5. annual presentation for j.p. morgan core fixed income ......2010/09/08 · james bauman chad...

5. Annual Presentation for J.P. Morgan Core Fixed Income Mandate

5

STRICTLY PRIVATE/CONFIDENTIAL

Joel Damon, Client Advisor

415-315-5246, [email protected]

Brett Cambern, Client Portfolio Manager614-213-9282, [email protected]

Data as of July 31, 2010

Portfolio Review

mailto:[email protected]


http://www.ladwp.com/ladwp/homepage.jsp


11

Content

J.P. Morgan Columbus

Investment Process

Market Overview

Investment Performance

Portfolio Review

Appendix


2

Joel V. Damon, vice president, is a client advisor in J.P. Morgan Asset Management's Institutional Americas Group. An employee since 2002, Joel serves the investment needs of U.S. institutional investors, including corporate and public retirement plans, as well as endowments and foundations. As a client advisor, his role is to marshal the firm's extensive resources in the delivery of tailored solutions across a spectrum of alternative (real assets/infrastructure, private equity, hedge funds), and traditional (equities, fixed income) asset classes aiming to exceed the strategic and tactical investment objectives of his clients. Prior to joining the firm, he directed institutional client relationship management for Montgomery Asset Management. Previously, Joel managed theinvestments for the Bank of America employees' pension and savings plans. Joel has a B.A. in mathematics and psychology fromSterling College and an M.B.A. in finance from the University of California, Berkeley. He holds FINRA Series 7, 63 and 65 licenses and his NFA Series 3 license.

2

Presenter Biographies

Brett Cambern, vice president, is a client portfolio manager for the U.S. Fixed Income Group. An employee since 1992, he is responsible for communicating investment strategy, decisions, and performance across various fixed income products to both clients and internal partners. Prior to joining the firm, he spent two years at Merrill Lynch managing a regional operations center and six years at Drexel Burnham Lambert in their High Yield Bond Department. While at Drexel, Brett worked on the syndicate desk, managed secondary trading of private placements, and co-founded the Debt Restructuring and Workout Division. Brett obtained a B.A. in economics from the University of California at Los Angeles. He also holds FINRA series 7, 63, and 65 licenses.


33

Our J.P. Morgan Columbus fixed income investment engine is a well established institutional investment manager

Based in Columbus, Ohio we have an established investment track record dating back to January 1986, and manage over $153 billion in fixed income assets

Wide variety of clients, including corporate defined benefit, defined contribution, public funds, Taft-Hartley, insurance companies, endowment, foundation, mutual fund and sub-advisory

Strong, consistent performance track record generated by stable team of investors

Past performance is no guarantee of future returns. Please see page 26 for additional performance information.


44

Columbus Fixed Income Assets Under Management

OUR DIVERSE CLIENT BASEColumbus fixed income platform Highlighted strategies:

Core $50.6 billionLong Duration $4.4 billion Intermediate $7.7 billion Short Duration $16.6 billion Mortgage-Specific $4.8 billionInsurance $13.9 billionMunicipals $38.0 billionHigh Yield $17.3 billion

Total Fixed Income AUM1 $153.3 billion

1 Note that the strategies highlighted above may not sum to the total assets under management (“AUM”) figure due to rounding. Core totals include accounts currently in a transitioning phase.

US Government BondManaged Income PortfoliosInsurance AssetsMunicipal SecuritiesHigh YieldDistressed DebtBuy and HoldBBB or Derivative RestrictedSocially Restricted Investing

Strategies can be customized according tospecific portfolio objectives:

CoreCore PlusLong DurationIntermediateShortUltra ShortTreasury and AgencyMortgage-Backed SecuritiesLaddered PortfolioCredit Only

