Institutional Investment Perspectives From Towers Watson

© 2010 Towers Watson. All rights reserved.

Institutional Investment PerspectivesFrom Towers Watson

December 14, 2010

2towerswatson.com© 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Towers Watson Investment Services (TWIS)

Who We Are Our Client Base● More than 200 U.S. clients with $650 billion in assets● 160 defined benefit plans ● 120 defined contribution plans● Corporate retirement plans are our focus

Our Resources Our Services Investment Policy Consulting

Portfolio Construction

Manager Search and Selection

Asset/liability modelingAsset allocation studiesInvestment manager structureDC line-up structureInvestment option structureInvestment product analysisRisk managementInvestment policy statement developmentSpending policy development

Dynamic strategic asset allocationOpportunistic exposure to asset classes and strategiesActive vs. passive managementSuitability assessment

Qualitative manager reviewsDetermination of number of managers and mixture of stylesTraditional asset class searchesAlternative asset class searches

“End State” Support Plan Operations Other Services

Annuity market conditions monitoringBuy-in vs. Buy-out analysisCoordination with plan administrator and insurance providers

Liquidity managementPlan rebalancingCustodial interfaceManager contract execution on behalf of Trust

DC provider searchesTrustee/custodian selectionTopical researchQuarterly fund monitoring reports

● Investment consultants since 1961● SEC registered investment advisor● Over 1,000 global investment consulting relationships● 675 worldwide associates

Global Investment Review

Resources-8 global consultants-3 dedicated full-time professionals

Focus-Economic and market views-Asset class research-Coordinate alpha and beta specialists

Investment Strategy

Resources-143 global consultants-88 dedicated full-time professionals

Activity-Over 475 ALM & Risk Budgeting studies in 2009 with a volume of $951 billion-Over 200 structured product transactions to date totaling over $100 billion

Manager Research

Resources-150 global consultants, -90 full-time-108 full-time equivalent consultants

Coverage-697 global selection exercises in 2009-94 selections for alternatives in 2009-Over 3,500 manager meetings last year

Thinking Ahead

Resources-9 consultants-7 dedicated consultants

Recent Themes-Diversity-Combined risk framework-Pension fund governance


The Next Three Years

FY10 FY13

675 associates worldwide More associates

More specialists

Stronger brand>1,000 worldwide clients

>30 AIS relationships

More delegated responsibility

Increasingly diverse client base

60% Core consulting

20% Strategy

20% Other

More asset based fees

Fiduciary outsourcing and structured products contribute an increasing share of revenue and profits

FY10 revenue ~$200m Ongoing revenue growth

Maintain financial momentum through stronger business model, research and innovation leadership and global brand


Educational Webcasts

2009 Webcasts

Watson Wyatt’s 2009 Global Survey of Investment and Economic Expectations

Watson Wyatt’s Capital Market Expectations

Implementing Sustainable and Responsible Investment Strategies During the Economic Crisis

Managing Defined Contribution Plans During the Economic Crisis

The New Reality of Pension Investment Strategies

The Current and Future State of Stable Value


Educational Webcasts

2010 Webcasts

The Impact of Extreme Risks on Economic Growth and Asset Returns

Liability-Driven Investment Strategies: Where Are We Now?

Defined Contribution Investing: Bringing Theory to Reality

Webcast — Private Equity: Emerging From the Crisis

Public Policy: Regulating the Financial Sector

Integrated Pension Journey Planning: What Does It Really Mean?


Sources of Growth

Advanced Investment Solutions (Global)

Alternatives (Global)

Structured products (Global)

Market share (Americas)

Defined contribution plans (Global)

Other institutional asset pools (Global)FoundationsEndowmentsSovereign fundsInsurers


Our Current Views

NeutralElevatedModerately attractiveDeveloped equities

NeutralElevatedModerately attractiveEmerging market equities

NeutralNeutralNeutralInvestment grade credit

NeutralNeutralNeutralAlternative credit

Moderately attractiveNeutralModerately attractiveEmerging market debt

Highly attractiveNeutralHighly attractiveEmerging market currency

Moderately unattractiveSlightly elevatedModerately unattractiveReal developed govt bonds

Moderately unattractiveSlightly elevatedModerately unattractiveNominal developed govt bonds

