0

Stanislaus County Employees Retirement Association

February 2010

1

I. BlackRock Overview

II. Fixed Income Overview

III. Approach to Passive Fixed Income

Appendix

Discussion Topics

2

BlackRock Overview

3

BlackRock Overview

Global provider of investment and risk management services

• Headquartered in NYC; offices in 24 countries

Independent firm in ownership and governance

• Established in 1988, BlackRock is a public company (NYSE:BLK)

• No majority owners

• Majority of Board of Directors is independent

• Laurence Fink, Chairman & CEO since firm’s inception

Leader in creating solutions for clients

• Strategies and services differentiated for clients

• Customized solutions to meet risk/return objectives

• Innovative strategies and services within and across asset classes

• Client dialogues have resulted in advisory assignments

• Senior level of commitment to client service

• “One-BlackRock” approach results in consistency & quality throughout firm

Pioneer in risk management and technology

• Currently provides risk management and enterprise investment services for over $8 trillion in assets

• BlackRock Solutions® offers independent risk management products

Multi-Asset

$156 Billion

Advisory

$163 Billion

Alternatives1

$108 Billion

Equity

$1,438

Billion

Cash

Management

$355 Billion

Fixed Income

$969 Billion

Total Assets of $3.19 Trillion

1Includes commodity and currency mandatesCombined AUM in USD as of 30 September 2009

For Use With Institutional Investors Only

4

BlackRock and BGI: Combination of Two Leading Asset Managers

On 1 December 2009, BlackRock and Barclays Global Investors (BGI) combined to create a new independent company with $3.19 trillion in assets under management

• New firm operates under BlackRock

Brings together two market leaders to create extraordinary investment platform

• Unique ability to combine active, enhanced, and index strategies to develop investment solutions for clients

• Market-leading iShares® ETF platform and BlackRock’s global mutual funds together create unmatched ability to tailor portfolios for investors

• Market-leading cash management, securities lending, and transition management businesses

• Industry-leading risk management and advisory platform, BlackRock Solutions®, benefits from broader capabilities

• Combined firm is independent and will be fully integrated, with employees, clients and products spanning the globe

• Global mutual fund platform• Customized solutions and advice• BlackRock Solutions (BRS)

• Active portfolio managementBlackRock

Combined AUM in USD as of 30 September 2009

• iShares, industry leading ETF-platform• Product innovation• Retirement solutions

• Indexed and scientific investingBGI

• Global leader in investment management with $3.19 trillion in AUM• Fiduciary for clients; pure asset manager• World -class risk management, analytics, and advisory capabilities• Fully-integrated, independent asset manager, with no majority owner• Common culture, emphasizing teamwork, excellence, and integrity• Strong corporate governance, with majority of independent directors

Combined Firm

5

Significant Presence in All Major Markets

Extensive resources provide deep understanding of local markets and economies

• Headquartered in NYC with investment centers across asset classes worldwide

• Operating in 24 countries and more than 60 cities

• Extensive fund offerings registered in domiciles worldwide

• Governance model balances functional and regional leadership

* Joint venture

North America• Atlanta• Bloomfield Hills• Boston• Charlotte• Chicago• Cincinnati• Dallas• Durham• Houston• Jacksonville• La Jolla• Los Angeles• Miami• Montreal• New York

• Newport Beach• Northern New Jersey• Palm Beach• Philadelphia• Phoenix• Pittsburgh• Princeton• San Francisco• Seattle• Stamford• St. Louis• St. Petersburg• Toronto• Washington DC• Wilmington

UK, Continental Europe & Middle East• Amsterdam• Brussels• Dubai• Frankfurt• Geneva• Luxembourg • Madrid• Milan• Munich• Paris

