International Value Equity Search January Jeffrey MacLean, President & CEO

Transcription

1 Fresno County Employees Retirement Association International Value Equity Search January 2011 Jeffrey MacLean, President & CEO SEATTLE 999 Third Avenue Suite 4200 Seattle, Washington telephone facsimile LOS ANGELES 2321 Rosecrans Avenue Suite 2250 El Segundo, California telephone facsimile

2 Table of Contents I. Screening Process 3 II. Comparative Manager Table Tab II5 III. Multi-Factor Charts Tab 15 II IV. Manager Detail Tab 25 II

3 I. Screening Process 3

4 Screening Process Starting Point ea EAFE Value Universe 110 products Active portfolio management strategy 110 products Mid and Large Cap Strategies 65 products Basic Screens Product currently active 65 products >=$1.75 bn Firm AUM in the last 2 years 46 products >=$500 mm Strategy AUM in the last 2 years 27 products 7 Year Track Record 23 products Inst'l Assets >4 22 products Seek long-term excess returns >.75% excess return vs. MSCI EAFE ( longer of 10 or 7 years) 18 products Screen out highly benchmark-centric and benchmark agnostic strategies R-Squared (longer of 10 or 7 years) 17 products Emerging market exposure too high (overlap with dedicated allocation) 14 products Subjective Screens Subjective screens: Organizational issues, team, style fit, other performance and risk 10 products metrics Wurts proprietary analysis: 7 products Macroeconomic sensitivies, beta-alpha ratios Semi-Finalists Dimensional Fund Advisors - International Value Strategy Grantham, Mayo, Van Otterloo - International Active Strategy Mondrian Investment Partners - International Equity Morgan Stanley Investment Management - International Equity Pyrford International - International Equity Research Affiliates - Enhanced RAFI International Tradewinds Global Investors - International Value Final Candidates Dimensional Fund Advisors - International Value Strategy Morgan Stanley Investment Management - International Equity Pyrford International - International Equity Research Affiliates - Enhanced RAFI International 4

5 II. Comparative Manager Table 5

6 Philosophical and Strategic Considerations Column1 Best Economic/ Market Environment Dimensional Fund Advisors: International Value Morgan Stanley Investment Mgmt International Equity Pyrford International International Equity Stable / Up Down / Down Down / Down Explanation of Best Environment Portfolio has smaller capitalization and deeper value stocks. The strategy tends to do well in all environements, but slightly better in stable environments and up markets. Looking for strong business franchises at a discount to long term intrinsic value. Focus on companies with low financial leverage tends to protect on the downside. Top down approach avoids countries that represent poor value (e.g. Japan in the 90's). Tend to avoid highly leveraged companies, resulting in better performance in down markets. Investment Philosophy Highly quantative process with some quality screens Buy list comes from the highest 3 of Bookto-Market ratio Eliminate REITs, holding companies and closesend investment companies Bottom up fundamental approach Focus on free cash flows, determine why market is wrong and identify the catalyst to realize value Combination of top-down and bottom up analysis Focus on absolute returns and value based on dividend yield plus projected 5 year earnings. Portfolio Construction Highly diversified holdings Top 10 Holdings = 16% of NAV No emerging markets 5% max position size Diversified holdings Top 10 holdings = 32% of NAV 1 limit to emerging markets (highest actual weight has been 3%) 5% max position size Diversified holdings Top 10 holdings = 24% of NAV 2 limit to emerging markets (highest actual weight has been 13%). Limit can be customized. 5% max position size Differentiating Characteristics Quantitative approach, broadly diversified Low fees, low turnover (19%) Greater outperformance in up markets Strongest outperformance in down markets Low overall volatility and beta Potential Concerns No exposure to REITs could cause underperformance in a REIT rally Senior management in parent company has had some leadership changes Strategy may lag in strong up markets Strategy may lag in strong up markets Benchmark agnostic - country and sector weights may differ greatly from the index at times 6

7 Philosophical and Strategic Considerations Column1 Best Economic/ Market Environment Research Affiliates RAFI Enhanced International Column3 Column2 Up / All Explanation of Best Environment This is an enhanced "fundamental index" strategy. The central concept of the fundamental index is to eliminate the "return drag" of capitalization weighted indices. The strategy tends to have modest outperformance in all environments. Investment Philosophy The strategy is based on a fundamental index that weights securities based upon 4 factors: book value, sales, income and dividends Cap weighted indices, like MSCI EAFE, based on market values tend to overweight overpriced securities and underweight underpriced securities Portfolio Construction Highly diversified holdings Top 10 Holdings = 13% of NAV 1 emerging markets. Limit can be customized. 5% max position size Differentiating Characteristics Highly diversified Fundamental indexing concept Low turnover (15%) Potential Concerns Shorter track record than other candidates (fundamental index has longer record however) 7

8 Organization and Product (9/10) Column1 Dimensional Fund Advisors: International Value Morgan Stanley Investment Mgmt International Equity Pyrford International International Equity Location Austin, TX New York, NY (Team is in London & Singapore) London, England Founded Ownership 61% employee owned 39% outside sharholders MSIM is owned by Morgan Stanley, a global financial services firm. Employees own 13% of MSIM 10 owned by Bank of Montreal Firm AUM ($mm's) $187,905 $151,299 $2,987 Strategy AUM ($mm's) $7,650 $15,517 $1,379 Team Size PMs/Analysts 13/17 7 / 1 8 / 1 Avg. Tenure PMs/Analysts 9 years / 4 years 8 years / 1 years 9 years / 2 years Vehicle Availability Separate Account, Mutual Fund Separate Account, Commingled Fund Separate Account, Commingled Fund Minimum ($mm's) SA ($75), MF ($2) SA ($100), CF ($25) SA ($100), CF ($25) Fees (based on $175mm) 39 bps / SA 46 bps / MF: DFIVX 50 bps / SA 59 bps / CF 49 bps / SA 64 bps / CF 8

