Foreign (Int l Active Strategy) 1 International Intrinsic Value Global Equity Global (Int l Active Strategy) 1 Currency Hedged International Equity International Disciplined Equity International Growth Global Growth Foreign Small Companies (Int l Active Strategy)* International Small Companies 1 Europe ex-uk Emerging Markets* Emerging Countries* Emerging Markets Quality 1 Tax-Managed International Equities Sydney Office Australian Equities 1 Australian Core Equities Australian Small Companies* Australian Market Neutral Trust* Australian Long/Short Equity* London Office UK Equities World ex-uk Equities Fixed Income Domestic Bond Core Plus Bond Inflation Indexed Plus Bond Inflation Indexed Bond* Short-Duration Investment International Bond Currency Hedged International Bond Global Bond Strategic Fixed Income Emerging Country Debt 1, 3 Alternative Assets Forestry* Alternative Asset Opportunity 1 Absolute Return Long/Short Market Neutral 2 U.S. Aggressive 2 Earnings Outlook 2 Emerging Country Debt Long/Short* 2 Global Tactical 2 Mean Reversion* 2 Pan-European Long/Short 1,2 Currency Hedge 2 U.S. Tactical Opportunities 1,2 Fixed Income Hedge 2 Emerging Currency Hedge 2 Short Term Market Opportunities 1,2 Multi-Strategy 1,2 (combination of strategies above) Tax-Managed Absolute Return 2 Asset Allocation U.S. Broad Market International Equity Allocation 1 Global Equity Allocation 1, 4 Global Balanced Allocation vs. benchmark of 65% stocks, 35% bonds Real Return Global Balanced Asset Allocation vs. benchmark of 60% stocks, 20% bonds, 20% cash Tax-Managed Global Balanced 2 Alpha Only Global Allocation Absolute Return* 2 vs. benchmark of +5% real return per year * Strategy is currently closed to new clients and additional cash flows 1 Strategy currently capacity constrained 2 Privately offered and available only to qualified purchasers. Call for further information. 3 New clients and additional cash flows through Emerging Country Debt Investment Fund only. 4 New clients and additional cash flows through World Opportunities Equity Allocation Fund only. Note: Does not include all products. 3

5 Fresno County Employees Retirement Association Periods ending July 31, 2006 Performance Gross of Management, Operating, Incentive Fees ($U.S.) Global Bond (3/12/99) Annualized Since Market Value Month YTD Year Year Year Inception * (000) ,512 JPMorgan Global Gov't. Bond Value Added Performance Net of Fees and Expenses ($U.S.) Global Bond (3/12/99) Annualized Since Market Value Month YTD Year Year Year Inception * (000) ,512 JPMorgan Global Gov't. Bond Value Added * Periods of less than a year are not annualized 4

6 Fixed Income at

7 Fixed Income Strategies (with Benchmarks) Assets as of August 1, 2006 totaled $14,803 million Developed Market Fixed Income $8,494 million Core U.S. Fixed Income $1,852 million JPMorgan U.S. 3-Month Lehman Brothers Government Cash Index ($544 Million) Bond Index ($492 million) Lehman Brothers Treasury Inflation Notes Index ($816 million) Portable Alpha $4,599 million TIPS Plus: Lehman Treasury Inflation Notes Index ($792 million) Core Strategies Emerging Country Debt $3,754 million J.P. Morgan: EMBI Global EMBI Global Diversified Short Duration Plus: Lehman U.S. Treasury 1-3 Year Index ($591 million) U.S. Core Plus: Lehman Brothers U.S. Aggregate Index ($3,216 million) Global Fixed Income Global Fixed Income $2,042 million J.P. Morgan: Global Government Bond Index Non-U.S. Government Bond Index Non-U.S. Government Bond Index (Hedged) ex Japan Lehman Brothers Global Aggregate Bond Index Absolute Return and Alternative Assets* $2,218million Emerging Country Debt Alternative Asset Opportunity (Commodities) Emerging Currency Hedge Currency Hedge Fixed Income Hedge *We trade, on behalf of Sydney, the Global Tactical Strategy (assets $518 million). 6

