Letter from David Remstein

Welcome to the latest issue of J.P. Morgan’s Investment Analytics & Consulting newsletter, which aims to provide informative and thought-provoking articles on topics relating to performance measurement, attribution, and risk measurement. In this issue, we explore the custodian’s role in providing performance measurement and analytics services. We also highlight a new online platform launched in the fourth quarter of 2012 that provides clients with an intuitive and customized view across a range of J.P. Morgan products.

We welcome your thoughts and suggestions, and hope that this issue provides you with useful information.

David RemsteinManaging Director and Global Executive, Investment Analytics & ConsultingInvestor Servicesdavid.m.remstein@jpmorgan.com

Second Quarter 2013 Edition

About J.P. Morgan's Investment Analytics & Consulting GroupJ.P. Morgan's suite of Investment Analytics and Consulting services provides clients with the information they need to make more informed investment decisions through innovative and forward-looking solutions. J.P. Morgan provides Investment Analytics & Consulting services to over 300 clients globally with over 9,000 institutional portfolios, representing approximately $2 trillion in assets. Our diverse client list includes corporate and public DB/DC pensions, investment managers, endowments and foundations, corporate treasuries, insurance companies, central banks and hedge funds.

J.P. Morgan offers security-level, multi-currency performance measurement (monthly and daily) using internal or third party accounting; characteristics and attribution at the asset class, sector, country, and individual security level; ex-ante risk measurement (including risk budgeting and security-level VaR); investment manager analysis, universe comparison, and peer grouping; global consolidated reporting for multi-national plans.

For further information, www.jpmorgan.com/visit/iac, or contact:

Americas: Mark Huamani Managing Director mark.huamani@jpmorgan.com

Asia Pacific: John Fu Executive Director qiang.fu@jpmorgan.com

Europe, Middle East, Africa: Alex Stimpson Executive Director alex.stimpson@jpmorgan.com

Australia: Stuart Hoy Vice President stuart.d.hoy@jpmorgan.com

Any opinions, estimates and forecasts offered in this newsletter constitute the authors’ judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this newsletter to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice. Any opinions, estimates and forecasts are solely those of the authors and not of J.P. Morgan.

This document contains information that is the property of JPMorgan Chase & Co. It may not be copied, published, or used in whole or in part for any purposes other than expressly authorized by JPMorgan Chase & Co.

Copyright © 2013 JPMorgan Chase & Co. All rights reserved

www.jpmorgan.com/visit/iac

Table of Contents

The Role of the Custodian: Performance Measurement for Pension Funds 2

J.P. Morgan ACCESS® Securities – A Powerful New Tool for Online Performance Clients 5

Global Markets 6

1

2Second Quarter 2013 Edition

The Role of the Custodian: Performance Measurement for Pension Funds

The Role of the Custodian: Performance Measurement for Pension FundsBy Alex Stimpson alex.stimpson@jpmorgan.com

Performance measurement continues to be essential for pension funds as they evaluate whether their overall objectives are being met and how the asset managers are performing against assigned benchmarks or targets. This article explores what we believe are the key components of the performance measurement service for pension funds.

Independence

The performance-based return of asset manager portfolios is fundamental to pension fund managers when analyzing the success of the manager in meeting specific targets. It also lays the foundations for determining any performance-based fees. Due to the vested interest of the asset manager, it is widely accepted as best practice for pension funds to source an independent view of asset manager performance.

In our view, true independence from a performance return perspective not only relies upon a third party calculating the portfolio returns, but also the use of independent accounting valuations of the portfolio. The performance calculation methodology is largely a standardized formula that is built into all performance systems, so real independence cannot be secured by simply calculating returns from the same set of accounting records as the asset manager.

As well as independently calculating a portfolio return, it is important to take a third party view with respect to the return of the manager benchmark. The benchmark itself may be a simple index, such as MSCI World, in which case, the third party will most likely source directly from the relevant vendor or data consolidator. Conversely, it may be a customized benchmark that requires multiple underlying indices as well as an element of currency hedging or sector, country or security exclusion. If this is the case, an independent calculation of the aggregated components would be beneficial.

In our view, the custodian is most often in the best position to provide independent accounting and performance measurement services. Having determined the return calculation, the custodian would typically reconcile back to the asset manager and advise the pension fund of any differences beyond an agreed tolerance level. Best practice is for the pension fund to take the performance data of the custodian as the

primary source.

