What’s Happening in Asset Management?!

1. What’s Happening in Asset Management?! Chris Carlson Senior Vice President and Head of Strategic Development Northern Trust Global Investments

2. What’s New in Asset Management?! • Broad Asset Management Trends • Today’s Markets • Building Winning Portfolios

3. Broad Asset Management Trends A combination of investment developments is serving to expose shortcomings in how the investment industry serves our clients… Moderating Long-term Expected Returns Underperforming Investment Capabilities Changing Retirement Needs & Expectations Under Saving & Inflexible Investment Products Regulatory Demands Shift to Individuals *Source: Casey, Quirk and Associates

4. Broad Asset Management Trends …As a result, the individual investor – regardless of accumulated net worth – is facing an unprecedented set of challenges. Investor Challenges Inadequate Investment Expertise Normalized Return Environment Concerns of Retirement Volatility Increased Personal Responsibility Potential Funding Gaps Investment managers must work with clients to help them adjust to this landscape, educate them on how to succeed, and invest for them in capabilities that will secure their future! *Source: Casey, Quirk and Associates

5. Broad Asset Management Trends We are now facing a moment of historic change in the industry. • Changing Investor Expectations and Needs • Institutional clients are rethinking their pension strategy rather than rebalancing their asset allocation • Plan sponsors are strategically re-evaluating the pension plan • Shifting to DC from DB • Growing number of under-funded plans • Current and pending regulatory changes • Personal clients are rethinking investment strategies as a result of an increased responsibility for their own financial security. • Integrated solutions with full asset allocation • Demand for best in class investments • Increase in demand for fixed annuity streams • Demand For Alpha & Alternatives Grows • Focus changing to total return • The importance of hedge funds and manager of managers • A growing list of alternative asset classes are increasingly important

6. Broad Asset Management Trends Late 90’s out-performance and the subsequent reversion to a normalized return environment is one factor driving a generational shift in the asset management business. Annualized S&P 500 Returns January 1990 - March 2000: +18.0% April 2000 - December 2005: (1.6%) January 1990 - December 2005: +10.6% Cumulative Nominal Return(Logarithmic Scale, January 1990 = 1.0) S&P 500 Historical January 1926 - December 2005 Annualized Return: +10.4% Source: Standard & Poors; Casey, Quirk & Associates analysis.

7. Under Funded Pensions Changing Pension Regulations Globalization Shift in Pension Accountability Hedge Funds Fund of Funds Commodities Portable Alpha Liability Driven Investments Investment Solutions Rapidly Aging Populations Alternatives Are Mainstream Value Equity Growth Equity Large Cap Mid Cap Vulnerable Competitors Small Cap Core Fixed Income High Yield Sector Allocation Geographic Allocation Private Equity Real Estate 1980’s 1990’s Second Generation: Asset Allocation / Specialization Broad Asset Management Trends The increased financial pressure, changing pension regulations, shifting demographics, and greater product choices are also driving the generational shift in asset management. Complexity Product Focused Sales Equity Fixed Income Cash 1970’s 2000’s First Generation: Limited Product Suites Third Generation: The Total Firm

8. Broad Asset Management Trends This generational shift is fundamentally changing the way that our clients will expect us to invest their assets. • Traditional Benchmarks Second Generation Third Generation • Non-Traditional Benchmarks With an “Outcome” Focus • Style Focus on “value” or “growth • Long Only Investing • Traditional Asset Classes • Elimination of Style Bias • Inclusion of Shorting • Alternatives? • Percentage Based Asset Allocation • Manager Selection Based on Style Box • Risk Budgeting • Alpha – Beta Separation *Source: Casey, Quirk and Associates

9. Broad Asset Management Trends Traditional Active Management: The Deconstruction of a Classic Favorite! Third Generation Approach Second Generation Approach Alpha Provider(s) Hedge Funds, Real Estate, Private Equity, Other Alts Alpha Return: Manager Skill • Absolute Return Focus • Pay for Performance • Identifiable Skill Beta Return: Market Return Deconstruction • One Price • Unclear Return Sources • Hard to Determine Manager Skill Beta Provider ETF’s, Indexing, Derivatives • Efficient Exposure • Minimal Cost *Source: Casey, Quirk and Associates

