Fort Lauderdale Police And Fire Pension Board Investment Workshop 2009
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Fort Lauderdale Police & Firefighters’ Retirement System
Investment Workshop December 3 & 4, 2009
Hyatt Pier 66 Hotel Fort Lauderdale, Florida
Investment Workshop Agenda Hyatt Pier 66 Hotel Fort Lauderdale, Florida
Thursday, December 3, 2009 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
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
Fort Lauderdale Police & Firefighters’ Retirement System
City of Fort Lauderdale Police and Fire Retirement System
Capital Markets Review 231 South Bemiston Avenue 14th Floor St. Louis, Missouri 63105 WWW.ACGNET.COM
December 3, 2009
Capital Markets Summary
Broad Market Returns For the Periods Ending October 31, 2009
65% 55% 45% 35% 25% 15% 5% -5% -15%
MTD
YTD
1 Year
3 Years
5 Years
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%
Source: ACG Research, Bloomberg © 2009 Asset Consulting Group All Rights Reserved
2
© 2009 Asset Consulting Group All Rights Reserved
MTD YTD One Year Three Years Five Years Te
lec
er ia
ls
ls
s
om m un ica ti o ns
M at
tri a
na nc ial In du s
Fi
-26.6%
-5.1%
-5.3%
-3.7%
-4.7%
-4.9% -7.8% -2.1% -11.6% -3.2%
-11.1%
-13.2%
-4.7%
-6.0%
-3.8%
-2.5%
7.8% 5.8%
1.0%
1.0%
-0.3%
6.7%
14.3%
12.0%
8.7%
9.3% 5.9%
3.2%
0.0% 3.6%
1.0%
1.6%
1.8%
15%
En er gy
les
-10.5%
-15%
er St ap
io na ry
-3.2% -2.6% -4.2% -7.4%
-1.4%
-0.4%
-0.1%
30.0%
28.6%
24.6% 21.4%
25%
Co ns um
re t
Ut ilit ies
ch no lo gy
-5.6%
35%
er D isc
Te
-5% 5.4% 5.7%
5%
-2.3%
44.2%
45%
Co ns um
In fo rm ati on
H ea lt h ca re
S&P 500 Sector Returns For the Periods Ending October 31, 2009
-25%
-35%
Source: ACG Research, Bloomberg 3
Fixed Income Market Environment For the Periods Ending October 31, 2009 Excess Returns by Sector1 as of October 31, 2009 6,000
1
Relative to the duration neutral Treasury Time periods over one year are annualized Source: Barclays Capital
© 2009 Asset Consulting Group All Rights Reserved
4,225
4,000 2,785
3,000
2,425 2,050
2,424
2,000
1,889
1,612 693 716
1,000
50
356 467 -52
8
485 478 89
14
219
45
65
167
101
-155
(1,000)
at e)
S
or po r
AB H
ig h
Y
ie ld
(C
Co r
po r
M B
BS
S
at e
el at ed G ov 'tR
re ga te
-160
-241
-474
Ag g
Nominal Returns by Quality 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%
QTD
YTD
1-Year
3-Year*
Excess Returns by Quality as of October 31, 2009
8,000
8 ,0 0 0 7,0 0 0
Excess Return (bps)
Nominal Returns by Maturity 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%
5,217
5,000
CM
Excess Return (bps)
Nominal Returns by Sector 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%
6 ,0 0 0 4,790
5,0 0 0 4,202
4,116
3,619
4 ,0 0 0
2,950
2,8172,912
3 ,0 0 0 2,225 1,767
2 ,0 0 0
1,227 1,078
1,0 0 0
372 349 40
-23
83
118
86
92
-45
162
242
-189
-273
(1,0 0 0 ) AAA
AA
-87
A
QTD
-403
B AA
YTD
1-Year
BA
B
-575
CAA
3 -Year*
4
Point in Time Analysis
Trailing One Year Market Performance – September 09 vs. October 09 Trailing One Year Returns 40.00%
30.00%
Percent Return
20.00%
10/31/2009 9/30/2009
10.00%
0.00%
-10.00%
Ag gr eg at e
U x W Ie SC IA C
M
Ba rc la y's
S
AF E M SC IE
Va lu e
R us se ll 20 00
G ro w th
R us se ll 20 00
R us se ll 20 00
Va lu e
R
us
se ll
10 00
G ro w th
R us se ll 10 00
S& P
50 0
-20.00%
Index
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.
© 2009 Asset Consulting Group All Rights Reserved
6
Trailing Ten Year Market Performance – September 09 vs. October 09 Trailing Ten Year Returns 10.00%
8.00%
Annualized Return
6.00%
4.00% 10/31/2009 9/30/2009 2.00%
0.00%
-2.00%
Ag gr eg at e rc la y's
Ba
M
SC IA C
W Ie
x
U
S
AF E M SC IE
Va lu e
th
R us se ll 20 00
ro w G
R us se ll 20 00
R us se ll 20 00
lu e Va 10 00 us
R
R
us
se l
se ll
l1 00 0
S& P
G ro w th
50 0
-4.00%
Index
Over longer periods of time trailing returns month over month tend to stabilize but still exhibit some dispersion in more volatile asset classes.
© 2009 Asset Consulting Group All Rights Reserved
7
Rolling One Year Rankings
Rolling One Year Ranks – Sawgrass Rolling 1-Year Rankings eVestment Alliance Large Cap Growth Universe 0 10 20 30 40 50 60 70 80 90
Russell 1000 Growth
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Sawgrass
9
Rolling One Year Ranks – Systematic Rolling 1-Year Rankings eVestment Alliance Large Cap Value Universe 0 10 20 30 40 50 60 70 80 90
Russell 1000 Value
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Systematic
10
Rolling One Year Ranks – NorthPointe Rolling 1-Year Rankings eVestment Alliance Small Cap Growth Universe 0 10 20 30 40 50 60 70 80 90
D ec -0 Ap 0 r -0 Au 1 g01 D ec -0 Ap 1 r -0 Au 2 g0 D 2 ec -0 Ap 2 r -0 Au 3 g03 D ec -0 Ap 3 r -0 Au 4 g0 D 4 ec -0 Ap 4 r -0 Au 5 g05 D ec -0 Ap 5 r -0 Au 6 g0 D 6 ec -0 Ap 6 r -0 Au 7 g07 D ec -0 Ap 7 r -0 Au 8 g0 D 8 ec -0 Ap 8 r -0 Au 9 g09
100
Russell 2000 Growth
© 2009 Asset Consulting Group All Rights Reserved
NorthPointe
11
Rolling One Year Ranks – Lee Munder Rolling 1-Year Rankings eVestment Alliance Small Cap Value Universe 0 10 20 30 40 50 60 70 80 90
Ju n03 Se p0 D 3 ec -0 M 3 ar0 Ju 4 n04 Se p0 D 4 ec -0 M 4 ar0 Ju 5 n05 Se p05 D ec -0 M 5 ar0 Ju 6 n06 Se p06 D ec -0 M 6 ar0 Ju 7 n07 Se p0 D 7 ec -0 M 7 ar0 Ju 8 n08 Se p0 D 8 ec -0 M 8 ar0 Ju 9 n09 Se p09
100
Russell 2000 Value
© 2009 Asset Consulting Group All Rights Reserved
Lee Munder
12
Rolling One Year Ranks – Artio Rolling 1-Year Rankings eVestment Alliance International Large Cap Universe 0 10 20 30 40 50 60 70 80 90
MSCI All Country World Ex-US
© 2009 Asset Consulting Group All Rights Reserved
Artio International Equity I
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Artio International Equity II 13
Rolling One Year Ranks – Agincourt Rolling 1-Year Rankings eVestment Alliance Core Fixed Income Universe 0 10 20 30 40 50 60 70 80 90
Barclays US Aggregate
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Agincourt 14
Pros and Cons of Style Peer Groups
Pros Provide 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.
Cons Survivorship 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.
© 2009 Asset Consulting Group All Rights Reserved
15
© 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 Ft. Lauderdale Police and Fire Retirement System: Fixed Income Market Review December 3, 2009
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.
Agenda
Page 2
I.
CIS Overview
II.
Market Review
III.
Observations and Outlook
IV.
Current Strategy Position
Firm Overview – BNY Mellon Asset Management
BNY Mellon Asset Management 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
Ankura Capital Pty Ltd. 1
Blackfriars Asset Management
BNY Mellon ARX
BNY Mellon Beta Management 2
The Boston Company Asset Management, LLC
The Dreyfus Corporation
EACM Advisors LLC
Hamon U.S. Investment Advisors Ltd. 3
Ivy Asset Management LLC
Mellon Capital Management Corporation
Mellon Global Alternative Investments Ltd. 1
The Newton Group
$925 billion in assets under management (as of 06/30/09)
Urdang Capital Mgmt, Inc. / Urdang Securities Mgmt, Inc.
Walter Scott & Partners Limited
$20.7 trillion in assets under custody and administration (as of 06/30/09)
West LB Mellon Asset Management 1,4
The Alcentra Group
BNY Mellon Cash Investment Strategies 5
Pareto Investment Management Limited
Standish Mellon Asset Management Company LLC
Do not offer services in the U.S. A division of The Bank of New York Mellon 3Minority Owned 450/50 Joint Venture 5A division of The Dreyfus Corporation. Please see disclosures in the appendix. 2
Page 3
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
$12 trillion in assets under trusteeship for over 90,000 clients worldwide (as of 06/30/09)
Fixed Income, Cash & Currency Group
1
The Bank of New York Mellon Treasury Services
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
Firm Overview – BNY Mellon Cash Investment Strategies
BNY Mellon Cash Investment Strategies (CIS) ▪
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
*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 4
Observations and Outlook
The Financial Industry in Transition
September 15, 2008 Lehman Brothers filed for bankruptcy
February 2008 Auction Rate Securities, failed auction
February 18, 2009 October 7, 2008
Bank of America agreed to acquire Merrill Lynch
6%
5%
Commercial Paper Funding Facility established by the Fed
September 16, 2008 NY Fed agreed to lend $85 billion to AIG in exchange for 80% equity stake
5.25%
October 14, 2008 Temporary Liquidity Guarantee Program established by the FDIC
4.50%
Fed Fund Rate
3%
Structured Investment Vehicles (SIV) liquidity issues
TARP Capital Purchase Program invests $125 Billion in 9 banks
September 19, 2008
4.25%
August 2007
ABCP Money Market Mutual Fund Liquidity Facility
3.50%
Fed announced Primary Dealer Credit Facility
Money Market Investor Funding Facility established by the Fed
2.25%
November 25, 2008
0% Sep 07
Dec 07
Mar 08
Jun 08
Sep 08 Time
Source: Various media outlets, Bloomberg
Page 5
Treasury Guarantee Program for Money Market Funds expires
1.50%
Treasury and the Fed announced the Term Asset Backed Securities Loan Facility
JP Morgan Chase Acquired Bear Stearns with Treasury bid
Jun 07
September 18, 2009
2.00%
March 17, 2008
1%
March 23, 2009
October 21, 2008
March 16, 2008
2%
Fed announced purchase of $750 Billion in agency debt and $300 Billion in longer term Treasury securities
Treasury announced details of the Public-Private Investment Program
Treasury to guarantee Money Market Funds
3.00%
Homeowner Affordability and Stability Plan announced
March 18, 2009
Reserve Fund “breaks the buck”
4.75%
4%
$787 Billion American Recovery and Reinvestment Act signed into law
Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (TARP)
FNMA and FHLMC placed into conservatorship
New Century Bankruptcy
February 17, 2009
October 3, 2008
September 7, 2008 June 2007
1.00%
0.25%
Dec 08
Mar 09
Jun 09
Sep 09
BNY Mellon Short Duration Market Review
Selected Money Market Rates For the period December 1, 2006 to October 31, 2009
7%
1 Month Asset Backed Commercial Paper 1 Month LIBOR Overnight Fed Effective Fed FundsTarget 3 Month Treasury Bill
6%
Yield
5% 4% 3% 2% 1% 0% 12/1/2006
Source: Bloomberg
Page 6
5/25/2007
11/16/2007
5/9/2008
10/28/2008
4/24/2009
10/13/2009
BNY Mellon Short Duration Market Review
Fed Watch November 16, 2009
Apr 30
2.00
Assessment Omitted
Jun 25
2.00
Inflation Risk
Aug 05
2.00
Inflation/Growth
Sep 16
2.00
Inflation/Growth
Oct 8
1.50
Inter-meeting
Oct 29
1.00
Risk to Growth
Dec 16
0 - 0.25
Risk to Growth
Implied Fed Funds Target 5%
30-Jun-09 16-Nov-09
4%
3% Rate
2008 FOMC Schedule of Meetings Date Rate Risk Assessment Mar 18 2.25 Downside Risk
2%
2009 FOMC Schedule of Meetings Date Start
Rate 0 - 0.25
Risk Assessment Risk to Growth
Jan 28
0 - 0.25
Risk to Growth
Mar 18
0 - 0.25
Risk to Growth
Apr 29
0 - 0.25
Risk to Growth
Jun 24
0 - 0.25
Risk to Growth
Aug 12
0 - 0.25
Risk to Growth
Sep 23
0 - 0.25
Risk to Growth
Nov 04
0 - 0.25
Risk to Growth
Dec 16
Source: Bloomberg
Page 7
1%
0% Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
BNY Mellon Short Duration Market Review
Historical Short Term Rates
Historical Treasury Yield Curves (0-30 Years)
For the period October 1999 to October 2009
October 31, 2009
10%
6%
2 Year Treas ury 3-Month LIBOR
Yield to M aturity
Yield-to-Worst
5%
Fed Funds Target
8% 6% 4% 2%
3% 2% 1%
0%
12/31/2006
12/31/2007
12/31/2008
10/31/2009
0% Oct 99
Source: Bloomberg
Page 8
4%
Oct 00
Oct 01
Oct 02
Oct 03
Oct 04
Oct 05
Oct 06
Oct 07
Oct 08
Oct 09
0
5
10
15 Years to Maturity
20
25
30
BNY Mellon Short Duration Market Review
Rolling One Year Excess Return vs. Treasury Notes October 31, 2009
Rolling One Year Excess Return as of October 31, 2009, 1-5 Year Corporate Index 20% 15%
Percent (%)
10% 5%
Credit/Liquidity Crisis
Bursting Tech Bubble
0% -5%
Russian Debt Default& LTC
S&LCrisis
-10%
Record Setting High Yield Downgrades & Defaults (Enron,W orldcom ,Tyco)
-15% Oct 89
Oct 91
Source: Barclays Capital Inc. index data
Page 9
Oct 93
Oct 95
Oct 97
Oct 99
Oct 01
Oct 03
Oct 05
Oct 07
Oct 09
Observations and Outlook
Summaries of Global Policies – Bailout Strategies Federal Reserve
Bank of England
Bank of Japa n
0.00-0.25%
0.50%
0.10%
Policy Rate Asset Sw aps
Term Se curitie s Lending Fa cility (TSLF) Special Liquidity Sche me: Banks can
European Central Bank 1.00% 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 Fa cility (TAF)
Discount W indow Facility
Term Asset Ba cked Se curitie s Loa n
Additional longer te rm re pos
Corporate debt financing facility
Main and supplementary longer-term refinancing operations (up to 6 months)
Facility (TALF)
were expanded and will be carried through at full allotment.
operations
Primary De ale r Cre dit Facility (PDCF) Asset-backed CP Money Market Mutual Fund Fa cility (MMIFF) Collatera l Expansion
Collateral expanded several times for various programs
Collateral expanded for repos and include MBS, AAA-corporate and consumer ABS,
Collateral expanded in Dec 08. New minimum rating lowered to BBB from A.
and highly rated ABCP. Private Asse t Purchases
Money Marke t Investor Funding
Asset Purchase Facility (APF)
Expanded, includes CDs and securities in USD, JPY and GBP. Min. rating lowered to BBB- from A-.
Corporate bond purchase program
Purchases of CP under discussion at ECB
Facility (MMIFF) Outright Purchases of CP Commercial Paper Funding Facility GSE purchase Tre asury Purchases
Announced purchases of up to $300bn
Asset Purchase Facility (APF)
in Treasuries
Increased purchases of Japanese Government Bonds (JGBs) from banks from Ұ1.4trn to Ұ1.8trn a month. (Announced January 09)
FX Sw aps
Other
Swap lines opened with other Central
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.
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
Source: News outlets, Barclays Capital
Page 10
Unlimited dollar supply offered on a
Observations and Outlook
The Consumer Retail Sales Total
10.0
Retail Sales Less A utos
8.0
Households still deleveraging and limiting spending
6.0 4.0
Decline in borrowing has affected consumer spending
2.0 0.0 -2.0
Consumer confidence and retail sales improving in UK and Eurozone, but US consumer continues to lag
-4.0 -6.0 -8.0 -10.0 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Personal Income and Spending Personal Income Personal Spending
10.0 8.0 6.0
Spending will be done by households and businesses that do not need to borrow or that have good credit quality
4.0 2.0 0.0
Personal spending rose 0.9% in August due in part to the “Cash for Clunkers” program
-2.0 -4.0 1993
1994
Source: Bloomberg
Page 11
Growth of income is important in the recovery
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Observations and Outlook
Housing
Household Debt Service Ratio Falls to 10.5%
Personal Savings Rate Reaches 8% 16 14
Personal Savings Rate
16
Household Debt Service Ratio
Target = 8%
14
Target = 10.5%
12
12
10
10
8
8
6
6
4
4 2
2
Households increasing personal savings Rising savings weighs on growth of consumer spending Continued deleveraging of the consumer
Source: Bloomberg
Page 12
06
08
20
04
20
20
00
02
20
98
19
20
94
96
19
92
19
19
88
90
19
86
19
19
82
84
19
80
19
19
76
78
19
74
19
19
70
72
19
68
19
19
64
66
19
19
60
19
19
06
08
20
04
20
20
00
02
20
98
19
20
94
96
19
19
90
92
19
88
19
19
84
86
19
82
19
19
78
80
19
76
19
19
72
74
19
19
68
70
19
66
19
19
62
64
19
60
19
19
62
0 0
Observations and Outlook
Housing Survey U.S. Home Sales Months Supply 14
New Hom e Sales Months Supply Exis ting Hom e Sales Months Supply
12
Housing supply is decreasing
10
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.
8 6 4 2 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
U.S. Sales Volume of New and Existing Homes 1,500
New Hom e Sales Thous ands of Units (L) Exis ting Hom e Sales Millions of Units (R)
1,250
7,500 7,000 6,500
1,000
6,000 5,500
750
5,000 500
4,500
250
4,000 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
Source: Bloomberg
Page 13
Sales are stabilizing Prime borrowers now defaulting due to job losses
Observations and Outlook
Employment Change in Non-Farm Payrolls 250
400
300
200
350 400
$000's
0
450
-200
500
-400
550
3 Month MA
-600
600
Initial Jobless Claims 4 W eek MA
650
-800 2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
700
Decline in unemployment claims
Unemployment Rate
Business still not hiring
11
7,500 Unemployment Rate (L)
10
6,500
Continuing Jobless Claims (R)
9
5,500
(%)
8 7
4,500
6
3,500
5 2,500
4
Page 14
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1,500 1999
3
Source: Bloomberg
Improving labor market
Observations and Outlook
Unemployment Rates
US
12.00
UK
Eurozone
Japan
Rate (%)
10.00 8.00 6.00 4.00 2.00
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
Source: Bloomberg
Page 15
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
00 20
99 19
19
98
-
Observations and Outlook
Manufacturing Sector
Capacity Utilization (%) (L)
90.0
Industrial Production (YoY % Change) (R)
15.0 10.0
85.0
5.0
80.0
0.0 75.0
-5.0
n09
Ja
n07
Ja
n05
Ja
n03
Ja
n01
Ja
n99
Ja
n97
Ja
n95
Ja
n93
Ja
n91
Ja
n89
Ja
n87
Ja
n85
Ja
n83
Ja
n81
Ja
Ja
Ja
Ja
Ja
n79
-15.0 n77
65.0 n75
-10.0
n73
70.0
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
Source: Bloomberg
Page 16
Observations and Outlook
Global Economic Watch
Gross Domestic Product
Consumer Price Index
Year-on-Year %
Year-on-Year %
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
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
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 Rate
Americas
Europe
Asia/Pacific
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
Source: Bloomberg
Page 17
Observations and Outlook
Survey of Economic Forecasts
Real GDP Country
Consumer Price Index
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
-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
--
--
Japan
F = Forecast
Anemic growth in developed countries. Growth projections higher in emerging market countries Deflation is still a threat Emerging market consumers need to spend more
Source: Bloomberg
Page 18
Observations and Outlook
GDP vs. Asset Performance US GDP vs. Asset Performance
Europe GDP vs. Asset Performance
10
1,800 GDP Annualized (L)
8
Long Yield (L)
Equities (R)
1,600
6
6
1,400
5
4
1,200 `
2
1,000
6,000
7 GDP Actual (L)
Long Yield (L)
Equities (R) 5,000
4
4,000
3 3,000
2 0
800
1
-3
2,000
0 -1
1,000
GDP Actual (L)
Long Yield (L)
20 09
20 08
20 07
20 06
20 05
20 04
20 03
20 02
Japan GDP vs. Asset Performance
UK GDP vs. Asset Performance 7
20 01
0 20 00
2 00 9
2 00 8
0 2 00 7
-8 2 00 6
-2
2 00 5
200
2 00 4
-6
2 00 3
400
2 00 2
-4
2 00 1
600
2 00 0
-2
8,000
Equities (R)
10
25,000 GDP Annualized (L)
6
Long Yield (L)
Equities (R)
7,000
5 6,000
5
20,000
0
15,000
-5
10,000
-10
5,000
-15
0
4 5,000
3 2
4,000
1
3,000
0 2,000 -1 1,000
-2
Similar scenario in developed countries Source: Bloomberg
Page 19
20 0 9
20 0 8
20 0 7
20 0 6
20 0 5
20 0 4
20 0 3
20 0 2
20 0 1
20 0 0
20 09
20 08
20 07
20 06
20 05
20 04
20 03
20 02
20 01
0 20 00
-3
Observations and Outlook
Global Rates
Central Bank Rates Start of Cycle Official Rate
Current
Date
Level
Last Move
Fed 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: W orking 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)
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
Source: Bloomberg
Page 20
Observations and Outlook
International Monitor 3-Month LIBOR (%) 8 UK
7
Euribor
USD
Japan
6
Reduction in interbank rates are a welcome sign as systemic risks have been reduced
Yield (%)
5 4
LIBOR now at 28.4 basis points. EurolandEONIA now at 40.5 basis points.
