Oklahoma Municipal A/C# 7000374400 Quarter Ending June 30, 2008 Client Relationship Manager Katie Burke (617) 346-7692 Katie.Burke@gmo.com Investment Management Review
Table of Contents Quarter Ending June 30, 2008 Performance............................................................. 3 Change in Market Value................................................... 4 Global Market Review..................................................... 5 Investment Review........................................................ 6 Profile Summary......................................................... 7 Process Review........................................................... 9
Performance Net of Fees and Expenses in USD Periods Ending June 30, 2008 Annualized Investment Month Quarter YTD 1 Year 3 Year 5 Year Since Inception* Market Value (000) International Intrinsic Value (11/22/2005) -7.14 % -1.62 % -9.70 % -11.18 % N/A N/A 10.45 % 3,183 S&P/Citigroup PMI EPAC Value -8.89-3.95-12.47-11.99 N/A N/A 11.49 Value Added 1.75 2.33 2.77 0.81 N/A N/A -1.04 MSCI EAFE -8.18-2.25-10.96-10.61 N/A N/A 10.99 Value Added 1.04 0.63 1.26-0.57 N/A N/A -0.54 * Periods of less than a year are not annualized Page 3, July 16, 2008 4:38:10 am
Change in Market Value, Account Detail in USD YTD Ending June 30, 2008 Fund % Of Fund Market Value 12/31/2007 Cash Flows International Intrinsic Value Fund-II 0.04 3,524,937 0 Total 3,524,937 0 Gains/ Losses Current Shares Price Market Value 06/30/2008-341,792 109,198.782 29.15 3,183,144-341,792 3,183,144 Page 4, July 16, 2008 4:38:10 am
Global Market Review Quarter Ending June 30, 2008 The second quarter of 2008 was a tale of two halves. At the end of the first quarter the market behaved as if we had just seen a one act play that finished with the Federal Reserve riding to the rescue and delivering Bear Stearns into the hands of JPMorgan. The market sighed in relief and risky assets started to rally back. For a moment until mid May it looked like the worst might indeed be behind us, but the oil market villain was clamoring for attention and could not be ignored. The first shot across the bow came in April as Brent crude climbed 8%. The market, however, refused to buckle and risky assets rallied across the board. The oil market s reaction was swift in coming and, like a lover scorned, determined to teach the equity markets a lesson that they would not soon forget. In rapid succession, oil climbed 15% in May, followed by another 8% in June, finishing the quarter at just under $140/barrel. As the rest of the commodities followed suit (the Dow Jones AIG rose 16% for the quarter), the broad market finally threw in the towel and the S&P fell 8.4% in June for a quarterly return of -2.7%. In the large cap style ranges growth was able to escape the worst and was up 1.25%, handsomely beating value, which fell 5.3%. Small cap managed to cling to a modest return of 0.6% despite falling 7.7% in June alone. Small cap value was a little more resilient than its large cap brethren but still finished down 3.5%. Small cap growth, on the other hand, escaped the damage entirely and returned a respectable +4.5%. Outside the U.S., foreign equities held up slightly better, reversing the pattern seen in the first quarter. EAFE finished down 2.3% in dollar terms but down only 0.9% on a local currency basis. As with the U.S., however, value was trounced by growth, returning -4.6% and 0%, respectively. Increasing oil prices were a worry for bonds as well during the quarter. Markets were spooked by the prospect of higher commodity prices feeding through to inflation and pushed yields on 10-Year Treasuries and Bunds higher. The U.S. 10-year yield jumped 55 basis points to finish at 3.98% while the 10-year Bund increased by 69 basis points, finishing at 4.58%. Rising yields meant bonds provided no safe haven this quarter, and the Lehman Aggregate fell 1% while the JPMorgan U.S. Government Bond index fell further, down 2.2%. International bonds fell even further with the JPMorgan Global Government Bond index down 4.4%. Page 5, July 16, 2008 4:38:10 am
International Intrinsic Value Strategy - Investment Review Quarter Ending June 30, 2008 International Intrinsic Value Strategy Product Manager: Tom Rosalanko Investment Objectives: Provide consistent exposure to value stocks in developed markets outside the U.S. Outperform both the MSCI EAFE and S&P/Citigroup PMI EPAC Value Index by +3% per year net of fees over a market cycle. Tracking error of +/- 5% per year around the value index. Absolute risk lower than the EAFE index. The International Intrinsic Value Strategy returned -1.4% during the second quarter of 2008. This was ahead of the broad market MSCI EAFE index, which returned -2.3% and the S&P/Citigroup PMI EPAC Value benchmark, which returned -4.0%. Within the portfolio, stock selection and sector exposures were the primary drivers of the outperformance. Country