FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION February 6, 2008 Peter Palfrey, CFA Vice President, Senior Portfolio Manager Kenneth M. Johnson Vice President, Client Portfolio Manager
CONTENTS Investment Results Portfolio Characteristics Market Review & Outlook Guideline Summary Overview of High Yield and Bank Loans Account Team /Appraisal of Holdings 2
Fresno County Employees Retirement Association INVESTMENT RESULTS THROUGH 12/31/2007 Annualized Since 2007 2-Year 3-Year 4 -Year 5-Year Inception Fresno County Employees Retir. Assn. - Gross 7.17% 6.44% 5.06% 5.12% 5.53% 4.56% Fresno County Employees Retir. Assn. - Net 6.91% 6.17% 4.79% 4.87% 5.27% 4.31% Lehman Aggregate Bond Index * 6.97% 5.64% 4.56% 4.50% 4.63% 5.46% Inception 07/31/2001 *Lehman Universal from 7/31/2001 to 6/30/2003; and Lehman Aggregate from 6/30/2003 to 12/31/2007 Returns over one year are annualized. Information is reported on a trade date basis. Data Source: Bloomberg, Lehman Brothers Research 3
Fresno County Employees Retirement Association: Characteristics FIXED INCOME PORTFOLIO STATISTICS: Period ending 12/31/2007 Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index High Yield US Credit CMBS CMBS 8% 23% 6% 7% US Credit Cash 22% 2% Treasury 22% Non USD Asset-backed 7% Asset-backed 1% 3% Agency Treasury Mortgage-backed Mortgage-backed 10% 17% 34% 38% Fresno County Employees Lehman Aggregate Retirement Assn. Bond Index Yield to Maturity 5.26% 4.92% Average Maturity 9.19 years 6.66 years Effective Duration 5.70 years 4.55 years Coupon Rate 5.26% 5.45% Average Quality Aa2 Aa2 4 Duration used is: Effective Data source: Lehman Brothers Research
Fresno County Employees Retirement Association: Characteristics SECTOR ALLOCATION CHANGE: 12/31/06 – 12/31/07 (%) US High Yield -5.63 ABS -2.7 CMBS -0.54 Convertibles -0.12 Cash -0.08 US Agency 0.00 MBS 0.25 US Credit 0.82 US Treasury 1.01 Non-US Dollar 7.00 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 5
Fresno County Employees Retirement Association: Characteristics FIXED INCOME PORTFOLIO STATISTICS: Period ending 12/31/2007 Maturity Distribution 50% Fresno County Employees Retirement Assn. 45% 40% 43% Lehman Aggregate Bond Index 40% 35% 30% 27% 25% 19% 18% 20% 13% 15% 11% 10% 8% 10% 5% 6% 5% 0% 0% Under 1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years Over 20 Years Quality Distribution 79% 70% 73% 65% Fresno County Employees Retirement Assn. 60% Lehman Aggregate Bond Index 55% 50% 45% 40% 35% 30% 25% 20% 16% 15% 8% 8% 10% 7% 5% 2% 5% 1% 0% 0% 6 AAA AA A BAA BA & Below
Fresno County Employees Retirement Association PORTFOLIO THEMES – CORE PLUS Sector � Defensive positioning has been maintained to help protect against ongoing market turbulence. Strategic positions include UST’s, TIPS, Agency-backed MBS and JPY exposure. � Recently reduced underweight to investment grade corporate bonds, as valuations became more attractive. � Reduced overweight to high yield corporate bonds remains; becoming more attractive. – Emphasis continues to be on higher yielding securities that have stable to improving credit trends. – Credit spreads approaching more attractive levels in recent months, particularly in select financial names. � Increased weighting to Agency-backed mortgages, including GNMA-backed MBS; approaching market-neutral weighting. – Recent underperformance of the MBS sector has provided a more attractive entry point – Potential extension/prepayment risk needs to be managed through security and maturity sector selection Security/Industry � Non-Dollar exposure has recently been consolidated in an increased JPY position, capturing Specific gains in NOK, CHF, and ISK. JPY has been a key hedge against market risk aversion. � Maintaining credit exposure to those industries that we believe will perform best in the present “late-economic cycle” environment. Duration/Yield Curve � Duration has been maintained at approximately 125% of benchmark duration, in response to ongoing credit gridlock and the continuing correction in the U.S. residential housing market. � FOMC is expected to ease at least another 50-75 bps through the first quarter, 2008, depending on the severity of the credit contraction. � Emphasis on a combination of shorter and longer maturities (barbell) has been maintained based on current yield curve outlook and longer term monetary policy uncertainty. � Tactical use of “TIPS” based on near to intermediate term inflation concerns in market, due to current elevated food and energy prices, and increased market concern over the potential need for excessive Fed monetary policy stimulus. Updated as of 1/16/08 7
