fort lauderdale police and fire pension board investment workshop 2009
TRANSCRIPT
Fort LauderdalePolice & Firefighters’ Retirement System
Investment WorkshopDecember 3 & 4, 2009
Hyatt Pier 66 HotelFort Lauderdale, Florida
Investment Workshop AgendaHyatt Pier 66 Hotel
Fort Lauderdale, Florida
Thursday, December 3, 2009
Fort LauderdalePolice & Firefighters’ Retirement System
Friday, December 4, 2009
8:30 am Domestic Equity Panel Speakers: Northpointe, Lee Munder, Sawgrass and Systematic 9:30 am Hedge Fund of Funds/Lessons Learned 2008 Speaker: K2 10:15 am Break 10:30 am Liability Driven Approach to Fixed Income Investing Speaker: Agincourt 11:15 am Closing Remarks Speaker: Asset Consulting Group 11:45 am Adjourn
12:30 pm Lunch 1:00 pm Opening Remarks Speaker: Michael Dew, Chairman
Fort Lauderdale Police and Fire Retirement System 1:15 pm Capital Markets Review Speaker: Asset Consulting Group 1:45 pm Fixed Income Market Overview Speaker: Mellon 2:30 pm Securities Litigation Monitoring Speaker: Saxena White 3:15 pm Break 3:30 pm Real Estate Market Environment Speakers: American and Prudential 4:15 pm Non – U.S. Equity Speakers: Thornburg and Artio 5:15 pm Adjourn 5:30 pm Refreshments/Appetizers 6:00 pm Dinner
City of Fort Lauderdale Police and Fire Retirement SystemCapital Markets Review
December 3, 2009231 South Bemiston Avenue 14th
FloorSt. Louis, Missouri 63105
WWW.ACGNET.COM
Capital Markets Summary
© 2009 Asset Consulting Group All Rights Reserved 2
Broad Market Returns
For the Periods Ending October 31, 2009
-15%
-5%
5%
15%
25%
35%
45%
55%
65%
Barclays Capital U.S Treasury Index -0.05% -2.34% 6.33% 6.66% 5.03%
Barclays Capital U.S. Aggregate 0.49% 6.24% 13.79% 6.35% 5.05%
Barclays Capital Global Aggregate (unhedged) 0.47% 8.35% 18.41% 7.91% 5.71%
S&P 500 -1.86% 17.03% 9.79% -7.02% 0.33%
Russell 2000 -6.79% 14.13% 6.46% -8.50% 0.59%
MSCI EAFE -1.24% 27.96% 28.39% -4.75% 5.59%
MSCI ACWI ex US -1.61% 28.39% 27.83% -4.79% 5.44%
MSCI Emerging Markets 0.13% 65.09% 64.63% 6.66% 17.16%
MTD YTD 1 Year 3 Years 5 Years
Source: ACG Research, Bloomberg
© 2009 Asset Consulting Group All Rights Reserved 3
S&P 500 Sector Returns
-2.3
% -0.4
%
-3.2
%
-2.5
%
1.0% 3.
2%
-6.0
%
-4.7
%
-5.3
%
-4.9
%
5.4%
44.2
%
-2.6
%
24.6
%
7.8% 9.
3% 12.0
%
6.7%
28.6
%
-7.8
%
5.7%
30.0
%
-4.2
%
21.4
%
5.8%
5.9%
1.0%
14.3
%
-2.1
%
-5.6
% -1.4
%
-7.4
%
-10.
5%
0.0%
-0.3
%
-26.
6%
-11.
1%
-5.1
%
-0.1
% 1.8%
1.6% 3.
6%
8.7%
-13.
2%
-3.7
%
1.0%
-3.2
%
-4.7
%
-11.
6%
-3.8
%
-35%
-25%
-15%
-5%
5%
15%
25%
35%
45%
Healthc
areInf
ormati
on Tech
nolog
y
Utilitie
sCon
sumer
Discret
ionary
Consum
er Sta
ples
Energy
Financia
ls
Indust
rials
Materia
lsTele
commun
icatio
ns
MTD YTD One Year Three Years Five Years
For the Periods Ending October 31, 2009
Source: ACG Research, Bloomberg
© 2009 Asset Consulting Group All Rights Reserved 4
Fixed Income Market Environment
As of 10/31/09 MTD YTD 1-Year 3-Year*Aggregate 0.49% 6.24% 13.79% 6.35%Treasury -0.05% -2.34% 6.33% 6.66%Gov't-Related 0.13% 2.81% 10.16% 6.59%Corporate 0.70% 17.93% 31.07% 5.63%MBS 0.71% 6.04% 12.05% 7.40%CMBS 2.40% 27.36% 21.99% 2.41%ABS 1.16% 24.50% 23.29% 3.76%High Yield (Corporate) 1.80% 51.65% 48.10% 5.46%
As of 10/31/09 MTD YTD 1-Year 3-Year*AAA 0.43% 3.46% 10.03% 6.55%AA 0.73% 8.35% 18.55% 5.09%A 0.73% 14.98% 29.37% 4.54%BAA 0.67% 25.69% 36.46% 6.45%BA 1.25% 41.21% 42.50% 6.66%B 1.78% 40.61% 35.06% 2.98%CAA 2.60% 79.93% 53.48% 1.26%
As of 10/31/09 MTD YTD 1-Year 3-Year*1-3 Yr. 0.40% 4.92% 7.29% 5.65%3-5 Yr. 0.71% 6.16% 11.11% 6.34%5-7 Yr. 0.85% 6.35% 12.17% 6.06%7-10 Yr. 0.64% 6.48% 18.45% 7.06%10+ Yr. -0.65% 1.99% 22.84% 5.81%1 Relative to the duration neutral TreasuryTime periods over one year are annualizedSource: Barclays Capital
Nominal Returns by Maturity
Nominal Returns by Sector
Nominal Returns by Quality
Excess Returns by Sector1
as of October 31, 2009
89 65 219 101 167693
356
2,050
485
2,7852,424
5,217
716467
2,425
478
1,6121,889
4,225
-52
-155 -160
850
-241
45
-474
14
(1,000)
-1,000
2,000
3,000
4,0005,000
6,000
Aggregat
eGov't
-Rela
ted
Corpora
te
MBS
CMBS
ABS
Hig
h Yiel
d (Cor
porate
)
Exce
ss R
etur
n (b
ps)
QTD YTD 1-Year 3-Year*
Excess Returns by Qualityas of October 31, 2009
162
1,078
349
1,227
2,912
3,619
2,950
4,790
-23 83 8640 11892 242372
2,817
8,000
4,1164,202
1,7672,225
-189-575-403
-45
-87-273(1,000 )
-
1,000
2 ,000
3 ,000
4 ,000
5,000
6 ,000
7,000
8 ,000
A A A A A A B A A B A B C A A
Exce
ss R
etur
n (b
ps)
QTD YTD 1-Year 3 -Year*
For the Periods Ending October 31, 2009
Point in Time Analysis
© 2009 Asset Consulting Group All Rights Reserved 6
Trailing One Year Market Performance –
September 09 vs. October 09
The ending point in time can make dramatic difference in results when reviewing periodic market performance as well as manager performance over relatively short periods of time.
The effect can be even more pronounced when month to month market volatility is extreme.
Trailing One Year Returns
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
S&P 500
Russe
ll 100
0 Grow
thRus
sell 1
000 V
alue
Russe
ll 200
0Rus
sell 2
000 G
rowth
Russe
ll 200
0 Valu
e
MSCI EAFE
MSCI ACWI e
x US
Barclay
's Agg
regate
Index
Perc
ent R
etur
n
10/31/20099/30/2009
© 2009 Asset Consulting Group All Rights Reserved 7
Trailing Ten Year Market Performance –
September 09 vs. October 09
Over longer periods of time trailing returns month over month tend to stabilize but still exhibit some dispersion in more volatile asset classes.
Trailing Ten Year Returns
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
S&P 500
Russe
ll 100
0 Grow
thRus
sell 1
000 V
alue
Russe
ll 200
0Rus
sell 2
000 G
rowth
Russe
ll 200
0 Valu
e
MSCI EAFE
MSCI ACWI e
x US
Barclay
's Agg
regate
Index
Ann
ualiz
ed R
etur
n
10/31/20099/30/2009
Rolling One Year Rankings
© 2009 Asset Consulting Group All Rights Reserved 9
Rolling One Year Ranks –
Sawgrass
Rolling 1-Year RankingseVestment Alliance Large Cap Growth Universe
0
10
20
30
40
50
60
70
80
90
100
Dec
-99
Apr
-00
Aug
-00
Dec
-00
Apr
-01
Aug
-01
Dec
-01
Apr
-02
Aug
-02
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Russell 1000 Growth Sawgrass
© 2009 Asset Consulting Group All Rights Reserved 10
Rolling One Year Ranks –
Systematic
Rolling 1-Year RankingseVestment Alliance Large Cap Value Universe
0
10
20
30
40
50
60
70
80
90
100
Dec
-99
Apr
-00
Aug
-00
Dec
-00
Apr
-01
Aug
-01
Dec
-01
Apr
-02
Aug
-02
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Russell 1000 Value Systematic
© 2009 Asset Consulting Group All Rights Reserved 11
Rolling One Year Ranks –
NorthPointe
Rolling 1-Year RankingseVestment Alliance Small Cap Growth Universe
0
10
20
30
40
50
60
70
80
90
100
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Russell 2000 Growth NorthPointe
© 2009 Asset Consulting Group All Rights Reserved 12
Rolling One Year Ranks –
Lee Munder
Rolling 1-Year RankingseVestment Alliance Small Cap Value Universe
0
10
20
30
40
50
60
70
80
90
100
Jun-03
Sep-0
3Dec-
03Mar-
04Jun-0
4Se
p-04
Dec-04
Mar-05
Jun-05
Sep-0
5Dec-
05Mar-
06Jun-0
6Se
p-06
Dec-06
Mar-07
Jun-07
Sep-0
7Dec-
07Mar-
08Jun-0
8Se
p-08
Dec-08
Mar-09
Jun-09
Sep-0
9
Russell 2000 Value Lee Munder
© 2009 Asset Consulting Group All Rights Reserved 13
Rolling One Year Ranks –
Artio
Rolling 1-Year RankingseVestment Alliance International Large Cap Universe
0
10
20
30
40
50
60
70
80
90
100
Dec
-99
Apr
-00
Aug
-00
Dec
-00
Apr
-01
Aug
-01
Dec
-01
Apr
-02
Aug
-02
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
MSCI All Country World Ex-US Artio International Equity I Artio International Equity II
© 2009 Asset Consulting Group All Rights Reserved 14
Rolling One Year Ranks –
Agincourt
Rolling 1-Year RankingseVestment Alliance Core Fixed Income Universe
0
10
20
30
40
50
60
70
80
90
100
Dec
-99
Apr
-00
Aug
-00
Dec
-00
Apr
-01
Aug
-01
Dec
-01
Apr
-02
Aug
-02
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Barclays US Aggregate Agincourt
© 2009 Asset Consulting Group All Rights Reserved 15
ProsProvide a simple and reasonable frame of reference for understanding and ranking a manager’s performance on a periodic basis.Frame of reference allows investors to evaluate a manager’s performance in the context of that being experienced by other manager’s employing a similar discipline or having comparable characteristics.Peer groups can have extensive “real time” histories, capturing actual investment experience.
ConsSurvivorship bias-occurs in composites where only returns of managers currently in business are used. Since better managers tend to persist over time, this creates an upward bias.Construction methodology may impact how managers are assigned to various peer group.Not investable per se. Manager does not know in advance which basket of securities it is being judged against. Strictly speaking, a peer group is thus not a benchmark.
Persistent above median performance is generally not sustainable on a quarter over quarter basis.Outperformance from active management tends to be cyclical, where periods of outperformance follow periods of underperformance.
Pros and Cons of Style Peer Groups
©
2009 Asset Consulting Group. All Rights Reserved. Asset Consulting Group is the sole owner of all rights, title, and interest to the materials, methodologies, techniques, and processes set forth herein, including any and all intellectual property rights. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Asset Consulting Group.
The information contained in this report is based on information
obtained by ACG from sources that are believed to be reliable including: subscription services and information provided directly from the managers themselves. ACG has not attempted to
verify the accuracy of the information provided, but believes it to be reliable and representative of the portfolios being managed by the manager. However, investor specific investment policies may cause dispersion in returns from the manager’s composite data and actual returns of specific investors may vary.
BNY Mellon Cash Investment Strategies
December 3, 2009
Ft. Lauderdale Police and Fire Retirement System:
Fixed Income Market Review
BNY Mellon Asset Management is the umbrella organization for The Bank of New York Mellon Corporation’s affiliated investment management firms and global distribution companies.
Page 2
I. CIS OverviewII. Market ReviewIII. Observations and OutlookIV. Current Strategy Position
Agenda
Page 3
1Do not offer services in the U.S.2A division of The Bank of New York Mellon3Minority Owned450/50 Joint Venture5A division of The Dreyfus Corporation.Please see disclosures in the appendix.
The Bank of New York Mellon Corporation
BNY Mellon Asset Management
BNY Mellon Wealth Management
BNY Mellon Asset Servicing
The Bank of New York Mellon Clearing Services
The Bank of New York Mellon Issuer Services
The Bank of New York Mellon Treasury Services
BNY Mellon Beta Management 2
The Dreyfus Corporation
Ankura Capital Pty Ltd. 1
The Boston Company Asset Management, LLC
EACM Advisors LLCHamon U.S. Investment
Advisors Ltd. 3
The Newton Group
The Alcentra GroupBNY Mellon Cash
Investment Strategies 5
Pareto Investment Management Limited
Standish Mellon Asset Management Company LLC
Fixed Income, Cash & Currency Group
Mellon Global Alternative Investments Ltd. 1
The Bank of New York Mellon’s Experience, Size and Scale Delivers Resources and Expertise
More than 220 years of experience
More than 42,000 employees worldwide
34 countries
$925 billion in assets under management (as of 06/30/09)
$20.7 trillion in assets under custody and administration (as of 06/30/09)
$12 trillion in assets under trusteeship for over 90,000 clients worldwide (as of 06/30/09)
Largest U.S. custodian for ETFs in terms of funds serviced and second largest U.S. custodian in terms of total assets serviced. (Source Media’s 2008 Mutual Fund Service Guide)
First private bank in the U.S. with more than 225 years experience in finance and wealth management
Located in 19 offices worldwide, Pershing serves more than 1,150 institutional and retail financial organizations and independent RIAs who collectively represent more that five million active individual investors.
Depositary for more than 1,300 American and global depositary receipt programs
West LB Mellon Asset Management 1,4
Urdang Capital Mgmt, Inc. / Urdang Securities Mgmt, Inc.
Walter Scott & Partners Limited
Ivy Asset Management LLC
Mellon Capital Management Corporation
BNY Mellon ARX
Blackfriars Asset Management
Firm Overview – BNY Mellon Asset Management
BNY Mellon Asset Management
Page 4
▪ CIS was created in 2009 to combine the strengths of our cash, index and stable value businesses
▪ Provides client solutions
− Institutional customized separate accounts
− Money Market Mutual Funds*
▪ Assets of over $401.1 billion under management** (as of September 30, 2009)
▪ More than 260 separate account clients (as of September 30, 2009)
▪ 108 employees – 54 investment professionals (as of September 30, 2009)
▪ Offices in New York, Pittsburgh, San Francisco
Firm Overview – BNY Mellon Cash Investment Strategies
BNY Mellon Cash Investment Strategies (CIS)
*All funds are structured within the confines of Rule 2a-7**Includes assets managed by CIS personnel acting as dual officers of The Bank of New York Mellon
Page 5
0%
1%
2%
3%
4%
5%
6%
Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09
Time
Fed
Fund
Rat
e
5.25%
4.75%
4.50%4.25%
3.50%
3.00%
2.25%
2.00%
1.50%
1.00%
0.25%
February 2008
Auction Rate Securities, failed auction
March 16, 2008
Fed announced Primary Dealer Credit Facility
March 17, 2008
JP Morgan Chase Acquired Bear Stearns with Treasury bid
September 7, 2008
FNMA and FHLMC placed into conservatorship
October 3, 2008
Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (TARP)
October 7, 2008
Commercial Paper Funding Facility established by the Fed
October 14, 2008
Temporary Liquidity Guarantee Program established by the FDIC
TARP Capital Purchase Program invests $125 Billion in 9 banks
October 21, 2008
Money Market Investor Funding Facility established by the Fed
February 17, 2009
$787 Billion American Recovery and Reinvestment Act signed into law
February 18, 2009
Homeowner Affordability and Stability Plan announced
March 18, 2009
Fed announced purchase of $750 Billion in agency debt and $300 Billion in longer term Treasury securities
March 23, 2009
Treasury announced details of the Public-Private Investment Program
September 15, 2008
Lehman Brothers filed for bankruptcy
Bank of America agreed to acquire Merrill Lynch
September 16, 2008
NY Fed agreed to lend $85 billion to AIG in exchange for 80% equity stake
Reserve Fund “breaks the buck”
September 19, 2008
ABCP Money Market Mutual Fund Liquidity Facility
Treasury to guarantee Money Market Funds
November 25, 2008
Treasury and the Fed announced the Term Asset Backed Securities Loan Facility
June 2007
New Century Bankruptcy
August 2007
Structured Investment Vehicles (SIV) liquidity issues
Observations and Outlook
The Financial Industry in Transition
September 18, 2009
Treasury Guarantee Program for Money Market Funds expires
Source: Various media outlets, Bloomberg
Page 6
Source: Bloomberg
Selected Money Market RatesFor the period December 1, 2006 to October 31, 2009
BNY Mellon Short Duration Market Review
0%
1%
2%
3%
4%
5%
6%
7%
12/1/2006 5/25/2007 11/16/2007 5/9/2008 10/28/2008 4/24/2009 10/13/2009
Yie
ld
1 Month Asset Backed Commercial Paper1 Month LIBOROvernight Fed EffectiveFed FundsTarget3 Month Treasury Bill
Page 7
Source: Bloomberg
Implied Fed Funds Target
0%
1%
2%
3%
4%
5%
Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
Rat
e
30-Jun-09
16-Nov-09
BNY Mellon Short Duration Market Review
Fed Watch November 16, 2009
2008 FOMC Schedule of MeetingsDate Rate Risk Assessment
Mar 18 2.25 Downside RiskApr 30 2.00 Assessment OmittedJun 25 2.00 Inflation RiskAug 05 2.00 Inflation/GrowthSep 16 2.00 Inflation/GrowthOct 8 1.50 Inter-meetingOct 29 1.00 Risk to GrowthDec 16 0 - 0.25 Risk to Growth
2009 FOMC Schedule of MeetingsDate Rate Risk AssessmentStart 0 - 0.25 Risk to Growth
Jan 28 0 - 0.25 Risk to GrowthMar 18 0 - 0.25 Risk to GrowthApr 29 0 - 0.25 Risk to GrowthJun 24 0 - 0.25 Risk to GrowthAug 12 0 - 0.25 Risk to GrowthSep 23 0 - 0.25 Risk to GrowthNov 04 0 - 0.25 Risk to GrowthDec 16
Page 8
Source: Bloomberg
Historical Short Term RatesFor the period October 1999 to October 2009
Historical Treasury Yield Curves (0-30 Years)October 31, 2009
0%
2%
4%
6%
8%
10%
Oct99
Oct00
Oct01
Oct02
Oct03
Oct04
Oct05
Oct06
Oct07
Oct08
Oct09
Yie
ld-to
-Wor
st
2 Year Treasury
3-Month LIBOR
Fed Funds Target
BNY Mellon Short Duration Market Review
0%
1%
2%
3%
4%
5%
6%
0 5 10 15 20 25 30
Years to MaturityY
ield
to M
atur
ity
12/31/2006 12/31/2007
12/31/2008 10/31/2009
Page 9
Source: Barclays Capital Inc. index data
Rolling One Year Excess Return as of October 31, 2009, 1-5 Year Corporate Index
BNY Mellon Short Duration Market Review
Rolling One Year Excess Return vs. Treasury Notes October 31, 2009
-15%
-10%
-5%
0%
5%
10%
15%
20%
Oct 89 Oct 91 Oct 93 Oct 95 Oct 97 Oct 99 Oct 01 Oct 03 Oct 05 Oct 07 Oct 09
Per
cent
(%)
S&LCrisis Russian Debt Default & LTC
Bursting Tech Bubble
Record Setting High Yield Downgrades & Defaults (Enron, W orldcom , Tyco)
Credit / Liquidity Crisis
Page 10
Source: News outlets, Barclays Capital
Observations and Outlook
Summaries of Global Policies – Bailout Strategies Federal Reserve Bank of England Bank of Japan European Central Bank
Policy Rate 0.00-0.25% 0.50% 0.10% 1.00%Asset Swaps Term Securities Lending Facility (TSLF) Special Liquidity Scheme : Banks can Facility to exchange collateral ineligible
swap high quality MBS for UK Treasury at ECB for eligible collateral by CBs in bills. Duration is 1 year but can be Italy (€40bn), Spain (€50bn) extended to 3 years.