8 Fixed Income Team of 16 has 224 years of collective investment management industry experience Years Portfolio Management At Industry Bonds and Currencies Investment Strategy Focus Emerging Country Debt Asset-Backed Securities and Corporate Credit Commodities and Alternatives Bill Nemerever, Partner, Group Co-Manager Tom Cooper, Partner, Group Co-Manager Steve Edelstein, Partner Allan Berliant 3 21 Justin Klosek 4 9 Research/Product Management/Technology Tina Vandersteel 3 16 Mark Mueller, Partner George Estes, Partner Kim Sullivan 6 8 Max Golts 1 2 Andy Gossard 1 1 Trading/Support Madelyn Tucker 9 16 Tracey Keenan 4 16 Bill O'Connell 7 8 Kyle Ciano 2 3 Investment Control Mark Puorro

9 Core Beliefs and Competitive Advantages Relative value is best exploited from the top down Global bond markets are less efficient There are five times as many managers benchmarked to aggregate-style domestic indices than benchmarked to global government bond indices. Currency markets are particularly inefficient Currency markets have relatively few dedicated currency managers. Major market participants hedgers and Central Banks are not primarily motivated by currency profits. Currencies and bonds should be evaluated separately evaluates currencies and bonds separately, generating independent sources of alpha. Liking a country s bonds does not mean we like the currency. Systematic methods effectively deal with complex issues Cheap implementation maximizes alpha, including when replicating the benchmark Global Fixed Income s disciplined approach is a consistent, thorough, adaptable way of capturing our investment ideas. Our approach avoids the pitfalls caused by emotion. implements using instruments with low transactions costs both for benchmark replication and active management, which allows the portfolios to respond quickly to changing markets but precludes investments in illiquid securities, like corporate bonds. 8

10 Investment Process Overview First we replicate the benchmark, then we combine a variety of strategies to add value Benchmark Replication Value-Added Strategies Invest in bonds, currencies, short-term high-quality debt & derivatives to generate benchmarklike returns + Currencies Relative Value Momentum-Plus Security Selection Bonds Market Selection Rate Anticipation + + Yield Curve Volatility Emerging Country Debt Issue Selection Asset-Backed Securities Issue Selection Opportunity Set: Australian dollars Canadian dollar Euro Yen New Zealand dollar Norwegian krone Swedish krona Swiss franc U.K. pound U.S. dollar Opportunity Set: Australian interest rates Canadian interest rates Euro-area interest rates Yen interest rates Swedish interest rates Swiss interest rates U.K. interest rates U.S. dollar interest rates Opportunity Set: Emerging Country Debt J.P. Morgan Emerging Market Bond Index Global and related sovereign, hard currency emerging country debt exposures Asset-backed Securities AAA, floating-rate ABS with various collateral types 9

11 Performance Review: Global Bonds

12 1-Year Performance Attribution: Total Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Total Global Bond Fund 1.64% -1.15% -1.05% -0.59% 0.24% 0.83% -0.23% -1.06% 3.20% 1.72% -0.90% 0.57% 3.15% J.P. Morgan Global Government Bond Index 1.83% -1.93% -1.80% -1.14% 1.04% 1.28% -0.46% -1.21% 2.19% 1.79% -0.97% 0.80% 1.30% Alpha -0.20% 0.78% 0.76% 0.55% -0.81% -0.46% 0.23% 0.16% 1.01% -0.06% 0.07% -0.23% 1.85% Bond Market Overlays Currency Emerging Markets LIBOR Plus Trading Costs Issue selection/other Total alpha Data as of 7/31/