As of June 30, 2010


5

Columbus Fixed Income Organizational Structure

Global Head of Fixed Income and CurrencySeth Bernstein

High Yield

William MorganJames Shanahan

Kevin Aug, CFACasey Basil

James BaumanChad Engelbert, CFA

James GibsonAndrew GuestMatthew KlineChris Musbach

Joel ParrishCory Pollock

Frederick Sabetta, CFAMichael Schlembach

W. Scott Telford III, CFAEric Tutterow

Kenneth Williamson, CFA

Credit Research

Greg Reed, CFA

John BlakelyTim Bond

Jeff Fountain, CFADavid Fucio

Mark GannonKyle GephartJosh Golden

Theo HadiwidjajaKevin Martinez

Stephen Mayes, CFABalakrishnan Prakash,

CFATim Schoening

Steve SunGreg Swisher

Scott Thomas, CFAJohn Updegraff

Kent Weber, CFAGeorge Williams

Taxable Fixed Income Portfolio Management

Douglas Swanson

Mark Byers, CFATom Donne, CFA

Timothy EiselRichard Figuly

Scott Grimshaw, CFAGregg Hrivnak, CFAMark Jackson, CFA

Christopher NausedaSusan ParekhJean Ruggles

Peter Simons, CFAHenry Song, CFA

Municipal Fixed Income

Richard Taormina

James AhnKimberly Bingle, CFA

Josh BrunnerMichael BuscemiMichael Caggia

Rick DavisKevin Ellis, CFAKathryn Gross

Michelle Hallam, CFASandra HeilmanJohn Kowalski

Shirley LeeDeepa MajmudarMichal MisiolekKevin MortimerMichael MyersTara Lee Noto

Benjamin PetrieKiran Shah

David Sivinski, CFAJennifer Tabak, CFA

Insurance AssetManagement Team

Michael Sais, CFADonald Clark, CFA

Kimberly Bingle, CFARobert Manning, CFA

Michael D Murray, CFAJoe Walden, CFA

Jennifer Williamson

Mid-Institutional

Barb Miller

Kris BeachnauSteve Deibel, CFA

Barbara GlennDarryl Jenkins

Toby Maczka, CFAMike McClinchie

Thad PaskellErin Spalsbury, CFA

Jeff Taylor

Client Portfolio Management

Timothy Holihen, CFA

Stephen BratcherBrett CambernJim CavanaughCaitlin GerdesDoug Gimple

Joseph HisdorfMatt KelbickJohn Nicely

Julie RancourtJustin Rucker, CFAJon Salstrom, CFA

Dawn SilviaPaul Swoboda

Marketing & Communication

Kimberly Heis

Chief Investment Officer (Columbus)Gary Madich, CFA

Quantitative Analysis & Risk

Rene NoelAlvey Smith, CFA

Yu HeSylvia Kambouris

Patti KraussRichard Lahiere, CFA

Mingsheng LiJerica Norasing

George Qiao, CFAScott Sabin

Tonya VanceJeff Whipple

15 FTE

Average Experience - 15Avg. Years at Firm - 12

13 FTE

Average Experience - 21Avg.Years at Firm - 17

19 FTE


17 FTE


22 FTE


8 FTE


10 FTE


12 FTE


Diversified Strategies

Duane Huff

Fixed Income Retail & Private Bank Product

Connie Plaehn

John Eckland, CFAScott Harvey

Andrew HatchGregory Kurek

Nicole Melwood

6 FTE


Economists

Stuart SchweitzerEhiwario Efeyini

As of June 30, 2010. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.


6

Representative Client List – Core Bond Strategy

Account Type Market Value ($MM)

Sub-Advisory 1,562.8

Defined Benefit – Public 1,371.3

Los Angeles Board of Water & Power (Combined) 1,366.5



Defined Benefit – Public 1,086.0

Defined Benefit – Public 607.4



Corporate (Non-ERISA) 526.3

As of July 31, 2010


7

Account Coverage Team

Client Advisor

Joel Damon

J.P. Morgan Asset Management

(415) 315-5246

[email protected]

Client Portfolio Manager

Brett Cambern


(614) 213-9282

[email protected]

Client Service Manager

Rosemary Burgos


(212) 648-1512

[email protected]

Analyst

Stephen Bratcher


(614) 213-7136

[email protected]






88

Content


Investment Process

Market Overview


Portfolio Review

Appendix


99

We believe in a disciplined value-driven approach based on bottom-up fundamental analysis

Longer term investing versus trading mentality

Style emphasizes research and individual security analysis, rather than large macro bets

Portfolios are well diversified and of AA+/AA average credit quality, helping to minimize individual security risk

Many small decisions drive overall portfolio strategy, making us less dependent on a few top-down decisions

Low turnover minimizes trading costs

Risk management, embedded throughout the process, seeks to limit downside risk relative to a benchmark

The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

This approach has resulted in consistent, long-term outperformance of the benchmark in a variety of market environments


1010

Relative Value SearchSector Security− Seek inexpensive

cash flows− High quality bias

Execution and RebalancingPM’s responsible for trading & fine tuning

Mac

roec

onom

ic E

nviro

nmen

tM

acroeconomic E

nvironment

Portfolio

Risk Management

Risk Management

Relative Value Search– Sector – Security

Seek inexpensive cash flowsHigh quality bias

Yield Curve & DurationTypically maintained within +/- 10% of benchmark

Execution & RebalancingPM’s responsible for trading & fine tuning

Fixed IncomeSecurity Universe

The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will met.