• Stockholm• United Kingdom-Edinburgh-Isle of Man-Jersey-London-Peterborough

• Vienna• Warsaw• Zurich

Australia• Brisbane• Melbourne • Perth• Sydney

Asia• Beijing• Hong Kong• Mumbai*• Seoul• Shanghai*• Singapore• Taipei• Tokyo

Latin America• Mexico City• Santiago• São Paulo

6

Investment Platform

Fixed Income

Equity

Alternatives

Multi-Asset

Liquidity

Real Estate

Transition Management

Securities Lending

Risk & Quantitative Analysis

One BlackRock Organizational Structure

Clients benefit from pooled expertise of BlackRock’s resources

• Ensures consistency on a global basis

• Tailors products and services to client objectives and to local needs

• Promotes teamwork

• Facilitates operational integrity and efficiency

Global Client Group

Pension Plans

Defined Contribution

Foundations · Endowments

Financial Institutions

Official Institutions

Wealth Management

Corporations

Consultants

Private Clients

iShares

BlackRock Solutions®

Aladdin® Investment Platform

Financial Modeling

Portfolio Analytics

Investment Accounting

Financial Markets Advisory

Firmwide Infrastructure

Operations & Administration · Aladdin & Technology · Aladdin Portfolio Services Group

Strategic Provider Management · Legal & Compliance · Finance · Human Resources

Facilities Management · Sourcing and Vendor Management

One BlackRock

7

iShares

Index Equity

iShares

FIXED INCOME $969 Billion

Fundamental Fixed Income

Model-Based Fixed Income

Index Fixed Income

$355 BillionCASH MANAGEMENT

Scientific Active Equity

Fundamental Equity

EQUITY $1,438 Billion

1Includes commodity and currency mandates Combined AUM in USD as of 30 September 2009

Products & Services in Multiple Asset Classes and Styles

$3.19 trillion in world-class products across asset classes that span the full risk spectrum

BlackRock SolutionsSecurities LendingTransition Management

iShares

iShares

Global Market Strategies Group

BlackRock Multi-Asset Client Solutions

Asset Allocation / Balanced

Capital Markets

Real Estate

BlackRock Alternative Advisors

$163 BillionFINANCIAL MARKETS ADVISORY

MULTI-ASSET

ALTERNATIVES1

$156 Billion

$108 Billion

8

BlackRock Fixed Income Overview

8

9

BlackRock’s Fixed Income Organization

Peter FisherHead of Fixed Income

Investment Management Groups

Curtis Arledge

$205 billion

Rick Rieder

$54 billion

Corporate Credit

Scott Thiel

$82 billion

European & Non-US Fixed Income

Peter Knez

Index: $377 billion

Model-based: $53 billion

Index & Model-Based Fixed Income

Kevin Holt

$160 billion

Financial Institutions

Peter Hayes

$38 billion*

Municipal BondsMulti-Sector & Mortgages

Cross-Functional Teams

Business & Product Strategy Performance Trading

Marie Chandoha Andy Phillips Richie Prager

Risk & Quantitative Analysis (RQA) Group

BlackRock Solutions® Analytics & Aladdin Platform

AUM as of September 30, 2009*Represents long-dated dedicated municipal mandates only, not total municipal assets managed/overseen of $115 billion

FundamentalCurtis Arledge - CIO

Rick Rieder - Deputy CIOScott Thiel - Deputy CIO

Index & Model-Based Peter Knez - CIO

Tim Webb - Deputy CIO

10

Fixed Income Investing at BlackRock

$969 billion in fixed income assets across four investment approaches

• Shared commitment to consistent, predictable performance

• Cross-platform resource sharing leverages Risk & Quantitative Analysis Group and BlackRock Solutions® analytics

Indexed$377 billion

Model-BasedActive

$53 billion

Fundamental Active

$379 billion

Balanced Sheet/Liability Driven

$160 billion

• Enhanced Index• Active Governments• Core/Core PLUS• Inflation-Linked• Absolute Return Hedge Funds