3 2 1
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
20
00
0
Long Yields (%) 8 UK Gilt
German Bund
US 10yr Note
JPY 10yr Bond
7
Long term government bonds tracking in a narrow range
6
Yield (%)
5
Yields low despite heavy new issuance
4 3 2 1
Source: Bloomberg
Page 21
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
20
00
0
Observations and Outlook
International Monitor Equities 25,000
UK FTSE 100
Germany DAX 30
JPY Nikkei 225
1800
USD S&P 500 (R)
1600 20,000
1400 1200
15,000
1000 800
10,000
600 400
5,000
200
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
20
20
01
0 00
0
Global stock markets have improved as money has flowed back into riskier assets
Source: Bloomberg
Page 22
Observations and Outlook
ABS Spreads 2500
1-Year AAA (Home Equity) 3-Year AAA (Home Equity)
2000
1-Year AAA (Credit Cards) 3-Year AAA (Credit Cards)
1500
5-Year AAA (Credit Cards) 1-Year AAA (Autos)
1000
3-Year AAA (Autos)
500
0 Sep 07
Dec 07
Mar 08
Jun 08
Sep 08
Dec 08
Mar 09
Jun 09
Outperformance in auto and credit card securities Subprime and Alt-A securities also improving in recent months
Source: Bloomberg
Page 23
Observations and Outlook
Corporate Spreads
1-3 Year Corporate Spreads By Sector 1,200
Industrial
Utility
1-3 Year Corporate Spreads By Rating 1,000
Finance
AAA
900
1,000
AA
A
BBB
800 700
800
600 500
600
400 400
300 200
200 0
100 Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Finance, industrial and utility spreads nearly back to pre-Lehman levels
Source: Bloomberg
Page 24
Q3 2009
0
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Lower credit quality has outperformed higher quality
Current Strategy Position
Economic Outlook Key Economic Variables W age and Price Inflation
Little inflationary pressure from most sectors
U.S. Economic Strength
Economy growing slowly; capital investment is very weak; consumer spending very weak
Market Forces
Improved equity, corporate markets due to declining risk aversion
Monetary Policy
Fed on hold until mid-2010
Global Outlook
Global Central Banks on hold mid- to late-2010
Limited Duration Strategy
Slight short reflecting low levels of interest rates
Duration
Neutral as spreads are narrow
Agency
Yield spreads tighter; issue selection is critical
Credit
Good value, AAA quality, consumer auto and credit cards
ABS
Market is favoring higher risk credits
Quality -100
Source: CIS
Page 25
Neutral 0
100
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.
© 2009 The Dreyfus Corporation.
Page 26
Maya Saxena
Fort Lauderdale Police & Fire Retirement System Investment Workshop 2009
Securities Litigation Trends Presented by 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 Financial Lehman 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 and enforcement of judgments
Case
Estimated Loss
Recommendation
Accuray
$86,000
Pass: “In and Out”
Genzyme
$4100
Pass: Too Small
Int’l Game Tech
$44,000
Pass: Merits
Conseco
$160,000
Pass: Minor acct’g issue
Textron
$65,000
Pass: Too Small
Coventry
$311,000
Pass: Too Small
Men’s Wearhouse
$32,000
Pass: Too Small
CVS Caremark
$474,000
Pass: Merits
Sunpower
$76,000
Pass: Too Small
Northwest 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 + β 4LCLASSit + β5CAR3it+ β6LOGPILit + β7LOGMVit + β8INSHAREit + β 9BETAit +β10SKEWNESSit+β11LAGRETit + β12ROEit + β13BMit + β14LEVit + β15TURNOVERit+ β16REGit + β17TECHit + β18RETAILit + YEAR DUMMIES + εit
Institutional Monitoring through Shareholder Litigation C.S. Agnes Cheng, Henry He Huang (2009) http://blogs.law.harvard.edu/corpgov/2009/05/28/institutionalmonitoring-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
Healthways case: Fund not adequate because of money manager
Satyam Case in NY
Solution: Use more than one firm
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 funds moving? Will we be part of a group?
Merger Related Litigation - 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.
Detroit P&F lawsuit - 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.
COX RADIO Coral Springs Police Pension Fund lawsuit – the tender offer price is unfair and is too low, undervalues the company.
Thank You 2424 N. Federal Highway, Suite 257 Boca Raton, FL 33431 561‐394‐3399 x 13 [email protected] saxenawhite.com
Fort Lauderdale Police and Fire Retirement System
AMERICAN CORE REALTY FUND Portfolio Review
Jay Butterfield, CFA Managing Director
December 3, 2009
Richelle Hayes Senior Manager, Marketing and Client Service
© 2009 American Realty AdvisorsSM. All rights reserved.
801 N. Brand Boulevard Suite 800 Glendale, CA 91203 (818) 545-1152 www.americanreal.com
American Realty Advisors American 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
Transparency
Institutional Clients
100% employee-owned Clients have direct communication with Principals and Portfolio Managers
Risk-Control
1
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 ¾ Open-end core/value-added real estate funds ¾ Closed-end value-added real estate funds ¾ Core/value-added separate accounts ¾ QPAM/Takeover portfolios of assets ¾ 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).
2
Today’s Commercial Real Estate Market Opportunities The “buy high and sell higher” world is gone ¾ Return expectations on commercial real estate have increased from historic lows of 2007
Fundamentals (rents and demand) are weak – reflection of the economics of the market ¾ 2006-2007 underwriting called for large growth in rents that never materialized ¾ Today’s reality is that cash flow will be flat/declining in the short run
Less transactions make pricing more attractive ¾ Transaction levels down 94% off the peak ¾ Prices down as much as 35-40% from the peak
3
Lack of Credit Will Force Sales of Assets as Loans Come Due Defaults 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
4
Those With Capital Will Drive Transactions for the Next 18-36 Months Refinancing will require large equity investments Mortgage Proceeds on a Property Valued at $100 Million in '07 vs Now
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?
$120 $100 $100 $80
$75 $63
$60 $38
$40 $20 $0 2007; LTV=75%*
2009; LTV=60% Property Value
Mortgage
* LTV calculated off the appraised value would have been lower. Appraised values were often inflated during the boom.
Source: ARA Research 5
What Does This Mean for Core Real Estate? Market pricing is now based on an overly negative outlook and expectation of slow recovery Those with capital who buy on pessimism-based/in-place income – not future appreciation – have a significant advantage Continue to seek quality assets in strong markets Carefully 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
6
American’s Investment Strategy: Core and Value Investment Opportunities Today Look Similar In today’s market, all investments may be “opportunistic” ¾ Product Types 4 Office 4 Industrial 4 Multi-family 4 Retail
¾ Market Characteristics 4 Limited lease rollover 4 Multi-tenant properties 4 No forward commitments 4 Strong institutional markets with lower vacancies 4 Low basis compared to market 4 Conservative underwriting
¾ Locations 4 Southern California 4 Seattle 4 San Francisco/Bay Area 4 Boston 4 Chicago
American’s strategies will be differentiated by outlook of risk 7
American’s Investment Strategy:
The Key is in the Risk Structure Core Investments – Strategy
Value-Added Investments – Strategy
Leverage
Leverage
¾ 15%-25% initially ¾ Increase to 25%-35% in a recovery market
Lease up ¾ 80%+ occupancy ¾ Strong credit tenancy
Management ¾ Focus on managing stabilized income producing properties with temporary correctable issues
¾ 30%-40% initially ¾ Increase to 50%-60% in a recovery market
Lease up ¾ 60-70% occupancy ¾ Underwrite credit tenancy selectively
Management ¾ Focus on correcting more complex management/property/financial deficiencies
8
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
16%
Average 3-Year Unleveraged Total Return - NCREIF Property Index
14.4% 14%
12.7%
12.5%
12% 10.5% 10% 8% 6% 4% 2% 0% 1982
1994
2002
Average
Year
Source: NCREIF, ARA Research 9
Indicators to Look for in Advance of a Recovery Falling Market Minimize Downside Risks Debt Returns Exceed Equity
2Q07 Peak in Real Estate Prices
Opportunistic Investing Value-added Strategy Discounted Pricing Distressed Debt
High Risk/High Return Potential
2Q08 Increasing Job Losses Real Estate Sales Volumes Fall Commodity Spike
4Q07 Financing Risk Premiums Skyrocket
3Q08 Energy Prices Decline Financial Industry Crises 1H09 Economic Stimulus Stock Market Rally Starts 3Q09 Job Losses Slow but Continue/ Liquidity Crunch
Risk Minimization
Expansionary Economy Core Investment Growth Development/Redevelopment Lease Up Strategies
4Q09 Dollar Plummets Unemployment at 10%+
Employment Growth Resumes
Normal (?) Economic Expansion . . . but not “back to where we were”
Increase in Global Demand Consumer Spending/ Increasing Liquidity Housing Prices Stabilize Commercial Real Estate Transactions Resume -Forced Sales??
Best Guess 2010???
Market Recovery
10
But What Will That Recovery Look Like?
11
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) 12
Focused on a Pure Core Strategy to Manage Risk 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: ¾ 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
13
High Quality Well-Positioned Assets Nationwide Fund Strategy – low risk approach in today’s market: ¾ Existing institutional quality office, retail, industrial, and multi-family properties in strong, growing, and/or supply-constrained diversified metropolitan areas nationwide ¾ Geographic, property type, and economic diversification to reduce risk – Focus on institutional markets ¾ 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
14
American Core Realty Fund Investment Objectives ¾ Steady income returns ¾ Long-term appreciation ¾ Exceed the NCREIF Property Index benchmark
Fiduciary Responsibility ¾ 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.
15
American Core Realty Fund – Valuations Each property is appraised by an independent MAI appraiser at least once every 12 months Approximately 25% of the portfolio externally valued each quarter Internal valuations are completed quarterly PwC – Independent Valuation Advisor – third-party oversight of all valuations American 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.
16
American Core Realty Fund – Liquidity Fund established a redemption queue in 4Q 2008 as the significant decline in stock market value caused clients to seek to rebalance their portfolios ¾ Total redemption requests to date
$ 227,101,504
¾ Paid
(64,971,821)
¾ Rescinded
(19,072,226)
¾ Outstanding requests as of 12/03/09 (45 clients)
$143,057,457
Current requests = 11.8% of NAV No new requests since 2Q 2009 Expect to continue to pay on the redemption queue into 2010 The Fund has on-going cash flow as well as over $100 million in undrawn commitments available for new acquisitions, Fund operations, and redemptions. 17
Diversification Across Major Markets Nationwide Denver
Minneapolis
Chicago/Cook County Suburban Chicago
Seattle
Cincinnati
Portland
East
M idw est
W est
San Francisco
Boston
San Jose Los Angeles
Nashville
South
Orange County
Atlanta
San Diego
Long Island, NY Northern NJ Philadelphia Baltimore Washington, DC Northern Virginia Raleigh
Jacksonville
Phoenix
Dallas Austin
Property Type Multi-Family
Office
Industrial
Miami
% Leased as of September 30, 2009
Retail
91%
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.
18
Broad Property Type, Size and Geographic Diversification Property Type
Property Size
Industrial 22.7% Office 38.4%
Retail 14.0%
$25 M $50 M 47.9%
MultiFam ily 24.9%
Geographic Region
$50 M $100 M 24.8%
$0 - $25 M 27.3%
West 29.5%
South 26.4%
East 32.3%
Midw est 11.8%
Additional Fund Metrics As of September 30, 2009 NAV: Loan to Value Ratio:
$ 1.2 Billion 22.5%
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. 19
American Core Realty Fund – Highlights 9 150 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.
150 N. Wacker Drive 243,616 sq. ft. Office Building Chicago, IL
9 Property situated one block from Ogilvie Station and two and a half blocks from Union Station, providing quick and convenient transportation to downtown Chicago.
Percent Leased: 85% Year Built:
1970
Major Tenants: Transwestern Investment Hometown America HDI Gerhling
ALARA® Harbour Pointe 230-Unit Multi-Family Community Mukilteo, WA
Percent Leased:
94%
Year Built:
1998
9 American is continuing to upgrade building finishes to maintain the property’s historically high occupancy and rent levels.
9 ALARA Harbour Pointe is located near Everett, Washington, home to a diverse range of corporate employers, including Boeing, TRW, JanSport and Allied Technology. 9 Property has an appealing location at the north end of Seattle's Technology corridor. 9 Strategically positioned location with high barriers-toentry limiting potential competition, severe shortage of multi-family land, and arduous environmental regulations.
ALARA® is a registered service mark owned by American Realty AdvisorsSM and is used under license. 20
American Core Realty Fund – Highlights Multi-state Industrial Portfolio Over 1,000,000 sq. ft. Industrial Portfolio Cincinnati, Chicago and Atlanta
Percent Leased: 100% Year Built:
2005-2007
Major Tenants: Uniform Direct The Pampered Chef GSI Commerce Lincoln Electric
Waldorf Marketplace II 168,177 sq. ft. Shopping Center Waldorf, MD
Percent Leased: 97% Year Built:
2007
Major Tenants: Home Goods Kincaid
9 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. 9 Each of the properties is well-located in proven warehouse distribution markets in the central regions of the U.S. 9 Each of the properties has long-term leases in place with contracted rentals that are generally subject to annual or periodic escalation.
9 Waldorf Marketplace II is a newly constructed retail shopping center located approximately 15 miles south of the Capital Beltway (I-495) in Waldorf, MD. 9 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. 9 This investment complements Waldorf Marketplace I, a community shopping center that American purchased for the Fund in 2005.
21
Fort Lauderdale Police and Fire Retirement System $25,000,000 commitment with initial investment made on July 2, 2007 Account Balance as of September 30, 2009: $18,239,099.98
Contributions 2007
$
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 2009
25,000,000.00
Inception-to-Date Original Commitment Withdrawals Distributions Net Income Realized Gains Unrealized Losses
$ $ $ $ $ $
25,000,000 2,157,674 332,864 (9,251,438)
Ending Net Asset Value
$
18,239,100
22
Performance American Core Realty Fund PERFORMANCE HISTORY AS OF SEPTEMBER 30, 2009
3Q09
Year-to-Date
One-Year
Since Inception* (07/02/2007)
1.34% -10.97% -9.62%
3.98% -30.06% -26.92%
5.05% -36.05% -32.42%
4.80% -16.49% -12.28%
-7.32%
-27.23%
-35.19%
-18.22%
Gross of Fees
Income Appreciation Total Return NFI-ODCE
3Q09
Year-to-Date
One-Year
Since Inception* (07/02/2007)
1.13% -10.97% -9.83%
3.34% -30.06% -27.42%
4.18% -36.05% -33.05%
3.90% -16.49% -13.06%
-7.52%
-27.72%
-35.70%
-18.90%
Net of Fees
Income Appreciation Total Return NFI-ODCE
*Annualized
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.
23
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%
Income 7.6% 90%
Appreciation 0.8% 10%
Total 8.5% 100%
-4%
0.5%
4.5%
4.6%
-8%
3Q09
3Q07
3Q05
3Q03
3Q01
3Q99
3Q97
3Q95
3Q93
3Q91
3Q87
-10%
3Q89
Income Return Appreciation Return
3Q83
Source: NCREIF, ARA Research
-6%
3Q85
Sources of Returns - 30 Years as of 3Q09 Average Return % of Return Standard Deviation Of Return
Rolling 5-Year Annualized Return
Source: NCREIF, ARA Research 24
American Realty Advisors Real 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 25
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.
26
Today’s Presenters 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 for overseeing the Fund level operations of American’s commingled and separate accounts and for directing marketing and client service for American's real estate products and services to the institutional investment community. Mr. Butterfield is also a member of the firm’s Executive Committee. He has over 31 years of experience in working with pension plan sponsors in helping them to meet 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 corporate plan 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 a member of the Los Angeles Society of Financial Analysts.
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 and consultants based in the Southeast. Prior to joining ICC, she was Vice President, Corporate Relations with the American Hospital Association in Florida, and was responsible for developing client relationships with senior executives of member hospitals, following various positions in financial relationship management within the national managed health care industry. Ms. Hayes graduated from University of Central Florida with a degree in Business Administration and a concentration in Finance, and earned an M.A. in Health Services Management and an M.B.A. from Webster University.
27
Disclosures 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.
28
Core Equity Real Estate Investments Composite Annual Disclosure Presentation Total Firm
Composite Assets
Annual Performance Results
Year
Assets*
U.S. Dollars
Number of
Composite
End
(millions)
(millions)
Accounts**
Income
Appreciation
Dispersion
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%)
Total
NPI
High
Low
* 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.
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.
29
Core Equity Real Estate Investments Composite Annual Disclosure Presentation 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. 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.ppt 11/24/2009 8:26 AM 30
December 3, 2009
PRISA II Performance Review
PREI® Prudential Real Estate Investors
Prudential Real Estate Investors, 8 Campus Drive, Parsippany, NJ 07054, Tel: (973) 734-1300, Fax: (973) 683-1790 CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
I. Real Estate Market Overview
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Deleveraging Effects Will Be Felt For Several Years
• 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.
Sources: Federal Reserve; PREI Research Page 2 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Market Correction Highlights Asset Deflation
• 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.
Sources: Moody’s; PREI Research Page 3 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Dismal Job Outlook Weighs on All Property Sectors
• 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.
Sources: Property & Portfolio Research; PREI Research Page 4 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Forecast
PREI®
Real Estate Market Overview
Is There a “Silver Lining”?
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
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
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
Page 6 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
II. PRISA II Performance Review
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
PRISA II Profile As of September 30, 2009 Strategy
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.
Core Plus, Open-End
Inception Date
July 1980
Gross Assets
$6.2B
# of Investors
Net Assets
$3.5B
Remaining Commitments
Leverage
44.3%
Deposits (9/30)
Effective Leverage
57.1%
Withdrawals (9/30)
$0
$328.7M
Distributions (9/30)
$0
Cash # of Investments
211
Geographic Diversification (Based on GMV)
123 $402M $50M
Redemption Requests
$396M
Redemption Requests (%of NAV)
11.2%
Property Type Diversification (Based on GMV)
* 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. Page 9 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
Performance & Total Returns
Total Return
Repricing of risk, largely reflected by cap rate increases, has resulted in significant value declines and increased leverage.
Income Return Appreciation Return Cash Flow Return Acquisitions Dispositions
Appraisers project further distress in space markets with lower market rents, increased concessions and longer absorption periods.