Liquidity Programs Term Auction Facility (TAF) Discount Window Facility Corporate debt financing facility Main and supplementary longer-term refinancing operations (up to 6 months)
Term Asset Backed Securities Loan Additional longer term repos were expanded and will be carried Facility (TALF) operations through at full allotment.
Primary Dealer Credit Facility (PDCF)
Asset-backed CP Money Market Mutual Fund Facility (MMIFF)
Collateral Expansion Collateral expanded several times for Collateral expanded for repos and include Collateral expanded in Dec 08. New Expanded, includes CDs and various programs MBS, AAA-corporate and consumer ABS, minimum rating lowered to BBB from A. securities in USD, JPY and GBP.
and highly rated ABCP. Min. rating lowered to BBB- from A-.Private Asset Purchases Money Market Investor Funding Asset Purchase Facility (APF) Corporate bond purchase program Purchases of CP under discussion
Facility (MMIFF) at ECB Outright Purchases of CP
Commercial Paper Funding Facility
GSE purchaseTreasury Purchases Announced purchases of up to $300bn Asset Purchase Facility (APF) Increased purchases of Japanese
in Treasuries Government Bonds (JGBs) from banks from Ұ1.4trn to Ұ1.8trn a month. (Announced January 09)
FX Swaps Swap lines opened with other Central Unlimited dollar supply offered on a Unlimited dollar supply offered on a Unlimited dollar supply offered on a Banks, including several with emerging weekly basis. Swap lines with the Fed weekly basis. Swap lines with the Fed weekly basis. Swap lines with the Fed market economies. to increase accordingly. to increase accordingly. to increase accordingly.
Other Loans for AIG of $123bn and set up The Complementary Deposit Facility Maiden Lane LLC in March 08 to acquire will pay interest on excess reserves until assets of Bear Stearns to collateralize a April 09 $30bn loan to JP Morgan
Page 11
Observations and Outlook
The Consumer
Source: Bloomberg
Retail Sales
Personal Income and Spending
Households still deleveraging and limiting spending
Decline in borrowing has affected consumer spending
Consumer confidence and retail sales improving in UK and Eurozone, but US consumer continues to lag
Growth of income is important in the recovery
Spending will be done by households and businesses that do not need to borrow or that have good credit quality
Personal spending rose 0.9% in August due in part to the “Cash for Clunkers”program
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total
Retail Sales Less Autos
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Personal IncomePersonal Spending
Page 12
0
2
4
6
8
10
12
14
16
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Observations and Outlook
Housing
Source: Bloomberg
Personal Savings Rate Reaches 8%
Households increasing personal savings
Rising savings weighs on growth of consumer spending
Continued deleveraging of the consumer
Household Debt Service Ratio Falls to 10.5%
Personal Savings Rate
Target = 8%
0
2
4
6
8
10
12
14
16
196019
6219
64196619
6819
70197219
741976197819
80198219
841986198819
901992199419
96199820
0020
02200420
0620
08
Household Debt Service Ratio
Target = 10.5%
Page 13
Observations and Outlook
Housing Survey
Source: Bloomberg
U.S. Home Sales Months Supply
U.S. Sales Volume of New and Existing Homes
Housing supply is decreasing
Government initiatives have “kick started”the housing market, but that is not the entire story. Tax credits, plunging house prices and low mortgage levels are helping.
Sales are stabilizing
Prime borrowers now defaulting due to job losses
2
4
6
8
10
12
14
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
New Hom e Sales Months Supply
Exis ting Hom e Sales Months Supply
250
500
750
1,000
1,250
1,500
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 094,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500New Hom e Sales Thousands of Units (L)
Exis ting Hom e Sales Millions of Units (R)
Page 14
Source: Bloomberg
Observations and Outlook
Employment
Change in Non-Farm Payrolls
Unemployment Rate
Improving labor market
Decline in unemployment claims
Business still not hiring
-800
-600
-400
-200
0
200
400
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
$000
's
250
300
350
400
450
500
550
600
650
700
3 Month MA
Initial Jobless Claims 4 Week MA
3
4
5
6
7
8
9
10
11
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(%)
1,500
2,500
3,500
4,500
5,500
6,500
7,500Unemployment Rate (L)
Continuing Jobless Claims (R)
Page 15
Source: Bloomberg
Observations and Outlook
Unemployment Rates
Eurozone: Spain, Italy, Ireland – highest unemployment areas
All developed countries are stabilizing, but still increasing
Decline in unemployment number will take years to recover due to structural shifts in economies
-
2.00
4.00
6.00
8.00
10.00
12.00
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Rat
e (%
)
US UK Eurozone Japan
Page 16
Source: Bloomberg
Observations and Outlook
Manufacturing Sector
Global inventory rebuilding has started
Emerging markets are leading the way
Abundance of capacity, giving the Fed room to keep rates low for and extended period of time
65.0
70.0
75.0
80.0
85.0
90.0
Jan-7
3Ja
n-75
Jan-7
7Ja
n-79
Jan-8
1Ja
n-83
Jan-8
5Ja
n-87
Jan-8
9Ja
n-91
Jan-9
3Ja
n-95
Jan-9
7Ja
n-99
Jan-0
1Ja
n-03
Jan-0
5Ja
n-07
Jan-0
9
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0Capacity Utilization (%) (L) Industrial Production (YoY % Change) (R)
Page 17
Observations and Outlook
Global Economic Watch
Source: Bloomberg
Jobless rate continues to climb with the US at a 26 year high
US has lost 7.2 million jobs since December 2007 and needs at least 100,000 a month for projected population growth
Inflation is clearly not a problem at this point in the cycle
Americas
United States -2.30% 09/09 -0.20% 10/09 10.20% 10/09
Canada -4.00% 08/09 0.10% 10/09 8.60% 10/09
Europe
Eurozone -4.10% 09/09 -0.10% 10/09 9.70% 09/09
United Kingdom -5.20% 09/09 1.50% 10/09 7.80% 09/09
Asia/Pacific
Japan -4.50% 09/09 -2.20% 09/09 5.30% 09/09
China 8.90% 09/09 -0.50% 10/09 n.a.
India 6.10% 06/09 11.64% 09/09 n.a.
Jobless RateGross Domestic Product
Year-on-Year %Consumer Price Index
Year-on-Year %
Page 18
Source: Bloomberg
Observations and Outlook
Survey of Economic Forecasts
Country 2008 2009 (F) 2010 (F) 2008 2009 (F) 2010 (F)
United States 0.40 -2.60 2.40 3.85 -0.50 1.90
Euro Zone 0.70 -3.90 0.90 3.28 -- --
United Kingdom 0.70 -4.30 1.10 3.61 2.00 1.90
Japan -0.68 -5.95 0.80 1.38 -- --
Canada 0.54 -2.30 2.50 2.38 0.40 1.70
China 9.00 8.30 9.40 2.90 -0.60 2.70
India 7.48 -- -- 8.32 -- --
F = Forecast
Real GDP Consumer Price Index
Anemic growth in developed countries. Growth projections higher in emerging market countries
Deflation is still a threat
Emerging market consumers need to spend more
Page 19
Observations and Outlook
GDP vs. Asset Performance
Source: Bloomberg
US GDP vs. Asset Performance
UK GDP vs. Asset Performance
Europe GDP vs. Asset Performance
Japan GDP vs. Asset Performance
Similar scenario in developed countries
-3
-2
-1
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000GDP Actual (L) Long Yield (L) Equities (R)
-8
-6
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
GDP Annualized (L) Long Yield (L) Equities (R)
`
-3
-2
-1
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
1,000
2,000
3,000
4,000
5,000
6,000GDP Actual (L) Long Yield (L) Equities (R)
-15
-10
-5
0
5
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
5,000
10,000
15,000
20,000
25,000GDP Annualized (L) Long Yield (L) Equities (R)
Page 20
Observations and Outlook
Global Rates
Central Bank Rates
Official Rate Current Date Level Last MoveFed Funds Rate 0 - 0.25 Easing: Sep 17, 2007 5.25 Dec 2008 (-75-100)
Bank of Japan Overnight Rate 0.10 Easing: Oct 30, 2008 0.50 Dec 2008 (-20)
European Central Bank Repo Rate 1.00 Easing: Aug 8, 2008 4.25 May 2009 (-25)
Bank of England Bank Rate 0.50 Easing: Dec 6, 2007 5.75 Mar 2009 (-50)
Bank of Canada 0.25 Easing: Dec 4, 2007 4.50 Apr 2009 (-25)
China: Working Capital Rate 5.31 Easing: Sep 12, 2008 7.47 Dec 2008 (-27)
India: Repo Rate 3.25 Easing: Oct 1, 2008 9.00 Nov 2009 (-125)
Start of Cycle
Source: Bloomberg
The Reserve Bank of Australia (RBA) announced the first rate increase by a G20 country since the start of the credit crunch. The RBA raised the cash rate by 25 basis points to 3.25%. Other Asian banks may follow sooner than expected.
Other major central banks will be on hold until mid- to late-2010
Bank of England may move before the Federal Reserve or European Central Bank due to inflation concerns
Page 21
Observations and Outlook
International Monitor
Source: Bloomberg
3-Month LIBOR (%)
Long Yields (%)
Reduction in interbank rates are a welcome sign as systemic risks have been reduced
LIBOR now at 28.4 basis points. Euroland-EONIA now at 40.5 basis points.
Long term government bonds tracking in a narrow range
Yields low despite heavy new issuance
0
1
2
3
4
5
6
7
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Yie
ld (%
)
UK Euribor USD Japan
0
1
2
3
4
5
6
7
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Yie
ld (%
)
UK Gilt German Bund US 10yr Note JPY 10yr Bond
Page 22
Observations and Outlook
International Monitor
Source: Bloomberg
Equities
Global stock markets have improved as money has flowed back into riskier assets
0
5,000
10,000
15,000
20,000
25,00020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
200
400
600
800
1000
1200
1400
1600
1800UK FTSE 100 Germany DAX 30 JPY Nikkei 225 USD S&P 500 (R)
Page 23
Observations and Outlook
ABS Spreads
0
500
1000
1500
2000
2500
Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09
1-Year AAA (Home Equity)
3-Year AAA (Home Equity)
1-Year AAA (Credit Cards)
3-Year AAA (Credit Cards)
5-Year AAA (Credit Cards)
1-Year AAA (Autos)
3-Year AAA (Autos)
Outperformance in auto and credit card securities
Subprime and Alt-A securities also improving in recent months
Source: Bloomberg
Page 24
Observations and Outlook
Corporate Spreads
1-3 Year Corporate Spreads By Sector 1-3 Year Corporate Spreads By Rating
Finance, industrial and utility spreads nearly back to pre-Lehman levels
Lower credit quality has outperformed higher quality
Source: Bloomberg
0
200
400
600
800
1,000
1,200
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Industrial Utility Finance
0100200300400500600700800900
1,000
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
AAA AA A BBB
Page 25
Current Strategy Position
Economic Outlook
Key Economic Variables
Wage and Price Inflation
U.S. Economic Strength
Market Forces
Monetary Policy
Global Outlook
Little inflationary pressure from most sectors
Economy growing slowly; capital investment is very weak; consumer spending very weak
Improved equity, corporate markets due to declining risk aversion
Fed on hold until mid-2010
Global Central Banks on hold mid- to late-2010
Limited Duration Strategy
Slight short reflecting low levels of interest rates
Neutral as spreads are narrow
Yield spreads tighter; issue selection is critical
Good value, AAA quality, consumer auto and credit cards
Market is favoring higher risk credits
-100 0 100
Quality
ABS
Credit
Agency
Duration
Neutral
Source: CIS
Page 26
© 2009 The Dreyfus Corporation.
Short-term corporate, asset-backed, and municipal securities holdings, while rated in the highest rating category by one or more NRSRO (or
if an unrated municipal, deemed of comparable quality by Dreyfus), involve credit and liquidity risks and risk of principal loss.
Separate account services are offered by BNY Mellon Cash Investment Strategies, a division of The Dreyfus Corporation, investment
advisor. BNY Mellon Cash Investment Services is a division of MBSC Securities Corporation, a registered broker/dealer. BNY Mellon Asset
Management is the umbrella organization for all of The Bank of New York Mellon Corporation’s affiliated investment management and
brokerage firms and is responsible for U.S. and non-U.S. retail, intermediary and institutional distribution of investment management and
related services.
Fort Lauderdale Police & Fire Retirement System
Investment Workshop 2009
Securities Litigation TrendsPresented by Maya Saxena
Maya Saxena
2009: A Wild Ride
• Massive Ponzi Schemes
• Subprime Meltdown
• During 2009 Public funds lost about 40% of their value through investment losses
The Subprime Meltdown and Its Domino Effect
From Mortgages to the Entire Financial Sector
Fighting Back: Shareholder Lawsuits
• 127 securities fraud lawsuits in first half of 2009 on track for over 250 this year
• 60% centered on credit crisis
• 80% against companies in the financial sector
Subprime-Related Litigation
Countrywide Merrill Lynch New Century FinancialLehman Bros Ratings agencies (Moody’s)
Proposed Legislation to Aid Investors
2008: Stoneridge
Investment: protects “secondary actors” from civil liability even if they commit criminal acts
If you help a corporation commit securities fraud -“aiding and abetting” there is no private right of action only the SEC can enforce
Little investor confidence in SEC post-Madoff
Aiding and Abetting Act by Senator Specter
“Greed is Right. Greed Works.” Gordon Gecko, Oliver Stone’s antihero in WallStreet
Unprecedented Losses in Ponzi Schemes
Public funds have sustained billions in losses due to investments in Madoff“feeder-funds” and funds that invested in Madoff securities such as:
Fairfield Greenwich Group
Ascot Partners Tremont Group Collins Capital
Robert Allen Stanford Chairman and CEO of Stanford Financial
Ponzi-Related Litigation
“Negligence” standard failing to perform adequate
due diligence on the legitimacy of the investment
BUT:
Significant problems with collectibility andenforcement of judgments
Case Estimated Loss RecommendationAccuray $86,000 Pass: “In and Out”Genzyme $4100 Pass: Too SmallInt’l Game Tech $44,000 Pass: MeritsConseco $160,000 Pass: Minor acct’g
issueTextron $65,000 Pass: Too SmallCoventry $311,000 Pass: Too SmallMen’s Wearhouse $32,000 Pass: Too SmallCVS Caremark $474,000 Pass: MeritsSunpower $76,000 Pass: Too SmallNorthwest Pipe $74,000 Pass: “In and Out”
Total Estimated Fraud Related Losses in 2009: $1,326,100
Should Public Funds Serve as Lead Plaintiffs?
The probit regression on the determinants of having an institutional lead plaintiff is Formalized below:
26 D_INLEADit
= α
+ β
1D_IP it + β2 D_GAAPit
+ β3D_ACCTFIRMit + β4LCLASSit + β5CAR3it+ β6LOGPILit + β7LOGMVit + β8INSHAREit + β9BETAit +β10SKEWNESSit+β11LAGRETit
+ β12ROEit
+ β13BMit
+ β14LEVit
+ β15TURNOVERit+ β16REGit
+ β17TECHit
+ β18RETAILit+ YEAR DUMMIES + εit
Institutional Monitoring through Shareholder LitigationC.S. Agnes Cheng, Henry He Huang (2009)http://blogs.law.harvard.edu/corpgov/2009/05/28/institutional-monitoring-through-shareholder-litigation/
. . . “lawsuits with an institutional lead plaintiff are less likely to be dismissed and have significantly larger settlements and result in greater improvement in board independence.”
Lead Plaintiff Updates
Satyam
Case in NY
Solution: Use more than one
firm
Healthways case:
Fund not adequate
because of money
manager
Best Practices When Working With Multiple Law Firms
Establish a loss notification threshold: When do you want to be notified of a loss?
Ask the right questions about lead plaintiff opportunities – Why this case? What are the weaknesses? Are larger fundsmoving? Will we be part of a group?
- Is it a good deal for shareholders?
- Corporate Management does not always act in the best interests of public shareholders.
- Cases involve thwarting potential buyers by improper defensive mechanisms.
- Tender offer situations where majority shareholders are trying to “go private” at prices which are unfair to public minority shareholders.
Merger Related Litigation
- Board of Yahoo breached their fiduciary duties by refusing to respond in good faith to Microsoft offer.
- Adopted improper change of control employee severance plan - created over $2 billion in liabilities that an acquirer would have to pay.
- RESULT: Claims are settled and improper change-in-control terms are removed.
Detroit P&F lawsuit
Coral Springs Police Pension Fund lawsuit – the tender offer price is unfair and is too low, undervalues the company.
COX RADIO
Thank You 2424 N. Federal Highway, Suite 257Boca Raton, FL 33431561‐394‐3399 x [email protected]
AMERICAN CORE REALTY FUNDPortfolio Review
© 2009 American Realty AdvisorsSM. All rights reserved.
December 3, 2009
Fort Lauderdale Police and Fire Retirement System
801 N. Brand BoulevardSuite 800
Glendale, CA 91203(818) 545-1152
www.americanreal.com
Jay Butterfield, CFAManaging Director
Richelle HayesSenior Manager, Marketing and Client Service
1
American Realty AdvisorsAmerican is one of the largest privately-held real estate managers in the country and is 100% owned by its senior investment professionals
Over 21 years of firm experience – doing only real estate investment management
Strong capital structure – no firm level debt
No exposure to “risky” subprime/off-balance sheet debt or derivatives – no need for government bailout/support
There has been no litigation with clients regarding their investments impacting the firm or its principals and no recent changes in senior management, firm structure or ownership
No conflicts of interest related to our investment activities
American Realty Advisors
100% employee-owned
Clients have direct communication with Principals and Portfolio Managers
Transparency
Risk-ControlInstitutional Clients
2
One of the Largest Privately-Held Real Estate Managers in the U.S.
Over $3.7 billion in assets under management* firm-wide in core and value-added investment strategies
Open-end core/value-added real estate funds
Closed-end value-added real estate funds
Core/value-added separate accounts
QPAM/Takeover portfolios of assets
Development consulting services
Offices in Los Angeles, Atlanta, Chicago, Santa Fe and Orlando
*Assets under management represent gross value of all assets and accounts managed by American as of June 30, 2009(excluding partners' share of equity and partner's share of debt on partnership investments).
3
The “buy high and sell higher” world is goneReturn expectations on commercial real estate have increased from historic lows of 2007
Fundamentals (rents and demand) are weak – reflection of the economics of the market2006-2007 underwriting called for large growth in rents that never materialized
Today’s reality is that cash flow will be flat/declining in the short run
Less transactions make pricing more attractive
Transaction levels down 94% off the peak
Prices down as much as 35-40% from the peak
Today’s Commercial Real Estate Market Opportunities
4
Lack of Credit Will Force Sales of Assets as Loans Come DueDefaults have recently picked up, despite loose terms that called for little, if any, pay-down of principal
Over $1 trillion of commercial real estate loan maturities may occur by 2012
Owners will be required to increase equity contributions to existing assets
This is an opportunity for funds with capital to invest
5
Refinancing will require large equity investments
* LTV calculated off the appraised value would have been lower. Appraised values were often inflated during the boom.
Source: ARA Research
Those With Capital Will Drive Transactions for the Next 18-36 Months
Mortgage Proceeds on a Property Valued at $100 Million in '07 vs Now
$100
$63
$75
$38
$0
$20
$40
$60
$80
$100
$120
2007; LTV=75%* 2009; LTV=60%
Property Value Mortgage
A 35-40% decline in value combined with tighter loan terms translates into
a $37 million shortfall (50% of the original loan amount) on maturity.
Who will write this check?
