October 4, 2006 Peter Palfrey, CFA Vice President, Senior Portfolio - PowerPoint PPT Presentation

FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION October 4, 2006 Peter Palfrey, CFA Vice President, Senior Portfolio Manager Ken Johnson Vice President, Client Portfolio Manager

CONTENTS Investment Results Portfolio Characteristics Market Review& Outlook Guideline Summary /Account Team Appraisal of Holdings 2

INVESTMENT RESULTS THROUGH 8/31/2006 A nnualized YTD S ince 2006 1-Year 2-Year 3-Year Inception Fresno CountyEm ployees Retir. A ssn . - G ross 2.74% 2.52% 3.50% 4.89% 3.77% Fresno CountyEm ployees Retir. A ssn . - Net 2.57% 2.26% 3.24% 4.65% 3.53% Leh m anA ggregateBondInd ex * 2.16% 1.71% 2.92% 3.98% 5.10% Inception07/ 31 / 2001 *LehmanUniversal from7/ 31 / 2001to6/ 30/ 2003; andLehmanA ggregatefrom6/ 30/ 2003to8/ 31/ 2006 Returnsov er oneyearareannualized. Informationisreportedonatradedatebasis. DataSource: Bloomberg, LehmanBrothersResearch 3

Characteristics CHARACTERISTICS SUMMARY AS OF 08/31/2006 Fresno County Employees Lehman Aggregate Retirement Assn. Bond Index Yield to Maturity 5.87% 5.42% Average Maturity 7.20 years 6.66 years Effective Duration 4.66 years 4.62 years Coupon Rate 5.53% 5.31% Average Quality Aa3 Aa2 Durationused is: Effectiv e Data source: LehmanBrothers Research 4

Portfolio Overview FIXED INCOME PORTFOLIO STATISTICS: Period ending 08/31/2006 Lehman Aggregate Bond Index Fresno County Employees Retirement Assn. US Credit High Yield CMBS 23% 13% 5% US Credit 21% CMBS 5% Treasury Asset-backed Cash Asset-backed 25% 1% 1% 6% Converts 1% Treasury Mortgage-backed Mortgage-backed 16% 35% Agency 36% 11% 5

Portfolio Overview FIXED INCOME PORTFOLIO STATISTICS: Period ending 08/31/2006 Maturity Distribution 50% 46% Fresno County Employees Retirement Assn. 45% 41% Lehman Aggregate Bond Index 40% 35% 30% 23% 21% 25% 19% 21% 20% 15% 11% 10% 6% 6% 4% 5% 2% 0% 0% Under 1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years Over 20 Years Quality Distribution 70% 79% 65% 65% Fresno County Employees Retirement Assn. 60% 55% Lehman Aggregate Bond Index 50% 45% 40% 35% 30% 25% 20% 17% 13% 15% 8% 8% 10% 5% 3% 5% 2% 0% 0% 6 AAA AA A BAA BA & Below

Bond Market Environment PORTFOLIO THEMES – CORE PLUS • Reduced overweight to corporate bonds Sector – Yield advantage versus Treasurys approaching fair value – Emphasis is on higher yielding securities that have stable to improving credit trends • Approximately market-neutral weight to mortgages – Mortgages currently offer an attractive nominal yield advantage versus cash and Treasurys. – Potential extension/prepayment risk needs to be managed through security and maturity sector selection Security/Industry • Non-Dollar exposure has been increased, particularly to Asia. Specific • Shifting exposure to those industries that we believe will perform best in the present “mid-economic cycle” environment Duration/Yield Curve • We recently reduced our duration to 100% of benchmark, reflecting the recent decline in yields to “fair” value. The Federal Reserve Bank has already raised short rates by 425 basis points since the most recent monetary tightening process began in June, 2004, and has signaled a “pause” as of the August 8 th FOMC meeting, while continuing to reassure the market that it remains “vigilant” against the threat of increased inflationarypressures. The FOMC is now more “data dependent” regarding potential future FOMC actions. • Our emphasis on a combination of shorter and longer maturities (barbelled) has been reduced to a more “curve-neutral” stance. • Tactical use of “TIPS” based on break-even spreads versus near to intermediate term inflation expectations outlook. 7 Updated as of 9/ 11/ 06

Bond Market Environment US CORPORATES: INVESTMENT GRADE OAS Opt ion Adj usted S pread (bps) Option Adj ust ed S pread (bps) 250 250 U.S. Corporate Investment Grade 10-Year Average 225 225 200 200 175 175 150 150 125 125 100 100 75 75 50 50 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Monthly Data 8 Source: L ehman Brothers; History Through Aug -2006

Bond Market Environment US INVESTMENT GRADE CREDIT QUALITY TRENDS 300 283 # of Upgrades & Downgrades Each Year 275 250 236 225 Downgrades Upgrades 194 200 168 168 175 167 151 147 150 137 131 127 127 123 116 115 125 108 109 107 105 104 103 98 99 92 90 90 90 100 89 87 82 71 68 67 67 75 58 56 56 54 52 49 42 50 40 25 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Yearly Data 9 Source: Moodys; History Through Aug-2006