13 1-Year Performance Attribution: Bond Markets 3.9% 3.7% JPMorgan Global Government Bond Index Yield 2.1% 1.9% Local Currency Total Bond Returns 4.4% -0.1% 3.1% 0.8% 3.5% 3.3% 3.1% 2.9% -1.1% -0.9% -2.2% Australia Canada Denmark Euro-area Japan New Zealand -0.9% -2.6% Norway Sweden Switzerland U.K. U.S. 2.7% Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 16% Bond Active Weights at Quarter Ends and Current 0% 8% 0% 0% 20% Total of 66 bps Global bond yields began rising in the second half of 2005, accelerating throughout the first half of 2006 before falling slightly in July. Major, sustained positions included overweight Sweden and underweight U.S. and U.K. We had been underweight briefly in the Euro-area in 2005 but otherwise overweight. U.S., Australian, Swiss and U.K. positions were the largest positive contributors over the past 12 months. The Swedish and Japanese overweights detracted from performance. -2% -18% Australia Canada Denmark Euro-area Japan New Zealand Contribution to Performance, bps -17 Australia Canada Denmark Euro-area Japan New Zealand 0 0-6% -9% Norway Sweden Swit zerland U.K. U.S Norway Sweden Switzerland U.K. U.S % Data as of 7/31/

14 1-Year Performance Attribution: Currency Markets 4.0% Weighted U.S. dollar performance 0.8% 8.5% 5.0% 5.1% Currency Returns 5.0% 7.5% 4.4% 6.0% 2.0% -2.0% 0.0% -2.0% -9.8% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. -4.0% Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Currency Active Weights at Quarter Ends and Current 6% 2% -1% 2% 6% 3% 1% 4% 7% Total of 19 bps The U.S. dollar s 2005 strength has evaporated in 2006, despite its continued yield advantage versus many of the major currencies. Due to the recent decrease in our U.S. dollar position, currency alpha reversed, and now is positive for the trailing 12 months. While overweights in Scandinavian countries hurt performance, underweight positions in Japanese yen and euros as well as a British sterling underweight provided gains. -12% -18% Australia Canada Denmark Euro-area Japan New Zealand Contribution to Performance, bps Norway Sweden Switzerland U.K. U.S Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. Data as of 7/31/

15 Performance Attribution Performance attribution is run daily, providing immediate feedback about the portfolios Total Currency Markets 300 b.p. 250 b.p. 200 b.p b.p b.p. 50 b.p b.p. -50 b.p b.p b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 300 b.p. 250 b.p. 200 b.p b.p. 100 b.p. 50 b.p b.p. -50 b.p b.p b.p b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Interest Rate Markets Emerging Debt 100 b.p. 80 b.p b.p. 40 b.p. 20 b.p b.p. -20 b.p. -40 b.p b.p. -80 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 50 b.p. 40 b.p b.p b.p b.p. 0 b.p. -10 b.p. -20 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 219 b.p. 91 b.p. 95 b.p. 78 b.p. 156 b.p. 19 b.p. 62 b.p. 43 b.p. 34 b.p. 29 b.p. 14 b.p. 11 b.p. 14 b.p First Half b.p. -4 b.p. -15 b.p. -16 b.p. -6 b.p. -53 b.p. -42 b.p. -93 b.p. Total Currency Markets Interest Rate Markets Emerging Debt LIBOR Plus Trading Costs Issue/Other 14

16 Global Bond Performance: Frank Russell Universe Global Bond Composite Universe of Global Fixed Income Composites Unhedged Periods Ending June 30, 2006 Min/Max Rate of Return (%) Global Bond Composite (U.S. $) JPMorgan Global Gov t. Bond (U.S. $) 10 Years 9 Years 8 Years 7 Years 6 Years 5 Years 4 Years 3 Years 2 Years 1 Year Current Quarter Periods Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. There are risks associated with investing in a fund of this type that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange rates. Performance shown is gross. Composite Inception Date: 12/31/95. 15

17 Sources of Value Added A diverse set of strategies adds breadth to our process Rate Anticipation Yield curve Volatility Emerging Debt Exposure (5%) Relative Value Bond Market Selection Global Bond Market Strategies (44%) Currency Market Selection (51%) Momentum Plus 16