Overall RatingRiskReturnsAsset Class


Our Current Views

Public policy will be a big part of the future investment landscape

Investment opportunities can be captured whatever the conditions but requires

Appropriate governanceRobust quantitative portfolio construction techniques to manage— Risk exposures

— Liquidity

— Costs

— Manager exposure

— and their inter-relationship

Context is key


-

Global Manager Research Resources

European Manager Research Team

55 full-time manager researchers9 support staff

13 part-time manager researchers(65 full-time equivalents)

Americas Manager Research Team



Asia Pacific Manager Research Team



Global Manager Research Team




Stream Summary

Stream Number of people FTE* Average experience (years)

Equities 44 29.0 11.0

Bonds 27 14.5 10.7

Private Markets 31 19.3 12.8

Hedge Funds 24 14.7 11.4

Split by full time equivalent:

Equities

Bonds

Private Markets

Hedge Funds

*There are an additional 30.6 full time equivalent people involved in specialist research and in support roles


Further Globalization – Recent Announcement

Global rather than local reporting linesWithin stream rather than within market

Stream leaders and ASK heads have objectives around serving the global client base

Greater need for travel and rotating people around regions

Hire where there is need, not where there is revenue

Regional head role changesEnsure the needs of the local client base are being metSpokesperson for manager research in the regionImprove relationship with client consulting teams


Global Manager Research Structure

Martin Knowles, FIAHead of Equities

Ed BrittonHead of Bonds

Craig Baker, FIAHead of Private Markets

Damien Loveday, CFAHead of Hedge Funds

Global Leadership roles

Craig Baker, FIAGlobal Head of Manager Research

Market Leadership roles

Paul Jayasingha, FIAEMEA

Marko Komarynsky, CFA US

Mark BrugnerAsia

Hugh DoughertyAustralia

*Average years industry experience: 19 years**As of October 1, 2010

Zainul Ali, CFACanada


Areas of Specialist Knowledge (ASK)

Manager Research resources are organized into a series of ASK teams. There are ASK teams for all of the major asset classes and specialist activities in the investment industry. Each ASK team is responsible for researching all managers within its asset class, and providing recommendations of suitable managers. Teams are also responsible for staying current and providing white paper research on trends in their respective investment areas

EquitiesAustralianCanadianEAFEEmerging MarketsEuropeanGlobalHong KongJapanesePacific BasinSingaporeUKU.S.

BondsAsianAustralianCanadianEmerging MarketsEuropeanGlobalHigh YieldHong KongJapaneseSingaporeSwissUKU.S.

AlternativesCommoditiesCurrency/TAA/ Target Return Multi AssetHedge Funds – DirectHedge Funds – Fund of FundsInfrastructurePrivate Equity – DirectPrivate Equity – Fund of fundsReal Estate – EuropeReal Estate – North AmericaReal Estate – Asia Pacific

SpecialistCustodyIndexationMulti managerStructured productsSustainable Investment & Corporate GovernanceQuantitative analysis inputTarget Date FundsTransition


ASK Team Heads

*Average years industry experience: 14 years**As of October 1, 2010

Asia and EM, JapanCraig Mercer

AustraliaHugh Dougherty

CanadaZainul Ali, CFA

EAFERon Radcliff, CFA

EuropePaul Jayasingha, FIA

GlobalStephen Miles, CFA

Greater China, Hong Kong, Korea, Malaysia, Taiwan

Mark Brugner

Long-Term Long-OnlyStuart Gray

UKJim MacLachlan

US Large CapHyde Hsu, CFA

US Small CapJanice Fritz-Snyder

EquitiesMartin Knowles, FIA

Equity, Multi-StrategyLeon Beukes, FIA

Fixed IncomeDamien Loveday, CFA

Fund of Hedge FundsCraig Stevenson

Hedge FundsDamien Loveday, CFA

InfrastructureDuncan Hale, CFA

Private EquityMark Calnan, CFA

Real EstatePaul Jayasingha, FIA

Private MarketsCraig Baker, FIA

AustraliaTony Arnold

CanadaSylvie Methot, CFA

Emerging Market,Mark Horne, CFA

Euro, UKEd Britton

GlobalChris Redmond

JapanToshiya Takenaka

Malaysia, TaiwanMark Brugner

USMarko Komarynsky, CFA

BondsEd Britton

CommoditiesMartin Dietz

DistressedLuba Nikulina

Emerging WealthCraig Mercer

Implementation – Custody, Implementation – Transition

Colin Rainbow

Implementation – IndexationRoz Amos

Multi-Asset – Diversified Growth

Matthew Roberts, CFA

Sustainable InvestmentsJane Goodland/Emma Hunt

Traditional multi-manager Andrew Funnell, CFA

Specialist


Manager Searches

Towers Watson does not use a pre-approved manager list from which we conduct searches