Consistency and Consolidation

Assessing the performance of an asset manager is most meaningful when any comparison to other asset managers is carried out on a relative basis. In order to achieve this, portfolio valuations within the accounting book of records need to be derived from the use of a consistent pricing hierarchy and consistent foreign exchange rates. These elements have a fundamental impact on the calculation of performance returns and should be employed across the pension fund's entire portfolio range. Further to this, having a consistent valuation process and methodology allows for an accurate aggregation of portfolios to the total pension fund top level. This consolidation is essential for the pension fund, as it provides for an assessment of the performance of the total fund on an absolute basis as compared to the strategic benchmark return or performance of the liabilities of the fund.

The custodian is well placed to provide a consistent valuation approach, by applying an agreed pricing hierarchy and foreign exchange source across the pension fund's entire portfolio range. In addition, all portfolios can be automatically aggregated within the custodian's performance systems by the use of composite functionality. Figure 1 illustrates the aggregation process.

Speed of Delivery

The receipt of timely performance measurement reporting is of ever increasing importance to pension fund managers.

The pension fund world has a growing proclivity for transparency and easy and fast access to information. Prior to the financial crisis of 2008, most pension fund managers found it sufficient to receive an updated performance measurement assessment on a monthly or even quarterly basis.

In our view, the crisis has led to a shift within the industry to provide daily assessments of the asset managers' and fund's returns. In response to the increasing demand from the pension fund community, custodians have heavily invested in technology and infrastructure in order to automate much of the process and provide online and mobile reporting solutions for clients.

Asset Manager A

Asset Manager B

Asset Manager E

Asset Manager D

Asset Manager C

Consistent pricing hierarchy, foreign exchange rates and performance calculation methodologies.

Composite 1 Equity

Composite 2 Fixed Income

Composite 3 Alternatives

TOTAL PENSION FUND

Consistent & Consolidated Performance Measurement

Figure 1: Pension Fund Consolidation

3Second Quarter 2013 Edition

Reporting

Most often, a significant amount of underlying data is required in order to accurately calculate the performance of the pension fund and that of the fund's asset managers. From this data, performance measurement systems generate a wealth of statistical data that is available to the pension fund manager. It is key for the pension fund manager to identify exactly what reporting is important for them and what is important for the investment committee or trustee board. The custodian is able to provide an insight into what the pension fund industry typically requires from a reporting perspective as well as provide a consultative approach to enhanced reporting solutions.

At the very least, a pension fund manager would want to see the performance returns of the fund and underlying asset managers.

Figure 2 reflects an example of a pension fund's relative performance report. From the report the pension fund manager can clearly ascertain the performance of each manager and the total fund across multiple time periods. For example, Manager B has performed the best on a relative basis over one-month, outperforming its benchmark by 0.81%. When reviewing asset manager performance returns, the pension fund manager will assess performance over longer time periods, for example on a trailing three- or five-year basis. From Figure 2, the pension fund manager can also see that the total fund has outperformed the strategic total benchmark by 0.06% for one-month and by 0.15% on a three-year annualized basis.

The Role of the Custodian: Performance Measurement for Pension Funds

NameMarket Value

1 Month

3 Months Year to Date

1 Year 3 Years Annualized

Manager A Benchmark Excess Return Standard Deviation Sharpe Ratio

83,829,563

7.91 8.46 -0.55

10.05 13.50 -3.45

4.01 1.81 2.20

8.01 4.02 3.99

-0.30 -1.62 1.32 12.12 -0.07

Manager B Benchmark Excess Return Standard Deviation Sharpe Ratio

268,484,763

7.44 6.63 0.81

10.56 8.02 2.54

4.94 4.13 0.81

8.65 7.33 1.32

-0.01 -0.40 0.39 13.25 -0.04

Manager C Benchmark Excess Return Standard Deviation Sharpe Ratio

146,648,242

7.00 6.90 0.10

12.54 8.67 3.87

4.02 6.61 -2.59

6.52 10.58 -4.06

1.00 1.35

-0.35 10.25 0.05

Manager D Benchmark Excess Return Standard Deviation Sharpe Ratio

59,993,099 5.90 6.54 -0.64

14.04 13.63 0.41

5.98 6.65 -0.67

10.85 12.49 -1.64

3.14 -1.04 4.18 16.25 0.16

Manager E Benchmark Excess Return Standard Deviation Sharpe Ratio

154,937,216 5.20 5.49 -0.29

5.00 6.81 -1.81

8.63 9.64 -1.01

8.62 10.59 -1.97

2.12 3.20 -1.08 15.25 0.11

Total Pension Fund

Total Benchmark

713,892,883

6.78

6.72

9.93

9.46

5.52

5.54

8.36

8.25

0.90

0.75

Excess Return 0.06 0.47 -0.02 0.11 0.15

Figure 2: Pension Fund Relative Performance

4Second Quarter 2013 Edition

The Role of the Custodian: Performance Measurement for Pension Funds

For pension funds, additional performance returns data is often required at composite level, asset class level and by region and/or country. Some pension funds require further data down to and including security level.

