The View from Institutional Investors

Tuesday, May 3, 2011; 2:30 PM – 3:45 PM

Moderator:

Alexander Friedman, Chief Investment Officer, UBS Wealth Management

Speakers:

Janet Cowell, Treasurer, State of North Carolina

Joseph Dear, Chief Investment Officer, California Public Employees' Retirement System (CalPERS)

Andy Dillon, Treasurer, State of Michigan

Hazel McNeilage, Head of Funds Management, Queensland Investment Corp.

Slides from Joseph Dear

Chief Investment Officer, CalPERS

Source: California Public Employees‟ Retirement System.

CalPERS Funded Ratio

Assets and Actuarial Accrued Liabilities, fy 1987-2010

65%62%

89%

101%93%

90%

86%80%

87%

105%

127%

138%134%

123%

104%100%

95%

100%97%

97%97%

100%94%

98%

0

50

100

150

200

250

300

350

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

0%

20%

40%

60%

80%

100%

120%

140%

160%

Assets, Market Value ($B) Actuarial Accrued Liabilities ($B) Funded Ratio (right axis)

3

Global Equity, 52.6%

Global Fixed Income, 21.1%

Private Equity, 14.1%

Real Estate, 7.3%

Inflation Linked Asset Class, 3.0%

Cash Equivalents, 2.0%

Actual Asset Allocation as of December 31, 2010

Source: California Public Employees‟ Retirement System.

4

Source: California Public Employees‟ Retirement System.

Total Fund - Historical Net ReturnsCalendar Year End

-30

-20

-10

0

10

20

30

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

Net Returns Annualized Returns Since 1989

5

Source: California Public Employees‟ Retirement System.

Public Equity, 49.1%

Fixed Income, 15.9%

Private Equity, 14.0%

Real Estate, 10.0%

Infrastructure and Forestland, 3.0%

Inflation Linked Bonds, 3.0%

Commodities, 1.0%

Treasuries, 4.0%

Target Asset Allocation Approved December 13, 2010

6

Slides from Andy Dillon

Treasurer, State of Michigan

8

9

Additional Slides

Strong financial recovery in U.S.

Particularly in much of 2009 and early 2010

Note: Data are as of April 19, 2011.

Source: Bloomberg.

5

10

15

20

2004 2005 2006 2007 2008 2009 2010 2011

U.S. stock market capitalizationUS$ trillions

Highest point: $19.1 trillion

on 07/23/2007

$16.2 trillion as of

04/19/23/2011

11

U.S. consumer confidence improves slowly

Confidence improves slowly U.S. Consumer Confidence Index

Source: Bloomberg.

0

20

40

60

80

100

120

140

160

Jan 2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Index (1985 =100)

Conference Board's Consumer Confidence Index

12

2011: U.S. stock market is off to a good start

Note: Data are as of April 19, 2011.

Source: Bloomberg.

3.0

3.1

5.6

5.8

6.2

6.9

7.1

7.6

9.0

0 2 4 6 8 10

Dow Jones transports

Dow Jones utility

Nasdaq composite

S&P 500

NYSE composite

S&P small-cap

Russell 2000

Dow Jones industrial avg

S&P mid-cap

2011 YTD gains for key U.S. stock indexes (%)(as of 04/20/2011)

13

The U.S. small- and mid-cap stocks outperform

S&P 600 Small Cap

S&P 400 Mid Cap

S&P 100 large Cap

50

100

150

200

250

300

350

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

January 1998 = 100

Note: Data are as of April 19, 2011.

Source: Bloomberg.14

Investment returns for selected asset classes

Sources: Bloomberg, Milken Institute.

$446

$237

$191$169

$133 $122

0

100

200

300

400

500

Emerging markets

U.S. high-yield bonds

U.S. AAA corporates

U.S. Treasuries Commodities S&P 500

As of March 2011, a $100 investment made in December 2000 gives you:

15

A record issuance of high-yield bonds in 2010-11

United States

* Year to date, annualized.

Source: Securities Industry and Financial Markets Association .

0

200

400

600

800

1,000

1,200

1,400

1,600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Total issuance (US$ billions)

High yield

Investment grade

16

U.S. high-yield bond spread over Treasury is

at its historical average

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Hig

h-Y

ield

Bo

nd

Sp

rea

ds

(ba

sis

po

ints

)

Long-term average

(1986-March 2011)

Note: Spread is the difference between the U.S. high-yield Merrill Lynch Master II index and 10-Year treasury bondSource: Bloomberg.

17

U.S. Treasury yields remained low by

historical standards

Source: Federal Reserve.

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011

Percent Interest rates on Treasury securities Percent

10-year

2-year

18

Credit spreads have returned to low levels

United States

0

5

10

15

20

25

Percent

Investment-grade AAA-rated bond yield

High-yield bond index yield

Treasurybond 10-year yield

Source: Bloomberg. 19

U.S. national debt will be close to 80% of GDP

in the next decade

Source: Congressional Budget Office (CBO).

