H E A L T H W E A L T H C A R E E R

H O W D O E V O L V I N G C L I E N T O B J E C T I V E SA F F E C T I N D U S T R Y C O M P E T I T I O N ?

Rich Nuzum, CFA

© MERCER 2018 1

E V O L V I N G C L I E N T O B J E C T I V E S

GOVERNANCE

PRIVATE MARKET INVESTING

FEES, RISK AND OPERATIONAL IMPLEMENTATION

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2

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GOVERNANCE

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T H E F I D U C I ARY ’ S M I S S I O N :T O M AK E AN D I M P L E M E N T B E T T E R I N V E S T M E N T D E C I S I O N S

S E T O B J E C T I V E S

D E C I D E L O N GT E R M S T R A T E G Y

D E C I D E M A N A G E RS T R U C T U R E &M A N A G E R R O L E S

S E L E C TI N V E S T M E N T

M A N A G E R S

M O N I T O RR E S U L T SA G A I N S T

O B J E C T I V E SGOVERNANCE

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W H AT I F W E H AV E C O M P E T I N G O B J E C T I V E S ?

R E T U R NO B J E C T I V E

Economic

Beat peers

Beatbenchmark

A S S E T A L L O C AT I O NS T R AT E G Y

High absolute returnswith acceptable levelof volatility

Benchmarkaware

Peer aware

M U LT I P L EO B J E C T I V E S ?

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P A R T N E R I N G W I T H I N V E S T M E N T M A N A G E R ST H R E AT S , O P P O R T U N I T I E S A N D I N N O V AT I O N

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I N C R E A S I N G P A C E O F I N N O V AT I O N

Source: G. Kofi Annan, gkofiannan.com; Pokemon Go added by Mercer (19 days to cross 50 million downloads worldwide); source: DMR Stats | Gadgets

50 MILL ION USERSYEARS

YEARS

YEARS

YEARS

YEARS

DAYS

DAYS19

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I N F O R M AT I O N O V E R L O A D

• Large and complex data sets

• Require new data processing applications

• Each day, the world creates 2.5 x 1018 bytes of data

• Enough to fill 10 million Blue-Ray discs

• Which would take you ~3500 years to watch

VAR I E T YV E L O C I T Y M U LT I - S O U R C E DV O L U M E

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G O V E R N A N C E : W H O D O E S W H AT ?C A N W E C R E AT E A C O M P A R A T I V E A D V A N T A G E ?

“I can do it myself” “Help me” “Do it for me”

RESEARCH AND TOOLSHands off provision ofresearch and analytical tools

ADVICEProactive consulting with clientin the driving seat

“Desired outcomes” agreed withclient and Mercer implements

SOLUTIONS

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*Assets under advisement includes aggregated data for Mercer Investment Consulting, Inc. and its affiliated companies globally (“Mercer”). Data is derived from a variety of sources, including, but not limited to, third-party custodians orinvestment managers, regulatory filings, and client self-reported data. Mercer has not independently verified the data. Where available, data is provided as of 30 June 2017 (“Reporting Date”). If data was not available as of the Reporting Date,information from a date closest in time to the Reporting Date, which may be of a more recent date than the Reporting Date, was included. Data includes assets of clients that have engaged Mercer to provide project-based services within the12-month period ending on the Reporting Date, and assets of clients that subscribe to Mercer’s Manager Research database.#: The assets under management data reported here include aggregate data for Mercer Investment Management, Inc. and its affiliated fiduciary management businesses globally as of 31 January 2018.

E X A M P L E : M E R C E R ’ S C L I E N T B A S E

150+ResearchClients

800+DiscretionaryClients

2,600+AdvisoryClients

• Global manager research • Operational due diligence$6.3 TNSubscriberAssets

$11 TNUnderAdvisement

$242 BNGlobalDelegatedAssets

• Outcome-orientedinvestment strategy

• Manager selection

• Responsible investment• Transitions, custody,

execution quality

• Multi-client and customfund implementations

• Alternative investments• Liability-driven investment

R E S E AR C H

AD V I C E

S O L U T I O N S

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C A S E S T U D Y E X A M P L E

C L I E N T S I T U AT I O N C H A L L E N G E S A N D S O L U T I O N

• A multinational company had established aninvestment management subsidiary to manage itsglobal pension assets– Registered with SEC in US and with Central Bank

of Ireland– Mainly acted as a manager-of-managers (MOM)

• Managed more than $30bn in assets• Used Mercer’s manager research via desktop access• Used Mercer and several other consultants for

advice as-needed

• Parent company split -- one sub retained ownershipof MOM

• Affiliated MOM experienced loss of CIO and other keyinvestment staff

• Fiduciaries of new subs initiated formal evaluation ofaffiliated MOM

• Mercer was selected by one subsidiary to build customfunds for $15bn in AUM– Fees dropped by 22%

• Ultimately, even the subsidiary which retained ownershipof the MOM elected to move to commercial third parties

Representative of general trend from “Research” to “Solutions” model.Drivers: changes in corporate strategy / structure at plan sponsor, personnel turnover,

and rise of commercial MOMs that are larger than any in-house affiliate

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E V O L U T I O N O F I N V E S T M E N T C O N S U L T I N G A N DO C I O I N D U S T R I E S

The information above includes worldwide assets under management and assets under advisement across Mercer’s Investment Consulting and Fiduciary Management businesses.