18 Portfolio Positioning

19 Current Portfolio: Global Bond Fund 37% 45% JPMorgan Global Government Bond Index Global Bond Fund 29% 18% 21% 23% Bond Markets 0% 2% 0% 1% 0% 11% 0% 0% 0% 0% 1% 0% 6% 9% 4% 0% Australia Canada Denmark Euro-area Japan New Zealand 37% 29% -6% -3% Norway Sweden Switzerland U.K. U.S.A. Emerging JPMorgan Global Government Bond Index Global Bond Fund 31% Currencies 24% 23% 0% 9% 2% 3% 1% 0% 11% 2% 0% 0% 6% 4% 1% 0% -0% 6% 12% 0% 0% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.A. Emerging Data as of 7/31/

20 Investment Process

21 Benchmark Replication Benchmark exposures are replicated in the least expensive way to minimize tracking error We can add value to any benchmark that can be replicated The return of the benchmark forms the base of our portfolio s return We use bond futures, currency forwards, swaps, options and other instruments to replicate the returns of the benchmark with limited risk. When they are inexpensive, we will use index total return swaps or synthetic indices to generate benchmark exposures Because our replication of the benchmark requires only small amounts of cash, we invest the balance of our clients assets in a very high-quality cash management pool, the Short-Duration Collateral Fund 20

22 Benchmark Replication It s not the number of instruments in the benchmark, but rather the number of unique risks Benchmark type Examples Replication instruments Narrow Domestic or global government and government-related bond JPMorgan Government Bond Indices Citigroup Government Bond Indices Lehman U.S. Agency Index Government bond and Agency bond futures, interest-rate swaps Inflation-protected government bond Lehman U.S. Treasury Inflation Notes Index Lehman Global TIPs Bonds, inflation swaps, index total return swaps Broad Aggregate-style (by subcomponent) Lehman domestic or Global Aggregate Indices Citigroup domestic or Global Broad Investment Grade Indices Index total return swaps (rarely available at the aggregate level) Securitized Lehman Fixed-Rate MBS Index Mortgage TBAs, bonds, index total return swaps Lehman ABS, CMBS Indices Bonds Investment-grade corporate credit Lehman U.S. or Global Corporate Index Citigroup U.S. or Global Credit Index Index total-return swaps, synthetic CDX indices, singlename CDS Specialized Liability-driven Nominal pension liabilities Interest-rate swaps 21

23 Currency Management We believe that the fact that there are relatively few long-term investors in global currency markets allows us to exploit continuing inefficiencies We have developed models that enable us to add value consistently by buying currencies we find undervalued and selling their overvalued counterparts Currencies outside our clients benchmark universes can be sources of valueadded (e.g., U.S. dollar is traded in our non-u.s. portfolios) Approximately half of our added-value comes from this strategy 22

24 What Makes a Currency Attractive? Relative Value High short-term yields when risk aversion is low Strong current account when risk aversion is high Momentum-Plus Positive price momentum Positive bond market momentum 23

25 Currency Relative Value Model We prefer high-yielding currencies especially when risk aversion is low, but we move to safe currencies when risk aversion is high Relative Short-term Interest Rate 7.4% 6.1% 5.5% 4.8% Three-Month Libor 4.3% 3.2% 3.1% 2.6% 1.6% 0.4% New Zealand Australia U.S.A. U.K. Canada Euro land Norway Sweden Switzerland Japan 17.8% 13.5% Current Account/Gross Domestic Product (GDP) Current Account Balance (Riskiness) 7.0% 3.8% 2.7% -0.3% -2.7% -5.9% -7.0% -7.8% Risk Aversion Index Norway Switzerland Sweden Japan Canada Euro land U.K. Australia U.S.A. New Zealand Safest Riskiest Risk averse: Reduce weight in risky currencies Risk Seeking: rank by yield Risk Aversion Index Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Data as of 7/31/2006 With risk aversion low, we pay less attention to a currency s riskiness and go for yield 24

26 Currency Valuation: Risk Aversion Example Currency active weights are modulated by changes in the risk aversion weight 20% 10% Risk Aversion and Currency Active Weights Australian dollar weight (left) Risk Aversion Index (right) % % Swiss franc weight (left) % Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan Source:, updated through 12/31/

