Investment Update

Judy Freyer

Senior Vice President, Treasurer and Chief Investment Officer

Video

It’s a Small, Small World

3

• Plans, Programs, and the Board of Pensions Balanced Investment Portfolio

• 2014 Markets and Investment Performance

• Our Changing and Ever Smaller World

• The Unknowable Future

Part 1 – Plans and Programs

4

• Independent plans/programs

• Diverse funding sources

• Distinct portfolios

• Separate accounting

2015 Dues-Based Programs

Medical Plan23%

Pension Plan11%

Death & Disability 1%

Short-Term Investments

Medical Benefits Paid for

Members

Pension, Death & Disability Benefits Paid to Members

Short-Term Investments

Board of Pensions Balanced

InvestmentPortfolio

Employing Organization35% Dues

5

2015 Dues-Based Programs

Medical Plan23%

Pension Plan11%

Death & Disability 1%

Short-Term Investments

Medical Benefits Paid for

Members

Pension, Death & Disability Benefits Paid

to Members

Short-Term Investments

Board of Pensions Balanced Investment

Portfolio

Employing Organization35% Dues

2014:

Revenue $ 180 Million

Expenses$ 181Million

6

2015 Dues-Based Programs

7

Medical Plan23.5%

Pension Plan11%

Death & Disability 1%

Short-Term Investments

Medical Benefits Paid for Members

Pension, Death & Disability Benefits Paid to Members

Short-Term Investments

Board of Pensions Balanced

InvestmentPortfolio

Employing Organization35% Dues

2014:

Dues $ 75 Million

Benefits Paid$ 344 Million

U.S. Stocks

InternationalStocks

Fixed Income

Alternatives

Pension

Death & Disability

Assistance Programs

Endowment

Restricted Gifts/Other Programs

Board of PensionsBalanced Investment

Portfolio

Investment Structure

8

A Portfolio that Reflects the Values of the Presbyterian Church (U.S.A.)

9

• Two voting members on Mission Responsibility Through Investment (MRTI)

• Divestment program of the PC(USA)

• Shareholder resolutions

• Proactive proxy voting

Part 2 - Global Markets and Investment Performance in 2014

10

• Overview of Global Markets in 2014

• 2014 Investment Performance – The Board of Pensions Balanced Investment Portfolio

2014 We Ain’t Down Yet!The Unsinkable Molly Brown

U.S. Dominates Global Markets

USA

11

Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-1480

85

90

95

100

105

110

115

120

125

US Stocks Int'l Stocks Emg Mkt Stocks Treasury Bonds High Yield BondsCommodities

24%

13%

-1%2%

-5%

-17%

2%

2014 Global Market Performance

Long U.S. Treasury bonds outperform;other asset classes perform similarly to each other

U.S. assets outperform the rest of the world, as relative strength in the U.S. economy attracts global investors

Commodities perform very poorly in the second half of 2014; oil leads the decline amidst a supply glut

Source: Bloomberg

12

Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-1450

60

70

80

90

100

110

120

Energy Industrial Metals Agriculture Livestock Precious Metals

14%

Copper and iron ore weaken on excess supply

Gold and silver re-bound after a terrible

2013

Demand outstrips supply as herd size is at a sixty-year low

Corn and wheat tumble with strong harvests

Oil prices collapse

Supply (U.S. shale) exceeds slow-ing global demand/growth

OPEC chooses not to cut supply

-4%-7%

-11%

-44%

2014 Commodity Group Performance

13

Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-130

20

40

60

80

100

120

140

160

Pri

ce

pe

r b

arr

el,

US

D

70% fall in 7 months

10/85$30

9/90$40

$1111/98

6/08$140

$421/09

6/14$105

$5312/14

50% fall in 6 months

Source: Bloomberg, first month futures contract. Data reflects month end prices.