Bond Market Environment US CORPORATES: HIGH YIELD OAS Opt ion Adj usted S pread (bps) Option Adj ust ed S pread (bps) 1100 1100 U.S. Corporate High Yield 5-Year Average 1000 1000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Monthly Data 10 Source: L ehman Brothers; History Through Aug -2006

Bond Market Environment US HIGH YIELD CREDIT QUALITY TRENDS 450 409 # of Upgrades & Downgrades Each Year 400 370 336 350 317 325 Downgrades Upgrades 300 272 258 252 246 241 250 226 201 195 189 200 178 175 167 167 153 137 150 123 114 115 109 100 100 97 97 94 92 92 90 100 86 84 75 75 64 64 57 50 48 37 50 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Yearly Data 11 Source: Moodys; History Through Aug-2006

Bond Market Environment CORPORATE PROFITS with IVA & CCAdj* as a PERCENT of GDP *Inventory Valuation and Capital Consumption Adjustments Per cent Per cent 1 4% 14% History Forecast 1 3% 13% 1 2% 12% 1 1% 11% 1 0% 10% 9% 9% 8% 8% 7% 7% 6% 6% 4 8 5 1 54 57 60 63 66 69 7 2 7 5 78 81 84 87 90 9 3 9 6 99 02 05 08 Seasonally-A djusted A nnualized Rate; Shaded A reas Denote N BE R-Designated Recessions Source: Commerce Department; L oomis Sayles; H istory Through Q2:2006; F orecast T hrough Q4:2007 10Q -09F 12

Bond Market Environment US DEFAULT TRENDS Billions of Dollars Percent 14% 14% Trailing 12-month Issuer Default Rates Forecast 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Monthly Data 13 Source: Moodys; History Through Aug-2006, Moodys Forecast Through: Aug-2007

Bond Market Environment EMERGING MARKETS BLENDED SPREAD Blended Spread (bps) Blended S pread (bps) 1200 1200 1100 1100 JPMorgan Emerging Markets Bond Indices 1000 EMBI Blended Spread 1000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 98 99 00 01 02 03 04 05 06 Monthly Data Source: JP Morg an, Bloomberg JPEGBL SD Index ;History Through Aug-2006 14

Bond Market Environment CBOE MARKET VOLATILITY INDEX Percent Percent 40 40 35 35 30 30 25 25 20 20 15 15 10 10 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Weekly Data Source: Wall Street Journal; History Through Aug-2006 15

Bond Market Environment MBS YIELD SPREAD Opt ion Adj ust ed Spread (bps) 180 Yield Spread 160 2 Year Moving Average 10 Year Average 140 120 100 80 60 Au g-96 Au g-97 A ug-98 A ug-99 Au g-00 Aug-01 A ug-02 A ug-03 Au g-04 Aug-05 A ug-06 Weekly Data 16 Source: Lehman Brothers; History Throug h Aug -2006

Bond Market Environment PORTFOLIO THEME – US DOLLAR U.S. Treasury debt will continue to rise rapidly for the rest of this decade. FEDERAL GOVERNMENT SURPLUS/DEFICIT Billions of Dollar s %of GDP 30 0 3 20 0 2 OM B Pro jection s O MB His to ry (le ft s cale ) (le ft s cale ) 10 0 1 0 0 -10 0 -1 -20 0 -2 -30 0 -3 Pro jection s for -40 0 -4 % o f GDP (right scale ) -50 0 -5 % o f G DP, His tory (rig ht s cale ) -60 0 -6 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 U nified Budget Basis; F iscal Years; Annual Data Source: Office of Management and Budget; Com merce Department; A n nual H istory T hrough CY 2 011 06A-14 •Large U.S. budget deficits forecasted for the next few years may be largely financed by foreigners, especially OPE C and Asian governments pegging their currencies. Updated by L S economics as of 09/ 06/ 06 17

Bond Market Environment PORTFOLIO THEME – NON US DOLLAR The current account deficit points to long-term weakness in the US dollar. U.S. CURRENT ACCOUNT Billions of Dollars Percent of GDP 200 2. 0 History Forecast 100 1. 0 0 0. 0 -100 -1.0 -200 -2.0 -300 Level (Left Scale) -3.0 Percent of GNP (Right Scale) -400 -4.0 -500 -5.0 -600 -6.0 -700 -7.0 -800 -8.0 -900 -9.0 -1000 -10.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Seasonally Adjusted, Quarterly Data; Shaded Areas D enote N BE R-Desig nated Recessions Source: Commerce D epartment; L oomis Sayles; H istory T hroug h Q1 :200 6; F orecast T hrough Q4:2007 07Q -12F •The currencies of countries that run current account deficits greater than 5% of GDP often depreciate significantly. The U.S. deficit was 6.3% of GDP in 2005 and is forecasted to be remain over 6% in 2006, 2007, and 2008. Updated by L S economics as of 09/ 06/ 06 18