MERCER INVESTMENTS BELIEFS

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Every investor has unique objectives. Our proprietary

tools, breadth of expertise, global scale, and decades of

experience will help you towards yours.

After over 40 years in the business, Mercer now advises

clients who collectively have over $7 trillion in assets

worldwide.* That makes us one of the largest investment

advisors in the world. It also allows us to offer a comprehensive

menu of investment tools, advice, and solutions to help you

navigate complex capital markets.

But like anything, effective investment strategy comes

down to smart thinking. Here are our beliefs that underpin

our approach and drive investment success.

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* As of December 31, 2013

1. The client comes first, and we will work in partnership to deliver tailored solutions.

2. All clients are different, and their investment objectives vary. Client beliefs, time horizon, liability structure, and broader stakeholder objectives are all important factors in defining investment objectives and, hence, the risk relevant to particular circumstances.

3. A fund exists to meet its obligations, so obligations should be forefront in the development of any strategy. An investor’s true risk is not being able to meet his/her objectives.

4. The robustness and quality of the governance process are critical to success, particularly in times of crisis.

5. We believe that a strong flow of intellectual capital can help address our clients’ objectives. Continual intellectual capital generation seeks to develop innovative approaches and ways to address the constantly changing nature of markets and the different issues faced by our clients.

6. It is important to clearly identify environmental, social, and governance (ESG) motivations. Whether an investor is addressing ESG factors for financial reasons, or because they seek to achieve consistency with an organisation’s values or beliefs, will influence the appropriate approach.

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1. Asset allocation is the most important decision an investor can make. This is the primary driver of investment risk and return.

2. Risk and return are related. To obtain higher returns, some amount of risk must be taken. However, higher risk does not always lead to higher returns. In other words, risk taking does not guarantee that an additional return will be achieved, even over long periods. We believe that clients will be successful if they seek to minimise their exposure to risk that is less well-rewarded and focus on risks where the expected return is commensurate with the risk taken.

3. We believe in the merits of genuine diversification (at the asset allocation, “factor exposures,” and underlying investment manager levels). Clients can benefit from building efficiently diversified portfolios. Diversification across different sources of risk and return improves investment efficiency and may help achieve the same level of expected return with a lower level of risk. It should also limit adverse investment outcomes stemming from tail risk events. Diversification is more than a mathematical exercise, and history demonstrates that correlations vary over time and in response to differing market conditions.

4. Risk is a multi-dimensional concept. Thoroughly understanding all of the risks attached to an asset will frequently be difficult (but necessary). Standard deviation is important to some investors as a measure of risk, but it is not a total measure of risk. Not all risks apply evenly to all investors. For example, liquidity risk is less of a risk to the investor who does not need access to his/her capital for many years than to one who needs access in the near term. Investment success can come from understanding and exploiting an investor’s risk tolerances.

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1. We believe that active management is a skill and, as evidenced by our value-add analysis, our manager research process can improve the likelihood of identifying skilful managers. There is no single right way to manage money successfully. Skilled managers demonstrate observable characteristics and follow approaches that set them apart from the average. These attributes may include: a better understanding of behavioural factors than a typical market participant, a willingness and ability to take a longer-term view (where relevant), superior insight, or an ability to “join the dots”. Different markets exhibit varying degrees of efficiency, and it is important to recognise which markets offer sufficient potential for alpha generation. Skilled managers are more likely to add value in less efficient markets.

2. High conviction managers have a better likelihood of delivering meaningful alpha after fees. A willingness to be “different” is a pre-requisite for successful active management. The structuring of a portfolio comprising a number of high conviction managers is one route to achieving superior risk-adjusted returns.

3. Even the most skilful of managers will experience periods of underperformance. This can be amplified with high conviction managers. It follows that past performance is frequently a poor guide to future performance. Care should be taken in appointing or retaining managers following a strong period of performance.

4. Tailoring of mandates too far away from a manager’s standard approach is undesirable, as it creates the risk of diluting or curtailing his or her ability to exercise skill. Excessive customisation may also increase implementation and operational risks.

