Speakers:

Bradley D. Jacob, Director of Marketing and Client Services,

Ryan Labs Asset Management

Ralf Ruediger Roeske, CPA, CGMA, MBA, MS, Senior

Director Finance/Treasury, MAHLE Industries Group

Case study: Is LDI right for you?Learn how MAHLE Inc. applied a custom LDI strategy

LDI Philosophy

• Identify the risk capacity and risk tolerance of each individual plan

sponsor

• Quantify the risk management characteristics of various fixed income

strategies

• Reduce surplus volatility within risk capacity threshold of each plan

sponsor

• Hedge tail risk with beta portfolio, take risk in growth portfolio

• Actively manage fixed income in a total return framework

• Glide path monitoring via Custom Liability Index

• Rebalance assets to achieve surplus volatility goals

2

MAHLE North AmericaCompany Overview

$3.6 billion USD in annual sales

More than 16,000 employees

About 30 locations

Products – Tier 1 supplier for

automotive products such as

engine components, filter

systems, thermal systems, etc.

3

MAHLE North AmericaStatus of Pension Plan in 2009

The US Pension Plan assets

were structured in a Total

Return Strategy

The fixed income portfolio was structured to both dampen

volatility and achieve strong returns over the long run

New Alternative The investment advisor of

MAHLE recommended to

restructure the fixed

income portfolio to better

align assets with

liabilities of the Pension

Plan

Move the fixed income assets

to a liability hedging strategy

and away from a total return

approach

Search The investment advisor performed a search for a custom

fixed income manager to structure the assets in a way to

better match the movements of the MAHLE US Pension

Liabilities

4

MAHLE North AmericaStatus of Pension Plan in 2009

5

Plan Performance2nd Quarter

2009

YTD

20091 Year

June 30, 2009

Market ValueAllocation Target

`MAHLE US Plan 10.9% 7.8% -9.5% $85 m USD

Policy Index 9.5% 6.1% -5.7%

Market Performance2nd Quarter

2009

YTD

20091 Year

S&P 500 Index 15.93% 3.16% -26.21%

MSCI EAFE (Net) Index 25.43% 7.95% -31.35%

Barclays Agg Bond Index 1.79% 1.91% 6.06%

CS High Yield Index 20.24% 27.21% -5.00%

Emerging Markets Debt Index 14.96% 21.56% -0.67%

30% Equity

70% Fixed Income

Liability Driven Investment (LDI) Manager Search Scope and Overview in 2009

The investment advisor performed

a search for liability driven

investment (LDI) managers on

behalf of MAHLE

The target allocation to LDI was

approximately $56 million USD or

70% of assets

Six firms were considered for this

search. The firms were invited to

participate in submitting data on

their LDI portfolio management

capabilities

6

Liability Driven Investment (LDI) Manager Search Selection Criteria in 2009

Criteria / Firms Firm 1 Firm 2 Firm 3 Firm 4 Firm 5 Firm 6

`Location USA USA USA USA USA USA

Total Assets under Management Billion Billion Billion Billion Billion Billion

Long Duration Assets under Management Billion Billion Billion Billion Billion Billion

Parent Company Name`

Primary Investment Style

Core Fixed

Income +

Treasury

Futures

Core Fixed

Income +

Treasury Strips

Combination of

3 Institutional

Mutual Funds

Custom

Liability

Matching

Strategy

Custom

Liability

Matching

Strategy

Long Credit +

Treasury Strips

Liability Matching Sophistication Moderate Moderate Moderate High High Moderate

Active Management Sophistication Moderate Moderate High Moderate Moderate High

Proposed Investment VehicleCommingled

Trust??? Mutual Funds

Separate

Accounts

Separate

Accounts

Collective

Investment

Fund

Asset/Liability Analysis Sophistication Moderate Moderate Low High High Low

Reported Fee for $56 million USD $$ bps Declined $$$ bps $$ bps $$ bps $$ bps

7

Liability Driven Investment (LDI) Manager Search Findings in 2009

Asset under Management All firms responding to search had a sufficient level of assets under

management

Primary Investment Style Each firm was asked to submit its proposed investment strategy for

mapping a custom bond portfolio structurally matched to MAHLE’s Defined

Benefit Plan liabilities. Two primary investment styles were represented

among the six firms:

Core Bonds + Duration Extension Pros: Cons:

Combines the firm’s core bond portfolio

with some form of long treasury

exposure, either through futures, strips or

a mutual fund vehicle

Access to firm’s active

management through the core

bond portfolio

Although long treasuries allow for an

overall duration match, the core of

the portfolio is not structured to

match Plan liabilities

Custom Liability Matching Strategy Pros: Cons:

