Costa Mesa, CA Wednesday, November 12, 2008 The Westin South Coast Plaza 2008 Research Roundtable Series The Global Investor’s Challenge: Achieving Balance

Costa Mesa, CAWednesday, November 12, 2008The Westin South Coast Plaza

2008 Research Roundtable Series

The Global Investor’s Challenge: Achieving Balance in a Volatile WorldU.S. Defined Benefit Survey Results

®

2008 U.S. Defined Benefit Survey ResultsFor Institutional Use Only 510126.1.0

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Agenda

I. Overview

II. Status of Defined Benefit (DB) Plans

III. Investment Strategies: “New Balance”


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I. Overview

2008 Survey Background—6th Annual Survey Designed by Pyramis Global Advisors*

When: Fielded in June 2008

Who: 248 of the largest DB plans in the U.S.– 126 Corporates (51%) and 122 Publics (49%)– Large plan tilt: 67% over $1 Billion– Liabilities-related questions based on 248 responses from individuals in HR/Investments functions– Investments-related questions based on 176 responses from individuals in Investments functions

One of the most comprehensive U.S. defined benefit surveys in the industry

Pyramis responsible for interpretation of results

Additional Quick Poll Survey conducted in late September 2008– 70 of the largest DB plans polled– Pulse check of current market volatility impact on future asset allocation decisions

*Survey was executed by Asset International, Inc., publisher of PLANSPONSOR magazine and Global Custodian magazine.


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Executive Summary

Status of DB Plans

The freezing/closing phenomenon seems to have largely played out

Funding status: Corporates in the 100s, Publics in the high 80s

Top worries remain: Corporates = Volatility; Publics = Low-Return Environment

Investment Strategy—“New Balance” in a Volatile World

Asset allocation—less reliance on equity

Alpha generation—long and long/short

World equity markets—between and within

Balance sheet—assets and liabilities (Primarily Corporates)


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II. Status of DB Plans

Attitudes

Funding Status

Top Concerns


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Percent of Plans Currently Active (Accruing Benefits for Current Employees)

Freezing and Closing Phenomenon Has Largely Played Out

83%

98%

0%

20%

40%

60%

80%

100%

Corporates Publics

Keep 91% Freeze in 3 Years 9%

Corporates: Future Intentions

Source: Pyramis DB Survey, 2008


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Attitude Shift—Commitment Is Actually More Resolute

“Why Are You Committed to DB?”*

*Multiple responses allowedSource: Pyramis DB Survey, 2008

Publics

When asked in 2008, 31% of Corporates and 57% of Publics said, “nothing could change our commitment”

52%49%

0%

20%

40%

60%

Philosophically Committed Confident We Can Meet Our Obligations

Corporates

52%

47%

0%

20%

40%

60%

Philosophically Committed Recruiting and Retention


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Funding Status Improved…But Still Volatile

Public funding status has remained stable

Note: Self-reported data, Pyramis DB Surveys, 2003–2008*Credit Suisse and Mellon

Average Funding Status

97%

100%98%

106%

96%

102%

91%

87% 88% 88%

80%

90%

100%

110%

2003 2004 2005 2006 2008

Corporates (ABO) Publics

However, third-party research* shows funding status declined in first six months of 2008


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Publics concerned with volatility

Top Concerns Similar to 2006

Publics: Top Concerns

37%

17% 17%

0%

10%

20%

30%

40%

Low-ReturnEnvironment

Current FundingStatus

GeneratingAlpha

Note: Only one choice allowedSource: Pyramis DB Survey, 2008


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Public Pensions Feeling Cost Pressures from Health Care

Publics: Cost Concerns

22%

17%

15%

0%

5%

10%

15%

20%

25%

Health Care Costs Impacting DB Funding

MortalityAssumptions

DB More Expensivethan Anticipated



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Publics

Health Care Liability Estimates—GASB 45Plans need to balance OPEB liabilities with pension liabilities

