Annual Meeting of 1818 Society Pension Plan Performance October 22, 2008

Annual Meeting of 1818 SocietyAnnual Meeting of 1818 Society

Pension Plan Performance

October 22, 2008

2

Pension Plan and Endowments

Roadmap

1. Highlights 2007

2. Update 2008 and Recent Market Stress

3. Determinants of Plan Long Term Performance

4. Concluding Remarks

3

SRP - Funded Status

Funded ratio is (MV of Assets)/(Liabilities)

101%

105%

126%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1998 1999 2000 2001 2002 2003 2004 2005 2005 2007

Year ending December 31

Closed Group Funded Ratio Closed Group incl PV of participant conts PBO Funded Ratio

4

Total Bank Contribution Rates for Total Bank Contribution Rates for FY03 - FY09FY03 - FY09

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009

Financial Year ending June 30

Staff Retirement Plan Retiree Medical Plan Other Bank Plans

5

SRP Plan Performance (2007)

Alternative investments continued playing a key role

Plan Return Policy Return Excess Return

TOTAL PLAN 10.3 8.3 2.1

U.S. Equity 5.5 5.1 0.4 Non-U.S. Equity (Unhedged) 18.8 15.8 3.0 Fixed Income 4.6 5.3 (0.7) Hedge Funds 10.4 3.6 6.8 Private Equity 28.6 16.3 12.2 Real Estate 8.0 10.0 (2.0) Currency Overlay (3.2) (3.2) 0.0

6

SRP - Change in Asset SRP - Change in Asset Allocation Policy, October 2007Allocation Policy, October 2007

Old Target New Target

Non US Equity16%

Fixed Income40%

US Equity19%

Hedge FundsUp to 12%

Private EquityUp to 12%

Real EstateUp to 8%

CashUp to

1%

Overlay Strategies

2%

Real Estate12.5%

Infrastructure2.5%

Timber2.5%

Fixed Income for hedging

25%

Cash1%

US Equity4.5%

Non-US Equity4.5%

Hedge Funds Strategies

23%

Private Equity15%

Emerging Market Equity

5%

Commodities2.5%

Equity Strategies

Absolute Return StrategiesFixed Income Strategies

Real Return Strategies

7


Roadmap

1. Highlights 2007




8


General Market DevelopmentsUpdate on Recent Market Developments

Unprecedented market conditions have led to losses in most asset classes

Asset Class Returns YTD (as of October 16 2008)

Russell 3000 -37.5%

MSCI World exUS -40.0%

MSCI EM Free -48.7%

DJ AIG Commodity Index -25.7%

EMBI -16.1%

Lehman Global Aggregate exUS 0.9%

Lehman US Aggregate -1.4%

Lehman Brothers U.S. Tips Index -3.1%

9


General Market DevelopmentsUpdate on Recent Market Developments

Equity market gyrations accelerated in October.

Dow drops the most ever in 1 day, and subsequently stages the biggest rally since 1930s, only to fall back again

10


Government interventions to stem the crisisUpdate on Recent Market Developments

Unprecedented government intervention across the world:

• Liquidity and lending guarantees

• Interest rate cuts

• Bank retail deposit guarantees

• Bank recapitalization

• Asset purchase

• Short selling bans

• Blanket deposit guarantees

US• Guarantee all senior debt issued by banks for next 3 years• Cut rates to 1.5% on Oct 8• Increase bank deposit to USD 250K from USD 100K. Non interest bearing accounts unlimited guarantee• Will purchase troubled bank assets up to USD 700bn.• Will use of up to USD250bn of the USD 700bn “bail-out package” to inject in banks. Half in the 9 big banks; other half for smaller lenders and thrifts• Temporarily banned short selling in financial companies. Ban lifted Oct 8.EU• Cut rates to 3.75% on Oct 8• Guarantee deposits for up to EUR100KUK• Guarantee new short and medium-term debt issued by banks• Cut rates to 4.5% on Oct 8• Increase deposit guarantee to GBP50K• RBS and Lloyds get GBP39bn capital injection. Another GBP25bn available for Tier 1 capital to other banks.• Short selling in financial stock until Jan 2009Germany• Provides EUR400bn in bank guarantees• Blanket guarantee for all private bank accounts• Provides EUR100bn in state funds to recapitalize banks•Short selling in financial stock until Jan 2009Australia• Plans AUD8bn purchases of residential mortgage backed securities• Blanket guarantee for entire deposit base

11


SRP PerformanceUpdate on Recent Market Developments

SRP has lost value

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

($ M

illi

on

s)September 30, 2008SRP Market Value:

$13.4b

12


SRP PerformanceUpdate on Recent Market Developments

Diversification has helped cushion losses

A scenario analysis of returns and risk of different hypothetical asset allocations show:

• The target SAA has highest risk adjusted returns in all scenarios

• The actual return of SRP are below the target SAA returns but above all other scenarios