allocation also added some value, while currency allocation detracted. Stock selection contributed significantly, especially our holdings in France, Italy, and Japan. Sector exposures added value, notably from our overweight to Energy and underweight to Financials. Country allocation was helped by our overweights in Canada and Japan and underweight in Spain. Currency allocation was a drag on relative performance due to our overweight to the Japanese yen and underweights to the Australian dollar and British pound. s stock selection disciplines all were successful in the quarter. Stocks selected for their strong momentum characteristics outperformed the most. Those with attractive valuations, ranked highly by either quality-adjusted value or intrinsic value, also outperformed. Individual stocks that made significant positive contributions to performance included French oil company Total, Italian oil company ENI, British pharmaceutical GlaxoSmithKline, and Japanese auto maker Honda Motor. Stock positions that detracted from relative performance included British financials Royal Bank of Scotland and HBOS and British oil company BP. Page 6, July 16, 2008 4:38:10 am
International Intrinsic Value Strategy - Profile Summary As of June 30, 2008 Top Ten Holdings 2 GlaxoSmithKline PLC 4.9% Total S.A. 4.8% Eni S.p.A 3.7% Sanofi-Aventis 2.8% Vodafone Group PLC 2.8% Royal Dutch Shell PLC 2.7% Novartis AG 2.4% ING Groep N.V. 1.9% Rio Tinto PLC 1.9% Honda Motor Co. Ltd. Total 1.8% 29.7% Risk Profile Since 06/30/1989 3 Portfolio Benchmark 1 Alpha 3.88.00 Beta.77 1.00 R-Squared.83 1.00 Sharpe Ratio.48.22 Regional Weights vs. Benchmark 1 Sector Weights vs. Benchmark 1 Characteristics Portfolio Benchmark 1 Price/Earnings - Hist 1 Yr Wtd Median 11.3x 11.0x Price/Cash Flow - Hist 1 Yr Wtd Median 8.8x 7.0x Price/Book - Hist 1 Yr Wtd Avg 1.7x 1.5x Return on Equity - Hist 1 Yr Avg 18.6% 13.7% Market Cap - Weighted Median -Bil 45.0 USD 23.9 USD Dividend Yield - Hist 1 Yr Wtd Avg 4.0% 4.2% GICS Sectors 1 S&P/Citigroup PMI EPAC Value 2 Portfolio holdings are a percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio's sensitivity to the market; R-Squared is a measure of how well a portfolio tracks the market; Sharpe ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. Page 7, July 16, 2008 4:38:10 am
International Intrinsic Value Strategy - Profile Summary As of June 30, 2008 Country Allocation Currency Allocation Page 8, July 16, 2008 4:38:10 am
International Intrinsic Value Strategy - Process Review Overview On an annualized basis, the International Intrinsic Value Strategy seeks to outperform the S&P/Citigroup PMI EPAC Value Index by 3%, net of fees, over a complete market cycle. The Strategy is a disciplined value portfolio which uses fundamental investment principles and quantitative applications to provide broad international equity exposure. Page 9, July 16, 2008 4:38:10 am
International Intrinsic Value Strategy - Process Review Methodology The investment process for the International Intrinsic Value Strategy begins with a universe of stocks from developed markets outside the U.S. The Strategy uses primarily disciplined value techniques to assess securities. Stocks are ranked on valuation measures such as Price/Earnings, Dividend Yield, Price/Book Value, and Price/Sales. A credit is given to higher quality stocks as measured through sustained high levels of profitability and lower levels of debt. The Strategy also uses a Dividend Discount Model that predicts future free cash flow. Predictions are based on the principle of regression to the mean, while recognizing 's belief that higher quality stocks are able to maintain competitive advantages farther into the future. The Strategy also uses price momentum and earnings revision factors to rank stocks that pass a valuation screen. The Strategy seeks to hold securities that score highly on these parameters. In addition, the Strategy uses risk and return forecasts for countries and currencies using historical, current, and future estimates of financial data that relate the current economic scenario to future return patterns. Factors include aggregate stock market valuations, GDP and stock market trends, positive market sentiment, export and producer price parity, balance of payments, and interest rate differentials. Portfolio Construction The International Intrinsic Value Strategy is constructed using a portfolio optimization process that weighs the trade-off of a stock's attractiveness against its contribution to the risk of the portfolio in comparison to the benchmark. Risk factors include stock specific exposure, countries and currencies, industry sectors, market capitalization tiers, as well as other style factors. The portfolio is implemented primarily through securities, but may also hold positions in financial futures and foreign exchange contracts. Page 10, July 16, 2008 4:38:10 am