27 Currency Momentum-Plus Models Currency momentum alone tells only part of the story Currency Momentum: Range of Short-to-Long Moving Averages Relative Currency Momentum 4% 2% 0% -2% -4% Australia U.K. Sweden Euro land New Zealand Norway Switzerland Canada Japan Yield Curve Slope: 10-Year Swap versus 3-Month LIBOR Relative Yield Curve Slope (48) (29) (18) Basis Points (158) New Zealand U.S.A. Australia U.K. Canada Euro land Switzerland Sweden Japan Norway Yield Momentum in 10-Year Bonds Relative Bond Yield Momentum 2.2% 1.9% 1.5% 1.5% 0.9% 0.9% 0.8% 0.5% 0.1% Switzerland Japan Euro land Australia U.S.A. U.K. Sweden New Zealand -0.2% Canada Norway Data as of 7/31/

28 Global Bond Management Our valuation models rank daily eight global bond markets We over and underweight markets in the same fashion as absolute return managers Our bond markets universe includes more countries than are in the various benchmarks we use We rigorously manage risk and invest primarily using low-cost derivatives such as bond futures, interest rate and total return swaps 27

29 What Makes a Bond Market Attractive? Market Selection High real yields Steep yield curve slopes Recent underperformance 28

30 Bond Market Selection Models We like high real yields, steep slopes, and recently lagging bond markets Real 10-Year Yields Relative Real Yield 3.0% 2.4% 2.2% 2.1% 2.1% 1.8% 1.3% 1.3% Australia Canada U.K. Sweden U.S.A. Euro land Japan Switzerland Relative Yield Curve Slope Yield Curve Slope: 10-Year Swap versus 3-Month LIBOR Basis Points (18) (29) (48) Japan Sweden Switzerland Euro land Canada U.K. Australia U.S.A. Relative Recent Bond Market Performance Month Change in 10-Year Yield Basis Points Euro land U.S.A. Switzerland Australia U.K. Japan Sweden Canada Data as of 7/31/

31 Bond Market Selection Example When all factors line up, the over/underweights are unambiguous 2.5% Yield curve slopes: 10-year less 3 months 2.0% Canada 1.5% Universe 1.0% 0.5% U.K. 0.0% 3/12/2003 3/26/2003 4/9/2003 4/23/ % 2.8% 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% Canada U.K. Real yields Universe Average 3/12/2003 3/26/2003 4/9/2003 4/23/ % 0.1% 0.0% -0.1% -0.2% -0.3% -0.4% -0.5% Canada U.K. Yield trend Universe Average 3/12/2003 3/26/2003 4/9/2003 4/23/ % Active weights 8% 4% Canada 0% -4% -8% Universe Average U.K -12% 3/12/2003 3/26/2003 4/9/2003 4/23/2003 Source:, updated through 4/30/

32 What Makes Global Bonds Attractive? Rate Anticipation Downward yield momentum Steep slopes U.S. dollar strength Equity markets weakness 31

33 Bond Rate Anticipation Model We like bonds in general when yields have positive downward momentum, when slopes are high, when the U.S. dollar is strong, and when equity markets are weak Yield Momentum 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% Moving Average Change in Global Yields Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Global yields are no longer moving upward, which is less negative for bonds Yield Curve Slope 120 b.p. 80 b.p. 40 b.p. Average Slope of Yield Curves in Euroland, U.K. and U.S.A. Flat yield curves are negative for bonds 0 b.p. Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Sources: J.P. Morgan, Morgan Stanley U.S. Dollar Strength Equity Weakness 20% 15% 10% 5% 0% -5% -10% -15% MSCI World Equity Index 1-Year Change in USD and MSCI World Equity USD Real Effective Exchange Rate Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Currently equity weakness is neutral for bonds, while USD weakness is negative Data as of 7/31/

34 Other Ways We Make Money in Bonds Yield Curve Global yield curve slopes Opportunistic butterfly positions Volatility Mean reversion in interest-rate volatility 33

