2006 1

A Review of Investment Performance Results

of

Emerging Manager Firmsand

Emerging Manager Fund of Funds

EXPANDING INVESTMENT OPPORTUNITIES THROUGH DIVERSITYA CALPERS AND CALSTRS CONFERENCE

2006 2

“Attractive investment management organizations encourage decisions directed toward creating investment returns, not toward generating fee income for the manager. Such principal-oriented advisers tend to be small, entrepreneurial, and independent.”

David F. Swensen, Yale CIO, in Pioneering Portfolio Management

2006 3

-15

-10

-5

0

5

10

15

20

25

30

0 5 10 15 20 25 30 35

Annualized Std Dev %

An

nu

aliz

ed R

et %

Mainline ManagersEmerging ManagersMainline Managers

Developing Managers

Comparing “Mainline” and Developing ManagersLarge Cap Core – 5 Years ending 3/31/05

• Median Developing Core Manager outperformed Mainline counterparts

• Wider dispersion

Mainline Mgr

Developing Mgr

Median Ann Return -2.82 -1.02Median Ann St Dev 15.62 15.53

2006 4

-15

-10

-5

0

5

10

15

20

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0 5 10 15 20 25 30

Annualized Std Dev %

An

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aliz

ed R

et %

Mainline ManagersEmerging ManagersMainline Managers

Developing Managers

Comparing “Mainline” and Developing Managers

Large Cap Value – 5 Years ending 3/31/05

Mainline Mgr

Developing Mgr

Median Ann Return 6.62 5.00Median Ann St Dev 14.55 14.82

• Median Developing LV Manager underperformed Mainline counterparts

• Similar dispersion

2006 5

-25

-20

-15

-10

-5

0

5

10

15

0 10 20 30 40 50

Annualized Std Dev %

An

nu

aliz

ed R

et %

Mainline ManagersEmerging ManagersMainline Managers

Developing Managers

Comparing “Mainline” and Developing Managers

Large Cap Growth – 5 Years ending 3/31/05

Mainline Mgr

Developing Mgr

Median Ann Return -7.35 -4.51Median Ann St Dev 18.49 17.40

• Median Developing LG Manager outperformed Mainline counterparts

• Similar to narrower dispersion

2006 6

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30 35 40

Annualized Std Dev %

An

nu

aliz

ed R

et %

Mainline ManagersEmerging ManagersMainline Managers

Developing Managers

Comparing “Mainline” and Developing Managers

Small Cap Value – 5 Years ending 3/31/05

Mainline Mgr

Developing Mgr

Median Ann Return 17.18 16.16Median Ann St Dev 17.41 16.92

• Median Developing SV Manager underperformed Mainline counterparts

• Similar dispersion

2006 7

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50

Annualized Std Dev %

An

nu

aliz

ed R

et %

Mainline ManagersEmerging ManagersMainline Managers

Developing Managers

Comparing “Mainline” and Developing Managers

Small Cap Growth – 5 Years ending 3/31/05

Mainline Mgr

Developing Mgr

Median Ann Return -2.07 -3.00Median Ann St Dev 24.85 28.67

• Median Developing SG Manager underperformed Mainline counterparts

• Wider dispersion

2006 8

Table 1 – Skewness and Kurtosis of Annualized Returns – Mainline Managers

Table 2 – Skewness and Kurtosis of Annualized Returns – Developing Managers

Skewness 1-Year 3-Year 5-YearCore Negative Skew Negative Skew Negative SkewLG Positive Skew No Skew Positive SkewLV Positive Skew Positive Skew Positive SkewSG Positive Skew No Skew No SkewSV Positive Skew No Skew No Skew

Kurtosis 1-Year 3-Year 5-YearCore Long Tails Long Tails Long TailsLG Long Tails Long Tails No TailsLV Long Tails Long Tails Long TailsSG Long Tails No Tails No TailsSV Long Tails Long Tails No Tails

Skewness 1-Year 3-Year 5-YearCore No Skew No Skew Positive SkewLG No Skew No Skew Positive SkewLV No Skew No Skew Positive SkewSG Positive Skew No Skew No SkewSV Positive Skew Positive Skew Positive Skew

Kurtosis 1-Year 3-Year 5-YearCore Long Tails No Tails No TailsLG No Tails No Tails Long TailsLV Long Tails Long Tails Long TailsSG Long Tails No Tails No TailsSV Long Tails Long Tails Long Tails

7 – Positive Skew5 – No Skew3 – Negative Skew

11 – Long Tails 4 – No Tails

7 – Positive Skew8 – No Skew

9 – Long Tails 6 – No Tails

Comparing “Mainline” and Developing Managers

2006 9

Table 3 – Skewness and Kurtosis of Standard Deviation – Mainline Managers

Skewness 1-Year 3-Year 5-YearCore No Skew Positive Skew Positive SkewLG Positive Skew No Skew No SkewLV Positive Skew Positive Skew Positive SkewSG No Skew No Skew No SkewSV Positive Skew Positive Skew Positive Skew

Kurtosis 1-Year 3-Year 5-YearCore Long Tails Long Tails Long TailsLG Long Tails Long Tails Long TailsLV Long Tails Long Tails Long TailsSG No Tails No Tails No TailsSV Long Tails Long Tails Long Tails

Skewness 1-Year 3-Year 5-YearCore No Skew No Skew Positive SkewLG Positive Skew Positive Skew Positive SkewLV No Skew No Skew No SkewSG Positive Skew No Skew No SkewSV Positive Skew Positive Skew Positive Skew

Kurtosis 1-Year 3-Year 5-YearCore No Tails Long Tails Long TailsLG Long Tails Long Tails Long TailsLV Long Tails No Tails No TailsSG Long Tails No Tails No TailsSV Long Tails No Tails No Tails

Table 4 – Skewness and Kurtosis of Standard Deviation – Developing Managers

9 – Positive Skew6 – No Skew

12 – Long Tails 3 – No Tails

8 – Positive Skew7 – No Skew

8 – Long Tails 7 – No Tails

Comparing “Mainline” and Developing Managers

2006 10

Developing Manager Fund of Funds

• Advisors focused on due diligence of developing managers

• Fees typically begin at 75bp and range to near 45bp, depending on account size

• PCA has recommended the concept of Developing Manager Fund of Funds because of:

i. the specialized nature of due diligenceii. the limited number of staff at the plan sponsor (outsourcing)iii. Fiduciary buffer – fund of funds have full discretion over selection of

developing managersiv. Potential to add value in this specialized segment

• Organizational risk at developing firms will continue for a variety of reasons related to both success and failure – the key is to manage for it

2006 11

• Fund of Funds groups represented:

FIS Northern Trust Progress Russell Investment Group

• Developing Manager groups have been successful in delivering added value

1st Qtr 1 Year 3 Years 5 YearsFund of Funds A Composite -1.6 9.1 4.7 -1.7Fund of Funds B Composite -1.9 8.3 5.5 1.0Fund of Funds C Representative Account -2.0 na na naFund of Funds D Representative Account -1.6 7.0 4.9 0.9Russell 3000 Benchmark -2.2 7.1 3.7 -2.5

Outperformance 4 of 4 2 of 3 3 of 3 3 of 3

Periods ending 3/31/2005 (periods > 1 yr are annualized)

Developing Manager Fund of Funds