Ex Post RiskWhen assessing manager performance returns, the pension fund manager should be encouraged to consider the risk taken to achieve the return. For example, the use of standard deviation provides an indication as to the level of variability of a manager's return around the average return. The higher the standard deviation, the more risk taken to achieve the return. Standard deviation is calculated using the historical performance returns of the manager, a statistically meaningful number of observations is required to make the data relevant. Within Figure 2, standard deviation is reflected on a three-year annualized basis. The best performing manager on an absolute and relative basis over three years is Manager D. However, with a standard deviation of 16.25%, Manager D also has the highest variability.

To analyze the manager returns further, the pension fund manager should also consider looking at performance on a risk-adjusted basis. For example, the Sharpe ratio compares the premium return of the manager (annualized average less the risk free rate) to the level of risk taken as measured by standard deviation. The higher the Sharpe ratio, the better the risk-adjusted return. Figure 2 shows that Manager D also has the highest Sharpe ratio and therefore has also performed the best on a risk-adjusted basis.

Performance AttributionIn our view, it is important for the pension fund manager to include a pension fund attribution model within their reporting suite in order to quantify the impact of the following decisions:

Asset Allocation: How much did decisions to over or underweight asset managers/asset classes versus the fund's strategic benchmark weights contribute to the fund's excess return?

(Portfolio weight - Portfolio benchmark weight) * (Portfolio benchmark return - Total benchmark return)

Stock Selection: How much did the performance of the asset managers versus their benchmarks contribute to the fund's excess return?

Portfolio weight * (Portfolio return - Portfolio benchmark return).

From Figure 3, the pension fund manager can determine that the out-performance of the fund versus the strategic benchmark of 0.06% for the latest month, was driven by stock selection (+ 0.14%), rather than asset allocation (-0.08%). Manager B was the highest contributer to stock selection, with 0.30% and Manager A contributed the majority of the asset allocation effect with -0.06%. As with performance returns assessment, the pension fund manager will use this type of attribution model over longer time periods, such as three or five years, in order to determine the long-term impact of the trustee or investment committee asset allocation decisions and measure an asset manager's stock selection ability.

Summary

In our view, performance measurement will continue to be an essential part of the pension fund manager's evaluation process when considering whether the fund's overall objectives are being met. As well as understanding the performance of the asset managers and the overall fund, the pension fund manager should be encouraged to undertake further analysis such as ex post risk and fund attribution in order to gain a greater insight into how the fund is performing.

The custodian is well placed to provide independent and consistent valuation and performance evaluation services. Its unique position of having access to the entire underlying pension fund data provides for the optimal position to consolidate up to the total fund level.

Figure 3: Current Month Pension Fund Attribution

Portfolio Weight

Benchmark Weight

Portfolio Return

Benchmark Return

Asset Allocation

Stock Selection

Total

Manager A 11.75 15.00 7.91 8.46 -0.06 -0.07 -0.13

Manager B 37.61 35.00 7.44 6.63 0.00 0.30 0.30

Manager C 20.54 20.00 7.00 6.90 0.00 0.02 0.02

Manager D 8.40 10.00 5.90 6.54 0.00 -0.05 -0.05

Manager E 21.70 20.00 5.20 5.49 -0.02 -0.06 -0.08

Total Fund 100.00 100.00 6.78 6.72 -0.08 0.14 0.06

5Second Quarter 2013 Edition

J.P. Morgan ACCESS® Securities – A Powerful New Tool for Online Performance Clients

J.P. Morgan ACCESS® Securities – A Powerful New Tool for Online Performance ClientsBy Tony Moceri tony.moceri@jpmorgan.com

After extensive market research and product development, J.P. Morgan launched a revamped online tool for institutional clients. This new tool—J.P. Morgan ACCESS® Securities—provides a more user-friendly reporting experience with improved navigation and customization features that deliver optimal access to critical plan information. The roll-out of J.P. Morgan ACCESS Securities was the first of many platform upgrades that will continue to enhance how clients can efficiently receive and process data to make precise, strategic decisions.

