SPRING Warmest regards, TERRY TOTH President, Northern Trust Global Investments

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1 SPRING 2004 DEAR CLIENT: We re pleased to introduce NTGI Viewpoints, a new publication designed to provide you with investment insights, views on current global money management trends and a forum to address the most pressing issues that affect your investment programs. At Northern Trust Global Investments, we spend a good deal of time focusing on your issues. In fact, over the years, we ve built our investment management business in anticipation of your evolving needs. And as your organizations have expanded globally, so has ours with new offices across the United States as well as in markets around the world. Our growth has been strategic, yet rapid, in order to offer you the benefits of a global enterprise with local servicing. Over the past year, we added substantially to our investment resources in Tokyo, London, New York, and Chicago, bringing on 34 new investment professionals across a wide range of product capabilities. We welcomed more than 200 new clients, and at yearend, managed assets of more than $470 billion, which places us among the 15 largest investment managers worldwide. Today, we offer a wide range of investment strategies and services, from index and quantitative strategies to manager of managers programs, including alternative investments and total investment program outsourcing. Yet we continue to look for new ways to bring value-added services to you through ongoing research and product development. One example is the ongoing expansion of our enhanced index capabilities, which is discussed in more detail in this issue s The Quest for Alpha. This exciting period of record growth and development of new capabilities has been importantly supported by our close partnership and ongoing dialog with you. Additionally, the NTGI Client Advisory Board has been an invaluable resource to us over the past seven years, providing us with perspectives and enhancing our ability to anticipate and address your issues, and enabling us to better serve you. We are pleased to welcome three new board members in this issue. In closing, we appreciate your confidence in our capabilities and as always, we look forward to continuing to work closely with you as this year unfolds. Warmest regards, TERRY TOTH President, Northern Trust Global Investments

2 SPRING 2004 The Quest For Alpha WHEN THE CITY OF SOUTHFIELD Fire and Police Retirement System shifted $20 million from its US mid-cap equity index portfolio to a new enhanced mid-cap portfolio last October, it was in good company. Institutional investors of all sizes have been assessing the benefits of enhanced indexing, and many of them have already made the move. According to recent industry reports, institutional investors had committed more than $200 billion to enhanced strategies at year-end 2002, and the number continued to grow in Why the increased interest? There are several reasons. While enhanced indexing has been available since the late 80s, this decade s more difficult market environment had investors looking for better ways to add consistency to their portfolios, particularly as the bear cycle extended into its third year. And even the market s bounce back in 2003 didn t help all managers equally as those focused on the lower quality, smaller cap sectors tended to fare better than the rest. As a result, the lower fees and lower tracking error offered by enhanced approaches had and still have great appeal. The lower fees and lower tracking error offered by enhanced approaches have great appeal. Please Turn to the Next Page

