2q 2011 European Update

7/31/2019 2q 2011 European Update

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European Quarterly Update

Second Quarter 2011

GMO offers a range of strategies orientated towardsinstitutional investors investing in equities and fixed income inthe developed international and emerging markets.

ContentsEuropean Market Review ............................................................. 4

Asset Allocation ............................................................................. 4

Performance Review and Outlook ............................................. 6

Strategy Performance Details..................................................... 16

Table of Benchmarks .................................................................. 45


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2 GMO European Quarterly Update

2011 Performance of GMO Strategies and Benchmarks

Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction ofmanagement fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assumethe reinvestment of dividends and other income. A GIPS compliant presentation is available at www.gmo.com.

Copyright 2011 by GMO. All rights reserved. This document may not be reproduced, distributed or transmitted, in whole or in portion, by anymeans, without written permission from GMO.

* Returns for one of the accounts in the composite are based on estimated market values for the period from and including October 2008 through February 2009.** Returns for the composite are based on estimated market values for the period from and including October 2008 through February 2009.

Total Return Net of Fees Aver age Annual Total Return

GMO Equity Inception 2Q YTD YTD Value One Five Ten SinceStrategies/Benchmarks Date Currency 2011 2011 Added Year Year Year Inception

Global Equity 7/31/96 USD 1.89 6.66 1.37 30.91 1.57 5.68 7.31

MSCI World 0.47 5.29 30.51 2.28 3.99 5.65

World ex-UK Equity 12/31/88 GBP 1.01 3.41 0.82 21.43 5.49 4.64 9.25FTSE World ex-UK 0.30 2.59 22.14 6.85 3.77 7.34

International Intrinsic Value 3/31/87 USD 2.68 6.94 1.37 31.34 0.72 8.13 8.57

MSCI EAFE Value 0.98 5.58 29.35 0.36 5.96 7.36

MSCI EAFE 1.56 4.98 30.36 1.48 5.66 5.41

International Core Equity 1/31/02 USD 3.51 7.31 2.33 34.25 1.74 n/a 9.33

MSCI EAFE 1.56 4.98 30.36 1.48 n/a 7.59

Japan Equity 12/31/05 USD 3.41 1.85 5.83 21.15 -1.14 n/a -0.88

MSCI Japan IMI++ 0.48 -3.97 13.43 -3.24 n/a -2.62

Emerging Markets 12/31/93 USD -1.48 3.15 2.46 33.25 9.57 17.72 9.99

S&P/IFCI Composite -0.98 0.70 28.61 12.06 17.53 7.30

MSCI Emerging Markets -1.15 0.88 27.80 11.42 16.20 6.74

UK Equity Core 11/30/04 GBP 2.70 3.80 0.84 25.64 3.98 n/a 8.43FTSE All-Share 1.91 2.96 25.63 4.49 n/a 8.00

UK Equity Value 11/30/88 GBP 3.53 4.52 1.56 27.13 2.87 5.54 10.08

FTSE All-Share 1.91 2.96 25.63 4.49 4.76 9.36

U.S. Core 9/30/85 USD 2.85 7.40 1.37 29.74 2.24 2.05 10.93

S&P 500 0.10 6.02 30.69 2.94 2.72 10.57

Intrinsic Value 5/31/99 USD 1.86 10.35 4.43 36.15 0.97 2.90 3.81

Russell 1000 Value -0.50 5.92 28.94 1.15 3.99 3.57

Quality 2/29/04 USD 3.42 7.02 0.99 26.77 4.15 n/a 3.22

S&P 500 0.10 6.02 30.69 2.94 n/a 4.05

GMO Fixed Income Inception 2Q YTD YTD Value One Five Ten Since

Strategies/Benchmarks Date Currency 2011 2011 Added Year Year Year InceptionGlobal Bond* 12/31/95 USD 3.15 4.86 0.97 14.16 5.63 7.60 6.29

J.P. Morgan Global Gov't. Bond 3.33 3.89 10.15 7.62 8.01 5.96

Emerging Country Debt* 4/30/94 USD 3.03 5.53 0.44 19.65 9.26 14.03 16.60

J.P. Morgan EMBI Global + 4.03 5.09 11.73 9.59 10.21 11.92

Emerging Country Local Debt Invst.** 2/29/08 USD 3.35 6.09 -0.86 20.72 n/a n/a 5.62

J.P. Morgan GBI-EM Diversified 4.14 6.94 19.59 n/a n/a 9.42


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GMO European Quarterly Update 3

2011 Performance of GMO Strategies and Benchmarks

Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction ofmanagement fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assumethe reinvestment of dividends and other income. A GIPS compliant presentation is available at www.gmo.com.

Total Return Net of Fees Aver age Annual Total Retur n

GMO Asset Allocation Inception 2Q YTD YTD Value One Five Ten SinceStrategies/Benchmarks Date Currency 2011 2011 Added Year Year Year Inception

Global Balanced Asset Allocation 6/30/88 USD 2.22 5.00 0.96 19.80 5.58 8.07 10.14

Blended Benchmark 0.98 4.04 20.59 4.58 4.90 8.32

Real Return Global Balanced Asset Alloc. 6/30/04 USD 2.33 4.48 0.72 17.00 5.21 n/a 6.89Blended Benchmark 0.74 3.76 18.91 3.53 n/a 4.98

Global Allocation Absolute Return 7/31/01 USD 1.59 3.03 -1.32 10.33 5.90 n/a 10.20

CPI Plus 5% 1.59 4.35 8.56 7.18 n/a 7.50

Global All Country Equity Allocation 12/31/93 USD 2.86 6.51 1.70 31.01 4.60 8.34 9.28


Global Developed Equity Allocation 3/31/87 USD 3.21 6.84 1.55 30.79 3.14 7.62 9.41


U.S. Equity Allocation 2/28/89 USD 3.16 7.36 1.13 28.65 2.59 3.28 10.18


GMO Absolute Return Inception 2Q YTD YTD Value One Five Ten Since

Strategies/Benchmarks Date Currency 2011 2011 Added Year Year Year InceptionAggr essive Long/Short 9/30/00 USD -0.71 1.80 1.74 7.07 1.30 2.73 5.85

Citigroup 3-Mo. T-Bill 0.02 0.06 0.14 1.87 2.01 2.25

Tactical Opportunities 9/30/04 USD 8.15 1.86 1.80 -12.62 -5.27 n/a -8.13

Citigroup 3-Mo. T-Bill 0.02 0.06 0.14 1.87 n/a 2.22

Emerging Country Debt Long/Short 3/31/96 USD 0.53 0.83 0.63 8.38 5.45 9.02 11.31

J.P. Morgan U.S. 3 Month Cash 0.10 0.20 0.49 2.93 2.71 3.84

Currency Hedge 7/31/03 USD 1.78 2.81 2.62 8.06 -1.07 n/a 0.72

J.P. Morgan U.S. 3 Month Cash 0.10 0.20 0.49 2.93 n/a 2.83

Fixed Income Hedge 8/31/05 USD -0.32 0.95 0.75 5.54 -6.60 n/a -4.73


Emerging Currency Hedge 3/31/06 USD 1.23 5.84 5.64 16.01 6.11 n/a 5.17


Mean Reversion 2/28/02 USD 0.08 1.21 1.15 -3.25 3.23 n/a 8.35


Systematic Global Macro 3/31/02 USD 3.72 -0.27 -0.33 1.21 7.64 n/a 7.81


Completion 8/31/07 USD -2.04 1.74 1.68 -4.39 n/a n/a 12.43

Citigroup 3-Mo. T-Bill 0.02 0.06 0.14 n/a n/a 0.92

Multi-Strategy 10/31/02 USD 1.41 1.44 1.38 0.32 2.44 n/a 2.92



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Please be advised, unless otherwise noted, all returns are in U.S. dollar terms.

European Market Review

Global equity markets were buffeted throughout the

quarter by a mixture of contradictory news. Steady

growth in emerging markets and positive economic data

from the U.S., Germany and France were helpful. In

contrast, markets were depressed on news of the

continuing problems in the Eurozone, rising inflationary

pressures and an apparent slowdown in Chinas

economy. Overall global equities ended the quarter

slightly negative with the MSCI World Index showing a

decline of 1.7% in euro terms.

The best performing equity regions were in Europe

with the European index returning 0.3%. The advance in

Europe took place despite the debt crisis. Initially,

attention was focused on Portugal but events quickly

turned to Greece as the threat of default heightened, not

helped by increasing levels of political and social turmoil.