0

20

40

60

80

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

% of GDP Federal debt held by public

62% of GDP, or

$9.2 trillion in 2010

CBO's estimate

20

Are rate-of-return assumptions too high?

Hurdle rates of the largest public pension funds in each state

Source: Pew Center on the States, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform” (February 2010).

Assumed

rate of return

# of states

with rateStates

7.25% 2 NC, SC

7.50% 7 GA, IN, IA, KY, TN, VA, WV

7.75% 7 CA, FL, ID, ME, MD, SD, UT

7.80% 1 WI

8.00% 22AL, AZ, AR, DE, HI, KS, MI, MS, MO, MT, NE,

NV, NM, NY, ND, OH, OK, OR, PA, TX, WA, WY

8.25% 6 AK, LA, MA, NJ, RI, VT

8.50% 5 CO, CT, IL, MN, NH

21

Already-promised state pension liabilities

rise significantly with lower return assumptions

Source: Novy-Marx, Robert and Rauh, Joshua D., Public Pension Promises: How Big Are They and What Are They Worth? (December 2009).

$3.0$3.2

$5.2

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

Current discount rate method

Taxable muni zero-coupon yield curve

Zero-coupon Treasury yield curve

US$ trillionsAggregate state pension liabilities (2008)

Discount rate used22

World economic recovery

Real GDP growth rates, 1980-2015

Source: Economist Intelligence Unit.

-4

-2

0

2

4

6

8

10

1980 1985 1990 1995 2000 2005 2010 2015

Percent

Emerging and developing economies

World

Advanced economies

Projected

23

World output forecasts Percent change from previous year

2010 2011F 2012F

World 5.0 4.4 4.5

Advanced economies 3.0 2.4 2.6

United States 2.8 2.8 2.9

Japan 3.9 1.4 2.1

United Kingdom 1.3 1.7 2.3

Euro area 1.7 1.6 1.8

Emerging and developing economies 7.3 6.5 6.5

Brazil 7.5 4.5 4.1

China 10.3 9.6 9.5

India 10.4 8.2 7.8

Russia 4.0 4.8 4.5

Source: World Economic Outlook, International Monetary Fund, April 2011. 24

Global stock markets are highly correlated

MSCI Emerging Markets

DAX 30

FTSE 100

-0.5

0

0.5

1

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

250-day rolling correlation with S&P 500

Po

sit

ive

& h

igh

ly

co

rre

late

d

Source: DataStream. 25

Stock prices around the world gained strongly,

but remained below their pre-crisis peaks

Note: Data are as of April 20, 2011.

Source: Bloomberg.

40

80

120

160

200

2006 2007 2008 2009 2010 2011

January 2006 = 100

Emerging markets

Europe

S&P 500

26

Will 2011 be another strong year for

global stock markets?

2%

13%

13%

16%

22%

0 5 10 15 20 25

Europe

U.S. (S&P 500)

Japan

Emerging markets

Frontier markets Africa

2010

Annual index return (%) in US$

Note: the regional equity indices are based on the MSCI equity indices.

Source: Bloomberg.

-9%

-1%

4%

6%

10%

-10 -5 0 5 10

Emerging markets

U.S. (S&P 500)

Europe

YTD (as of 4/20/2011)

Annual index return (%) in US$

Frontier markets Africa

Japan

27

U.S. stock market’s share is shrinking

Share of the world’s market capitalization

Note: The 2011 data are as of April 18, 2011.

Source: Bloomberg.

U.S., 50%

Japan, 9%China,

1%

U.K., 9%

Rest of the

world, 31%

2001

U.S., 30%

China, 8%

Japan, 7%U.K., 6%

Rest of the

world, 49%

2011

28

Implied volatility: U.S. vs. emerging markets

Source: Bloomberg.

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010 2011

Chicago Board OptionsExchange Volatility

Index (VIX)

Implied volatility, percent

JPMorganEmerging Market Volatility

Index (VXY)

29

Global imbalances on the rise againProjections after 2010

Sources: International Monetary Fund, Milken Institute.

Note: Discrepancies are not plotted.

-4

-3

-2

-1

0

1

2

3

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

U.S.

China

Emerging Asia

Oil exporting countries

Rest of world

Percent of world GDP

30

Performance of emerging bond marketsTotal return of JPMorgan EMBI Global indexes

Sources: DataStream, Milken Institute.

-1.7

22.4

-14.2

20.9

-6.7

17.3

-10.2

17.2

-11.1

16.7

-20

-15

-10

-5

0

5

10

15

20

25

2008 2009 to Q1 2011

Middle East Europe

Asia Africa

Latin America

Annualized total return, percent

31

The persistence of sovereign defaults

Argentina Ecuador Paraguay Uruguay Venezuela

• 1830

• 1890

• 1915

• 1930s

• 1982

• 2001

• 1832

• 1868

• 1911

• 1914

• 1931

• 1982

• 1999

• 2008

• 1827

• 1874

• 1892

• 1920

• 1932

• 1986

• 2003

• 1876

• 1891

• 1915

• 1933

• 1983

• 2003

• 1832

• 1878

• 1892

• 1898

• 1932

• 1998

Sovereign defaults in selected countries, 1824 to 2008

Sources: Sturzenegger and Zettelmayer (2006), Moody„s, Milken Institute.