3 Continued from Cover NORTHERN TRUST ACADEMIC ADVISORY PANEL Northern has a select group of well-respected academics serving on its Academic Advisory Panel, who are an important resource for the extensive quantitative work supporting the enhanced indexing program. The panel includes: Nicholas Barberis, Ph. D University of Chicago Werner debondt, Ph. D University of Wisconsin and DePaul University Stephen Satchell, Ph. D Cambridge University, UK Peter Pope, Ph. D University of Lancaster, UK Another reason is the increased focus by many investors on separating beta, the market return, from alpha, the value-added excess return generated by active decision-making. There is a growing school of thought that suggests investors should use indexing for most or all of their marketgenerated return, and then layer on alpha with carefully selected active strategies, thus minimizing manager fees. Indexing represents the lowest cost way to achieve beta, so investors would be paying more only for the value-added component. Indeed, additional alpha and cost control were important factors in the City of Southfield s decision to move from a mid-cap index allocation to an enhanced strategy. As Richard Keier, president of the retirement plan board of trustees explains, Our analysis showed that enhanced indexing compared very favorably to purely active strategies in terms of performance and fees. Working with our consultant, Asset Strategies Portfolio Services, we found that enhanced mid cap index managers performed, on average, in the top third of the active mid cap managers, but with less volatility. And with their significantly lower fees, the enhanced managers offered an approach that we felt was in the best interest of our beneficiaries. George Vitta, managing director of Asset Strategies Portfolio Services agrees, commenting, History shows that few active managers consistently outperform their benchmarks, and when they do, it s often with above-market levels of volatility. Enhanced indexing approaches, on the other hand, offer a way to add alpha at very little cost to the portfolio in terms of both expenses and risk. Many of our clients with enhanced indexing allocations have experienced substantial performance benefits on the return side but without the increase in volatility. Northern Trust Commits Additional Resources To help clients take advantage of these types of benefits, Northern Trust has committed significant additional resources to its enhanced indexing program in recent years. These programs are managed with the same focus on risk and cost efficiency that underlies Northern s index investment process and has benefited clients since Northern became an early pioneer of index fund management in Today, Northern manages more than $7 billion in enhanced programs for clients, in the U.S. and abroad. The objective of Northern s enhanced strategies is to deliver consistent outperformance of the benchmark through security selection and risk control, while maintaining general style, industry and sector neutrality. For a typical enhanced S&P 500 assignment, for example, Northern targets an outperformance range of basis points, with a tracking error of basis points. Northern has a very strict approach to risk control and a focus on execution efficiency that, along with a well-defined investment process, is critical to providing consistent outperformance. The goal is to have an effective approach in all market environments, even as market dynamics change. Northern s investment process is based on a Jeremy Baskin philosophy of continuous improvement and innovation. The quantitative investment team recognizes that as markets and the needs of investors evolve, so must investment approaches. And that s why Northern has expended considerable resources researching the impact of market structure and trading on investment performance. Naturally, our most important resource is our intellectual capital our people, says Jeremy VIEWPOINTS

4 Baskin, Northern s director of global quantitative/ enhanced equities. Our quantitative management team has created a forum where the best practices drawn from a variety of experiences and insights have been combined to enhance our overall capabilities. The newest members to join the quantitative portfolio management and research team are Dr. Ajay Zutshi, and Dr. Gavin D. Brown. Ajay has more than 15 years of investment management and financial analysis experience, holds an MBA from the University of Oklahoma, a Ph.D. in finance and accounting from the Stern School of Ajay Zutshi Business at New York University, and has been published in international economic journals. Gavin has 14 years experience in quantitative research and portfolio management, and he holds a BS in mathematics and a PhD in engineering, both from the University of Strathclyde in the United Kingdom. He has had his research published in the Journal of Business Finance and Accounting. Gavin Brown Enhanced Allocations Expected to Rise Looking ahead, investors are likely to continue increasing their allocations to enhanced indexing. As Asset Strategies George Vitta notes, Plan sponsors are generally expecting below average returns from equities and bonds for the next three to five years, so the focus now is on how to increase expected returns with the greatest amount of certainty. Enhanced indexing, with its lower volatility, typically offers a higher level of certainty than active approaches, with lower fees and transaction costs as well. And that s attractive for all types of institutional investors. Welcome to our New Client Advisory Board Members Since 1997, the Northern Trust Global Investments Client Advisory Board has played an important role in the development of Northern s investment management business. The Board meets quarterly to provide NTGI management with input, perspectives and viewpoints that help shape all elements of our business strategy from client servicing and product management to branding, distribution and, of course, investment management. Northern Trust is pleased to welcome the newest members to our Client Advisory Board: Kenneth E. Smith, Director, Capital Markets for The Pepsi Bottling Group, Robert M. Smith, Jr., Executive Vice President, Delphi Financial Group, Inc. and Joseph C. Anderson, Manager, Employee Benefit Fund Investments, Texas Instruments, Inc CLIENT ADVISORY BOARD Joseph C. Anderson Walter J. Koziol Manager, Employee Benefit Director of Investments Fund Investments Illinois Municipal Texas Instruments, Inc. Retirement Fund David Bodley Stephen Lopez-Bowlan Administrative Manager Chief Financial Officer Midwest Operating Sutton Place Limited Engineers William J. Raver William L. Cobb, Jr. Chief Operating Officer Executive Vice President & Verizon Investment Chief Investment Officer Management Corp. The Church Pension Fund Miles Shackleford, CFA Director, Investment Services LifeWay Christian Resources Kenneth E. Smith Director, Capital Markets The Pepsi Bottling Group, Inc. Robert M. Smith, Jr. Executive Vice President Delphi Financial Group, Inc. David Zellner Chief Investment Officer General Board of Pension of United Methodist Church VIEWPOINTS

