Alternative Investments for RetirementMonday, April 26, 201006 30 AM 07 45 AM06:30 AM - 07:45 AM

ModeratorSanjay Yodh, Managing Director, Security Global Investors

SpeakersHal Bjornson, Head of Investment Services Group, J.P. Morgan

Charles Ruffel, Managing Partner, Kudu Advisors LLCVictor Zhang, Managing Director, Head of Investments, Wilshire Funds

Management, Wilshire Associates Incorporated1

Sanjay Yodh’s slides

2

A look at the changing face of retirement

3

Growth of mutual fund market & alternative mutual funds

9,000Total Mutual Fund Assets 1997 to 2010

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Billi

ons

Total Mutual Fund Assets

March 2010:$7.3 trillion

0

1,000

,

Alternative mutual fund market share has grown from $4,035,751,555 in 1997 to $63 trillion in 2010 4

What is the role for alternatives?

Monthly correlations of equity style boxes to S&P 500 1999 2009

Historical correlation of various asset classes vs S&P 500 1999–2009

Value Blend Growth

Large .95 1 .95

Medium .87 .91 .85

Small .81 .80 .76

S&P 500, 1999–2009various asset classes vs. S&P 500,1999 2009

Small .81 .80 .76

1999-2009 Annualized Return of the S&P 500 is -.95% v. Hedge Funds’ 6.5% All things being equal 4 uncorrelated asset give you a greater reduction in risk than an infinite number of .5 correlated assets

5

Essential FrontierTM vs. Efficient Frontier (December 1999–December 2009)

Essential Frontier 1999-2009 % Difference

4.60 +25.49%

9.71 -12.75%

Efficient Frontier 1999-2009

Average Return 3.67

Average Standard Deviation

11.12

6

Questions for panel

• Where are retirement accounts headed next?

• Given recent market events, are traditional asset types enough to meet retiree goals?

• Where might alternative investments fit into retirement accounts? Through which type of vehicle?

7

Hal Bjornson’s slides

8

J.P. Morgan Retirement Plan Services• More than 1,060 employees

– Kansas Cityy– Denver– Chicago– New York

• Nearly 200 defined contribution (DC) institutional clients– More than $107 billion in assets under administration– Nearly 1 7 million plan-level participants– Nearly 1.7 million plan-level participants

• 31 defined benefit (DB) clients– Comprehensive retirement plan administration services– More than 300,000 participants for DB administration

• 14 Total Retirement SolutionsSM (TRS) clients 9

Investment choice aligned to participant behavior

Active InvestorsSeeking choice beyond core fund f

Doers

Active InvestorsUse self-directed brokerage or mutual fund window

Allocate assets using core options

Not confident in ability to pick funds Delegators

Source: J.P. Morgan Retirement Plan Services

Not confident in ability to pick fundsUse asset allocation strategy choices

Delegators

10

Customized client solution

Utilizing a 3 tier menu approach

Stable Value/Money

Fixed Income Large Cap Value

Large Cap Core

Large Cap Growth

Mid Cap Small Cap Global/ International

Asset Allocation "Delegators"

Core "Doers"

Balanced/Lifestyle/Lifecycle Managed Accounts

Company Stock

Specialty "Sophisticates"

Brokerage Other

11

Investment Lineup Trends

• QDIA -- monitoring these vehiclesR ti t i• Retirement income

• Number of plan investment option • Industry offering Collective Funds• Increased interest

– TIPS– Extended asset classes – Custom Target Date Fund usage

12

Benefits

• Institutional pricing• Institutional product access• Inflation hedge• Diversification

13

Considerations

• Participant communicationsParticipant communications

• Participant education

• Due diligence

14

Plan sponsor usage

• Typically employed by plans with assets of $500 million plusLimited for mid size plans• Limited for mid size plans

• Custom asset allocation• Stand alone with limits• Brokerage window• Which ones are offered?