• Institutional Index• ETFs

• Accounting, tax, regulatory, or capital constrained

• Financial institution balance sheets

• Liability-driven

• Sector/Regional Specialty• Global Bond• Municipals• Short Duration• Bank Loans/Distressed

BlackRock’s Fixed Income Investment Approaches

Efficient Beta Alpha Seeking

Total & Absolute Return Oriented

Pro-forma AUM in USD as of September 30, 2009

11

Distinct Active Investment Process: Model-Based

Alpha & Portfolio Construction Teams

Research Teams

Peter KnezChief Investment Officer

Identification of economically sound, empirically valid investment ideas Signal development and testing and

portfolio construction

Tim WebbDeputy CIO

• Ultimate decision making forum for investment decisions in model-based portfolios

• Approves implementation of new investment strategies

• Responsible for oversight of risk and performance in hedge funds and long only funds

RatesMike RiersonRalph Smith

Disciplined process combining skill of investors with science of models

• Peter Knez as Chief Investment Officer of Fixed Income, Index & Model-Based Portfolios leads model-based research

• Tim Webb as Deputy CIO of Fixed Income, Index & Model-Based Portfolios and leads model-based alpha teams

• Research Teams are responsible for research and analysis to evaluate, monitor, and improve models continuously

• Alpha and Portfolio Construction Teams are responsible for signal development, testing and portfolio construction

Fixed Income Investment Review Committee

Fixed Income Research Approval Committee

• Provide quality control, peer review and oversight of the model-based research process

• Provide recommendations on both new models and signals and amendments to models and signals

RatesJohn MaskellMike Rierson

CreditHeather DeGarmo

Tom Parker

MortgagesEddy Vataru

Asset AllocationBenjamin Brodsky

Securitized CreditBrent Canada

Emerging MarketsKetan Gada

Portfolio SolutionsScott Radell & Lee Sterne

Alex Claringbull & Michael Harper

Corporate CreditNavneet Arora

Asset AllocationSanjay Yadav

MortgagesMike Rierson

12

BlackRock Fixed Income Index and Model-Based Business Overview

•Largest bond indexer with 25 years experience of indexing innovation and results*

•$372 billion of indexed assets under management.

•Top tier counterparty trading over $1 trillion annually

Source: BlackRock. Asset under management information as of 31 December 2009* Source: Pensions and Investments, May 2009.

Active Long-Only$53 billion

ETFs$103 billion

Indexed Strategies $269 billion

Long/Short & Alternatives

$3 billion

Global Fixed Income $429 billion

• Barclays Capital Aggregate

• Citi WGBI

• Government/Credit

• Mortgage/Asset Backed Securities

• Global Aggregate

• Emerging Market Bonds

• DS/BARRA Canadian Universe Bond

• LDI

• Treasury Market

• Corporate Credit Market

• Broad Market

• Emerging Market

• Treasury Inflation Protected

• Global Agg

• CorePlus Bond

• Alpha Credit

• Alpha Mortgage

• Ascent Life Gilt

• Ascent UK Real Return

• Ascent UK Corporate

• Alpha Emerging Market Bond

• Global Multi-Strategy

• Capital Structure

• Global Rates Long/Short Strategy

• Structured products

13

BlackRock Approach to Passive Fixed Income

14

Passive Philosophy: Total Performance Management

Total Performance Management — understanding, measuring, forecasting and managing the three dimensions of investment performance

Return

• Performance as expected

• Largest US Fixed Income Index Manager with over 25 years of experience

Risk

• Proprietary BlackRock portfolio & risk systems control investment and operational risk

• Stress testing across multiple dimensions

Cost

• Trading costs integrated into portfolio construction using proprietary T-cost models

• Internal crossing network minimizes transaction costs

Total Performance Management

Return Risk

Cost

15

Performance as Expected

For 25 years, BlackRock has been delivering consistent, predictable index fund performance