Note: Not including plans that could not estimate their liabilities, only 39% of public plans responded to this question.Source: Pyramis DB Survey, 2008

30%

23%

11%

36%

0%

20%

40%

60%

80%

100%

Under $100 Million$100 to $499 Million

$500 Million to $5 BillionMore than $5 Billion

41% over half billion dollars

Plans feeling increased pressure to fund OPEB liabilities

Plans expect to fund these liabilities within the next 1 to 3 years

“GASB 45” trusts likely to mirror the pension


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U.S. OPEB Funding Status

Source: The PEW Charitable Trusts, “Promises with a Price”, 2007

Percent Funded

0%–35%

35% and over

N/A


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III. Investment Strategies: “New Balance”

Asset allocation—less reliance on equity

Alpha generation—long and long/short

World equity markets—between and within

Balance sheet—assets and liabilities (Primarily Corporates)


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CorporatesPublics

Last Survey, Plans Intended to Decrease U.S. Equities…

0% 10% 20% 30% 40%40% 30% 20% 10% 0%

% of Plans Increasing% of Plans Decreasing

Hedge Funds

Private Equity

Real Estate

Non–U.S. Equity

U.S. Equity

Fixed Income



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…And They Did

*Alternatives includes Private Equity and Hedge Funds, as well as commodities, GTAA, and cash.Source: Pyramis Survey, 2006 and 2008—Public Data Only

2008

Alternatives*8.8%

Real Estate 6.8%

Fixed Income 27.4%

Non–U.S Equity19.0%

U.S. Equity 38.1%

2006

Real Estate 6.5%

Fixed Income 27.2%

Non–U.S Equity17.2%

U.S. Equity, 44.5%

U.S. Equity 43.2%

Alternatives*5.9%


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Historical Asset Allocations—Publics

Reduction in U.S. Equity

Motivated to increase non–U.S. Equity and Alternatives* as a return enhancer

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2008

45%

35%

12%

8%

U.S. Equity

Fixed Income

Non–U.S. Equity

Alternatives* and Real Estate

43%

27%

17%

13%

27%

19%

16%

38%

*Alternatives includes Private Equity and Hedge Funds, as well as commodities, GTAA, and cash.Source: Pyramis DB Surveys, 2003–2008


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7.3%

7.7%

39.9% 38.1%

15.9% 19.0%

32.8% 27.4%

3.0% 6.8%

8.4% 8.8%

0%

20%

40%

60%

80%

100%

Corporates Publics

U.S. Equity Non–U.S. Equity Fixed IncomeReal Estate Alternatives

Expected Return portfolio is calculated by multiplying the average weight of each asset class as of 12/31/07 by the average 5-year expected return of that respective asset class. Plan sponsor survey respondents, on average, for corporate and public plans, respectively, expect returns (gross) for U.S. Equity to be 8.2% and 8.3%, non–U.S. equity to be 8.6% and 9.4%, fixed income to be 5.1% and 5.2%, real estate to be 7.0% and 8.2%, private equity to be 10.9% and 11.3%, hedge fund to be 8.6% and 8.7%. These six asset classes account for 97.4% and 95.9% of assets. The remaining 2.6% and 4.1% comprises a host of asset classes including commodities and cash. The survey did not collect “expected return” information for these asset classes, so for the purposes of this illustration, we assumed a rate of return of 8.5% for all these assets combined. In other words, we assumed that the collection of these more esoteric asset classes would behave like U.S. equities. This is not an uncommon perception, i.e., that alternatives are generally expected to deliver “equity-like” returns with “bond-like” volatility. Source: Pyramis DB Survey, 2008

Asset AllocationsIllustration:

“Expected Returns” vs. Required Returns

Required return is between 8.0% and 8.5%

4%

5%

6%

7%

8%

Corporates Publics

Corporates and Publics Will Struggle Meeting Return Targets


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Expected Changes—Over Next Two Years