However, equity investors seemed to take comfort in the

Greek parliament passing a crucial package of austerity

measures.

The Pacific ex-Japan and emerging equity markets

vied to be the worst performing region, achieving

respective returns of -2.4% and -3.1%. The U.S. equity

market also fell with a -2.0% return in euro terms.

Style factors had only minor impact on overall market

performance this quarter. There was little appreciable

difference in returns between large/medium and small

capitalisation stocks in equity markets, although large

growth companies were slightly ahead of traditional

value.

The Eurozone sovereign debt crisis saw investors

seek out the safe havens of U.S. and German government

debt. Global bonds and emerging market debt rose

adding 1.1% and 1.8% respectively during the quarter,

both in euro terms. EMU government bonds also gained

slightly with the JPM EMU Government All Maturities

Index returning 0.7%. The U.S. Dollar as well as the

British Pound lost about 2% and the Japanese Yen was

flat with +0.4% against the Euro.

Mounting concern about the strength of the global

recovery and an unexpected announcement in June by

the International Energy Agency that it would release 60

million barrels from its strategic oil reserves as a

replacement for Libyan supply losses led to a fall of about

10% in the oil price during the quarter.

Asset Allocation

Review

Throughout the first four months of 2011, investors

around the globe continued to climb a wall of worry, with

their speculative zeal trumping any and all concerns

surrounding a nasty brew of poor employment numbers,

worsening housing markets, rising commodity prices, and

dysfunctional European parliaments. And, lets not

forget the rolling series of civil wars in the Middle East

GMO Allocation

Quality

23.1%Alpha Only

17.0%

Cash &

Equivalents

2.1%

Special

Situations

3.7%

Asset

Allocation Bond

2.7%

Emerging

Country Debt

0.5%

Strategic

Fixed Income

10.7%

Domestic

Bond

2.5%

Emerging

Markets

12.1%

Flexible

Equities

3.3%

International

Core Equity

13.3%

International

Growth

4.6%

International

Intrinsic Value

4.6%

Global Balanced Asset Allocation: One ExampleRecommendations as of June 30, 2011

Benchmark: 65% MSCI ACWI Index /35% Barclays Capital Aggregate

Note: Asset Allocation ranges are 20% for U.S. andinternational equities and -10%/+15% for fixed income.

Benchmark

Fixed

Income

35.0%

Emerging

Equities

8.8%

International

Equities

28.4%

U.S.

Equities

27.8%

GMO Active

Weighting Decisions

U.S.

Equities

-4.7%

Int'l.

Equities

-2.6%

Emerging

Equities

+3.3%

Fixed

Income

+4.2%

-10% -5% 0% 5% 10%


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and North Africa and the nuclear crisis in Japan. In May,

however, it was as if having reached the top of the wall

investors finally took a more serious survey of the

landscape and concluded all is not well. Perhaps it was

the looming end of QE2 and all of the unknowns

associated with it, or the realization that the Greek debt

crisis was merely the tip of a liquidity and sovereign debt

crisis iceberg that could destabilize European banks (and

the entire money market system here in the U.S.).

Whatever the tipping point, a healthy dose of fear, not

panic, finally set in. Global equity markets trimmed

about 210 basis points during May and almost another

160 basis points in June. The rising yields in the bond

market gave way to a classic flight to safety, and Treasury

yields fell soundly to around 3.0% in the latter part of the

quarter. Our view is that this correction, while painful, is

likely not over, with equity markets around the planet

trading well above their fair value. As always, the path,

speed, and timing of the movement to fair value is

unknowable, but whether its a pin-prick event or a slow

grind, we believe a hunker down mentality is prudent

when it comes to portfolio positioning.

Strategies

There is, of course, no law that forbids expensiveasset classes from becoming more expensive. There are

no chiseled tablets forbidding historically low bond yields

from going lower. And some bold and courageous

investors may want to stay for additional courses. Wall

Street is more than willing to provide the investment

rationale for such a decision, and CNBC can no doubt

line up a healthy roster of yea-sayers to serve up the next

dish. But we have other plans. We remain defensive.

We remain cautious. We are cognizant that, while

valuations are not nearly as stretched as we saw in thesummer of 2007, they dance dangerously close. That

while the high yield market one of the many canaries in

the coal mine is signaling all sorts of speculative froth

(from historically low spreads and all manner of dodgy

conditions), it is not as bad as it was only four years ago.

Faint praise indeed. And lets not get started again on

Treasuries and their negative yields. No, there are still

plenty of investors willing to stay at the speculative feast,

but we have pushed ourselves away from the table.

Our broad strategies are:

Emphasize Quality stocks. While one month doth

not a trend make, Mays substantial market pull-back

was illustrative of what we expect to be a string of

market movements over the coming year. The market

witnessed a wake-up call, if you will, to the worrisome

sets of crises globally. The laundry list of worries

the looming end of QE2 most notably has been

known for some time, yet the urgency of them

somehow spooked the markets starting in May. With

that, we witnessed a sizable rotation into Quality. Our

Quality Strategy outperformed the S&P 500 by over

330 basis points, as the appeal of highly profitable and

stable, unlevered business models suddenly trumped

animal spirits. We dont believe this rotation is

anywhere near complete. Nor do we believe that the

list of worries is by any means checked off. Far

from it. Therefore, we happily maintain our Quality

bias.

Maintain exposure to emerging markets, but with

some precise hedging. We remain overweight

emerging markets within global equity mandates as

they represent a sub-asset class priced to deliver very

decent returns. However, the China real estate

bubble remains on our watch list, and, where

appropriate, we have taken pains to surgically hedge

specific areas of the global market that are highly tied

to continued growth in Chinese real estate.

Specifically, we have hedged direct exposure

Chinese real estate developers and banks but wehave crafted a custom basket of secondary and tertiary

plays on the China bubble days coming to an end (e.g.,

Australian copper miners and luxury goods

manufacturers). Either way, our position remains

constructive on the broad universe of emerging

equities, but with some serious caveats regarding

China.


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Bonds back into very, very expensive territory.

The rally in bonds this quarter can be called many

things: a flight to safety, a deflation play, etc. We call

it the way we see it: already expensive bonds just

became more expensive. Our sober forecast for

bonds is global in nature, just from a pure valuation

perspective. Throw in a good dose of sovereign credit

worries and the end of QE2, and you have a whole

basket of excuses to, where possible, avoid bonds.

Maintain positions in low duration fixed income

and cash/cash plus in balanced portfolios.

Truth be told, we dont necessarily like holding these

low-duration cash instruments given their low yields.

Their appeal, then, is not so much that theyre going

to make us a ton of money, but rather that they can

act as dry powder that we can deploy when

expensive assets elsewhere (read: stocks and

bonds) get closer to fair value. Yes, these holding

are a short-term drag on performance, but the

option they provide to put cash to work at better

pricing gives us some degree of comfort.

Invest in conservative absolute return strategies,

where available. Ideally, absolute return strategies

are often a pure play on manager skill. Therefore, the

return streams should have little correlation to the

movements of the markets. Such investment

instruments can provide equity-like returns, while

helping to diversify other parts of ones portfolio.

Performance Review and Outlook

U.S. Equities

Market Review

In the second quarter of 2011, U.S. investors softenedtheir affinity for the riskiest segments of the market, as

developments domestic and abroad called into question

the sustainability of U.S. stocks year-long run. European

sovereign debt woes, and their potential to destabilize a

global economic recovery, continued to weigh on global

markets during the period as troubles in Greece were

viewed as a potential canary in the proverbial coal mine

for indebted nations around the globe. While U.S. stocks

had in recent quarters resisted falling prey to European

gloom, the second quarter combination of continued

European troubles with a number of stumbling points in

the U.S. economic recovery held stocks in check. The

S&P 500 started off the quarter with a strong April

return, but spent the remaining two months giving back

those gains to finish with a modest +0.1% quarterly

return.

Where European troubles highlighted a more

generalized risk for U.S. investors that European

sovereign debt problems could spill over into U.S.

markets domestic economic data during the quarter

highlighted a more specific risk for U.S. investors: that a

stalled U.S. economic recovery would put a limit on stock

returns. During the quarter, U.S. investors fretted over a

variety of economic reports showing slowing or stalling

in the pace of the economic recovery. From jobs data to

manufacturing reports, a slew of widely reviewed

economic indicators conspired to tell a not so fast

cautionary tale to U.S. investors bidding up stocks in

anticipation of a return to pre-recession economic

conditions. Hints of a less-than-stellar economic

rebound were particularly troubling for stocks and areas

of the market perceived most levered to general

economic conditions. Indeed, the S&P 500s modest

+0.1% quarterly return belied a significant underlying

split in returns to risk-taking within equities. Of the 10

GICS economic sectors within the S&P 500, only five

posted positive absolute returns during the quarter, with

U.S. Equity MarketsSecond Quarter 2011 Performance

0.1%

-0.5%

0.8%

-1.5%

0.4%

3.6%

0.0%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Russell 2500S&P

500

Dow

Jones

U.S. TSMGrowth

MSCI

U.S.

