A CalPERS and CalSTRS Conference April 24-25, 2006

1. A CalPERS and CalSTRS ConferenceApril 24-25, 2006 Achieving Market Share Growth Through Consulting Firms Robert Toigo Foundation Watson Wyatt Survey Martha A. SpanoSenior Consultant / Division Practice Leader 818.623.4527 martha.spano@watsonwyatt.com

2. Consultant Use of Minority/Developing Investment Managers • Watson Wyatt commissioned the Toigo Foundation to conduct a survey of top Investment Consulting Firms • Survey respondents advise on over $2 trillion in pension assets based on Greenwich Associates data Buck Consultants / Mellon Financial Callan Associates Ennis, Knupp & Associates Hewitt Associates New England Pension Consultants Pension Consulting Alliance Rocaton Investment Advisors Russell Investment Group Strategic Investment Solutions Watson Wyatt Investment Consulting Wilshire Associates Source: Greenwich Associates

3. Separately track Minority-owned investment managers Separately track Developing investment managers Track neither Minority nor Developing investment managers 91% 27% 9% 0% 20% 40% 60% 80% 100% Consultant Tracking of Minority/ Developing Firms • Most consultants track Minority-owned firms. Typical definition is >50% minority ownership, some allow lower ownership • Few track Developing managers, typically defined by small AUM and short track record Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

4. 8% % of Minority & Developing managers, among all respondents Among respondents using Vendor databases Among respondents using Proprietary databases 3% 11% 0% 5% 10% 15% As % of Total Mgrs in Consultant database Consultant Database Coverage • Minority & Developing managers represent 8% of managers listed in investment consultant databases, with a range between 1% to 18% • Minority & Developing managers seem to be better represented in Proprietary databases. The most popular Vendor-provided databases are eVestment and PSN Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

5. Hedge Fund or Long/Short – 1% Private Market – 1% Fund-of-Funds – 1% Public Market Strategy 97% Investment Strategies Covered • Minority & Developing firms seem heavily focused on Public Market strategies, based on Consultant database listings Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

6. Client searches with a preference or a request for Minority & Developing managers Client searches with a requirement for Minority & Developing managers 5% 3% 0% 1% 2% 3% 4% 5% 6% % of Total # of Client Searches Manager Searches – Requests for Minority & Developing Managers • A relatively small number of client searches establish either a preference or a requirement for including Minority & Developing managers • Data probably understates actual demand, since informal requests for Minority & Developing managers are common but not part of written mandate and therefore not tracked Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

7. Manager Searches – Client Requests by Plan Type • Public Plans have been at forefront of demand for Minority & Developing investment managers • This data likely does not capture informal requests for Minority & Developing managers Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

8. Non-Profit Plans Multi Employer 1% Plans Corporate Plans 1% 13% PublicPlans 85% Minority & Developing Firm Market Position by Assets Under Management • Public Plans have been at forefront of demand for more diversity in investment management providers • Corporate Plans also represent an important opportunity for Minority & Developing investment managers Data is based on 7 responses. Total AUM is $1.7 billion. Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

9. Client searches that included a Minority & Developing manager among candidates Client searches that included a Minority & Developing manager among finalists Client searches that were awarded to Minority & Developing manager 12% 10% 6% 5% Last Year 4% 3% Last 3 yrs 0% 5% 10% 15% % of all Manager Searches Manager Searches Success Rates for Minority & Developing Managers • About 10% of all searches in the past 3 years included a Minority & Developing manager among the candidates, with about 3% of searches resulting in selection. Results in the last year are slightly higher • The success rate ranges from 0% to 10%. May reflect each consultant’s institutional client mix (public, corporate, non-profit plans) Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

10. Yes, greater fit within fund-of-funds 36% 36% No, worse fit within a fund-of funds 27% No response 0% 10% 20% 30% 40% 50% % of Respondents Manager Searches Opportunity within Fund-of-Funds • Consultants seem evenly divided on whether a Fund-of-Funds (FoF) strategy is preferable for Minority & Developing managers • Advocates cite more intensive research required to identify small/developing managers • Detractors cite the expense of a middleman, reducing the ability to generate alpha. “FoF” performance has not been particularly compelling Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

11. Size of mandate vs. firm size 73% 55% Size of assets under management. 27% Client screening requirements Education / Prof'l Background of staff 27% 27% Financial strength of firm AIMR compliant record 18% Performance results 18% 9% Consultant screening requirements 0% 15% 30% 45% 60% 75% 90% % of Respondents Limitations to Greater Usage by Institutional Investors • The most common limitation faced by Minority & Developing firms is the concentration of assets in the proposed mandate Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

12. No change to policies 64% 36% Outreach effort 18% Dedicated contact person Concessions to listing requirements 9% Joint Consultant & Client initiatives 9% 0% 10% 20% 30% 40% 50% 60% 70% % of Respondents Consultant Initiatives to Improve Accessibility • Many consulting firms have initiatives to improve access to their research staff, since consultants are an important gateway to institutional assets Source: Robert Toigo Foundation/Watson Wyatt Survey 2004

13. Consultant Comments for Improving Success Build & Maintain Relationships • Push for direct relationships with plans • Develop institutional client & asset base • Target reasonable sized clients for asset base • Introduce key investment professionals to consultants • Establish direct contact w/ consulting firm clients • Call on us (consulting firms) • Develop relationships with fund-of-funds • Get listed in vendor databases – they’re used by many consultants to leverage resources • Maintain database information • Invest In Your People • Hire experienced investment professionals • Outsource non-essential functions to focus on priorities • Understand/articulate strengths & weaknesses of professionals • Gain experience prior to starting firm • Build firm w/partners so there is established team in place • Strategic Firm Planning • Outline a clear plan for asset growth • Develop a business plan to support & protect alpha generation • Focus on strengths w/ 1 or 2 products before branching out • Articulate how firm will manage a larger asset base • Offer strategy where size less important (i.e., small cap) • Ownership structure, transition planning • Strategic planning • Identify comparative advantage & focus on it • Deliver Investment Results • Provide proof statements for claims • Disciplined investment process • Follow best practices w/ rigorous buy & sell process Source: Robert Toigo Foundation/Watson Wyatt Survey 2004