3Q2009
2009 YTD
-10.20%
-40.92%
1.89%
5.34%
-12.09%
-46.26%
1.65%
4.62%
$146.2 million $247.0 million
$500.5 million $320.2 million
For Periods Ending September 30, 2009
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
Cumulative Prior Four Quarters Attribution Summary
Sources of Value Decline 9/30/08 to 9/30/09 Sector Cap Rate as of 9/30/09: Residential:
6.98%
Hotel:
8.78%
Office:
7.88%
Retail:
8.28%
Self Storage:
8.26%
(Millions)
Percentage Points
Percentage of Total
($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%
-58.05%
100.00%
Operating Investments
Total Decline
($3,724.8)
• 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. Page 11 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
PRISA II Leasing & Operations
PRISA II Occupancy and Rollover
PRISA II targets appreciation return by accepting market leasing risk. This strategy can negatively impact performance when the economy contracts.
Office
Retail
Apartment
Occupancy - Operating Properties - 9/30/09
82.2%
86.5%
92.7%
Hotel 55.7%
Self-Storage 83.2%
Occupancy - Operating Properties - 9/30/08 Occupancy - with Development Assets - 9/30/091
85.5%
91.1%
93.4%
61.5%
85.6%
68.6%
81.5%
87.6%
55.7%
83.2%
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%
10.6%
-3.6%
-5.6%
-62.4%
Lease Rollover
Same Property Income Growth2 1 2
-4.9%
Includes lease-up and substantially completed development projects. 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. Page 12 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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.
No. of Investments
Cumulative Value Decline (%)
Development
35
-30.9%
($566.2)
$1,273.7
Predevelopment
35
-47.5%
($560.5)
$618.7
Total
70
($1,126.7)
$1,892.4
Development (Based on GMV)
Page 13 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Cumulative Value Decline ($M)
9/30/09 GMV ($M)
Predevelopment Land (intend use) (Based on GMV)
PREI®
PRISA II
Pipeline Outlook Completed projects Current appraisal underwriting suggests some value recovery as occupancy stabilizes.
12 of 35 development projects increased in value from 2Q09 to 3Q09.
• 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
Page 14 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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.
As of September 30, 2009 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 Effective Leverage Ratio
Page 15 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
44.3% 57.2%
PREI®
PRISA II
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Appendix
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
Biographies
Darin Bright Principal Prudential Real Estate Investors
Number of Years Real Estate Experience: 18 Number of Years with Prudential: 5
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.
Page 18 Reference #: MCAA-7XBSJW
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PREI®
Appendix
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.
Page 19 Reference #: MCAA-7XBSJW
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PREI®
Appendix
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.
Page 20 Reference #: MCAA-7XBSJW
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PREI®
Appendix
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. Page 21 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
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.
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. Page 22 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
International Discussion Presented by: Chris Neill, CFA, Portfolio Specialist John Roche, Regional Sales Manager
Discussion Topics Business Models Always Matter Fundamental Analysis is Key Adhere to Investment Thesis Willing to be Contrarian Closing Remarks
2
This material is for financial advisors and institutional clients only.
Business Models Always Matter Case Study: LVMH (MC FP) 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
MC FP Price Chart ( ): 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 3
This material is for financial advisors and institutional clients only.
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Fundamental Analysis is Key Case Study: National Bank of Greece (ETE GA) 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
ETE GA Price Chart ( ) 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00
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. 4
This material is for financial advisors and institutional clients only.
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Adhere To Investment Thesis Case Study: OPAP (OPAP GA) 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
OPAP GA Price Chart ( ): 35.00
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Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 5
This material is for financial advisors and institutional clients only.
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Willing To Be Contrarian Case Study: Baidu.com Inc., (BIDU) 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?
BIDU Price Chart (USD): 400.00
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150.00
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 6
This material is for financial advisors and institutional clients only.
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Company Geographical Diversification Home Country
# Countries Operating In
Sales from Home Country
Sales from Outside Home Country
Israel
50+
4%
96%
Switzerland
86+
2%
98%
Novo Nordisk A/S
Denmark
179
5%
95%
Roche Holding AG
Switzerland
150+
1%
99%
Rogers Communications Inc.
Canada
1
100%
--
China Life Insurance Co. Ltd.
China
1
100%
--
Nintendo Co. Ltd.
Japan
16+
58%
42%
AXA S.A.
France
13+
25%
75%
Telefonica S.A.
Spain
24
37%
63%
United Kingdom
180
33%
67%
Company Teva Pharmaceutical Ind. Nestle S.A.
Reckitt Benckiser Group PLC
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 7
This material is for financial advisors and institutional clients only.
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
8
This material is for financial advisors and institutional clients only.
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.
9
This material is for financial advisors and institutional clients only.
A presentation to: City of Fort Lauderdale Police and Fire Retirement System
New World Order Positioning global portfolios within a new economic paradigm
Presented by: Brian Holland, Portfolio Manager Scott Rubin, Relationship Manager, Institutional Investments
Artio Global Management LLC
Agenda • A View of the Markets • Inflation Over the Horizon? • Artio Global Management Current Portfolio Strategy
Artio Global Management LLC #077
2
A View of the Markets
Artio Global Management LLC #0200
3
Artio Global Management LLC
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
Dec-92
Dec-91
Dec-90
Dec-89
Dec-88
Dec-87
Dec-86
Dec-85
Dec-84
Dec-83
Dec-82
Dec-81
Dec-80
Dec-79
Dec-78
Dec-77
Dec-76
Dec-75
Dec-74
Dec-73
Dec-72
Dec-71
Dec-70
A Historic Market Rally MSCI World Index (% Difference Between 12 Month High/Low) December 1970 - October 2009
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Bloomberg Past performance is not indicative of future returns.
4
Artio Global Management LLC
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
Mar-82
Mar-80
Mar-78
Mar-76
Mar-74
Mar-72
Mar-70
Mar-68
Mar-66
Mar-64
Mar-62
Mar-60
Mar-58
Mar-56
Mar-54
Mar-52
Mar-50
Mar-48
Mar-46
Mar-44
Mar-42
Mar-40
Mar-38
Mar-36
Mar-34
Mar-32
Mar-30
A Historic Market Rally S&P 500 Index (% Difference Between 12 Month High/ Low) March 1930 - October 2009
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Bloomberg Past performance is not indicative of future returns.
5
A Historic Market Rally
Trend Line
Sources: Bank of America, Merrill Lynch, Artio Global Investors Past performance is not indicative of future returns.
Artio Global Management LLC
6
1/2/1998 4/3/1998 7/10/1998 10/9/1998 1/22/1999 4/23/1999 7/23/1999 10/22/1999 1/21/2000 4/28/2000 7/28/2000 10/27/2000 1/26/2001 5/4/2001 8/3/2001 11/2/2001 2/1/2002 5/10/2002 8/9/2002 11/8/2002 2/7/2003 5/16/2003 8/15/2003 11/14/2003 2/13/2004 5/21/2004 8/20/2004 11/19/2004 2/25/2005 5/27/2005 8/26/2005 11/25/2005 2/24/2006 5/26/2006 8/25/2006 11/24/2006 2/23/2007 6/1/2007 8/31/2007 11/30/2007 2/29/2008 6/6/2008 9/5/2008 12/5/2008 3/6/2009 6/12/2009 9/11/2009
A Historic Market Rally High Yield versus BBB Spreads 12 Month Difference Between Maximum and Minimum
(basis points)
January 1998 to October 2009
1,200
1,000
800
600
400
200
0
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
7
1/2/1998 4/3/1998 7/10/1998 10/9/1998 1/22/1999 4/23/1999 7/23/1999 10/22/1999 1/21/2000 4/28/2000 7/28/2000 10/27/2000 1/26/2001 5/4/2001 8/3/2001 11/2/2001 2/1/2002 5/10/2002 8/9/2002 11/8/2002 2/7/2003 5/16/2003 8/15/2003 11/14/2003 2/13/2004 5/21/2004 8/20/2004 11/19/2004 2/25/2005 5/27/2005 8/26/2005 11/25/2005 2/24/2006 5/26/2006 8/25/2006 11/24/2006 2/23/2007 6/1/2007 8/31/2007 11/30/2007 2/29/2008 6/6/2008 9/5/2008 12/5/2008 3/6/2009 6/12/2009 9/11/2009
A Historic Market Rally Emerging Sovereign Spreads (12 Month Difference Between Maximum and Minimum )
(basis points)
January 1998 to October 2009
1,200
1,000
800
600
400
200
0
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
8
Fueled by Massive Stimulus Economic Contraction and Government Applied Stimulus 30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0% 1929 - 1933
2007 - Present
GDP
Stimulus
Source: Grant's Interest Rate Observer
Artio Global Management LLC
9
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 LLC
10
Inflation Over the Horizon?
Artio Global Management LLC #0200
11
Extraordinary Market Reversal S&P 500 price change (December 1929 – June 2009 – 8 week movement)
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
12
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
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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, 5/4/09 2. Harvard University Professor of Public Policy, former Chief Economist of the IMF. Bloomberg, 5/19/09
Artio Global Management LLC
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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
15
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 LLC
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Artio Global Management Current Portfolio Strategy
Artio Global Management LLC #0200
17
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
18
Emerging Markets Continue to Grow in Importance
Emerging Markets (as % total global GDP) 25%
23.2%
20%
18.2%
17.4%
14.8%
15% 12.5%
13.0%
13.4% 11.5%
10%
5%
0% 1972
1977
1982
1987
1992
1997
2002
2007
Source: World Bank
Artio Global Management LLC
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Artio Global Management LLC
Developed Markets Saudi Arabia Chile
Russia
Nigeria
Bulgaria Ukraine
Australia
Denmark China
South Af rica
Indonesia
Mexico Sweden
Philippines
Argentina
Malaysia Pakistan
Korea
Poland
New Zealand Turkey
Brazil
Finland
Netherlands Hungary
Austria
Canada
Spain Norway
India
Iceland
United Kingdom Portugal
France
United States Germany
Greece
Belgium
Italy Ireland
Japan
Longer Term Investment Concerns Government Debt/GDP Estimates in the Year 2014
250%
200%
150%
100%
50%
0%
Emerging Markets
Source: International Monetary Fund
20
Current Market Valuations (as of 10/7/09) Commodity Based
Developed Markets
Emerging Markets
Australia (S&P ASX 200) Canada (S&P TSX Composite) US (S&P 500) Europe (Eurostoxx) UK (FTSE 100) Japan (TOPIX) China (Shanghai SE Brazil (Bovespa) Hong Kong (Hang Seng Index) Poland (WSE WIG 20 Index) Czech Republic (Prague Stock Russia (Russian RTS Index)
P/E Ratio
P/Sales
Dividend Yield
17.1x
1.6x
3.9%
18.1x
1.6x
2.8%
17.5x
1.2x
2.1%
13.4x
0.9x
3.9%
14.5x
1.1x
3.8%
37.7x
0.5x
1.9%
20.7x
1.8x
1.7%
15.7x
1.6x
2.7%
17.1x
2.9x
2.9%
13.1x
0.8x
4.3%
14.9x
1.7x
4.6%
10.3x
1.3x
1.3%
Source: Bloomberg. Past performance is not indicative of future returns.
Artio Global Management LLC #01198
21
Regional Positioning Comparison Year‐to‐date changes (%) International Equity II Group Trust
MSCI ACWI (ex-US)
12/31/08
10/31/09
3.55 Dollar Bloc¹
0.99 2.36 3.09
1.37 3.36 3.76
Dev. Asia (ex-Japan)
8.21
Emerging Markets
10.80 12.89 8.42
Dollar Bloc¹
11.00 6.05
Dev. Asia (ex-Japan)
MSCI EAFE Index
22.93 20.84
Emerging Markets
17.20 0.00
0.00
61.72 Dev. Europe
37.98 Dev. Europe
34.95
32.46
45.73
45.31
8.74
10.37
Japan
Japan
19.30 25.25
21.24
10.03 15.19 19.88
UK
0
20
15.21
13.07 15.24
UK
21.27 40
60
80
0
10
20
30
40
50
1. Dollar Bloc includes Australia, Canada and New Zealand Please 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.
Artio Global Management LLC #0986
22
Sector Positioning Comparison Year‐to‐date changes (%) International Equity II Group Trust
MSCI ACWI (ex-US)
12/31/08
10/31/09 7.11 8.39 9.60
Cons Discretionary
Energy Financials
Cons Staples Energy 23.26 22.64
10.18 7.97 9.76 10.86 10.53 11.55
Healthcare Industrials 2.82
Utilities
6.70 7.74 6.69
0
5
10
Materials 11.69
Telecommunications
9.99
Utilities Cash & Other 15
20
25
30.82
4.66 6.39 8.26 10.91 9.79 11.14 4.46 6.52 4.83 14.34 11.22 9.53 6.23 6.42 5.94 1.67 5.02 5.83 1.36 0.00 0.00
Information Tech
7.92 6.96
0.00 0.00
26.47 26.23
Industrials
6.00 5.12
Telecommunications
Cash & Other
Financials Healthcare
8.12 9.37 7.84
Materials
7.10 8.35 9.71 6.78 8.60 10.11 11.67 11.22 8.42
Cons Discretionary
11.82 9.05 10.25 11.11 10.81 8.54 9.61
Cons Staples
Information Tech
MSCI EAFE Index
0
10
20
30
40
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.
Artio Global Management LLC #0986
23
Current Investment Focus 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 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.
Artio Global Management LLC #01198
24
Disclosures This 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.
Artio Global Management LLC #0240
25
NorthPointe Capital Portfolio Construction
SCREEN
1,800 stock universe market capitalizations from approximately $200M-$2.5B
Phase One: Screening
B UY portfolio of
250 stocks
approximately 70-100 stocks
Phase Two: In-Depth Fundamental Research
Narrow Focus Using Quality Screens • Superior earnings growth • Balance sheet strength • Operating strength • Valuation
ANALYZE
Begin Review Process • Analysis of business trends and risks • Business model review
Phase Three: Stock Selection
Perform Due Diligence
Identify Catalysts
Buy When Appropriate
We insist on strong fundamentals:
Compelling catalysts may include:
Review overall portfolio risk:
• Management team depth
• New products
• 10Q and 10K analysis
• New management
• Market share analysis • Quality of earnings
Committed. Consistent. Competent.
• New markets • Rising earnings and margins
• Attractive relative valuation • Discount to longterm growth rate • Sector diversification • Security risk diversification
FORT LAUDERDALE POLICE & FIRE RETIREMENT SYSTEM
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
PRICE
STOCK PRICE FAIR VALUE
OVERVALUED
ALUE FAIR V UNDERVALUED
BUY ZONE
SELL ZONE
TIME
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 LEADER Todd 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 & SALES Tom 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, Partner
Large Cap Growth Portfolio Manager
Institutional Marketing & Client Service 904-493-5500
Initial Rallies After Significant Bear Markets
Decline
Rally
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 ?
Source: S&P 500
2
3
Quarterly Investment Review Period Ending September 30, 2009
S&P 500 Since the Oct.-Nov. “Waterfall” Extreme Volatility
+60%
+24% +18% +27%
-35%
-19%
-26% -49%
-29%
4
The Character of the Recent Rally Has Been Very Speculative Rally from March 6th to April 30th 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 $5
71%
3%
14%
Annualized Volatility (Computed Over 6 Months)
146%
69%
92%
Book to Price
5.8
0.7
1.5
Sales to Price
18.1
2.4
4.2
ROIC
12%
18%
14%
-323.8%
-15.3%
-84.1%
Net Income Growth
Source: Barclays Capital Quantitative Equity Strategies; Thompson Reuters; IDC; S&P Compustat; Russell
i.e. – This rally favored smaller, more heavily shorted, less institutional, higher volatility, more expensive, weaker growth companies. 5
Quarterly Investment Review Period Ending September 30, 2009
PORTFOLIO CHARACTERISTICS Portfolio Characteristics (as of 9/30/09):
EPS Growth (Forecast 1 Year) Portfolio P/E (Trailing 12 Months) Portfolio Price/Cash Flow Portfolio Price/Sales Portfolio Price/Book Average Weighted Market Cap ($b) Number of Holdings
Top 10 Holdings:
Sawgrass
R1G
6.6% 16.9 11.6 1.2 3.2 81.9 47
3.6% 22.0 14.8 1.6 3.6 70.3 624
Weight % 4.5 4.4 3.9 3.9 3.5 3.5 3.4 3.3 2.9
IBM Google Cisco Systems M icrosoft CVS/Caremark Apple DirecTV TJX Hewlett Packard
Sector Breakdown:
WalM art
2.8 34%
Information Technology
32% 15% 17%
Health Care 10% 10%
Industrials 2%
Financials
5% 16% 16% 15%
Consumer Staples Consumer Discretionary
10% 4% 4%
Energy 1% 1%
Utilities
2% 1% 2%
Telecommunication Services Materials 0%
Sawgrass Russell 1000 Growth 4% 5%
10%
15%
20%
25%
30%
35%
40%
*Large Cap Growth Composite Data
6
Fuel for a Rally Monthly Data 10/31/1980 - 9/30/2009 (Log Scale)
NDR Total Market Value vs Money Market Fund Assets / NDR Total Market Value 18082.49
17102.05
NDR Total Market Value Gain/Annum When: Money Market Fund Assets/ NDR Total Market Value:
Gain/ Annum
% of Time
10.9
89.6
-12.5
10.4
* Above 10.80 10.80 and Below
NDR Total Market Value (Billions, Scale Right) 9/30/2009 = 12022.6 9715.02
9322.61 8289.32
3903.50
3539 2905 2385 1958 1607 1319 1083 889 730 599 492 403 331 272 223 183 150 123 101
2382.00
1862.00
Total Money Market Fund Assets (Scale Left In Billions) 9/30/2009 = $3429 613.84 570.10
1055.64
276.66
Source: Investment Company Institute
196.81
47.09
Money Market Fund Assets / NDR Total Market Value (
43.9 38.3 33.4 29.1 25.4 22.2 19.3 16.9 14.7 12.8 11.2 9.8 8.5 7.4
) 9/30/2009 = 28.5%
24.12
23.91
High Liquidity
19.64
Linear Regression (
)
12.79
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
Low Liquidity
9.96
9.29
(S423)
18646 15978 13692 11733 10054 8615 7383 6326 5421 4645 3981 3411 2923 2505 2146 1839 1576 1351 1157
Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
December 4, 2009 Large Cap Value Portfolio Review
D. Kevin McCreesh, CFA Chief Investment Officer James V. Wallerius Senior Vice President
City of Fort Lauderdale Police & Fire Retirement System
Our mission is to provide our clients with above benchmark long-term investment results and client service that consistently surpasses your expectations.
Firm Profile
Exclusive Focus on Managing Value Portfolios 25+ Years Experience Institutional Client Base $7.5 Billion in Assets
10 Product Offerings 45 Employees Affiliated Managers Group Affiliate
Client Distribution
Portfolio Offerings Value Portfolio
Public 24%
Sub-Advisory 8%
Corporate 25%
Taft-Hartley 28%
Foundation/ Endowment 10%
Free Cash Flow Inception
Portfolio
Quantitative
Inception
Portfolio
Inception
Large Cap Value
1991
Small Cap Free Cash Flow 1993
Small Cap Equity
2006
Mid Cap Value
2000
Small Cap FCF Focus
International Equity
2007
Mid Cap Focus
2000
SMID Cap Value
2002
Small Cap Value
1998
Select Equity
2003
1996
Healthcare 5%
1
Introduction
As of September 30, 2009
0110
Investment Team
Name
Title
Fundamental Quantitative Portfolio Research Analysis Management
Fundamental Research Focus
Years Investment Experience
Year Joined 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
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
2008
13
2008
Energy, Financials, Healthcare,
Matthew Tangel
Equity Analyst
Utilities, Energy
Christopher Lippincott
Equity Analyst
Technology, Staples, Industrials, Materials
* Partner of the firm
2
Introduction
0140
Philosophy Buy value, but buy at the right time. Avoid the Value Trap Companies with low valuation outperform Stock prices follow earnings cycles Investors underreact to positive/negative change
Buy on Confirmation
3
Value Equity
0150
Investment Process
Identify Universe Screening
Fundamental Research
Initial Universe: Large Cap $2.5 billion +
Gauge Investor Expectations Key revenue & margin assumptions underlying earnings estimates
Quantitative Model: 50% Valuation 50% Earnings Catalyst Model Investor Expectations Income Statement Balance Sheet/Cash Flow
Perform Financial Statement Analysis Profit & loss trends Balance sheet quality Cash flow analysis
150 Stock Research Focus list: 15 stocks in each economic sector
4
Analyze
Value Equity
Assess Company Valuation Relative to: Company history Peer group Benchmark
Execute Portfolio Construction 65-90 Securities P/E in line or lower than Index Earnings surprise higher than Index Estimate revision higher than Index
Risk Control Market cap sensitive Max position size 5% Max sector weight 30% Relative sector weight +/- 5%
0161
Performance Review
Performance as of 10/31/09 Performance Summary
3Q 2009
YTD 2009
1 Year Trailing
3 Year Trailing
5 Year Trailing
Inception 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
*Annualized 12/9/02 to 10/31/09
Market Value Summary Market Value (12/9/02)
5
$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
Market Environment
Valuation Spreads The Top Quintile Compared to the Market Average 1952 Through Late-September 2009
Source: Empirical Research Partners Analysis, National Bureau of Economic Research
Earnings Revisions: Best vs. Worst Quintile Monthly Relative Returns 1989 through September, 2009
6
Source: Bernstein analysis (Sanford C. Bernstein & Co., LLC)
6070
Performance Review
YTD 2009
Economic Sector
Average Weight +/Portfolio Index
Portfolio
Index
Allocation Effect
Stock 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
13.4
11.3
1.7
0.4
Total Portfolio sector weights are average weights over the period. Index used is the Russell 1000® Value. Source: FactSet
7
Total Returns
Total Effect
2.1
Portfolio Contribution
Largest Positions Stock
Strong Performers
Weight
JPMorgan Chase & Co.