REITValueGrowth

Russell 1000

Value


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U.S. EquitiesRelative Performance of Selected Groups versus the S&P 500

Year-to-Date June 30, 2011

Size

InvestmentDisciplin

es

Se

ctors

Financials

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

12/10 2/11 4/11 6

Consumer Discretionary

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

12/10 2/11 4/11 6/11

Information Technology

-6.0

-4.0

-2.0

0.0

2.0

4.0

12/10 2/11 4/11 6/11

Russell 2000

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

12/10 2/11 4/11 6

Energy

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

12/10 2/11 4/11 6/

Largest 100

-2.0

0.0

2.0

4.0

6.0

8.0

12/10 2/11 4/11 6/11

Cheap on Price/Intrinsic Value

0.0

2.0

4.0

6.0

8.0

10.0

12/10 2/11 4/11 6/11

High Price Momentum

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12/10 2/11 4/11 6


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the best performance coming from more defensive areas

of the market. Health Care led sector winners, rising

7.8%. Utilities advanced 6.1%, and Consumer Staples

gained 5.2%. On the negative side, more economically-

exposed sectors posted negative returns during the

period, with Financials (-6.0%) and Energy (-4.7%)

leading the decliners. The split in returns to risky areas of

the market could also be seen in the returns to a number

of investment factors during the period. High quality and

low volatility stocks posted strong relative returns, while

their low quality and high volatility counterparts lagged

the market by similar margins. Momentum metrics also

underperformed during the quarter, hurt by their

exposure to the economically exposed areas of the

market that had performed well recently. Bottom-up

valuation metrics delivered mixed relative returns, with

those incorporating company quality in their valuation

faring the best. Investors distaste for risk was also

exhibited in index returns for the quarter, with large cap

stocks outperforming mid and small caps.

Outlook

In the long run, investment returns have three

sources: dividends, fundamental growth, and changes in

price multiple. There are innumerable factors thatinfluence a companys ability to pay dividends and grow,

and the multiple the market is willing to pay for it. But at

the heart of a value investment philosophy is an

understanding of what is knowable, what is unknowable,

the risks to both the known and unknown, and where we

derive an edge. Our focus remains on understanding the

knowable, acknowledging the unknown, weighing the

associated risks, and finding investments trading for less

than theyre worth.

International Equities

Market Review

The sovereign debt crisis in Europe was the dominant

news story affecting developed international equity

markets. The received wisdom (reflected in bond and

CDS prices, if not on the balance sheets of banks) is that

Greece will eventually default or restructure. But there is

also a widespread view that, to repeat what has become a

very tired metaphor, the can will be kicked down the road

for several years. And if this happens with the European

taxpayer ultimately bearing much of the burden, the crisis

need not be disastrous for equity markets broadly. The

can kicking at the end of the quarter allowed the MSCI

Europe index to end the period above water, returning

+2.4% for the period in U.S. dollar terms. The broader

MSCI EAFE index of developed international stocks

returned +1.6%.

In Europe (and elsewhere) the more defensive

Pharmaceuticals and Consumer Staples sectors, as well as

automotive and retail stocks, drove the outperformance.

Large pharma stocks like Novartis, Roche, Sanofi, and

GlaxoSmithKline enjoyed gains ranging from 10% to

20%. Although Financials and many riskier industries

underperformed, there appeared to be a fairly strong

appetite for equities, perhaps stimulated by relatively

derisory bond yields.

Greece was the worst performing developed market

for the quarter, with the MSCI Greece index falling 18%

in local terms. It was not a complete wipeout for the

PIIGS though, as Ireland was at the other extreme,

gaining 5.3%. Germany was the best performing major

market, up 4.0% in local terms. While Italy had shown

some signs of graduating from the PIIGS acronym

(shortened by many commentators to PIGS), that

owner of the second I suffered a whiff of contagion,

International Equity MarketsSecond Quarter 2011 Performance

-2.4%-2.9%

0.2%

-0.8%

0.2%

2.4%

1.6%

-1.0%

-0.2%

-4%

-2%

0%

2%

4%

In Local Terms

In Dollars

EAFE Europe

S&P/IFC

Compos

(Emergin

MSCI

Pacific

ex-Japan

Japan


9/47



with a downgrade of its credit ranking, political concerns,

and capital raising by a number of its banks, and the

MSCI Italy index fell 4.7% in euro terms.

Japan is showing some signs of recovery from the

tsunami. The MSCI Japan index was up a meager 0.2%

for the quarter in dollar terms. Consumer-oriented

stocks and financials held up relatively well, but

commodity dependent companies and utilities with

nuclear power exposure suffered.

While currency moves were not dramatic, a falling

dollar contributed to positive returns and the

outperformance of international equities. The MSCI

EAFE index actually fell 0.8% when measured in local

currencies. The Swiss franc and New Zealand dollar

were the stronger performers, up over 8% against the

U.S. dollar. The yen and euro both gained about 2.5%,

while British sterling was virtually flat.

Oil prices declined in May and June, falling about

10% for the quarter, depending on the benchmark.

Energy stocks were the worst performing global sector,

though the price falls were muted. Broader commodity

indices suffered their first quarterly declines since the end

of the financial crisis, and the Materials sector also lagged.

Large miners like BHP and Anglo American suffered

modest declines, and Glencores IPO in May came off

with only muted success.

Higher quality stocks outperformed during much of

the quarter. On GMOs measure blending high and

stable profitability with low leverage, the highest quartile

of the EAFE markets outperformed by nearly 4%.

Understandably, the gap was widest in Europe, but was

observable in Japan as well. Defensive industries (onGMOs definition) outperformed by a similar margin.

Lower price volatility stocks also did well and, indeed, the

low earnings volatility component of GMOs quality

measure was more significant than high profitability or

leverage (though all three were ahead).

Growth outperformed Value for the quarter, as

defined either by MSCI indices or price/book (though

not as defined by analyst consensus forecasts). MSCI

EAFE Growth gained 2.1%, while MSCI EAFE Value

was up 1.0%. Smaller cap stocks are generally more

cyclical, and the MSCI EAFE Small Cap index rose a

more modest 0.8%

Outlook

The more the pendulum swings from greed toward

fear, the more opportunities there will be for an investor

in equity markets. While it would be nice to be able to

say things have gone so far as to provide mouthwatering

valuations at little downside risk, things are not generally

so simple. The good news is that the story of the lack ofgrowth in much of the developed world has become so

widespread that virtually none is priced in for many

companies that have stellar track records, and so the odds

seem in the investors favor. Some of the more

distressed parts of the world have fallen severely, and

may rebound sharply, but investing there requires

something of a gambling mentality. And stocks with

clear exposure to growth, most likely from China, tend to

be at least fully priced. Still, volatility and fear are friends

of prudent investors, so, while the markets in aggregatemay not present the valuations we would hope for, there

are opportunities within them that excite us.

Emerging Market Equities

Market Review

Emerging markets suffered minor losses over the

second quarter, with a strong April getting pulled down

by weak May and June returns. Investors spent the

quarter chewing over the myriad developments in the

sovereign debt crisis and the pace of monetary tightening

in several key markets. The last days of the quarter saw

sentiment turn bullish as concern of a Greek default

eased after the government secured enough votes to push


10/47



ahead with budget cuts. The quarter saw country

performances as diverse as an 8.5% jump in Chile and a

15.2% plunge in Peru. Among sectors, the spread was

tighter, with Consumer Discretionary leaping 8.3% and

Energy dropping 7.4%.

Russian Energy underperformed the asset class as the

outlook for commodities grew less rosy and concern

deepened that tighter monetary policy in Russia would

curb economic growth. The central bank unexpectedly

raised interest rates in April to check inflation. The

central bank had in the past relied on currency gains and

higher reserve requirements as its tools in fighting

inflation rather than hiking rates. The concerns over the

ultimate resolution to Greeces debt crisis, inflation

fighting efforts in countries such as China and India, and

speculation that U.S. demand may be slowing have all led

to a fall in energy prices.