Oil PricePrice per barrel, West Texas Intermediate

14

Dec Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec96

98

100

102

104

106

108

110

112

114

116

Vs. Other Developed Market Currencies Vs. Emerging Market Currencies

Ch

an

ge

in V

alu

e o

f U

.S. D

olla

r

YTD

The Value of the U.S. Dollar in 2014

+13%+12%

Source: Bloomberg

15

I’m Lovin’ It – You Can Never Start Too Young

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Le Big Mac - The Real Deal in a Global Economy

17

Ukraine

India

South Africa

Egypt

Poland

Venezuela

China

Czech Republic

Pakistan

Japan

Argentina

Colombia

Mexico

Portugal

UAE

South Korea

Costa Rica

Australia

Israel

New Zealand

Canada

Sweden

Denmark

Switzerland

-100 -80 -60 -40 -20 0 20 40 60 80

The Economist Big Mac Index

Source: Bloomberg

Overvalued vs. U.S. Dollar

Undervalued vs. U.S. Dollar

18

10 Year Sovereign Bond Yields

Source: Bloomberg

Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-140

1

2

3

4

5

6

7

8

9

10

11

12

U.S. U.K. Germany Japan Australia Canada

Inte

res

t R

ate

(%

)

0.3%

Japan6. 5%12/90

U.S.8.1%12/90

U.K.10.8%12/90

0.5%

1.8%1.8%2.2%

2.7%

19

Ownership of U.S. Treasury SecuritiesSeptember 30, 2014

Source: J.P. Morgan, U.S. Treasury. Excludes intragovernmental debt such as securities held by Social Security Trust Fund.

Foreign official

32%

Federal Reserve

19%Foreign private

15%

Mutual funds9%

State/local govt 7%

Finan-cial insti-tutions

7%

Households 6%

Pensions 4%

Other1% Total Debt Held by Public:

$12.756 trillion

20

U.S. Inflation Composition and 2014 year over year percent change

Source: Bureau of Labor Statistics. Data as of December 2014.

Item Weight 2014 Pct. Change

Transportation 16.4% (6.2)%

Apparel 3.4 (2.0)

Recreation 5.8 0.0

Education/Communication 7.0 0.4

Other 3.4 1.6

Housing 41.5 2.5

Medical Care 7.6 3.0

Food/Beverages 14.9 3.3

Total 100% 0.8%

21

Jan-58 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13-4

-2

0

2

4

6

8

10

12

14

16

CPI (All Items) Core CPI (excludes Food and Energy)

Co

ns

um

er

Pri

ce

Ind

ex

U.S. Inflation Year over year percent change

Source: Bureau of Labor Statistics

1.6%0.8%

Inflation rose throughout the 1970s as oil prices and wages both soared

The Federal Reserve’s efforts to curtail inflation led to a multidecade disinflationary trend

Inflation has been low and stable; commodity volatility has not impacted core CPI

12/7412.3%

3/8014.8%

7/085.6%

7/09-2.1%

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12/31/14 12/31/13 Change

U.S. Equity 37.9% 37.3% 0.6%

Int’l Equity 19.9 21.3 (1.4)

Fixed Income 29.4 29.5 (0.1)

Alternatives

Private LPs 8.0 7.3 0.7

Liquid Alts 4.8 4.6 0.2

Total 100.0% 100.0%

$ millions $8,640 $8,478 $162

Balanced Investment Portfolio Asset Allocation

23

12/31/14L-T Strategic Asset Allocation

Ranges

U.S. Equity 37.9% 30-50%Int’l Equity 19.9 10-25Fixed Income 29.4 25-45Alternatives 12.8 1-20 Private LPs 8.0%

Liquid Alts 4.8

Total 100.0%$ millions $8,640

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Balanced Investment Portfolio Asset Allocation

Returns of Market Indices andBoard of Pensions Balanced Investment Portfolio

December 31, 2014

-4.9

4.9

5.6

6.0

1.8

-2.2

12.6

-10 -5 0 5 10 15

MSCI EAFE

MSCI EM

CG High Yield Cash Pay

Russell 2000

BOARD OF PENSIONS

Barclays Govt/Credit

Russell 3000

% Return

Source: MSCI (net) 25

Board of Pensions Balanced Investment PortfolioHistorical Asset Allocation

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

10

20

30

40

50

60

70

80

90

100

U.S. Equity International Equity Fixed Income Alternatives

High14%

44% US Stocks

Low 6%Intl Stocks

High48% Fixed

3% Alts

Low 0%13%Alts

29%Fixed

High21%

38% US Stocks

High51%

20% Intl Stocks

Low 28%

Low 36%

26

Annualized Rate of Return (%)