4.1
Freeport-McMoRan Copper & Gold Inc.
Wells Fargo & Co.
3.5
Walter Energy, Inc.
Exxon Mobil Corp.
3.1
Pfizer Inc.
3.1
Chevron Corp.
3.0
Noble Corp.
2.7
Whiting Petroleum Corp.
2.5
Bank of America Corp.
AT&T Inc.
2.4
Hartford Financial Services Group Inc.
Amgen Inc.
2.2
Bank of America Corp.
1.9
Total
28.5
Western Digital Corp.
Poor Performers
Principal Financial Group Inc.
As of 10/31/09
Based upon performance 12/31/08 to 10/31/09
Information on all holdings is available upon request. Source: FactSet
8
Large Cap Value Russell 1000® Value 9.3%
Sector Consumer Discretionary
Portfolio 8.4%
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.
Consumer Staples
2.5%
Dr Pepper Snapple Group Inc. J.M. Smucker Co.
Molson Coors Brewing Co. Reynolds American Inc.
Energy
20.4%
Chevron Corp. ConocoPhillips Devon 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.
Financials
26.3%
Ameriprise Financial Inc. Arch Capital Group Ltd. Bank of America Corp. Boston Properties Inc. Capital One Financial Corp. Citigroup Inc. Comerica Inc. Discover Financial Services Goldman Sachs Group Inc. INVESCO Ltd.
JPMorgan Chase & Co. KeyCorp PNC Financial Services Group Inc. ProLogis Prudential Financial Inc. Regions Financial Corp. Simon Property Group Inc. Unum Group Wells Fargo & Co. XL Capital Ltd.
5.7%
19.5%
25.0%
Russell 1000® Value 8.9%
Sector Healthcare
Portfolio 11.1%
Amgen Inc. Eli Lilly & Co. Johnson & Johnson Life Technologies Corp.
Merck & Co. Inc. Pfizer Inc. UnitedHealth Group Inc. Universal Health Services Inc.
Industrials
10.7%
Avery Dennison Corp. Caterpillar Inc. Cooper Industries PLC Cummins Inc. Fluor Corp. General Dynamics Corp.
General Electric Co. Ingersoll-Rand Plc ITT Corp. SPX Corp. Textron Inc.
Information Technology
5.0%
Advanced Micro Devices Inc. EMC Corp. Seagate Technology Inc. Sybase Inc.
Tellabs Inc. Tyco Electronics Ltd. Xerox Corp.
Materials
5.9%
Airgas Inc. Cliffs Natural Resources Inc. Dow Chemical Co.
Freeport-McMoRan Copper & Gold Inc. Walter Energy, Inc.
Telecommunications
4.5%
AT&T Inc. Qwest Communications Int’l Inc.
Verizon Communications Inc.
Utilities
3.3%
AES Corp. American Electric Power Co. Inc.
Northeast Utilities
10.4%
5.0%
3.8%
5.5%
6.9%
As of October 31, 2009 Systematic sector weights do not total 100% due to cash. Source: FactSet
9
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.
0201
Large Cap Value Annualized Returns
Portfolio Statistics vs. Russell 1000® Value
Large Cap Value (Since 1/1/99)
Large Cap Value Gross
Period 5%
Annualized Alpha
2.1%
Annual Standard Deviation
18.1%
Russell 1000® Value
2.6 0.9
0%
18.1% 0.97
Portfolio Beta
0.97
Information Ratio
0.49
Tracking Error
4.28
Up Capture
115%
Down Capture
97%
Russell Large Cap Value 1000® Value
4.1 2.3
Correlation
Investment Results
Russell 1000 R Value
-5% -6.4 -7.7
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
-7.9
-10% -10.6
-15%
1 Year
3 Years
5 Years
10 Years
Rolling 3 Year Returns vs. Russell 1000® Value 35
Portfolio Characteristics Weighted Average Mkt. Cap Price to Forward Earnings
Large Cap Value
Russell 1000® Value
$53.0 b
$67.6 b
14.1x
16.0x
Large Cap Value
30 25 20 15 10 5 0 -5 -10
Quarterly Earnings Surprise
16.2%
8.3%
-15
Estimate Revision
8.1%
2.1%
-20 -20
Source: FactSet
-15
-10
-5
86% Batting Average 55 of 64 Observations
0
5
10
15
20
25
30
Russell 1000 R Value Index
35
All Data as of September 30, 2009
10
Portfolio
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.
0701
Earnings and Portfolio Performance Earnings YoY Change
(Russell 1000® Value Index)
80% 60% 40%
1
2
20% 0% -20% -40% -60% 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 Source: Baseline
Prior Performance
11
1
Subsequent Performance
Prior Performance
2
Value Added*
12/31/02
Value Added*
Subsequent Performance
Value Added*
6/30/99
Value Added*
-2.0%
1 Year
+7.1%
-0.8%
1Year
+5.5%
-0.1%
3 Years
+2.8%
+0.9%
3 Years
+2.9%
+0.6%
5 Years
+2.5%
+0.9%
5 Years
+3.0%
* Value added represents the difference between the Large Cap Value composite return and the Russell 1000® Value Index return for the same period. 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.
Large Cap Value Composite Disclosure 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 presented 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 represents 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’s Large 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 capitalization 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. Composite policy 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-initiated restriction 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 in which 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 policy required 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 beginning 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 the first 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 occurred while 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 responsibility 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 composite for 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 measures 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 Investment Group 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 information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Systematic Financial Management, LLP. Russell Investment Group is not responsible 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 Year End (millions) (millions) YTD 2009* 7,527 3,257 2008* 6,144 2,930 2007 9,578 4,540 2006 8,760 3,350 2005 7,068 1,937 2004 7,008 1,749 2003 6,577 1,576 2002 4,472 900 2001 4,195 1,128 2000 3,209 850 1999 1,747 676 1998 1,221 658 1997 1,148 739 1996 612 94
% of Firm Assets 43% 48% 47% 38% 27% 25% 24% 20% 27% 26% 39% 54% 64% 15%
Number of Accounts 48 48 40 27 25 26 21 20 17 10 9 10 Five or fewer Five or fewer
Composite Gross Net 17.93% 17.41% -40.59% -41.01% 8.95% 8.26% 18.49% 17.75% 11.37% 10.67% 15.55% 14.71% 35.49% 34.54% -16.29% -16.95% -7.69% -8.39% 13.77% 12.95% 17.76% 16.91% 6.92% 6.12% 33.61% 32.68%
Russell 1000® Value 14.84% -36.84% -0.18% 22.24% 7.05% 16.49% 30.03% -15.52% -5.60% 7.01% 7.35% 15.65% 35.18%
Composite Dispersion 0.4% 0.1% 0.2% 0.1% 0.2% 0.2% 0.3% 0.4% 0.2% 0.6% 0.6% 0.5% N/A
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
12
Appendix
1001
K2 ADVISORS, L.L.C.
Presentation to:
Fort Lauderdale Fire and Police December 2009 Confidential Presentation 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 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.
1
K2 Organization – 83 Employees* K2 ADVISORS
William A. Douglass III
David C. Saunders
Founding Managing Director
Founding Managing Director
Research
Operational Due Diligence
Portfolio Construction
Risk Management/ Technology
Business Management
Investor Relations
K2 International
Brian Walsh Managing Director
Andrew Kandiew Managing Director
J. Brooks Ritchey Managing Director
Kelsey Biggers Managing Director
John Ferguson COO
Dan Elsberry Managing Director
James Rice Managing Director
Strategy Teams
Equity-Related
Risk
Low Volatility
* As of October 1, 2009
2
Alternate Strategies
Currency
Technology
Client Service
London
Legal/ Compliance
Sydney
Tokyo
Administration/ Operations
Hong Kong
Finance
Representative Client List As of September 30, 2009
Total
Institutional Investors
90%
Pensions and Other Tax Exempt Entities Public Funds Anne Arundel County Retirement & Pension System City of New Orleans Retirement System City of Richmond Retirement System Chicago Police Annuity and Benefit Chicago Municipal Employees LASERS (Louisiana State Employees’ Retirement System) Mass PRIM New Mexico State Investment Council St. Louis Public School Retirement System Texas Treasury Safekeeping Trust Company Oklahoma City Employee Retirement System Los Angeles Fire and Police Pension System Teachers Retirement System of the State of Illinois Queensland Local Government Superannuation Board
Corporate Pension Ametek AkzoNobel Campbell Soup Company Cadbury Pension Trust Limited Coca-Cola Enterprises, Inc. Cordares Vermogensbeheer B.V. Energy East Marks and Spencer PLC Raiffeisen Capital Management Rohm and Haas Company Toshiba America Inc. Retirement Plan
U.S. Union Plans (Taft-Hartley) Automotive Machinists Pension Trust Denver Area Meat Cutters Laborers’ Pension Fund Rocky Mountain UFCW Sheet Metal Workers Local Union No. 100 UFCW International Pension Plan United Mine Workers of America 1974 Pension Trust
Other Tax-Exempt Bethesda Foundation Carilion Health Systems Norton Healthcare Retirement System
Endowments and Foundations Altman Foundation Baltimore Symphony Orchestra Birmingham-Southern College
Central Synagogue of New York Detroit Medical Center North Carolina Baptist Foundation
Other Institutional Dexion Equity Alternative Limited
OIL Insurance Corporation Ltd.
Individuals, Family Offices, and Trusts
3
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.
10%
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 1000%
Cumulative Return
900%
872%
800% 700% 600% `
500%
413%
400% 300%
357%
200% 100% 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Historical Drawdowns
0%
-10%
-20%
-30%
-40%
HFRI Fund Weighted Composite Index Annualized 8% Return S&P 500 DRI Merrill Lynch High Yield Master II
-50%
-60%
4
Source: HFR, S&P, Merrill Lynch Data through September 2009. Past performance is not indicative or a guarantee of future results. Please see important disclosures and disclaimers at the end of this presentation.
K2 Institutional Investors II, Ltd. – Beta Evolution 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 44.00%
K2 Institutional Investors II Ltd Beta vs. S&P 500 0.33
34.00%
0.32
0.31 0.29
0.27
24.00%
0.28
0.28 0.28 0.24
0.24
0.23 0.23
0.22
0.21
0.19
0.18
0.17 0.17 0.14
14.00% 0.10
0.09 0.09 0.08
0.09
0.08
0.04 0.04
4.00%
0.07 0.07 0.06 0.06
0.05
0.01 (0.00)
(0.02)
(0.03)
-6.00%
5
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.
Jul-09
Aug-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Jul-07
Aug-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
-16.00%
K2 Institutional Investors II, Ltd. – Value-at-Risk Evolution 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 -30%
K2 Institutional Investors II Ltd VaR S&P 500 VaR
-25%
-20%
-15%
-10%
-7.28%
-5%
-1.31%
Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09
0%
* As of September 2009 Source: S&P, Measurisk.
6
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.
2008 January
Timeline of the Global Credit Crisis 2007
March
•Fed makes $200B available to banks to improve liquidity •Bear Stearns in fire-sale to JP Morgan •Fed makes weekend ¼% rate cut.
April
•$250 billion US tax rebates begin mailing •IMF warns of $1 trillion in credit-related losses
June
•FBI arrests 406 people for mortgage-related fraud •2 Bear Stearns workers face criminal charges •Qatar buys 7.7% of Barclays
The Before Years April July
New Century Financial Sub-prime lender files Chapter 11 2 Bear Stearns hedge funds fold
July
The After Time August
September
October
•BNP Paribus freezes 2 funds citing “complete evaporation of liquidity” •ECB pumps 85B Euro into system •German bank Sachsen, facing collapse, is sold •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
December
September
October
Major losses emerge • UBS $3.4B • Merrill Lynch $7.9B • Citigroup initial $3.1B goes to $40B • CEOs at Merrill and Citibank resign
•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.
7
•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
November
December
•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 Treasury abandons plan to buy troubled assets, instead invests to recapitalize banks Group of 20 meets in Washington to coordinate response Treasury gives Citigroup $20B bringing total to $45B as its stock falls 60% in one week Fed pledges $800B to shore up financial system of which $600B goes to back up Fannie and Freddie mortgages S&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+%
Timeline of the Global Credit Crisis (cont.) 2009
January
•President-elect Obama requests remaining $350B TARP •Treasury takes preferred shares in BofA for$20B TARP •Initial $1.5B investment in Chrysler from TARP
February
•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
March
May
•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
June
•GM files Bankruptcy 100 years 258 days after founding •Goldman Sachs and 9 other banks pay back $68B in TARP funds
July
August
8
•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
•Congress establishes “Financial Crisis Inquiry Commission” •Bernanke announces “extreme risk aversion has eased and investors are returning to the private credit markets.” •Fed and Treasury extend TALF through March 2010 •FDIC announces # of problem banks increased from 305 to 416
September
•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%
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)
S&P Index from 1825 to 2008
129 Positive years (70%) 54 Negative years (30%)
9
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
10
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
11
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
12
Equity Long/Short Much improved dispersion environment 16%
14%
12%
10%
8%
6%
4%
2%
Aug 2009 Dispersion
13
June 2007 Dispersion
Dispersion – Performance difference between the best- and the worst-performing stock quartiles Data through Aug 2009 Source: Bloomberg, S&P
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.
Basic Materials
Utilities
Healthcare
Financials
Consumer Cyclical
Energy
Industrials
Consumer NonCyclical
Communications
Technology
S&P 500 Index
0%
Factor History S&P 500 INDEX: 1071.49
2
1,400
Single B Credit Spreads: 597.26
US 10yr Bond Yields: 3.38
8
1,580 1,200
Sep -11.77% Aug -15.46%
1,380
Jul
-9.97%
1,000
Sep
-2.71%
Aug
-2.36%
Jul
-1.53%
6
1,180
1091.62 800
980
600
780 Sep
3.57%
Aug
3.36%
Jul
7.41%
J an-9 7
4
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
400
Aug Jul
200 J an-9 5
88.0
VIX Index: 23.12 Sep
4
459.11 580
380 J an-9 5
5.00
J an-9 7
5
J an-9 9
J an-0 5
J an-0 7
J an-0 9
2 J an-9 5
300
6
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
600
RU 2000 Growth vs. Value Indices
550
Sep -12.93% Aug
0.35%
-5.63%
Sep Grow th Wins
250
500
Aug Value Wins
Jul -14.77%
68.0
-1.63%
J an-0 3
Bond Implied Volatility (BIX): 114.70
78.0
-1.54%
J an-0 1
Jul Value Wins
58.0
450
200
400 Value
48.0
350
Gro wt h
150
38.0
300 250
28.0
104.47
100
21.23
200
18.0
150
8.0 J an-9 5
J an-9 7
J an-9 9
J an-0 5
J an-0 7
J an-0 9
50
J an-0 1
J an-0 3
J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
14
Data as of September 2009 Please see Important Disclosures and Disclaimers at the end of the presentation.
J an-0 5
J an-0 7
J an-0 9
100 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
Factor History 7
11,780
GS Commodity Index: 4233.00
10,780 Sep
0.17%
Aug
-2.36%
Jul
0.44%
4.3
EY / Bond Yield (Stock/Bond Valu Ratio): 1.46
3.8
9,780 3.3 8,780 7,780
Sep
-2.75%
Aug
-7.40%
Jul
-5.92%
128.0
US Dollar Index: 76.43
9
Sep
-1.94%
Aug
-0.22%
Jul
-2.23%
118.0
108.0
2.8
6,780
2.3
98.0
93.38
5,780
1.8
88.0
4,780
4285.00 3,780
1.3
1.11
1,780 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
TED Spread (3m EuroD - 3m Tbill): 0.22
0.3 J an-9 5
5.0
11
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
4.0
2.9
2.4
Sep
-2.83%
Aug
2.57%
Jul
-2.28%
Aug
-27.4%
Jul
-27.2%
J an-9 7
12
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
488
SPX priced in units of VIX: 222.84
438 Sep
4.38%
Aug
3.18%
Jul
8.30%
1.9
3.5 -18.7%
68.0 J an-9 5
10s - 2s Yield Curve Slope: 2.42
4.5
Sep
78.0
0.8
2,780
388 338
3.0
1.4
2.5 2.0
288 0.9
0.88
1.5
249.79
238
0.4
188
1.0
0.53
(0.1)
0.5 -
J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
(0.6) J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
Data as of Sseptember 2009
15
138
Please see Important Disclosures and Disclaimers at the end of the presentation.
J an-0 7
J an-0 9
88 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
Important Disclosures and Disclaimers 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.
16
Important Disclosures and Disclaimers (continued)
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.
17
Definitions of Comparative Indices and Statistics 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, MortgageBacked 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.
18
Definitions of Comparative Indices and Statistics (continued) 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.
19
Contact Information
K2 Advisors, L.L.C. 300 Atlantic Street – 12th Floor Stamford, CT 06901
Kelsey Biggers Managing Director, Risk Management E-mail: [email protected]
Telephone: 203-348-5252 Facsimile: 203-359-6369 Investor Relations: 203-504-1407 E-mail: [email protected]
Dan Elsberry Managing Director E-mail: [email protected]
20
December 4, 2009
Agincourt Capital Management, LLC Presentation to:
Ft. Lauderdale Police & Fire System
Patrick K. Kelly, CFA – Managing Director
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. equities Bonds are a good source of cash flow Bonds are a good deflation hedge High quality bonds are relatively stable
Liability-driven investing (LDI) rejects these factors Not because they are untrue, but because they don’t matter! In LDI, all we really care about is meeting future benefit obligations The bond portfolio is structured to meet these cash flows Simple in concept, but there are challenges
Change your thinking from “maximizing return” to “minimizing risk”
2
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)
$7,500 $6,250
Sample Liability Schedule ($000) Total Future Liabilities=$228.1 million
$5,000 $3,750 $2,500 $1,250 $0 '10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
This liability schedule is simply an example, but is pretty typical in its “shape” The duration of this schedule is just over 13 years.
3
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 Present Value of $228.1 Million $150,000
$125,000
$100,000
$75,000
$50,000 3%
4%
5%
6%
7%
8%
9%
10%
4
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 Discount Yield Curves: November 2009
7% 6% 5%
PPA
4%
Citigroup 3% 2% 1% 0% 0
20
40 60 Years From Present
80
100
5
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
10.0%
Assets vs. Liabilities (% of Total) Portfolio Cash Flow
7.5%
Liability Schedule
5.0%
2.5%
0.0% '10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
6
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
7
Scenario Analysis/Rebalancing
The portfolio must perform well in a wide
Treasury Yield Curve Scenarios 6%
variety of interest rate scenarios.
5%
In order to perform the necessary analysis, 4% 3%
Agincourt has made significant investments in portfolio modeling systems. We have the best systems commercially-available.
Bear Steepening Bear Flattening No Change Bull Steepening Bull Flattening
2% 1%
To the left is a sampling of interest rate
0% 1 2 3
5
7
10
20
30
scenarios we believe are in the “two standard deviation” range of likely outcomes over the next twelve months.
One Year Total Returns: Assets vs. Liabilities
Again, the main objective is to closely track
20%
Total 12-Month Return
15%
Agincourt Long Duration Portfolio Liabilities Barclays Long Gov't/Credit Index
the liability stream (and meet all future benefit obligations.
10%
Beating an appropriate “long duration”
benchmark may also be appropriate.
5%
Here, we compare the performance of the
0%
sample portfolio with the target liabilities and the Barclays Long Government/Credit Index.