Investors in Hungary were cheered by signs of a

strengthening global economic recovery. Closer to

home, they found comfort in the ongoing talks between

the government and commercial banks on ending a

moratorium on evictions and stimulating mortgage

lending. The market was also influenced by rumors that

the government would lower a special tax on banks as

part of an agreement with lenders to help distressed

borrowers after the moratorium on evictions runs out.

The government had relied on temporary industry taxes

and the effective nationalization of private pension

portfolios to reach budget targets in the past rather than

imposing austerity measures directly on the populace.

A happy combination of rapid growth, slowing

inflation, and low interest rates is boosting domestic

spending in Indonesia. The central bank forecasts the

economy to grow as much as 6.5% this year, the fastest

pace since 2004. However, inflation decelerated, with

consumer prices rising 6.0% in May from a year earlier.

This has helped convince the central bank to let the

benchmark interest rate stay at a near record low of

6.75%.

Perus stocks dropped as the market awaited President

-elect Humalas economic policies. Investors fear that he

will expand the role of the state and call for higher

mining taxes. Humala said that he is seeking economic

growth with social inclusion. Some of the gloom was

lifted by the central bank unexpectedly keeping its

benchmark rate unchanged for the first time in six

months.

Outlook

This outlook takes a look at some recent significant

political developments in emerging markets. Changes in

leadership in these markets often have a greater impact

on the macroeconomic policies of a country than they do

in developed markets.

Peru Elections

President-elect Humala has put investors on edge by

some of his campaign pledges to revise mining contracts

and revisit free-trade agreements with the U.S. and other

nations. Peru is the worlds largest silver and third largest

copper producer. The central bank estimates that mining

projects will account for almost half of the $47.5 billion

of private investment expected in Peru from 2011 to2013. While he has praised his one-time ally, Venezuelan

President Hugo Chavez, in the past, more recently his

comments have been peppered with references to the

business-friendly policies of Brazil. In a trip to the U.S.

after his election, he stated that relations are good, but,

We want to improve them during my government. His

post-election comments have also included a goal of

balancing economic growth with social inclusion.

Investors, however, remain uncertain of his policies and

eagerly await his first moves once he takes office at theend of July.


11/47



Thailand Elections

The Pheu Thai party, backed by former premier

Thaksin Shinawatra, won 265 seats in the 500-member

parliament. Yingluck Shinawatra, Thaksins youngest

sister, will become prime minister, and has built a five-

party coalition to broaden her mandate. Thaksin was

ousted in a 2006 coup and has lived overseas since fleeing

a jail sentence for abuse of power. Parties linked to him

have won the past four national elections based on

support in northern rural areas for cheap health care

plans and microcredit policies. While the waters could

yet get muddy, there is a sense that this time Pheu Thai

can corral more support than earlier. A reduction in

political uncertainty would cheer businesses and improve

growth prospects. The party made campaign pledges to

raise the minimum wage and guarantee rice prices for

farmers. Optimists hope for greater political stability and

controlled fiscal expenditure while pessimists fear a

return to political disorder and patronage spending.

Elections in the Middle East

Massive street protests forced Egyptian President

Mubarak to resign in February and cede interim authority

to the Supreme Council of the Armed Forces. But, five

months later, there is still considerable opacity over the

future political landscape. Parliamentary elections are

scheduled in September. Egypts Cabinet approved a

draft law under which half of the seats would be

contested through slates of candidates and the rest by

individual candidates. According to the draft, parliament

would have 500 seats and candidates of different parties

may run on one slate, allowing alliances to be struck.

Mubaraks 30-year-long stay in office has shrunk any

opposition, leading to a dearth of viable alternative

parties. The Egyptian Brotherhood is one of the few

groups with a significant grassroots network. Senior

officials at the Brotherhood pledge support for private

enterprise and free markets. However, there is

skepticism as to whether they will be a force for

moderation or a divisive, fundamentalist element.

Protests, though on a much smaller scale, are ongoing in

Egypt as activists demand more rapid trials of former

government officials and policemen accused of killing

protesters in the uprising that toppled Mubarak.

In Morocco, the other emerging market in the Middle

East, a draft constitution was widely approved in a

referendum. The constitution was written at King

Mohammeds orders in response to protests that echoed

the uprisings in Tunisia and Egypt. Under the plan, the

prime minister will be chosen from the party that wins

elections and will replace the king as the head of

government. However, the king will retain the power to

overrule or dismiss parliament. While many supported it

as a significant step toward democratization, others felt

that it wasnt close enough to their ideal. Moroccos

tradition of greater social freedoms and deeper political

participation suggest that this move, while well short of

achieving genuine democracy, will probably be enough to

deflect the current pressure.

Fixed Income

Review

Bonds had a good quarter, particularly unhedged

foreign bonds, as yields fell nearly everywhere and the

U.S. dollar declined. U.S. Treasuries returned +2.5%,

slightly outpacing the broader Barclays U.S. Aggregate

Bond index, where widening sector spreads detracted.

USD emerging debt (EMBIG series) returned +4.0%,

partially a reflection of the relatively longer interest-rate

duration of the asset class, but also due to the spread

return from it. Foreign government bonds, both from

developed countries and emerging countries, produced

positive returns, all the more so when the positive

currency returns were added given the U.S. dollars near

uniform decline.


12/47



The main exception to this positive bond story

continued to be the fallen angels of sovereign bonds,

less charitably referred to as PIG (Portugal, Ireland,

Greece). Lucky for J.P. Morgans series, none of these

countries pertains to its Global Government Bond

Index series, which draws the line to include Italy and

Spain but not the PIGs. Unlucky for the fallen angels,

unless they default, they are ineligible for J.P. Morgans

Emerging bond indices, which exclude high income

countries unless they default. So, the fallen angels, all

at or near junk ratings at quarter end, are homeless from

a bond index perspective, compounding woes for the

countries in their search for buyers of their debt.

In terms of yield levels, interest rates fell in most

markets. Among developed countries, Canadian,

Swedish, and U.S. yields fell the most, and Japanese and

New Zealand the least, with the eclines ranging from 10-

30 basis points for 10-year yields. Among emerging

countries, the declines were greater than 30 basis points

in eight markets, although here we take 5-year yields.

Only in Turkey did rates rise and do so sharply, as the

market lost patience with the Central Bank of Turkeys

monetary policy experimentalism.

In currencies, apart from idiosyncratic circumstances,

the foreign currencies gained relative to the U.S. dollar

fairly broadly for a second quarter in a row. Most

emerging currencies rose relative to the U.S. dollar, with

the largest quarterly spot gain coming from Colombian

peso, +5.8%. Another nine currencies registered spot

gains greater than 2%, including Brazil, Poland, Czech

Republic, Korea, Singapore, Taiwan, Chile, Hungary, and

Israel.

On the downside, Turkish lira was the stand-out loser,

-4.9%. A yawning current account deficit (financed

mostly by short-term debt) defied authorities confidence

that their unusual monetary policy would

simultaneously cool domestic demand and deter hot

money inflows. The CBRT did acknowledge in its spring

financial stability report that sharply rising short-term

borrowing (mostly by banks) was the main threat to

financial stability. They vowed to continue reserve

requirement hikes (rather than interest-rate hikes) to

pinch credit growth.

Other laggards included Argentine peso, -1.4%, and

Thai baht, -1.3%. In Argentina, although the question of

whether Cristina Fernandez de Kirchner would run for

president in the fall was settled (yes), locals were already

voting with their pesos in leaving the country. Although

difficult to observe directly, the parallel (or ironically

named Blue Chip) peso rate fell even faster than the

official one. Despite the declines, the official pesos

return was +0.5% due to the high carry in the NDF (non

-deliverable forwards) points. In Thailand, pre-election

Source: J.P. Morgan

European Government Bond

Total Returns 2Q vs. 1Q 2011

-2.4%

0.2%

-8.6%

-5.7%

2.1%

0.5%

-0.4%

-2.0%-2.3%

-14.5%

-11.8%

-6.0%

0.5%1.0%1.4%1.9%1.9%2.1%

Germ

any

Fran

ce

Netherlan

ds

Belgi

um Italy

Spain

Irelan

d

Portu

gal

Gree

ce

1Q 2011

2Q 2011

Total Returns Second Quarter 2011

2.3%

4.0%

1.6%

3.1%

2.2%

1.1%

2.5%

0.0%

0.5%

1.0%

1.5%2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

U.S. Gov't.

Bonds

(JPM GBI)

USD

Bonds

(Barclays

U.S. Agg)

USD

Emerging

Bonds

(EMBIG)

Non-U.S.