Investment Process


1111

We focus on identifying undervalued sectors within defined allocation guidelines

Sector analysis

Analysis focuses research efforts on attractive sectors that offer a clear risk/reward advantage

Process utilizes:– sector-specific scenario analysis– historical and projected spread analysis– macroeconomic trends

Portfolio managers are generalists, and maintain specialized sector research responsibilities

Typical allocation leads to spread product of 65% to 85%

Source: J.P. Morgan Investment Management Inc.Actual account allocations may differ.

Allocation range

Allocation as of

7/31/10

Mortgage-backed securities (MBS) 40-65% 49.3%

Agency (excluding MBS) 0-10% 1.3%

Credit and asset-backed 15-35% 16.8%

Treasury 15-33% 26.8%

Typical allocation ranges - Core Bond strategy


1212

Diligent research results in the identification of undervalued securities

Security selection

Perform rigorous security-by-security research in an effort to uncover value

Seek securities that are high in quality

Utilize:– option-adjusted spread analysis– projected total returns– historical and projected spread analysis– credit research

Drives creation of added value

Security analysis example(12-month horizon stress test)

Security Description Price Yield Duration OAS

Pass-through FNMA-TBA 30yr 5.0% 102.78 4.06 3.47 (35)

PAC bond FHLMC 3195 PD 6.5% 108.31 4.70 3.34 164

Key point:Well-structured PAC bonds can protect against prepayment and extension risk

-150 -100 -50 0 +50 +100 +150

Total expected return pass-through MBS 2.00 2.43 3.21 3.18 2.31 0.85 -1.20

Total expected return PAC bond mortgage 7.31 6.99 6.32 5.01 3.37 1.73 -0.11

PAC advantage 5.31 4.56 3.11 1.83 1.06 0.88 1.09

Change in interest rates

Source: J.P. Morgan Investment Management Inc.The above example is shown for illustrative purposes only and is not representative of any specific portfolio. The manager seeks to achieve the stated objective. There can be no guarantee the objective will be met.


13

Credit Research – An integrated and standardized approach

Standardized approach to fundamental research

Consistent analytical framework

12 taxable credit analysts focused by sector:– Energy– Sovereigns– Manufacturing– Electronics– Telecom– Consumer products

Have as a resource our 8 municipal analysts

Have as a resource our 11 high yield analysts

Integrated process with portfolio management and risk management

Focus on high quality

Daily interaction with portfolio managers

Active participants in risk management

− Media− Real estate− Brokers− Insurance− Banks and finance− Structured ABS

Contributes to the goal of excess returns through relative value comparisons to other sectors

The manager seeks to achieve the stated objectives. There can be no guarantee they can be met.


1414

Risk management is an integral part of our investment process

ObjectivesLimit downside risk relative to benchmark

Consciously identify and manage risk exposures

FoundationsPortfolio guidelines– provide diversification framework relative to benchmark

– serve as the primary basis for monitoring portfolios versus benchmarks

Stress testing– total return simulations for portfolio versus benchmark

– stress changes in interest rates, yield curve and spreads

Extensive portfolio reporting and oversight

Performance review

The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

Participants Portfolio managers — portfolio construction and monitoring

Quantitative/risk managers — risk environment, analysis and monitoring

Credit analysts — security review

Senior management — oversight and accountability

Client portfolio managers — client policy and communication


15

Investment GuidelinesGeneral Guidelines – Core Fixed Income

Total portfolio’s average rating will be A or better as rated by Moody’s or S&P or Fitch. The lowest rating for a security in the portfolio is Baa3 (Moody’s) or BBB-(Fitch, S&P). If a bond is rated by all three rating agencies, then it must be rated investment-grade by two or more rating agencies. If rated by two rating agencies, lower rating applies. If only rated by one rating agency, rating must be BBB- or Baa3.