9 Organization and Product (9/10) Column1 Research Affiliates RAFI Enhanced International Location Newport Beach, CA Founded 2002 Ownership 95% employee owned by 6 professionals Firm AUM ($mm's) $3,783 Strategy AUM ($mm's) $2,184 Team Size PMs/Analysts 2 / 16 Avg. Tenure PMs/Analysts 7 years / 2 years Vehicle Availability Separate Account, Commingled Fund Minimum ($mm's) SA ($100), CF ($5) Fees (based on $175mm) 42 bps / SA 42 bps / CF 9

10 Performance and Portfolio Characteristics (9/10) Column1 Dimensional Fund Advisors: International Value Morgan Stanley Investment Mgmt International Equity Pyrford International International Equity MSCI EAFE Beta-Alpha Ratio (7 yr) Country: 1.02 Sector: 1.01 Country: 1.00 Sector: 1.00 Country: 1.01 Sector: 1.00 R-squared (7 yr) Beta (7 yr) Standard Dev. (7yr) Tracking Error (7 yr) Info. Ratio (7 yr) P/E (12 mo. trai) Dividend yield % 4.3% 3.1% Wtd Avg Mkt Cap ($mm's) $36,601 $45,852 $45,521 $42,700 Annual Turnover 19% 35% 29% Currency Hedging Not Used Defensive Defensive Gross Annualized Excess Return vs. MSCI EAFE-GD (through 9/30/10) Return (not excess) 1 Year Years Years Years Years Gross Calendar Year Excess Return vs. MSCI EAFE-GD Return (not excess) 2010 YTD (9/30)

11 Performance and Portfolio Characteristics (9/10) Column1 Beta-Alpha Ratio (7 yr) Research Affiliates RAFI Enhanced International Column3 Column2 MSCI EAFE Country: 1.01 Sector: 1.01 R-squared (7 yr) 0.97 Beta (7 yr) 0.99 Standard Dev. (7yr) Tracking Error (7 yr) 3.4 Info. Ratio (7 yr) 0.6 P/E (12 mo. trai) Dividend yield 3.2% 3.1% Wtd Avg Mkt Cap ($mm's) $41,670 $42,700 Annual Turnover 15% Currency Hedging Not Used Gross Annualized Excess Return vs. MSCI EAFE-GD (through 9/30/10) Return (not excess) 1 Year Years Years Years Years Gross Calendar Year Excess Return vs. MSCI EAFE-GD Return (not excess) 2010 YTD (9/30) *Note: Performance data for Research Affiliates is 5-year data. 11

12 III. Multi-Factor Charts 12

13 How to Read Multi-Factor Charts Multi-factor charts can be used to analyze the ability of a manager to provide excess return in various market environments, which are based on whether the appropriate benchmark returns are down, stable, or up. Down, stable, and up environments are defined by choosing a reasonable level of index return that provides a somewhat equal distribution of data points in each market environment. The X-axis shows benchmark returns and the Y-axis shows rolling 1 year manager returns. The diagonal line represents the index, so points above the line indicate excess return, while points below indicate negative excess return. Dispersion of returns can be seen based on distance from the diagonal line. This manager has performed well in down markets, beating the benchmark in 85% of rolling 1-year periods. Manager: Rolling 1 Year Return The manager has performed best during stable markets, consistently beating the benchmark 89% of the time with an average excess return of 8.7%. Higher tracking error is all to the upside Avg. Down Mkt. Excess Rtn: 4.4% Trk. Error: 4.6 %. Obs. Above Index: 85% Manager vs. Index (Last 10 years) Avg. Stable Mkt. Excess Rtn: 8.7% Trk. Error: 6.7 %. Obs. Above Index: 89% + Excess Rtn. - Excess Rtn. Avg. Up Mkt. Excess Rtn: 0.1% Trk. Error: 3.1 %. Obs. Above Index: 5 Up Market Stable Market Down Market Linear (INDEX) Index: Rolling 1 Year Return Ranges used (may vary for each index): Down Market: <-5% Up Market: >13% The manager does worse during up markets, keeping up with the benchmark and tracking it closely, providing little excess return. 13

14 How to Read Multi-Factor Charts, cont. This chart is for the same manager as the previous page, it applies the same concepts as the previous chart, but considers thetimeperiodinwhichtheexcessreturnsoccurred. Orange triangles represent down markets, black circles represent stable markets, and green squares represent up markets. During this mostly up market (green squares), the fund exhibited mixed excess returns as indicated by the blue bars. Blue bars = manager excess return 2 Manager: Rolling 1 Year Excess Return & Index return 75% 15% 6 Dotted gray line = index performance Manager: Rolling 1 Year Excess Return 1 5% -5% -1-15% -2 Manager Excess Rtn. Index UP Index STABLE Index DOWN Index 45% 3 15% -15% -3-45% -6-75% Index: Rolling 1 Year Return Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Ranges used (may vary for each index): Down Market: <-5% Up Market: >13% During these mostly down markets (orange triangles), the fund exhibited mostly high excess returns as indicated by the blue bars. 14