32

A map for world sovereign default

1932

1935

1932

1991

1991

19851983

2001

1812

18771892

19321981

1986

20041983

1983

1939

1972

2002

1932 2000

2008

19841982

2004

1984

2003

2003

‘87

1940

1932 1942

2002

1981

1982

1993

2000

33

Sovereign debt most likely to default in five

years As of Q1 2011

Rank Country

Five-year cumulative

probability of default

(%) Rank Country

Five-year cumulative

probability of default

(%)

1 Greece 57.7 6 Ukraine 27.7

2 Venezuela 51.8 7 Dubai 24.7

3 Ireland 43.0 8 Lebanon 21.9

4 Portugal 40.1 9 Iraq 21.1

5 Argentina 34.7 10 Egypt 21.1

Source: CMA Global Sovereign Credit Risk Report.

Note: Ranked by five-year cumulative probability of default. 34

European sovereign debt crisis

Widening spreads over German government bond

Source: Bloomberg.

0

200

400

600

800

1,000

01/2010 04/2010 07/2010 10/2010 01/2011 04/2011

10-year gov't bond spreads over German gov'tbond (basis points)

Greece

Spain

Ireland

Portugal

Italy

35

Total financial bailouts by country

Government capital investments in financial firms

Source: Bloomberg.

United States,

$476

United Kingdom,

$106

Germany, $68

Ireland, $31

Netherlands, $23 France, $23 Rest of the

world, $31

Total outstanding = $757 billionData as of April 20, 2011 (US$ billions)

36

Consumer confidence index: Eurozone

Sources: Eurostat, Bloomberg.

-40

-35

-30

-25

-20

-15

-10

-5

0

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Consumer confidence index

37

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

Government surplus/deficit as percent of GDP

Fiscal deficit for selected Eurozone countries

Source: OECD.

38

Sovereign risks heightened after 2009Credit default swap spreads, five-year government bonds

0

50

100

150

200

250

2008 2009 2010 2011

Basis points

Italy

France

Germany

0

200

400

600

800

1,000

1,200

2008 2009 2010 2011

Basis points

Greece

IrelandPortugal

Spain

Source: DataStream.39

Debt-to-GDP ratios in selected countries

0

200

400

600

800

1,000

1,200Financial institutions

Corporates

Households

Government

Debt as % of GDP, 2009

Source: International Monetary Fund.

40

Emerging market bond yield spreadsAs of April 8, 2011

9.57

5.534.88 4.61 4.55 4.49 4.27 3.88 3.47 3.19

2.59

0.62 0.52 0.32 0.210

2

4

6

8

10

12

Percent

Sources: Bloomberg, Milken Institute.41

Growth of investment funds using ESG factors Investment funds incorporating ESG factors, 1995-2010

Note: ESG funds include mutual funds, annuity funds, closed-end funds, exchange-traded funds (ETFs),

alternative investment funds and other pooled products, but exclude separate account vehicles.

Source: Social Investment Forum Foundation.

0

100

200

300

400

500

600

0

100

200

300

400

500

600

1995 1997 1999 2001 2003 2005 2007 2010

Total net assets (US$ billions) Number of funds

Number of funds

Total net assets

42

Green Winners:

Sustainable companies outperform peers

43

Managing climate change risk across scenariosPortfolio to target 7% return

44

ESG factors are increasing in U.S. investmentsSustainable investing, 1995-2010

Note: Overlapping assets involved in some combination of ESG incorporation, filing shareholder resolutions or community investing are subtracted to avoid

potential effects of double counting. Prior to 2010, assets subject to ESG incorporation were limited to socially and environmentally screened assets.

Source: Social Investment Forum Foundation.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1995 1997 1999 2001 2003 2005 2007 2010

Sustainable investing (US$ billions)

Total sustainable

investments

Incorporating ESG investments

45

Directors are not responding to their

environmental stewardship

Note: Surveyed companies are the top 2,000 publicly traded firms (by revenue) listed with the NYSE Euronext,the NYSE Amex,

and the NASDAQ OMX Group stock exchanges.

Source: PwC, “Annual Corporate Directors Survey 2010” (formerly titled “What Directors Think”).

Please indicate if you would like your

board to devote more time this year

on the sustainability/climate change(% of total 1,104

surveyed directors)

Yes, much more time and focus than in the past

2%

Yes, but not a great increase from the past

13%

No change, it's already a

major focus21% No, I don't expect

any change 58%

No, we will decrease our time and focus

6%

46