Bonds:

Developed

(JPM GBI)

Non-U.S.

Bonds:

Emerging

(JPM GBI-

EM)

Currency

Bonds


13/47



jitters weighed on the baht and temporarily narrowed

onshore-offshore forwards.

In Peru, leftist candidate Ollanta Humala emerged

victorious, although the margin was small. During the

final months of the campaign he did a Lula makeover,

and each gesture lifted the depreciation pressure on the

new sol. By quarter end, the new sol had risen by 1.9%, a

middling performance in the region (Chile +2.2%, Brazil

+4.4%, Mexico +1.5%).

Chinas currency ended the quarter +1.3%, with all of

the gains coming in April, ahead of the U.S./China

Strategic and Economic dialog. As has become a

seasonal pattern, China allows the currency to rise ahead

of the meeting (and the U.S. semiannual report on

currency manipulation), then backs off afterwards.

In G10, somewhat unusually, the quarters lead

gainers were safe haven Swiss franc, +8.7%, and high-

carry New Zealand dollar, +8.3%. Swiss franc reached all

-time highs in real effective terms, prompting one Swiss

lawmaker to suggest imposing negative interest rates on

foreign investors (read: Greek deposit flight) to deter

further inflows. New Zealand dollar, meanwhile,

continued to benefit from post-quake reconstruction and

insurance inflows.

The euro ended the quarter surprisingly well,

considering that euro member Greeces bonds are pricing

significant bondholder losses. The single currency see-

sawed between 1.405 and 1.475 relative to the dollar

during the quarter, alternatively buoyed by the ECBs first

post-crisis interest-rate increase (and the strong hints of

more) and deflated by the ongoing slow-motion

sovereign crises in the periphery. During the quarter, the

ratings for Greek debt were cut deep into junk; Portugal

rested on the edge of junk (and downgraded to below

right after quarter end); while Ireland delivered a rather

nasty haircut to bank bondholders.

In credit markets, emerging debt spreads (EMBIG

series) tightened by 10 basis points to 288 basis points

during the quarter. Eurozone countries suffered more

downgrades from the ratings agencies, which were not

convinced by plans to allow Greece to impose losses on

bondholders without technically defaulting. CDS spreads

on Greece more than doubled to imminent-default levels

in line with the CCC/Caa1 ratings. Ireland and Portugal

kept their investment-grade ratings through the end of

the quarter, although Moodys dropped Portugal to Ba2

immediately afterwards. Liquidity in the emerging cash

bond market deteriorated slightly and the average bid-

offer spread widened to 67 basis points at the end of the

quarter from 62 at the beginning. New issuance of $81

billion fell slightly from the first quarter, but was above

the average of the previous four quarters.

The biggest index gainers were Ivory Coast (+12.5%),

Nigeria (+6.9%), Venezuela (+6.4%), and Uruguay

(+6.4%). The Ivory Coast bond continued to rally during

the quarter as the internationally-recognized Ouattara

administration took office, although it missed another

Second Quarter 2011 Change in Interest Rates (10Y DM, 5Y EM)

0.4

0.00.0-0.1-0.1-0.1-0.1-0.2-0.3-0.3-0.3

-0.4-0.4-0.4-0.4-0.5-0.5

-0.7

-0.9

-0.3-0.3-0.3-0.3-0.3-0.2-0.2

-0.2-0.2-0.1-0.1

New

Zea

land

Japa

nG

BI

Eur

o

Aus

tralia

Sw

itzerla

nd UK

Nor

way

U.S

.

Sw

eden

Can

ada

Indo

nesi

a

Mex

ico

Hon

gK

ong

Rus

sia

Bra

zil

Pol

and

S.A

frica

Cze

ch.R

ep.

Sin

g.

Isra

el

Chi

le

Kor

ea

Hun

gary

Taiw

an

GB

I-E

MD

Mal

aysi

a

Thaila

nd

Chi

na

Turk

ey

Source: J.P. Morgan


14/47



coupon without committing to a schedule for making up

the overdue payments. Nigerian elections were peaceful

by local standards and the re-elected president showed

signs of supporting positive reforms in the electricity

sector. Venezuelan bonds recovered from earlier losses

at the end of June when President Chavez had to be

hospitalized in Cuba and was found to have cancer. The

Uruguayan economy performed well in the first quarter,

and the Central Bank conducted a well-received investor

road show.

Index laggers for the quarter included Belize (-19.9%),

Iraq (-0.2%), Pakistan (+0.2%), and Serbia (+1.4%). The

Belize bond collapsed at the end of June when the

government nationalized the electric utility, which was

not able to pay for imported fuel. Iraq and Pakistan both

experienced political conflict well-covered by the media.

In asset-backeds, the market generally experienced

tightening spreads. According to J.P. Morgan, credit card

spreads declined from 22 basis points to 16 basis points,

auto spreads from 40 basis points to 32 basis points, and

student loan spreads remained flat at 40 basis points.

The ABX subprime indices declined sharply quarter-over

-quarter, although the final week of June did show

improvement. For the quarter, the triple-A Indices were

4% to 14% down in price; however, they finished the

quarter 2% to 10% off of their lows.

Strategies

Fixed income strategies were mixed during the

quarter: currency positioning, both developed and

emerging, performed well, while developed markets

interest-rate selection, emerging debt exposure, and asset-

backed portfolios formerly used as cash sweep suffered

during the quarter.

The U.S. dollars somewhat uniform fall helped our

long FX positions in both developed and emerging

currencies. Overweights in New Zealand, Australia, and

Norway contributed on the developed side, while

overweight positions in Brazil, Hungary, Poland, Peru,

Mexico, Chile, and Indonesia were notable in emerging

fx.

In developed markets interest-rate strategies,

opportunistic positions hindered performance during the

quarter, while the cross-market strategy and yield curve

trades contributed positively. This quarter marks the

culmination of a months-long research effort to refine

Fixed Incomes systematic strategies. The group

reconsidered all components of the strategies, including

the base factors used, their weightings, and the

construction of the ultimate target portfolios. The end

result is a series of refinements, which the team believes

will benefit going forward.

Source: J.P. Morgan

Second Quarter 2011 Currency Spot Returns

5.84.4

3.43.12.82.72.42.22.22.11.91.81.51.51.31.10.30.20.0-0.1

-0.2-0.3-0.5-1.3-1.4

-4.9

8.78.3

3.53.12.62.22.20.80.20.0

Sw

eden U

K

Can

ada

Eur

o

GB

Iex-

U.S

.

Japa

n

Nor

way

Aus

tralia

New

Zea

land

Sw

itzerla

nd

Turk

ey

Arg

entin

a

Thaila

nd

Rom

ania

S.Afri

ca

Indi

a

Egy

pt

Hon

gK

ong

Phi

lippi

nes

Mal

aysi

a

GB

I-E

MD

Chi

na

Mex

ico

Indo

nesi

a

Rus

sia

Per

u

Isra

el

Hun

gary

Chi

le

Taiw

an

Sin

gapo

re

Kor

ea

Cze

ch.R

ep.

Pol

and

Bra

zil

Col

ombi

a


15/47



In external emerging debt strategies, country selection

and security selection were detractors. Emerging local

debt strategies benefited from instrument selection and

country selection, but currency selection detracted.

Finally, after nine consecutive quarters of positive

contributions, the collateral pools reported negative

returns for the quarter, detracting alpha from all of the

strategies in direct proportion to each strategys exposure.

Outlook

At press time, no durable solution had been proposed

to either deal with the PIGs issues or contain the fallout

from not doing so. We put it in the too hard category

to offer a credible opinion about the outcome (other than

to say, having lived through a number of such crises inemerging countries, that default isnt the end of the

world). Given the number of stakeholders and the

chasm that separates their interests, a disorderly outcome

cant be ruled out.

On the matter of the U.S. debt ceiling, the

irresponsible brinksmanship being played out by

politicians and pundits in the news masks the more

fundamental truth about the looming August deadline:

the U.S. has both the willingness and ability to pay itsdebts in nominal U.S. dollars. Whether these dollars will

be worth anything is a different question, one the market

seems to be betting negatively about given the dollars

near uniform decline.

We continue to keep our portfolios tilted toward

those currencies, interest-rate, credit markets, and

instruments that we believe represent good value. At

quarter end that included a continued underweight in the

U.S. dollar, both against most G10 currencies and most

emerging ones. In developed rates, we moved to

overweight duration from underweight, mostly by cutting

our substantial Japan underweight and adding a bit to our

U.S. overweight. In credit, we still see value in asset-

backed securities and emerging debt.