15 Multi-Factor Charts: Dimensional Fund Advisors DFA: Rolling 1 Year Return Avg. Down Mkt. Excess Rtn: 5.9% Trk. Error: 8.7 %. Obs. Above Index: 69% DFA vs. MSCI EAFE (Last 10 years) Avg. Stable Mkt. Excess Rtn: 2% Trk. Error: 3.6 %. Obs. Above Index: 7 Avg. Up Mkt. Excess Rtn: 8.1% Trk. Error: 3.9 %. Obs. Above Index: 10 Up Market Stable Market Down Market Linear (INDEX) DFA: Rolling 1 Year Excess Return DFA: Rolling 1 Year Excess Return & MSCI EAFE return 2 15% 1 5% -5% -1 Manager Excess Rtn. Index UP -15% Index STABLE Index DOWN Index -2 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 75% 6 45% 3 15% -15% -3-45% -6-75% MSCI EAFE: Rolling 1 Year Return MSCI EAFE: Rolling 1 Year Return 2 DFA: Calendar Year Excess Return & MSCI EAFE Return 6 Average Excess Return 15% 14.3% 11.5% 4 Macro Factors Range Up Down Stable Range of Values Highest Sensitivity MSCI EAFE roiling 1 yr P/E (Change) % 5.3% 5.4% 3. Stable GDP Growth (Change) 0.5% 4.8% 3.8% 5.5% 1.7% Stable Country Dispersion (Diff fr Avg) % 3.2% 4.7% 2.3% Up Sector Dispersion (Diff fr Avg) 4.5% 3.3% 5.5% 4.7% 2.1% Down Global Credit Corp OAS (Change) % 5.8% % Stable Wtd. Avg Exchange Value of USD 1.5% 1.5% 4.2% 7.8% 6.2% Stable Commodities % 0.4% 8.1% 7.7% Stable DFA: Annual Excess Return 1 5% -5% -1-15% % 7.6% 7.9% 7.6% 6.4% 1.8% Manager Excess Rtn. Index UP Index STABLE Index DOWN Index MSCI EAFE: Annual Return 15

16 Multi-Factor Charts: Morgan Stanley Investment Management Morgan Stanley: Rolling 1 Year Return Avg. Down Mkt. Excess Rtn: 12.8% Trk. Error: 6.9 %. Obs. Above Index: 10 Morgan Stanley vs. MSCI EAFE (Last 10 years) Avg. Stable Mkt. Excess Rtn: 2.9% Trk. Error: 6.2 %. Obs. Above Index: 5 Avg. Up Mkt. Excess Rtn: -3.8% Trk. Error: 3.8 %. Obs. Above Index: 12% Up Market Stable Market Down Market Linear (INDEX) Morgan Stanley: Rolling 1 Year Excess Return 2 15% 1 5% -5% -1-15% -2 Morgan Stanley: Rolling 1 Year Excess Return & MSCI EAFE return Manager Excess Rtn. Index UP Index STABLE Index DOWN Index Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 75% 6 45% 3 15% -15% -3-45% -6-75% MSCI EAFE: Rolling 1 Year Return MSCI EAFE: Rolling 1 Year Return 2 Morgan Stanley: Calendar Year Excess Return & MSCI EAFE Return 6 Average Excess Return 15% 12.2% 12.6% 4 Macro Factors Range Up Down Stable Range of Values Highest Sensitivity MSCI EAFE roiling 1 yr P/E (Change) % -1.5% 9.4% Down GDP Growth (Change) 0.5% 0.8% 7.5% % Down Country Dispersion (Diff fr Avg) % -1.6% 3.4% 8.5% Up Sector Dispersion (Diff fr Avg) 4.5% 10.1% -2.3% 1.4% 12.4% Up Global Credit Corp OAS (Change) % 3.6% % Up Wtd. Avg Exchange Value of USD 1.5% 7.1% 0.6% 3.4% 6.5% Up Commodities % 7.1% 5.9% 6.9% Down Morgan Stanley: Annual Excess Return 1 5% -5% -1-15% % 0.5% -0.2% -2.8% -3.9% -7. Manager Excess Rtn. -8.1% Index UP Index STABLE Index DOWN Index MSCI EAFE: Annual Return 16

17 Multi-Factor Charts: Pyrford International Pyrford: Rolling 1 Year Return Avg. Down Mkt. Excess Rtn: 11.5% Trk. Error: 7.3 %. Obs. Above Index: 10 Pyrford vs. MSCI EAFE (Last 10 years) Avg. Stable Mkt. Excess Rtn: 2.7% Trk. Error: 5 %. Obs. Above Index: 7 Avg. Up Mkt. Excess Rtn: -3.5% Trk. Error: 4.1 %. Obs. Above Index: 18% Up Market Stable Market Down Market Linear (INDEX) Pyrford: Rolling 1 Year Excess Return 2 15% 1 5% -5% -1-15% -2 Pyrford: Rolling 1 Year Excess Return & MSCI EAFE return Manager Excess Rtn. Index UP Index STABLE Index DOWN Index Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 75% 6 45% 3 15% -15% -3-45% -6-75% MSCI EAFE: Rolling 1 Year Return MSCI EAFE: Rolling 1 Year Return % Pyrford: Calendar Year Excess Return & MSCI EAFE Return 6 Average Excess Return Macro Factors Range Up Down Stable Range of Values Highest Sensitivity MSCI EAFE roiling 1 yr P/E (Change) % -2.1% 8.8% Down GDP Growth (Change) 0.5% -1.1% 6.8% 0.8% 7.9% Down Country Dispersion (Diff fr Avg) % -0.2% 2.4% 3.4% Up Sector Dispersion (Diff fr Avg) 4.5% 6.9% -1.9% 0.2% 8.8% Up Global Credit Corp OAS (Change) % 3.5% % Up Wtd. Avg Exchange Value of USD 1.5% 4.2% -0.9% 3.7% 5.1% Up Commodities % 8.5% 6.3% 11.5% Down Pyrford: Annual Excess Return 15% 1 5% -5% -1-15% % 10.1% 3.7% 1.1% % -0.9% -5.4% -7.2% Manager Excess Rtn. Index UP Index STABLE Index DOWN Index MSCI EAFE: Annual Return 17