5 Viewpoints NORTHERN TRUST GLOBAL INVESTMENTS Newsline Transition Management: Keeping up with Change Northern Trust Global Investments is a multi-asset class investment manager serving institutional and personal clients worldwide. With more than $475 billion in assets under management, we offer our clients a full range of investment management capabilities, from single-style mandates to complete program outsourcing. We are a leader in providing: Active investment management Quantitative and enhanced index management Manager-of-managers programs, including alternative investments Transition management We serve a broad range of clients, including: Corporate and public retirement programs Not-for-profit programs Endowments and foundations Health care organizations Taft-Hartley plans Insurance companies High net worth individuals Locations: 50 S. LaSalle St., Chicago, IL E. 55th St., New York, NY Atlantic St., Suite 400, Stamford, CT Devonshire Square, London ECZA4YE Izumi Garden Tower, 6-1, Roppongi 1-chome, Minato-ku, Tokyo, , Japan 161 Bay Street, Suite 4540, B.C.E. Place Toronto, Ontario, Canada M5J 2S1 We look forward to assisting you with all of your investment needs. Please feel free to contact us anytime. Kevin Rochford, Managing Director, Global Sales and Client Servicing, Raheela Gill Anwar, Director, Client Service and Direct Sales, Don Pollak, Director, Strategic Accounts, Jim Barrett, Director, Consultant Calling and Public Funds New Business, The only constant is change, as the saying goes, and that s truer than ever in today s institutional investment world. More than $2 trillion in Jeff Blanchard pension plan assets were shifted in 2003 as investors made asset allocation or manager changes in their portfolios. And that number continues to rise, according to industry watchers. This means the role of the transition manager has become increasingly important as investors seek the most cost-effective and risk-controlled ways to manage their transitions, while maintaining exposure to their desired benchmark. One important component in selecting a transition manager, clearly, is cost, but comparing different providers can be difficult. Jeff Blanchard, global director of transition management for Northern Trust, recently shared his insights on comparing transition pre-trade bids in the January 2004 Pensions & Investments Transition Management supplement. Jeff points out that the lack of an industry standard for estimating transition costs often results in bids that differ in content, methodology and structure thus making an apples-toapples comparison of transition providers a challenge. But by applying some fairly simple techniques, institutional investors can make bids more comparable, which should lead to better transition provider selection. A related topic that s been in the news recently is interim management, which has been fueled by the recent surge in transition activity by institutional investors. Interim management is needed when a manager is terminated but a new one has not yet been selected. Interim managers are hired to maintain exposure to the plan s benchmark, and are used during both passive and active manager changes. Interim management assignments more than doubled during the fourth quarter of 2003, as reported in the January 26, 2004 issue of Pensions & Investments, increasing between $20 billion and $50 billion since September. In that issue, Northern Trust is listed among the leaders, managing close to $1 billion in interim management assignments for clients. Jeff s advice for clients considering a transition now is to make sure that their provider has a very clear understanding of their objectives, including timing For a complete copy of the Pensions & Investments Transition Management supplement, which includes more tips on comparing transition bids, please visit corporate/article_reprints.html requirements, their expectation of fiduciary responsibility and preference for transition benchmarks. Both direct costs and indirect costs need to be considered, implementation shortfalls should be estimated and trade type defined. In addition, the transition manager s ability to provide interim management is an important consideration, as well. Jeff and his team would be very pleased to assist you with any transition or interim management questions you may have. Please feel free to contact him at Northern Trust Global Investments (NTGI) comprises Northern Trust Investments, N.A.; NTGI Europe Ltd.; NTGI Japan K.K.; the investment adviser division of The Northern Trust Company; Northern Trust Global Advisors; and its subsidiaries to offer investment products and services to personal and institutional markets. Q6070 (03/04)