-5% -10% Bear Steepening
Bear Flattening
No Change
Bull Steepening
Bull Flattening
In addition, the portfolio outperforms the
Index under most scenarios. 8
Final Thought
9
Investment Workshop December 3 & 4, 2009
Hyatt Pier 66 Hotel Fort Lauderdale, Florida
Investment Workshop Agenda Hyatt Pier 66 Hotel Fort Lauderdale, Florida
Thursday, December 3, 2009 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
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
Fort Lauderdale Police & Firefighters’ Retirement System
City of Fort Lauderdale Police and Fire Retirement System
Capital Markets Review 231 South Bemiston Avenue 14th Floor St. Louis, Missouri 63105 WWW.ACGNET.COM
December 3, 2009
Capital Markets Summary
Broad Market Returns For the Periods Ending October 31, 2009
65% 55% 45% 35% 25% 15% 5% -5% -15%
MTD
YTD
1 Year
3 Years
5 Years
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%
Source: ACG Research, Bloomberg © 2009 Asset Consulting Group All Rights Reserved
2
© 2009 Asset Consulting Group All Rights Reserved
MTD YTD One Year Three Years Five Years Te
lec
er ia
ls
ls
s
om m un ica ti o ns
M at
tri a
na nc ial In du s
Fi
-26.6%
-5.1%
-5.3%
-3.7%
-4.7%
-4.9% -7.8% -2.1% -11.6% -3.2%
-11.1%
-13.2%
-4.7%
-6.0%
-3.8%
-2.5%
7.8% 5.8%
1.0%
1.0%
-0.3%
6.7%
14.3%
12.0%
8.7%
9.3% 5.9%
3.2%
0.0% 3.6%
1.0%
1.6%
1.8%
15%
En er gy
les
-10.5%
-15%
er St ap
io na ry
-3.2% -2.6% -4.2% -7.4%
-1.4%
-0.4%
-0.1%
30.0%
28.6%
24.6% 21.4%
25%
Co ns um
re t
Ut ilit ies
ch no lo gy
-5.6%
35%
er D isc
Te
-5% 5.4% 5.7%
5%
-2.3%
44.2%
45%
Co ns um
In fo rm ati on
H ea lt h ca re
S&P 500 Sector Returns For the Periods Ending October 31, 2009
-25%
-35%
Source: ACG Research, Bloomberg 3
Fixed Income Market Environment For the Periods Ending October 31, 2009 Excess Returns by Sector1 as of October 31, 2009 6,000
1
Relative to the duration neutral Treasury Time periods over one year are annualized Source: Barclays Capital
© 2009 Asset Consulting Group All Rights Reserved
4,225
4,000 2,785
3,000
2,425 2,050
2,424
2,000
1,889
1,612 693 716
1,000
50
356 467 -52
8
485 478 89
14
219
45
65
167
101
-155
(1,000)
at e)
S
or po r
AB H
ig h
Y
ie ld
(C
Co r
po r
M B
BS
S
at e
el at ed G ov 'tR
re ga te
-160
-241
-474
Ag g
Nominal Returns by Quality 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%
QTD
YTD
1-Year
3-Year*
Excess Returns by Quality as of October 31, 2009
8,000
8 ,0 0 0 7,0 0 0
Excess Return (bps)
Nominal Returns by Maturity 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%
5,217
5,000
CM
Excess Return (bps)
Nominal Returns by Sector 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%
6 ,0 0 0 4,790
5,0 0 0 4,202
4,116
3,619
4 ,0 0 0
2,950
2,8172,912
3 ,0 0 0 2,225 1,767
2 ,0 0 0
1,227 1,078
1,0 0 0
372 349 40
-23
83
118
86
92
-45
162
242
-189
-273
(1,0 0 0 ) AAA
AA
-87
A
QTD
-403
B AA
YTD
1-Year
BA
B
-575
CAA
3 -Year*
4
Point in Time Analysis
Trailing One Year Market Performance – September 09 vs. October 09 Trailing One Year Returns 40.00%
30.00%
Percent Return
20.00%
10/31/2009 9/30/2009
10.00%
0.00%
-10.00%
Ag gr eg at e
U x W Ie SC IA C
M
Ba rc la y's
S
AF E M SC IE
Va lu e
R us se ll 20 00
G ro w th
R us se ll 20 00
R us se ll 20 00
Va lu e
R
us
se ll
10 00
G ro w th
R us se ll 10 00
S& P
50 0
-20.00%
Index
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.
© 2009 Asset Consulting Group All Rights Reserved
6
Trailing Ten Year Market Performance – September 09 vs. October 09 Trailing Ten Year Returns 10.00%
8.00%
Annualized Return
6.00%
4.00% 10/31/2009 9/30/2009 2.00%
0.00%
-2.00%
Ag gr eg at e rc la y's
Ba
M
SC IA C
W Ie
x
U
S
AF E M SC IE
Va lu e
th
R us se ll 20 00
ro w G
R us se ll 20 00
R us se ll 20 00
lu e Va 10 00 us
R
R
us
se l
se ll
l1 00 0
S& P
G ro w th
50 0
-4.00%
Index
Over longer periods of time trailing returns month over month tend to stabilize but still exhibit some dispersion in more volatile asset classes.
© 2009 Asset Consulting Group All Rights Reserved
7
Rolling One Year Rankings
Rolling One Year Ranks – Sawgrass Rolling 1-Year Rankings eVestment Alliance Large Cap Growth Universe 0 10 20 30 40 50 60 70 80 90
Russell 1000 Growth
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Sawgrass
9
Rolling One Year Ranks – Systematic Rolling 1-Year Rankings eVestment Alliance Large Cap Value Universe 0 10 20 30 40 50 60 70 80 90
Russell 1000 Value
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Systematic
10
Rolling One Year Ranks – NorthPointe Rolling 1-Year Rankings eVestment Alliance Small Cap Growth Universe 0 10 20 30 40 50 60 70 80 90
D ec -0 Ap 0 r -0 Au 1 g01 D ec -0 Ap 1 r -0 Au 2 g0 D 2 ec -0 Ap 2 r -0 Au 3 g03 D ec -0 Ap 3 r -0 Au 4 g0 D 4 ec -0 Ap 4 r -0 Au 5 g05 D ec -0 Ap 5 r -0 Au 6 g0 D 6 ec -0 Ap 6 r -0 Au 7 g07 D ec -0 Ap 7 r -0 Au 8 g0 D 8 ec -0 Ap 8 r -0 Au 9 g09
100
Russell 2000 Growth
© 2009 Asset Consulting Group All Rights Reserved
NorthPointe
11
Rolling One Year Ranks – Lee Munder Rolling 1-Year Rankings eVestment Alliance Small Cap Value Universe 0 10 20 30 40 50 60 70 80 90
Ju n03 Se p0 D 3 ec -0 M 3 ar0 Ju 4 n04 Se p0 D 4 ec -0 M 4 ar0 Ju 5 n05 Se p05 D ec -0 M 5 ar0 Ju 6 n06 Se p06 D ec -0 M 6 ar0 Ju 7 n07 Se p0 D 7 ec -0 M 7 ar0 Ju 8 n08 Se p0 D 8 ec -0 M 8 ar0 Ju 9 n09 Se p09
100
Russell 2000 Value
© 2009 Asset Consulting Group All Rights Reserved
Lee Munder
12
Rolling One Year Ranks – Artio Rolling 1-Year Rankings eVestment Alliance International Large Cap Universe 0 10 20 30 40 50 60 70 80 90
MSCI All Country World Ex-US
© 2009 Asset Consulting Group All Rights Reserved
Artio International Equity I
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Artio International Equity II 13
Rolling One Year Ranks – Agincourt Rolling 1-Year Rankings eVestment Alliance Core Fixed Income Universe 0 10 20 30 40 50 60 70 80 90
Barclays US Aggregate
© 2009 Asset Consulting Group All Rights Reserved
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Aug-03
Apr-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Aug-00
Apr-00
Dec-99
100
Agincourt 14
Pros and Cons of Style Peer Groups
Pros Provide 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.
Cons Survivorship 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.
© 2009 Asset Consulting Group All Rights Reserved
15
© 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 Ft. Lauderdale Police and Fire Retirement System: Fixed Income Market Review December 3, 2009
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.
Agenda
Page 2
I.
CIS Overview
II.
Market Review
III.
Observations and Outlook
IV.
Current Strategy Position
Firm Overview – BNY Mellon Asset Management
BNY Mellon Asset Management 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
Ankura Capital Pty Ltd. 1
Blackfriars Asset Management
BNY Mellon ARX
BNY Mellon Beta Management 2
The Boston Company Asset Management, LLC
The Dreyfus Corporation
EACM Advisors LLC
Hamon U.S. Investment Advisors Ltd. 3
Ivy Asset Management LLC
Mellon Capital Management Corporation
Mellon Global Alternative Investments Ltd. 1
The Newton Group
$925 billion in assets under management (as of 06/30/09)
Urdang Capital Mgmt, Inc. / Urdang Securities Mgmt, Inc.
Walter Scott & Partners Limited
$20.7 trillion in assets under custody and administration (as of 06/30/09)
West LB Mellon Asset Management 1,4
The Alcentra Group
BNY Mellon Cash Investment Strategies 5
Pareto Investment Management Limited
Standish Mellon Asset Management Company LLC
Do not offer services in the U.S. A division of The Bank of New York Mellon 3Minority Owned 450/50 Joint Venture 5A division of The Dreyfus Corporation. Please see disclosures in the appendix. 2
Page 3
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
$12 trillion in assets under trusteeship for over 90,000 clients worldwide (as of 06/30/09)
Fixed Income, Cash & Currency Group
1
The Bank of New York Mellon Treasury Services
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
Firm Overview – BNY Mellon Cash Investment Strategies
BNY Mellon Cash Investment Strategies (CIS) ▪
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
*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 4
Observations and Outlook
The Financial Industry in Transition
September 15, 2008 Lehman Brothers filed for bankruptcy
February 2008 Auction Rate Securities, failed auction
February 18, 2009 October 7, 2008
Bank of America agreed to acquire Merrill Lynch
6%
5%
Commercial Paper Funding Facility established by the Fed
September 16, 2008 NY Fed agreed to lend $85 billion to AIG in exchange for 80% equity stake
5.25%
October 14, 2008 Temporary Liquidity Guarantee Program established by the FDIC
4.50%
Fed Fund Rate
3%
Structured Investment Vehicles (SIV) liquidity issues
TARP Capital Purchase Program invests $125 Billion in 9 banks
September 19, 2008
4.25%
August 2007
ABCP Money Market Mutual Fund Liquidity Facility
3.50%
Fed announced Primary Dealer Credit Facility
Money Market Investor Funding Facility established by the Fed
2.25%
November 25, 2008
0% Sep 07
Dec 07
Mar 08
Jun 08
Sep 08 Time
Source: Various media outlets, Bloomberg
Page 5
Treasury Guarantee Program for Money Market Funds expires
1.50%
Treasury and the Fed announced the Term Asset Backed Securities Loan Facility
JP Morgan Chase Acquired Bear Stearns with Treasury bid
Jun 07
September 18, 2009
2.00%
March 17, 2008
1%
March 23, 2009
October 21, 2008
March 16, 2008
2%
Fed announced purchase of $750 Billion in agency debt and $300 Billion in longer term Treasury securities
Treasury announced details of the Public-Private Investment Program
Treasury to guarantee Money Market Funds
3.00%
Homeowner Affordability and Stability Plan announced
March 18, 2009
Reserve Fund “breaks the buck”
4.75%
4%
$787 Billion American Recovery and Reinvestment Act signed into law
Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (TARP)
FNMA and FHLMC placed into conservatorship
New Century Bankruptcy
February 17, 2009
October 3, 2008
September 7, 2008 June 2007
1.00%
0.25%
Dec 08
Mar 09
Jun 09
Sep 09
BNY Mellon Short Duration Market Review
Selected Money Market Rates For the period December 1, 2006 to October 31, 2009
7%
1 Month Asset Backed Commercial Paper 1 Month LIBOR Overnight Fed Effective Fed FundsTarget 3 Month Treasury Bill
6%
Yield
5% 4% 3% 2% 1% 0% 12/1/2006
Source: Bloomberg
Page 6
5/25/2007
11/16/2007
5/9/2008
10/28/2008
4/24/2009
10/13/2009
BNY Mellon Short Duration Market Review
Fed Watch November 16, 2009
Apr 30
2.00
Assessment Omitted
Jun 25
2.00
Inflation Risk
Aug 05
2.00
Inflation/Growth
Sep 16
2.00
Inflation/Growth
Oct 8
1.50
Inter-meeting
Oct 29
1.00
Risk to Growth
Dec 16
0 - 0.25
Risk to Growth
Implied Fed Funds Target 5%
30-Jun-09 16-Nov-09
4%
3% Rate
2008 FOMC Schedule of Meetings Date Rate Risk Assessment Mar 18 2.25 Downside Risk
2%
2009 FOMC Schedule of Meetings Date Start
Rate 0 - 0.25
Risk Assessment Risk to Growth
Jan 28
0 - 0.25
Risk to Growth
Mar 18
0 - 0.25
Risk to Growth
Apr 29
0 - 0.25
Risk to Growth
Jun 24
0 - 0.25
Risk to Growth
Aug 12
0 - 0.25
Risk to Growth
Sep 23
0 - 0.25
Risk to Growth
Nov 04
0 - 0.25
Risk to Growth
Dec 16
Source: Bloomberg
Page 7
1%
0% Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
BNY Mellon Short Duration Market Review
Historical Short Term Rates
Historical Treasury Yield Curves (0-30 Years)
For the period October 1999 to October 2009
October 31, 2009
10%
6%
2 Year Treas ury 3-Month LIBOR
Yield to M aturity
Yield-to-Worst
5%
Fed Funds Target
8% 6% 4% 2%
3% 2% 1%
0%
12/31/2006
12/31/2007
12/31/2008
10/31/2009
0% Oct 99
Source: Bloomberg
Page 8
4%
Oct 00
Oct 01
Oct 02
Oct 03
Oct 04
Oct 05
Oct 06
Oct 07
Oct 08
Oct 09
0
5
10
15 Years to Maturity
20
25
30
BNY Mellon Short Duration Market Review
Rolling One Year Excess Return vs. Treasury Notes October 31, 2009
Rolling One Year Excess Return as of October 31, 2009, 1-5 Year Corporate Index 20% 15%
Percent (%)
10% 5%
Credit/Liquidity Crisis
Bursting Tech Bubble
0% -5%
Russian Debt Default& LTC
S&LCrisis
-10%
Record Setting High Yield Downgrades & Defaults (Enron,W orldcom ,Tyco)
-15% Oct 89
Oct 91
Source: Barclays Capital Inc. index data
Page 9
Oct 93
Oct 95
Oct 97
Oct 99
Oct 01
Oct 03
Oct 05
Oct 07
Oct 09
Observations and Outlook
Summaries of Global Policies – Bailout Strategies Federal Reserve
Bank of England
Bank of Japa n
0.00-0.25%
0.50%
0.10%
Policy Rate Asset Sw aps
Term Se curitie s Lending Fa cility (TSLF) Special Liquidity Sche me: Banks can
European Central Bank 1.00% 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 Fa cility (TAF)
Discount W indow Facility
Term Asset Ba cked Se curitie s Loa n
Additional longer te rm re pos
Corporate debt financing facility
Main and supplementary longer-term refinancing operations (up to 6 months)
Facility (TALF)
were expanded and will be carried through at full allotment.
operations
Primary De ale r Cre dit Facility (PDCF) Asset-backed CP Money Market Mutual Fund Fa cility (MMIFF) Collatera l Expansion
Collateral expanded several times for various programs
Collateral expanded for repos and include MBS, AAA-corporate and consumer ABS,
Collateral expanded in Dec 08. New minimum rating lowered to BBB from A.
and highly rated ABCP. Private Asse t Purchases
Money Marke t Investor Funding
Asset Purchase Facility (APF)
Expanded, includes CDs and securities in USD, JPY and GBP. Min. rating lowered to BBB- from A-.
Corporate bond purchase program
Purchases of CP under discussion at ECB
Facility (MMIFF) Outright Purchases of CP Commercial Paper Funding Facility GSE purchase Tre asury Purchases
Announced purchases of up to $300bn
Asset Purchase Facility (APF)
in Treasuries
Increased purchases of Japanese Government Bonds (JGBs) from banks from Ұ1.4trn to Ұ1.8trn a month. (Announced January 09)
FX Sw aps
Other
Swap lines opened with other Central
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.
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
Source: News outlets, Barclays Capital
Page 10
Unlimited dollar supply offered on a
Observations and Outlook
The Consumer Retail Sales Total
10.0
Retail Sales Less A utos
8.0
Households still deleveraging and limiting spending
6.0 4.0
Decline in borrowing has affected consumer spending
2.0 0.0 -2.0
Consumer confidence and retail sales improving in UK and Eurozone, but US consumer continues to lag
-4.0 -6.0 -8.0 -10.0 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Personal Income and Spending Personal Income Personal Spending
10.0 8.0 6.0
Spending will be done by households and businesses that do not need to borrow or that have good credit quality
4.0 2.0 0.0
Personal spending rose 0.9% in August due in part to the “Cash for Clunkers” program
-2.0 -4.0 1993
1994
Source: Bloomberg
Page 11
Growth of income is important in the recovery
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Observations and Outlook
Housing
Household Debt Service Ratio Falls to 10.5%
Personal Savings Rate Reaches 8% 16 14
Personal Savings Rate
16
Household Debt Service Ratio
Target = 8%
14
Target = 10.5%
12
12
10
10
8
8
6
6
4
4 2
2
Households increasing personal savings Rising savings weighs on growth of consumer spending Continued deleveraging of the consumer
Source: Bloomberg
Page 12
06
08
20
04
20
20
00
02
20
98
19
20
94
96
19
92
19
19
88
90
19
86
19
19
82
84
19
80
19
19
76
78
19
74
19
19
70
72
19
68
19
19
64
66
19
19
60
19
19
06
08
20
04
20
20
00
02
20
98
19
20
94
96
19
19
90
92
19
88
19
19
84
86
19
82
19
19
78
80
19
76
19
19
72
74
19
19
68
70
19
66
19
19
62
64
19
60
19
19
62
0 0
Observations and Outlook
Housing Survey U.S. Home Sales Months Supply 14
New Hom e Sales Months Supply Exis ting Hom e Sales Months Supply
12
Housing supply is decreasing
10
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.
8 6 4 2 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
U.S. Sales Volume of New and Existing Homes 1,500
New Hom e Sales Thous ands of Units (L) Exis ting Hom e Sales Millions of Units (R)
1,250
7,500 7,000 6,500
1,000
6,000 5,500
750
5,000 500
4,500
250
4,000 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
Source: Bloomberg
Page 13
Sales are stabilizing Prime borrowers now defaulting due to job losses
Observations and Outlook
Employment Change in Non-Farm Payrolls 250
400
300
200
350 400
$000's
0
450
-200
500
-400
550
3 Month MA
-600
600
Initial Jobless Claims 4 W eek MA
650
-800 2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
700
Decline in unemployment claims
Unemployment Rate
Business still not hiring
11
7,500 Unemployment Rate (L)
10
6,500
Continuing Jobless Claims (R)
9
5,500
(%)
8 7
4,500
6
3,500
5 2,500
4
Page 14
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1,500 1999
3
Source: Bloomberg
Improving labor market
Observations and Outlook
Unemployment Rates
US
12.00
UK
Eurozone
Japan
Rate (%)
10.00 8.00 6.00 4.00 2.00
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
Source: Bloomberg
Page 15
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
00 20
99 19
19
98
-
Observations and Outlook
Manufacturing Sector
Capacity Utilization (%) (L)
90.0
Industrial Production (YoY % Change) (R)
15.0 10.0
85.0
5.0
80.0
0.0 75.0
-5.0
n09
Ja
n07
Ja
n05
Ja
n03
Ja
n01
Ja
n99
Ja
n97
Ja
n95
Ja
n93
Ja
n91
Ja
n89
Ja
n87
Ja
n85
Ja
n83
Ja
n81
Ja
Ja
Ja
Ja
Ja
n79
-15.0 n77
65.0 n75
-10.0
n73
70.0
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
Source: Bloomberg
Page 16
Observations and Outlook
Global Economic Watch
Gross Domestic Product
Consumer Price Index
Year-on-Year %
Year-on-Year %
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
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
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 Rate
Americas
Europe
Asia/Pacific
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
Source: Bloomberg
Page 17
Observations and Outlook
Survey of Economic Forecasts
Real GDP Country
Consumer Price Index
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
-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
--
--
Japan
F = Forecast
Anemic growth in developed countries. Growth projections higher in emerging market countries Deflation is still a threat Emerging market consumers need to spend more
Source: Bloomberg
Page 18
Observations and Outlook
GDP vs. Asset Performance US GDP vs. Asset Performance
Europe GDP vs. Asset Performance
10
1,800 GDP Annualized (L)
8
Long Yield (L)
Equities (R)
1,600
6
6
1,400
5
4
1,200 `
2
1,000
6,000
7 GDP Actual (L)
Long Yield (L)
Equities (R) 5,000
4
4,000
3 3,000
2 0
800
1
-3
2,000
0 -1
1,000
GDP Actual (L)
Long Yield (L)
20 09
20 08
20 07
20 06
20 05
20 04
20 03
20 02
Japan GDP vs. Asset Performance
UK GDP vs. Asset Performance 7
20 01
0 20 00
2 00 9
2 00 8
0 2 00 7
-8 2 00 6
-2
2 00 5
200
2 00 4
-6
2 00 3
400
2 00 2
-4
2 00 1
600
2 00 0
-2
8,000
Equities (R)
10
25,000 GDP Annualized (L)
6
Long Yield (L)
Equities (R)
7,000
5 6,000
5
20,000
0
15,000
-5
10,000
-10
5,000
-15
0
4 5,000
3 2
4,000
1
3,000
0 2,000 -1 1,000
-2
Similar scenario in developed countries Source: Bloomberg
Page 19
20 0 9
20 0 8
20 0 7
20 0 6
20 0 5
20 0 4
20 0 3
20 0 2
20 0 1
20 0 0
20 09
20 08
20 07
20 06
20 05
20 04
20 03
20 02
20 01
0 20 00
-3
Observations and Outlook
Global Rates
Central Bank Rates Start of Cycle Official Rate
Current
Date
Level
Last Move
Fed 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: W orking 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)
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
Source: Bloomberg
Page 20
Observations and Outlook
International Monitor 3-Month LIBOR (%) 8 UK
7
Euribor
USD
Japan
6
Reduction in interbank rates are a welcome sign as systemic risks have been reduced
Yield (%)
5 4
LIBOR now at 28.4 basis points. EurolandEONIA now at 40.5 basis points.