18 Multi-Factor Charts: Research Affiliates Research Affiliates: Rolling 1 Year Return Avg. Down Mkt. Excess Rtn: 3.3% Trk. Error: 3.5 %. Obs. Above Index: 8 Research Affiliates vs. MSCI EAFE (Last 5 years) Avg. Stable Mkt. Excess Rtn: 2.7% Trk. Error: 4.3 %. Obs. Above Index: 75% Avg. Up Mkt. Excess Rtn: 1.2% Trk. Error: 2.8 %. Obs. Above Index: 75% Up Market Stable Market Down Market Linear (INDEX) Research Affiliates: Rolling 1 Year Excess Return 2 15% 1 5% -5% -1-15% -2 Research Affiliates: Rolling 1 Year Excess Return & MSCI EAFE return Manager Excess Rtn. Index UP Index STABLE Index DOWN Index Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 75% 6 45% 3 15% -15% -3-45% -6-75% MSCI EAFE: Rolling 1 Year Return MSCI EAFE: Rolling 1 Year Return 2 Research Affiliates: Calendar Year Excess Return & MSCI EAFE Return 6 Average Excess Return 15% 4 Macro Factors Range Up Down Stable Range of Values Highest Sensitivity MSCI EAFE roiling 1 yr P/E (Change) % 1.5% 0.8% 5.9% Up GDP Growth (Change) 0.5% 4.6% 2.9% 0.1% 4.4% Up Country Dispersion (Diff fr Avg) % 0.7% 3.4% 8.2% Up Sector Dispersion (Diff fr Avg) 4.5% 5.2% 1.1% 1.8% 4.1% Up Global Credit Corp OAS (Change) % 4.6% 0.4% 4.1% Down Wtd. Avg Exchange Value of USD 1.5% 3.4% 2.4% % Up Commodities % 6.1% 1.1% 5.7% Down Research Affiliates: Annual Excess Return 1 5% -5% -1-15% % 0.6% Manager Excess Rtn. Index UP Index STABLE Index DOWN Index 4.2% 3.1% MSCI EAFE: Annual Return

19 IV. Manager Detail 19

20 Firm Background Period Ending: September 30, 2010 Dimensional Fund Advisors Location : Austin, Texas Assets by Client Type (Total: $187,905 Million) Founded : 1981 Firm Background: Dimensional Fund Advisors Inc., a registered investment adviser under the Advisers Act of 1940, is headquartered in Austin with offices in Santa Monica, London, Sydney, Vancouver and Chicago. Dimensional was founded in April 1981 to provide institutional investors access to asset classes or dimensions of the market which provide high risk adjusted returns. Dimensional's key investment professionals, David Booth and Eugene Fama, have worked together since Dimensional has worked closely with a number of leading financial economists, such as Eugene Fama and Kenneth French. These academics have worked closely with Dimensional to develop investment strategies and policy. Virtually all of Dimensional's investment strategies are supported by academic research. Firm Ownership: Dimensional Fund Advisors Inc. is a private corporation and is not a subsidiary or joint venture partner of any other organization. Their affiliates consist of their subsidiaries, including their incorporated overseas offices - London, Sydney and Vancouver - their investment management companies (including mutual funds), their group trusts and DFA Securities Inc., their broker/dealer. DFA is 61% owned by employees and 39% owned by outside directors and other investors. 48 employees share in the ownership. text1 Label 17 Mutual Funds 57.6% Corporate 23.8% Public 5.9% Endowment/Foundation 5.4% Other 3.7% Defined Contribution 2. Taft Hartley 0.9% Insurance 0.6% Individual/Wrap 0.1% Non US Equity 46.4% US Equity 29.3% $0 $20,000 $40,000 $60,000 $80,000 $100,000 Assets by Asset Class (Total: $187,905 Million) US Fixed Income 13.9% Non US Fixed Income 7.6% Other 2.1% Non US Balanced 0.8% "Other" Assets by Client Type includes sub advised assets. 20 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000

21 Firm Background Period Ending: September 30, 2010 Morgan Stanley Investment Management Location : New York, New York Assets by Client Type (Total: $151,299 Million) Founded : 1975 Firm Background: Morgan Stanley represents the union of two firms with strong histories: Morgan Stanley, established in New York in 1935, and Dean Witter, established in San Francisco in Morgan Stanley Group Inc. and Dean Witter, Discover & Co. merged on May 31, 1997 to form Morgan Stanley Dean Witter & Co. After changing its brand name to Morgan Stanley in April 2001, the firm legally changed its name in June In conjunction with the firm name change, the asset management division took a new brand name as well, Morgan Stanley Investment Management. Morgan Stanley Investment Management's investment advisory affiliates include Morgan Stanley Investment Advisors Inc., Van Kampen Investments and Morgan Stanley Investment Management Inc. and its non-us affiliates. Mutual Funds 36.2% Other 28.8% Corporate 18.2% Public 9.5% Insurance 4.9% Endowment/Foundation 1.7% Taft Hartley 0.3% Health 0.3% Firm Ownership: Morgan Stanley is a publicly held company whose shares trade on the New York Stock Exchange under the symbol MWD. The firm estimates that employees own approximately 25% of the firm's shares. text1 Label 17 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 Assets by Asset Class (Total: $151,299 Million) Non US Equity 41. Non US Fixed Income 20.9% US Fixed Income 19.9% US Equity 12.5% Non US Balanced 3.2% Alternatives 1.8% US Balanced 0.7% Asset data shown as of 6/30/ $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