Second Quarter 2011 J.P. Morgan EMBIG Returns by Country

12.5

6.96.46.46.25.55.55.45.3 5.45.14.74.74.64.4 4.54.1 4.34.14.0 4.04.03.73.73.63.43.12.92.82.42.1 2.42.01.91.91.91.81.6 1.71.40.2

-1.3-0.2

-19.4

Beliz

e

Sen

egal

Iraq

Pak

ista

n

Serbi

a

Gab

on

Vie

tnam

Ukr

aine

Mal

aysi

a

Arg

entin

a

Gha

na

Chi

le

Bul

garia

Kaz

akhs

tan

Rus

sia

Chi

na

Leba

non

Pol

and

Sri

Lank

a

Turk

ey

Sou

thAfri

ca

Dom

.Rep

.

Geo

rgia

Per

u

EM

BIG

Cro

atia

Bel

arus

Cro

atia

Jam

aica

ElS

alva

dor

Mex

ico

Phi

lippi

nes

Hun

gary

Indo

nesi

a

Bra

zil

Jord

an

Ecu

ador

Col

ombi

a

Pan

ama

Egy

pt

Uru

guay

Ven

ezue

la

Nig

eria

Ivor

yC

oast

Disclaimer: The views expressed herein are through the period ending June 30, 2011, and are subject to change at any time based on market and otherconditions. This is not an offer or solicitation for the purchase or sale of any security, is not intended to be investment advice and should notbe construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not beinterpreted as, recommendations to purchase or sell such securities.


16/47


As of June 30, 2011

GMO 2011

GMO Global Equity StrategyInception: 7/31/96; Benchmark: MSCI World Index

Performance (USD)1 Top Ten Holdings2,5

Risk Profile Since 7/31/964

Quarterly Strategy Attribution

1Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees,transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends andother income.

2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.3 The MSCI World Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed

markets. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liabilityhereunder.

4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolios sensitivity to the market; R2 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.

5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.The performance information above is supplemental to the GIPS compliant presentation that was made available on GMOs website in April of 2011.

Sector Weights5

GICS Sectors

Regional Weights5

Characteristics5

Global equity markets fell during most of the quarter but a rally in the last few days meant that the MSCI World Index eked out a gain of 0.5% when measured in terms of the weak US dollar,but provided negative returns from the perspective of most other currencies. The Global Equity Strategy outperformed its benchmark this quarter by 1.4%.

The crisis in Europe continues its steady trundle towards an end game. The cost of borrowing in peripheral Europe reached ever higher during the quarter with market participants now pricingsome sort of restructuring of government debt in Greece as a certainty and in Portugal and Ireland as a near certainty. As policy makers vacillate, the bond markets have come to their ownconclusions.

Nevertheless, European equities were the best performing developed market region, despite weakness in financials-dominated Greece and debt-laden Italy. European equities are pricing in adecent amount of disaster already; at the end of June, eurozone markets comprised 11 of the cheapest 13 developed markets, with discounts ranging from 12% for Germany through to 60% forGreece. By contrast, Canada trades at a premium, with little or no cushion for the unexpected built into valuations. Increase in nerves over the quarter meant that Canada could underperformPortugal, Italy, Ireland, and Spain despite being perceived as being in a fundamentally more robust state.

The strategy is overweight European equities on valuation grounds. Outside of Europe, our policy has ranged from avoid (Canada and Australia are the strategys two most significantgeographical underweights) to invest with caution (in the US, where we retain a significant allocation to high quality blue chips). Overall country selection made a positive contribution toreturns this quarter.

The strategys stock selection disciplines also contributed to relative returns with the most significant part coming from the allocation to high quality companies unsurprising given the overallnervous tone of the markets. Pharmaceuticals put in the strongest performance of any industry over the period as investors remembered that pharmaceuticals have several desirablecharacteristics, not least the defensive nature of their revenues in the face of concern for the broader economic outlook. The US high quality stocks remain the most significant driver of relativereturns for the strategy at this point.

The momentum stock picks had relatively little impact as the strategy shifts emphasis away from the Asian-facing growth stocks that allowed us to profit in rising markets last year. We havebeen gradually replacing that exposure with the beneficiaries of rising energy prices in the global oil sector. We have also added to German exporters, such as chemical manufacturer BASF andauto producer Volkswagen, supported by an increasingly competitive exchange rate as a consequence of the trouble in Southern Europe. Overall, energy stocks lagged for the quarter, whilst theGerman exporters added to returns.

The strategys value discipline outperformed modestly. Given the emphasis on Europe, especially the weaker eurozone members, this was a welcome validation of the philosophy underpinningthis strategy by buying into areas where prices are low, a certain buttressing against unpleasant events is achieved. We continued to refine our valuation-based exposures over the quarter,increasing allocations to the eurozone in general and Spain in particular. We increased our stakes in Santander for example we rate the large Spanish banks as among the better quality andmore diversified large banks in the eurozone today; they trade on reasonable valuations too.

Prices for European stocks are in many cases significantly lower than those outside Europe. Our principal European investments are in oil companies, auto manufacturers, utilities, andfinancials. We have assembled exposure to integrated oil stocks (for example Italian oil major ENI and Total in France) at an average 30% discount to the global sector. Our investments inautos, utilities, and financials trade on average at discounts of 20-30% to their global peers. This debt crisis, like others before it, has opened windows of opportunity in terms of valuation.

Total Return Net of Fees (%) Average Annual Total Return (%)

2Q YTD One Five Ten Since2011 2011 Year Year Year Inception

Strategy 1.89 6.66 30.91 1.57 5.68 7.31Benchmark 3 0.47 5.29 30.51 2.28 3.99 5.65

Annual Total Return Net of Fees (%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Strategy -9.39 -10.70 36.36 17.95 11.08 21.19 6.16 -38.71 24.61 10.40

Benchmark -16.82 -19 .89 33.11 14.72 9 .49 20.07 9 .04 -40 .71 29.99 11.76

Johnson & Johnson 3.8%

Royal Dutch Shell PLC 2.5%

Coca-Cola Co. 2.3%

Google Inc. (Cl A) 2.0%

Apple Inc. 1.9%

Merck & Co Inc 1.7%

Wal-Mart Stores Inc. 1.7%

PepsiCo Inc. 1.7%

ENI S.p.A. 1.6%

QUALCOMM Inc. 1.5%

Total 20.7%

Strategy Benchmark

Alpha 2.47 0.00

Beta 0.91 1.00

R2

0.95 1.00

Sharpe Ratio 0.32 0.16

Strategy Benchmark

Price/Earnings - Hist 1 Yr Wtd Med 13.3 x 15.2 x

Price/Cash Flow- Hist 1 Yr Wtd Med 10.2 x 10.6 x

Price/Book - Hist 1 Yr Wtd Avg 1.7 x 1.8 x

Return on Equity - Hist 1 Yr Wtd Med 16.9 % 14.5 %

Market Cap - Weighted Median $Bil $41.4 $33.7

Dividend Yield - Hist 1 Yr Wtd Avg 3.1 % 2.6 %

Underweight/OverweightRegion Against Benchmark (%)

North America

Europe ex-UK

United Kingdom

Japan

Pacific ex-Japan

Cash 1.7

-3.2

0.5

0.8

3.4

-3.3

-10 -5 0 5 10

Underweight/Overweight

Sector Against Benchmark Strategy Benchmark

Consumer Discretionary 10.5 % 10.5 %Consumer Staples 9.1 9.9Energy 14.3 11.4Financials 12.6 19.6Health Care 16.0 9.8Industrials 11.9 11.5Information Technology 12.1 11.2Materials 6.2 8.2

Telecom. Services 4.2 4.2Utilities 3.2 3.8-0.6

0.0

-2.0

0.9

0.4

6.2-7.0

2.9

-0.8

0.0

-10 -5 0 5 10


17/47


As of June 30, 2011

GMO 2011

GMO World ex-UK Equity StrategyInception: 12/31/88; Benchmark: FTSE World ex-UK Total Return Index

Performance (GBP)1

The World ex-UK Equity Strategy returned +1.0% for the second quarter, outperforming the FTSE World ex-UK Index which returned +0.3% in sterling terms.The strategy is overweight European equities on valuation grounds. Outside of Europe, our policy has ranged from avoid (Canada and Australia are the strategys two

most significant geographical underweights) to invest with caution (in the U.S., where we retain a significant allocation to high quality blue chips). Overall countryselection made a positive contribution to returns this quarter.