No more than 10% of any single portfolio at the lesser of cost or market value will be invested in any one issuer, with the exception of U.S. Treasury or Federal Agency issues.

Investment in non-dollar denominated bonds is permitted but shall not exceed 15% of the lesser of cost or market value of a single portfolio or 10% of the aggregate market value of the core fixed income portfolio.

Investment in U.S. dollar denominated issues of foreign governments, international organizations, and U.S. subsidiaries of foreign corporations are permitted but shall not exceed 15% of the market value of a single manager portfolio or 10% of the lesser of cost or market value of the aggregate core fixed income portfolio.

No securities shall be purchased on margin or sold short.

Permissible securities also include forward foreign exchange contracts, currency futures, financial futures, government and government agency bonds, Eurobonds, mortgage bonds (including CMOs), yankees, commercial mortgages, asset-backed bonds, corporate bonds, and Rule 144A investment-grade bonds with registration rights subject to individual manager guidelines. Derivatives, including forward or futures contracts for foreign currencies, may generally be used for defensive purposes only or to effect portfolio management decisions in a timely, cost-effective manner. Borrower funds shall not be used.

Active Fixed Income Guidelines

Portfolio Component Definition

Manager(s) will manage an active portfolio for the Plan that will provide participation in the broad fixed income market. Given this orientation, the goal for the Portfolio is to provide superior performance versus the Barclays Capital Aggregate Bond Index (BC Aggregate) over a complete investment cycle.

Portfolio Guidelines

The portfolio shall be composed of investment grade fixed income securities as defined by Barclays Capital. BC defines an investment-grade bond as follows: if a bond is rated by all three rating agencies (Moody’s, S&P, Fitch), then it must be rated investment-grade (BBB- or Baa3) by two or more rating agencies. If a bond is rated by two rating agencies, the lowest rating applies. If only one rating agency rates the bond, then that rating must be at least BBB- or Baa3. The portfolio shall be composed of companies doing business under the laws of the United States, debt guaranteed by the United States or its government-sponsored agencies or by the Dominion of Canada or Supra-national agencies.


16

Investment Guidelines - continuedPortfolio Guidelines (con’t)

In the event of a downgrade below Baa3 or BBB-, Manager must notify the Plan about the quality of the issue and make a recommendation on either the retention or deletion of the bond from the portfolio.

Fixed income managers are allowed to hold equity-oriented positions when received in exchange for, or conversion or cancellation of debt securities held in the portfolio. The manager is required to inform the Plan 30 days prior to conversion when they intend to hold the resulting equity-oriented positions. Equity-oriented securities can be held in the portfolio no longer than six months. The manager is required to provide 30 days advance notice to extend the holding period beyond the original six month period. No more than 10% of the portfolio shall be invested in equity-oriented securities resulting from fixed-to-equity exchanges.

Investment in U.S. dollar denominated issues of foreign governments, international organizations and U.S. subsidiaries of foreign corporations are permitted, however, shall not exceed 15% of the lesser of cost or market value of a single manager portfolio.

Derivatives used for substitution, risk control, and arbitrage strategies are permitted. Use of derivatives for speculation is prohibited. For non-exchange traded derivatives, counterparty credit status shall be of the highest caliber with care taken to avoid credit guarantees extended through to parties less creditworthy than the primary counterparty in the transaction. Counterparty exposure limited to firms with a short-term credit rating of at least A1/P1, single counterparty exposure limited to 5% of the cost value of the aggregate portfolio as well as any specific manager portfolio.

For prudent diversification, the portfolio shall have a minimum of 25 issues. No more than 10% of the lesser of cost or market value of the portfolio shall be invested in any one issue except U.S. government bonds.

The cash equivalent portion should not normally exceed 10% of the portfolio.

Portfolio Characteristics

The portfolio shall have a maturity range of 5 to 20 years with portfolio modified duration expected to range from 3 to 7 years. It is expected that the portfolio’s modified duration will track that of the BC Aggregate closely. The acceptable modified duration band around the BC Aggregate is +/- 1 year.

It is an objective of the portfolio that it will track the BC Aggregate closely. Over an investment cycle, the portfolio should produce and R-squared statistic of 0.90 versus the BC Aggregate.