6
Market pricing is now based on an overly negative outlook and expectation of slow recoveryThose with capital who buy on pessimism-based/in-place income –not future appreciation – have a significant advantageContinue to seek quality assets in strong marketsCarefully underwrite risk to capture strongest returns and protect downside exposure
IN THE MIDST OF UNCERTAINTY,THERE IS A CLEAR OPPORTUNITY TO CAPTURE QUALITY NEW INVESTMENTS AT LOWER PRICES
What Does This Mean for Core Real Estate?
7
In today’s market, all investments may be “opportunistic”
Market Characteristics4 Limited lease rollover4 Multi-tenant properties4 No forward commitments4 Strong institutional markets
with lower vacancies4 Low basis compared to
market4 Conservative underwriting
American’s Investment Strategy: Core and Value Investment Opportunities Today Look Similar
Product Types4 Office4 Industrial4 Multi-family4 Retail
Locations4 Southern California4 Seattle4 San Francisco/Bay Area4 Boston4 Chicago
American’s strategies will be differentiated by outlook of risk
8
American’s Investment Strategy: The Key is in the Risk Structure
Core Investments – StrategyLeverage
15%-25% initiallyIncrease to 25%-35% in a recovery market
Lease up80%+ occupancyStrong credit tenancy
ManagementFocus on managing stabilized income producing properties with temporary correctable issues
Value-Added Investments – Strategy Leverage
30%-40% initiallyIncrease to 50%-60% in a recovery market
Lease up60-70% occupancyUnderwrite credit tenancy selectively
ManagementFocus on correcting more complex management/property/financial deficiencies
9
12.7%
10.5%
14.4%
12.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1982 1994 2002 Average
Average 3-Year Unleveraged Total Return - NCREIF Property Index
Source: NCREIF, ARA Research
Investing in Downturns Results in Higher Returns In periods of weak economic performance in 1982, 1994 and 2002, total returns on investments made in private real estate averaged 12.5% over the next three years,
This is 3.6% higher than the long-term average for real estate
Year
10
Indicators to Look for in Advance of a RecoveryOpportunistic InvestingValue-added StrategyDiscounted PricingDistressed Debt
Falling MarketMinimize Downside RisksDebt Returns Exceed Equity
Expansionary EconomyCore Investment GrowthDevelopment/RedevelopmentLease Up Strategies
Market RecoveryRisk Minimization
High Risk/High Return Potential
4Q07Financing Risk
Premiums Skyrocket
Normal (?) Economic Expansion . . .
but not “back to where we were”Employment Growth
Resumes
2Q07Peak in Real Estate Prices
2Q08Increasing Job Losses
Real Estate Sales Volumes Fall
Commodity Spike
3Q08Energy Prices Decline
Financial Industry Crises
Housing Prices Stabilize
Commercial Real Estate Transactions
Resume --Forced Sales??
1H09 Economic StimulusStock Market Rally Starts
Increase in Global Demand
Best Guess 2010???Consumer Spending/
Increasing Liquidity
3Q09 Job LossesSlow but Continue/
Liquidity Crunch
4Q09 Dollar PlummetsUnemployment at 10%+
11
But What Will That Recovery Look Like?
12
American Core Realty Fund A Diversified Core Equity Real Estate Strategy
169 clients
$1.5 billion Gross Market Value invested in 78 properties nationwide (09/30/09)
13
The American Core Realty Fund is a open-end core commingled fund – risk management is essential in today’s market environment
Consistent long-term investment strategy – no style drift – focus on core assets only
Fund Strategy:
Diversified pool of stable core operating real estate assets:
4 Stable, predictable income
4 Income represents majority of expected long-term total return
4 Diversified rent roll
Multi-tenant
Economically diverse
Staggered lease expirations
Focused on a Pure Core Strategy to Manage Risk
14
Fund Strategy – low risk approach in today’s market:
Existing institutional quality office, retail, industrial, and multi-family properties in strong, growing, and/or supply-constrained diversified metropolitan areas nationwide
Geographic, property type, and economic diversification to reduce risk – Focus on institutional markets
Target properties that:
4
show strong and consistent long-term tenant and buyer demand
4
have limited or no deferred maintenance, minimal need for capital expenditures and no functional obsolescence
4
are substantially leased
4
occupy superior locations within each market
Strong focus on “downside” risk control
High Quality Well-Positioned Assets Nationwide
15
Investment Objectives
Steady income returns
Long-term appreciation
Exceed the NCREIF Property Index benchmark
Fiduciary Responsibility
American is an ERISA fiduciary with respect to the investments made by the American Core Realty Fund and acknowledges this in writing
NOTE: All investments such as the American Core Realty Fund may be subject to loss of capital and there is no guarantee that the above goals will be achieved over all time periods.
American Core Realty Fund
16
Each property is appraised by an independent MAI appraiser at least once every 12 monthsApproximately 25% of the portfolio externally valued each quarterInternal valuations are completed quarterlyPwC – Independent Valuation Advisor – third-party oversight of all valuationsAmerican claims compliance with GIPS® on a firm-wide basis and composite returns are externally examined*
* American Realty Advisors’ compliance with the GIPS® standards has been verified on a firm-wide basis for the period January 1, 2001 through June 30, 2009 by Ashland Partners & Company, LLP. Please see the Core Equity Real Estate Investments Composite Annual Disclosure Presentation at the end of this
presentation. A complete list and description of American’s composites and verification reports are available upon request.
American Core Realty Fund – Valuations
17
Fund established a redemption queue in 4Q 2008 as the significant decline in stock market value caused clients to seek to rebalance their portfolios
Total redemption requests to date $ 227,101,504
Paid (64,971,821)
Rescinded (19,072,226)
Outstanding requests as of 12/03/09 (45 clients) $143,057,457
Current requests = 11.8% of NAVNo new requests since 2Q 2009Expect to continue to pay on the redemption queue into 2010The Fund has on-going cash flow as well as over $100 million in undrawn commitments available for new acquisitions, Fund operations, andredemptions.
American Core Realty Fund – Liquidity
18
Diversification Across Major Markets Nationwide
NOTE: Represents the American Core Realty Fund’s investments as of September 30, 2009. Information provided is supplemental to the attached Core Equity Real Estate Investments Composite Annual Disclosure Presentation.
% Leased as of September 30, 2009
91% Multi-Family Office Industrial Retail
Property Type
W estM idwest
East
South
Seattle
Portland
Denver
San Francisco
San Jose
San Diego
Los Angeles
Orange County
Phoenix
Austin
DallasMiami
Jacksonville
Nashville
Atlanta
Boston
RaleighNorthern Virginia
BaltimoreWashington, DC
PhiladelphiaNorthern NJLong Island, NY
Cincinnati
MinneapolisChicago/Cook County
Suburban Chicago
W estW estM idwestM idwest
EastEast
SouthSouth
SeattleSeattle
PortlandPortland
DenverDenver
San Francisco
San Jose
San Diego
Los AngelesLos Angeles
Orange County
Phoenix
Austin
DallasMiami
JacksonvilleJacksonville
Nashville
AtlantaAtlanta
BostonBoston
RaleighNorthern Virginia
BaltimoreBaltimoreWashington, DCWashington, DC
PhiladelphiaPhiladelphiaNorthern NJLong Island, NYLong Island, NY
Cincinnati
MinneapolisChicago/Cook County
Suburban Chicago
19
NOTE: Portfolio Diversification is based on the American Core Realty Fund’s gross market value of properties. The Information presented above is based on data as of September 30, 2009.
Information provided is supplemental to the attached Core Equity Real Estate Investments Composite Annual Disclosure Presentation.
Broad Property Type, Size and Geographic Diversification
Property SizeProperty Type Geographic Region
Additional Fund MetricsAs of September 30, 2009
NAV: $ 1.2 Billion
Loan to Value Ratio: 22.5%
Office 38.4%
Industrial 22.7%
Multi-Family 24.9%Retail
14.0%South 26.4%
Midwest 11.8%
East 32.3%
West 29.5%
$50 M - $100 M 24.8%
$0 - $25 M 27.3%
$25 M - $50 M 47.9%
20
American Core Realty Fund – Highlights
ALARA® is a registered service mark owned by American Realty AdvisorsSM and is used under license.
ALARA® Harbour Pointe230-Unit Multi-Family Community Mukilteo, WA
150 N. Wacker Drive243,616 sq. ft. Office Building Chicago, IL
150 North Wacker is strategically located in the prestigious West Loop submarket of the Chicago Central Business District. The West Loop is widely considered to be the dominant submarket in Chicago.
Property situated one block from Ogilvie Station and two and a half blocks from Union Station, providing quick and convenient transportation to downtown Chicago.
American is continuing to upgrade building finishes to maintain the property’s historically high occupancy and rent levels.
ALARA Harbour Pointe is located near Everett, Washington, home to a diverse range of corporate employers, including Boeing, TRW, JanSport and Allied Technology.
Property has an appealing location at the north end of Seattle's Technology corridor.
Strategically positioned location with high barriers-to-entry limiting potential competition, severe shortage of multi-family land, and arduous environmental regulations.
Percent Leased: 85%
Year Built: 1970
Major Tenants: Transwestern Investment Hometown America HDI Gerhling
Percent Leased: 94%
Year Built: 1998
21
Waldorf Marketplace II168,177 sq. ft. Shopping Center Waldorf, MD
Multi-state Industrial PortfolioOver 1,000,000 sq. ft. Industrial PortfolioCincinnati, Chicago and Atlanta
All of the properties in the portfolio contain state-of-the-art ESFR sprinkler systems and a minimum 50’ x 50’ interior column spacing providing tenants with considerable storage capacity and flexibility.
Each of the properties is well-located in proven warehouse distribution markets in the central regions of the U.S.
Each of the properties has long-term leases in place with contracted rentals that are generally subject to annual or periodic escalation.
Waldorf Marketplace II is a newly constructed retail shopping center located approximately 15 miles south of the Capital Beltway (I-495) in Waldorf, MD.
Property is anchored by major, national retail tenants including TJ Maxx/Home Goods, DSW, and Kincaid Home Furnishings and include two out-parcels ground leased to TGI Fridays and Mimi’s Café.
This investment complements Waldorf Marketplace I, a community shopping center that American purchased for the Fund in 2005.
Percent Leased: 100%
Year Built: 2005-2007
Major Tenants: Uniform Direct The Pampered ChefGSI CommerceLincoln Electric
Percent Leased: 97%
Year Built: 2007
Major Tenants: Home Goods Kincaid
American Core Realty Fund – Highlights
22
$25,000,000 commitment with initial investment made on July 2, 2007
Account Balance as of September 30, 2009: $18,239,099.98
Fort Lauderdale Police and Fire Retirement System
2007 25,000,000.00$
Contributions
Inception-to-Date
Original Commitment 25,000,000$ Withdrawals -$ Distributions -$ Net Income 2,157,674$ Realized Gains 332,864$ Unrealized Losses (9,251,438)$
Ending Net Asset Value 18,239,100$
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 2009
23
*Annualized
PerformanceAmerican Core Realty Fund
Gross of Fees3Q09 Year-to-Date One-Year
Income 1.34% 3.98% 5.05% 4.80%Appreciation -10.97% -30.06% -36.05% -16.49%Total Return -9.62% -26.92% -32.42% -12.28%
NFI-ODCE -7.32% -27.23% -35.19% -18.22%
Net of Fees3Q09 Year-to-Date One-Year
Income 1.13% 3.34% 4.18% 3.90%Appreciation -10.97% -30.06% -36.05% -16.49%Total Return -9.83% -27.42% -33.05% -13.06%
NFI-ODCE -7.52% -27.72% -35.70% -18.90%
PERFORMANCE HISTORY AS OF SEPTEMBER 30, 2009Since Inception*
(07/02/2007)
Since Inception*(07/02/2007)
PERFORMANCE DISCLAIMER:The returns above are for the Fort Lauderdale Police and Fire Retirement System and include leveraged returns before (gross) and after (net) the deduction of investment management fees and reflect the reinvestment of some income. The above performance is considered supplemental information and complements the Core Equity Real Estate Investments Composite performance in the attached Annual Disclosure Presentation. The sum of annualized component returns may not equal the total return due to the chain-linking of quarterly returns. Past performance is not a guarantee of future results and it is important to understand that investments of the type made by the Fund pose the potential for loss of capital over any time period.
24
Rolling 5-Year Annualized Return
Source: NCREIF, ARA Research
Keep a Long-Term Perspective – Real Estate’s Income Return Represents Over 80% of Return
Historically, the income return for real estate is in the 6% to 8% range
While representing under 20% of the long-run return, the volatility of appreciation returns is 8 times greater than income returns
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
3Q83
3Q85
3Q87
3Q89
3Q91
3Q93
3Q95
3Q97
3Q99
3Q01
3Q03
3Q05
3Q07
3Q09
Income ReturnAppreciation Return
Sources of Returns - 30 Years as of 3Q09Income Appreciation Total
Average Return 7.6% 0.8% 8.5%% of Return 90% 10% 100%Standard DeviationOf Return 0.5% 4.5% 4.6%
Source: NCREIF, ARA Research
25
American Realty AdvisorsReal Estate Focus: Firm philosophy and process focused exclusively on private real estate transactions – 21-year firm track record
Working with Decision Makers: Firm is 100% owned by senior management
Disciplined Process: Research-based investment management focusing on risk control and value-realization
Client Orientation: Core and value-added strategies available in separate accounts and commingled funds to meet specific needs
Performance: Strong long-term performance. Experience in investing in all phases of the real estate cycle
Risk Control: Long-term record of understanding and underwriting risk
DISCIPLINE COMMITMENT EXCELLENCE
26
American Realty Advisors
Mission Statement
Our mission is to create and implement client focused institutional real estate
investment strategies providing superior returns, capital preservation and growth,
delivered with the highest level of integrity, communication, and service.
27
Today’s Presenters
Richelle Hayes, Senior Manager, Marketing and Client Service Richelle Hayes is responsible for developing and expanding client and consultant relationships for American’s commingled fund clients, and is based out of American’s Orlando office. She has over 19 years of experience in the financial services industry. Most recently, she was Vice President of Client Services for ICC Capital Management in Orlando, where she worked closely with clients andconsultants based in the Southeast. Prior to joining ICC, she was Vice President, Corporate Relations with the American HospitalAssociation in Florida, and was responsible for developing client relationships with senior executives of member hospitals, followingvarious positions in financial relationship management within the national managed health care industry. Ms. Hayes graduated fromUniversity of Central Florida with a degree in Business Administration and a concentration in Finance, and earned an M.A. in HealthServices Management and an M.B.A. from Webster University.
Jay Butterfield, CFA, Managing Director, Fund/Separate Account Operations Jay Butterfield is the Managing Director for the firm’s Marketing and Client Service Team. Mr. Butterfield is responsible foroverseeing the Fund level operations of American’s commingled and separate accounts and for directing marketing and clientservice for American's real estate products and services to the institutional investment community. Mr. Butterfield is also a memberof the firm’s Executive Committee. He has over 31 years of experience in working with pension plan sponsors in helping them tomeet their investment needs. Prior to joining American, Mr. Butterfield was Vice-President with Prudential Investments, where he represented the firm's multi-asset investment capabilities to Taft-Hartley plans, public employee retirement systems and corporateplan sponsors in the Western United States and Canada. Mr. Butterfield graduated from the University of California, Berkeley with
a B.A. in Economics and received his M.A. in Economics from the University of California, Los Angeles. He is a Chartered Financial Analyst and amember of the Los Angeles Society of Financial Analysts.
28
This presentation is for your information only and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments. The information in this presentation has been obtained or derived from sources believed by American Realty Advisors (“American”) to be reliable but American does not represent that this information is accurate or complete. Any opinions or estimates contained in this presentation represent the judgment of American at the time this presentation was prepared and are subject to change without notice. Performance analysis is based on certain assumptions with respect to significant factors that may prove not to be as assumed. You should understand these assumptions and evaluate whether they are appropriate for your purposes. Performance results are often based on mathematical models that use inputs to calculate results. As with all models, results may vary significantly depending upon the value of the inputs given. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce.
This presentation should be considered confidential and may not be reproduced in whole or in part, and may not be circulated or redelivered to any person without the prior written consent of American. This presentation is intended for Fund investors, their consultants, and prospective investors only. Past performance is not a guide to or otherwise indicative of future results. As with all investments there are associated inherent risks. The investments made by the Fund and described herein are not FDIC insured, are not bank guaranteed, are not guaranteed by American and may lose value.
Forward-Looking Statements
This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions. American Realty Advisors (“American”) cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and American assumes no duty to and does not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
In addition to factors previously disclosed in the Fund’s disclosure documents and those identified elsewhere in this presentation, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies by American on behalf of the Fund and/or by others in its industry; (2) changes in political, economic or industry conditions, the interest rate environment or financial and capital markets; (3) the relative and absolute investment performance and operations of the Fund’s investments; (4) the impact of increased competition in the financial, capital and real estate markets; (5) the impact of capital improvement projects in the real estate markets; (6) the impact of future acquisitions and divestitures by the Fund, its competitors and other participants in the financial, capital and real estate markets; (7) the favorable or unfavorable resolution of legal proceedings affecting the Fund’s investments; (8) the impact, extent and timing of technological changes; (9) the impact of legislative and regulatory actions and reforms and increasing regulatory, supervisory or enforcement actions of government agencies relating to the Fund’s investments; (10) terrorist activities, which may adversely affect the general economy, real estate, financial and capital markets and specific industries; (11) the ability of American to attract and retain highly talented professionals; and (12) the impact of changes to the tax code and tax legislation in general.
Disclosures
29
Core Equity Real Estate Investments Composite Annual Disclosure Presentation
Core Equity Real Estate Investments Composite is comprised primarily of fully operational, stabilized, income-producing properties of four property types: institutional office, industrial, retail and multi-family, diversified nationwide in markets with above-average growth potential. For comparison purposes this composite is measured against the NCREIF Property Index (NPI). The NPI is an unmanaged index published by the National Council of Real Estate Investment Fiduciaries. NPI returns are calculated unleveraged and are shown before (gross) the deduction of any investment management fees. Although the Core Equity Real Estate Investments Composite may invest in similar property types as the NPI, the weighting of each property type will differ from the NPI in any measurement period. Unlike the NPI, the portfolios in the composite are actively managed. Furthermore, the portfolios are invested in substantially fewer assets than the number of investments comprising the NPI. The NPI does not reflect payment of investment management or other fees or expenses. Because of these differences, the NPI should not be relied upon as an accurate measure of comparison. It is important to understand that investments of the type included in the composite pose the potential for loss of capital over any time period.
American Realty Advisors has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).
American Realty Advisors, founded in 1988, is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 and has qualified as a Qualified Professional Asset Manager (QPAM), investment manager and fiduciary under ERISA. The firm maintains a complete list and description of composites, which is available upon request.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. All accounts managed by American Realty Advisors are considered "discretionary" for purposes of determining composite membership, except those that contain investment guidelines significantly restricting the management team’s ability to manage the assets according to the applicable product mandate. Past performance is not a guarantee of future results and it is important to understand that investments of the type included above pose the potential for loss of capital over any time period.
* Assets under management represent the gross value of all assets and accounts managed by American Realty Advisors (excluding partners' share of equity and partners' share of debt on partnership investments). Prior to March 31, 2008, American reported total firm assets as the amount of assets under management plus undrawn capital commitments and noted the amount of such undrawn commitments in a footnote. Effective March 31, 2008, American has restated year end total firm assets from 2001-2007 to omit such undrawn commitments.
** Each account in the composite represents a single property investment.
Total Firm Composite Assets Annual Performance Results
Year Assets* U.S. Dollars Number of Composite Dispersion
End (millions) (millions) Accounts** Income Appreciation Total NPI High Low
2008 4,219 3,264 94 4.94% (10.04%) (5.48%) (6.46%) 16.98% (60.84%) 2007 4,363 3,337 88 5.50% 14.65% 20.74% 15.85% 69.41% (18.27%) 2006 3,392 2,622 84 5.71% 9.94% 16.07% 16.60% 51.17% (26.60%) 2005 2,523 2,038 74 6.16% 14.61% 21.43% 20.06% 73.93% (35.67%) 2004 1,423 1,290 51 7.37% 4.23% 11.83% 14.49% 53.78% (39.46%) 2003 1,194 896 46 8.71% 1.50% 10.31% 9.00% 249.64% (49.65%) 2002 983 690 37 8.69% (1.12%) 7.50% 6.75% 23.77% (15.07%) 2001 1,058 589 35 9.49% (2.23%) 7.10% 7.28% 14.58% (9.04%)
30
The U.S. Dollar is the currency used to express performance. Income and capital appreciation component returns are presented, in addition to the total composite. The income return measures the portion of the composite’s total return that is generated by the income from the operations during the period. The appreciation return measures the portion of the composite’s total return that is generated from the change in the market value of the assets during the period. Performance returns are computed using the NCREIF mandated property level return formulas, which calculate time-weighted returns for real estate investments by geometrically linking component returns. The sum of income return and the capital return may not equal the total return for annualized periods due to the chain-linking of quarterly returns.
Real estate values are based upon independent appraisals performed for commingled funds annually on or about the asset’s acquisition anniversary date and for separate accounts every three years, or otherwise as required by each account’s Investment Management Agreement. Internal valuations are conducted quarterly and are used on an interim basis. Market values represent the value at which a willing buyer and seller would agree upon in an arm’s length transaction, without any pressure to consummate the transaction on the imposed deadline. The market value does not include costs to consummate the transaction. Various approaches have been used to determine market value, including the Cost, Sales Comparison and Income approaches. Additional information regarding valuation methods is available upon request. All valuations of real estate involve subjective judgments, as the actual market price of real estate can be determined only by negotiations between independent parties in sales transactions. As of December 31, 2008, December 31, 2007 and December 31, 2006, 82%, 53% and 51%, respectively, on a market value basis, of the real estate assets in the composite had been appraised by independent appraisal firms during the year ended on such dates.
All composite returns are presented gross of management fees. Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. The collection of fees produces a compounding effect on the total rate of return net of management fees. As an example, the effect of investment management fees on the total value of a client’s portfolio assuming (a) quarterly fee assessment, (b) $1,000,000 investment, (c) portfolio return of 8% a year, and (d) 1.00% annual investment advisory fee would be $10,416 in the first year, and cumulative effects of $59,816 over five years and $143,430 over ten years. The highest and lowest annual gross of management fee property returns are shown as a measure of composite dispersion. Additional information regarding the policies for calculating and reporting returns is available upon request.
As discussed below, asset management fees vary for each fund and portfolio managed by American Realty Advisors. The fees are based on a variable which generally consists of original acquisition cost, net asset value, net operating income or gross value. Some fee arrangements provide for the lower or higher of two variables. The low end of the range is equal to 0.45% of acquisition cost with the high end of the range based on 0.80% of gross value.
The fee structure for the largest fund that American Realty Advisors manages is dependent on the level of commitment made by the investor and ranges from 0.85% to 1.10% of net asset value.
Incentive fees may also be charged. Incentive fee structures differ for each client; however, such fees are generally based upon achieving stipulated internal rate of return hurdles.
In most cases, the use of leverage is not a primary component of the investment return strategy. Leverage is used primarily for making additional acquisitions. While fixed rate leverage is preferred, floating rate debt with interest rate caps is considered when pricing is favorable. The firm’s leverage strategy takes into account a wide variety of factors and is designed to control for risks associated with the operating and leasing strategies of the underlying properties. Leverage in separate account portfolios would only be used if approved by the client’s investment guidelines and only when there is a significant positive spread between the capitalization rate for the acquisition of the asset and the cost of the loan. Fixed rate leverage would be used, but only if it enhances the overall yield of the investment and provides for enhanced disposition opportunities associated with the use of leverage.
The Core Equity Real Estate Investments Composite was created on January 1, 1992. American Realty Advisors' compliance with the GIPS standards has been verified for the period January 1, 2001 through June 30, 2009 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Core Equity Real Estate Investments Composite beginning January 1, 2001. A copy of the verification report is available upon request.
Core Equity Real Estate Investments Composite Annual Disclosure Presentation
F:\F\W\PowerPoint\Stable Value Fund\Client Reviews\Fort Lauderdale Police and Fire Retirement System\Fort Lauderdale Police and Fire Retirement System 12-03-09_Final.ppt11/24/2009 8:26 AM
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTIONPrudential Real Estate Investors, 8 Campus Drive, Parsippany, NJ 07054, Tel: (973) 734-1300, Fax: (973) 683-1790
PRISA II Performance Review
December 3, 2009
PREI®
Prudential Real Estate Investors
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
I. Real Estate Market Overview
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Deleveraging Effects Will Be Felt For Several Years
Sources: Federal Reserve; PREI Research
• Deleveraging is proceeding slowly.
• Delinquency rates have increased meaningfully, but most borrowers & lenders are extending loan maturities wherever possible.
• An immense funding gap exists for maturing loans that will be filled by a combination of lender discounts and fresh capital.
Real Estate Market Overview
Page 2
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Market Correction Highlights Asset Deflation
Sources: Moody’s; PREI Research
• Commercial property values have fallen sharply from their peak in 2007.
• Peak-to-trough declines are expected to be 40% to 50%.
• The full extent of such declines have yet to be recognized by most appraisal-based funds or indices, e.g. NCREIF.
• The transactions market has strengthened modestly and will help speed the process of resetting values.
Real Estate Market Overview
Page 3
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Sources: Property & Portfolio Research; PREI Research
• Market fundamentals are weakening for all property types.
• So long as unemployment continues to increase, demand will be weak and vacancies will rise.
• As a result, it could be 24-36 months before market conditions show improvement.
• This uncertainty further contributes to the downward pressure on values.
Forecast
Dismal Job Outlook Weighs on All Property Sectors
Real Estate Market Overview
Page 4
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Is There a “Silver Lining”?
Real Estate Market Overview
Despite current market gloom, we believe the recent turmoil will produce some exciting opportunities.
• Funding gap will persist over an extended period, increasingly causing distress among banks and property owners:
– Historic opportunity to buy and originate debt in the US and Western Europe
– Opportunity for those with capital to acquire properties at attractive prices
• Public companies that have strengthened balance sheets may provide competition for acquisitions but offer potential rewards to investors both here and abroad.
• Faster recovery may provide a growth story for investment in South America (Brazil, Chile) and parts of Asia.
Page 5
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Evolution of 2009
• Early 2009
– Concerns about liquidity
– Lack of visibility with respect to value stabilization
– Impact of value declines on loan covenants
– Frozen transactions market
• Late 2009
– Liquidity is of lesser concern
– Value losses have moderated
– Loan covenants have been modified
– Transactions market is gaining some steam
– More focus on positioning the funds for recovery, raising and deploying capital in 2010 and 2011
Real Estate Market Overview
Page 6
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
II. PRISA II Performance Review
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Executive Summary
• Value declines continued to moderate in 3Q09. PRISA II’s portfolio declined in value by 12.09% for a total return of -10.20%.*
• PRISA II’s peak to trough value decline is projected to reach approximately 65% (-40% unleveraged) by early 2010. Through 9/30/09 declines total -55.8% (-33.7% unleveraged).
• PRISA II’s cap rate increased by 20 bps to 7.90%.
• Effective leverage is 57.2% as of 9/30/09. As the pipeline matures, loans are modified and sales occur, effective leverage could decrease to 43-48% by year end 2010.
• $361 million of loans were refinanced and/or extended in 3Q09. PRISA II has addressed $1,606 million of loans in 2009.
• PRISA II called $50 million of new client capital in 3Q09 and expects to call an additional $50 in the fourth quarter of 2009.
• The Fund’s liquidity has improved measurably since early 2009 as a result of loan modifications & pay downs, sales, new capital from clients and retention of cash flow.
* 3Q09 performance figure is gross before fees and is not indicative of future results.
Page 8
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PRISA II Profile
Strategy Core Plus, Open-EndGross Assets $6.2BNet Assets $3.5BLeverage 44.3%Effective Leverage 57.1%Cash $328.7M# of Investments 211
Inception Date July 1980# of Investors 123Remaining Commitments $402MDeposits (9/30) $50MWithdrawals (9/30) $0Distributions (9/30) $0Redemption Requests $396MRedemption Requests (%of NAV) 11.2%
Geographic Diversification(Based on GMV)
Property Type Diversification(Based on GMV)
As of September 30, 2009
* Performance objectives are not guaranteed. For more information on the NCREIF Property Index, please refer to the Appendix. Note: PRISA II is a group annuity insurance product issued through The Prudential Insurance Company of America, a wholly-owned subsidiary of Prudential Financial, Inc., Newark, NJ 07102.
The Account’s investment objective is to offer a diversified portfolio with superior income growth and appreciation potential over a complete market cycle.
Withdrawal requests decreased in 3Q09 as several investors reduced or cancelled pending redemptions.
Page 9
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Performance & Total Returns
3Q2009 2009 YTDTotal Return -10.20% -40.92%Income Return 1.89% 5.34%Appreciation Return -12.09% -46.26%Cash Flow Return 1.65% 4.62%Acquisitions $146.2 million $500.5 millionDispositions $247.0 million $320.2 million
For Periods Ending September 30, 2009
Repricing of risk, largely reflected by cap rate increases, has resulted in significant value declines and increased leverage.
Appraisers project further distress in space markets with lower market rents, increased concessions and longer absorption periods.
The income return will be a larger component of total return going forward.
Note: Performance reflects time-weighted rates of return before the deduction of management fees. Past performance is not indicative of future results.
Page 10
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Cumulative Prior Four Quarters Attribution Summary
• The cumulative leveraged decline for this period was -58.05% (-32.4% unleveraged).
• The PRISA II cap rate increased by 162 bps to 7.90%.
• With the exception of three “early stage” pipeline projects, all investments have been appraised and reflected in 3Q09 NAV.
• Generally the value declines were broad based with no significant variation among property type or region. The effect of leverage and level of development activity resulted in variability by property type.
Sector Cap Rate as of 9/30/09:
Residential: 6.98%
Hotel: 8.78%
Office: 7.88%
Retail: 8.28%
Self Storage: 8.26%
Sources of Value Decline 9/30/08 to 9/30/09
(Millions)Percentage
PointsPercentage
of TotalOperating Investments ($2,464.5) -38.41% 66.16%Developments (631.0) -9.83% 16.94%Predevelopments (481.6) -7.51% 12.93%Mezz./Preferred Equity (164.7) -2.57% 4.42%Mark to Market of Debt 17.0 0.27% -0.46%Total Decline ($3,724.8) -58.05% 100.00%
Page 11
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PRISA II Leasing & Operations
1 Includes lease-up and substantially completed development projects.2 Unleveraged income for the nine months ending 9/30/09 vs. the nine months ending 9/30/08.
• Year over year PRISA II same property income growth was -2.34% unleveraged, -3.9% leveraged. Office income has been driven by free rent periods expiring and is not likely to continue in today’s economic environment.
• Demand weakness is evident in all property types.
PRISA II targets appreciation return by accepting market leasing risk. This strategy can negatively impact performance when the economy contracts.
Office Retail Apartment Hotel Self-StorageOccupancy - Operating Properties - 9/30/09 82.2% 86.5% 92.7% 55.7% 83.2%Occupancy - Operating Properties - 9/30/08 85.5% 91.1% 93.4% 61.5% 85.6%Occupancy - with Development Assets - 9/30/091 68.6% 81.5% 87.6% 55.7% 83.2%Lease Rollover
Bal. 2009 1.2% 1.9%2010 9.8% 7.8%2011 11.1% 9.8%2012 7.4% 6.9%2013 5.1% 9.5%
Same Property Income Growth2 10.6% -3.6% -5.6% -62.4% -4.9%
PRISA II Occupancy and Rollover
Page 12
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PRISA II: Investment Commitment Pipeline
PRISA II’s commitments reflect an emphasis to the apartment sector which should be the first sector to recover.
Development activity has been mostly financed with debt. Development
(Based on GMV)
No. ofInvestments
Cumulative Value Decline (%)
Cumulative Value Decline ($M)
9/30/09 GMV ($M)
Development 35 -30.9% ($566.2) $1,273.7
Predevelopment 35 -47.5% ($560.5) $618.7
Total 70 ($1,126.7) $1,892.4
Predevelopment Land (intend use)(Based on GMV)
Page 13
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Pipeline Outlook
Completed projects
• Constructions loans will be extended wherever possible
• Leasing efforts for apartment projects have delivered positive results. While office and retail benefit from some preleasing, both property types are expected to struggle in the near term
• Projects with stabilized occupancy may be sold prior to loan maturity
Projects under construction
• Generally have been valued significantly below costs expended to date
• Projects are well located and are typically "Class A" construction
Predevelopment projects
• Many projects are unlikely to advance to construction
• A limited number of apartment projects could advance to construction upon market recovery
• Land positions are difficult to exit
• Partners' ability to fund obligations is uncertain and has resulted in a large loss reserve and partnership restructurings
Current appraisal underwriting suggests some value recovery as occupancy stabilizes.
12 of 35 development projects increased in value from 2Q09 to 3Q09.
Page 14
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Portfolio Review - Debt Summary
The decline in asset values has increased the Account’s leverage ratio.
The Account has benefited from a low cost of debt.
Portfolio line of credit: $200 million with $0 outstanding at 9/30/09.
Weighted Average Cost of Fixed-Rate Debt 5.7%Weighted Average Cost of Floating-Rate Debt 2.8%Weighted Average Cost of Debt 4.1%
Leverage Ratio 44.3%
As of September 30, 2009
Effective Leverage Ratio 57.2%
Page 15
PRISA II
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Near Term Strategy
• Manage Fund liquidity and take steps to delever
– Extend or replace loans when available
– Continue to actively sell assets at appropriate pricing levels
– Draw down investor commitments to meet development pipeline obligations
• Maximize return of properties delivering from pipeline
– Aggressively work to stabilize leasing in challenging environment
– Complete rezoning/entitlement efforts to enhance marketability and value of predevelopment land
– Work with development partners to restructure Joint Venture obligations and seek to recover partners' share of loss
• Maintain long-term perspective to position Account to benefit from recovery
– Market conditions and capital constraints should create attractive core investment acquisition opportunities in 2010 & 2011.
Page 16
PRISA II
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Appendix
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Biographies
Darin Bright serves as the assistant portfolio manager for PRISA II and leads the asset management team responsible for the execution of PRISA II asset strategies in the Midwest and West Regions. Mr. Bright also serves as the portfolio manager for the Prudential Variable Contract Real Property Account, a $230 million separate account. Mr. Bright oversees fund strategy, acquisitions, dispositions, asset management and reporting for this portfolio.
From 1995 to 2004, Mr. Bright was Vice President with Grubb & Ellis, providing third party asset management services for institutional and corporate clients. In that capacity, he provided such services for a $500 million real estate portfolio for PREI. He started his career as a commercial real estate appraiser with Richard E. Nichols Associates, providing advisory and valuation services to lenders, developers, corporate and institutional clients.
Mr. Bright received a B.S. degree in Finance from Indiana University and a MBA from the University of Chicago. Mr. Bright is a former Certified Commercial Real Estate Appraiser and currently a member of the Urban Land Institute.
Darin BrightPrincipalPrudential Real Estate Investors
Number of Years Real Estate Experience: 18Number of Years with Prudential: 5
Appendix
Page 18
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Valuation Policy – PRISA Series of Funds
All PREI-managed properties held in the firm’s open-end commingled funds (such as the PRISA series of funds) are accounted for at fair value in accordance with applicable contractual requirements and in compliance with FAS 157. Property level debt is also accounted for at fair value based on the amount at which the liability could be exited in a current transaction exclusive of direct transactions costs. The firm’s current valuation procedure is as follows:
The Chief Real Estate Appraiser of Prudential Investment Management (the “Chief Appraiser”) is responsible for the valuation of PREI’s investments. The Chief Appraiser retains an independent Appraisal Management Firm to run the day-to-day operation of the appraisal process. The Appraisal Management Firm is responsible to assist with the selection, hiring, oversight, rotation and/or termination of third party appraisal firms. In addition, the Appraisal Management or another qualified firm provides independent valuations and/or reviews of the narrative appraisal reports. The Appraisal Management Firm may adjust a value estimate (in either direction) provided in the narrative appraisal should a material fact or error be identified and considered to be unresolved during the review process. It is PREI’s practice to report any such adjustments with a summary of the reasoning and supporting analysis to the applicable fund investors, and to schedule a narrative appraisal by a different appraisal firm for the quarter following the calendar quarter in which the adjustment is made. (No such adjustments were made in 2007 or 2008.) In quarters when a narrative appraisal of a property is not performed, the Appraisal Management Firm or another qualified independent valuation firm is responsible for performing an independent update appraisal, making any adjustments it deems necessary due to changes in market conditions or property circumstances occurring during the quarter. All external reviews, override adjustments, if any, and quarterly valuations are made in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”). The Chief Appraiser oversees the activities of the Appraisal Management Firm and approves all final values.
Appendix
Page 19
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Valuation Policy – PRISA Series of Funds (continued)
Prudential’s policy requires that every property that is held in a fund for a full calendar year is valued at least once during the calendar year by an independent appraiser with professional qualifications. For properties held for partial years, the following policies apply: (1) for properties expected to be sold during a calendar year, the Appraisal Management Firm or another qualified firm performs the interim valuations as described above until the property is either sold or a narrative appraisal is scheduled, and (2) properties acquired during a calendar year are carried at cost, which approximates fair value for the quarter in which they are acquired, and valued based on a narrative appraisal by an independent appraiser with professional qualifications in the quarter subsequent to acquisition. The fair value of land held for development is considered to be acquisition cost, including soft costs incurred prior to development assuming it is the assumption a market participant would use. Cost is considered fair value for properties under development until substantial completion has occurred assuming the same premise. If cost is not considered to be representative of market, the properties are independently appraised based on the general policy.
PREI periodically enters into forward contract obligations to acquire, for a fixed price, real estate investments to be constructed in accordance with predetermined plans and specifications. The funding obligation/forward contract obligation and related asset are recorded in the consolidated financial statements in the period in which the project is deemed to have reached substantial completion and PRISA’s commitment to fund is firm; the amount of any unrealized gain or loss is recognized based upon the difference between the estimated investment's fair value as described above and PREI’s funding obligation. If the funding obligation is not considered to be representative of market, the properties are independently appraised based on the general policy.
In summary, Prudential’s valuation policy is that every PREI property and other investments (with the noted exceptions) held in its open-end commingled funds, is determined by independent appraisers with professional qualifications each calendar quarter.
Appendix
Page 20
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Investment Considerations
PRISA and PRISA II are commingled, open-ended separate accounts established under the laws of the State of New Jersey, under a group annuity insurance contract issued through The Prudential Insurance Company of America, a wholly-owned subsidiary of Prudential Financial, Inc., 751 Broad Street, Newark, New Jersey 07102.Past performance is not indicative of future results. Forecasts of future performance (whether of markets that affect PRISA/PRISA II or of the account itself), while presented with numerical specificity, reflect a variety of assumptions, which may not be realized and are subject to significant uncertainties and contingencies. There can be no assurance that the projections will be realized, and actual results may vary materially from those shown. No representation is made as to, and no responsibility is assumed for the accuracy of, the projections.Income (loss) projections are based on an annual budgeting process. The property budgets are based on a variety of assumptions, including: current leases not due to expire during the period in question remaining in place; a certain percentage of leases whose terms expire during the period in question being renewed or released at market rates and terms; rent and other amounts due being paid in accordance with applicable lease terms; recognition of income on an accrual basis, in accordance with generally accepted accounting principles.Projections of valuation appreciation or depreciation are based on experience and training of Prudential's real estate professionals as to movement in real estate market trends with respect to identified geographical locations and property types. Appreciation return projections also assume that capital expenditures are made in accordance with approved budgets.Investment results are time-weighted returns for the periods noted. Fees and other expenses are described in the individual PRISA and PRISA II contracts.PRISA and PRISA II are intended to provide a vehicle for long-term investments. As compared with other asset classes, real estate is a relatively illiquid investment. Therefore, investors' withdrawal requests may not be satisfied for significant periods of time. Other than its general fiduciary duties with respect to investors, Prudential has no specific obligation to take any particular action (such as liquidation of investments) to satisfy withdrawal requests.PREI's statements of current plans and goals for the PRISA/PRISA II portfolios are not commitments by PREI to take any particular actions with regard to the PRISA portfolio. Nor are they promises that any stated goals will be met. Many factors can cause changes in plans or in goals, and PREI expressly reserves the right to change or eliminate any of its current plans or goals at any time.There can be no guaranty that the sale of the various properties targeted for sale will take place as projected or that the occupancy levels at the portfolio's holdings will remain at the current high level. In addition, there can be no guaranty that the targeted acquisitions will be successfully achieved at projected levels within projected periods of time. For these and other reasons, there can be no assurance that the projected portfolio returns and cash flow returns discussed will be achieved.PREI and certain of its affiliates engage in various activities related to investment in real estate securities. For example, PREI or any of its affiliates may enter into financing arrangements with issuers of real estate securities, including the making of loans secured by the assets or by the credit of the issuer of the real estate securities and the exercise of remedies in connection with such loans. In addition, PREI or any of its affiliates may buy or sell, or may direct or recommend that another person buy or sell, securities of the same kind or class, or from the same issuer as are purchased or sold for this or any other account under the direction of PREI or any of its affiliates. As a consequence of these activities, PREI's ability to purchase or sell, or to chose the timing of the purchase or sale of real estate securities of a given issuer may be restricted by contract or by applicable laws, including ERISA or federal securities laws. Finally, PREI or any of its affiliates may earn fees based on the performance of real estate securities held in certain accounts. Thus, potential conflicts of interest could arise in PREI's selection of investments, or decision to dispose of such investments, that would not arise in the absence of a performance fee.
Appendix
Page 21
Reference #: MCAA-7XBSJW
PREI®
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
The NCREIF Property Index
Methodology
• This Index is set at 100 for fourth quarter of 1977. Calculations are based on quarterly returns of individual properties before deduction of management fees.
• Each property’s return is weighted by its market value.
• Income and capital changes are also calculated.
• The current quarter’s return is preliminary and subject to revision in the subsequent quarter.
Universe of Properties
All properties have been acquired on behalf of tax exempt institutions and held in a fiduciary environment.
The NCREIF Property Index (“NPI”) is comprised of the NCREIF Classic Property Index (unleveraged) and the NCREIF Leveraged Property Database. Please note that when returns are computed for the NPI, the returns for the levered properties are computed on a de-levered basis, i.e., the impact of financing is excluded.
Universe includes:
– Wholly owned and joint-venture investments.– Existing properties only — no development projects.– Only investment-grade, non-agricultural, income-producing properties: apartments, hotels, office,
retail, office showroom/R&D, and warehouses.– The database fluctuates quarterly as participants acquire properties, as new members join
NCREIF, and as properties are sold. – Sold properties are removed from the Index in the quarter the sales take place (historical data
remains). – Each property’s market value is determined by real estate appraisal methodology, consistently
applied.
Appendix
Page 22
Note: A benchmark Index is not professionally managed, does not have a defined investment objective, and does not incur fees or expenses. Reinvestment of dividends is not applicable to this asset class. Investors cannot invest directly in an index.
International Discussion
Presented by:
Chris Neill, CFA, Portfolio Specialist
John Roche, Regional Sales Manager
This material is for financial advisors and institutional clients only.2
Discussion Topics
Business Models Always Matter
Fundamental Analysis is Key
Adhere to Investment Thesis
Willing to be Contrarian
Closing Remarks
This material is for financial advisors and institutional clients only.3
MC FP Price Chart ( ):
LVMH is one of the leading luxury goods companies world wide, with a strong portfolio of brands including Louis Vuitton,Pucci, Fendi, Tag Heuer, champagne brands Krug, Dom Perignon and Veuve Cliquot and cosmetics retailer Sephora.
Initial Investment Thesis:• Leading brand portfolio
• Secular growth opportunities in emerging markets
• Margin expansion opportunity
• Consistent improvement in financial metrics
• Unwarranted discount to peers
Recent Observations: • Surprising resilience of core brands
• Control over supply chain
• China remains a major growth opportunity; developed market improvement
• Compelling valuation on depressed earnings and sales
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09.
Business Models Always MatterCase Study: LVMH (MC FP)
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This material is for financial advisors and institutional clients only.4
ETE GA Price Chart ( )
National Bank of Greece is the oldest and largest commercial bank in Greece, established in 1841, with subsidiaries in faster growing southeastern Europe and Mediterranean countries. The company has had operations outside Greece since 1907, Turkey being the most prominent after the acquisition of an 80% stake in leading bank, Finansbank.
Initial Investment Thesis:• Double digit loan and deposit growth
• Attractive margins with a conservative loan deposit ratio
• Growing presence in underpenetrated banking regions
• Declining cost/ income ratio
Recent Observations: • Operating results exceeded expectations throughout crisis
• Resilient NIM, fee income, trading operations
• Market share gains, cost control
• Healthy capital position; compelling valuation
Source: Bloomberg and FactSet. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09.
Fundamental Analysis is Key Case Study: National Bank of Greece (ETE GA)
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This material is for financial advisors and institutional clients only.5
OPAP GA Price Chart ( ):
OPAP is a Greek lottery system operator that is primarily engaged in the organization and operation of lottery games, and the management and advertisement of these games.
Initial Investment Thesis:• Light-asset, scalable business model
• High operating leverage
• Primary risks coming from illegal gaming, de-regulation, and government ownership (34%)
• Trade-off of profit margins versus game payout ratio
Sell Discipline:• Influence of government control (Tax)
• Increased payout/ pricing challenges due to competitive forces (Illegal/ Online)
• Negative developments in agency system (Strikes)
• Challenge to monopoly status/ regulatory risks
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09.
Adhere To Investment Thesis Case Study: OPAP (OPAP GA)
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This material is for financial advisors and institutional clients only.6
BIDU Price Chart (USD):
Baidu is a leading Chinese language search engine provider. The company offers an auction-based pay for performance (P4P) platform on which advertisers bid for the priority placement of website links in search results. The ranking of the links in search results is influenced by the price of the bids as well as the relevancy of the search keywords.
Initial Investment Thesis:• Simple business model: Paid users + ARPU = More Traffic/ Revenues
• Nearly 300 million Chinese internet users, growing 31% CAGR since 2001
• BIDU is the share leader with brand equity
• Risks are primarily regulatory in nature (Socially Responsible/ Illegal Advertising)
Recent Observations: • Stronger than expected Operational results – More accounts and better ARPU
• Technological innovation: Phoenix Nest system; KPI metrics to improve ROI
• Offsetting rising traffic acquisition costs (TAC) with planned decline in marketing spend
• Negative press and loss of key personnel at main competitor may lead to share gains?
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09.
Willing To Be ContrarianCase Study: Baidu.com Inc., (BIDU)
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This material is for financial advisors and institutional clients only.7
Company Geographical Diversification
67%33%180United KingdomReckitt Benckiser Group PLC
63%37%24SpainTelefonica S.A.
75%25%13+FranceAXA S.A.
42%58%16+JapanNintendo Co. Ltd.
--100%1ChinaChina Life Insurance Co. Ltd.
--100%1CanadaRogers Communications Inc.
99%1%150+SwitzerlandRoche Holding AG
95%5%179DenmarkNovo Nordisk A/S
98%2%86+SwitzerlandNestle S.A.
96%4%50+IsraelTeva Pharmaceutical Ind.
Sales from Outside Home Country
Sales from Home Country
# Countries Operating In
Home CountryCompany
For Illustration purposes only. This is not a buy or sell recommendation for any particular security
List represents the Thornburg International Equity Strategy’s top ten holdings as of December 31, 2008.
Source: Thornburg Investment Management and each company’s 2007 Annual Report
This material is for financial advisors and institutional clients only.8
Closing Remarks
Things Aren’t Always As They Seem
– Regions: Real Exposure of Developed Markets vs. Emerging Markets
– Industries: Not All Companies Are Created Equal
– Banks
– Retailers
– Healthcare
Don’t Fix What Isn’t Broken
– Promising Companies at A Discount
– Diversification Through Three Baskets of Value
– Consistency of Process and Philosophy
This material is for financial advisors and institutional clients only.9
Disclosures
This presentation is intended for financial advisor and institutional client use only and is not intended for distribution to the public.
The securities mentioned are for illustration purposes only. Under no circumstances does the information contained within represent a recommendation to buy or sell the securities. These views are subject to change at any time in response to changing circumstances with the company, security or in the general markets, and are not intended to predict or guarantee the future performance of any individual security or the markets generally, nor are they intended to predict the future performance of any Thornburg Investment Management account, strategy or fund.
Performance data represents past performance, which is no guarantee of future results.
Unless otherwise noted, source of all data, charts, tables and graphs is Thornburg Investment Management
Investors may not make direct investments into any index.
Artio Global Management LLC
Presented by:
Brian Holland, Portfolio Manager
Scott Rubin, Relationship Manager, Institutional Investments
New World Order Positioning global portfolios within a new economic paradigm
A presentation to: City of Fort Lauderdale Police and Fire Retirement System
Artio Global Management LLCArtio Global Management LLC 2
Agenda
•A View of the Markets
• Inflation Over the Horizon?
•Artio Global Management Current Portfolio Strategy
#0772
Artio Global Management LLCArtio Global Management LLC
A View of the Markets
#02003
Artio Global Management LLC 4
A Historic Market Rally
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec
-70
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-71
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-72
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-73
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-05
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-06
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-07
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-08
MSCI World Index (% Difference Between 12 Month High/Low)December 1970 - October 2009
Source: BloombergPast performance is not indicative of future returns.
Artio Global Management LLC 5
A Historic Market Rally
0%
10%
20%
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40%
50%
60%
70%
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Mar
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-00
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-02
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-08
S&P 500 Index (% Difference Between 12 Month High/ Low)March 1930 - October 2009
Source: BloombergPast performance is not indicative of future returns.
Artio Global Management LLC 6
A Historic Market Rally
Sources: Bank of America, Merrill Lynch, Artio Global InvestorsPast performance is not indicative of future returns.
Trend Line
Artio Global Management LLC 7
A Historic Market Rally
Source: BloombergPast performance is not indicative of future returns.
0
200
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1,000
1,200
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4/3/
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/199
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/200
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11/2
4/20
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23/2
007
6/1/
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/200
711
/30/
2007
2/29
/200
86/
6/20
089/
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0812
/5/2
008
3/6/
2009
6/12
/200
99/
11/2
009
High Yield versus BBB Spreads 12 Month Difference Between Maximum and Minimum
January 1998 to October 2009(basis points)
Artio Global Management LLC 8
A Historic Market Rally
Source: BloombergPast performance is not indicative of future returns.
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Emerging Sovereign Spreads (12 Month Difference Between Maximum and Minimum )
January 1998 to October 2009(basis points)
Artio Global Management LLC 9
Source: Grant's Interest Rate Observer
Fueled by Massive Stimulus
-40.0%
-30.0%
-20.0%
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1929 - 1933 2007 - Present
Economic Contraction and Government Applied Stimulus
GDP Stimulus
Artio Global Management LLC 10
And Helped by Regulatory Intervention
Sources: Artio Global Management, MSCI.This information is provided for illustrative purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of securities. Past performance is not indicative of future returns. Performance results are presented gross of management and custodial fees and net of trading commissions. A client’s return will be reduced by such fees and any other expenses that it may incur relative to its advisory account.
Artio Global Management LLCArtio Global Management LLC
Inflation Over the Horizon?
#020011
Artio Global Management LLC 12
Source: BloombergPast performance is not indicative of future returns.
Extraordinary Market Reversal S&P
500 price change (December 1929 –
June 2009 – 8 week movement)
Artio Global Management LLC 13
The Classic Battle: Borrowers and Lenders
“All monetary and economic systems are a struggle between borrowers, who favor inflation, and creditors, who are determined to maintain the purchasing power of their currency. In a democracy, this is a very fluid battle. The creditors have the money and therefore the ear of the political elite; the borrowers tend to have the
votes.”
“Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given
the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate.”
Source: The Economist, 5/16/09 edition
Artio Global Management LLC 14
Does Significantly Higher Inflation Lie Ahead?
“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to
inflate its way out of the burden of that debt. That becomes a tax on everybody that has fixed dollar investments.”
Warren Buffett1
“I am advocating 6% inflation for at least a couple of years. It would ameliorate the debt bomb and help us work through the
deleveraging process.”
Kenneth Rogoff2
1. CNBC, 5/4/092. Harvard University Professor of Public Policy, former Chief Economist of the IMF. Bloomberg, 5/19/09
Artio Global Management LLC 15
Classic Battle – Deflation vs. Reflation or Inflation
Inflation will be low for the next few years, but
massive monetization of debt means inflation will win.Artio Global Investors View
“Inflation is first and foremost a monetary phenomenon.”
Milton Friedman
Artio Global Management LLC 16
Rising Inflation: Winners and Losers
Winners Losers
Individual and corporate debtors vs. Savers
Low grade bonds vs. High grade bonds
Inflation linked bonds vs. Fixed rate bonds
Real assets vs. Financial assets
College freshman vs. Fixed pension retiree
Artio Global Management LLCArtio Global Management LLC
Artio Global Management Current Portfolio Strategy
#020017
Artio Global Management LLC 18
A Key Current Investment Factor: Big Government
Single Party Control of Executive Office, House and Senate
Major Global Financial and Economic Crisis
Recipe for Unprecedented Policy Activism
Unusually Challenging Asset Allocation Climate
Artio Global Management LLC 19
Emerging Markets Continue to Grow in Importance
Source: World Bank
12.5% 13.0% 13.4%
11.5%
14.8%
18.2%17.4%
23.2%
0%
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10%
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25%
1972 1977 1982 1987 1992 1997 2002 2007
Emerging Markets (as % total global GDP)
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Japa
nIta
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gium
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ece
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ted
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man
yFr
ance
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aA
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ethe
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sH
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ew Z
eala
ndTu
rkey
Pol
and
Kor
eaM
alay
sia
Pak
ista
nA
rgen
tina
Phi
lippi
nes
Mex
ico
Sw
eden
Indo
nesi
aS
outh
Afr
ica
Den
mar
kC
hina
Aus
tralia
Bul
garia
Ukr
aine
Nig
eria
Rus
sia
Sau
di A
rabi
aC
hile
Government Debt/GDP Estimates in the Year 2014
20
Source: International Monetary Fund
Longer Term Investment Concerns
Artio Global Management LLC
Developed Markets Emerging Markets
Artio Global Management LLCArtio Global Management LLC 21
Current Market Valuations (as of 10/7/09)
Source: Bloomberg. Past performance is not indicative of future returns.
P/E Ratio P/Sales Dividend Yield
Commodity Based Australia(S&P ASX 200) 17.1x 1.6x 3.9%Canada (S&P TSX Composite) 18.1x 1.6x 2.8%
Developed Markets US (S&P 500) 17.5x 1.2x 2.1%Europe (Eurostoxx) 13.4x 0.9x 3.9%UK (FTSE 100) 14.5x 1.1x 3.8%Japan (TOPIX) 37.7x 0.5x 1.9%
Emerging Markets China(Shanghai SE 20.7x 1.8x 1.7%Brazil(Bovespa) 15.7x 1.6x 2.7%Hong Kong(Hang Seng Index) 17.1x 2.9x 2.9%Poland(WSE WIG 20 Index) 13.1x 0.8x 4.3%Czech Republic(Prague Stock 14.9x 1.7x 4.6%Russia(Russian RTS Index) 10.3x 1.3x 1.3%
#01198
Artio Global Management LLC 22
International Equity II Group Trust MSCI ACWI (ex-US) MSCI EAFE Index
#0986
1. Dollar Bloc includes Australia, Canada and New ZealandPlease see important disclosures at the end of the presentation. Regional weights represent investments at the date stated and are subject to change without notice. For informational purposes only.
12/31/08 10/31/093.55
0.99
8.21
61.72
8.74
10.03
11.00
2.36
17.20
34.95
19.30
15.19
6.05
3.09
0.00
45.73
25.25
19.88
0 20 40 60 80
Dollar Bloc¹
Dev. Asia (ex-Japan)
Emerging Markets
Dev. Europe
Japan
UK
10.80
1.37
22.93
37.98
10.37
13.07
12.89
3.36
20.84
32.46
15.21
15.24
8.42
3.76
0.00
45.31
21.24
21.27
0 10 20 30 40 50
Dollar Bloc¹
Dev. Asia (ex-Japan)
Emerging Markets
Dev. Europe
Japan
UK
Regional Positioning Comparison Year‐to‐date changes (%)
Artio Global Management LLC
Artio Global Management LLC 23
Please see important disclosures at the end of the presentation. Sector weights represent investments at the date stated and are subject to change without notice. For informational purposes only.
#0986
International Equity II Group Trust MSCI ACWI (ex-US) MSCI EAFE Index
12/31/08 10/31/097.11
11.82
11.11
9.61
10.18
10.86
2.82
8.12
11.69
9.99
6.69
8.39
9.05
10.81
23.26
7.97
10.53
6.00
9.37
7.92
6.70
0.00
9.60
10.25
8.54
22.64
9.76
11.55
5.12
7.84
6.96
7.74
0.00
0 5 10 15 20 25
Cons Discretionary
Cons Staples
Energy
Financials
Healthcare
Industrials
Information Tech
Materials
Telecommunications
Utilities
Cash & Other
7.10
6.78
11.67
30.82
4.66
10.91
4.46
14.34
6.23
1.67
1.36
8.35
8.60
11.22
26.47
6.39
9.79
6.52
11.22
6.42
5.02
0.00
9.71
10.11
8.42
26.23
8.26
11.14
4.83
9.53
5.94
5.83
0.00
0 10 20 30 40
Cons Discretionary
Cons Staples
Energy
Financials
Healthcare
Industrials
Information Tech
Materials
Telecommunications
Utilities
Cash & Other
Sector Positioning Comparison Year‐to‐date changes (%)
Artio Global Management LLC
Artio Global Management LLCArtio Global Management LLC
Big Picture• Positive trend in markets poised to continue – liquidity driven rally with some fundamental underpinnings• Stimulative environment – another investment bubble ahead?• Close to fully invested
New world versus old world• Regions with visible signs of GDP growth likely to continue to benefit from investment flows• Portfolios overweight to emerging markets, with notable increase in Asia
Long-term focus on commodities and deeply discounted cyclicals• Massive global liquidity injections taking hold – stemming pace of economic deterioration• Favor more cyclical industries (industrials, materials)
Importance of geography when selecting industries and companies• Prefer industries selling to new world versus those selling more to old world consumers
Environment has changed for developed market financials• Allocation increased toward the banks and diversified financials – prefer larger, more liquid companies
Commodity rich countries to remain supported• Positive long term bias toward resource rich areas – Canada, Brazil, Australia• Near-term catalysts – Asian and emerging market consumption• Long-term catalysts – inflationary pressures due to massive liquidity
Developed Europe attractive over long-term• Attractive valuations versus Asia and other emerging markets• Region structurally sound – monetary/fiscal policies not used to detriment of long-term economic and financial
stability
Current Investment Focus
These views and opinions are provided for illustrative purposes only and do not constitute any investment advice, investment strategy, or the recommendation to purchase or sell any securities. These views and opinions are subject to change.
24#01198
Artio Global Management LLCArtio Global Management LLC
DisclosuresThis material is provided for informational purposes only and does not in any sense constitute a solicitation or offer for the purchase or sale of securities.
The views expressed solely reflect those of Artio Global Management LLC (“Artio Global”) and its managers, and do not necessarily reflect the views of any affiliated companies.
The material may contain forward- or backward-looking statements regarding intent or beliefs on current or past expectations. Readers are cautioned that such statements are not a guarantee of future performance, involve risks and uncertainties, and actual results may differ materially from those statements as a result of various factors. The views expressed are also subject to change based on market and other conditions. Furthermore, the opinions expressed do not constitute investment advice or recommendation by Artio Global Management LLC or affiliated companies.
A significant portion of the information used by Artio Global Management is received from external sources and has been adapted for use in Artio Global Management's analytical and risk management systems framework. This report has been created using information believed to be reliable but we do not warrant its accuracy or completeness. While every effort is made to insure the validity of the information received, Artio Global Management cannot be responsible for any inaccuracies that may occur.
All material in this presentation, unless specifically indicated otherwise, is under copyright to Artio Global. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Artio Global.
Certain information contained herein is derived from historical price data from various indices (described below) and does not purport to represent investment results of an actual portfolio. These results do not reflect the deductions for investment management fees. Past results do not guarantee future results.
Foreign securities generally pose greater risks than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign countries there is a possibility of naturalization, expropriation or confiscatory taxation, imposition of withholding or other taxes and political or social instability that could affect investments in those countries. These risks can be greater in the case of emerging country securities.
In addition to emerging markets, in order to achieve certain “Top-Down” objectives, Artio Global Management LLC may affect transactions in certain index positions where permissible by individual client guidelines.
The Morgan Stanley Capital International (MSCI) All Country World Index (ACWI) ex-US® is a market capitalization weighted index composed of companies representative of the market structure of developed and emerging market countries in the Americas, Europe/Middle East, and Asia/Pacific Regions, excluding the United States. The index also excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The index is calculated without dividends or with gross dividends reinvested, in both US dollars and local currencies.
The Morgan Stanley Capital International (MSCI) EAFE Index® is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in Europe, Australia and the Far East. The index excludes the US & Canada. The index is calculated without dividends, with net or with gross dividends reinvested, in both US dollars and local currencies.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”) and is licensed for use by Artio Global Management LLC. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representation with respect to such standard or classification (or the results to be obtain by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P any of their affiliate or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
#024025
250 stocksportfolio of
approximately70-100stocks
A N A L Y Z ESCREEN1,800 stock universe
market capitalizations from approximately
$200M-$2.5B
B U Y
Phase Three:Stock Selection
Phase Two:In-Depth Fundamental Research
Phase One:Screening
Begin Review Process
Perform Due DiligenceWe insist on strong fundamentals:
Identify CatalystsCompelling catalysts may include:
Buy When AppropriateReview overall portfolio risk:
•
Analysis of business trends and risks
•
Business model review
•
Management team depth
•
10Q and 10K analysis
•
Market share analysis
•
Quality of earnings
•
New products
•
New markets
•
New management
•
Rising earnings and margins
•
Attractive relative valuation
•
Discount to long-
term growth rate
•
Sector diversification
•
Security risk diversification
Narrow Focus Using Quality Screens
•
Superior earnings growth
•
Balance sheet strength
•
Operating strength
•
Valuation
NorthPointe Capital Portfolio Construction
Committed. Consistent. Competent.
F O R T L A U D E R D A L E P O L I C E & F I R E R E T I R E M E N T S Y S T E M
200 CLARENDON STREET • 28TH FLOOR • BOSTON, MA 02116 • T 617.380.5600 • F 617.380.5601 • WWW.LEEMUNDER.COM
1
Investment Philosophy• Classic value-driven strategy
• Belief that leading businesses selling at a discount to fair value have the potential to generate excess returns
• Focus on stocks offering high probability of modest outperformance rather than a low probability of high outperformance
PRIC
E
TIME
UNDERVALUED
OVERVALUED
STOCK PRICE
FAIR VALUE
FAIR VALUE
BUY ZONESELL ZONE
2
Distinguishing Characteristics
Team: Continuity and Experience
• No team turnover since inception
• Over 16 years of experience (on average)
Investment Process: Unique Insight, Consistent Approach
• Focus on cash flow, not growth
• Return on capital and strong balance sheet bias
• Reversion to mean bias
• Focus on probability of catalyst occurring rather than timing
Performance: Strong Risk/Reward Profile
• Modest bets
• Focus on limiting downside not only capturing upside
3
PRESENTER BIOGRAPHIES
R. TODD VINGERS, CFA, PORTFOLIO MANAGER, TEAM LEADERTodd joined LMCG in June 2002 as the Value Team leader and the Small Cap Value portfolio manager. Prior to joining the firm, Todd served as Vice President and senior portfolio manager for American Century Investments. Prior to joining American Century, he was a valuation analyst for the Hawthorne Company. Todd is a member of both LMCG’s Management Committee and Board of Directors. He holds a BA from the University of St. Thomas and an MBA from the University of Chicago Booth School of Business. Todd is a Chartered Financial Analyst and a member of the CFA Institute.
THOMAS J. CAPOBIANCO, BUSINESS DEVELOPMENT & SALESTom is responsible for developing new business within the Public Fund and Taft-Hartley marketplaces. He has been in the industry since 1989. Prior to joining CCI he was a Senior Vice President in the Sales and Relationship Management Group at Independence Investments LLC since 2003. Previously, Tom worked for State Street Global Advisors where he served as a Senior Sales Principal dedicated to the Public Fund and Taft-Hartley marketplaces. He has a B.S. from Fitchburg State College and has completed extensive coursework at the FW Olin Graduate School of Business at Babson College. Tom is a founder and former board member of the Connecticut Public Pension Forum. He currently serves on the Board of Directors of the Massachusetts Public Pension Forum and the Florida Public Pension Trustee Association Advisory Board
Investment Review for the
Ft. Lauderdale Police & Firefighters’ Retirement System
December 4, 2009
Martin LaPrade, CFA, Partner Chris Greco, PartnerLarge Cap Growth Portfolio Manager Institutional Marketing & Client Service
904-493-5500
2
126 Months 73% March 1938 July 1938 +50% 4 Months
32 Months 28% April 1942 October 1942 +27% 3 Months
23 Months 47% December 1974 July 1975 +47% 7 Months
3 Months 56% October 1987 March 1988 +26% 5 Months
3 Months 20% October 1990 May 1991 +33% 6 Months
31 Months 50% October 2002 December 2002 +24% 2 Months
17 Months 57% March 2009 September 2009 ? +60% ? 7 Months ?
Decline Rally
Initial Rallies After Significant Bear Markets
Source: S&P 500
3
4
Quarterly Investment ReviewPeriod Ending September 30, 2009
-49%
-35%-19%
-26%
-29%
+24%
+18%
+27%
+60%
S&P 500 Since the Oct.-Nov. “Waterfall”
Extreme Volatility
5
The Character of the Recent Rally Has Been Very Speculative
Rally from March 6th to April 30th
i.e. – This rally favored smaller, more heavily shorted, less institutional, higher volatility, more expensive, weaker growth companies.
Top 100 Russell 1000 Performers
Bottom 100 Russell 1000 Performers Russell 1000
Equally Weighted 198.9% 2.3% 57.6%
Market Cap Weighted 162.5% 3.7% 30.4%
Number of Stocks in Portfolio 100 100 978
Median Market Size ($ mil) $516 $4,408 $2,190
Avg. Short Interest (% of Shares Out) 7.7% 3.9% 6.2%
Percent of Stocks with Price Below $5 71% 3% 14%
Annualized Volatility (Computed Over 6 Months) 146% 69% 92%
Book to Price 5.8 0.7 1.5
Sales to Price 18.1 2.4 4.2
ROIC 12% 18% 14%
Net Income Growth -323.8% -15.3% -84.1%
Source: Barclays Capital Quantitative Equity Strategies; Thompson Reuters; IDC; S&P Compustat; Russell
6
Quarterly Investment ReviewPeriod Ending September 30, 2009PORTFOLIO CHARACTERISTICS
*Large Cap Growth Composite Data
Portfolio Characteristics (as of 9/30/09): Top 10 Holdings:Weight %
Sawgrass R1G IBM 4.5EPS Growth (Forecast 1 Year) 6.6% 3.6% Google 4.4Portfolio P/E (Trailing 12 Months) 16.9 22.0 Cisco Systems 3.9Portfolio Price/Cash Flow 11.6 14.8 Microsoft 3.9Portfolio Price/Sales 1.2 1.6 CVS/Caremark 3.5Portfolio Price/Book 3.2 3.6 Apple 3.5Average Weighted Market Cap ($b) 81.9 70.3 DirecTV 3.4Number of Holdings 47 624 TJX 3.3
Hewlett Packard 2.9Sector Breakdown: WalMart 2.8
4%
10%
16%
10%
32%
17%
4%
1%
1%
5%
4%
1%
2%
16%
15%
2%
2%
10%
34%
15%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Materials
Telecommunication Services
Utilities
Energy
Consumer Discretionary
Consumer Staples
Financials
Industrials
Health Care
Information Technology
SawgrassRussell 1000 Growth
(S423)
Monthly Data 10/31/1980 - 9/30/2009 (Log Scale)
NDR Total Market Value Gain/Annum When:
Money Market Fund Assets/ Gain/ % NDR Total Market Value: Annum of Time
* Above 10.80 10.9 89.6
10.80 and Below -12.5 10.4
NDR Total Market Value(Billions, Scale Right)
9/30/2009 = 12022.6
17102.05 18082.49
1055.64
9715.02 9322.61 8289.32
11571351157618392146250529233411398146455421632673838615
10054 11733 13692 15978 18646
Total Money Market Fund Assets(Scale Left In Billions)
9/30/2009 = $3429
276.66
613.84
2382.00
3903.50
196.81
570.10
1862.00
Source: Investment Company Institute
101 123 150 183 223 272 331 403 492 599 730 889
1083131916071958238529053539
Money Market Fund Assets / NDR Total Market Value ( ) 9/30/2009 = 28.5%
Linear Regression ( ) High Liquidity
Low Liquidity
24.12
19.64
23.91
47.09
9.299.96
12.79
7.4 8.5 9.8
11.212.814.716.919.322.225.429.133.438.343.9
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NDR Total Market Value vs Money Market Fund Assets / NDR Total Market Value
Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Fuel for a Rally
December 4, 2009Large Cap ValuePortfolio Review
D. Kevin McCreesh, CFAChief Investment Officer
James V. WalleriusSenior Vice President
Our mission is to provide our clients with above benchmark long-term investment results and
client service that consistently surpasses your expectations.
City of Fort LauderdalePolice & Fire Retirement System
Introduction
Firm ProfileFirm Profile
Client Distribution
Foundation/Endowment
10%
Healthcare5%
Taft-Hartley28%
Public24%
Corporate25%
Sub-Advisory8%
Portfolio Offerings
Exclusive Focus on Managing Value Portfolios
0110As of September 30, 2009
Portfolio Inception
Large Cap Value 1991
Mid Cap Value 2000
Mid Cap Focus 2000
SMID Cap Value 2002
Small Cap Value 1998
Select Equity 2003
Portfolio Inception
Small Cap Free Cash Flow 1993
Small Cap FCF Focus 1996
Portfolio Inception
Small Cap Equity 2006
International Equity 2007
Value Free Cash Flow Quantitative
25+ Years ExperienceInstitutional Client Base$7.5 Billion in Assets
10 Product Offerings45 EmployeesAffiliated Managers Group Affiliate
1
Investment Team
Fundamental Quantitative Portfolio Years Investment Year JoinedName Title Research Analysis Management Fundamental Research Focus Experience Systematic
D. Kevin McCreesh, CFA* Chief Investment Officer Generalist 23 1996
Kenneth W. Burgess, CFA* Portfolio Manager Generalist 17 1993
Ronald M. Mushock, CFA* Portfolio Manager Generalist 18 1997
Joseph M. Sharma, CFA Portfolio Manager Generalist 18 2000
Eoin E. Middaugh, CFA Chief Investment Strategist Quantitative Analysis 12 2002
Energy, Financials, Healthcare, Aman Patel Assistant Portfolio Manager Materials, Technology, Utilities 12 2002
Rick Plummer, CFA Equity Analyst Financials, Technology, Telecom 15 2004
W. Ryan Wick Equity Analyst Cons. Disc., Healthcare, Staples, Industrials, Tech. 10 2005
Tom LaBarbera Jr., CFA Equity Analyst Quantitative Analysis 9 2005
Ross O’Toole, CFA Equity Analyst Consumer Discretionary, Staples, Industrials 11 2006
Brian D. Kostka, CFA Equity Analyst Consumer Disc., Healthcare, Staples, Industrials 8 2007
Quantitative Analysis/Fundamental Research 4 2008Matthew Tangel Equity Analyst Utilities, Energy
Christopher Lippincott Equity Analyst Technology, Staples, Industrials, Materials 13 2008
0140Introduction
* Partner of the firm
2
Value Equity
Philosophy
Companies with low valuation outperform
Stock prices follow earnings cycles
Investors underreact to positive/negative change
Buy on Confirmation
Buy value, but buy at the right time.
Avoid the Value Trap
01503
Value Equity
Investment Process
0161
Universe Screening
Initial Universe: Large Cap $2.5 billion +
Quantitative Model:50% Valuation50% Earnings Catalyst Model
Investor ExpectationsIncome StatementBalance Sheet/Cash Flow
150 Stock Research Focus list:15 stocks in each economic sector
Fundamental Research Gauge Investor Expectations
Key revenue & margin assumptionsunderlying earnings estimates
Perform Financial Statement AnalysisProfit & loss trendsBalance sheet qualityCash flow analysis
Assess Company ValuationRelative to:
Company historyPeer groupBenchmark
Portfolio Construction65-90 Securities
P/E in line or lower than IndexEarnings surprise higher than IndexEstimate revision higher than Index
Risk ControlMarket cap sensitiveMax position size 5%Max sector weight 30%Relative sector weight +/- 5%
Identify Analyze Execute
4
Performance Review
5
Performance as of 10/31/09
3Q YTD 1 Year 3 Year 5 Year InceptionPerformance Summary 2009 2009 Trailing Trailing Trailing To Date*
City of Fort Lauderdale 19.5 13.4 5.7 -8.4 1.2 6.2
Russell 1000® Value 18.2 11.3 4.8 -9.8 -0.1 4.9
S&P 500 15.6 17.0 9.8 -7.0 0.3 4.2
Market Value Summary
Market Value (12/9/02) $40,849,791
Withdrawals ($46,990,660)
Contributions $15,935,081
Adjusted Value $9,794,212
Market Value (10/31/09) $41,318,578
Net Gain $31,524,366
*Annualized 12/9/02 to 10/31/09
Market Environment
6070Source: Bernstein analysis (Sanford C. Bernstein & Co., LLC)
Source: Empirical Research Partners Analysis, National Bureau of Economic Research
Valuation SpreadsThe Top Quintile Compared
to the Market Average1952 Through Late-September 2009
Earnings Revisions: Best vs. Worst Quintile Monthly Relative Returns
1989 through September, 2009
6
7
Performance Review
77
+/- Allocation StockEconomic Sector Portfolio Index Portfolio Index Effect Effect
Materials 6.0 2.5 126.9 39.3 0.8 2.9
Energy 16.7 -1.4 17.7 6.5 0.2 2.0
Consumer Staples 6.5 -1.5 13.7 9.5 0.0 0.8
Utilities 3.2 -3.9 9.5 0.6 0.8 0.1
Information Technology 7.1 3.1 44.6 47.1 1.1 0.0
Telecommunication Services 5.6 -0.8 -9.9 -2.1 0.0 -0.6
Health Care 13.0 1.0 3.0 9.0 -0.3 -0.7
Financials 24.5 1.7 6.4 10.8 -0.5 -1.2
Industrials 6.5 -2.7 -10.5 4.5 0.1 -1.3
Consumer Discretionary 9.3 0.4 18.5 29.1 0.1 -1.6
Cash 1.6 1.6 0.1 0.0 -0.6 0.0
Total 13.4 11.3 1.7 0.4
Portfolio sector weights are average weights over the period. Index used is the Russell 1000® Value.
Source: FactSet
YTD 2009
Average Weight Total Returns
Total Effect 2.1
Portfolio Contribution
88
Information on all holdings is available upon request.
Source: FactSet
Largest Positions
As of 10/31/09Based upon performance 12/31/08 to 10/31/09
Stock Weight
JPMorgan Chase & Co. 4.1
Wells Fargo & Co. 3.5
Exxon Mobil Corp. 3.1
Pfizer Inc. 3.1
Chevron Corp. 3.0
Noble Corp. 2.7
Whiting Petroleum Corp. 2.5
AT&T Inc. 2.4
Amgen Inc. 2.2
Bank of America Corp. 1.9
Total 28.5
Strong Performers
Freeport-McMoRan Copper & Gold Inc.
Walter Energy, Inc.
Western Digital Corp.
Poor Performers
Bank of America Corp.
Hartford Financial Services Group Inc.
Principal Financial Group Inc.
Large Cap Value
0201
As of October 31, 2009Systematic sector weights do not total 100% due to cash.
Source: FactSet
Companies listed are not investment recommendations and may no longer be held in the portfolio. Companies listed are Supplemental Information. The Annual Composite Disclosure and Additional Disclosure at the end of this book are an integral part of this presentation.
9
RussellSector Portfolio 1000® ValueConsumer Discretionary 8.4% 9.3%
Consumer Staples 2.5% 5.7%
Energy 20.4% 19.5%
Financials 26.3% 25.0%
RussellSector Portfolio 1000® ValueHealthcare 11.1% 8.9%
Industrials 10.7% 10.4%
Information Technology 5.0% 5.0%
Materials 5.9% 3.8%
Telecommunications 4.5% 5.5%
Utilities 3.3% 6.9%
Dr Pepper Snapple Group Inc.J.M. Smucker Co.
Molson Coors Brewing Co.Reynolds American Inc.
Chevron Corp.ConocoPhillipsDevon Energy Corp.El Paso Corp.Exxon Mobil Corp.Hess Corp.
Newfield Exploration Co.Noble Corp.Occidental Petroleum Corp.Schlumberger Ltd.Whiting Petroleum Corp.XTO Energy Inc.
Ameriprise Financial Inc.Arch Capital Group Ltd.Bank of America Corp.Boston Properties Inc.Capital One Financial Corp.Citigroup Inc.Comerica Inc.Discover Financial ServicesGoldman Sachs Group Inc.INVESCO Ltd.
JPMorgan Chase & Co.KeyCorpPNC Financial Services Group Inc.ProLogisPrudential Financial Inc.Regions Financial Corp.Simon Property Group Inc.Unum GroupWells Fargo & Co.XL Capital Ltd.
Amgen Inc.Eli Lilly & Co.Johnson & JohnsonLife Technologies Corp.
Merck & Co. Inc.Pfizer Inc.UnitedHealth Group Inc.Universal Health Services Inc.
Avery Dennison Corp.Caterpillar Inc.Cooper Industries PLCCummins Inc.Fluor Corp.General Dynamics Corp.
General Electric Co.Ingersoll-Rand PlcITT Corp.SPX Corp.Textron Inc.
Advanced Micro Devices Inc.EMC Corp.Seagate Technology Inc.Sybase Inc.
Tellabs Inc.Tyco Electronics Ltd.Xerox Corp.
Airgas Inc.Cliffs Natural Resources Inc.Dow Chemical Co.
Freeport-McMoRan Copper & Gold Inc.Walter Energy, Inc.
AT&T Inc.Qwest Communications Int’l Inc.
Verizon Communications Inc.
AES Corp.American Electric Power Co. Inc.
Northeast Utilities
Black & Decker Corp.Fortune Brands Inc.Gannett Co. Inc.Guess? Inc.Home Depot Inc.J.C. Penney Co. Inc.
Kohl's Corp.Liberty Media Holding Corp.Newell Rubbermaid Inc.Shaw Communications Inc.Wyndham Worldwide Corp.
Portfolio
Large Cap Value
0701
Large Cap Value Gross Russell 1000 Value R
-15%
-10%
-5%
0%
5%
10 Years5 Years3 Years1 Year
-7.7
-10.6
-6.4
-7.9
2.3
0.9
4.1
2.6
Portfolio Statistics Annualized Returns
Portfolio Characteristics
Investment Results
Rolling 3 Year Returns vs.Russell 1000® Value
RussellPeriod Large Cap Value 1000® Value
YTD 2009 17.9 14.9
2008 -40.6 -36.9
2007 9.0 -0.2
2006 18.5 22.3
2005 11.4 7.1
2004 15.6 16.5
2003 35.5 30.0
2002 -16.3 -15.5
2001 -7.7 -5.6
2000 13.8 7.0
1999 17.8 7.4
1998 6.9 15.7
1997 33.6 35.2
1996 28.6 21.6
1995 37.8 38.4
1994 -0.8 -2.0
1993 26.9 18.1
1992 15.1 13.8
1991 35.3 24.6
Large Cap Valuevs. Russell 1000® Value (Since 1/1/99)
Annualized Alpha 2.1%
Annual Standard Deviation 18.1%
Russell 1000® Value 18.1%
Correlation 0.97
Portfolio Beta 0.97
Information Ratio 0.49
Tracking Error 4.28
Up Capture 115%
Down Capture 97%
Large RussellCap Value 1000® Value
Weighted Average Mkt. Cap $53.0 b $67.6 b
Price to Forward Earnings 14.1x 16.0x
Quarterly Earnings Surprise 16.2% 8.3%
Estimate Revision 8.1% 2.1%
Larg
e C
ap V
alue
Russell 1000 Value Index86% Batting Average55 of 64 Observations R
-20 -15 -10 -5 0 5 10 15 20 25 30 35-20-15-10
-505
101520253035
All Data as of September 30, 2009
Past performance is not indicative of future performance.Information shown represents the Large Cap Value Composite, is supplemental and is intended for information purposes only.
The Annual Composite Disclosure and Additional Disclosure at the end of this book are an integral part of this presentation.Systematic is the source of data unless otherwise indicated.
Source: FactSet
10
Earnings and Portfolio Performance
-60%
-40%
-20%
0%
20%
40%
60%
80%
20092008200720062005200420032002200120001999199819971996
21
2010
Earnings YoY Change (Russell 1000® Value Index)
Value ValueAdded* 6/30/99 Added*
-2.0% 1 Year +7.1%
-0.1% 3 Years +2.8%
+0.6% 5 Years +2.5%
1Source: Baseline
Quarterly YoY EPS change data from 3/31/96 through 3/31/2009 are actual reported earnings results for the companies in the Russell 1000® Value Index. For the period 6/30/09 through 9/30/10, the quarterly YoY EPS change data are consensus earnings estimates for the companies in the Russell 1000® Value Index. Consensus earnings estimates are based on the combined earnings
estimates of the analysts covering a public company and are derived from projections, models, sentiments and research.Past performance is not indicative of future performance. Information shown represents the Large Cap Value Composite, is supplemental and is intended for information purposes only.
The Annual Composite Disclosure included is an integral part of this presentation. Systematic is the source of data unless otherwise indicated.
Prior Performance Subsequent PerformanceValue Value
Added* 12/31/02 Added*
-0.8% 1Year +5.5%
+0.9% 3 Years +2.9%
+0.9% 5 Years +3.0%
2Prior Performance Subsequent Performance
* Value added represents the difference between the Large Cap Value composite return and the Russell 1000® Value Index return for the same period.
11
Large Cap Value Composite Disclosure
1001
N/A - Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.*Preliminary and pending verification 2008 and 2009
Appendix
Systematic Financial Management, LP (“Systematic”) is an independently managed investment advisory firm and is an affiliate of Affiliated Managers Group, Inc. Systematic has prepared and pre-sented this report in compliance with the Global Investment Performance Standards (GIPS®). For periods from 1993 through 4Q07, Systematic has been verified by Ashland Partners & Company, LLP.A copy of the verification report is available upon request.
Systematic’s Large Cap Value Composite represents all fully discretionary, unrestricted institutional large cap value accounts, including those accounts no longer with the firm. This composite repre-sents 92% of the firm’s institutional large cap value assets under management of $3,523 million, and 92% of the firm’s total large cap value assets under management of $3,548 million. Systematic’sLarge Cap Value strategy, initiated in July of 1996, seeks to invest in companies (U.S. Equity, REITS, ADRs and foreign securities traded on U.S. markets) generally consistent with the market capitaliza-tion range of the Russell 1000® Index with a combination of attractive valuations and a positive earnings catalyst. Systematic’s Large Cap Value Composite is measured against the Russell 1000®Value Index for comparison purposes. The minimum account size for inclusion into this composite is $1 million. Prior to January 1, 2009, the minimum account size for inclusion was $5 million. Compositepolicy requires a portfolio to be revalued on the date of a significant cash flow that exceeds 10%. Composite policy also requires the temporary exclusion of any portfolio incurring a client-initiatedrestriction of greater than two securities such as limitations on foreign issuers or socially responsible investments. A portfolio will re-enter the composite when the restriction no longer applies.Additionally, composite policy requires the temporary removal of any portfolio with client initiated tax-loss selling. The temporary removal of such accounts occur at the beginning of the month inwhich the tax-loss selling was initiated and will re-enter the composite the first full month after tax loss restrictions no longer apply. For the period July 1, 2002 through April 1, 2007, composite policyrequired the temporary exclusion of any portfolio incurring a client initiated significant cash flows of 10% or more of portfolio assets. The temporary removal of such accounts occurred at the begin-ning of the quarter in which the significant cash flow occurred and the accounts re-entered the composite according to the firm’s policy defining the grace period for new accounts, which is thefirst full quarter after the cash flow. Additional information regarding the treatment of significant cash flows, inclusions and exclusions is available upon request.
The Large Cap Value Composite was created July 1, 1996. Prior to April 1, 2007, this composite was called Large Cap Value Earnings Surprise. Performance presented prior to July 1, 1996 occurredwhile the Portfolio Manager was affiliated with a prior firm and the Portfolio Manager had complete investment discretion of each portfolio included within the composite and had lead responsibili-ty for selecting the securities to buy and sell. A complete list and description of Systematic’s composites is available upon request.
Returns are presented gross and net of management fees and include the reinvestment of all income. Net of fee performance was calculated using the highest management fee of 0.65%.Dispersion in the annual rates of return for the composite is measured using the equal-weighted standard deviation method. Dispersion for this composite is calculated using accounts in compositefor one full calendar year. Additional information regarding the firm’s policies and procedures for calculating and reporting performance returns is available upon request.
Past performance is not indicative of future performance. Performance results for the Large Cap Value Composite are based on U.S. dollar returns.
The Russell 1000® Value Index measures the performance of those Russell 1000® Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Index meas-ures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 92% of the total market capitalization of the Russell 3000® Index. Russell InvestmentGroup is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential infor-mation and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Systematic Financial Management, LLP. Russell Investment Group is notresponsible for the formatting or configuration of this material or for any inaccuracy in Systematic's presentation thereof. An investment cannot be made directly in an index.
The management fee is as follows: 0.65% of the first $25 million; 0.45% of the next $50 million; and 0.35% over $75 million. Actual investment advisory fees incurred by clients may vary.
Total Firm Assets U.S. Dollars % of Firm Number of Composite Russell CompositeYear End (millions) (millions) Assets Accounts Gross Net 1000® Value DispersionYTD 2009* 7,527 3,257 43% 48 17.93% 17.41% 14.84% 0.4%2008* 6,144 2,930 48% 48 -40.59% -41.01% -36.84% 0.1%2007 9,578 4,540 47% 40 8.95% 8.26% -0.18% 0.2%2006 8,760 3,350 38% 27 18.49% 17.75% 22.24% 0.1%2005 7,068 1,937 27% 25 11.37% 10.67% 7.05% 0.2%2004 7,008 1,749 25% 26 15.55% 14.71% 16.49% 0.2%2003 6,577 1,576 24% 21 35.49% 34.54% 30.03% 0.3%2002 4,472 900 20% 20 -16.29% -16.95% -15.52% 0.4%2001 4,195 1,128 27% 17 -7.69% -8.39% -5.60% 0.2%2000 3,209 850 26% 10 13.77% 12.95% 7.01% 0.6%1999 1,747 676 39% 9 17.76% 16.91% 7.35% 0.6%1998 1,221 658 54% 10 6.92% 6.12% 15.65% 0.5%1997 1,148 739 64% Five or fewer 33.61% 32.68% 35.18% N/A1996 612 94 15% Five or fewer
12
This Presentation is provided to you on a confidential basis for informational purposes only and shall not constitute an offer to sell or a solicitation of an offer to buy an interest in any of the funds advised by K2 Advisors, L.L.C. Such offer may only be made at the time a qualified offeree receives from K2 Advisors, L.L.C. a Confidential Private Offering Memorandum describing the offer. This Presentation may not be copied, loaned or distributed to any other person without the consent of K2 Advisors, L.L.C.
K2 ADVISORS, L.L.C.
Presentation to:
Fort Lauderdale Fire and Police
December 2009
Confidential Presentation
1
K2 Organization
Founded in 1994
SEC Registered Investment Adviser*
UK FSA authorized and regulated**
$7.6 billion under management as of October 1, 2009
2009 YTD net inflows of $1 billion
83 employees; no significant turnover
TA Associates (Partner)
Global presence: Stamford, CT; New York; Chicago; London; Tokyo; Hong Kong; and Sydney
* K2 Advisors, L.L.C. and K2/D&S Management Co., L.L.C.** K2 Advisors, Ltd.
2
K2 Organization – 83 Employees*
* As of October 1, 2009
K2 ADVISORS
David C. SaundersFounding Managing Director
William A. Douglass IIIFounding Managing Director
Strategy Teams
Brian WalshManaging Director
OperationalDue Diligence
Risk Management/TechnologyResearch
PortfolioConstruction
Business Management
Investor Relations
K2International
Andrew KandiewManaging Director
J. Brooks RitcheyManaging Director
Kelsey BiggersManaging Director
John FergusonCOO
Dan ElsberryManaging Director
James RiceManaging Director
Equity-Related Low Volatility AlternateStrategies Currency
TechnologyRisk Hong KongLondon Sydney Tokyo
Legal/Compliance
Administration/Operations
FinanceClient Service
3
Representative Client ListTotal
Institutional Investors 90%
Individuals, Family Offices, and Trusts 10%
Pensions and Other Tax Exempt EntitiesPublic FundsAnne Arundel County Retirement & Pension SystemCity of New Orleans Retirement SystemCity of Richmond Retirement System Chicago Police Annuity and BenefitChicago Municipal EmployeesLASERS (Louisiana State Employees’ Retirement System) Mass PRIM New Mexico State Investment Council St. Louis Public School Retirement SystemTexas Treasury Safekeeping Trust CompanyOklahoma City Employee Retirement SystemLos Angeles Fire and Police Pension SystemTeachers Retirement System of the State of IllinoisQueensland Local Government Superannuation Board
U.S. Union Plans (Taft-Hartley)Automotive Machinists Pension TrustDenver Area Meat CuttersLaborers’ Pension FundRocky Mountain UFCWSheet Metal Workers Local Union No. 100UFCW International Pension PlanUnited Mine Workers of America 1974 Pension Trust
Endowments and FoundationsAltman FoundationBaltimore Symphony OrchestraBirmingham-Southern College
Other InstitutionalDexion Equity Alternative Limited
Corporate PensionAmetekAkzoNobelCampbell Soup CompanyCadbury Pension Trust LimitedCoca-Cola Enterprises, Inc.Cordares Vermogensbeheer B.V.Energy EastMarks and Spencer PLCRaiffeisen Capital ManagementRohm and Haas CompanyToshiba America Inc. Retirement Plan
Other Tax-ExemptBethesda FoundationCarilion Health SystemsNorton Healthcare Retirement System
Central Synagogue of New YorkDetroit Medical CenterNorth Carolina Baptist Foundation
OIL Insurance Corporation Ltd.
Please note that the identities of our clients are confidential. Nonetheless, the organizations included on this list have given us permission to use their names for informational purposes only. Please note that the representative client list was created based on the following objective criteria: investor type, name recognition within the industry, and geographic diversity. It is not known whether the clients listed herein approve or disapprove of K2 or the advisory services provided by K2.
As of September 30, 2009
4
-60%
-50%
-40%
-30%
-20%
-10%
0%1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
His
toric
al D
raw
dow
ns
HFRI Fund Weighted Composite IndexAnnualized 8% ReturnS&P 500 DRIMerrill Lynch High Yield Master II
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
1000%
Cum
ulat
ive
Ret
urn
`
413%
872%
357%
Source: HFR, S&P, Merrill Lynch Data through September 2009.
-60%
-50%
-40%
-30%
-20%
-10%
0%1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
His
toric
al D
raw
dow
ns
HFRI Fund Weighted Composite IndexAnnualized 8% ReturnS&P 500 DRIMerrill Lynch High Yield Master II
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
1000%
Cum
ulat
ive
Ret
urn
`
413%
872%
357%
Source: HFR, S&P, Merrill Lynch Data through September 2009.
Hedge Funds
Hedge Fund strategies in the aggregate, as represented below by the HFRI Fund Weighted Composite Index, have delivered significant outperformance compared to Equities and High Yield bonds with lower drawdowns
Past performance is not indicative or a guarantee of future results. Please see important disclosures and disclaimers at the end of this presentation.4
5
0.23 0.23
0.33
0.21
0.27
0.32
0.29 0.28
0.31
0.220.24
0.19 0.18
0.280.28
0.24
0.17 0.17
0.100.090.090.08
(0.02)
0.01
0.08
0.14
0.09
0.04 0.04 0.05
(0.00)
(0.03)
0.070.06 0.070.06
-16.00%
-6.00%
4.00%
14.00%
24.00%
34.00%
44.00%
Sep-
06O
ct-0
6N
ov-0
6D
ec-0
6Ja
n-07
Feb-
07M
ar-0
7Ap
r-07
May
-07
Jun-
07Ju
l-07
Aug-
07Se
p-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr-
08M
ay-0
8Ju
n-08
Jul-0
8Au
g-08
Sep-
08O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09M
ar-0
9Ap
r-09
May
-09
Jun-
09Ju
l-09
Aug-
09
K2 Institutional Investors II Ltd Beta vs. S&P 500
5
K2 Institutional Investors II, Ltd. – Beta Evolution
Data contained in this report has been prepared and provided to K2 by Measurisk LLC. K2 does not independently verify such information and is not responsible or liable for any error or miscalculation made by Measurisk LLC, or for any loss, liability, claim, damage or expense arising out of such error or miscalculation. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and form an integral part hereof.
K2 decreased equity market sensitivity over past two years, as measured by our beta to the S&P 500 Index. Directional managers were replaced by those pursuing low beta or market neutral strategies
6
-1.31%-7.28%
-30%
-25%
-20%
-15%
-10%
-5%
0%
Sep-
06O
ct-0
6N
ov-0
6D
ec-0
6Ja
n-07
Feb-
07M
ar-0
7Ap
r-07
May
-07
Jun-
07Ju
l-07
Aug-
07Se
p-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr-
08M
ay-0
8Ju
n-08
Jul-0
8Au
g-08
Sep-
08O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09M
ar-0
9Ap
r-09
May
-09
Jun-
09Ju
l-09
Aug-
09
K2 Institutional Investors IILtd VaRS&P 500 VaR
6
K2 Institutional Investors II, Ltd. – Value-at-Risk Evolution
Data contained in this report has been prepared and provided to K2 by Measurisk LLC. K2 does not independently verify such information and is not responsible or liable for any error or miscalculation made by Measurisk LLC, or for any loss, liability, claim, damage or expense arising out of such error or miscalculation. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future success.
K2 decreased equity market risk exposure over past two years, despite the significant increase in the risk of the equity market as a whole over the same period as measured by the Value-at-Risk (VaR) of the S&P 500
* As of September 2009Source: S&P, Measurisk.
77
Timeline of the Global Credit Crisis
2007
April New Century Financial Sub-prime lender files Chapter 11
2 Bear Stearns hedge funds foldJuly
•BNP Paribus freezes 2 fundsciting “complete evaporation of liquidity”
•ECB pumps 85B Euro into system•German bank Sachsen, facing collapse, is sold
August
•Fed cuts 50 bps to 4.75•Depositors run on UK Bank Northern Rock•Libor spikes to 6.8% as banks fear lending to other banks•German lender IK Bloses 1B in US sub-prime
September
Major losses emerge
• UBS $3.4B• Merrill Lynch $7.9B• Citigroup initial $3.1B goes to $40B• CEOs at Merrill and Citibank resign
October
•Global Institutions Coordinate help•White House plans help for 1 million homeowners facing foreclosure•Bank of England cuts rates•Fed and 5 central banks offer billions in loans to banks•Rating agencies downgrade credit Insurers.
December
•Fed makes $200B available to banks to improve liquidity•Bear Stearns in fire-sale to JP Morgan•Fed makes weekend ¼% rate cut.
•$250 billion US tax rebates begin mailing•IMF warns of $1 trillion in credit-related losses
•FBI arrests 406 people for mortgage-related fraud •2 Bear Stearns workers face criminal charges•Qatar buys 7.7% of Barclays•Initial U.S. support for Fannie Mae and Freddie Mac –holders of $5 trillion in mortgage credit•IndyMac declares Chapter 11in 2nd largest bank failure in U.S. history•U.S. home prices decline 15 %
•Unemployment hits 6.1%•Fannie and Freddie taken over by U.S•Lehman Brother Collapses•Buffet buys Goldman Sachs, GE stakes•Merrill Lynch in fire sale to Bank of America•Fed lends $85B to AIG, takes 80% ownership•Congress fails to pass $700B bailout of banks
•$700B approved for bailout to Treasury•Major developed countries cut rates in unprecedented coordinated action
•Markets crash worldwide, partial recovery•U.K. government invests £50B in UK banks•Fed funds commercial paper market•U.S. government invest $250B in US banks
2008 •Global stock market falls hardest since Sept 2001•Fed cuts rates 75 bps - largest in 25 years•MBIA loses $2.3B on sub-prime •World Bank predicts slow growth•Market recovers from early loses
January
March
April
June
July
September
October
November Treasury abandons plan to buy troubled assets, instead invests to recapitalize banksGroup of 20 meets in Washington to coordinate responseTreasury gives Citigroup $20B bringing total to $45B as its stock falls 60% in one weekFed pledges $800B to shore up financial system of which$600B goes to back up Fannie and Freddie mortgagesS&P falls 7.43 % for the month
•Belgium government resigns after Fortis Nationalization•Madoff arrested in $50B Ponzi scheme•Automakers testify in Congress asking $34B in loans•S&P ends year down over 38%• HFRI down 18+%
December
The Before Years
The After Time
88
Timeline of the Global Credit Crisis (cont.) 2009
•GM files Bankruptcy 100 years 258 days after founding•Goldman Sachs and 9 other banks pay back $68B in TARP funds
•Treasury releases results of Bank Stress tests showing $118B in additional capital needed under certain scenarios•Obama signs “Helping Families Save Their Home Act,” raising FDIC guarantees to $250,000•Administration injects additional $30B into GM
•Fed and Treasury extend TALF through March 2010•FDIC announces # of problem banks increased from 305 to 416
•Congress establishes “Financial Crisis Inquiry Commission”•Bernanke announces “extreme risk aversion has eased and investors are returning to the private credit markets.”
•Treasury releases report focused on unwinding programs deemed necessary to prevent systemic failure in the financial markets and broader economy•Treasury closes Money Market Guarantee Fund setup after Lehman bankruptcy having realized no losses and earning $1.2B in fees•Unemployment hits 9.8%
•Fed expands TALF (Term Asset-backed Securities Loan Facility) to $1 Trillion dollars•Treasury takes preferred shares in 29 Banks•President Obama signs into law $787B “American Recovery and Reinvestment Act”•Stress tests announced for troubled Banks exceeding $100B•GM request additional $16B
•AIG receives additional $30B from TARP•Treasury announces guidelines to restructure mortgage terms under Homeowner and Affordability Plan•Fannie and Freddie announce losses of $50B and $58B, respectively•Treasury puts $5B in Auto Supplier Support Program•Treasury offers legislation to put troubled financial firms in “conservatorship”•Treasury extends guarantee of “Money Market Fund Support Program to cover $3 trillion in funds•GM Chairman resigns under administration pressure•S&P closes down 57% from 10/9/07 peak
•President-elect Obama requests remaining $350B TARP•Treasury takes preferred shares in BofA for$20B TARP•Initial $1.5B investment in Chrysler from TARP
January
February
March
June
May
August
September
July
October •Dow Jones Average closes above 10,000 first time since October 2008•Special Master determines compensation for troubled firms (AIG, Citi, BofA, Chrysler, GM)
9
129 Positive years (70%)54 Negative years (30%)
S&P Index from 1825 to 2008
10
Future of Hedge Fund Investing
Fewer but stronger players; institutional quality
Hedge fund industry matures and addresses shortcomings in business and operating models
More alignment with investor needs– Broad consensus on transparency– Closed managers are now open and capacity is not an issue– Significant reduction in fees – Liquidity is becoming strategy-specific
Tighter credit has negatively impacted highly leveraged strategies
Focus on new types of risk– Counterparty– Co-investor– Liquidity mismatch– Regulation– Operational due diligence– Fat tail risks (black swans)
Potentially beneficial regulatory reform (also potentially harmful)– Clearance for complex instruments– SEC registration
Globally assets expected to double by 2013* – $1.3 trillion to $2.6 trillion – 50% hedge fund allocations through Fund of Funds
*Source: The Bank of New York Mellon Casey Quirk survey
11
Hedge Fund Strategies are finding their way into traditional asset classes
Hedged Equity as an Equity Allocation– Capacity
– Liquidity
– Superior Performance
More tools to manage portfolio
12
2009 Year to Date in the Financial Markets i
Much improved hedge fund performance
Strong rally in equity and credit markets
Improved equity dispersion environment
Fundamentals gaining prominence, though momentum has been strong
Corporate defaults accelerating
13
Equity Long/Short
Dispersion – Performance difference between the best- and the worst-performing stock quartilesData through Aug 2009Source: Bloomberg, S&P
Much improved dispersion environment
0%
2%
4%
6%
8%
10%
12%
14%
16%
S&P
500
Inde
x
Tech
nolo
gy
Com
mun
icat
ions
Con
sum
er N
on-
Cyc
lical
Indu
stria
ls
Ener
gy
Con
sum
er C
yclic
al
Fina
ncia
ls
Hea
lthca
re
Utili
ties
Basi
c M
ater
ials
Aug 2009 Dispersion June 2007 Dispersion
Please see Important Disclosures and Disclaimers and Definitions of Comparison Indices and Statistics at the end of this presentation, which provide detailed information regarding information presented herein and form an integral part hereof.
S&P 500 INDEX: 1071.49
1091.62
380
580
780
980
1,180
1,380
1,580
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
US 10yr Bond Yields: 3.38
5.00
2
4
6
8
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Single B Credit Spreads: 597.26
459.11
200
400
600
800
1,000
1,200
1,400
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
2
VIX Index: 23.12
21.23
8.0
18.0
28.0
38.0
48.0
58.0
68.0
78.0
88.0
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
4 Bond Implied Volatility (BIX): 114.70
104.47
50
100
150
200
250
300
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
5 RU 2000 Growth vs. Value Indices
100
150
200
250
300
350
400
450
500
550
600
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
6
Value
Growth
Sep 3.57%Aug 3.36%
Jul 7.41%
Sep -11.77%Aug -15.46%
Jul -9.97%
Sep -2.71%Aug -2.36%
Jul -1.53%
Sep -1.54%Aug 0.35%
Jul -1.63%
Sep -12.93%Aug -5.63%
Jul -14.77%
Sep Grow th WinsAug Value Wins
Jul Value Wins
Factor History
Please see Important Disclosures and Disclaimers at the end of the presentation.14Data as of September 2009
15
GS Commodity Index: 4233.00
4285.00
1,780
2,780
3,780
4,780
5,780
6,780
7,780
8,780
9,780
10,780
11,780
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
7 EY / Bond Yield (Stock/Bond Valu Ratio): 1.46
1.11
0.3
0.8
1.3
1.8
2.3
2.8
3.3
3.8
4.3
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
US Dollar Index: 76.43
93.38
68.0
78.0
88.0
98.0
108.0
118.0
128.0
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
9
TED Spread (3m EuroD - 3m Tbill): 0.22
0.53
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
10s - 2s Yield Curve Slope: 2.42
0.88
(0.6)
(0.1)
0.4
0.9
1.4
1.9
2.4
2.9
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
11 SPX priced in units of VIX: 222.84
249.79
88
138
188
238
288
338
388
438
488
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
12
Sep 0.17%Aug -2.36%
Jul 0.44% Sep -2.75%Aug -7.40%
Jul -5.92%
Sep -1.94%Aug -0.22%
Jul -2.23%
Sep -18.7%Aug -27.4%
Jul -27.2%
Sep -2.83%Aug 2.57%
Jul -2.28%
Sep 4.38%Aug 3.18%
Jul 8.30%
Factor History
Please see Important Disclosures and Disclaimers at the end of the presentation.15
Data as of Sseptember 2009
16
The performance information presented herein reflects the actual performance of K2 Institutional Investors II, Ltd. (“K2 Institutional II” or the “Fund”) net of all fees and expenses including a 1.25% annual management fee, and a 10% incentive fee calculated on profits over a hurdle rate of 7%.
The performance figures shown in this presentation for 2009 are estimated and unaudited and subject to change.
Returns are calculated for a typical investor eligible for new issue income assuming a January 1 investment. Additions and withdrawals made after January 1 are not taken into account when calculating the rate of return and investors may pay different management and incentive fees, therefore, investors may experience different rates of return. All performance returns greater than one month are computed by geometrically linking monthly returns. Performance results shown include the reinvestment of all income and gains derived from the sale of assets in the Funds’ underlying portfolio.
Past performance is not indicative or a guarantee of future results. Additionally, there is the possibility for loss when investing in K2 Institutional II.
S&P 500 TR Index is a market-value weighted index provided by Standard & Poor’s which consists of 500 stocks chosen for market size, liquidity, and industry group representation. Includes reinvestment of dividends. Lehman Aggregate Bond Index is a broadly followed benchmark of aggregate bond performance. The index is made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding Par value of at least $100 million. The VIX Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used. GSCI Total Return Index invests in a diversified group of commodities. Lehman Aggregate Total Return provides a broad-based measure of the global investment-grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the U.S. Aggregate Index (USD 300 million), the Pan-European Aggregate Index (EUR 300 million), and the Asian- Pacific Aggregate Index (JPY 35 billion). In addition to securities from these three benchmarks (94.4% of the overall Global Aggregate market value), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300 million), Euro-Yen (JPY 35 billion), Canadian (CAD 300 million), and Investment-Grade 144A (USD 300 million) index-eligible securities not already in the three regional aggregate indices. Lehman Global Treasury Index tracks fixed-rate local currency sovereign debt of investment-grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 33 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. The Dow Jones Euro Stoxx 50 is a capitalization-weighted index of 50 European blue-chip stocks from those countries participating in the EMU. The equities use free float shares in the index calculation. The index was developed with a base value of 1000 as of December 31, 1991. This index uses float shares. The Sweden OMX Index is a capitalization-weighted index of the 30 stocks that have the largest volume of the trading on the Stockholm Stock Exchange. The equities use free float shares in the index calculation. The index was developed with a base level of 125 as of September 30, 1986. US 10 year LIBOR Swap -The 10 year interest rate swap level is expressed in percent yield. This is the fixed rate yield an investor is willing to pay in order to receive a floating rate yield. US 2 Year BBB Spread - A measure of Credit Spreads, this indicator examines the difference in the yield of 2 year maturity BBB (triple B) rated debt instruments relative to the yield of the 2 year maturity U.S. Treasury Note. ML Euro Index is composed of publicly issued Sovereign and Quasi-Government bonds, Collateralized and Securitized bonds, and Corporate bonds. Issuer must have a BBB3 or higher rating, and term must be greater that 1 year with fixed coupons. The Euro Currency is the official currency of the European Economic & Monetary Union. The conventional market quote is the # of USD per Euro. The MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world. Russell Growth/Russell Value is a ratio calculated by dividing the value of the Russell 2000 Growth Index by the value of the Russell 2000 Value Index. The DXY Index indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and 6 major world currencies. The FINEX computes this by using the rates supplied by some 500 banks.
Important Disclosures and Disclaimers
17
The portfolios of K2 Institutional II consist of securities that vary significantly from those in the S&P 500 Index. Nevertheless, K2 believes that a comparison to the S&P 500 Index is relevant because the S&P 500 Index is widely considered to be representative of the performance of the equity markets.
The risk free rate of return in calculating the Sharpe ratio is equal to the annualized return of 3-month T-bills for the relevant period.
Investment in a fund of funds is a speculative investment, entails significant risk and should not be considered a complete investment program. An investment in a fund of funds provides for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. There can be no assurance that the investment strategies employed by K2 Advisors or the managers of the investment entities in which the funds described in this summary invests will be successful.
Hedge funds are not required to provide investors with periodic pricing or valuation and there is generally a lack of transparency as to the underlying assets. Investing in hedge funds may also involve tax consequences and a prospective investor should consult with a tax advisor before investing. Investors in funds of hedge funds will incur asset-based fees and expenses at the fund level and indirect fees, expenses and asset-based compensation of investment funds in which these funds invest.
The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from the funds described in this summary may not adequately compensate investors for the business and financial risks assumed. Investment in these types of funds is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by the investment entities in which the funds described in this summary invest, such as leverage and hedging, may increase the adverse impact to which the Fund’s investment portfolio may be subject.
Please refer to the confidential private offering memorandum of K2 Institutional II for more detailed information and a description of the underlying risks.
The Fund is only available to qualified investors, as determined by K2 Institutional II and K2 Advisors, in their discretion. Investors may not subscribe for an interest in K2 Institutional II until they have received a copy of its confidential private offering memorandum and have completed a subscription document. This material does not constitute investment advice with respect to an investment in any security or other interest in K2 Institutional II. The information regarding K2 Institutional II and should not be regarded as providing any assurance that K2 Institutional II or will continue to have the features, attributes and qualities described herein as of any subsequent date and is not a guarantee of future results. THIS MATERIAL IS NOT AN OFFER TO SELL OR BUY ANY SECURITY OR INTEREST IN K2 INSTITUTIONAL II AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS MATERIAL TO A PROSPECTIVE INVESTOR IN K2 INSTITUTIONAL II. AN INVESTOR CONSIDERING INVESTING IN K2 INSTITUTIONAL II OR SHOULD CAREFULLY CONSIDER ALL OF THE TERMS GOVERNING AN INVESTMENT THEREIN INCLUDING INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES, WHICH ARE CONTAINED IN EACH FUND’S CONFIDENTIAL PRIVATE OFFERING MEMORANDUM. THE CONFIDENTIAL OFFERING MEMORANDUM OF K2 INSTITUTIONAL II AND SHOULD BE CAREFULLY READ AND UNDERSTOOD BEFORE INVESTING.
This summary is confidential and should not be reproduced or distributed to any other person without the written approval of K2 Advisors.
Important Disclosures and Disclaimers (continued)
1818
S&P 500 TR Index is a market-value weighted index provided by Standard & Poor’s which consists of 500 stocks chosen for market size, liquidity, and industry group representation. Includes reinvestment of dividends.
Barclays Aggregate Bond Index is a broadly followed benchmark of aggregate bond performance. The index is made up of the Barclays Government/Corporate Bond Index, Mortgage- Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding Par value of at least $100 million.
The VIX Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.
GSCI Total Return Index invests in a diversified group of commodities.
Barclays Aggregate Total Return provides a broad-based measure of the global investment-grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the U.S. Aggregate Index (USD 300 million), the Pan-European Aggregate Index (EUR 300 million), and the Asian- Pacific Aggregate Index (JPY 35 billion). In addition to securities from these three benchmarks (94.4% of the overall Global Aggregate market value), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300 million), Euro-Yen (JPY 35 billion), Canadian (CAD 300 million), and Investment-Grade 144A (USD 300 million) index-eligible securities not already in the three regional aggregate indices.
Barclays Global Treasury Index tracks fixed-rate local currency sovereign debt of investment-grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 33 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds.
The Dow Jones Euro Stoxx 50 is a capitalization-weighted index of 50 European blue-chip stocks from those countries participating in the EMU. The equities use free float shares in the index calculation. The index was developed with a base value of 1000 as of December 31, 1991. This index uses float shares.
The Sweden OMX Index is a capitalization-weighted index of the 30 stocks that have the largest volume of the trading on the Stockholm Stock Exchange. The equities use free float shares in the index calculation. The index was developed with a base level of 125 as of September 30, 1986.
US 10 year LIBOR Swap -The 10 year interest rate swap level is expressed in percent yield. This is the fixed rate yield an investor is willing to pay in order to receive a floating rate yield.
US 2 Year BBB Spread - A measure of Credit Spreads, this indicator examines the difference in the yield of 2 year maturity BBB (triple B) rated debt instruments relative to the yield of the 2 year maturity U.S. Treasury Note.
ML Euro Index is composed of publicly issued Sovereign and Quasi-Government bonds, Collateralized and Securitized bonds, and Corporate bonds. Issuer must have a BBB3 or higher rating, and term must be greater that 1 year with fixed coupons.
The Euro Currency is the official currency of the European Economic & Monetary Union. The conventional market quote is the # of USD per Euro.
The MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
Russell Growth/Russell Value is a ratio calculated by dividing the value of the Russell 2000 Growth Index by the value of the Russell 2000 Value Index.
The DXY Index indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and 6 major world currencies. The FINEX computes this by using the rates supplied by some 500 banks.
The PE Ratio over 10 years tracks the performance of globally listed private equity stocks, and is a customized index calculated for Societe Generale. The members are the 25 largest and most liquid stocks of the private equity companies listed in the world stock exchanges.
The MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30. `MOVE' is a trademark product of Merrill Lynch.
Definitions of Comparative Indices and Statistics
1919
The Dow Jones PE Index tracks the performance of globally listed private equity stocks, and is a customized index calculated for Societe Generale. The members are the 25 largest and most liquid stocks of the private equity companies listed in the world stock exchanges.
YC Ten Minus Two represents the yield curve as the difference between the yields on 10 years swaps and 2 year swaps.
Select SPDR – Financial is an exchange-traded fund incorporated in the USA. The Fund's objective is to provide investment results that, before expenses, correspond to the performance of The Financial Select Sector. The Index includes financial services firms whose business' range from investment management to commercial & business banking.
Select SPDR – Energy is an exchange-traded fund incorporated in the USA. The Fund's objective is to provide investment results that correspond to the performance of The Energy Select Sector Index. The Index includes companies that develop & produce crude oil & natural gas, provide drilling and other energy related services.
Select SPDR – Technology is an exchange-traded fund incorporated in the USA. The Fund's objective is to provide investment results that correspond to the performance of The Technology Select Sector Index. The Index includes products developed by defense manufacturers, microcomputer components, telecom equipment and integrated computer circuits.
Select SPDR – Health Care is an exchange-traded fund incorporated in the USA. The Fund's objective is to provide investment results that correspond to the performance of The Health Care Select Sector Index. The Index includes companies involved in health care equipment and supplies, health care providers and services, biotechnology & pharmaceuticals.
Select SPDR – Consumer Staples is an exchange-traded fund incorporated in the USA. The Fund's objective is to provide investment results that correspond to the performance of The Consumer Staples Select Sector Index. The Index includes cosmetic and personal care, pharmaceuticals, soft drinks, tobacco and food products.
Russell 2000 Index is measure of the performance of the 2,000 smallest companies in the Russell 3000 Index provided by the Frank Russell Company, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The index was developed with a base value of 135.00 as of December 31, 1986.
MSCI EAFE Index (Europe, Australasia, Far East) is a market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
Average Annualized Return – Annualized geometric average return comprised of compounded monthly returns
Alpha - A mathematical value indicating an investment's excess return relative to a benchmark. Measures a manager's value added relative to a passive strategy, independent of the market movement.
Beta – The slope of the regression line and represents the expected change in the Fund’s return for a 1 percent change in the comparison Index. Beta is considered to be a measure of the Fund’s risk relative to the comparison index.
Sharpe Ratio - A reward/risk ratio. The numerator, annualized arithmetic return less the risk-free interest rate (defined as annualized arithmetic return on 3-month U.S. Treasury Bills), indicates the excess reward earned above the risk-free rate. The denominator, annualized standard deviation, measures the volatility of monthly performance. The higher the Sharpe Ratio, the more return (reward) per unit of volatility (risk) that has been achieved.
Standard Deviation - Annualized arithmetic standard deviation is a measure of dispersion indicating the degree to which each monthly return clusters about the mean return. Standard deviation is calculated based upon monthly returns, net of all fees and expenses, and annualized by multiplying by the square root of 12 (approximately 3.46).
Value-at-Risk (or “VaR”) - VaR is a statistical measure of risk that estimates the downside loss potential of a portfolio. More precisely, the 95% 1-month VaR is the loss one would not expect to exceed over a 1-month period with 95% probability
Estimated Performance-to-VaR – The ratio of actual return to predicted VaR over the same period.
Definitions of Comparative Indices and Statistics (continued)
20
Contact Information
K2 Advisors, L.L.C.300 Atlantic Street – 12th FloorStamford, CT 06901
Telephone: 203-348-5252Facsimile: 203-359-6369Investor Relations: 203-504-1407E-mail: [email protected]
Kelsey BiggersManaging Director, Risk ManagementE-mail: [email protected]
Dan ElsberryManaging DirectorE-mail: [email protected]
Agincourt Capital Management, LLC
Presentation to:
Ft. Lauderdale Police & Fire System
Patrick K. Kelly, CFA –
Managing Director
December 4, 2009
2
Liability-Driven Fixed Income
LDI
is a completely different way of thinking about asset allocation and the role of bonds
Conventional thinking:Bonds are a good diversifier vs. equitiesBonds are a good source of cash flowBonds are a good deflation hedgeHigh quality bonds are relatively stable
Liability-driven investing (LDI) rejects these factorsNot because they are untrue, but because they don’t matter!In LDI, all we really care about is meeting future benefit obligationsThe bond portfolio is structured to meet these cash flowsSimple in concept, but there are challenges
Change your thinking from “maximizing return” to “minimizing risk”
3
Measuring the Benefit Liability Stream
Actuarial analysis is performed to measure all future benefit obligations
Must also account for COLAs and other assumptions
Rules are different for public funds than for corporate retirement plans (PPA of ‘06, FAS 158 vs. GASB)
$0
$1,250
$2,500
$3,750
$5,000
$6,250
$7,500
'10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
Sample Liability Schedule ($000)
Total Future Liabilities=$228.1 million
This liability schedule is simply an example, but is pretty typical in its “shape”
The duration of this schedule is just over 13 years.
4
Valuing the Liabilities
Each one of these cash flows needs to be individually measured at the appropriate rate to arrive at their present value
Again, rules here are changing, moving towards a “yield curve” concept, away from a “single rate”
The discount rate that is chosen has a profound impact on the present value of the liabilities
And is a critical piece of the funded/underfunded equation
$50,000
$75,000
$100,000
$125,000
$150,000
3% 4% 5% 6% 7% 8% 9% 10%
Present Value of $228.1 Million
5
Discount Curves
As mentioned, new rules are encouraging the discontinuation of a single discount rate in favor
of a series of rates
The “yield curves” more accurately reflect the prevailing rates in the market
The Federal Government has developed the “PPA Curve” for corporate pensions
It is based on “A-rated and above” corporate bond yields
Citigroup has their own corporate yield curve, based on zero-coupon Treasuries, overlaid with
“AA-rated” corporates yield spreads
Both are improvements on the old 30-year AA corporate discount rate formerly in place
0%
1%
2%
3%
4%
5%
6%
7%
0 20 40 60 80 100Years From Present
Discount Yield Curves: November 2009
PPA
Citigroup
6
Structuring the Bond Portfolio
Portfolio construction is based upon the liability streams, current funded status, risk
tolerance and return objectives of the client
Benchmark selection: Use either standard benchmark (Barclays Long Government/Credit
Index) or customized benchmark
Ongoing monitoring and management of the investment strategy relative to changes in
the plan’s liability stream, risk tolerances, etc.
Agincourt uses no derivatives; all trades conducted in cash markets, minimizing
counterparty risk
0.0%
2.5%
5.0%
7.5%
10.0%
'10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
Assets vs. Liabilities (% of Total)
Portfolio Cash Flow
Liability Schedule
7
Bond Selection Process
For these portfolios, strict matching of all liabilities is impossible
There are very few bonds with maturities over 30 years
Therefore, we use a duration matching strategy
We slightly overweight some of the earlier cash flows, but excess cash is reinvested to meet more distant liabilities
Use scenario analysis to evaluate yield curve opportunities
Optimize allocations to duration/ maturity cells
Improve overall yield and total return
Objective is to build a portfolio that minimizes tracking error relative to the liability stream
Where appropriate, active management can be used to narrow the funding gap for underfunded plans and/or to reduce sponsor contributions
8
Scenario Analysis/Rebalancing
0%
1%
2%
3%
4%
5%
6%
1 2 3 5 7 10 20 30
Treasury Yield Curve Scenarios
Bear Steepening
Bear Flattening
No Change
Bull Steepening
Bull Flattening
-10%
-5%
0%
5%
10%
15%
20%
Bear Steepening Bear Flattening No Change Bull Steepening Bull Flattening
Tota
l 12-
Mon
th R
etur
n
One Year Total Returns: Assets vs. Liabilities
Agincourt Long Duration PortfolioLiabilitiesBarclays Long Gov't/Credit Index
The portfolio must perform well in a wide variety of interest rate scenarios.
In order to perform the necessary analysis,Agincourt has made significant investments in portfolio modeling systems. We have the best systems commercially-available.
To the left is a sampling of interest rate scenarios we believe are in the “two standard deviation” range of likely outcomes over the next twelve months.
Again, the main objective is to closely track the liability stream (and meet all future benefit obligations.
Beating an appropriate “long duration”benchmark may also be appropriate.
Here, we compare the performance of the sample portfolio with the target liabilities and the Barclays Long Government/Credit Index.
In addition, the portfolio outperforms the Index under most scenarios.
9
Final Thought