3 2 1
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
20
00
0
Long Yields (%) 8 UK Gilt
German Bund
US 10yr Note
JPY 10yr Bond
7
Long term government bonds tracking in a narrow range
6
Yield (%)
5
Yields low despite heavy new issuance
4 3 2 1
Source: Bloomberg
Page 21
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
20
00
0
Observations and Outlook
International Monitor Equities 25,000
UK FTSE 100
Germany DAX 30
JPY Nikkei 225
1800
USD S&P 500 (R)
1600 20,000
1400 1200
15,000
1000 800
10,000
600 400
5,000
200
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
20
20
01
0 00
0
Global stock markets have improved as money has flowed back into riskier assets
Source: Bloomberg
Page 22
Observations and Outlook
ABS Spreads 2500
1-Year AAA (Home Equity) 3-Year AAA (Home Equity)
2000
1-Year AAA (Credit Cards) 3-Year AAA (Credit Cards)
1500
5-Year AAA (Credit Cards) 1-Year AAA (Autos)
1000
3-Year AAA (Autos)
500
0 Sep 07
Dec 07
Mar 08
Jun 08
Sep 08
Dec 08
Mar 09
Jun 09
Outperformance in auto and credit card securities Subprime and Alt-A securities also improving in recent months
Source: Bloomberg
Page 23
Observations and Outlook
Corporate Spreads
1-3 Year Corporate Spreads By Sector 1,200
Industrial
Utility
1-3 Year Corporate Spreads By Rating 1,000
Finance
AAA
900
1,000
AA
A
BBB
800 700
800
600 500
600
400 400
300 200
200 0
100 Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Finance, industrial and utility spreads nearly back to pre-Lehman levels
Source: Bloomberg
Page 24
Q3 2009
0
Q4 2006
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Lower credit quality has outperformed higher quality
Current Strategy Position
Economic Outlook Key Economic Variables W age and Price Inflation
Little inflationary pressure from most sectors
U.S. Economic Strength
Economy growing slowly; capital investment is very weak; consumer spending very weak
Market Forces
Improved equity, corporate markets due to declining risk aversion
Monetary Policy
Fed on hold until mid-2010
Global Outlook
Global Central Banks on hold mid- to late-2010
Limited Duration Strategy
Slight short reflecting low levels of interest rates
Duration
Neutral as spreads are narrow
Agency
Yield spreads tighter; issue selection is critical
Credit
Good value, AAA quality, consumer auto and credit cards
ABS
Market is favoring higher risk credits
Quality -100
Source: CIS
Page 25
Neutral 0
100
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.
© 2009 The Dreyfus Corporation.
Page 26
Maya Saxena
Fort Lauderdale Police & Fire Retirement System Investment Workshop 2009
Securities Litigation Trends Presented by 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 Financial Lehman 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 and enforcement of judgments
Case
Estimated Loss
Recommendation
Accuray
$86,000
Pass: “In and Out”
Genzyme
$4100
Pass: Too Small
Int’l Game Tech
$44,000
Pass: Merits
Conseco
$160,000
Pass: Minor acct’g issue
Textron
$65,000
Pass: Too Small
Coventry
$311,000
Pass: Too Small
Men’s Wearhouse
$32,000
Pass: Too Small
CVS Caremark
$474,000
Pass: Merits
Sunpower
$76,000
Pass: Too Small
Northwest 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 + β 4LCLASSit + β5CAR3it+ β6LOGPILit + β7LOGMVit + β8INSHAREit + β 9BETAit +β10SKEWNESSit+β11LAGRETit + β12ROEit + β13BMit + β14LEVit + β15TURNOVERit+ β16REGit + β17TECHit + β18RETAILit + YEAR DUMMIES + εit
Institutional Monitoring through Shareholder Litigation C.S. Agnes Cheng, Henry He Huang (2009) http://blogs.law.harvard.edu/corpgov/2009/05/28/institutionalmonitoring-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
Healthways case: Fund not adequate because of money manager
Satyam Case in NY
Solution: Use more than one firm
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 funds moving? Will we be part of a group?
Merger Related Litigation - 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.
Detroit P&F lawsuit - 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.
COX RADIO Coral Springs Police Pension Fund lawsuit – the tender offer price is unfair and is too low, undervalues the company.
Thank You 2424 N. Federal Highway, Suite 257 Boca Raton, FL 33431 561‐394‐3399 x 13 [email protected] saxenawhite.com
Fort Lauderdale Police and Fire Retirement System
AMERICAN CORE REALTY FUND Portfolio Review
Jay Butterfield, CFA Managing Director
December 3, 2009
Richelle Hayes Senior Manager, Marketing and Client Service
© 2009 American Realty AdvisorsSM. All rights reserved.
801 N. Brand Boulevard Suite 800 Glendale, CA 91203 (818) 545-1152 www.americanreal.com
American Realty Advisors American 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
Transparency
Institutional Clients
100% employee-owned Clients have direct communication with Principals and Portfolio Managers
Risk-Control
1
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 ¾ Open-end core/value-added real estate funds ¾ Closed-end value-added real estate funds ¾ Core/value-added separate accounts ¾ QPAM/Takeover portfolios of assets ¾ 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).
2
Today’s Commercial Real Estate Market Opportunities The “buy high and sell higher” world is gone ¾ Return expectations on commercial real estate have increased from historic lows of 2007
Fundamentals (rents and demand) are weak – reflection of the economics of the market ¾ 2006-2007 underwriting called for large growth in rents that never materialized ¾ Today’s reality is that cash flow will be flat/declining in the short run
Less transactions make pricing more attractive ¾ Transaction levels down 94% off the peak ¾ Prices down as much as 35-40% from the peak
3
Lack of Credit Will Force Sales of Assets as Loans Come Due Defaults 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
4
Those With Capital Will Drive Transactions for the Next 18-36 Months Refinancing will require large equity investments Mortgage Proceeds on a Property Valued at $100 Million in '07 vs Now
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?
$120 $100 $100 $80
$75 $63
$60 $38
$40 $20 $0 2007; LTV=75%*
2009; LTV=60% Property Value
Mortgage
* LTV calculated off the appraised value would have been lower. Appraised values were often inflated during the boom.
Source: ARA Research 5
What Does This Mean for Core Real Estate? Market pricing is now based on an overly negative outlook and expectation of slow recovery Those with capital who buy on pessimism-based/in-place income – not future appreciation – have a significant advantage Continue to seek quality assets in strong markets Carefully 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
6
American’s Investment Strategy: Core and Value Investment Opportunities Today Look Similar In today’s market, all investments may be “opportunistic” ¾ Product Types 4 Office 4 Industrial 4 Multi-family 4 Retail
¾ Market Characteristics 4 Limited lease rollover 4 Multi-tenant properties 4 No forward commitments 4 Strong institutional markets with lower vacancies 4 Low basis compared to market 4 Conservative underwriting
¾ Locations 4 Southern California 4 Seattle 4 San Francisco/Bay Area 4 Boston 4 Chicago
American’s strategies will be differentiated by outlook of risk 7
American’s Investment Strategy:
The Key is in the Risk Structure Core Investments – Strategy
Value-Added Investments – Strategy
Leverage
Leverage
¾ 15%-25% initially ¾ Increase to 25%-35% in a recovery market
Lease up ¾ 80%+ occupancy ¾ Strong credit tenancy
Management ¾ Focus on managing stabilized income producing properties with temporary correctable issues
¾ 30%-40% initially ¾ Increase to 50%-60% in a recovery market
Lease up ¾ 60-70% occupancy ¾ Underwrite credit tenancy selectively
Management ¾ Focus on correcting more complex management/property/financial deficiencies
8
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
16%
Average 3-Year Unleveraged Total Return - NCREIF Property Index
14.4% 14%
12.7%
12.5%
12% 10.5% 10% 8% 6% 4% 2% 0% 1982
1994
2002
Average
Year
Source: NCREIF, ARA Research 9
Indicators to Look for in Advance of a Recovery Falling Market Minimize Downside Risks Debt Returns Exceed Equity
2Q07 Peak in Real Estate Prices
Opportunistic Investing Value-added Strategy Discounted Pricing Distressed Debt
High Risk/High Return Potential
2Q08 Increasing Job Losses Real Estate Sales Volumes Fall Commodity Spike
4Q07 Financing Risk Premiums Skyrocket
3Q08 Energy Prices Decline Financial Industry Crises 1H09 Economic Stimulus Stock Market Rally Starts 3Q09 Job Losses Slow but Continue/ Liquidity Crunch
Risk Minimization
Expansionary Economy Core Investment Growth Development/Redevelopment Lease Up Strategies
4Q09 Dollar Plummets Unemployment at 10%+
Employment Growth Resumes
Normal (?) Economic Expansion . . . but not “back to where we were”
Increase in Global Demand Consumer Spending/ Increasing Liquidity Housing Prices Stabilize Commercial Real Estate Transactions Resume -Forced Sales??
Best Guess 2010???
Market Recovery
10
But What Will That Recovery Look Like?
11
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) 12
Focused on a Pure Core Strategy to Manage Risk 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: ¾ 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
13
High Quality Well-Positioned Assets Nationwide Fund Strategy – low risk approach in today’s market: ¾ Existing institutional quality office, retail, industrial, and multi-family properties in strong, growing, and/or supply-constrained diversified metropolitan areas nationwide ¾ Geographic, property type, and economic diversification to reduce risk – Focus on institutional markets ¾ 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
14
American Core Realty Fund Investment Objectives ¾ Steady income returns ¾ Long-term appreciation ¾ Exceed the NCREIF Property Index benchmark
Fiduciary Responsibility ¾ 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.
15
American Core Realty Fund – Valuations Each property is appraised by an independent MAI appraiser at least once every 12 months Approximately 25% of the portfolio externally valued each quarter Internal valuations are completed quarterly PwC – Independent Valuation Advisor – third-party oversight of all valuations American 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.
16
American Core Realty Fund – Liquidity Fund established a redemption queue in 4Q 2008 as the significant decline in stock market value caused clients to seek to rebalance their portfolios ¾ Total redemption requests to date
$ 227,101,504
¾ Paid
(64,971,821)
¾ Rescinded
(19,072,226)
¾ Outstanding requests as of 12/03/09 (45 clients)
$143,057,457
Current requests = 11.8% of NAV No new requests since 2Q 2009 Expect to continue to pay on the redemption queue into 2010 The Fund has on-going cash flow as well as over $100 million in undrawn commitments available for new acquisitions, Fund operations, and redemptions. 17
Diversification Across Major Markets Nationwide Denver
Minneapolis
Chicago/Cook County Suburban Chicago
Seattle
Cincinnati
Portland
East
M idw est
W est
San Francisco
Boston
San Jose Los Angeles
Nashville
South
Orange County
Atlanta
San Diego
Long Island, NY Northern NJ Philadelphia Baltimore Washington, DC Northern Virginia Raleigh
Jacksonville
Phoenix
Dallas Austin
Property Type Multi-Family
Office
Industrial
Miami
% Leased as of September 30, 2009
Retail
91%
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.
18
Broad Property Type, Size and Geographic Diversification Property Type
Property Size
Industrial 22.7% Office 38.4%
Retail 14.0%
$25 M $50 M 47.9%
MultiFam ily 24.9%
Geographic Region
$50 M $100 M 24.8%
$0 - $25 M 27.3%
West 29.5%
South 26.4%
East 32.3%
Midw est 11.8%
Additional Fund Metrics As of September 30, 2009 NAV: Loan to Value Ratio:
$ 1.2 Billion 22.5%
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. 19
American Core Realty Fund – Highlights 9 150 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.
150 N. Wacker Drive 243,616 sq. ft. Office Building Chicago, IL
9 Property situated one block from Ogilvie Station and two and a half blocks from Union Station, providing quick and convenient transportation to downtown Chicago.
Percent Leased: 85% Year Built:
1970
Major Tenants: Transwestern Investment Hometown America HDI Gerhling
ALARA® Harbour Pointe 230-Unit Multi-Family Community Mukilteo, WA
Percent Leased:
94%
Year Built:
1998
9 American is continuing to upgrade building finishes to maintain the property’s historically high occupancy and rent levels.
9 ALARA Harbour Pointe is located near Everett, Washington, home to a diverse range of corporate employers, including Boeing, TRW, JanSport and Allied Technology. 9 Property has an appealing location at the north end of Seattle's Technology corridor. 9 Strategically positioned location with high barriers-toentry limiting potential competition, severe shortage of multi-family land, and arduous environmental regulations.
ALARA® is a registered service mark owned by American Realty AdvisorsSM and is used under license. 20
American Core Realty Fund – Highlights Multi-state Industrial Portfolio Over 1,000,000 sq. ft. Industrial Portfolio Cincinnati, Chicago and Atlanta
Percent Leased: 100% Year Built:
2005-2007
Major Tenants: Uniform Direct The Pampered Chef GSI Commerce Lincoln Electric
Waldorf Marketplace II 168,177 sq. ft. Shopping Center Waldorf, MD
Percent Leased: 97% Year Built:
2007
Major Tenants: Home Goods Kincaid
9 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. 9 Each of the properties is well-located in proven warehouse distribution markets in the central regions of the U.S. 9 Each of the properties has long-term leases in place with contracted rentals that are generally subject to annual or periodic escalation.
9 Waldorf Marketplace II is a newly constructed retail shopping center located approximately 15 miles south of the Capital Beltway (I-495) in Waldorf, MD. 9 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. 9 This investment complements Waldorf Marketplace I, a community shopping center that American purchased for the Fund in 2005.
21
Fort Lauderdale Police and Fire Retirement System $25,000,000 commitment with initial investment made on July 2, 2007 Account Balance as of September 30, 2009: $18,239,099.98
Contributions 2007
$
INVESTMENT SUMMARY AS OF SEPTEMBER 30, 2009
25,000,000.00
Inception-to-Date Original Commitment Withdrawals Distributions Net Income Realized Gains Unrealized Losses
$ $ $ $ $ $
25,000,000 2,157,674 332,864 (9,251,438)
Ending Net Asset Value
$
18,239,100
22
Performance American Core Realty Fund PERFORMANCE HISTORY AS OF SEPTEMBER 30, 2009
3Q09
Year-to-Date
One-Year
Since Inception* (07/02/2007)
1.34% -10.97% -9.62%
3.98% -30.06% -26.92%
5.05% -36.05% -32.42%
4.80% -16.49% -12.28%
-7.32%
-27.23%
-35.19%
-18.22%
Gross of Fees
Income Appreciation Total Return NFI-ODCE
3Q09
Year-to-Date
One-Year
Since Inception* (07/02/2007)
1.13% -10.97% -9.83%
3.34% -30.06% -27.42%
4.18% -36.05% -33.05%
3.90% -16.49% -13.06%
-7.52%
-27.72%
-35.70%
-18.90%
Net of Fees
Income Appreciation Total Return NFI-ODCE
*Annualized
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.
23
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%
Income 7.6% 90%
Appreciation 0.8% 10%
Total 8.5% 100%
-4%
0.5%
4.5%
4.6%
-8%
3Q09
3Q07
3Q05
3Q03
3Q01
3Q99
3Q97
3Q95
3Q93
3Q91
3Q87
-10%
3Q89
Income Return Appreciation Return
3Q83
Source: NCREIF, ARA Research
-6%
3Q85
Sources of Returns - 30 Years as of 3Q09 Average Return % of Return Standard Deviation Of Return
Rolling 5-Year Annualized Return
Source: NCREIF, ARA Research 24
American Realty Advisors Real 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 25
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.
26
Today’s Presenters 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 for overseeing the Fund level operations of American’s commingled and separate accounts and for directing marketing and client service for American's real estate products and services to the institutional investment community. Mr. Butterfield is also a member of the firm’s Executive Committee. He has over 31 years of experience in working with pension plan sponsors in helping them to meet 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 corporate plan 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 a member of the Los Angeles Society of Financial Analysts.
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 and consultants based in the Southeast. Prior to joining ICC, she was Vice President, Corporate Relations with the American Hospital Association in Florida, and was responsible for developing client relationships with senior executives of member hospitals, following various positions in financial relationship management within the national managed health care industry. Ms. Hayes graduated from University of Central Florida with a degree in Business Administration and a concentration in Finance, and earned an M.A. in Health Services Management and an M.B.A. from Webster University.
27
Disclosures 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.
28
Core Equity Real Estate Investments Composite Annual Disclosure Presentation Total Firm
Composite Assets
Annual Performance Results
Year
Assets*
U.S. Dollars
Number of
Composite
End
(millions)
(millions)
Accounts**
Income
Appreciation
Dispersion
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%)
Total
NPI
High
Low
* 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.
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.
29
Core Equity Real Estate Investments Composite Annual Disclosure Presentation 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. 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.ppt 11/24/2009 8:26 AM 30
December 3, 2009
PRISA II Performance Review
PREI® Prudential Real Estate Investors
Prudential Real Estate Investors, 8 Campus Drive, Parsippany, NJ 07054, Tel: (973) 734-1300, Fax: (973) 683-1790 CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
I. Real Estate Market Overview
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Deleveraging Effects Will Be Felt For Several Years
• 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.
Sources: Federal Reserve; PREI Research Page 2 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Market Correction Highlights Asset Deflation
• 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.
Sources: Moody’s; PREI Research Page 3 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
Dismal Job Outlook Weighs on All Property Sectors
• 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.
Sources: Property & Portfolio Research; PREI Research Page 4 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Forecast
PREI®
Real Estate Market Overview
Is There a “Silver Lining”?
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
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Real Estate Market Overview
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
Page 6 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
II. PRISA II Performance Review
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
PRISA II Profile As of September 30, 2009 Strategy
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.
Core Plus, Open-End
Inception Date
July 1980
Gross Assets
$6.2B
# of Investors
Net Assets
$3.5B
Remaining Commitments
Leverage
44.3%
Deposits (9/30)
Effective Leverage
57.1%
Withdrawals (9/30)
$0
$328.7M
Distributions (9/30)
$0
Cash # of Investments
211
Geographic Diversification (Based on GMV)
123 $402M $50M
Redemption Requests
$396M
Redemption Requests (%of NAV)
11.2%
Property Type Diversification (Based on GMV)
* 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. Page 9 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
Performance & Total Returns
Total Return
Repricing of risk, largely reflected by cap rate increases, has resulted in significant value declines and increased leverage.
Income Return Appreciation Return Cash Flow Return Acquisitions Dispositions
Appraisers project further distress in space markets with lower market rents, increased concessions and longer absorption periods.
3Q2009
2009 YTD
-10.20%
-40.92%
1.89%
5.34%
-12.09%
-46.26%
1.65%
4.62%
$146.2 million $247.0 million
$500.5 million $320.2 million
For Periods Ending September 30, 2009
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
Cumulative Prior Four Quarters Attribution Summary
Sources of Value Decline 9/30/08 to 9/30/09 Sector Cap Rate as of 9/30/09: Residential:
6.98%
Hotel:
8.78%
Office:
7.88%
Retail:
8.28%
Self Storage:
8.26%
(Millions)
Percentage Points
Percentage of Total
($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%
-58.05%
100.00%
Operating Investments
Total Decline
($3,724.8)
• 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. Page 11 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
PRISA II Leasing & Operations
PRISA II Occupancy and Rollover
PRISA II targets appreciation return by accepting market leasing risk. This strategy can negatively impact performance when the economy contracts.