Real Estate– Real Estate– Commodities– TIPS– Private Equity– Multi Asset Portfolio

15

Victor Zhang’s slides

16

Wilshire Associates: Institutional Pedigree

A global financial services firm serving institutional investors for more than ff S30 years, Wilshire Associates serves its clients with offices in the U.S.,

Europe, and the Asia Pacific

• Founded in 1972 by the current chairman and CEO, Dennis Tito

• Approximately 350 employees with headquarters in Santa Monica, CA

17

– Other locations: Denver, Chicago, Pittsburgh, New York, London, Singapore, Canberra and Tokyo (Wilshire Australia Pty Ltd), Amsterdam (Wilshire Associates Europe BV)

Wilshire Associates: Institutional Pedigree(cont.)

• A pioneering tradition in research and quantitative analysis– Created the first asset/liability model for pension plans in the 1970’s– Created the first asset/liability model for pension plans in the 1970 s– Developed the first comprehensive U.S. stock index, the Wilshire 5000

IndexSM

– Wilshire risk management tools are used by many of the leading money managers in the U.S.

• A leader in the institutional marketC lt t i tit ti ith t f i t l $500 billi

18

– Consult to institutions with assets of approximately $500 billion – Serve in excess of 600 organizations in over 20 countries, with combined

assets exceeding $5 trillion*

• Owned 100% by active key employees and fully independent* Assets are as of December 31, 2008, based on published data in the December 28, 2009 issue of Pension & Investments

Wilshire Funds Management

As an independently managed business unit of Wilshire Associates, Wilshire FundsManagement was established in 1998 to create innovative investment programs designed forindividual investors that combine the risk management techniques in our software tools with thebest in class asset allocation and manager research offered to o r Cons lting clients We

Wilshire’s competencies include manager research, asset allocation and portfolio construction:• Manager research outsourcing and due diligence support

Centralized manager research group actively covers approximately 3 000

best-in-class asset allocation and manager research offered to our Consulting clients. Wecurrently manage approximately 25 multi-manager, multi-asset class investment programsrepresenting over $50 billion in assets as of December 31, 2009.

19

– Centralized manager research group actively covers approximately 3,000 institutional investment products and mutual funds

• Customized multi-manager investment solutions, including single asset class multi-manager, target risk, target date, and hedge fund-of-fund investments

• Discretionary managed accounts, retirement income portfolios, depletion portfolios

Investment rationale for alternatives • Enhance portfolio diversification

– Generate uncorrelated source of returnsProvide downside protection– Provide downside protection

• Broaden the investment opportunity set– Incorporate hedge fund like trading strategies, such as shorting, arbitrage, and leverage– Access top investment talent

• Separate alpha from betaIntegrate strategies that focus on generating returns through exploiting market– Integrate strategies that focus on generating returns through exploiting market inefficiencies

• Express investment views– Capture unique market knowledge and intelligence – Tactical asset allocation

20

Alternative investments – added diversification

21

Institutional Requirements• Fiduciary

– Headline risk– Transparency– Liquidityq y– Equitable fees and incentives

• Investment– Solid track record– Identifiable investment philosophy– Institutional quality investment process– Manage risk over returns

• Operational– Stable investment organization and management team– Institutional caliber operations and infrastructure– Dedicated client service

22

Alternative Mutual Fund vs. Hedge Fund

Mutual Fund Hedge Fund

Li idit D il Varies - LockupsLiquidity Daily Varies Lockups Common

Fees 1-2% 2% + Performance Fee

Transparency High Low to None

Regulation High Low or None

Minimum Investment Low Often High

Accredited Investor No Yes

Leverage Low Unrestricted

Page 2323

Universe of alternative mutual funds

Based on Morningstar Direct Universe at March 31, 2010.

24

Additional slides

25

Relying more on private savings for retirement

45% Retirement assets (% of household financial assets)

20

25

30

35

40

45

23%

35%

26

Note: Retirement assets include IRAs, annuities, defined contribution plans, private defined benefit plans, state and local pension plans, and Federal pension plans. Source: Investment Company Institute.

15

20Quarterly data

Income resources of people 65 and olderSocial Security is the bedrock of retirement income for low-income earners

Bottom quintile Top quintileAsset income;

Social Security;

Private pension or annuity; 10%

Asset income; 2%

Earning; 19%

Government employee

pension; 16%

Private pension or

annuity; 14%

Asset income; 9%

Earning; 38%

Government employee

27Sources: Allianz Global Investors and Social Security Administration, Income of the Population 55 or Older in 2006, February 2009.

