Annual Meeting of 1818 Society

1
Annual Meeting of 1818 Society
Pension Plan Performance
October 22, 2008
2
Pension Plan and Endowments
Roadmap

• Highlights 2007
• Update 2008 and Recent Market Stress
• Determinants of Plan Long Term Performance
• Concluding Remarks

3
SRP - Funded Status
Funded ratio is (MV of Assets)/(Liabilities)
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Total Bank Contribution Rates for FY03 - FY09
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SRP Plan Performance (2007)

• Alternative investments continued playing a key
  role

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SRP - Change in Asset Allocation Policy, October
2007
Old Target
New Target
Emerging Market Equity 5
Non US Equity 16
Private Equity 15
Non-US Equity 4.5
Real Estate 12.5
Timber 2.5
Private Equity Up to 12
US Equity 19
Infrastructure 2.5
US Equity 4.5
Real Estate Up to 8
Commodities 2.5
Cash 1
Cash Up to 1
Hedge Funds Up to 12
Hedge Funds Strategies 23
Fixed Income for hedging 25
Fixed Income 40
Overlay Strategies 2
Equity Strategies
Real Return Strategies
Fixed Income Strategies
Absolute Return Strategies
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Pension Plan and Endowments
Roadmap

• Highlights 2007
• Update 2008 and Recent Market Stress
• Determinants of Plan Long Term Performance
• Concluding Remarks

8
Pension Plan and Endowments
General Market Developments
Update on Recent Market Developments
Unprecedented market conditions have led to
losses in most asset classes
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Pension Plan and Endowments
General Market Developments
Update on Recent Market Developments
Equity market gyrations accelerated in October.
Dow drops the most ever in 1 day, and
subsequently stages the biggest rally since
1930s, only to fall back again
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Pension Plan and Endowments
Government interventions to stem the crisis
Update on Recent Market Developments

• US
• Guarantee all senior debt issued by banks for
  next 3 years
• Cut rates to 1.5 on Oct 8
• Increase bank deposit to USD 250K from USD 100K.
  Non interest bearing accounts unlimited guarantee
• Will purchase troubled bank assets up to USD
  700bn.
• Will use of up to USD250bn of the USD 700bn
  bail-out package to inject in banks. Half in
  the 9 big banks other half for smaller lenders
  and thrifts
• Temporarily banned short selling in financial
  companies. Ban lifted Oct 8.
• EU
• Cut rates to 3.75 on Oct 8
• Guarantee deposits for up to EUR100K
• UK
• Guarantee new short and medium-term debt issued
  by banks
• Cut rates to 4.5 on Oct 8
• Increase deposit guarantee to GBP50K
• RBS and Lloyds get GBP39bn capital injection.
  Another GBP25bn available for Tier 1 capital to
  other banks.
• Short selling in financial stock until Jan 2009
• Germany
• Provides EUR400bn in bank guarantees
• Blanket guarantee for all private bank accounts

• Unprecedented government intervention across the
  world
• Liquidity and lending guarantees
• Interest rate cuts
• Bank retail deposit guarantees
• Bank recapitalization
• Asset purchase
• Short selling bans
• Blanket deposit guarantees

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Pension Plan and Endowments
SRP Performance
Update on Recent Market Developments
SRP has lost value
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Pension Plan and Endowments
SRP Performance
Update on Recent Market Developments

• A scenario analysis of returns and risk of
  different hypothetical asset allocations show
• The target SAA has highest risk adjusted returns
  in all scenarios
• The actual return of SRP are below the target
  SAA returns but above all other scenarios
• Actual SRP losses were less than for a risk
  averse 40 eq / 60 fixed income portfolio

Diversification has helped cushion losses
Total return comparison of different asset
allocations
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Pension Plan and Endowments
Roadmap

• Highlights 2007
• Update 2008 and Recent Market Stress
• Determinants of Plan Long Term Performance
• Concluding Remarks

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Pension Plan and Endowments
Approaches to SRP Management
Cyclicality and Sources of Alpha
Progressive improvement in the amount and
consistency of Excess Return over time
Excess Return has increased three-fold in the
past 5 years
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Pension Plan and Endowments
Approaches to SRP Management
Cyclicality and Sources of Alpha
Gradual improvement in managing downside risk
Since 2002 major effort to increase portfolio
diversification and investment in alternatives
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Pension Plan and Endowments
Diversification across Asset Classes Improves
Excess Returns
Greater diversification and low excess returns
correlation across asset classes are two main
reasons for improvement of excess returns
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Pension Plan and Endowments
Diversification within Asset Classes Improves
Excess Returns
Greater diversification within each asset class
across active managers has also positively
contributed to reduce the overall volatility
Impact is greatest in the highest return
producers alternative asset classes
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Pension Plan and Endowments
2008 Alpha generation A Damage-Control Year
Cyclicality and Sources of Alpha

• Environment has made it difficult for active
  managers to add Alpha
• Plan has done better than market average in
  public equities and roughly in line in fixed
  income

• Preliminary indicators confirm this trend for the
  quarter ending September 30th. Data will not be
  available till mid-November

Market average is composed of 197 different
active managers in the Fixed Income space and 293
in the Public Equity space. per annum
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Pension Plan and Endowments
Roadmap

• Highlights 2007
• Update 2008 and Recent Market Stress
• Determinants of Plan Long Term Performance
• Concluding Remarks

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Pension Plan and Endowments
Concluding Remarks

• An unprecedented market environment has prompted
  an unprecedented government response
• Short-term performance will continue to be
  volatile
• Plans increased diversification across asset
  classes and active managers has been a major
  determinant of performance and stronger risk
  management
• Diversification will continue to contribute to
  the downside protection of the Plan
• Crisis will be tough in the short term but will
  bring better risk/return metrics better buying
  opportunities for the long term investor

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