22 Firm Background Period Ending: September 30, 2010 Pyrford International PLC Location : London, Other Assets by Client Type (Total: $2,987 Million) Founded : 1987 Firm Background: Pyrford International is specialist value investment manager based in London, England. Core to the firms investment beliefs are the following: 1. Focus on absolute returns and absolute risk. 2. Be disciplined throughout the cycle. The process will deliver over time. 3. Both stock-picking, and country allocations are important drivers of total return. Emphasis changes over the course of the cycle thus we take a long-term view. 4. Diverge significantly from the benchmark when the process dictates. Public 32.4% Corporate 32. Other 12.3% Mutual Funds 9.7% Endowment/Foundation 7.4% Individual/Wrap 5.6% Insurance 0.7% Firm Ownership: Bank of Montreal Capital Markets (Holdings) Limited, a company within the BMO Financial Group (being Bank Of Montreal and its subsidiaries), acquired 10 of the share capital of Pyrford International in December text1 Label 17 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Assets by Asset Class (Total: $2,987 Million) Non US Balanced 53.1% Non US Equity 46.9% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 22

23 Firm Background Period Ending: September 30, 2010 Research Affiliates Location : Newport Beach, California Assets by Client Type (Total: $3,783 Million) Founded : 2002 Firm Background: Research Affiliates, LLC was organized as a Limited Liability Corporation on March 5, 2002 and is an investment adviser registered under the Investment Advisers Act of 1940 with the U.S. Securities and Exchange Commission (SEC). The sole line of business is investment management services for institutional and retail clients. Research Affiliates, LLC, was founded by Robert D. Arnott to generate research-driven solutions. The firm offers proprietary solutions in the areas of active asset allocation, optimal portfolio construction, equity indexation, and enhanced equity indexation. Research Affiliates product partnership affiliations take the form of direct asset management, sub-advisory services, and licensing agreements. Public 49.5% Taft Hartley 18.9% Other 18.5% Corporate 12.8% Individual/Wrap 0.3% Firm Ownership: The firm s principle owner is Robert D. Arnott. He currently holds a 92% ownership interest through the Arnott Family Trust. The firm is committed to broadening ownership to include key employees. Currently, Jason Hsu, Director, Research & Investment Management and Janine Nesbit, Director, Administrative and Chief Compliance Officer each hold equity in the firm of less than 5% of total firm value. text1 Label 17 Other 100. $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 Assets by Asset Class (Total: $3,783 Million) "Other" Assets by Asset Class includes Global Tactical Asset Allocation portfolios. 23 $0 $400 $800 $1,200 $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000

24 Product Overview Period Ending: September 30, 2010 Management Portfolio Management Strategy Assets Investment Manager/Product Style Bias Style # Port Mgrs # Analysts ($mm) Dimensional Fund Advisors: International Value Strategy Value Quantitative $7,650 Morgan Stanley Investment Management: International Equity Value Bottom-Up 7 1 $15,517 Pyrford International PLC: International Equity Value Top-Down/ 8 1 $1,379 Bottom-Up Research Affiliates: RAFI Enhanced International Core / Value Tilt Quantitative 2 16 $2,184 24

25 Equity Characteristics Period Ending: September 30, 2010 Beta (3 Years vs. MSCI EAFE INDEX ) R-squared (3 Years vs. MSCI EAFE INDEX ) DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 0.00 DFA Morgan Stanley(MSIM) Pyrford Research Affiliates Average Market Capitalization($Million) Median Market Capitalization($Million) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 36,601 45,852 45,521 41,670 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 5,315 15,079 17,211 5,660 DFA Morgan Stanley(MSIM) Pyrford Research Affiliates DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 25

26 Equity Characteristics Period Ending: September 30, 2010 Price-to-Earnings Ratio Price-to-Book Ratio DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 0.0 DFA Morgan Stanley(MSIM) Pyrford Research Affiliates Turnover (%) Dividend Yield (%) DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 0.0 DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 26

27 Equity Characteristics Period Ending: September 30, 2010 Current Number of Holdings Investment Manager Historical Range in Holdings 1,100 1,078 Dimensional Fund Advisors Morgan Stanley Investment Management Pyrford International PLC Research Affiliates , DFA Morgan Stanley(MSIM) Pyrford Research Affiliates Current Cash Position Investment Manager Historical Range in Cash Dimensional Fund Advisors 0-4% Morgan Stanley Investment Management 1-5% Pyrford International PLC 1-16% Research Affiliates 0-5% 3.00 % 2.00 % 2.7% 1.6% 1.3% 1.00 % 0.4% 0.00 % DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 27

28 Style Analysis: Rolling 3 Year Cartesian Graph Period Ending: September 30, 2010

29 Fresno County Employees' Retirement association Historical Regional Allocations Period Ending: September 30, 2010 DFA International Value Morgan Stanley International Equity Pyrford International Equity i Q Q Q10 Europe ex-uk United Kingdom Asia ex-japan Japan North America Emerging Markets

30 Fresno County Employees' Retirement association Historical Regional Allocations Period Ending: September 30, 2010 RA Enhanced RAFI International 10 MSCI EAFE Index Q Q10 Europe ex-uk United Kingdom Asia ex-japan Japan North America Emerging Markets 30