Process is structured/disciplined, but customized for each client’s performance objectives and related selection criteria

Overview of our search processPlanning stage— Client/consultant/research staff actively involved— Determine desired characteristics/criteria— Set timetable

Preliminary candidate identification— Focus on “efficacy” (quality), led by manager research staff, and “suitability” (fit), led by

consulting staff

Final candidate recommendation— Determined by the relevant ASK team (manager research staff)— Usually 3-6 candidates best suited to meet the client’s specific need


Total Search Activity Through October 2010

Total # of SearchesThru October 29, 2010

01020304050607080

2006 2007 2008 2009 2010

Int'l Equity Fixed Income Large US Equity

Sm/Mid US Equity Multi-Asset Alternatives/Specialist

Alternatives # is not accurate prior to 2009.


Typical Process for Rating Managers

Global asset class head signs off

Universe of managers

ASK signs off

FREX 1 checklist

Devil’s advocate

Engagement

Follow-up meetings

Follow-up desk-based research & conf calls

Initial research meetings

Desk-based research

Market knowledge, contacts, publications, databases

Experience/stability of team, fees, process/philosophy,quant analysis (see supporting materials)

Meet key people, detail on process, independent thoughts e-mails

Read manager’s research notes & valuation analysis, further quant

Sit in on internal meetings & stock discussions, meet more people

Fees, capacity framework, vehicles

One ASK* member makes case against rating manager highly

20 key points to cover before moving to FREX** 1 rating

ASK debates all key issues & decides whether to rate FREX 1

* ASK = Area of Specialist Knowledge** FREX = Future Return EXpectation


The Qualities We Look for in Managers

PeopleTalented and experiencedSmall decision-making teamsDepth of resourcesCultural alignmentStrong recruitment and trainingHealthy staff turnover

BusinessLong-term focusAsset Management is the core businessStable corporate structureStrong compliance/technologyLimitations to growthEmployee ownership

ProcessClear competitive advantageSuperior researchEfficient communicationEvolution of processStrong portfolio constructionTransaction cost monitoring


ABC - Large Cap Growth: Qtr End 2009Q3Business success factors

People success factors

Process success factors

Long-term focus on asset management by strong business leaders

Non-bureaucratic, investment-led culture

Stable corporate structure

Significant investment in key aspects of business

Business structure and employee interests are aligned with those of clients

Successful management of the growth of the business as well as the existing client base

Insightful, experienced and motivated investors

Focused decision-making with clear accountability

Healthy staff turnover, neither too high nor too low

Effective, cohesive teams with complementary skills and personalities

A clear investment philosophy and process designed to leverage competitive advantages

Adequate depth of resources relative to the process employed

Culture that promotes creative thinking and collaboration

Superior research that produces unique investment insights

Pro-active consideration of potential process improvements

Effective management of wider impacts on performance, such as capacity issues and transaction costs

Appreciation and management of all risks relevant to the investment approach

Portfolio management that efficiently translates research insights into portfolio positions

This section provides a description of the investment team, including commentary on the experience of key professionals (prior firms, etc.) and the roles of team members.

This section provides a brief description of the manager’s investment process, focusing on information sources, key decision-making criteria (and the decision-making process), and portfolio characteristics.

FREX rating Skill Exp Deviation Soft Risk

Large Cap Growth 1 Average Average

Product Description

Key Investment Professionals


ABC - Large Cap Growth: Qtr End 2009Q3Critical Success Factor Changes/Comments

Key Issues to Watch

This section provides explanations of changes to “traffic lights”and/or rationale for non-green lights.