Office
Retail
Apartment
Occupancy - Operating Properties - 9/30/09
82.2%
86.5%
92.7%
Hotel 55.7%
Self-Storage 83.2%
Occupancy - Operating Properties - 9/30/08 Occupancy - with Development Assets - 9/30/091
85.5%
91.1%
93.4%
61.5%
85.6%
68.6%
81.5%
87.6%
55.7%
83.2%
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%
10.6%
-3.6%
-5.6%
-62.4%
Lease Rollover
Same Property Income Growth2 1 2
-4.9%
Includes lease-up and substantially completed development projects. 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. Page 12 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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.
No. of Investments
Cumulative Value Decline (%)
Development
35
-30.9%
($566.2)
$1,273.7
Predevelopment
35
-47.5%
($560.5)
$618.7
Total
70
($1,126.7)
$1,892.4
Development (Based on GMV)
Page 13 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Cumulative Value Decline ($M)
9/30/09 GMV ($M)
Predevelopment Land (intend use) (Based on GMV)
PREI®
PRISA II
Pipeline Outlook Completed projects Current appraisal underwriting suggests some value recovery as occupancy stabilizes.
12 of 35 development projects increased in value from 2Q09 to 3Q09.
• 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
Page 14 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
PRISA II
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.
As of September 30, 2009 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 Effective Leverage Ratio
Page 15 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
44.3% 57.2%
PREI®
PRISA II
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 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
Appendix
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
Biographies
Darin Bright Principal Prudential Real Estate Investors
Number of Years Real Estate Experience: 18 Number of Years with Prudential: 5
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.
Page 18 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
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.
Page 19 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
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.
Page 20 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
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. Page 21 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
PREI®
Appendix
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.
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. Page 22 Reference #: MCAA-7XBSJW
CONFIDENTIAL INFORMATION--NOT FOR FURTHER DISTRIBUTION
International Discussion Presented by: Chris Neill, CFA, Portfolio Specialist John Roche, Regional Sales Manager
Discussion Topics Business Models Always Matter Fundamental Analysis is Key Adhere to Investment Thesis Willing to be Contrarian Closing Remarks
2
This material is for financial advisors and institutional clients only.
Business Models Always Matter Case Study: LVMH (MC FP) 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
MC FP Price Chart ( ): 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 3
This material is for financial advisors and institutional clients only.
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Fundamental Analysis is Key Case Study: National Bank of Greece (ETE GA) 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
ETE GA Price Chart ( ) 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00
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. 4
This material is for financial advisors and institutional clients only.
A ug -0 9
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5.00
Adhere To Investment Thesis Case Study: OPAP (OPAP GA) 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
OPAP GA Price Chart ( ): 35.00
30.00
25.00
20.00
15.00
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 5
This material is for financial advisors and institutional clients only.
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Willing To Be Contrarian Case Study: Baidu.com Inc., (BIDU) 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?
BIDU Price Chart (USD): 400.00
350.00
300.00
250.00
200.00
150.00
Source: Bloomberg. For Illustration purposes only. This is not a buy or sell recommendation for any particular security. As of 8/31/09. 6
This material is for financial advisors and institutional clients only.
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100.00
Company Geographical Diversification Home Country
# Countries Operating In
Sales from Home Country
Sales from Outside Home Country
Israel
50+
4%
96%
Switzerland
86+
2%
98%
Novo Nordisk A/S
Denmark
179
5%
95%
Roche Holding AG
Switzerland
150+
1%
99%
Rogers Communications Inc.
Canada
1
100%
--
China Life Insurance Co. Ltd.
China
1
100%
--
Nintendo Co. Ltd.
Japan
16+
58%
42%
AXA S.A.
France
13+
25%
75%
Telefonica S.A.
Spain
24
37%
63%
United Kingdom
180
33%
67%
Company Teva Pharmaceutical Ind. Nestle S.A.
Reckitt Benckiser Group PLC
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 7
This material is for financial advisors and institutional clients only.
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
8
This material is for financial advisors and institutional clients only.
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.
9
This material is for financial advisors and institutional clients only.
A presentation to: City of Fort Lauderdale Police and Fire Retirement System
New World Order Positioning global portfolios within a new economic paradigm
Presented by: Brian Holland, Portfolio Manager Scott Rubin, Relationship Manager, Institutional Investments
Artio Global Management LLC
Agenda • A View of the Markets • Inflation Over the Horizon? • Artio Global Management Current Portfolio Strategy
Artio Global Management LLC #077
2
A View of the Markets
Artio Global Management LLC #0200
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Artio Global Management LLC
Dec-08
Dec-07
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Dec-73
Dec-72
Dec-71
Dec-70
A Historic Market Rally MSCI World Index (% Difference Between 12 Month High/Low) December 1970 - October 2009
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Bloomberg Past performance is not indicative of future returns.
4
Artio Global Management LLC
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
Mar-82
Mar-80
Mar-78
Mar-76
Mar-74
Mar-72
Mar-70
Mar-68
Mar-66
Mar-64
Mar-62
Mar-60
Mar-58
Mar-56
Mar-54
Mar-52
Mar-50
Mar-48
Mar-46
Mar-44
Mar-42
Mar-40
Mar-38
Mar-36
Mar-34
Mar-32
Mar-30
A Historic Market Rally S&P 500 Index (% Difference Between 12 Month High/ Low) March 1930 - October 2009
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Bloomberg Past performance is not indicative of future returns.
5
A Historic Market Rally
Trend Line
Sources: Bank of America, Merrill Lynch, Artio Global Investors Past performance is not indicative of future returns.
Artio Global Management LLC
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1/2/1998 4/3/1998 7/10/1998 10/9/1998 1/22/1999 4/23/1999 7/23/1999 10/22/1999 1/21/2000 4/28/2000 7/28/2000 10/27/2000 1/26/2001 5/4/2001 8/3/2001 11/2/2001 2/1/2002 5/10/2002 8/9/2002 11/8/2002 2/7/2003 5/16/2003 8/15/2003 11/14/2003 2/13/2004 5/21/2004 8/20/2004 11/19/2004 2/25/2005 5/27/2005 8/26/2005 11/25/2005 2/24/2006 5/26/2006 8/25/2006 11/24/2006 2/23/2007 6/1/2007 8/31/2007 11/30/2007 2/29/2008 6/6/2008 9/5/2008 12/5/2008 3/6/2009 6/12/2009 9/11/2009
A Historic Market Rally High Yield versus BBB Spreads 12 Month Difference Between Maximum and Minimum
(basis points)
January 1998 to October 2009
1,200
1,000
800
600
400
200
0
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
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1/2/1998 4/3/1998 7/10/1998 10/9/1998 1/22/1999 4/23/1999 7/23/1999 10/22/1999 1/21/2000 4/28/2000 7/28/2000 10/27/2000 1/26/2001 5/4/2001 8/3/2001 11/2/2001 2/1/2002 5/10/2002 8/9/2002 11/8/2002 2/7/2003 5/16/2003 8/15/2003 11/14/2003 2/13/2004 5/21/2004 8/20/2004 11/19/2004 2/25/2005 5/27/2005 8/26/2005 11/25/2005 2/24/2006 5/26/2006 8/25/2006 11/24/2006 2/23/2007 6/1/2007 8/31/2007 11/30/2007 2/29/2008 6/6/2008 9/5/2008 12/5/2008 3/6/2009 6/12/2009 9/11/2009
A Historic Market Rally Emerging Sovereign Spreads (12 Month Difference Between Maximum and Minimum )
(basis points)
January 1998 to October 2009
1,200
1,000
800
600
400
200
0
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
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Fueled by Massive Stimulus Economic Contraction and Government Applied Stimulus 30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0% 1929 - 1933
2007 - Present
GDP
Stimulus
Source: Grant's Interest Rate Observer
Artio Global Management LLC
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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 LLC
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Inflation Over the Horizon?
Artio Global Management LLC #0200
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Extraordinary Market Reversal S&P 500 price change (December 1929 – June 2009 – 8 week movement)
Source: Bloomberg Past performance is not indicative of future returns.
Artio Global Management LLC
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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
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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, 5/4/09 2. Harvard University Professor of Public Policy, former Chief Economist of the IMF. Bloomberg, 5/19/09
Artio Global Management LLC
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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
15
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 LLC
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Artio Global Management Current Portfolio Strategy
Artio Global Management LLC #0200
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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
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Emerging Markets Continue to Grow in Importance
Emerging Markets (as % total global GDP) 25%
23.2%
20%
18.2%
17.4%
14.8%
15% 12.5%
13.0%
13.4% 11.5%
10%
5%
0% 1972
1977
1982
1987
1992
1997
2002
2007
Source: World Bank
Artio Global Management LLC
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Artio Global Management LLC
Developed Markets Saudi Arabia Chile
Russia
Nigeria
Bulgaria Ukraine
Australia
Denmark China
South Af rica
Indonesia
Mexico Sweden
Philippines
Argentina
Malaysia Pakistan
Korea
Poland
New Zealand Turkey
Brazil
Finland
Netherlands Hungary
Austria
Canada
Spain Norway
India
Iceland
United Kingdom Portugal
France
United States Germany
Greece
Belgium
Italy Ireland
Japan
Longer Term Investment Concerns Government Debt/GDP Estimates in the Year 2014
250%
200%
150%
100%
50%
0%
Emerging Markets
Source: International Monetary Fund
20
Current Market Valuations (as of 10/7/09) Commodity Based
Developed Markets
Emerging Markets
Australia (S&P ASX 200) Canada (S&P TSX Composite) US (S&P 500) Europe (Eurostoxx) UK (FTSE 100) Japan (TOPIX) China (Shanghai SE Brazil (Bovespa) Hong Kong (Hang Seng Index) Poland (WSE WIG 20 Index) Czech Republic (Prague Stock Russia (Russian RTS Index)
P/E Ratio
P/Sales
Dividend Yield
17.1x
1.6x
3.9%
18.1x
1.6x
2.8%
17.5x
1.2x
2.1%
13.4x
0.9x
3.9%
14.5x
1.1x
3.8%
37.7x
0.5x
1.9%
20.7x
1.8x
1.7%
15.7x
1.6x
2.7%
17.1x
2.9x
2.9%
13.1x
0.8x
4.3%
14.9x
1.7x
4.6%
10.3x
1.3x
1.3%
Source: Bloomberg. Past performance is not indicative of future returns.
Artio Global Management LLC #01198
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Regional Positioning Comparison Year‐to‐date changes (%) International Equity II Group Trust
MSCI ACWI (ex-US)
12/31/08
10/31/09
3.55 Dollar Bloc¹
0.99 2.36 3.09
1.37 3.36 3.76
Dev. Asia (ex-Japan)
8.21
Emerging Markets
10.80 12.89 8.42
Dollar Bloc¹
11.00 6.05
Dev. Asia (ex-Japan)
MSCI EAFE Index
22.93 20.84
Emerging Markets
17.20 0.00
0.00
61.72 Dev. Europe
37.98 Dev. Europe
34.95
32.46
45.73
45.31
8.74
10.37
Japan
Japan
19.30 25.25
21.24
10.03 15.19 19.88
UK
0
20
15.21
13.07 15.24
UK
21.27 40
60
80
0
10
20
30
40
50
1. Dollar Bloc includes Australia, Canada and New Zealand Please 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.
Artio Global Management LLC #0986
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Sector Positioning Comparison Year‐to‐date changes (%) International Equity II Group Trust
MSCI ACWI (ex-US)
12/31/08
10/31/09 7.11 8.39 9.60
Cons Discretionary
Energy Financials
Cons Staples Energy 23.26 22.64
10.18 7.97 9.76 10.86 10.53 11.55
Healthcare Industrials 2.82
Utilities
6.70 7.74 6.69
0
5
10
Materials 11.69
Telecommunications
9.99
Utilities Cash & Other 15
20
25
30.82
4.66 6.39 8.26 10.91 9.79 11.14 4.46 6.52 4.83 14.34 11.22 9.53 6.23 6.42 5.94 1.67 5.02 5.83 1.36 0.00 0.00
Information Tech
7.92 6.96
0.00 0.00
26.47 26.23
Industrials
6.00 5.12
Telecommunications
Cash & Other
Financials Healthcare
8.12 9.37 7.84
Materials
7.10 8.35 9.71 6.78 8.60 10.11 11.67 11.22 8.42
Cons Discretionary
11.82 9.05 10.25 11.11 10.81 8.54 9.61
Cons Staples
Information Tech
MSCI EAFE Index
0
10
20
30
40
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.
Artio Global Management LLC #0986
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Current Investment Focus 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 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.
Artio Global Management LLC #01198
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Disclosures This 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.
Artio Global Management LLC #0240
25
NorthPointe Capital Portfolio Construction
SCREEN
1,800 stock universe market capitalizations from approximately $200M-$2.5B
Phase One: Screening
B UY portfolio of
250 stocks
approximately 70-100 stocks
Phase Two: In-Depth Fundamental Research
Narrow Focus Using Quality Screens • Superior earnings growth • Balance sheet strength • Operating strength • Valuation
ANALYZE
Begin Review Process • Analysis of business trends and risks • Business model review
Phase Three: Stock Selection
Perform Due Diligence
Identify Catalysts
Buy When Appropriate
We insist on strong fundamentals:
Compelling catalysts may include:
Review overall portfolio risk:
• Management team depth
• New products
• 10Q and 10K analysis
• New management
• Market share analysis • Quality of earnings
Committed. Consistent. Competent.
• New markets • Rising earnings and margins
• Attractive relative valuation • Discount to longterm growth rate • Sector diversification • Security risk diversification
FORT LAUDERDALE POLICE & FIRE RETIREMENT SYSTEM
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
PRICE
STOCK PRICE FAIR VALUE
OVERVALUED
ALUE FAIR V UNDERVALUED
BUY ZONE
SELL ZONE
TIME
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 LEADER Todd 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 & SALES Tom 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, Partner
Large Cap Growth Portfolio Manager
Institutional Marketing & Client Service 904-493-5500
Initial Rallies After Significant Bear Markets
Decline
Rally
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 ?
Source: S&P 500
2
3
Quarterly Investment Review Period Ending September 30, 2009
S&P 500 Since the Oct.-Nov. “Waterfall” Extreme Volatility
+60%
+24% +18% +27%
-35%
-19%
-26% -49%
-29%
4
The Character of the Recent Rally Has Been Very Speculative Rally from March 6th to April 30th 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 $5
71%
3%
14%
Annualized Volatility (Computed Over 6 Months)
146%
69%
92%
Book to Price
5.8
0.7
1.5
Sales to Price
18.1
2.4
4.2
ROIC
12%
18%
14%
-323.8%
-15.3%
-84.1%
Net Income Growth
Source: Barclays Capital Quantitative Equity Strategies; Thompson Reuters; IDC; S&P Compustat; Russell
i.e. – This rally favored smaller, more heavily shorted, less institutional, higher volatility, more expensive, weaker growth companies. 5
Quarterly Investment Review Period Ending September 30, 2009
PORTFOLIO CHARACTERISTICS Portfolio Characteristics (as of 9/30/09):
EPS Growth (Forecast 1 Year) Portfolio P/E (Trailing 12 Months) Portfolio Price/Cash Flow Portfolio Price/Sales Portfolio Price/Book Average Weighted Market Cap ($b) Number of Holdings
Top 10 Holdings:
Sawgrass
R1G
6.6% 16.9 11.6 1.2 3.2 81.9 47
3.6% 22.0 14.8 1.6 3.6 70.3 624
Weight % 4.5 4.4 3.9 3.9 3.5 3.5 3.4 3.3 2.9
IBM Google Cisco Systems M icrosoft CVS/Caremark Apple DirecTV TJX Hewlett Packard
Sector Breakdown:
WalM art
2.8 34%
Information Technology
32% 15% 17%
Health Care 10% 10%
Industrials 2%
Financials
5% 16% 16% 15%
Consumer Staples Consumer Discretionary
10% 4% 4%
Energy 1% 1%
Utilities
2% 1% 2%
Telecommunication Services Materials 0%
Sawgrass Russell 1000 Growth 4% 5%
10%
15%
20%
25%
30%
35%
40%
*Large Cap Growth Composite Data
6
Fuel for a Rally Monthly Data 10/31/1980 - 9/30/2009 (Log Scale)
NDR Total Market Value vs Money Market Fund Assets / NDR Total Market Value 18082.49
17102.05
NDR Total Market Value Gain/Annum When: Money Market Fund Assets/ NDR Total Market Value:
Gain/ Annum
% of Time
10.9
89.6
-12.5
10.4
* Above 10.80 10.80 and Below
NDR Total Market Value (Billions, Scale Right) 9/30/2009 = 12022.6 9715.02
9322.61 8289.32
3903.50
3539 2905 2385 1958 1607 1319 1083 889 730 599 492 403 331 272 223 183 150 123 101
2382.00
1862.00
Total Money Market Fund Assets (Scale Left In Billions) 9/30/2009 = $3429 613.84 570.10
1055.64
276.66
Source: Investment Company Institute
196.81
47.09
Money Market Fund Assets / NDR Total Market Value (
43.9 38.3 33.4 29.1 25.4 22.2 19.3 16.9 14.7 12.8 11.2 9.8 8.5 7.4
) 9/30/2009 = 28.5%
24.12
23.91
High Liquidity
19.64
Linear Regression (
)
12.79
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
Low Liquidity
9.96
9.29
(S423)
18646 15978 13692 11733 10054 8615 7383 6326 5421 4645 3981 3411 2923 2505 2146 1839 1576 1351 1157
Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
December 4, 2009 Large Cap Value Portfolio Review
D. Kevin McCreesh, CFA Chief Investment Officer James V. Wallerius Senior Vice President
City of Fort Lauderdale Police & Fire Retirement System
Our mission is to provide our clients with above benchmark long-term investment results and client service that consistently surpasses your expectations.
Firm Profile
Exclusive Focus on Managing Value Portfolios 25+ Years Experience Institutional Client Base $7.5 Billion in Assets
10 Product Offerings 45 Employees Affiliated Managers Group Affiliate
Client Distribution
Portfolio Offerings Value Portfolio
Public 24%
Sub-Advisory 8%
Corporate 25%
Taft-Hartley 28%
Foundation/ Endowment 10%
Free Cash Flow Inception
Portfolio
Quantitative
Inception
Portfolio
Inception
Large Cap Value
1991
Small Cap Free Cash Flow 1993
Small Cap Equity
2006
Mid Cap Value
2000
Small Cap FCF Focus
International Equity
2007
Mid Cap Focus
2000
SMID Cap Value
2002
Small Cap Value
1998
Select Equity
2003
1996
Healthcare 5%
1
Introduction
As of September 30, 2009
0110
Investment Team
Name
Title
Fundamental Quantitative Portfolio Research Analysis Management
Fundamental Research Focus
Years Investment Experience
Year Joined 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
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
2008
13
2008
Energy, Financials, Healthcare,
Matthew Tangel
Equity Analyst
Utilities, Energy
Christopher Lippincott
Equity Analyst
Technology, Staples, Industrials, Materials
* Partner of the firm
2
Introduction
0140
Philosophy Buy value, but buy at the right time. Avoid the Value Trap Companies with low valuation outperform Stock prices follow earnings cycles Investors underreact to positive/negative change
Buy on Confirmation
3
Value Equity
0150
Investment Process
Identify Universe Screening
Fundamental Research
Initial Universe: Large Cap $2.5 billion +
Gauge Investor Expectations Key revenue & margin assumptions underlying earnings estimates
Quantitative Model: 50% Valuation 50% Earnings Catalyst Model Investor Expectations Income Statement Balance Sheet/Cash Flow
Perform Financial Statement Analysis Profit & loss trends Balance sheet quality Cash flow analysis
150 Stock Research Focus list: 15 stocks in each economic sector
4
Analyze
Value Equity
Assess Company Valuation Relative to: Company history Peer group Benchmark
Execute Portfolio Construction 65-90 Securities P/E in line or lower than Index Earnings surprise higher than Index Estimate revision higher than Index
Risk Control Market cap sensitive Max position size 5% Max sector weight 30% Relative sector weight +/- 5%
0161
Performance Review
Performance as of 10/31/09 Performance Summary
3Q 2009
YTD 2009
1 Year Trailing
3 Year Trailing
5 Year Trailing
Inception 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
*Annualized 12/9/02 to 10/31/09
Market Value Summary Market Value (12/9/02)
5
$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
Market Environment
Valuation Spreads The Top Quintile Compared to the Market Average 1952 Through Late-September 2009
Source: Empirical Research Partners Analysis, National Bureau of Economic Research
Earnings Revisions: Best vs. Worst Quintile Monthly Relative Returns 1989 through September, 2009
6
Source: Bernstein analysis (Sanford C. Bernstein & Co., LLC)
6070
Performance Review
YTD 2009
Economic Sector
Average Weight +/Portfolio Index
Portfolio
Index
Allocation Effect
Stock 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
13.4
11.3
1.7
0.4
Total Portfolio sector weights are average weights over the period. Index used is the Russell 1000® Value. Source: FactSet
7
Total Returns
Total Effect
2.1
Portfolio Contribution
Largest Positions Stock
Strong Performers
Weight
JPMorgan Chase & Co.