31 Performance Review: Annualized Periods Period Ending: September 30, 2010 Annualized Returns Investment Manager 10 Yrs 9 Yrs 8 Yrs 7 Yrs 6 Yrs 5 Yrs 4 Yrs 3 Yrs 2 Yrs 1 Yr Benchmarks MSCI EAFE INDEX GROSS FTSE RAFI DEVELOPED ex US 1000 INDEX MSCI EAFE VALUE INDEX Universe Int'l Developed Market Equity Funds Median Investment Manager Candidates (figures bold if below benchmark Index: MSCI EAFE INDEX ) Dimensional Fund Advisors Morgan Stanley Investment Management Pyrford International PLC Research Affiliates All Returns are before investment fees and are calculated by the investment manager in compliance with the AIMR standards. 31

32 Performance Review: Calendar Years Period Ending: September 30, Month Periods Ending December YTD Batting Investment Manager Average Benchmarks MSCI EAFE INDEX GROSS FTSE RAFI DEVELOPED ex US 1000 INDEX MSCI EAFE VALUE INDEX Universe Int'l Developed Market Equity Funds Median Investment Manager Candidates (figures bold if below benchmark Index: MSCI EAFE INDEX ) Dimensional Fund Advisors Morgan Stanley Investment Management Pyrford International PLC Research Affiliates All Returns are before investment fees and are calculated by the investment manager in compliance with the AIMR standards. Batting Average calculation does not include the year-to-date period. 32

33 Up & Down Market Performance Period Ending: September 30, 2010 Three Year Period Ending September 30, 2010 Investment Manager Up Market Return Capture Down Market Return Capture % MSCI EAFE INDEX Dimensional Fund Advisors % % Morgan Stanley Investment Management % % Pyrford International PLC % % Research Affiliates % % % 76.2% 83.6% 83.6% 77.8% 109.5% 96.5% Number of Quarters: DFA Morgan Stanley(MSIM) Pyrford Research Affiliates Up Market Capture Down Market Capture Five Year Period Ending September 30, 2010 Investment Manager Up Market Return Capture Down Market Return Capture % MSCI EAFE INDEX Dimensional Fund Advisors % % Morgan Stanley Investment Management % % Pyrford International PLC % % Research Affiliates % % % 73.4% 83.6% 80.6% 77.8% 107.2% 96.5% Number of Quarters: DFA Morgan Stanley(MSIM) Pyrford Research Affiliates 33 Up Market Capture Down Market Capture

34 Rolling Three Year Excess Returns vs MSCI EAFE INDEX Period Ending: September 30, 2010 Index: MSCI EAFE INDEX DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International 34

35 Rolling Five Year Excess Returns vs MSCI EAFE INDEX Period Ending: September 30, 2010 Index: MSCI EAFE INDEX DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International 35

36 Rolling 3-Year Excess Returns vs. Universe Median Period Ending: September 30, 2010 Universe: Int'l Developed Market Equity Funds DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International 36

37 Rolling Three Year Tracking Error vs MSCI EAFE INDEX Period Ending: September 30, 2010 Quarterly Five Years Tracking Error (Rolling 3 Years) Tracking Error (5 Years) DFA Morgan Stanley(MSIM) Pyrford Research Affiliates DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International Tracking Errror Error is the standard deviation of the difference between the rate of return of a portfolio and its benchmark (i.e., excess return). Contributors to a manager's tracking error may include the aggressive or conservative nature of their approach, portfolio concentration and/or sector weightings relative to the benchmark. You would expect a passively-managed index fund to have a tracking error of zero. 37

38 Rolling Three Year Information Ratio vs MSCI EAFE INDEX Period Ending: September 30, 2010 Quarterly Five Years Information Ratio (Rolling 3 Years) Information Ratio (5 Years) DFA Morgan Stanley(MSIM) Pyrford Research Affiliates DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International Information Tracking Error Ratio is a measure of a manager s ability to earn excess return without incurring additional risk relative to the benchmark. It is calculated as excess return divided by tracking error. You would expect a passively-managed index fund to have an information ratio of zero; good information ratios are above zero. 38

39 Three Year Risk vs Return Period Ending: September 30, 2010 Universe: Int'l Developed Market Equity Funds Return Risk DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International FTSE RAFI DEVELOPED ex US 1000 INDEX MSCI EAFE INDEX MSCI EAFE VALUE INDEX 25th Percentile Median (Return) 75th Percentile Median (Risk) 39

40 Five Year Risk vs Return Period Ending: September 30, 2010 Universe: Int'l Developed Market Equity Funds Return Risk DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International FTSE RAFI DEVELOPED ex US 1000 INDEX MSCI EAFE INDEX MSCI EAFE VALUE INDEX 25th Percentile Median (Return) 75th Percentile Median (Risk) 40

41 Ten Year Risk vs Return Period Ending: September 30, 2010 Universe: Int'l Developed Market Equity Funds Return Risk DFA:IVP Morgan Stanley(MSIM):Intl Equity Pyrford:Intl Eq Research Affiliates:RAFI International FTSE RAFI DEVELOPED ex US 1000 INDEX MSCI EAFE INDEX MSCI EAFE VALUE INDEX 25th Percentile Median (Return) 75th Percentile Median (Risk) 41