The strategys stock selection disciplines also contributed to relative returns with the most significant part coming from the allocation to high quality companies unsurprising given the overall nervous tone of the markets. Pharmaceuticals put in the strongest performance of any industry over the period as investors rememberedthat pharmaceuticals have several desirable characteristics, not least the defensive nature of their revenues in the face of concern for the broader economic outlook. TheU.S. high quality stocks remain the most significant driver of relative returns for the strategy at this point.

The momentum stock picks had relatively little impact as the strategy shifts emphasis away from the Asian-facing growth stocks that allowed us to profit in risingmarkets last year. We have been gradually replacing that exposure with the beneficiaries of rising energy prices in the global oil sector. We have also added to Germanexporters, such as chemical manufacturer BASF and auto producer Volkswagen, supported by an increasingly competitive exchange rate as a consequence of the troublein Southern Europe. Overall, energy stocks lagged for the quarter, whilst the German exporters added to returns.

The strategys value discipline outperformed modestly. Given the emphasis on Europe, especially the weaker eurozone members, this was a welcome validation of thephilosophy underpinning this strategy by buying into areas where prices are low, a certain buttressing against unpleasant events is achieved. We continued to refine our

valuation-based exposures over the quarter, increasing allocations to the eurozone in general and Spain in particular. We increased our stakes in Santander for example we rate the large Spanish banks as among the better quality and more diversified large banks in the eurozone today; they trade on reasonable valuations too.Prices for European stocks are in many cases significantly lower than those outside Europe. Our principal European investments are in oil companies, auto

manufacturers, utilities, and financials. We have assembled exposure to integrated oil stocks (for example Italian oil major ENI and Total in France) at an average 30%discount to the global sector. Our investments in autos, utilities, and financials trade on average at discounts of 20-30% to their global peers. This debt crisis, like othersbefore it, has opened windows of opportunity in terms of valuation.

Top Ten Holdings2,5




2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.3 The FTSE World ex-UK Index is an independently maintained and widely published index comprised of developed (excluding the UK) and emerging large and mid

capitalization stocks.4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolios sensitivity to the market; R2 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.5The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.The performance information above is supplemental to the GIPS compliant presentation that was made available on GMOs website in April of 2011.

Sector Weights5

GICS Sectors

Regional Weights5

Characteristics5



Strategy 1.01 3.41 21.43 5.49 4.64 9.25Benchmark 3 0.30 2.59 22.14 6.85 3.77 7.34


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Strategy -9.49 -21.29 23.70 9.75 25.88 5.41 7.41 -14.80 13.64 13.64

Benchmark -14.04 -27.35 20.66 7 .83 24.85 5 .65 9 .70 -17.12 18.86 16.69

Johnson & Johnson 3.8%

Coca-Cola Co. 2.2%

Google Inc. (Cl A) 1.8%

Apple Inc. 1.8%

ENI S.p.A. 1.8%

Merck & Co Inc 1.8%

PepsiCo Inc. 1.6%

Wal-Mart Stores Inc. 1.6%

Sanofi -Avent is S.A. 1 .4%

QUALCOMM Inc. 1.4%

Total 19.2%

Strategy Benchmark

Alpha 1.94 0.00

Beta 0.84 1.00

R 0.79 1.00


Strategy Benchmark


Price/Cash Flow - Hist 1 Yr Wtd Med 10.3 x 10.5 x


Return on Equity - Hist 1 Yr Med 16.4 % 14.2 %

Market Cap - Weighted Med GBP Bil. 23.2 18.9


Underweight/Overweighteg on ga ns enc mar

Europe ex-UK

North America

Japan

Pacific ex-Japan

Emerging

Cash 1.3

1.7

-3.1

0.2

-3.0

3.0

-10 -5 0 5 10

Underweight/OverweightSector Against Benchmark Strategy Benchmark

Consumer Discretionary 10.6 % 10.8 %

Consumer Staples 8.6 9.2

Energy 14.3 9.9

Financials 13.7 20.5

Health Care 13.9 8.8

Industrials 11.6 11.9

Information Technology 13.3 12.6

Materials 6.7 8.4

Telecom. Services 4.0 4.2

Utilities 3.3 3.6-0.3-0.2

-1.7

0.7-0.3

5.1

-6.8

4.4

-0.6

-0.2

-10 -5 0 5 10


18/47


As of June 30, 2011

GMO 2011

GMO International Intrinsic Value StrategyInception: 3/31/87; Benchmark: MSCI EAFE Value Index and MSCI EAFE Index





2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.3 The MSCI EAFE (Europe, Australasia, and Far East) Value Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely

published index comprised of international large and mid capitalization stocks that have a value style. Large and mid capitalization stocks encompass approximately 85%of each markets free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCIdata may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.



Sector Weights5Regional Weights5

Characteristics5

The International Intrinsic Value Strategy returned +2.7% during the second quarter of 2011, compared to the broad market MSCI EAFE index, whichreturned +1.6%, and the MSCI EAFE Value benchmark, which returned +1.0%.

Stock selection and sector exposures both contributed to the outperformance relative to EAFE. Selection was particularly good within the United Kingdom(especially among high quality drug companies) and Japan (notably among consumer stocks and rebuilding-related stocks). By sector, stock selection was bestin Consumer Discretionary, Health Care, and Utilities.

Sector exposures (as a result of stock selection) added value mainly from our overweight to Health Care, which was the best performing sector in EAFE.

In country allocation, the positive impact from our underweight to Australia, which underperformed, was largely offset by the negative impact from ouroverweight to Italy, which also underperformed.

Compared to the value benchmark, the strategy did even better due to the many differences between EAFE and EAFE Value.

The EAFE Value index has less in Consumer Staples, which outperformed, and more in Energy, which underperformed, and holds different stocks. These

resulted in better relative performance from sector exposures and stock selection versus EAFE Value.GMOs stock selection disciplines had good results in the quarter as momentum outperformed value. Stocks selected for their strong momentum

characteristics had the best returns. Those stocks chosen by quality-adjusted value were next, and those ranked highly by intrinsic value (the quality componentdid very well; valuation did not) trailed. All three disciplines outperformed.

Individual stock positions that added significant value included overweights in pharmaceuticals Sanofi (France), GlaxoSmithKline (UK), and AstraZeneca(UK). Stock positions that were significant detractors included overweights in oil companies Total (France), Eni (Italy), and Encana (Canada).

GICS Sectors

Tota l Retur n Net of Fees (%) Aver age Annua l Tota l Retur n (%)


Strategy 2.68 6.94 31.34 0.72 8.13 8.57MSCI EAFE Value 3 0.98 5.58 29.35 0.36 5.96 7.36

MSCI EAFE3

1.56 4.98 30.36 1.48 5.66 5.41


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Strategy -12.10 -0.59 43.53 25.23 13.98 25.78 10.21 -40.31 21.41 7.53MSCI EAFE Value -18.52 -15.91 45.30 24.33 13.80 30.38 5.96 -44.09 34.23 3.25

MSCI EAFE -21.44 -15.94 38.59 20.25 13.54 26.34 11.17 -43.38 31.78 7.75

Sanofi-Aventis S.A. 4.3%

Total S.A. 3.9%

GlaxoSmithKline PLC 3.3%


AstraZeneca PLC 3.1%

ENI S.p.A. 2.7%

Enel S.p.A. 2.2%

Novartis AG 1.8%

E.ON AG 1.6%

Takeda Pharmaceutical 1.5%

Total 27.6%

Strategy

M SCI

EAFE Val ue

MSCI

EAFE

Alpha 2.58 0.00 0.00

Beta 0.81 1.00 1.00

R2

0.86 1.00 1.00

Sharpe Ratio 0.33 0.18 0.08

Strategy

M SCI

EAFE Val ue

MSCI

EAFE

Price/Earnings - Hist 1 Yr Wtd Med 11.0 x 11.6 x 14.0 x

Price/Cash Flow - Hist 1 Yr Wtd Med 6.4 x 6.3 x 9.1 x

Price/Book - Hist 1 Yr Wtd Avg 1.3 x 1.2 x 1.5 x

Return on Equity - Hist 1 Yr Med 12.8 % 10.7 % 11.4 %Market Cap - Weighted Median $Bil $29.8 $34.4 $29.3

Dividend Yield - Hist 1 Yr Wtd Avg 4.1 % 4.4 % 3.4 %


Region Against M SCI EAFE Value (%)

Europe ex-UK

United Kingdom

Japan

Southeast Asia

Canada

Australia/New Zealand

Cash 1.6

-6.5

2.0

-0.4

2.8

0.7

-0.3

-10 -5 0 5 10

Underweight/OverweightSector Against M SCI EAFE Value Strategy Benchmark


Telecom. Services 8.6 9.4Utilities 6.9 7.5-0.6

-0.8

0.9

0.7

2.7

6.5

-18.4

4.6

1.2

3.2

-20 -10 0 10 20


19/47


As of June 30, 2011

GMO 2011

GMO International Core Equity StrategyInception: 1/31/02; Benchmark: MSCI EAFE Index





2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.3 The MSCI EAFE (Europe, Australasia, and Far East) Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published

index comprised of international large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, hasnot prepared or approved this report, and has no liability hereunder.