4.1
Freeport-McMoRan Copper & Gold Inc.
Wells Fargo & Co.
3.5
Walter Energy, Inc.
Exxon Mobil Corp.
3.1
Pfizer Inc.
3.1
Chevron Corp.
3.0
Noble Corp.
2.7
Whiting Petroleum Corp.
2.5
Bank of America Corp.
AT&T Inc.
2.4
Hartford Financial Services Group Inc.
Amgen Inc.
2.2
Bank of America Corp.
1.9
Total
28.5
Western Digital Corp.
Poor Performers
Principal Financial Group Inc.
As of 10/31/09
Based upon performance 12/31/08 to 10/31/09
Information on all holdings is available upon request. Source: FactSet
8
Large Cap Value Russell 1000® Value 9.3%
Sector Consumer Discretionary
Portfolio 8.4%
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.
Consumer Staples
2.5%
Dr Pepper Snapple Group Inc. J.M. Smucker Co.
Molson Coors Brewing Co. Reynolds American Inc.
Energy
20.4%
Chevron Corp. ConocoPhillips Devon 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.
Financials
26.3%
Ameriprise Financial Inc. Arch Capital Group Ltd. Bank of America Corp. Boston Properties Inc. Capital One Financial Corp. Citigroup Inc. Comerica Inc. Discover Financial Services Goldman Sachs Group Inc. INVESCO Ltd.
JPMorgan Chase & Co. KeyCorp PNC Financial Services Group Inc. ProLogis Prudential Financial Inc. Regions Financial Corp. Simon Property Group Inc. Unum Group Wells Fargo & Co. XL Capital Ltd.
5.7%
19.5%
25.0%
Russell 1000® Value 8.9%
Sector Healthcare
Portfolio 11.1%
Amgen Inc. Eli Lilly & Co. Johnson & Johnson Life Technologies Corp.
Merck & Co. Inc. Pfizer Inc. UnitedHealth Group Inc. Universal Health Services Inc.
Industrials
10.7%
Avery Dennison Corp. Caterpillar Inc. Cooper Industries PLC Cummins Inc. Fluor Corp. General Dynamics Corp.
General Electric Co. Ingersoll-Rand Plc ITT Corp. SPX Corp. Textron Inc.
Information Technology
5.0%
Advanced Micro Devices Inc. EMC Corp. Seagate Technology Inc. Sybase Inc.
Tellabs Inc. Tyco Electronics Ltd. Xerox Corp.
Materials
5.9%
Airgas Inc. Cliffs Natural Resources Inc. Dow Chemical Co.
Freeport-McMoRan Copper & Gold Inc. Walter Energy, Inc.
Telecommunications
4.5%
AT&T Inc. Qwest Communications Int’l Inc.
Verizon Communications Inc.
Utilities
3.3%
AES Corp. American Electric Power Co. Inc.
Northeast Utilities
10.4%
5.0%
3.8%
5.5%
6.9%
As of October 31, 2009 Systematic sector weights do not total 100% due to cash. Source: FactSet
9
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.
0201
Large Cap Value Annualized Returns
Portfolio Statistics vs. Russell 1000® Value
Large Cap Value (Since 1/1/99)
Large Cap Value Gross
Period 5%
Annualized Alpha
2.1%
Annual Standard Deviation
18.1%
Russell 1000® Value
2.6 0.9
0%
18.1% 0.97
Portfolio Beta
0.97
Information Ratio
0.49
Tracking Error
4.28
Up Capture
115%
Down Capture
97%
Russell Large Cap Value 1000® Value
4.1 2.3
Correlation
Investment Results
Russell 1000 R Value
-5% -6.4 -7.7
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
-7.9
-10% -10.6
-15%
1 Year
3 Years
5 Years
10 Years
Rolling 3 Year Returns vs. Russell 1000® Value 35
Portfolio Characteristics Weighted Average Mkt. Cap Price to Forward Earnings
Large Cap Value
Russell 1000® Value
$53.0 b
$67.6 b
14.1x
16.0x
Large Cap Value
30 25 20 15 10 5 0 -5 -10
Quarterly Earnings Surprise
16.2%
8.3%
-15
Estimate Revision
8.1%
2.1%
-20 -20
Source: FactSet
-15
-10
-5
86% Batting Average 55 of 64 Observations
0
5
10
15
20
25
30
Russell 1000 R Value Index
35
All Data as of September 30, 2009
10
Portfolio
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.
0701
Earnings and Portfolio Performance Earnings YoY Change
(Russell 1000® Value Index)
80% 60% 40%
1
2
20% 0% -20% -40% -60% 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 Source: Baseline
Prior Performance
11
1
Subsequent Performance
Prior Performance
2
Value Added*
12/31/02
Value Added*
Subsequent Performance
Value Added*
6/30/99
Value Added*
-2.0%
1 Year
+7.1%
-0.8%
1Year
+5.5%
-0.1%
3 Years
+2.8%
+0.9%
3 Years
+2.9%
+0.6%
5 Years
+2.5%
+0.9%
5 Years
+3.0%
* Value added represents the difference between the Large Cap Value composite return and the Russell 1000® Value Index return for the same period. 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.
Large Cap Value Composite Disclosure 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 presented 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 represents 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’s Large 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 capitalization 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. Composite policy 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-initiated restriction 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 in which 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 policy required 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 beginning 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 the first 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 occurred while 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 responsibility 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 composite for 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 measures 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 Investment Group 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 information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Systematic Financial Management, LLP. Russell Investment Group is not responsible 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 Year End (millions) (millions) YTD 2009* 7,527 3,257 2008* 6,144 2,930 2007 9,578 4,540 2006 8,760 3,350 2005 7,068 1,937 2004 7,008 1,749 2003 6,577 1,576 2002 4,472 900 2001 4,195 1,128 2000 3,209 850 1999 1,747 676 1998 1,221 658 1997 1,148 739 1996 612 94
% of Firm Assets 43% 48% 47% 38% 27% 25% 24% 20% 27% 26% 39% 54% 64% 15%
Number of Accounts 48 48 40 27 25 26 21 20 17 10 9 10 Five or fewer Five or fewer
Composite Gross Net 17.93% 17.41% -40.59% -41.01% 8.95% 8.26% 18.49% 17.75% 11.37% 10.67% 15.55% 14.71% 35.49% 34.54% -16.29% -16.95% -7.69% -8.39% 13.77% 12.95% 17.76% 16.91% 6.92% 6.12% 33.61% 32.68%
Russell 1000® Value 14.84% -36.84% -0.18% 22.24% 7.05% 16.49% 30.03% -15.52% -5.60% 7.01% 7.35% 15.65% 35.18%
Composite Dispersion 0.4% 0.1% 0.2% 0.1% 0.2% 0.2% 0.3% 0.4% 0.2% 0.6% 0.6% 0.5% N/A
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
12
Appendix
1001
K2 ADVISORS, L.L.C.
Presentation to:
Fort Lauderdale Fire and Police December 2009 Confidential Presentation 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 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.
1
K2 Organization – 83 Employees* K2 ADVISORS
William A. Douglass III
David C. Saunders
Founding Managing Director
Founding Managing Director
Research
Operational Due Diligence
Portfolio Construction
Risk Management/ Technology
Business Management
Investor Relations
K2 International
Brian Walsh Managing Director
Andrew Kandiew Managing Director
J. Brooks Ritchey Managing Director
Kelsey Biggers Managing Director
John Ferguson COO
Dan Elsberry Managing Director
James Rice Managing Director
Strategy Teams
Equity-Related
Risk
Low Volatility
* As of October 1, 2009
2
Alternate Strategies
Currency
Technology
Client Service
London
Legal/ Compliance
Sydney
Tokyo
Administration/ Operations
Hong Kong
Finance
Representative Client List As of September 30, 2009
Total
Institutional Investors
90%
Pensions and Other Tax Exempt Entities Public Funds Anne Arundel County Retirement & Pension System City of New Orleans Retirement System City of Richmond Retirement System Chicago Police Annuity and Benefit Chicago Municipal Employees LASERS (Louisiana State Employees’ Retirement System) Mass PRIM New Mexico State Investment Council St. Louis Public School Retirement System Texas Treasury Safekeeping Trust Company Oklahoma City Employee Retirement System Los Angeles Fire and Police Pension System Teachers Retirement System of the State of Illinois Queensland Local Government Superannuation Board
Corporate Pension Ametek AkzoNobel Campbell Soup Company Cadbury Pension Trust Limited Coca-Cola Enterprises, Inc. Cordares Vermogensbeheer B.V. Energy East Marks and Spencer PLC Raiffeisen Capital Management Rohm and Haas Company Toshiba America Inc. Retirement Plan
U.S. Union Plans (Taft-Hartley) Automotive Machinists Pension Trust Denver Area Meat Cutters Laborers’ Pension Fund Rocky Mountain UFCW Sheet Metal Workers Local Union No. 100 UFCW International Pension Plan United Mine Workers of America 1974 Pension Trust
Other Tax-Exempt Bethesda Foundation Carilion Health Systems Norton Healthcare Retirement System
Endowments and Foundations Altman Foundation Baltimore Symphony Orchestra Birmingham-Southern College
Central Synagogue of New York Detroit Medical Center North Carolina Baptist Foundation
Other Institutional Dexion Equity Alternative Limited
OIL Insurance Corporation Ltd.
Individuals, Family Offices, and Trusts
3
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.
10%
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 1000%
Cumulative Return
900%
872%
800% 700% 600% `
500%
413%
400% 300%
357%
200% 100% 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Historical Drawdowns
0%
-10%
-20%
-30%
-40%
HFRI Fund Weighted Composite Index Annualized 8% Return S&P 500 DRI Merrill Lynch High Yield Master II
-50%
-60%
4
Source: HFR, S&P, Merrill Lynch Data through September 2009. Past performance is not indicative or a guarantee of future results. Please see important disclosures and disclaimers at the end of this presentation.
K2 Institutional Investors II, Ltd. – Beta Evolution 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 44.00%
K2 Institutional Investors II Ltd Beta vs. S&P 500 0.33
34.00%
0.32
0.31 0.29
0.27
24.00%
0.28
0.28 0.28 0.24
0.24
0.23 0.23
0.22
0.21
0.19
0.18
0.17 0.17 0.14
14.00% 0.10
0.09 0.09 0.08
0.09
0.08
0.04 0.04
4.00%
0.07 0.07 0.06 0.06
0.05
0.01 (0.00)
(0.02)
(0.03)
-6.00%
5
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.
Jul-09
Aug-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Jul-07
Aug-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
-16.00%
K2 Institutional Investors II, Ltd. – Value-at-Risk Evolution 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 -30%
K2 Institutional Investors II Ltd VaR S&P 500 VaR
-25%
-20%
-15%
-10%
-7.28%
-5%
-1.31%
Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09
0%
* As of September 2009 Source: S&P, Measurisk.
6
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.
2008 January
Timeline of the Global Credit Crisis 2007
March
•Fed makes $200B available to banks to improve liquidity •Bear Stearns in fire-sale to JP Morgan •Fed makes weekend ¼% rate cut.
April
•$250 billion US tax rebates begin mailing •IMF warns of $1 trillion in credit-related losses
June
•FBI arrests 406 people for mortgage-related fraud •2 Bear Stearns workers face criminal charges •Qatar buys 7.7% of Barclays
The Before Years April July
New Century Financial Sub-prime lender files Chapter 11 2 Bear Stearns hedge funds fold
July
The After Time August
September
October
•BNP Paribus freezes 2 funds citing “complete evaporation of liquidity” •ECB pumps 85B Euro into system •German bank Sachsen, facing collapse, is sold •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
December
September
October
Major losses emerge • UBS $3.4B • Merrill Lynch $7.9B • Citigroup initial $3.1B goes to $40B • CEOs at Merrill and Citibank resign
•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.
7
•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
November
December
•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 Treasury abandons plan to buy troubled assets, instead invests to recapitalize banks Group of 20 meets in Washington to coordinate response Treasury gives Citigroup $20B bringing total to $45B as its stock falls 60% in one week Fed pledges $800B to shore up financial system of which $600B goes to back up Fannie and Freddie mortgages S&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+%
Timeline of the Global Credit Crisis (cont.) 2009
January
•President-elect Obama requests remaining $350B TARP •Treasury takes preferred shares in BofA for$20B TARP •Initial $1.5B investment in Chrysler from TARP
February
•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
March
May
•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
June
•GM files Bankruptcy 100 years 258 days after founding •Goldman Sachs and 9 other banks pay back $68B in TARP funds
July
August
8
•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
•Congress establishes “Financial Crisis Inquiry Commission” •Bernanke announces “extreme risk aversion has eased and investors are returning to the private credit markets.” •Fed and Treasury extend TALF through March 2010 •FDIC announces # of problem banks increased from 305 to 416
September
•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%
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)
S&P Index from 1825 to 2008
129 Positive years (70%) 54 Negative years (30%)
9
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
10
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
11
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
12
Equity Long/Short Much improved dispersion environment 16%
14%
12%
10%
8%
6%
4%
2%
Aug 2009 Dispersion
13
June 2007 Dispersion
Dispersion – Performance difference between the best- and the worst-performing stock quartiles Data through Aug 2009 Source: Bloomberg, S&P
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.
Basic Materials
Utilities
Healthcare
Financials
Consumer Cyclical
Energy
Industrials
Consumer NonCyclical
Communications
Technology
S&P 500 Index
0%
Factor History S&P 500 INDEX: 1071.49
2
1,400
Single B Credit Spreads: 597.26
US 10yr Bond Yields: 3.38
8
1,580 1,200
Sep -11.77% Aug -15.46%
1,380
Jul
-9.97%
1,000
Sep
-2.71%
Aug
-2.36%
Jul
-1.53%
6
1,180
1091.62 800
980
600
780 Sep
3.57%
Aug
3.36%
Jul
7.41%
J an-9 7
4
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
400
Aug Jul
200 J an-9 5
88.0
VIX Index: 23.12 Sep
4
459.11 580
380 J an-9 5
5.00
J an-9 7
5
J an-9 9
J an-0 5
J an-0 7
J an-0 9
2 J an-9 5
300
6
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
600
RU 2000 Growth vs. Value Indices
550
Sep -12.93% Aug
0.35%
-5.63%
Sep Grow th Wins
250
500
Aug Value Wins
Jul -14.77%
68.0
-1.63%
J an-0 3
Bond Implied Volatility (BIX): 114.70
78.0
-1.54%
J an-0 1
Jul Value Wins
58.0
450
200
400 Value
48.0
350
Gro wt h
150
38.0
300 250
28.0
104.47
100
21.23
200
18.0
150
8.0 J an-9 5
J an-9 7
J an-9 9
J an-0 5
J an-0 7
J an-0 9
50
J an-0 1
J an-0 3
J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
14
Data as of September 2009 Please see Important Disclosures and Disclaimers at the end of the presentation.
J an-0 5
J an-0 7
J an-0 9
100 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
Factor History 7
11,780
GS Commodity Index: 4233.00
10,780 Sep
0.17%
Aug
-2.36%
Jul
0.44%
4.3
EY / Bond Yield (Stock/Bond Valu Ratio): 1.46
3.8
9,780 3.3 8,780 7,780
Sep
-2.75%
Aug
-7.40%
Jul
-5.92%
128.0
US Dollar Index: 76.43
9
Sep
-1.94%
Aug
-0.22%
Jul
-2.23%
118.0
108.0
2.8
6,780
2.3
98.0
93.38
5,780
1.8
88.0
4,780
4285.00 3,780
1.3
1.11
1,780 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
TED Spread (3m EuroD - 3m Tbill): 0.22
0.3 J an-9 5
5.0
11
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
4.0
2.9
2.4
Sep
-2.83%
Aug
2.57%
Jul
-2.28%
Aug
-27.4%
Jul
-27.2%
J an-9 7
12
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
488
SPX priced in units of VIX: 222.84
438 Sep
4.38%
Aug
3.18%
Jul
8.30%
1.9
3.5 -18.7%
68.0 J an-9 5
10s - 2s Yield Curve Slope: 2.42
4.5
Sep
78.0
0.8
2,780
388 338
3.0
1.4
2.5 2.0
288 0.9
0.88
1.5
249.79
238
0.4
188
1.0
0.53
(0.1)
0.5 -
J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
(0.6) J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
Data as of Sseptember 2009
15
138
Please see Important Disclosures and Disclaimers at the end of the presentation.
J an-0 7
J an-0 9
88 J an-9 5
J an-9 7
J an-9 9
J an-0 1
J an-0 3
J an-0 5
J an-0 7
J an-0 9
Important Disclosures and Disclaimers 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.
16
Important Disclosures and Disclaimers (continued)
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.
17
Definitions of Comparative Indices and Statistics 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, MortgageBacked 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.
18
Definitions of Comparative Indices and Statistics (continued) 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.
19
Contact Information
K2 Advisors, L.L.C. 300 Atlantic Street – 12th Floor Stamford, CT 06901
Kelsey Biggers Managing Director, Risk Management E-mail: [email protected]
Telephone: 203-348-5252 Facsimile: 203-359-6369 Investor Relations: 203-504-1407 E-mail: [email protected]
Dan Elsberry Managing Director E-mail: [email protected]
20
December 4, 2009
Agincourt Capital Management, LLC Presentation to:
Ft. Lauderdale Police & Fire System
Patrick K. Kelly, CFA – Managing Director
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. equities Bonds are a good source of cash flow Bonds are a good deflation hedge High quality bonds are relatively stable
Liability-driven investing (LDI) rejects these factors Not because they are untrue, but because they don’t matter! In LDI, all we really care about is meeting future benefit obligations The bond portfolio is structured to meet these cash flows Simple in concept, but there are challenges
Change your thinking from “maximizing return” to “minimizing risk”
2
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)
$7,500 $6,250
Sample Liability Schedule ($000) Total Future Liabilities=$228.1 million
$5,000 $3,750 $2,500 $1,250 $0 '10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
This liability schedule is simply an example, but is pretty typical in its “shape” The duration of this schedule is just over 13 years.
3
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 Present Value of $228.1 Million $150,000
$125,000
$100,000
$75,000
$50,000 3%
4%
5%
6%
7%
8%
9%
10%
4
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 Discount Yield Curves: November 2009
7% 6% 5%
PPA
4%
Citigroup 3% 2% 1% 0% 0
20
40 60 Years From Present
80
100
5
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
10.0%
Assets vs. Liabilities (% of Total) Portfolio Cash Flow
7.5%
Liability Schedule
5.0%
2.5%
0.0% '10 '14 '18 '22 '26 '30 '34 '38 '42 '46 '50 '54 '58 '62 '66 '70 '74 '78 '82
6
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
7
Scenario Analysis/Rebalancing
The portfolio must perform well in a wide
Treasury Yield Curve Scenarios 6%
variety of interest rate scenarios.
5%
In order to perform the necessary analysis, 4% 3%
Agincourt has made significant investments in portfolio modeling systems. We have the best systems commercially-available.
Bear Steepening Bear Flattening No Change Bull Steepening Bull Flattening
2% 1%
To the left is a sampling of interest rate
0% 1 2 3
5
7
10
20
30
scenarios we believe are in the “two standard deviation” range of likely outcomes over the next twelve months.
One Year Total Returns: Assets vs. Liabilities
Again, the main objective is to closely track
20%
Total 12-Month Return
15%
Agincourt Long Duration Portfolio Liabilities Barclays Long Gov't/Credit Index
the liability stream (and meet all future benefit obligations.
10%
Beating an appropriate “long duration”
benchmark may also be appropriate.
5%
Here, we compare the performance of the
0%
sample portfolio with the target liabilities and the Barclays Long Government/Credit Index.
-5% -10% Bear Steepening
Bear Flattening
No Change
Bull Steepening
Bull Flattening
In addition, the portfolio outperforms the
Index under most scenarios. 8
Final Thought
9
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