BarCap US Aggregate Index Fund

Government Funds

Intermediate Government Index

Long Government Index

Corporate Credit Funds

Intermediate Investment Grade Credit

Long Investment Grade Credit

Securitized

MBS

CMBS

ABS

AnnualizedTracking

FundInception AUM

FundReturn

IndexReturn

Jun-1986 7.31% 7.27% 0.04%$30.8B

Oct-1989 6.43% 6.39% 0.04%$16.7B

Dec-1989 8.23% 8.13% 0.10%$3.7B

Dec-1989 7.10% 7.14% -0.04%$11.6B

Dec-1989 8.01% 8.10% -0.09%$9.5B

Dec-1989 7.18% 7.11% 0.07%$14.9B

Performance data annualized since fund inception.As of 12/31/09.

Dec-1991 5.87% 5.76% 0.11%$1.3B

Jun-1999 5.95% 5.77% 0.18%$1.5B

16

For illustrative purpose only.Source: BlackRock

Tracking Error

Number of issues

Transaction CostsOptimal Portfolio

Fixed Income Indexing

Unlike equities, Fixed Income is not traded on exchanges

Prohibitive costs, uncertain liquidity, and issue scarcity often makes perfect replication infeasible

Index process optimizes marginal contribution to tracking error with T-Costs

Quantitative Process Balances Tracking Error & Transaction Costs

Different Markets, Different Strategies

17

Index Portfolio Construction Processes

• Expert traders• Unit exchange opportunities• Economies of scale

• Daily updates from index providers• Index methodology changes• New securities

• Investment Review Committee• Dedicated return attribution• Independent compliance

• Portfolio analysis• Full replication vs. stratified sampling• Leading edge portfolio construction

technology

Detailed Benchmark Knowledge

Index ReplicationPerformance Analysis

Efficient Trading

18

Modular Funds Match the Design of the Indexes

Barclays Capital US Aggregate Bond Index

Duration: modified/effectiveTotal may not equal 100% due to rounding.Source: BlackRock; data as of 30 September 2009

Barclays Capital U.S. AggregateIssues: 8,492Duration: 4.43 years

Government/CreditIssues: 4,755 Duration: 5.34 years

Mortgage-BackedSecuritiesIssues: 1,536Duration: 3.08 years

Asset-Backed SecuritiesIssues: 133Duration: 3.19 years

Com. Mortgage-Backed SecuritiesIssues: 2,068 Duration: 4.02 years

Intermediate Government/CreditIssues: 3,596 Duration: 3.89 years

Intermediate GovernmentIssues: 890 Duration: 3.62 years

Intermediate CreditIssues: 2,706 Duration: 4.37 years

Long Government/CreditIssues: 1,159 Duration: 12.19 years

Long GovernmentIssues: 128 Duration: 12.40 years

Long CreditIssues: 1,031 Duration: 12.03 years

3%Commercial Mortgage-Backed1%Asset-Backed

38%Mortgage-Backed23%Credit35%Government

Mortgage-

Bac ked

Government

Credit

Commerc ial

Mortgage-

Bac kedAsset-Bac ked

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient Trading

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient Trading

19

Portfolio Construction

Stratified sampling methodology: Dividing the various indexes into subsets (cells) based upon relative parameters

Portfolios are constructed by sampling bonds from each index cell

Mortgage-Backed Securities

Issuer (GNMA, FNMA, FHLMC)

Mortgage type(30 year, 15 year, balloon)

Coupon

Age (year of issuance)

Credit and Asset-Backed

Securities

Sector/issue type

Maturity/average life

Credit rating

Call/payment structure

Sector

Mat

urit

y

Cred

it qu

ality

Cell• BBB-rated • Industrial• 7–10 years

maturity

Government Bonds

Sector/Issue type

Maturity

Call Features

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient Trading

20

Portfolio Construction

For illustrative purpose only. Source: BlackRock

Key Rate & Gap Analysis Int Term Credit Bond Index FundKey Rate Durations

Sector Portfolio 3M 1Yr 2Yr 3Yr 5Yr 7Yr 10Yr

TOTAL ASSETS INTCORPA 0.0 0.1 0.3 0.7 0.9 1.3 0.8 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.2 0.9 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)