35 Other Bond Models: Example An additional risk budget is given to a series of bond strategies designed to add relatively uncorrelated sources of value to the portfolios: slope model example Static Return 1.3% 0.6% -0.3% Static Carry Including Rolldown (Duration Neutral Hedge Ratio) -1.3% -2.6% -2.7% -4.4% U.S. (4.1) Canada (4.2) Australia (3.9) U.K. (4.2) Japan (4.5) Euro land (4.2) Switzerland (4.4) -5.3% Sweden (4.2) 118 Yield Curve Slope: 10-Year Swap versus 2-Year Swap Basis Points Relative Swap Slopes Japan Switzerland Sweden Euro land Canada U.S. Australia U.K. Forward Markets Three-Month Change in 3-month, 3-month Forward Rates Basis Points Sweden Australia Euro land Japan Switzerland U.S. U.K. Canada Inclined to flatten Inclined to steepen Data as of 7/31/

36 Portfolio Allocation We have built a customized risk management system to model the active risks in our portfolios We budget our portfolio risks in a structured fashion, targeting specific tracking errors for each strategy Each trading day new market information is incorporated in our portfolios to accommodate changing economic and market conditions On a daily basis we attribute performance to our various strategies, gaining valuable information to control and allocate risk While allocations are performed based on the underlying strategies, an added layer of risk control exists to limit exposures by bond market, by currency, and by the deviation of the portfolio duration from the benchmark 35

37 Risk Model Risk model transforms alpha forecasts into bond and currency active weights Active Weights -25% -15% -5% 5% 15% 25% Covariance Matrix Trading Costs -2% 1% 8% 18% Australia Canada Currency Market Forecasts Bond Market Forecasts Risk Model Maximizes expected return subject to tracking error* constraint -18% -18% -13% -6% 7% 0% 2% 0% 6% 3% 0% Euro land Japan New Zealand Norway 20% Sweden Switzerland -9% 6% U.K. * 1.5%-2.5% for global bond portfolios, 15% for Currency Hedge Fund and Fixed Income Hedge Fund -15% 7% U.S.A. Data as of 7/31/

38 Portfolio Risk Exposures and Implementation Tracking error is the primary risk measure, while credit rating distribution qualifies the cash collateral backing derivatives exposures Exposure Risk Statistics Current & Range Tracking error 1.5% 2.5% Duration difference -2yr +2yr Bond weights -25% +25% Currency weights -25% +25% 37

39 Active Management is Key to Capturing Value Portfolio positions adjust to pick up relative opportunities on a daily basis Daily Active Weight: Switzerland Bond Market 6% 4% 2% 0% -2% -4% -6% -8% 7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31 Daily Active Weight: Australian dollar 10% 8% 6% 4% 2% 0% -2% -4% 7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31 Data as of 7/31/

40 Security Selection Some of our value-added comes from diverse security selection choices Implementing global bond and currency allocations: -To minimize transaction costs we typically gain our exposure to currency and bond markets using derivatives such as forwards, futures, swaps and options -The choice of instrument rests on relative value models as well as on our strategy of adding well-priced convexity when available to limit downside risks Investing underlying cash collateral: -Given our macro views on the outlook for asset-backed sectors, and current portfolio positioning, we select complementary AAA-rated issues that carry a liquidity or complexity yield premium -We do not reach for yield by reducing asset credit quality Earning a credit spread: We use a small (0-5%), relatively stable allocation to our Emerging Country Debt fund to earn the asset class yield spread and take advantage of the Fund s alpha, generated almost exclusively through security selection 39

41 Short-Duration Collateral Fund (SDCF): Quality and Diversification Quality Distribution Portfolio Breakdown Treasury 0% UK Residential 6% Cash 1.1% AAA Non- Insured 87.8% Student Loans 7% Other 5% ABS Residential 23% Non-AAA 0.5% AAA Insured 9.4% US Agency 1.2% U.S. Treasury 0.0% All Triple-A Rated 99.5% MBS Residential 2% Insurance Financing 1% Credit Cards 17% Agency 1% Australian Residential 4% Auto 12% CMBS 6% CDO 10% Business Loans 6% Interest Rate Duration 0.25 years Spread Duration 0.1 years Percent Floating Rate 92% Spread to LIBOR 0.1% Market Value $5.9 billion Please see Appendix for SDCF guidelines Data as of July 31,

