Alternative/Traditional Investment Management ConvergencePresentation to the Montreal Stock Exchange Canadian Annual Derivative Conference

Yvan Fontaine, CFA

Château Frontenac, Quebec

August 18, 2005

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Alternative/Traditional Investment

Definition of alternative/traditional investment

Alternative investments related to fixed income

Future trends in alternative/traditional investments in fixed income

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Investments with a low correlation to traditional asset classes

Hedge Funds

Investments without a specific line in an investment policy

Definition ofAlternative/Traditional Investment

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Typical U.S. Investment Policy

Stocks Domestic International Emerging Markets Small Cap

Bonds Domestic International High Yield Emerging Markets

Real Estate

Alternative Investments Hedge Funds

Definition ofAlternative/Traditional Investment

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Definition ofAlternative/Traditional Investment

Typical Canadian Investment Policy

Variable Income Domestic Stocks

U.S. Stocks

International Stocks

Fixed Income Short Term

Domestic Bonds

Mortgages

Miscellaneous or others

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Alternative InvestmentsRelated to Fixed Income

International

Emerging Debt

High Yield

Distressed Bonds

Mezzanine Bonds

Private Placements

Convertible

Credit Derivatives (CDO, CLO,CDS)

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Alternative InvestmentsRelated to Fixed Income

International

Emerging Debt

High Yield

Distressed Bonds

Mezzanine Bonds

Private Placement

Convertible

Credit Derivatives (CDO, CLO,CDS)

Overlay

Hedge Funds

Portable Alpha

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Future Trends inAlternative/Traditional Investments

Excellent historical Canadian bond returns

Important reduction in risk premiums

Removal of the foreign content limit

Recent Canadian dollar appreciation

Low equity returns, low interest rates

Pension funds matching problems

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Excellent HistoricalCanadian Bond Returns

Source: JP Morgan

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Important Reductionin Risk Premium

Source: Datastream

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Important Reductionin Risk Premium

40.5

36

134

0

20

40

60

80

100

120

140

160

Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

10-year U.S. Swap Spread

12/31/0404/01/97

05/15/00

Bps

Source: Bloomberg

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Changes in the Foreign Content Limit & Recent Canadian Dollar Appreciation

Source: Bloomberg

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Future Trends in Fixed Income

Customized benchmarks, better matching

Stable or increased fixed income portion of asset mix

More tools given to the domestic manager Access to foreign securities, use of derivatives

Problem of leverage

More international allocation

Portable Alpha Replicate views with derivatives

Leverage of the T-bills portion of a beta stock portfolio