Financials - Lehman Sector INTCORPA 0.0 0.1 0.3 0.8 1.0 1.4 0.7 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 0.7 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)

Banking INTCORPA 0.0 0.1 0.3 0.8 1.0 1.3 0.7 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 0.7 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.0 (0.0)

Brokerage INTCORPA 0.0 0.1 0.2 0.8 1.0 1.8 1.0 LCREDINT 0.0 0.1 0.2 0.7 1.1 1.8 0.9 Gap 0.0 (0.0) 0.0 0.0 (0.0) 0.0 0.1

REITS INTCORPA 0.0 0.1 0.3 0.6 1.1 2.0 0.6 LCREDINT 0.0 0.1 0.3 0.6 1.2 1.7 0.7 Gap 0.0 0.0 0.0 (0.0) (0.1) 0.2 (0.2)

Finance Company INTCORPA 0.0 0.2 0.4 0.9 0.8 1.0 0.5 LCREDINT 0.0 0.2 0.4 0.9 0.8 1.0 0.5 Gap 0.0 0.0 (0.0) (0.0) 0.0 0.0 0.0

Insurance INTCORPA 0.0 0.1 0.3 0.7 1.0 1.5 0.9 LCREDINT 0.0 0.1 0.3 0.7 1.0 1.5 0.9 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.1)

Other Finance INTCORPA 0.0 0.1 0.5 1.2 1.0 0.6 0.1 LCREDINT 0.0 0.1 0.5 1.2 1.0 0.5 0.1 Gap 0.0 0.0 0.0 (0.1) 0.0 0.1 0.0

Industrials - Lehman Sector INTCORPA 0.0 0.1 0.3 0.7 0.9 1.3 1.1 LCREDINT 0.0 0.1 0.3 0.7 1.0 1.2 1.1 Gap 0.0 0.0 0.0 0.0 (0.1) 0.1 (0.0)

Basic INTCORPA 0.0 0.1 0.2 0.8 1.0 1.3 1.3 LCREDINT 0.0 0.1 0.2 0.8 1.1 1.3 1.3 Gap 0.0 0.0 0.0 (0.0) (0.0) 0.1 (0.0)

Capital Goods INTCORPA 0.0 0.1 0.3 0.8 0.8 1.2 1.1 LCREDINT 0.0 0.1 0.3 0.8 0.9 1.1 1.2 Gap 0.0 0.0 (0.0) 0.0 (0.1) 0.1 (0.1)

Consumer Cyclical INTCORPA 0.0 0.2 0.4 0.7 0.8 1.4 0.6 LCREDINT 0.0 0.2 0.4 0.7 0.8 1.4 0.6 Gap 0.0 0.0 (0.0) 0.0 (0.0) 0.0 (0.0)

Consumer Non Cyclical INTCORPA 0.0 0.1 0.3 0.8 1.0 1.4 1.1 LCREDINT 0.0 0.1 0.3 0.8 1.0 1.3 1.1 Gap 0.0 0.0 (0.0) 0.0 (0.0) 0.1 (0.0)

Energy INTCORPA 0.0 0.1 0.4 0.6 0.9 1.4 1.5 LCREDINT 0.0 0.1 0.3 0.6 1.0 1.3 1.4 Gap 0.0 0.0 0.0 (0.0) (0.1) 0.1 0.1

• Control interest rate risk at a sector andsub-sector level

• Manage “Key Rate”durations to address parallel and non-parallel yield curve shifts

Curve Risk: Key Rate Duration and Gap Analysis

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient Trading

21

Aladdin (GP Live)

Global Trading System

TradeWeb

Aladdin (Dashboard)