Portfolio Objectives

On a annual basis, Manager is expected to outperform the BC Aggregate return, net of fees, to be measured over a market cycle of three-to-five years. For the performance evaluation, the Portfolio will be measured, net of fees and expenses, against the BC Aggregate.


1717

Compliance

From May 7, 2010 - July 22, 2010, Rule 144a securities were purchased which were not issued with registration rights. At the time, the investment guidelines had not been properly coded in our compliance system. The problem has been resolved without cost to the portfolios and our compliance system has been properly coded to prevent future occurrences.

As of July 31, both portfolios were in compliance with the Investment Guidelines.


1818

Content


Investment Process

Market Overview


Portfolio Review

Appendix


19

Market returns (%) 3 Month YTD 1 Year 3 Years* 5 Years* Duration

Fixed Income

Barclays 1-3 Govt/Credit Index 1.17 2.37 3.71 5.00 4.67 1.88

Barclays Int. Govt/Credit Index 3.20 5.70 7.99 7.02 5.67 3.93

Barclays Aggregate Bond Index 3.52 6.46 8.91 7.63 5.96 4.13

Barclays High Yield Bond Index 1.08 8.23 23.74 9.09 7.55 4.25

Barclays Long Govt/Credit Index 6.77 11.70 13.77 9.48 6.32 12.93

Cash Equivalents

91-day Treasury bill 0.05 0.08 0.17 1.54 2.79 0.24*AnnualizedSource: Barclays Capital Inc.

Source: Bloomberg Indices presented are representative of various broad base asset classes. They are unmanaged and shown for illustrative purposes only. See appendix for appropriate disclosures.

Fixed Income Market Update

Market returns (%) 3 Month YTD 1 Year 3 Year* 5 Year*

Barclays Treasury Index 4.31 6.58 6.95 7.46 5.81

Barclays Agency Index 2.74 4.60 5.91 7.08 5.75

Barclays MBS Index 3.13 5.35 7.52 8.29 6.54

Barclays Credit Index 3.56 7.87 13.30 8.03 5.89

Barclays ABS Index 3.24 6.12 12.14 4.92 4.56

As of July 31, 2010


20

Source: JPMorgan Investment Advisors Inc. using data from the Bureau of Economic Analysis, U.S. Department of Commerce.

Monthly Changes in Non-farm Payroll Employment

-900-800-700-600-500-400-300-200-100

0100200300400500

Jan-06

Feb-06

Mar-06

Apr-06

May

-06

Jun-06

Jul-0

6

Aug

-06

Sep

-06

Oct-06

Nov

-06

Dec

-06

Jan-07

Feb-07

Mar-07

Apr-07

May

-07

Jun-07

Jul-0

7

Aug

-07

Sep

-07

Oct-07

Nov

-07

Dec

-07

Jan-08

Feb-08

Mar-08

Apr-08

May

-08

Jun-08

Jul-0

8

Aug

-08

Sep

-08

Oct-08

Nov

-08

Dec

-08

Jan-09

Feb-09

Mar-09

Apr-09

May

-09

Jun-09

Jul-0

9

Aug

-09

Sep

-09

Oct-09

Nov

-09

Dec

-09

Jan-10

Feb-10

Mar-10

Apr-10

May

-10

Jun-10

Jul-1

0

As of July 31, 2010

The July employment report saw 131,000 jobs lost during the month, but the decline was largely attributable to a census related drop in government hiring. The private sector added 71,000 jobs, 40,000 more than in the prior month. Average weekly hours worked ticked up by 0.1 to 34.2, while the unemployment remained unchanged 9.5%. Average hourly earnings grew by 0.1% on the month, taking the year-on-year number to 2.3%.

The latest payroll figures take the 3-month average of the private series to +27,000 (51,000 for the private sector), from +175,000 (31,000 for private) inclusive of all revisions last month. Given the trend increase in hours worked and wages, as well as still high levels of productivity growth, we expect the so far subdued employment recovery to be sustained. However, there appear as yet to be few signs of labor market acceleration.

Though it has been encouraging that S&P 500 earnings growth has registered positive surprises for a sixth consecutive quarter, recent data on housing activity, auto sales, manufacturing, small business confidence and retail sales have disappointed. While we still view the chances of a double-dip as remote, the economy is clearly decelerating.

Economic Update


21

Fixed income outlook and strategy

Outlook

The past two months of consistently disappointing U.S. economic data and heightened sovereign uncertainty have altered the Federal Reserve’s rhetoric and reduced U.S. consumer confidence. However, we believe that the fading manufacturing inventory cycle and the reduction of housing stimulus will not derail the U.S. economy from its jobless recovery.

The labor market continues to experience long durations of unemployment and excess slack. Initial jobless claims averaged over 450,000 in July. The average duration of unemployment continued to rise to 35.2 weeks in July from 29.7 weeks in February. However, temporary hiring and hiring surveys are signaling preliminary interest in hiring, and corporate productivity and spending on equipment and software are strong and have portended improved hiring historically.

The end of housing tax credits in the second quarter caused single-family new home sales to stall, with June and May sales at their lowest levels in the history of this data going back to 1963. This indicates the continued power of tighter credit conditions despite low mortgage rates and an excess supply of homes on the market. Nonetheless, home prices for now are showing less weakness.

The Conference Board’s index of consumer confidence dropped to 50.4 in July from 54.3 in June and 62.7 in May. This change in sentiment, reflected in other consumer surveys as well, likely contributed to weaker consumer spending in June.

As a result of disappointing economic data, Treasury prices were higher in July and the curve flattened as the spread between the two- and five-year Treasury yields decreased from 117 bps to 105 bps. The yield of the two-year note declined by 5 bps to 0.55% and the yield of the five-year note dropped 18 bps to 1.60% on the month.

As of July 31, 2010

Strategy

The duration of the core strategy remained unchanged during July while the benchmark decreased slightly during the month. We remain slightly short duration versus the benchmark.

Our allocation to mortgages generally outperformed index pass-through and agency debt, however trailed the credit sector as a whole. We believe select non-agency CMOs remain an attractive option versus other risk assets, however this allocation lagged corporates on the month.

Corporate earnings remained solid, with companies continuing to run their balance sheets lean. Overall, the corporate index OAS tightened from 193 to 175, and the financial sector moved from 249 to 222 (Barclays). The style’s underweight to credit was a negative on the month; however our bias towards financials was a slight positive.

CMBS outperformed comparable duration Treasuries by 128 basis points. Although we see select pockets of value, we believe that higher vacancies, further credit deterioration, and increased defaults will continue surface over the long term; therefore, security selection within the sector remains paramount.


2222

Content


Investment Process

Market Overview


Portfolio Review

Appendix


23

LAWP Retirement PlanInvestment PerformancePeriod ending July 31, 2010 - (%)

•Inception date: 04/30/2010Past Performance is not indicative of future results. Results will fluctuate and sell prices may be more or less than original cost. Returns less then one year are not annualized.

3.31 3.313.29 3.293.52 3.52

LAWP Retirement Plan (gross of fees) 3.31 3.31LAWP Retirement Plan (net of fees) 3.29 3.29BC Aggregate Index 3.52 3.52Excess Return (net of fees) -0.23 -0.23

3 Mos Since Inception*


24

LAWP Health PlanInvestment PerformancePeriod ending July 31, 2010 - (%)

•Inception date: 04/30/2010Past Performance is not indicative of future results. Results will fluctuate and sell prices may be more or less than original cost. Returns less then one year are not annualized.

3.30 3.303.27 3.273.52 3.52

LAWP Health Plan (gross of fees) 3.30 3.30LAWP Health Plan (net of fees) 3.27 3.27BC Aggregate Index 3.52 3.52Excess Return (net of fees) -0.25 -0.25

3 Mos Since Inception*


2525

Content


Investment Process

Market Overview


Portfolio Review

Appendix


26

Fixed Income Portfolio Analysis – LAWP Retirement Plan

LAWP Retirement Plan Barclays Aggregate

Market Value w/ Accrued Income $1,186,410,198 -

Eff. Weighted Average Life (WAL) 5.86 Years 6.31 Years

Yield to Worst 2.13 2.48

Average Quality AA+ AA+

Effective Duration (years) 4.18 4.24

Modified Duration (years) 4.35 4.48

Convexity (0.05) (0.32)

Sector Breakdown

31.1%

4.9%

0.7%3.7%

0.0%

7.6%

42.3%

17.3%

0.3%3.0%

0.0%

33.8%32.5%

22.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

MBS Treasury Credit ABS Agency CMBS Cash

LAWP Retirement Plan

Barclays Aggregate Bond Index

As of July 31, 2010

1Measurements in percents. Index statistics compiled by running Barclays Capital constituents through Yield Book models. Please see performance disclosures which accompany this presentation. Actual account characteristics may differ.


27

AAA78.3%

BBB7.9%

AA4.3%

A9.5%

Fixed Income Portfolio Analysis – LAWP Retirement PlanAs of July 31, 2010

<=BB0.2%

AAA80.5%

BBB8.5%

AA3.4%

A7.4%

LAWP Retirement Plan Barclays Aggregate

Weighted Average Life

0.9%

20.4%

1.5%

6.6%3.5%

7.0%

34.8% 35.8%

1.1%

23.3%

39.5%

25.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0-1 Years 1-3 Years 3-5 Years 5-10 Years 10-20 Years 20+ Years



Contribution to Spread Duration

0.0

0.2

1.0

1.4

1.1

0.0

1.11.1

0.2

0.00.0

0.5

1.0

1.5

2.0

Treasury Agency MBS ABS/CMBS Credit




Contribution to Duration

2.2

0.2

1.0

1.5

0.8

0.00.1

0.7

0.2

1.7

0.0

0.5

1.0

1.5

2.0

2.5





28

Top Ten Holdings – LAWP Retirement PlanPeriod ending July 31, 2010


29

Portfolio Holdings – LAWP Retirement PlanPeriod ending July 31, 2010


30



31



32



33



34



35



36

Portfolio Market Value – LAWP Retirement PlanApril 2010 thru July 2010

1,100,000,000

1,120,000,000

1,140,000,000

1,160,000,000

1,180,000,000

1,200,000,000Ap

ril-1

0

May

-10

June

-10

July

-10

Market Value ($)

Source: J.P. Morgan Asset Management


37

Fixed Income Portfolio Analysis – LAWP Health Plan

LAWP Health Plan Barclays Aggregate

Market Value w/ Accrued Income $180,070,736 -

Eff. Weighted Average Life (WAL) 6.04 Years 6.31 Years

Yield to Worst 2.26 2.48

Average Quality AAA AA+

Effective Duration (years) 4.06 4.24

Modified Duration (years) 4.46 4.48

Convexity (0.27) (0.32)

Sector Breakdown

46.0%

3.6%0.5%

6.8%4.4%

7.6%

24.2%

14.5%

0.3%3.0%

0.0%

33.8%32.5%

22.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

MBS Treasury Credit ABS Agency CMBS Cash

LAWP Health Plan


As of July 31, 2010



38

AAA78.3%

BBB7.9%

AA4.3%

A9.5%

Fixed Income Portfolio Analysis – LAWP Health PlanAs of July 31, 2010

AAA85.0%

BBB6.3%

AA2.4%A

6.3%

LAWP Health Plan Barclays Aggregate


7.0%

30.8%

2.3%6.3%

3.5%7.0%

25.5% 28.1%

1.1%

23.3%

39.5%

25.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0-1 Years 1-3 Years 3-5 Years 5-10 Years 10-20 Years 20+ Years

LAWP Health Plan


Contribution to Spread Duration

0.0

0.3

0.9

1.41.5

0.0

1.11.1

0.2

0.00.0

0.5

1.0

1.5

2.0


LAWP Health Plan



Contribution to Duration

1.9

0.2

0.9

1.5

1.0

0.00.1

0.7

0.2

1.7

0.0

0.5

1.0

1.5

2.0

2.5


LAWP Health Plan



39

Top Ten Holdings – LAWP Health PlanPeriod ending July 31, 2010


40

Portfolio Holdings – LAWP Health PlanPeriod ending July 31, 2010


41



42



43



44



45



46



47



48

Portfolio Market Value – LAWP Health PlanApril 2010 thru July 2010

150,000,000

160,000,000

170,000,000

180,000,000

190,000,000

April

-10

May

-10

June

-10

July

-10

Market Value ($)

Source: J.P. Morgan Asset Management


4949

Content


Investment Process

Market Overview


Portfolio Review

Appendix


5050

Fee Schedule

10 basis points flat fee schedule.


51

Investment TermsOption-Adjusted Spread

A security’s spread (in basis points) over the pricing yield curve, after adjusting for the probability of any optional prepayments and assuming a volatility (or set of volatilities) of future yields. For securities without embedded options, it is independent of the volatility and is equal to the amount that, when added to each of the yield curve’s forward BE rates, makes the present value of the cash flows equal to the full price. For securities with options, where multiple rate paths are considered, the spread is added to each of the forward BE rates on each of the paths.

Effective Duration

A duration measure of relative changes in the full price to standard shifts in the pricing yield curve and depends on assumptions about the volatility of future yields. For securities without embedded options, the value will be close to Macaulay Duration and Modified Duration, which are computed using a specific cash flow schedule.


The weighted average time to principal payments in years, weighted by the amount of principal.

Effective Convexity

A measure of the curvature of the full price as a function of the level of the pricing yield curve. It approximates numerically the second derivative of price with respect to standard shifts and is calculated consistently with the effective duration, so it quantifies the sensitivity of the first derivative (and effective duration) to the level of the curve. Since this calculation permits the cash flows of the security to vary with the level, the effective convexity may be either positive or negative, with a negative value indicating that the security becomes more of a short-term security at lower levels, e.g., prepayments increase as rates fall.

Yield to Worst of Call/Maturity

The minimum of yield to maturity and yield to next call; otherwise yield to maturity.

Weighted Average Coupon

The dollar weighted coupon value for a portfolio of securities.


5252

J.P. Morgan Asset ManagementThis document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Indices do not include fees or operating expenses and are not available for actual investment. The information contained herein employs proprietary projections of expected returns as well as estimates of their future volatility. The relative relationships and forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Selected Risks

Interest Rate Risk. The Strategy mainly invests in bonds and other debt securities. These securities will increase or decrease in value based on changes in interest rates. If rates increase, the value of the Strategy’s investments generally declines. On the other hand, if rates fall, the value of the investments generally increases. Your investment will decline in value if the value of the investments decreases. Securities with greater interest rate sensitivity and longer maturities tend to produce higher yields, but are subject to greater fluctuations in value. Usually, the changes in the value of fixed income securities will not affect cash income generated, but may affect the value of your investment.

Mortgage-related and asset-backed securities are subject to certain other risks. The value of these securities will be influenced by the factors affecting the housing market and the assets underlying such securities. As a result, during periods of declining asset value, difficult or frozen credit markets, swings in interest rates, or deteriorating economic conditions, mortgage-related and asset-backed securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid. Additionally, during such periods and also under normal conditions, these securities are also subject to prepayment and call risk. When mortgages and other obligations are prepaid and when securities are called, the strategy may have to reinvest in securities with a lower yield or fail to recover additional amounts (i.e., premiums) paid for securities with higher interest rates, resulting in an unexpected capital loss. Some of these securities may receive little or no collateral protection from the underlying assets and are thus subject to the risk of default described under “Credit Risk”. The risk of such defaults is generally higher in the case of mortgage-backed investments that include so-called “sub-prime” mortgages. The structure of some of these securities may be complex and there may be less available information than other types of debt securities.

Credit Risk. There is a risk that issuers and counterparties will not make payments on securities and investments held by the portfolio. Such default could result in losses to an investment in the portfolio. In addition, the credit quality of securities held by a portfolio may be lowered if an issuer’s financial condition changes. Lower credit quality may lead to greater volatility in the price of a security. Lower credit quality also may affect liquidity and make it difficult for the portfolio to sell the security. The portfolio may invest in securities that are rated in the lowest investment grade category. Such securities are considered to have speculative characteristics similar to high yield securities, and issuers of such securities are more vulnerable to changes in economic conditions than issuers of higher grade securities.

The Barclays Capital U.S. Aggregate Index (formerly Lehman Brothers U.S. Aggregate Index) is an unmanaged index that represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The performance of the index does not reflect the deduction of expenses associated with a mutual fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of the mutual fund expenses, including sales charges if applicable. An individual cannot invest directly in an index.

The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are available upon request.

The following is an example of the effect of compounded advisory fees over a period of time on the value of a client’s portfolio: A portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 million after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding.

The value of investments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results. Please note current performance may be higher or lower than the performance data shown. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in emerging markets may be more volatile than other markets and the risk to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not necessarily indicative of the likely future performance of an investment.

Any securities mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year is available upon request.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

Copyright © 2010 JPMorgan Chase & Co. All rights reserved.

5. annual presentation for j.p. morgan core fixed income ......2010/09/08 · james bauman chad...

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