• Actual SRP losses were less than for a “risk averse” 40% eq / 60% fixed income portfolio

Asset allocation Return Volatility Ratio* Return Volatility Ratio* Return Volatility Ratio*60% Public Equity, 40% Fixed Income (13.5) 9.6 (1.4) 5.4 7.2 0.7 6.0 8.6 0.7 40% Public Equity, 60% Fixed Income (8.9) 6.4 (1.4) 4.7 4.9 1.0 5.9 5.9 1.0

"Target" SAA** (6.4) 4.7 (1.3) 8.8 5.1 1.7 10.9 5.9 1.8

Actual*** (8.3) 6.3 (1.3) 8.6 5.1 1.7 6.7 8.1 0.8

*: Ratio is calculated as Return / Volatility (IR)**: "Target" SAA proxy: 25% Hedge Fund, 15% Public Equity, 25% Fixed Income, 20% Real Estate, 15% Private Equity***: Actual based on Falsh report as of 10/14/08

Rolling 1YR Rolling 5YR Rolling 10YR

Total return comparison of different asset allocations

13


Roadmap

1. Highlights 2007




14


Approaches to SRP ManagementCyclicality and Sources of Alpha

Progressive improvement in the amount and consistency of Excess Return over time

Excess Return has increased three-fold in the past 5 years

1989-1995 1996-2002 2003-2007

Actual Return 16.24% 8.14% 12.02%

Benchmark 15.85% 7.30% 9.63%

Excess (+) 0.38% 0.85% 2.38%

I Period 1989-1995I I Period 1996-2001I I I Period 2002-2007

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

SRP Annual Excess Return

15


Approaches to SRP ManagementCyclicality and Sources of Alpha

Gradual improvement in managing downside risk

Period I : 1989-1995 15 -11.01% 2.27% -1.88%Period I I : 1996-2002 8 -6.31% 1.38% -3.34%Period I I I : 2003-2007 1 -0.18% 1.75% -0.18%

Cumulative neg. Alpha

Worst Quarter

Best Quarter

# of neg. Quarters

Since 2002: major effort to increase portfolio diversification and investment in alternatives

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

IV 2

007

IV 2

006

IV 2

005

IV 2

004

IV 2

003

IV 2

002

IV 2

001

IV 2

000

IV 1

999

IV 1

998

IV 1

997

IV 1

996

IV 1

995

IV 1

994

IV 1

993

IV 1

992

IV 1

991

IV 1

990

IV 1

989

SRP Quarterly Excess Return

16


Diversification across Asset Classes Improves ExcessReturns

Greater diversification and low excess returns correlation across asset classes are two main reasons for improvement of excess returns

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2007200219951989

Fixed Income

Public Equity

Private Equity

Real Estate

Hedge Fund

Commodity

FX Overlay

Portable Alpha*

* Portable Alpha proggram was discontinued after new SAA was approved in October 2007.

17


Diversification within Asset Classes Improves ExcessReturns

Greater diversification within each asset class across active managers has also positively contributed to reduce the overall volatility

0

100

200

300

400

1996 2002 2007

Number of active investments by asset class

Fixed Income

Private Equity

Real Estate

Hedge Fund

Public Equity

Impact is greatest in the highest return producers: alternative asset classes

18


2008 Alpha generation: A Damage-Control YearCyclicality and Sources of Alpha

• Environment has made it difficult for active managers to add Alpha

• Plan has done better than market average in public equities and roughly in line in fixed income

* Market average is composed of 197 different active managers in the Fixed Income space and 293 in the Public Equity space.

** per annum

• Preliminary indicators confirm this trend for the quarter ending September 30th. Data will not be available till mid-November

SRP Excess Return (data till J une 2008)

Jan-June 2008

1YR 2YR ** Jan-June 2008

1YR 2YR **

SRP Portfolio -0.64% -1.27% -0.62% 1.58% 2.05% 2.38%

Market Average * -0.59% -2.54% -1.31% 0.81% 1.49% 1.09%

Overperformance -0.05% 1.27% 0.69% 0.77% 0.55% 1.29%

Fixed Income Public Equity

SRP ExcessReturn (data till J une 2008)

Jan-June 2008

1YR 2YR **

SRP Total Invest. Port. -0.27% -0.34% 1.82%

19


Roadmap

1. Highlights 2007




20


Concluding Remarks

• An unprecedented market environment has prompted an unprecedented government response

• Short-term performance will continue to be volatile

• Plan’s increased diversification across asset classes and active managers has been a major determinant of performance and stronger risk management

• Diversification will continue to contribute to the downside protection of the Plan

• Crisis will be tough in the short term but will bring better risk/return metrics: better buying opportunities for the long term investor

Documents

Annual Meeting of 1818 Society Pension Plan Performance October 22, 2008