53%

Social Security; 15%

employeepension; 24%

The U.S. retirement market by asset typesPredominated by IRA and employer-sponsored pension plans

Total retirement assets: 15.6 trillion

IRA assets26.5%

Annuities 9 7%

401(k) plans17.2%

403(b) plans4.1%

457 plans1.0% Other defined

contribution plans2.8%

Total retirement assets: 15.6 trillion (as of third quarter, 2009)

28

Source: Investment Company Institute.

State and local government

pension plans17.4%

Private defined benefit plans

13.5%

Federal pension plans 7.7%

9.7%

Massive losses in retirement savings in the 2008 market crash

US$ trillionsChange in retirement assets in 2008

-0.2

-0.70 9

-0.8

-0.4

0.0

0.4

US$ trillions

IRA

401(k), 403(b), 457, and other

DC plans

State and local govt pension

plans

Private defined

benefit plansAnnuities

Federalpension

plans

29

Sources: U.S. Census Bureau and Investment Company Institute.

-0.9-1.0

-1.1

-1.6

-1.2IRA assets fell $1.1 trillion in 2008

Unprecedented rise in market volatility duringthe 2008 market crash

80Volatility index (VIX)VIX long term average 1990 2010 Lehman Brothers

20

30

40

50

60

70VIX long-term average,1990-2010 Lehman Brothers

collapsed (September 2008)

Dot-com bubble burst (March 2000)

Long-Term Capital Management bailout (September 1998)

30Note: VIX is the Chicago Board Options Exchange's volatility index. Source: DataStream.

0

10

20

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

U.S. retirement assets still below 2007 peak

1820IRA

US$ trillions

14.916.7

18

15.914 13.4 14.4

15.6

8

12

16

IRAs

Private defined contribution plans

Private defined benefit plans

State and local pension plans

Source: Investment Company Institute.

0

4

2005 2006 2007 Q3, 2008 Q4, 2008 Q1, 2009 Q2, 2009 Q3,2009

Federal pension plans

Annuities

31

$ 1.4 trillion 401(k) plans were managed by mutual funds (as of the end of third quarter, 2009)

3.5US$ trillions 401(k)plan asset allocation in

mutual funds and other investments

0 9 1.1 1.21.5

1.7

1.11.40.9

1.0 0.9 0.9 0.81.0

1.11.1

1.31.3

1.11.2

1.0

1.5

2.0

2.5

3.0

3.5Other investmentsMutual funds

32

0.60.8 0.8 0.8 0.7

0.9

0.0

0.5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q3: 2009

Source: Investment Company Institute.

Mutual funds managed about half of defined contribution plan assets

Defined contribution plan asset allocation between mutual funds and other investments

40%

49%

54%

60%

51%

46%

457 plans

403(b) plans

401(k) plans

33

Source: Investment Company Institute.

40% 60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

457 plans

Mutual funds Other investments

Domestic stock market indexesHighly correlated stock markets

9001,800

400

500

600

700

800

800

1,000

1,200

1,400

1,600 Russell 2000 (right scale)

S&P 500(left scale)

34

200

300

400

600

2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: DataStream.

2009 and 2010 global equity marketsEmerging markets were the clear winners in 2009

YTD (as of April 20, 2010)

-0.4%

3.7%

5.6%

1.4%

5.8%

7.4%

MSCI Europe

MSCI World

S&P 500 Index

MSCI EAFE

MSCI Pacific

MSCI Japan

35

Source: DataStream.

3.8%

-2 0 2 4 6 8 10

MSCI EM index

Index return (%) in US$

2010 global equity markets Japan and U.S. lead; Europe lags in 2010

110December2009 = 100 Japan and U.S. have

been the leader in 2010

90

95

100

105MSCI Japan

S&P 500 Index

MSCI EM

MSCI EAFE

MSCI EUROPE

been the leader in 2010.

Spain, Portugal and

36

Source: DataStream.

85

90

Dec-09 Jan-10 Feb-10 Mar-10 Apr-10

Spain, Portugal and Greece continue to weigh on European performance