This section provides a description of potential events that could cause a re-evaluation of the manager, examples include:

– Departure/retirement of key professionals

– Excessive asset growth

– Change in portfolio characteristics

Recent developmentsThis section provides a description of developments associated with this manager/product over the past 12-18 months, examples include:

– Personnel additions/departures

– Asset growth

– Portfolio strategy

– Business Ownership


SWISS TableBusiness People Process

Focused purely on asset management

Diversified client base

Heavy investment in technology and infrastructure

Equity participation for majority of investment professionals

Broad and experienced team

Charlie Loveday, Chief Investment Officer (CIO) is insightful and market savvy [correct spelling of names]

Ability to attract talent

Large, focused research resource

Small decision-making teams

[no use of the word 'strong']

Investment Committee vets every major portfolio decision and carries out weekly sense checks

Clearly understood, disciplined, macro-driven process

Risk management and portfolio monitoring tools

Access to wide range of research sources

Emphasis on asset gathering

History of destabilising corporate activity

Management of capacity

High fees

[points related to traffic lights]

Departure of Paul Miles, Senior Portfolio Manager [include full title]

Analysts have limited idea ownership

Limited evolution of quantitative inputs [avoid unnecessarily long comments]

Derivative expertise and capability lags competition

Impact on culture and morale following acquisition of ABC Corporation

Ongoing FSA investigation in to allocation of initial public offerings (IPO's) [use of acronyms]

Succession planning for key investment professionals

Outsourcing of back office functions to DEF Limited

[no use of numbers that can change like AUM]

Recent changes to the investment committee

Global expansion and multiple locations creates communication challenges

Impact of the hire of Jim Disdale as Senior Portfolio Manager

Link between investment performance and remuneration is unclear

Asset growth may impact the implementation of ideas

Performance and risk objectives are based on back testing ratherthan actual results

Do enough analyst ideas filter through to the portfolio?

Is the process increasingly short-term [use of hyphen]

One year lock up period for this product

Management techniques in this product may incur high administration costs [comments on product structure as well as process issues]

XYZ Example Manager (XYZ) is a business focused on asset management with a diversified client base. [double spaces] The recent acquisition of ABC Corporation has the potential to be destabilising [review trigger], although the business remains asset management oriented.

The key investment professional involved in running the zzProduct is Charlie Loveday, Chief investment Officer (CIO), who is a fundamental investor with a passion for the markets [review trigger]. The team is well resourced, particularly from a research standpoint. However, there have been some changes to the formation of the Investment Committee, which may have repercussions for idea generation [review trigger].

The investment process is disciplined and has a clear macroeconomic backdrop. There are strict stop losses for every position. Concerns include the degree to which analysts feel they have ownership of positions [monitoring point]; asset growth impacting implementation [monitoring point] and the limited experience and use of derivatives [monitoring point]. [Do not include advice to clients in the SWISS table. However, it is often appropriate to include a comment relating to what environments in which the manager may perform strongly/poorly][THE DUE DILIGENCE PROCESS FOR THIS PRODUCT HAS NOT BEEN COMPLETED. THIS SWISS REPRESENTS OUR INITIAL VIEWS AND SHOULD NOT BE DISTRIBUTED OR RELIED UPON WITHOUT CONSULTATION WITH THE ASK TEAM]


Towers Watson Manager Research Current Issues

See clients searching out new strategies or ways to do things – yields/returns are low; broaden out mandatesRisk control continues to be very important across strategiesEQUITIES

More focus on tracking error and passive mandatesLess demand for quant strategies and traditional equity buckets Greater demand for global mandates that can improve efficiencies

BONDSHedging and risk controlled strategies: LDI, tail risk hedgingImproving returns in a low rate environment so looking at opportunistic markets

ALTERNATIVESMany are giving up on VC and some not getting back investment in ‘97 vintageEmerging markets PE is attracting interest from LPs, but we need to direct them to alpha opportunities vs. beta plays FOF fees are under pressure from clients who are looking for a better mousetrap


Contact Details

Chris DeMeo335 Madison Avenue, New York, NY 10017-4605212.309.3845 [email protected]

Carl Hess335 Madison Avenue, New York, NY 10017-4605212.309.3800 [email protected]

Marko Komarynsky191 North Wacker Drive, Suite 2100, Chicago, IL 60606-1615312.525.2362 [email protected]


Disclaimer

The information included in this presentation is general information only and should not be relied upon without further review by the appropriate professional advisors. Towers Watson is not a law firm or accounting firm, and we are not providing legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with and involve their legal counsel and other professional advisors as appropriate to ensure that they are fully advised concerning such matters. Additionally, material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments.