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Geo-Political Headwinds are

Risk Management Tailwinds Niagara Institutional Dialogue 2012

Niagara on the Lake, Ontario

Bruce B. Curwood, MBA, CFA, CIMA, Acc.Dir.

Director, Investment Strategy

Don Ezra, M.A, FIA

Co-Chairman Global Consulting

June 11, 2012

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Important Information Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of

any investment. This is a publication of Russell Investments Canada Limited and has been prepared solely for information purposes. It is made

available on an “as is” basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

This document is not intended as and is not to be taken as an offer or solicitation with respect to the purchase or sale of any security or interest,

nor does it constitute an offer or solicitation in any jurisdiction in Canada, including those in which such an offer or solicitation is not authorized

or to any person to whom it is unlawful to make such a solicitation or offer. Any decision to purchase securities or interests with respect to the

mutual funds described herein (the "Funds") must be based solely upon the information contained in the private placement offering or

prospectus documents for the Funds. The information contained herein is directed exclusively at persons who are accredited investors for

purposes of Canadian securities laws. Series of the Funds to which this communication relates are only available to the persons referred to

above and other persons should not act or rely on the information contained herein. This communication is by Russell Investments Canada

Limited.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an

even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return

could, at certain times, unintentionally reduce returns. Diversification does not assure a profit and does not protect against loss in declining

markets.

Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments

Canada Limited and its affiliates, including Frank Russell Company, are collectively known as “Russell Investments”.

Frank Russell Company, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments Canada

Limited, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

TRADEMARKS The Russell logo, Sovereign, Sovereign Investment Program, LifePoints, MULTI ASSET MULTI STYLE MULTI MANAGER,

and any Russell indices are either trademarks or registered trademarks of Frank Russell Company. The information and any statistical data

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they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.

Copyright© Russell Investments Canada Limited 2012. All rights reserved. The contents of this report are intended for the recipient of the report

only and are not be reproduced, transferred or distributed in any form without prior written permission from Russell Investments Canada

Limited.

Date of first publication: May 2012

INST-2012-05-25-0053 (EXP-12-12)

p.2

THIS CONFERENCE MATERIAL WAS CREATED BY RUSSELL AS AN EDUCATIONAL TOOL

AND IS NOT FOR FURTHER DISTRIBUTION.

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p.3

Overall PIAC* Report Card September 28, 2000

You are on the right track. But there is room for improvement.

A+ A A- B+ B B- C+ C C- D+ D D-

1. Business Like X

2. Governance X

3. Risk X

4. Asset Allocation X

5. Investment Structure X

6. Investment Manager Hiring X

7. Research X

8. Measurement X

9. Documentation X

10. Scale X

OVERALL X

A+ A A- B+ B B- C+ C C- D+ D D-

1. BUSINESS-LIKE X

2. GOVERNANCE X

3. RISK X

4. ASSET ALLOCATION X

5. INVESTMENT

STRUCTURE X

6. INVESTMENT MANAGER

HIRING X

7. RESEARCH X

8. MEASUREMENT X

9. DOCUMENTATION X

10 SCALE X

OVERALL X

*PIAC: The Pension Investment Association of Canada Source: Russell Investments

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Failure to Understand Risk at the Total Fund Level

› Risk – an area that needs greater exploration

› Sponsors tend to look at risk sporadically

› A comprehensive risk-evaluation process should be the

primary factor in managing total fund risk and setting the

pension game plan

› Few sponsors are proactive when it comes to total fund

risk and many use inappropriate tools

p.4

C -

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p.5

Ten Observations on Risk Management

1. Too much dialogue; too little action

2. No one-size-fits-all solution

3. Risk is multi-dimensional (quantitative & qualitative)

4. Investors are not proactive and lack a true understanding of the risks in

their fund

5. Tail events can destroy your fund

6. Financial crises are regular recurring events

7. Satisficing behavior is preferable to optimization of the unknown

8. Agreeing on your primary objective, risk tolerance, risk capacity and

relevant time horizon is critical

9. Risk management is just as much a people issue as an organizational

issue

10. Organizational changes around risk management are difficult and

time-consuming

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Conventional Approaches are Failing Us!

The New Normal.

A new market environment of:

› Austerity,

› Low returns, and

› High volatility, which is

› Often driven by geopolitics.

A period of great uncertainty!

p.6

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Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise

p.7

Conventional Wisdom

› a random walk

› the Theory

Unconventional Realities

› random, with hops, skips & jumps

› the Reality

factors affecting events will remain

equal factors affecting events will change

events are mildly random events can be wildly random

extreme events are rare and should

be treated as anomalies

extreme events are more common than

we think and should be treated as such

forecasts are accurate and reliable forecasts are inaccurate and unreliable

events are independent of one

another events interact

markets are efficient and rational markets are neither efficient nor rational

Source: Frederick Funston & Stephen Wagner, 2010, Surviving and Thriving in Uncertainty: Creating the risk intelligent enterprise.

John Wiley & Sons Inc, p.34

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p.8

The Problem…

The Problem The inequitable amount of time and

resources that investors spend on

return over risk.

The Solution Building an organization-wide

approach within a risk-management

framework, process and culture!

and the Solution.

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Tailwinds & Headwinds

p.9

1981 – 2007 Tailwinds 2008 – Future Headwinds

Interest rates steadily fall from 1981

peaks

Short-term interest rates are near

all-time lows and are expected to

rise

De-regulation of investment

markets

Global Financial Crisis (GFC), fraud

and various market abuses may

lead to greater regulation

Globalization of trade as Berlin Wall

falls and Cold War ends Possible protectionism and tariffs?

Consumer and government debt

levels reasonable

Consumer and government debt

levels (debt / GDP) elevated

Leverage De-leveraging

Falling inflation

Greater uncertainty as politics may

lead to dichotomous outcomes

(inflation or taxation)

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A Demon of our Own Design

› “The global economy is a complex, tightly coupled,

non-linear system that is turbulent, near impossible to

predict and very difficult to control.”

› Investors face strong headwinds for a prolonged period!

p.10

“The more complex and tightly coupled the system,

the greater the frequency of normal accidents.”

Source: Richard Bookstaber, 2007, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.

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Change is Necessary

› The only certainty in investing is that there is no certainty!

› As Trustees, we are generally dealing with incomplete,

ambiguous market information

› Returns often appear to follow a normal pattern and then

they don’t – movements can be random & dramatic

› Markets are complex adaptive systems affected by

human behavior

› Humans suffer from a host of behavioral biases

› So investors can’t generally predict or control return!

p.11

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So What Can We Learn From The Current Crisis?

p.12

RIMS State of ERM Report 2008 found that

organizations seeking better performance need to

broaden their programs to mature in the

competency drivers that support front-line risk

ownership, linkage and governance oversight…to

build a culture of risk-adjusted decision making

throughout an organization.

“

“

RIMS = Risk & Insurance Management Society

ERM = Enterprise Risk Management

Source: RIMS ERM Report 2008

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The Governance Catch-22

p.13

Governance can overcome unconscious

bad behavior

Unconscious bad behavior can

undermine Governance

BUT

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5 Governance Impediments to Risk Management

1. Narrow interpretation of the solution set

(seeking a tool, not a process)

2. Impatience and short cuts

(ignoring behavioral issues)

3. Looking at the normative instead of a broader

perspective (underestimating dynamic markets)

4. Inadequate allocation of time

5. Defining the problem incorrectly

p.14

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Understand Why Change is Necessary: Return, by nature, is largely unpredictable

p.15

In short,

by optimizing the unpredictable (return),

we have been focusing on the wrong variable.

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p.16

On what you

can control

(re)Focus

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What Can Trustees Control?

1. The governance process (to overcome bad behavior)

› Discipline

› Preparedness

› Focus on the primary goal

› Better communication

2. The risk-management process

› Determine the level of acceptable risk relative to your primary goal, risk capacity, risk tolerance and time horizon

› Be cognizant of liquidity, transparency & leverage

› Utilize stress testing & scenario analysis (ask yourself what can go wrong)

p.17

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The More Thoughtful will…

› Realize that risk can’t be summed up in a number, but involves

intangibles such as investor culture, behavior and strategy

› Evaluate whether their horizon is long or short

› Take into account the fact that a meltdown results in temporary

imbalances: can you take that risk?

› Improve your governance structure and risk management

practices (invest for success, but be cognizant of the downside)

› Focus more on common sense in risk management and

develop a comprehensive framework (quantitative &

qualitative)

› Consider new approaches

“There is no education like adversity”, Benjamin Disraeli‡

p.18

‡

Source: Disraeli – A Biography, Stanley Weintraub, October, 1993

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Summary

1. The world is driven more and more by geopolitical

forces, which are overriding investment fundamentals

2. Investor uncertainty is therefore greater than ever

3. To avoid being blindsided, a better understanding of

fund risk(s) and better preparedness is essential

4. Investors need to focus on the two things they can

control: Governance & Risk Management Process

5. It all comes down to building a culture of risk-adjusted

decision-making

p.19

Geo-political headwinds should be

tailwinds for risk management!

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Russell Surveys 2012 Results

› Purpose of the study

› To gather information on measuring attitudes towards risk management as well

as governance.

› Surveyed population - Pensions & Investments Advisor Panel

› Respondents by sector: Corporate, Public, Endowment, educational Institution,

Foundation, Health Service Organization, Union

› Respondents by function: Investment/portfolio management, Pension

management/administration, Employee benefits/Human resources, General

financial administration, Cash management, Insurance/risk management

› Number of Respondents = approx. 233 (Survey#1) and approx. 205 (Survey#2)

› Plan type: DB, DC, E&F

p.20

Source: Pensions & Investments (in conjunction with Russell Investments), 1st Risk Survey February 2012 and 2nd Risk Survey March 2012

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Top Concerns in 2012 Pertaining to Investment Program

p.21

TOP CONCERNS IN 2012 PERTAINING TO INVESTMENT PROGRAM

Rank Corporate Plans % Public Plans % Endowments &

Foundations %

1 Market Volatility 88.6 Market Volatility 82.1 Market Volatility 82.5

2 Risk Management 69.5 Risk Management

Risk 79.9 Risk Management 80.0

3 Regulatory Changes 53.5

Expense Control

Manager

Transparency

41.0 Regulatory Changes 37.5

4 Expense Control 42.9

Regulatory

Changes Need for

Contributions

30.8 Manager

Transparency 35.0

5 Need for

Contributions 40.0

Performance vs.

Peers 25.6

Expense Control

Inflation Control 32.5

Source: Pensions & Investments (in conjunction with Russell Investments) , 1st Risk Survey, February 2012

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p.22

90%

58% 52%

58%

73% 81%

Risk more

important than

5 years ago

Pension plan

presents higher

risk to balance

sheet than 5 years

ago

Pension plan

presents higher

risk to earnings

than 5 years ago

Investment portfolio

presents higher risk

to organizational

mission than 5 years

ago (E&F only)

Increase in scrutiny

from Board &

Investment

Committee vs.

5 years ago

Complexity of

manager selection

has increased from

5 years ago

Comparing Importance of Issues Today versus 5 Years Ago

Source: Pensions & Investments (in conjunction with Russell Investments), 1st Risk Survey February 2012

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Portfolio Changes Due to Risk Measures (Last 12 months)

p.23

Source: Pensions & Investments (in conjunction with Russell Investments), 2nd Risk Survey March 2012

Minor Tweaks 46%

Moderate Changes

28%

Major Overhaul

5%

No Changes 21%

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Risk Management: Perception vs. Action

p.24

Source: Pensions & Investments (in conjunction with Russell Investments), 2nd Risk Survey March 2012

90.0%

79.2%

35.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Risk more important than 5 years ago

Made changes to portfolio due to Risk Management (last 12 months)

Need to spend more time on risk management

(i.e. currently spending "too little" time)

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Expect to Take Additional Steps to Increase Risk Management (within12 months)?

p.25

Source: Pensions & Investments (in conjunction with Russell Investments), 2nd Risk Survey, March 2012

18.3 18.8 23.2

32.9 37.5

39.3

48.8 43.8 37.5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Corporate Public E&F

No (net)

Yes but no plan

Yes & Have a plan

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Top Steps Taken to Improve Governance

p.26

Source: Pensions & Investments (in conjunction with Russell Investments), 2nd Risk Survey, March 2012

Increase monitoring & supervision

69.2%

Hired investment consultant

28.4%

Added staff 19.9%

Purchased/built risk tools 19.9%

Outsourced 10.9%

No changes 17.4%

Other 5.5%

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Institutional investors fall behind USA Inc in conversation with Amanda White top1000funds.com May 9, 2012

› Institutional investors are clearly behind in risk management compared to the innovative techniques implemented in treasury departments of corporate America, chief investment officer of Wurts and Associates, Jeff Scott says.

› Scott, who spent his career managing the balance sheet at Microsoft, Dow Chemical, the Alaska Permanent Fund and now investment consultant Wurts, says institutional investors want to manage returns, which is impossible.

› “Returns are a function of animal spirits. They swing between fear and greed. Do companies really change in long-term valuation over the weekend?” he asks.

› And while he points to investors such as Warren Buffet who “thinks about risk constantly with his capital”, Scott says many institutions are not thinking about risk.

› “There is poor governance, and poor risk management. A lot of losses experienced by funds throughout the financial crisis were a function of missing simple risk-management concepts like custody of collateral and liquidity. You didn’t need fancy mathematical risk models instead of common sense you can get in Omaha.”

› Scott says that institutional investors are behind in their risk-management practices.

› Many asset-management firms and hedge funds have far superior approaches to risk management than institutional investors. There are steps to take and it has to start with governance, and then understanding the risks you are taking.

p.27

Any views or opinions made are solely representations of the cited author (Jeff Scott) and do not necessarily represent those of Russell Investments.

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Russell Hazard Report

Sample Pension, as of December 31, 2011

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Surplus Summary Risk Analysis

Sample Pension, As of December 31, 2011

Sources: The above analysis is based primarily on Russell’s Capital Markets Forecasts and data from Bloomberg and FactSet. Please see Slide 31 ’Supplemental Information’ for

further details on the analysis provided.

This is a sample report provided for illustrative purposes only and is not meant to represent any actual results.

Equity 45%

Canada Equity 20%

Global Equity 25%

Fixed Income 40%

Canadian Agg 40%

Other 15%Canada Real Estate 10%

Global Infrastructure 5%

Physicals 16%

Unhedged Liability 84%

Assets ($450)

Liability ($500)

95% Surplus VaR Forward looking/Non-normal inputs

Less Risk M ore Risk Assets Liabilit ies

Treasury Rates 2.4% 2.2%

Credit Spreads 0.6% 1.5%

Equity Beta 7.0%

Other Assets 5.6%

Currency 0.0%

Active M anagement 0.9%

Diversification 0.0%

Total 6.1% 3.7%

Sponsor ImpactFunded

Status

Surplus/

Def icit

$ millions

As of 12/31/2011 90% (50.0)

R isk Enviro nmentLess Risk M ore Risk

Immed.

Recog.

IAS 19

Recog.

Amort ize

1 year

Amort ize

5 years

Standard VaR 80% (109.7) 1.31 2.45 (19.7) 28.1

Stressed VaR 57% (231.6) (1.13) 2.35 (141.6) 3.7

Scenario s

2011 Debt Crisis 83% (89.6) 1.71 2.47 0.4 32.1

Global Financial Crisis 82% (80.0) 1.90 2.48 10.0 34.0

Tech Bubble 83% (91.9) 1.66 2.47 (1.9) 31.6

100 bp Int Rate Decr 80% (113.0) 1.24 2.45 (23.0) 27.4

10% Equity Decline 86% (70.3) 2.10 2.48 19.8 36.0

Volatility Environment5th, 50th and 95th Percentiles as of April 30, 2012

Equity

Currency

Fixed Income

2.50 40.0

10 Year

Expected Returns

2011

EPS

2011

Free Cash Flow

0 50 100 150 200

50th 95th5th HighLow

-100 -50 0 50 100

p.29

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Asset Only Summary Risk Analysis

Sample Pension, as of December 31, 2011

Sources: The above analysis is based primarily on Russell’s Capital Markets Forecasts and data from Bloomberg and FactSet. Please see Slide 31 ’Supplemental

Information’ for further details on the analysis provided.

This is a sample report provided for illustrative purposes only and is not meant to represent any actual results.

Equity 45%

Canada Equity 20%

Global Equity 25%

Fixed Income 40%

Canadian Agg 40%

Other 15%Canada Real Estate 10%

Global Infrastructure 5%

Physicals 16%

Unhedged Liability 84%

Assets ($450)

Liability ($500)

95% VaR Forward looking/Non-normal inputs

Less Risk M ore Risk

Treasury Rates

Credit Spreads

Equity Beta

Other Assets

Currency

Active M anagement

Diversification 0.0% 0.0%

Total

Sponsor ImpactAs of 12/31/2011

R isk Enviro nmentLess Risk M ore Risk

Immed.

Recog.

IAS 19

Recog.

Amort ize

1 year

Amort ize

5 years

Standard VaR 1.64 2.47 (3.0) 31.4

Stressed VaR (0.79) 2.37 (124.7) 7.1

Scenario s

2011 Debt Crisis 2.29 2.49 29.7 37.9

Global Financial Crisis 0.92 2.44 (38.8) 24.2

Tech Bubble 2.27 2.49 28.4 37.7

100 bp Int Rate Incr 2.26 2.49 28.0 37.6

10% Equity Decline 2.10 2.48 19.8 36.0

Volatility Environment5th, 50th and 95th Percentiles as of April 30, 2012

Equity

Currency

Fixed Income

438.0

429.8

407.0

285.3

439.7

371.2

438.4

2011

EPS

2011

Free Cash Flow

2.50 40.0

Assets

450.0

0.0%

10 Yr Exp. Asset

Returns

2.4%

0.6%

7.0%

5.6%

0.9%

6.1%

-40 -20 0 20 40 60

0 50 100 150 200

50th 95th5th HighLow

p.30

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Supplemental Information

Note: This supplemental information relates to Slide 29 and Slide 30

p.31

●

● Asset values are based on actual market values w here available, and are otherw ise estimated.

● The value of the liability and its behavior in different environments is estimated from the generalized pension plan cash flow s, reported liability values, sensitivity to interest

rates, and information regarding the status of the plan. This data is typically provided by the client or the plan’s actuary, or derived from corporate f inancial statements.

● The alpha and tracking error assumptions used in this analysis are based on published expectations for the Russell funds in the portfolio. For investments outside of Russell

funds, estimates are based on the Russell alpha assumptions for the asset class/strategy or they have been provided by the client.

● Free cash flow s and earnings per share f igures are based on the corporation’s most recent 10K filing as provided by FactSet or Bloomberg w here available.

● Value at Risk (VaR) calculation and decomposition is calculated follow ing industry standards.

● 95% VaR represents the 1 in 20 dow nside Value at Risk on a forw ard-looking, one-year basis.

● 95% VaR calculations are based on return, standard deviations, and correlations w hich are generated from a non-normal asset class return distributions w ith fat tails as

represented by Russell’s capital market forecasts.

● VaR is calculated independently for individual components, w ith a diversif ication component balancing to total VaR.

● The VaR associated w ith the liabilities is captured w ithin the Treasury and Credit Spreads components.

● Active management is defined as the difference betw een the actual allocation and policy w eights, combined w ith alpha and tracking error expectations for active managers.

●

●

●

● The volatility environment is represented as follow s:

● Equities – The average value of the S&P/TSX 60 VIX index over the previous month plotted against its historical range (October 2009 to present).

● Fixed Income – The standard deviation of the yield on the 10-yr Canadian government bonds over the previous month plotted against its historic range (January 1990 to

present).● Currency – The average standard deviation of the JP Morgan G7 Currency Volatility Index over the previous month plotted against its historic range (June 1992 to present).

V2.0.0009

All values are estimates and should not be relied upon for any regulatory or f inancial f iling.

10-Year Expected Return is the expected return for each asset and liability component (Russell’s capital market forecasts).

The Stressed VaR scenario (“2XVol/ ρ~1.0”) assumes standard deviations are 2 times Russell’s current forecast. Correlations betw een asset classes are assumed to be 1.0 ,

except for surplus calculations, w here Treasury returns are assumed to have a correlation of -1.0 w ith other asset classes.

Scenario calculations are based on actual events defined as follow s: Tech Bubble (March 24, 2000 through April 4, 2001), Global Financial Crisis (June 8, 2008 through March

9, 2009), 2011 Debt Crisis (April 11, 2011 through October 3, 2011).

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p.32

Q&A

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p.33

Appendix

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Practical Considerations for Risk Management: A customized approach

1. Practical first steps, define:

› What is the primary objective for your fund?

› How much risk do you need to take on to meet your primary objective?

› What is your organization’s risk tolerance and risk capacity?

› What is your relevant time horizon?

› What are current and projected cash flows?

› What is your comparative advantage in investments and what needs improvement?

› What are your risk-management beliefs (conservative or informed judgment) and are your

current strategies appropriate?

› Are your investment beliefs supported by appropriate research?

› What are the required resources and risk-management tools needed to succeed?

› Is your governance process structured to succeed and are you focusing on the appropriate

issues? Is your valuable fiduciary time appropriately allocated? Do you need to delegate more to

investment professionals?

› Do you understand the possible tail events (not just normal markets)?

› Are you measuring what matters and is your reporting appropriate and focusing your attention

correctly?

p.34

BETA V1

Practical Considerations for Risk Management: A customized approach

2. Look at the impact of your fund on your organizations today vs. 10 or 20 years ago. Ask yourself:

› Is the impact considerably larger or smaller?

› Is the investment fund a significant exposure for your organization?

› How does this compare to peers in your industry?

3. Is an investment solution satisfactory or do you need to de-risk?

› If the latter, can you reduce the liabilities (based on the past or for the future)?

› With whom and how can you start the dialogue and negotiate this process?

4. Evaluate your depth of expertise in risk management and governance:

› Are you capable of handling this complex topic yourselves or do you need third-party assistance?

› Do you need a change agent to assist you or a 3rd party deep dive for governance and risk management?

p.35

BETA V1

p.36

Fiduciary Asset / Liability Structural Implementation Operational

Governance

1. Legislative/Legal 2. Political 3. Decision-making 4. Imprudent

delegation 5. Publicity 6. Documentation

10. Benefits

18. Maverick 19. Research 20. Initial Due Diligence

28. Procedural Control

48. Resources 49. Systems / Technology

Objective Setting 7. Policy

Asset Allocation 8. SRI 9. Actuarial / Funding

11. Mismatch 12. Assumptions 13. Asset Mix / Class 14. Model 15. Downside 16. Diversification

21. Rebalancing 29. Cash flow

Asset Class Strategy 17. Regret 22. Active / Passive 23. Currency 24. Benchmark

30. Hedging 31. TAA 32. Timing 33. Credit

Manager / Portfolio Structure

25. Style 26. Sector 27. Country

34. Manager 35. Holdings Concentration 36. Tracking Error

Manager Research & Selection

37. Residual 38. Call

50. Liquidity

Custody / Execution 39. Trading 40. Transition

51. Custodial 52. Securities Lending 53. Valuation

Performance / Process Evaluation

41. Tolerance 42. Monitoring 43. Control 44. Contract 45. Audit / Accounting 46. Oversight

47. Ongoing Due Diligence

54. Guideline breach

Decision

Risk

Russell’s General Hierarchy of Governing Fiduciary Concerns

Hig

h I

mp

act

Hig

h R

isk

M

od

era

te R

isk

L

ow

Ris

k

BETA V1

Summary of 3 Steps to Trustee Redemption

1. Acknowledge the problem

Human behavior can be irrational

Markets are not normal

Managing risk is a complex, pervasive problem, which most Trustees have failed to master

2. Understand why change is necessary

Unconscious bad behavior can undermine good governance

By trying to optimize the unpredictable (return), we have been focusing on the wrong variable

3. Take action!

Focus on the things you can control:

i. Good governance

ii. Determine an acceptable level of risk and develop a risk-management culture & process

p.37

Risk Management is the cornerstone of

investing!

BETA V1

Take Action

Organize for success:

› Training – educate & use research to gain

market insight

› Culture – establish a risk-aware culture

through open communication and trust

› Accountability – develop an effective decision-

making structure with appropriate documentation,

reporting and oversight

› Motivation – don’t create incentives which inhibit

the achievement of your long term-goals

p.38

BETA V1

Remember, the Chair & CIO Play a Vital Role in Fund Governance

p.39

A culture or collaboration through partnership and rigorous self assessment

Governance

Structure

Unambiguous Accountability

Focus on what matters

- Primary Objective

- Risk Management

- Strategy

Delegation to Professionals

Board / Committee

Membership

Tenure / Recruitment / Orientation

Behavior

Expertise

Experience

Training / Development /

Appraisal

Proper Business Plan

Agendas & Documentation

Investment Education

& Innovation

Oversight

Prioritize by importance

Governance

Process

A

Common

Vision

Board

Effectiveness

Tim

ely

Decis

ion

Resea

rch

/

Beliefs

Resources

Source: Based on the

"Proposed Board Effectiveness

Model" of Richard Leblanc, PhD.

BETA V1

Markets Are Anything But Normal

› Irrational human behavior leads to less certainty

› Market bubbles are inevitable and can lead to crisis

› Traditional mean-variance deficient & insufficient

› Over reliance on optimization tools leads to

overconfidence

› Magnitude of investment exposures unknown, resulting in

significant fund losses

› The rate of change and periodic market volatility are not

likely to abate and could escalate

p.40

BETA V1

And There Are Many Ways To Mismanage Risk 1. Relying on historical data

2. Focusing on narrow measures

3. Overlooking knowable risks

4. Overlooking concealed risks

5. Failing to communicate

6. Not managing in real time

p.41

“Solutions from outside the traditional framework will

be required.”

Source: Six ways to mismanage risk, Harvard Business Review, March 2009

BETA V1

Pension Fund Trustee Competence Major findings

› Many trustees have limited problem-solving skills relevant to

investment issues

› Most trustees are unable to deal with probabilities and are

inefficient information processors

› Short cuts (heuristics) dominate trustee decision-making

procedures

› Diversity of trustee competence suggests the possibility of

considerable disagreement or resistance

p.42

Source: University of Oxford 2005 Study

Leadership and structured decision-making are crucial otherwise there will

be low levels of innovation and slow adaptation to changing

circumstances.

BETA V1

This All Leads to Ineffective Decision-making

› Unclear objectives

› Ambiguous accountability

› Changing investment beliefs

› A failure to delegate to investment experts

› Short evaluation periods for long-term strategies

› Unrealistic performance expectations

› Lack of trust in staff & service providers

› Insufficient time / resources

p.43

BETA V1

Pension Governance: The UK Pensions Regulator 2006 Report

Areas where large funds demonstrated better governance include:

› Professional trustees

› Appropriate internal controls are in place to monitor and mitigate risks

› Degree of appropriate knowledge and learning ascribed to trustees

› Training levels were higher where the responsibilities of trustees are greatest

› Confidence and those with in-house administration

› Formal processes to identify risks

p.44

BETA V1

Organizational Research Denotes Various Behavioral Impediments

1. Overconfidence & irrationality

› Optimism

› Biased opinion (the recency effect)

› Lack of formal investment training

› Illusion of control

› Portfolio segregation

› Hindsight bias (delude ourselves we knew)

› Confirmation bias (trend fallacy)

2. Reference dependence / heuristics (short cuts)

3. Personal agenda

4. Group think (committee composition, polarization, etc)

p.45

BETA V1

Thank You Bruce B. Curwood, MBA, CFA, CIMA, Acc.Dir.

Director, Investment Strategy

Don Ezra, M.A, FIA

Co-Chairman Global Consulting