When ACCESS Securities subscribers log in, they are greeted by the new executive-level dashboard, which consists of several customizable portlets. Within the Performance Measurement portlet, clients can scan detailed metrics by multiple variables, as well as compare and benchmark portfolios against one another. Performance data can also be integrated within other product portlets—including Compliance Reporting, Securities Lending and J.P. Morgan Portfolio Insights—for a holistic snapshot of pertinent information on a single screen, as shown in Figure 1.

In addition to dashboard functionality, clients can drill down at plan and portfolio levels to view details of underlying holdings. Extensive graphical capabilities bolster the interactive experience, which extends far beyond traditional reporting systems.

J.P. Morgan maintains an active dialogue with clients in order to refine and build on the platform experience. Based on client input, the firm focused on some of the most critical functionality and features for the ACCESS Securities launch. But over the next few months, additional products will be added to the platform—including Custody, Cash, Fund Accounting and Alternative Reporting applications.

As of the second quarter of 2013, several clients have been onboarded to the new J.P. Morgan ACCESS Securities portal. If you are presently a J.P. Morgan ACCESS user and would like to know when the added functionality will become available to you, please contact your Relationship Manager (RM) for roll out information. ACCESS Securities is simply an add-on to users’ log-in credentials and does not require an additional user ID or password. All new J.P. Morgan ACCESS users will automatically be greeted by the new dashboard and all of its features upon logging into the site. Existing users will notice the addition on the left-hand side of their screen

under Applications.

For busy professionals on the go, a J.P. Morgan ACCESS Securities iPadSM app is now available for free from the App Store®. The first mobile release provides a modified dashboard view for Performance Measurement and Custody users, as well as the My Reports feature with Views Portfolio Reporting, as shown in Figure 2.

The iPad app uses the same award-winning security features as the web portal: RSA® authentication protocol plus multifactor authentication for user registration. J.P. Morgan has also implemented an additional security measure that disallows the app to store data or account information locally on the device after the user has exited the application.

Currently, the app will run on all generations of iPad and iOS® systems, with additional mobile device compatibility expected in future releases, including a version for AndroidTM devices.

We hope you take advantage of our new J.P. Morgan ACCESS Securities online tools and iPad app. Your J.P. Morgan RM can provide additional information should you have any questions.

Figure 1: J.P. Morgan Securities Dashboard

Source: J.P. Morgan

Figure 2: Performance Measurement iPad App

Source: J.P. Morgan

Apple, the Apple logo, iPad, iPhone, and iPod touch are trademarks of Apple Inc., registered in the U.S. and other countries. Android is a trademark of Google Inc.

6Second Quarter 2013 Edition

Global Markets

Multiple Asset Class Return Comparison as of March 2013By Karl C. Mergenthaler, CFA, William Pometto and Xixi Chen karl.c.mergenthaler@jpmorgan.com, william.x.pometto@jpmorgan.com and xixi.chen@jpmorgan.com

IndexMonthly return 3 months Year to date 1 Year 2 Year 3 Year 5 Year 10 Year

Russell 3000 (Gross) 3.92 11.07 11.07 14.56 10.81 12.97 6.32 9.15

MSCI EAFE (Net) 0.82 5.13 5.13 11.25 2.39 5.00 (0.89) 9.69

MSCI Emerging Markets (Net) (1.72) (1.62) (1.62) 1.96 (3.57) 3.27 1.09 17.05

Barclays U.S. Aggregate Bond Index 0.08 (0.12) (0.12) 3.77 5.73 5.52 5.47 5.02

Merrill High Yield Index 1.03 2.87 2.87 13.05 9.31 10.90 11.25 9.78

J.P. Morgan GBI Emerging Markets Bond Index 0.11 0.22 0.22 8.85 4.89 6.79 4.71 8.34

NAREIT Index 3.01 8.10 8.10 17.11 14.17 17.67 7.10 12.58

Goldman Sachs Commodity Index (Gross) 0.77 0.55 0.55 (4.96) (5.59) 3.04 (9.74) 1.84

-20%

-10%

0%

10%

20%

30%

40%

Monthly return 3 months Year to date 1 year 2 year 3 year 5 year 10 year

Russell 3000 (Gross) MSCI EAFE Index (Net) MSCI Emerging Markets Index (Net) Barclays U.S. Aggregate Bond Index

Merrill High Yield Index J.P. Morgan Government Bond Index-Emerging Markets NAREIT Index S&P GSCI (Gross)

U.S. Equity• U.S. equities began the year with a strong first quarter. The

Russell 3000 Index generated an 11.07% return in the first quarter.