The firm builds a portfolio of fixed income

securities who’s future cash flows closely

match the future liabilities of the Plan

Entire portfolio is built from the

ground up to match liabilities of

the Plan

Big name bonds managers are not

represented in custom providers

8

Liability Driven Investment (LDI) Manager Search Findings in 2009 – continued

Liability Matching Sophistication Firms providing the most efficient liability hedge were favored

Custom Liability Matching Strategies tend

to best hedge Plan liabilities, but Core

Bonds + Duration Extension is viewed as

a step in the right direction

Ultimately, a firm with moderate

level of liability matching

sophistication would only be

selected if access to big name

active bond managers was

desired

Firms were found providing custom

strategies best accomplished the

goal of a liability hedge while still

resulting in satisfactory active

management abilities

9

Identifying the Appropriate Solution

10

Initial Asset Allocation

11

April 2009 Liability Term Structure

12

Core Bonds vs MAHLE Liabilities

13

Strategy Summary

Correlation of Assets to Liabilities

0% 100%

0% 100%

50%

73%

0% 100%86%

• The analysis looked at a number of metrics, one important metric being

correlation

• The correlation of the assets to the liabilities increases 36% when

moving to a structure match strategy

Current Strategy

Long Corporate Strategy

Structure Match Strategy

14

Current Strategy Surplus Volatility Analysis

• Above shows funding ratio change over 15 years of 12-month iterations

• The two standard-deviation dollar funding volatility of the current

strategy is $15.2 million dollars

15

Proposed Strategy Surplus Volatility Analysis

• Above shows funding ratio change over 15 years of 12-month iterations

• The two standard-deviation dollar funding volatility of the current strategy

is $10.6 million dollars

16

Implementation

vs

Custom Liability Index

17

MAHLE Implementation: Structure Match vs Liabilities

• The implemented structure match strategy hedges the liabilities across

the curve

• A greater duration hedge results in a larger interest rate hedge

18

MAHLE Assets vs Liability Index By Sector

19

MAHLE Assets vs Liability Index By Rating

20

MAHLE LDI Process

1. Worked with MAHLE to identify what their goals of the LDI strategy were:

– Reduce interest rate risk

– Reduce surplus volatility

– Relative to PPA liabilities

2. Prepared Pension Diagnostic to quantify the risk management

characteristics of various fixed income strategies and their ability to

reduce these risks

3. Worked with MAHLE to review the pros and cons of each strategy

4. Determined a customized bond portfolio managed against the term

structure of liabilities was the most appropriate solution

5. Created Custom Liability Index in accordance with the Pension

Protection Act

6. Measure and monitor success of portfolio, updating the Diagnostic

annually21

Disclosures

22

Investment results may vary. No assurance can be given that the investment objective will be achieved, and an investor may lose

money. The Barclays Aggregate Index is comprised of domestic investment grade fixed income securities with maturities of 1 to 30

years. Pursuant to the rules of the Index, the Index’s portfolio must (i) have at least one year to final maturity, (ii) have at least $100

million par amount outstanding, (iii) be fixed rate, (iv) be U.S. Dollar denominated and non-convertible, (v) and be publicly issued.

Indexes are unmanaged and are not subject to transaction charges or expenses. An investor may not invest directly in an index.

The term “modified duration” is derived from the duration of any security or series of securities and provides a measure of the risk

with which the sensitivity of bonds or bond portfolios to interest rate changes can be estimated. A 1% increase (or decrease) in the

interest rate accordingly produces a percentage fall (or rise) in the price in proportion to the modified duration. For example, assume

that the modified duration of a bond portfolio is 4.5 years and the theoretical YTW is 5.3%. If the interest rate drops by 1% to 4.3%,

the portfolio price increases by approximately 4.5%.

This information is being presented as a means of demonstrating Ryan Labs’ investment approach. RLAM makes no representation

as to the accuracy or completeness of the information or mathematical calculations contained herein. Certain information contained

herein concerning economic and financial market trends and/or performance is based on or derived from information provided by

independent third party sources. RLAM believes that the sources from which such information has been obtained are reliable;

however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of

such information or the assumptions on which such information is based.

In addition, RLAM has made certain assumptions which it has not independently verified and the results of which may vary

significantly. The projections or other information generated by this analysis regarding the likelihood of various investment

outcomes are hypothetical in nature, future results may vary significantly from the projections and are not guarantees of future

results. Results may vary with each use and over time. The views expressed in this material are as of the date(s) indicated and

subject to change without notice. RLAM has no duty or obligation to update the information contained herein.