USD Short Duration

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USD Short Duration

• Mike MarkowitzManaging Director, Head US Short
  Duration
• NAST Treasury Management Conference December 2004

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Does This Sound Familiar?

• We are unhappy with current fixed income returns
• We believe in an economic recovery and we are
  concerned about rising interest rates leading to
  declining bond values
• We want positive returns regardless of whether
  interest rates are rising or falling
• Love my money fund safety and liquidity, but
  tired of the low yields

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US Short Duration Capabilities
Risk/Return Spectrum
Short Duration

• Maturity range 1-5 years
• 1-3 year benchmark
• 1-5 year benchmark

EnhancedCash
Return Potential

• Maturity range 3-18 months
• 1-12 month Treasury
• and LIBOR benchmark

LiquidityManagement

• Maturity range 0-3 months
• Stable net asset value

Liquidity
Volatility
Horizon
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US Fixed Income Benchmarks
Risk/Reward Characteristics of Benchmarks1
Lehman US Aggregate
Lehman US Aggregate Intermediate
1-3 Year Treasury Index
3-Month LIBOR
1-month LIBOR
3-Month Treasury Bill
Money Fund First Tier Institutional
1 10-year period ended October 31,
2004 SourceThe 3-month and 1-3 year Treasury
Indices are Merrill Lynch Indices.
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Benchmark Total Returns
Wealth Indices December 31, 1991 October 31,
2004
Wealth Index
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How Has The Market Changed?
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Stress Testing Total Rate of Return Analysis
One Year Time Horizon
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What is a 3-Month LIBOR Benchmark
December 31, 1989 November 30, 2004

• LIBOR is a proxy of cash
• LIBOR is closely tied to short-term US interest
  rates
• As US interest rates increase LIBOR will
  increase
• LIBOR Index will not be negative

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Merrill Lynch U.S. Treasury 1-3 Year Returns
Three Month Returns March 31, 1980 September
30, 2004
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Sources of Return for Enhanced Yield Strategy
Enhanced Yield Average Quality AAA
Cash Return

• Measured duration exposure
• Barbell vs. bullet
• Use of floating rate, callable issues, focus on 5
  year and less on the curve

Duration/Yield Curve
20

40

• Investment grade sector allocation
• Bias towards spread sectors

Sector

• Bias towards higher quality
• No BBB
• US dollar only
• Securities purchased with a maturity lt 5 year

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Security Selection

LIBOR (over a full cycle)
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Short Duration Sector Analysis
Data Through September 30, 2004
Sector Opportunities

• Examine the yield opportunities between sectors
  and subsectors.
• Analyze spread widening tolerance versus
  treasuries (breakeven returns).

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Return Expectations and Goals
Absolute Return
Relative Return
Investment style
Generate positive returns rather than correlating
to an asset class benchmark
Add value vs. a given benchmark
Capital preservation
Primary interest in capital preservation growing
interest in capital accumulation as risk
tolerance increases
Downside risk mainly driven by benchmark
risk/return characteristics
Client tolerance for losses over time/opportunity
losses
Risk understood as downside focus on capital
preservation
Symmetrical, two-sided risk concept
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Loosen up a little!