42 Fund Expenses: Period Ending: September 30, 2010 Minimum Pricing Expense 12B-1 Subject to Investment Manager Vehicle Investment Breakpoint Ratio Fee Ratio Annual Fee Dimensional Fund Advisors International Value Strategy Separate Account $75,000,000 $100,000, % $100,000,000 $450,000 $999,999, $75,000,000 $225,000 Weighted Average: 0.39% $175,000,000 $675,000 Mutual Fund $2,000,000 $999,999, % $175,000,000 $805,000 (DFIVX) Morgan Stanley Morgan Stanley International Equity Strategy Separate Account $100,000,000 $25,000, $25,000,000 $200,000 $25,000, $25,000,000 $150,000 $25,000, $25,000,000 $125,000 $999,999, $100,000,000 $400,000 Weighted Average: 0.5 $175,000,000 $875,000 Commingled Fund $25,000,000 $25,000, $25,000,000 $225,000 $25,000, % $25,000,000 $187,500 $25,000, $25,000,000 $150,000 $25,000, $25,000,000 $125,000 $999,999, % $75,000,000 $337,500 Weighted Average: 0.59% $175,000,000 $1,025,000 Pyrford International PLC Pryford International Equity Strategy Separate Account $25,000,000 $25,000, % $25,000,000 $187,500 $25,000, % $25,000,000 $162,500 $50,000, $50,000,000 $250,000 $999,999, % $75,000,000 $262,500 Weighted Average: 0.49% $175,000,000 $862,500 Commingled Fund $3,000,000 $5,000, $5,000,000 $50,000 $15,000, % $15,000,000 $142,500 $80,000, $80,000,000 $560,000 $999,999, $75,000,000 $375,000 Weighted Average: 0.64% $175,000,000 $1,127,500 2

43 Fund Expenses: Period Ending: September 30, 2010 Minimum Pricing Expense 12B-1 Subject to Investment Manager Vehicle Investment Breakpoint Ratio Fee Ratio Annual Fee Research Affiliates RAFI Enhanced International 1 Separate Account $100,000,000 $175,000, % $175,000,000 $446,250 (AUM Based Fee) Separate Account $100,000,000 $175,000, % $175,000,000 $105,000 (Performance Based Fee) + 15% over the cap-weighted index? Total: 0.06% + $105,

44 Correlation Matrix Period Ending: September 30, 2010 DFA International Value Strategy Morgan Stanley International Equity Strategy Pyrford International Equity Strategy Research Affiliates Enhanced RAFI International Strategy FTSE RAFI Developed ex U.S Index MSCI EAFE Index MSCI EAFE Value DFA International Value Strategy 1.00 Morgan Stanley International Equity Strategy Pyrford International Equity Strategy Research Affiliates Enhanced RAFI International Strategy FTSE RAFI Developed ex U.S Index MSCI EAFE Index MSCI EAFE Value * Correlation matrix derrived using monthly returns (June September 2010) 44

45 Product Background Period Ending: September 30, 2010 Dimensional Fund Advisors: International Value Strategy Strategy Information Style Bias: Management Style: Typical Portfolio Size: Assets ( millions ): Value Three Year Account Turnover Gained Year Assets $M Accts Historical Growth in Assets ($ Millions) $7,000 $6,000 $5,000 $4,000 $3, Quantitative $7,650 $8,000 $7,650 $3,735 $4, $6,152 Lost Assets $M Accts $3,345 7 $5,552 2 Investment Strategy Description : The International Value strategy is designed to capture the return and diversification benefits of a broad cross-section of international large cap value companies. The strategy combines a market capitalization approach with a number of names implementation to ensure broad diversification. This approach targets approximately the largest 85-9 of the market universe which may vary by country and region over time. The strategy invests within the highest 3 when ranked by book-to-market (BtM) ratio. Securities are considered value stocks primarily because a company's shares have a high book value in relation to their market value. This BtM sort excludes firms with negative or zero book values. Investment Process : Dimensional uses a highly disciplined approach to portfolio construction. The sources of information include the use of a variety of information services to collect and analyze data. Electronic sources include DataStream, Extel, WorldScope, Instinet Analytics, Compustat, Bloomberg, Disclosure, OneSource, Reuters and Bridge Information systems. In addition to the variety of information sources and academic research, the firm has established relationships with local brokerage firms in each country to provide insight into the local markets as well as individual securities. The firm's research efforts are directed by the Investment Committee and are coordinated in the Santa Monica headquarters. The Investment Committee uses this research for product development and for setting the policies and procedures for all portfolios. The firm's investment approach combines both top-down and bottom-up elements. The top-down analysis involves drawing the boundaries for qualifying countries and company characteristics. It does not include macro-economic forecasting or tactical country allocation decisions. In the bottom-up analysis, Dimensional analyzes the attributes of individual securities for portfolio suitability given the investment guidelines. Dimensional employs a combined or team approach in managing client s assets. The Investment Committee sets the overall investment strategy including asset allocation country selection and portfolio construction. The Portfolio Managers implement the established policies and procedures and make daily decisions regarding the portfolios. The International Value strategy invests in companies of EAFE countries with Market capitalization in roughly the top 9 of each country and Book-to-market ratio is in the upper 3 of the investment universe for each country. Dimensional's sell discipline is designed to minimize transaction costs and reduce portfolio turnover by taking in to account a sell candidate s market capitalization, book value-to-market ratio and transaction costs. $2,000 $1,000 $ /30/10 45