Custodian Bank

Order created by Portfolio Manager

Order transmitted to Trading

Order Routing and Execution

Execution transmitted back to Trading

Trade Operations

Execution sent to custodian bank

MarketAxess

Efficient Trading: Electronic Linkages Between Systems

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient Trading

22

-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Portfolio Return Index Return Difference

Fund TrackingError Attribution

Performance Analysisand Review

• Analytics generate PTE• Analysis of projected

tracking error vs. realized

Source: BlackRock, Barclay's Capital Point

Investment Review Committee

• Portfolio Mangers and Management meet monthly

• Regional and Global Committee Oversight

• Daily and Monthly Attribution• Custodial reports• Daily flags on tolerances

Performance Analysis and Review

Testing for Low Tracking: Risk Model Simulates Index and Fund Return and Tracking Error Difference

Detailed BenchmarkKnowledge

Rigorous Portfolio Construction

to Replicate Index

Performance Analysis and

Review

Efficient TradingMultiple checkpoints to deliver consistently low tracking

23

Why BlackRock? Index Provider Checklist

•Wide breadth of strategies across all major asset class segments

•Flexible “modular” design for custom solutionsGlobal Platform

•Transparent pricing without cross subsidization (BlackRock has no custody business)

•All trades executed on best execution basis (incl. FX trades)

Business Transparency

•Cost savings from economies of scale

•Tier 1 counterparty with unique access to liquidityCost Efficiency

•State-of-the-Art Technology

•Comprehensive integrated platform for risk and operations management

•Largest bond indexer with 25 years experience of indexing innovation and results*

•Experienced team delivering consistently low tracking error

Risk Management

Consistent Returns

* Source: Pensions and Investments, May 2009.

24

Appendix:

Performance and FundCharacteristics

25

25

US D

ebt Index Fund506864

Proprietary and Confidential: This material m

ay not be distributed beyond its intended audience.TO

BE USED

ON

LY FOR CO

LLECTIVE TRU

ST FUN

D IN

VESTMEN

TS

26

Portfolio Profile

US Debt Index Fund

Data are for analytical purposes only. Index data may differ to those published by the Index due to calculation methods. Breakdowns may not sum to total due to rounding, exclusion of cash, STIF, and statistically immaterial factorsAs of 31 December 2009. Source: BlackRock

US-Debt-Idx-A-Pro

0.000.00

8.148.19

9.749.74

4.034.01

78.0878.07

Quality Breakdown (Mkt Val %)

AAA or above

AA

A

BBB

Below BBB

0.400.3930+

6.126.1820-30

3.684.1610-20

16.1516.347-10

10.2510.525-7

28.9530.533-5

22.8019.212-3

10.6911.481-2

0.961.210-1Maturity Breakdown (Mkt Val %)

US Debt Index FundBarclays Capital

Aggregate Bond Index

Sector Breakdown (Mkt Val %)27.6427.79Treasury8.968.87Agencies6.776.79Financials9.859.86Industrials2.162.17Utilities3.803.81Non-US Corp0.480.45Taxable Muni0.360.36ABS35.0334.98Mortgages5.515.52GNMA 30 year0.120.01GNMA 15 year10.079.75FHLM Gold 30 year1.802.44FHLM Gold 15 year0.000.01FHLM Balloons15.0714.70FNMA 302.472.56FNMA 151.741.76Hybrid ARM3.203.13CMBS

3.473.47Nominal Yield (%)4.524.55Current Yield (%)3.493.49Yield to Maturity (YTM)

6.156.20Weighted Avg Life (yrs)

4.264.26Effective Duration (yrs) 3.373.38Spread Duration5657Option Adjusted Spread (bps)

-0.44-0.41Convexity103.64103.73Avg Price ($)

AaaAaaMoody RatingAAAAA+S&P Rating

4.684.72Coupon (%)Characteristics

8,3724,871# Issues

US Debt Index Fund Barclays Capital Aggregate Bond Index

13,577.1430.79Market value ($B)