% of Plans Increasing

0% 10% 20% 30% 40% 50%

Private Equity

Real Estate

Emerging Markets

Global Equity

Hedge Funds

Commodities and Other

Non–U.S. Equity EAFE

U.S. Equity—Active

U.S. Equity—Passive

Fixed Income

% of Plans Decreasing

50% 40% 30% 20% 10% 0%

Source: Pyramis DB Survey, 2008—Public Data Only

Quick Poll Results>>>

100% No Change

100% No Change

98% No Change

95% No Change


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Hedge Fund Prevalence Takes Dramatic Leap…But Weighting Remains Stable


47%

57% of Corporates use hedge funds

40% of Publics use hedge funds

Prevalence

20%

0%

10%

20%

30%

40%

50%

2006 2008

? 7.4%

7.0%

2008

2006

Weighting Among Plans Using Hedge Funds


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Hedge Fund Use: Strong Bias Toward Long/Short

Note: Multiple responses allowedSource: Pyramis DB Survey, 2008

Current Use of Diversified Hedge Funds

47%

25% 23%18%

23%

13%

0%

20%

40%

60%

Fund of Funds Multi-StrategyFund(s)

A Collection of Single Strategy

Fund(s)

Corporates Publics

58%

27% 27%

14%22%

7%0%

20%

40%

60%

Long/Short and Market Neutral

Event Driven (e.g., Distressed, Risk Arbitrage)

Relative Value Arbitrage

Current Use of Single Strategy Hedge Funds


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130/30 Gaining Traction, but Awareness Still Low

Usage increased from 2006, but off a low base

High conceptual appeal from 18 months ago tempered by plan’s “shorting” restrictions

Despite marketing efforts, almost half of plans still largely unawareCorporates Publics

27%

43%

28% 28%

0%

10%

20%

30%

40%

50%

Using/Considering Need More Education


Quick Poll Results>>>100% No Change


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World Markets: Balancing U.S. With Non–U.S. EquityReducing the home-country bias

Equity Allocation: U.S. vs. Non–U.S.

Note: U.S. market weight within MSCI All Country World Index (ACWI) equals 41% as of 06/30/08Source: Pyramis DB Survey, 2008—Public Data Only.

While this transition may seem dramatic, the public side is even more striking

Publics have gone from an 80/20 split four years ago to a 66/33 split today

76.7% 71.4% 66.7%

23.3% 28.6% 33.3%

0%

20%

40%

60%

80%

100%

2004 2006 2008

U.S. Equity Non–U.S. Equity


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% of Plans Disagree

Risk Management

% of Plans Agree

Our Plan Is More Risky Than Two Years Ago

Risk Management Is More Challenging with Alternatives

Risk Management Has Shifted from Market Volatility to Funded-

Status Volatility

0% 20% 40% 60% 80%80% 60% 40% 20% 0%

CorporatesPublics



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Strategic Partnerships

Sample Size = 123

Currently Using Considering

0%

10%

20%

30%

All $1 Billion or More Less than $1 Billion

22%24%

11%

Note: What is your status regarding embracing a “strategic partnership model” (e.g., situation where fewer managers are given many mandates)?Source: Pyramis DB Survey, 2008


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The Future: Asset Allocation 10-Year OutlookPublics will likely be more global

Ten Years from Now, What Is the Most Likely Future for Pension Asset Allocation?

Source: Pyramis DB Survey, 2008—Public Data Only

56%

20%

1%0%

10%

20%

30%

40%

50%

60%

Global (both fixed incomeand equity)

Significant shift to alternatives

Significant shift towardsfixed income


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Conclusion

Market Volatility

Return Enhancers

U.S.

Assets

Long Only

Equity

Funded Volatility

Risk Reducers

Non–U.S.

Liabilities

Long/Short

Alternatives

Thank You

Documents

Costa Mesa, CA Wednesday, November 12, 2008 The Westin South Coast Plaza 2008 Research Roundtable Series The Global Investor’s Challenge: Achieving Balance