10. Broad Asset Management Trends These Trends Are Driving Fundamental Change in the Institutional AND Personal Market Place. Personal Market: Institutional Market: • Increased Individual Responsibility • A Return To “Normal” Market Returns • Demand For Increased Diversification • Demand For Broader Access • The Need For Investment Solutions • Closing of DB Plans • Demand To Put Plans On “Auto Pilot” • Limit Financial Impact of Plans on P & L • Reassessment of the Asset / Liability Equation & The Management of Assets • The Need For Investment Solutions 3rdGeneration Firms

11. Broad Asset Management Trends Investors need firms that have access to the component parts. • Third Generation Firm Characteristics • Relative AND Absolute return orientation • Dynamic solutions strategy orientation • Alternative investment capabilities • Financial engineering • Alpha generation capabilities • Appropriate fee strategies *Source: Casey, Quirk and Associates

12. Today’s Markets The current crisis is not an isolated event, but another in a series of seemingly more frequent events. Equity Market Crash 1987 Long Term Capital Management 1998 Tech Bubble Bursting 2000 Sub-Prime Crisis 2007

13. Today’s Markets We know the basics of each of these markets events, the more important question is how does risk management work and what breaks down in a market crisis? Rational Participants Knowable Unknowable Known Knowables Known Unknowables Known Unknown Knowables Unknown Unknowables Unknown

14. Today’s Markets There have been crises as long as there have been markets. Is anything different in today’s market environment? • Complexity: Look to evolution to understand • Tight Coupling: How close are the dominoes? In some views, part of the problem has been our quest for transparency and specificity. The other is fear. • Transparency & Specificity • Traders alter or hide behavior • Increased “information” can increase instability • Fear: The “experimental neurosis example” *Source: A Demon of Our Own Design – Richard Bookstaber 2007

15. Today’s Markets Time, risk management and liquidity heal all. • We have a wave of vehicles that need to mature • Losses are being recognized AND realized • Final clarity on who has what and how much • A resumption of normal function

16. Building Winning Portfolios Personal clients are becoming increasingly sophisticated and re-thinking their approach to investing as a result of increased responsibility for their financial security. Investment Industry Dynamics Personal Market Dynamics • The separation of alpha and beta return • The ascendancy of quantitative and alternative investments • Increased use of derivative instruments and derivative strategies for risk management and investment • The implementation of performance fees • Loosening of benchmark restrictions • Demand for diversified and risk managed portfolios • Demand for best in class asset managers • Increase in demand for fixed annuity streams • Demand for total return that ensures net principal grows faster than inflation *Source: Casey, Quirk and Associates

17. Increased Client Sophistication & Size Building Winning Portfolios Personal market and investment industry trends are driving an evolution in the client conversation that is much more focused on liabilities, goals and investment outcomes. Old Paradigm Client Conversation New Paradigm Client Conversation • Product Focused • Proprietary Architecture • Equity / Fixed Income Asset Allocation • Individual Security Orientation • Traditional Benchmarks • Consultatively Focused • Outcome Oriented • Open Architecture • Unconstrained Solutions • Alpha / Beta Separation • Risk Budgeting vs. Asset Allocation • Alternatives • Derivative Based Products • Thought Leadership *Source: Casey, Quirk and Associates

18. Building Winning Portfolios Asset managers must be prepared to deliver the investment capabilities that fulfill client needs from a menu of beta and open architecture alpha strategies. Risk Budgeted Asset Selection Active Extension Equity Strategies Hedge Strategies Structured Capabilities Open Architecture Other Alternative Strategies Fixed Income Alpha Strategies Synthetic Exposures Legacy Individual Securities Exchange Traded Funds Index Mutual Funds Beta Return

19. 1. Objective Analysis: • Liability Review • Life Goals • Fears/Dreams 2. Solutions Perspective: • Best in Class Investments • Optimizing the Efficient Frontier • Tax Sensitivity 4. The End Game: • Growing Financial Security • Generational Wealth Transfer • Growing AuM 3. Implementation: • Efficient Execution • Rational Pricing • Risk Monitoring/Mgmt. Building Winning Portfolios One size does not fit all… financial solutions, and the manager value proposition depend on understanding client needs and delivering investments that reflect these considerations. Targeted Financial Solutions Needs, Aspirations, Dreams Investment Program Design Execution & Monitoring Financially Secure Clients!

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