42 Summary Global currency and bond markets offer fixed income managers dramatically more opportunities to add value than domestic bond markets Opportunities in currency and bond markets can be exploited independently Our valuation models and implementation techniques give us the ability to outperform any benchmark The value we add using our valuation models can be enhanced through thoughtful security selection Our team of experienced investment professionals focuses on investment strategies where we have a significant competitive advantage The value we add complements and diversifies that of other managers 41

43 Appendix

44 Fixed Income Performance Through July 2006 Total Return Net of Fees As of 7/31/2006 Average Annual Total Returns (Net Trans. Costs) Fixed Income Fund/ Inception Month YTD YTD Value One Five Ten Since Benchmark Date Added Year Year Year Inception Domestic Bond Fund 8/18/ Lehman Brothers U.S. Government Core Plus Bond Fund 4/30/ N/A 6.81 Lehman Brothers U.S. Aggregate N/A 6.24 International Bond Fund 12/22/ JPMorgan Non-U.S. Gov't. Bond Currency Hedged Int'l. Bond Fund 9/30/ JPMorgan Non-U.S. Gov't ex-jpn Hdg Bond Global Bond Fund 12/28/ JPMorgan Global Gov't. Bond Emerging Country Debt Fund 4/19/ JPMorgan EMBI Global Inflation Indexed Plus Bond Fund 5/31/ N/A N/A N/A 1.40 Lehman Brothers U.S. Treasury Inflation Notes N/A N/A N/A 1.92 Strategic Fixed Income Fund 5/31/ N/A N/A N/A 0.60 Lehman Brothers U.S. Treasury 1-3 Year N/A N/A N/A 0.93 Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. Performance shown is net of fees and expenses after reimbursement from the manager. The Fund may have a transaction fee at purchase and/or redemption which is paid to the Fund to cover trading costs. Average Annual Total Return figures reflect these fees; Total Return figures net of fees do not. There are risks associated with investing in a fund that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange rates. J.P. Morgan EMBI Global represents the J.P. Morgan EMBI prior to 8/95, J.P. Morgan EMBI + through 12/31/99 and the J.P. Morgan EMBI Global thereafter. 43

45 Short-Duration Collateral Fund: Guidelines Effective 9/2/2004 Pre NPF Current I. Issue/Issuer Limits Asset-Backed Securities Single Issue None 3% Corporate Securities Single Issuer 5% 3% Total per Issuer None 5% All Single Issues > 2% None 25% II. Servicer limit* None 5% III. Industry Limits Total (Including Insured) Credit Card 25% 25% 40% Auto Financing 25% 25% 40% US Residential Home Equity None 25% 40% US Residential Prime Mortgages None 25% 40% CMBS None 25% 40% CDO None 25% 40% Other 25% 15% 25% IV. Pre NPF Current Sector Limits CBO: Emerging Collateral 25% 10% CBO: High-Yield Collateral 25% 10% USAid None 20% Gov t Sponsored Enterprises None 15% each Government Repo None 15% V. Credit Limits Issues Rated Below AA- ** 2% per issuer All Issues Rated Below AA- None 10% All Issues Rated Below A- 5% 5% VI. Insurance Wrap Limits Per Insurer*** None 25% * No Issues will be purchased whose servicer does not meet the standards set forth in the Fund s investment guidelines. ** ALF represented that it primarily owned investment -grade securities. *** Wrapped issues are not coun ted in issuer, servicer, industry or sector limits above. However, within wrapped issues the limits above apply. Note: All limits apply at time of purchase. 44