• The Russell 3000 was up 14.56% for the past year, and produced an annual return of 9.15% over the last 10 years.

International Equity• The MSCI EAFE Index posted a 5.13% return in the first quarter

and an 11.25% return over the last 12 months, attributable to the abatement in stress posed by the European sovereign debt crisis.

• With a market slowdown for a number of emerging market countries in 2012, the MSCI Emerging Market Index experienced a 1.62% decline in the first quarter, while the return for the past year remained positive. The 10-year annual return is an impressive 17.05%.

Fixed Income• The Barclays U.S. Aggregate Index produced an overall return

of 3.77% for the past year, despite a 0.12% loss in the first quarter.

• The Merrill High Yield Index generated a return of 2.87% year to date.

• The J.P. Morgan GBI Emerging Market Bond Index only gained 0.22% in the first quarter, though still up 8.85% over the last 12 months.

Real Estate and Other• The NAREIT Index over 12 months returned 17.11%, outperforming

the broader U.S. equity market.

• The Goldman Sachs Commodities Index was up 0.55% for the first quarter of 2013 but still down 5.59% for the past two years.

Multiple Asset Class Return Comparison as of March 2013

7Second Quarter 2013 Edition

Global Markets

Global Equities (ex-North America) as of March 2013By Andrew Farmer, Simon Senior and Tom Agureandrew.e.farmer@jpmorgan.com, simon.senior@jpmorgan.com and tom.agure@jpmorgan.com

European indexes (performance in €)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013020406080100120140160180

0

2,000

4,000

6,000

8,000

10,000

12,000U.K., France, Germany, Switzerland

FTSE 100 CAC 40 DAX 30 SMI 20 MSCI Europe (right axis)

Commentary: Against a backdrop of low interest rates and subsiding global risks, equity markets got off to a bullish start this year. However, renewed eurozone instability in the form of an inconclusive Italian election and bailout deal in Cyprus offered some resistance to the rally. For the first quarter of 2013, eurozone markets were essentially flat in local currency terms (e.g., Euro Stoxx 50 fell −0.11% in euro terms) as debt woes and weak growth data took back any early January 2013 gains.

• TheASX200 indexhita fouryearhigh inMarch2013,postingagain of AUD 10.28% during the first quarter of 2013. This was driven by the strong performances in the Consumer Discretionary (AUD +16.4%) and Banks (AUD +15.5%) sectors.

• MSCI China fell 2.75% (in local currency terms) in March 2013,reducing the strong period of growth seen earlier in the year. This rebound was driven off the back of inflation fears and slowing economic growth, with the Consumer Discretionary sector being the worst performer.

• TheHongKongequitymarkethadastrongstartin2013,primarilyled by the property and Macau gaming sectors and higher than expected export trade figures.

• TheFTSEStraitsTimesindexhadastrongperformanceinthefirstquarter of 2013 (+5.9% in EUR terms), primarily due to a renewed risk-taking activity, taking cues from positive China economic prints and the aversion of the first U.S. fiscal cliff. Similar to the ASX200 index, thiswas ledby the strongperformingConsumerDiscretionary and Banking sectors.

• Japanwasthestandoutperformerforasecondquarterrunning(Nikkei 225 JPY +12.39%), beating the gains of the fourth quarter of 2012, as markets continued to anticipate further monetary easing by the Bank of Japan in early April and a commitment to reflate the economy by the policymakers.

• DuringMarch,delaysinKorea’snewgovernment’spolicymeasureswerekeydragsontheKOSPIindexsendingtheKOSPIbackdownto 1,950 levels. However, towards the end of March, the KOSPIpartially rebounded thanks to the government’s reiteration of its stance on the supplementary budget and measures to stabilize the property market.

0

1,000

2,000

3,000

4,000

5,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Australia, Hong Kong, Singapore

ASX 200 Hang Seng Index Straits Times Index

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00 Japan

Nikkei 225

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.00

0.50

1.00

1.50

2.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

South Korea

Kospi Index

Asian indexes (performance in €)

Source: J.P. Morgan's Investment Analytics & Consulting group, J.P. Morgan Equity Research, Morgan Markets, Bloomberg and Rimes.