Sector Weights5

GICS Sectors

Regional Weights5

Characteristics5

The International Core Equity Strategy returned +3.5% during the second quarter of 2011, compared to the MSCI EAFE index, which returned+1.6%.

Stock selection and sector exposures both contributed to the outperformance relative to EAFE.

Stock selection was particularly good within the United Kingdom (especially among high quality drug companies), Japan (notably among consumerstocks and rebuilding-related stocks), and France (in drug and chemical companies). By sector, stock selection was best in Consumer Discretionary,Health Care, and Utilities.

Sector exposures (as a result of stock selection) added value mainly from our overweight to Health Care, which was the best performing sector inEAFE, and underweight to Financials, which underperformed.

In country allocation, the positive impact from our underweight to Australia, which underperformed, was largely offset by the negative impact fromour overweight to Italy, which also underperformed.

GMOs stock selection disciplines had good results in the quarter as momentum outperformed value. Stocks selected for their strong momentumcharacteristics had the best returns. Those stocks chosen by quality-adjusted value were next, and those ranked highly by intrinsic value (the qualitycomponent did very well; valuation did not) trailed. All three disciplines outperformed.

Individual stock positions that added significant value included overweights in pharmaceuticals Sanofi (France) and GlaxoSmithKline (UK) andchemical company Rhodia (France). Stock positions that were significant detractors included overweights in oil companies Encana (Canada), Total(France), and Eni (Italy).



Strategy 3.51 7.31 34.25 1.74 n/a 9.33Benchmark 3 1.56 4.98 30.36 1.48 n/a 7.59


2002 2003 2004 2005 2006 2007 2008 2009 2010

Strategy -2.43 37.67 23.28 15.58 25.56 12.13 -41.34 23.73 10.33

Benchmark -11.22 38.59 20.25 13.54 26.34 11.17 -43 .38 31.78 7 .75

Sanofi-Aventis S.A. 3.6%

GlaxoSmithKline PLC 3.3%

Total S.A. 3.0%


AstraZeneca PLC 2.7%

ENI S.p.A. 2.5%

Novartis AG 1.9%

Enel S.p.A. 1.8%

Vodafone Group PLC 1.4%

Takeda Pharmaceutical 1.4%

Total 24.5%

Strategy Benchmark

Alpha 2.57 0.00

Beta 0.94 1.00

R2

0.98 1.00


Strategy Benchmark


Earnings/Share - F'cast LT Med Growth Rate 8.8 x 10.2 x



Market Cap - Weighted Median $Bil $28.5 $29.3Dividend Yield - Hist 1 Yr Wtd Avg 3.8 % 3.4 %


Region Against Benchmark (%)

Europe ex-UK

United Kingdom

Japan

Southeast Asia

Canada

Australia/New Zealand

Cash 0.7

-5.1

1.2

-0.3

2.8

-0.6

1.2

-10 -5 0 5 10



Telecom. Services 8.3 5.5Utilities 5.9 4.71.22.8

-2.1

0.3

-1.3

7.4

-11.4

5.4

-5.1

2.6

-20 -10 0 10 20


20/47


As of June 30, 2011

GMO 2011

GMO Japan Equity StrategyInception: 12/31/05; Benchmark: MSCI Japan IMI ++ Index

Performance (USD)1

The Japan Equity Strategy returned +3.4% during the second quarter of 2011. This was ahead of its benchmark, the MSCI Japan IMIindex, which returned +0.5%.

Within the portfolio, stock selection and the resulting sector exposures were the primary reasons for the outperformance.

Performance was particularly good within Consumer Discretionary, but also within Telecommunication Services, Financials, andMaterials.

Individual stock positions that added value included overweight positions in telecom company KDDI Corp., real estate developer

Daito Trust Construction, and leisure company Round One Corp. Stock positions that were significant detractors includedunderweights in office electronics company Canon, machinery company Fanuc, and electronics company Hitachi.

Sector exposures also added some value, thanks to our overweight to Telecommunication Services, which outperformed, and ourunderweight to Utilities, which lagged.

Top Ten Holdings2,5




2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.3 The MSCI Japan IMI (Investable Market Index Series) ++ Index is an internally maintained benchmark computed by GMO, comprised of (i) the MSCI Japan (MSCI

Standard Index Series, net of withholding tax) from 12/31/2005 to 6/30/2008 and (ii) the MSCI Japan IMI (MSCI Standard Index Series, net of withholding tax)thereafter. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liabilityhereunder.



Sector Weights5

Strategy Benchmark

Alpha 2.84 0.00

Beta 1.09 1.00

R2

0.94 1.00

Sharpe Ratio -0.13 -0.29

Strategy Benchmark

% Negative Earnings 5.8 % 4.3 %

Price/Earnings - Excl Neg Earn Hist 1 Yr Wtd Med 10.1 x 16.1 x




Market Cap - Weighted Median $Bil $2.2 $10.1


Characteristics5

GICS Sectors



Strategy 3.41 1.85 21.15 -1.14 n/a -0.88Benchmark 3 0.48 -3.97 13.43 -3.24 n/a -2.62


2006 2007 2008 2009 2010

Strategy 6.39 -2.39 -24.83 -1.78 21.95

Benchmark 6 .24 -4 .23 -28 .16 6 .12 16.02

KDDI Corp. 4.9%

Mizuho Financial Group 4.1%

Nippon T & T Corp. 4.0%

NTT DoCoMo Inc. 3.1%

Sumitomo Mitsui Financial 2.5%

Daito Trust Construct ion 2.3%

Yamada Denki Co. Ltd. 1.8%

Resona Holdings Inc. 1.8%

Takeda Pharmaceutical Co. 1.7%

Sumitomo Corp. 1.3%

Total 27.5%


Consumer Discretionary 18.2 % 20.0 %Consumer Staples 7.9 5.9Energy 4.1 1.6Financials 21.2 17.2Health Care 4.8 5.8Industrials 19.5 21.0

Information Technology 3.7 12.8Materials 6.7 8.6Telecom. Services 12.1 3.8Utilities 1.9 3.3-1.4

8.3

-1.9

-9.1-1.5

-1.0

4.0

2.5

2.0

-1.8

-10 -5 0 5 10


21/47


As of June 30, 2011

GMO 2011

GMO Emerging Markets StrategyInception: 12/31/93; Benchmark: S&P/IFCI Composite Index

Performance (USD)1

The Emerging Markets Strategy fell 1.5% in the second quarter, trailing the -1.0% return of the S&P/IFCI Composite by 0.5%. Overall, country/sector selection detracted0.1%, while stock selection cost 0.4%.

Emerging markets suffered minor losses over the second quarter as investors chewed over the myriad developments in the sovereign debt crisis and the pace of monetarytightening in several key markets. The last days of the quarter saw sentiment turn bullish as concern of a Greek default eased after the government secured enough votes topush ahead with budget cuts. The quarter saw country performances as diverse as an 8.5% jump in Chile and a 15.2% plunge in Peru. Among sectors, the spread was tighter,

with Consumer Discretionary leaping 8.3% and Energy dropping 7.4%.Russian Energy underperformed the asset class as the outlook for commodities grew less rosy and concern deepened that tighter monetary policy in Russia would curb

economic growth. The central bank unexpectedly raised interest rates in April to check inflation. The concerns over the ultimate resolution to Greeces debt crisis, inflationfighting efforts in countries such as China and India, and speculation that U.S. demand may be slowing have all led to a fall in energy prices. Our overweight in RussianEnergy, a reflection of its cheapness and positive momentum, detracted from performance.

Investors in Hungary found comfort in the ongoing talks between the government and commercial banks on ending a moratorium on evictions and stimulating mortgagelending. The market was also influenced by rumors that the government would lower a special tax on banks as part

Documents

2q 2011 European Update