Rank Provider Full Discretion AssetsUnder Management (Bn)

1 Mercer $150.7

2 Russell Investments $104.9

3 SEI Investments $81.4

4 Blackrock $80.1

5 Aon Hewitt Investment Consulting $61.2

6 Goldman Sachs $60.0

7 Northern Trust Asset Management $59.1

8 J.P. Morgan Asset Management $45.2

9 Willis Towers Watson $44.6

10 Wells Fargo $31.0

Source: Asset International - Chief Investment Officer (“ai-CIO”) Magazine Survey - Outsourced-ChiefInvestment Officer (“OCIO”) Providers, 15 February 2017.

Rank Provider Global AssetsUnder Advice (Bn)

1 Mercer $10,174.0

2 Aon Hewitt Investment Consulting $4,202.3

3 Russell Investments $2,400.0

4 Cambridge Associates $2,399.8

5 Callan Associates Inc. $2,210.2

6 Willis Towers Watson $2,200.0

7 Nomura Securities Co. Ltd. $1,819.1

8 RVK Inc. $1,322.6

9 Pension Consulting Alliance Inc. $1,149.0

10 Wilshire Associates Inc. $970.5

Source: Pensions & Investments survey as of June 30, 2016

I N V E S T M E N T C O N S U L T A N T S OUTSOURCED CHIEF INVESTMENT OFFICERS (OCIOS)

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M A N A G E R SC O V E R E D

S T R A T E G I E SC O V E R E D

S T R A T E G I E SR A T E D

S T R A T E G I E SR A T E D A

6,085 30,755 10,460 2,714

Data as of 30 September 16Investment Professionals exclude Financial Services and are FTE (not count of employees)Research Specialists exclude 10 central support /admin staff

N O R T HA M E R I C A

G R O W T HM A R K E T S

(Asia & Middle East &Latin America)

P A C I F I C

A C C E S S I N G B E S T I N V E S T M E N T S T R AT E G I E SR E Q U I R E S G L O B A L R E S E A R C H

56ResearchSpecialists

E U R O P E

54ResearchSpecialists

10ResearchSpecialists

10ResearchSpecialists

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P A R T N E R I N G W I T H I N V E S T M E N T M A N A G E R ST H R E AT S , O P P O R T U N I T I E S A N D I N N O V AT I O N

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PRIVATE MARKET INVESTING

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G O V E R N M E N T B O N D Y I E L D S H AV E “ C R AT E R E D ”

Source: Bloomberg; Global Financial DataUS Generic Govt 10Y Yield / Japan Generic Govt 10Y Yield / UK Generic Govt 10Y Yield / Germany Generic Govt 10Y Yield

-2%

0%

2%

4%

6%

8%

10%

12%

14%

T R E A S U R Y B O N D I N T E R E S T R AT E S

US Japan UK GermanySource: Bloomberg, Data as of Feb 21, 2018

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AB S O L U T E AN D R E L AT I V E R E T U R N P R E M I A H AV E C H A N G E D

Source: Mercer Capital Markets Outlook as of December 1996, January 2007, and January 2018

6.9%7.8%

11.0% 11.2%12.0% 11.8%

5.1%

7.1%8.2% 8.2% 8.5%

9.4%

3.4%

6.7%

5.6%

7.3%

8.7% 8.8%

2%

4%

6%

8%

10%

12%

14%

US Aggregate FI Core Real Estate US All Cap Equity Non-US Developed AllCap Equity

Emerging MarketEquities

Private Equity

Dec 96 Jan 07 Jan 18

M E R C E R R E T U R N E X P E C TAT I O N S

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R E T U R N - F O C U S E D

• Core RealEstate

• Core Infrastructure

• Timber

• Agriculture

• Tail-Risk HedgingStrategies

• Commodities

• Short-BiasedHedge Funds

• Opportunistic Real Estate

• Growth Infrastructure

• Natural Resources• Shipping

• Directional Hedge Funds• Private Equity

• Insurance Linked Securities• Non-Directional Hedge Funds

• Private Debt

“ A L T E R N A T I V E I N V E S T M E N T S ”

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P R I V AT E E Q U I T Y ( N O R T H A M E R I C A )N E T I R R s

Distribution of Net IRRs for Private Equity Funds (North America) by Vintage Year

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I N F R A S T R U C T U R EN E T I R R s

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Distribution of Net IRRs for Infrastructure Funds by Vintage Year

Net IRRs for Individual Infrastructure Funds Median Public Market Equivalent IRR

Data sources: Preqin, Bloomberg, Mercerestimates, based on data as as Dec 31 2015

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P R I V AT E D E B TN E T I R R s

Distribution of Net IRRs for Private Deft Funds by Vintage Year

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FEES, R ISK ANDOPERATIONALIMPLEMENTATION

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F E E S AV I N G S F R O M O C I O M O D E L

Average Manager fee

70 bpsManager fee through OCIO

32 bps

10 CLIENTS WITH $50M IN ACTIVEGLOBAL EQUITY ACCOUNTS

ONE $500M OCIO-INTERMEDIATEDACTIVE GLOBAL EQUITY ACCOUNT

$50M $50M $50M $50M $50M

ILLUSTRATIVE

$50M $50M $50M $50M $50M

$50M $50M $50M $50M $50M

$50M $50M $50M $50M $50M

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CLOSING REMARKS

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E V O L V I N G C L I E N T O B J E C T I V E S

GOVERNANCE

PRIVATE MARKET INVESTING

FEES, RISK AND OPERATIONAL IMPLEMENTATION

1

2

3

© MERCER 2018 25