46 Capsule Biographies: Fixed Income William Nemerever Thomas Cooper Mr. Nemerever is a member of the executive committee and co-manages s global fixed income area with Tom Cooper. Prior to joining in 1993, he worked at Boston International Advisors where he founded the quantitative global fixed income effort. Previously, he was in charge of several Fidelity Investments fixed income groups, head of the fixed income department at State Street Bank & Trust Co., a portfolio manager at Wells Fargo, and a portfolio manager, equity analyst and actuary at John Hancock. Mr. Nemerever earned his B.S. in Mathematics at the University of Washington and his M.S. in Actuarial Science from Northeastern University. He is a CFA charterholder. Mr. Cooper co-manages s global fixed income area with Bill Nemerever. Before joining in 1993, he was a managing director at Boston International Advisors. Prior to joining Boston International, he worked at Goldman Sachs Asset Management, Western Asset Management and State Street Bank & Trust Co. Mr. Cooper received his M.B.A. from the University of California (Berkeley) and earned a B.A. from Oberlin College. He is a CFA charterholder. Steve Edelstein Mr. Edelstein works with s global fixed income group as a portfolio manager. Prior to joining in 1995, he was a vice president and fixed income options and futures strategist with Morgan Stanley. Mr. Edelstein has also worked with First Boston in the fixed income proprietary trading, government trading and risk management groups, and as a financial model builder and programmer with Lehman Brothers Kuhn Loeb. He holds his M.S. in Economic and Social Statistics from Cornell University and earned a B.S. from the State University of New York at Oneonta. George Estes Mark Mueller Mr. Estes is responsible for credit analysis for s emerging country debt portfolios. Prior to joining in 1996, he was director for Latin America and Canada for the Burger King Corporation. Mr. Estes holds a B.A. in German from the University of Virginia and an M.B.A. in Finance from the University of California at Berkeley. Dr. Mueller is the director of research for the algorithmic trading group and is a consulting director of research for the fixed income group. Since joining in 1997, he has also served as the director of research for the fixed income group. Prior to joining, he worked at Goldman Sachs in the fixed income proprietary trading group, and earlier at Morgan Stanley as a quantitative analyst in equity derivatives. Dr. Mueller holds a B.S. in Physics from the Massachusetts Institute of Technology and a Ph.D. in Physics from Stanford University. 45

47 Capsule Biographies: Fixed Income Allan Berliant Max Golts Mr. Berliant is a member of the global fixed income group. Prior to joining in 2003, he worked at Hartford Investment Management Company as director of asset-backed securities. Previously, he was a vice president within Structured Asset Research at Zurich Scudder Investments. Mr. Berliant earned his B.S. from The Johns Hopkins University and his M.B.A. from University of Chicago. Dr. Golts is a member of s global fixed income group, focusing on quantitative research. Prior to joining in 2005, he worked on fixed income analytics and strategies for State Street Global Markets. Previously, he did volatility research at Fort Hill Capital Management. Dr. Golts earned his undergraduate degree from Kiev University and his Ph.D. in Mathematics from Yale University. Tracey Keenan Ms. Keenan works with s global fixed income group as a finance/repo trader. Prior to joining in 2002, she held various positions at Standish Mellon, most recently as assistant vice president of fixed income trading. She earned her B.A. in political science from Stonehill College and her M.B.A. in Finance from Suffolk University. Justin Klosek Madelyn Tucker Tina Vandersteel Mr. Klosek is a member of the global fixed income group. Prior to joining in 2002, he worked on the fixed income teams of both Morgan Stanley Asset Management and Long-Term Capital Management. Mr. Klosek earned his B.S.E. in Civil Engineering and Operations Research from Princeton University and his M.S. in Civil Engineering from Massachusetts Institute of Technology. He is a CFA charterholder. Ms. Tucker is a trader for the global fixed income group. Prior to joining in 1997, she worked at Fidelity Investments where she traded asset backed corporate and mortgage securities, and monitored benchmarks for trust funds. Prior to that, she was director of financial systems development at Cherry Webb. Ms. Tucker earned her M.B.A. from the Simmons School of Management. Ms. Vandersteel is a member of the global fixed income group, focusing on product management. Prior to joining in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee University. She is a CFA charterholder. 46

48 North America Europe Asia-Pacific 40 Rowes Wharf Boston, Massachusetts (617)