46 Product Background Period Ending: September 30, 2010 Morgan Stanley Investment Management: International Equity Strategy Information Style Bias: Management Style: Typical Portfolio Size: Assets ( millions ): Value Bottom-Up $15,517 Three Year Account Turnover Gained Year Assets $M Accts Historical Growth in Assets ($ Millions) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 1,534 $36,655 $34, $29, Lost Assets $M Accts $16,812 $17,752 $15, /30/10 Investment Strategy Description : The International Equity team believes that the best route to long term returns is through downside protection and long term compounding. Stock prices ultimately converge to their long term intrinsic value, but in the short term markets can overreact. As a result, long term investors can take advantage of pricing anomalies, but an attractive price alone does not make a stock a compelling investment. In-depth fundamental analysis is key to identifying quality stocks with long term compounding potential. The team employs a disciplined bottom-up, value-driven approach to investing. The team s strategy is to purchase superior business franchises at a substantial discount to their long-term fair value. The approach is stock specific and predominantly qualitative, concentrating on rigorous fundamental company analysis. Within this stock specific context the team focuses on the portfolio s overall absolute risk rather than on relative or benchmark risk in an attempt to minimize those risks that can jeopardize long-term returns. The team also believes that closely monitoring portfolio holdings using the same in-depth research that defines the stock selection process is critical to updating knowledge about existing holdings to justify continued inclusion in the portfolio. Investment Process : The investment process begins with a search of several international equity databases. FactSet, a program which combines a number of source databases and allows the user to sort data based on customized criteria is used in the initial search. By filtering an equity universe of some 1,000 stocks, the team is able to identify a subset of securities that appears to offer attractive absolute and/or relative value. The initial search is carried out on a regular (weekly) basis and is further supplemented by ad hoc searches as market conditions and portfolio maintenance warrants. The screening process provides two important advantages. First, it eliminates stocks that do not meet the team s liquidity and valuation requirements. In addition, the screening process makes efficient use of evolving technology and changing databases, allowing the team to devote more time on qualitative fundamental analysis which is integral to determining whether an inexpensive stock offers real value. Valuation Criteria: An important goal of the team s analysis is to make accurate comparisons between companies that are domiciled in different countries. Variations among global accounting practices can lead to misinterpretation of many standard valuation measures. This process is designed to minimize this uncertainty by focusing on cash flow or asset based valuation measures (rather than reported earnings) that are less susceptible to distortions caused by different accounting policies. Buy Discipline: The International Equity team s philosophy is firmly rooted in the search for both value and quality. As a result, the team conducts extensive fundamental analysis to identify quality companies. Sell Discipline: The sell target, or the price that represents a stock s fair value, is included in that stock s investment thesis. Sell targets are revised as part of the team s ongoing maintenance research (applying the same in-depth fundamental analysis that defines the initial stock selection process). While no sale is automatic, a security is typically sold if it meets a given set of criteria. Portfolio Construction: The intensive research process results in a diversified portfolio of approximately of the team s best investment ideas. The portfolio s country and sector weightings are a residual of the bottom-up stock selection process. The team s primary focus is to choose superior companies whose stocks are attractively valued, regardless of country of domicile. While there are no predefined exposure limits, the team maintains broad diversification by country, sector and market capitalization to prevent undue concentration. 46

47 Product Background Period Ending: September 30, 2010 Pyrford International PLC: International Equity Strategy Information Style Bias: Management Style: Typical Portfolio Size: Assets ( millions ): Value Three Year Account Turnover Gained Year Assets $M Accts Historical Growth in Assets ($ Millions) $2,500 $2,000 $1,500 $1,000 $500 $0 176 $2,039 $1,912 $1, Top-Down/ Bottom-Up $1, Lost Assets $M Accts $ $1,389 $1, /30/10 Investment Strategy Description : Pyrford's investment strategy is active and value-driven based on a top-down country allocation approach followed by a rigorous bottom-up stock selection process. They believe over the long-term markets appreciate in line with earnings growth. Therefore, energy is spent in forecasting future earnings movements over the next 5 years and relating these to stock market valuations. They also believe that significantly increased risk-adjusted returns can be produced over the long term for Pyrford's clients by utilizing fundamental analysis of world economies and markets. This process leads Pyrford to participate only in those markets in which it is felt that value exists. Pyrford can, therefore, at times be absent from major markets and equity country allocations can thus differ markedly from the relevant index or peer group averages. Investment Process Decision making steps: (1) Country allocation - Country decisions are made by the Investment Strategy Committee (ISC) made up of the three senior investment professionals. This policy, subject to specific client guidelines, is applied to all accounts. (2) Security selection - Fund managers have full discretion in selecting stocks in their regions. (3) Sector/industry allocation - The model portfolio is checked to see that there is sufficient industry diversification. Economic sectors will be consistent with the firm's macro-economic outlook. (4) Currency management - Currency policy decisions are made by the ISC based on purchasing power parity analysis and judgment calls on specific event risks. Investment Process : Screens are done on a regional basis in Europe and at the country level in Asia. The starting point for the European stocks is the DJ Stoxx European Index which comprises 600 companies. In Asia individual country indices are used. For example, in Thailand the SET 50, in Hong Kong the HSCI 200 and in Japan the universe of listed stocks are used as the basis of the screens. Pyrford employs a three-level screening process with the initial universe prior to screening consisting of around 1600 stocks. The final screened universe consists of approximately 360 stocks. Ultimately Pyrford will own around of these. - Screen 1: Market capitalization: Eliminates stocks which are smaller than a certain size. The cut-off in each region/country is dependent upon the size of those markets. - Screen 2: Interest cover, return on equity and price earnings ratio: The second set of screens relate to financial quality. - Screen 3: Qualitative: Has value been created for minority shareholders? Companies with management not working for minority shareholders' interests are eliminated. In selecting a stock the most important consideration is the long term value which it offers. Pyrford uses a total return concept to define value, in which the key elements are dividend yield and five-year forecast of growth in earnings per share. All portfolio holdings are continuously monitored by the relevant regional specialist portfolio manager. Generally, stocks are sold for three reasons: - The company s share price rises to such an extent that the sum of its dividend yield and forecast long term earnings per share growth falls to a level below that of the total local market or alternative stocks within that market. - Changes occur in company strategy or industry which in Pyrford's view will affect its long term ability to generate adequate long term earnings per share growth. - A country allocation change has been made and it has been decided to no longer maintain client funds in the country. 47