Bond Market Environment SPREAD COMPARISON: 2007 VS. 2000-2002* 1200 1000 800 bps 600 400 200 0 Agency MBS CMBS ABS IG Corporates High Yield Emerging Peak 2007 OAS Peak 2000-2002 OAS � Spreads in certain sectors have reached or exceeded previous cyclical peaks, potentially creating buy opportunities 8 *Most Securitized products peaked in 2000/2001, while Corporate products did not peak until 2002 Source: Lehman Brothers, history through December 31, 2007
Bond Market Environment U.S. CORPORATES: HIGH YIELD OAS Option Adjusted Spread (bps) 1200 1200 U.S. Corporate High Yield 5-Year Average 1000 1000 800 800 600 600 400 400 200 200 0 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Monthly Data Source: Lehman Brothers; History Through December 2007 9
Bond Market Environment MORTGAGES SHOULD BENEFIT FROM HISTORICALLY CHEAP VALUATIONS 160 140 Spread (bps) 120 100 80 60 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 MBS Yield Spread MBS Average � MBS spreads have widened substantially; portfolios should benefit as product overhang is absorbed 10 Source: Lehman Brothers, history through December 2007, monthly data
Bond Market Environment OUR POSITION IN THE YEN SERVES AS AN EFFECTIVE FLIGHT-TO-QUALITY HEDGE 125 115 105 Japanese Yen 95 85 75 65 Dec-79 Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Trade W eighted Index Value 10-Y r Moving Average � During periods of risk aversion, historically carry-trade investors ‘unwind’ their trades, which helps strengthen the currency 11 Source: JP Morgan, history through December 2007, monthly data
Bond Market Environment DURATION MANAGEMENT: JUN 2006 – DECEMBER 2007 0.6 5.3 0.5 5.1 0.4 4.9 0.3 Treasury Yield (%) 4.7 Duration (Years) 0.2 0.1 4.5 0.0 4.3 -0.1 4.1 -0.2 3.9 -0.3 -0.4 3.7 Oct-06 Dec-06 Oct-07 Dec-07 Jun-06 Jul-06 Aug-06 Sep-06 Nov-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Nov-07 City of Livonia Employees Retirement System - Fixed Income Duration Less Lehman Aggregate Index Duration 10-Year Treasury 12 Data source: Loomis Sayles, LP, Lehman Brothers, Bloomberg
Fresno County Employees Retirement Association GUIDELINE SUMMARY The portfolio benchmark is the Lehman Brothers US Aggregate Index Account may not hold more than 5% market value in any one issuer excluding US Government and Agencies Account may hold up to 20% of the market value in securities rated below Moody, Standard & Poor, or Fitch Baa3/BBB-/BBB- at time of purchase Account may not hold any securities with Moody, Standard & Poor, or Fitch rating below B3/B-/B-. In the case of splits ratings, the highest of the three shall be used. Account may hold non investment grade emerging market securities Portfolio duration will be +/- 30% to the Benchmark Account may not hold more than 10% market value in non-US dollar denominated securities Account may hold up to 5% market value in cash and cash equivalents 13
Fresno County Employees Retirement Association Fresno County Employees Retirement Association : Points of Discussion 1 Addition of High Yield capability in the portfolio 2 Opportunistic Investment in Bank Loans within the Core Plus Strategy 14
High Yield Bonds LOOMIS SAYLES’ VIEW OF HIGH YIELD A significant and growing asset class � � Current market offers attractive opportunities � Attractive risk/reward characteristics � Compelling diversification benefits This presentation is a service provided by Loomis Sayles. It is for informational purposes and it should not be construed as investment advice. We believe the information in this presentation is reliable, but we cannot guarantee its accuracy. Opinions expressed reflect subjective judgments and will evolve as future events unfold. 15 MALR000491
High Yield Bonds GROWTH OF THE US HIGH YIELD BOND MARKET, 1987-2006 1,200 1,000 800 Billions 600 400 200 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Federal Reserve estimate High Yield market is a significant asset class with over $1 trillion in debt outstanding. 16
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