5. An appropriate benchmark or measure should be agreed upon and used to assess the performance of the manager, with an appropriate timeframe commensurate with the nature of the strategy.

6. There are many different types of asset management organisations, but those most likely to be successful will have portfolio managers whose rewards are aligned with those of their clients and where the culture is investment-led and demonstrates a high degree of integrity. Investment management organisations frequently develop, change, and mature over time, in the manner of a lifecycle. Large organisations benefit from deeper and broader research, but they may also face the headwinds of not being able to implement investment views in a timely manner.

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1. We believe that DAA can add value. While strategic asset allocation is key to clients achieving their long-term objectives, a static strategy is unlikely to be sufficiently robust or able to capture all the available return-seeking/risk-mitigation opportunities.

2. Markets are behavioural in nature, and “animal spirits” can move asset prices away from “fair value” for significant periods of time. Inefficiencies between markets are frequently larger than inefficiencies within markets, so dynamic asset allocation is a valuable resource for improving risk/return outcomes. Irrationality of markets creates opportunities for the long-term and/or contrarian investors.

3. Many valuation variables in investment markets are mean-reverting in the very long run. This allows long-term investors to obtain better risk/reward outcomes than those with shorter-time horizons. The length of time over which some investment views play out means that good investment decisions are rarely comfortable and comfortable investment decisions are rarely good.

4. Implementing medium-term asset allocation views can add value, but it can also mitigate downside risk in a portfolio. Success in dynamic asset allocation is more likely within a structured framework. Strong investment governance should improve investment decision making, particularly in times of crisis.

DYNAMIC ASSET ALLOCATION (DAA)

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1. All investors should assess the quality of their investment operations and investment implementation, regardless of their size or complexity. Operational inefficiencies, poor implementation, and lapses of internal controls within any of the participants in the process could erode returns and expose investors to unwanted risks and potential losses.

2. We believe that clients should look to achieve the highest value for money spent. Investors should consider both financial costs and non-financial elements (such as regulation, governance, reputation, etc.) As to financial costs, the effect of less obvious factors implicit in transacting business (such as spreads and market impact) should be considered alongside those that are directly observable and explicitly agreed (such as management charges).

3. The overall investment returns can be enhanced by having a monitoring and governance framework that focuses on evaluating and quantifying investment efficiency.

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1. ESG risks and opportunities, along with the exercise of active ownership (voting and engagement), can have a material impact on long-term risk and return outcomes. Consequently, a sustainable investment approach, which considers such risks and opportunities, is preferred.

2. Taking a sustainable investment view is more likely to create and preserve long-term investment capital.

We distinguish between:

• Financial implications (such as risks and costs) associated with ESG factors, where there is often shifting public sentiment and regulation.

• Growth opportunities in industries most directly affected by sustainability challenges (such as the growing population and natural resource constraints).

3. Active ownership helps the realisation of long-term shareholder value. In companies with inactive/disengaged shareholders, the chances are greater that company management will act in ways detrimental to shareholders’ interests. Active ownership — exercised through voting and engagement — provides diversified investors with an opportunity to enhance the value of companies and markets.

4. Accessing long-term streams of returns and long-term themes, rather than focusing on short-term price movements, can add value. We seek to identify managers and strategies that are structured this way.

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References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

© 2014 Mercer LLC. All rights reserved.

This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualised investment advice.

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For Mercer’s conflict of interest disclosures, contact your Mercer representative or see www.mercer.com/conflictsofinterest.

IMPORTANT NOTICES

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Copyright 2014 Mercer LLC. All rights reserved. 13500D-IC

Argentina

Australia

Austria

Belgium

Brazil

Canada

Chile

Colombia

Denmark

Finland

France

Germany

Hong Kong

India

Indonesia

Ireland

Italy

Japan

Mainland China

Malaysia

Mexico

Netherlands

New Zealand

Norway

Peru

Philippines

Poland

Portugal

Saudi Arabia

Singapore

South Africa

South Korea

Spain

Sweden

Switzerland

Taiwan

Thailand

Turkey

United Arab Emirates

United Kingdom

United States

Venezuela

For further information, please contact your local Mercer office or visit our website at:www.mercer.com