1Year

3Years

5Years

10Years

15Years

20Years

Total Fund 5.6 12.1 10.0 6.8 5.7 8.6

Asset Mix Policy Benchmark

7.4 12.3 10.1 6.8 5.3 8.2

Excess Return (1.8) (0.2) (0.1) 0.0 0.4 0.4

Board of Pensions Balanced Investment PortfolioDecember 31, 2014

27

Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-142

3

4

5

6

7

8

9

-0.2

0

0.2

0.4

0.6

0.8

1

Balanced Investment Portfolio (left) Benchmark Performance (left)

Bill

ion

s o

f d

olla

rs

Cu

mu

lati

ve R

elat

ive

Per

form

ance

, bill

ion

s

Since 1990, active management of the Balanced Investment Portfolio has pro-vided an additional $840 million in as-sets, most of which is attributable to the last ten years.

The Value of Long-Term Outperformance

Benchmark Performance represents Asset Mix Policy Benchmark, adjusted for Balanced Investment Portfolio cash flows. Columns represent cumulative dollar impact of relative performance, shown on right hand scale.

28

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-142

3

4

5

6

7

8

9

-50

0

50

100

150

200

250

300

350

Balanced Investment Portfolio (left)

Bill

ion

s o

f d

olla

rs (

mar

ket

valu

e)

Mill

ion

s o

f d

olla

rs (

ben

efit

s p

aid

)

Since 1988, $4.5 billion has been withdrawn from the Balanced In-vestment Portfolio to pay benefits.

$132 million

$1.42 billion

Balanced Investment PortfolioMarket Value and Benefits Paid in Excess of Dues

Gray bars represent benefits paid annually in excess of dues received and are shown in millions of dollars against the right scale. Timing of cash payments in December 2011, 2012 and 2013 overstates 2011 payments and understates 2013 payments. Excluding timing differences, cash payments were approximately equal 2011-2013.

29

Part 3: It’s a Small, Small WorldOur Changing and Ever Smaller World

30

• Butterfly Wings in 2015 and Our Interconnected Global Markets

• Global Demographics and Statistics

31

The Butterfly Effect

“The flapping of a butterfly’s wings might create a minuscule disturbance that, in the chaotic motion of the atmosphere…change the large scale atmospheric motion.”

Edward Lorenz,

Meteorologist

Chaos Theory, 1963

32

Demographics - Why It Matters

D- Drinking water, discount rates, debts, deficits

E- Economic growth, emerging markets, social equality

M- Mortality, longevity risk, mega-cities

O- Organizational structure and behaviors, outsourcing

G- Geopolitical risks, genomics, global labor force

R- Retirement, real estate, resource allocation

A- Asset prices, asset allocation

P- Pensions, pharmaceuticals

H- Health, housing

I- Inflation, information technology, infrastructure

C- Climate, countries, commodities, communications

S- Societal structures, investment sectors

0

1

2

3

4

5

6

7

8

9

10

World Asia Africa Europe

Latin America North America Oceania

Source: Wikipedia, Presbyterian Historical Society, spiritrestoration.org

Glo

bal p

opul

atio

n (b

illio

ns)

Global Population Growth through a Presbyterian Historical Lens

70000 BC – 500 BC 1 AD 1000 1750 - 1900 1950 - 2010

Noah born

c3000 BC

Great Pyramids

c2500 BC

Moses born

c1250 BC

Rome

c750 BC

Birth ofChrist

John Calvin born

1509 Fund forPious Uses

1717

First GAPhila, PA

1789

North-South split1861

UPCUSA forms

1958Book of Confessions

1967

Reunion

PCUSA 1983

33

The World’s Most Populated Countries - 2014

Source: Population Reference Bureau

China India U.S. Indonesia Brazil Pakistan Nigeria Bangladesh

Russia Japan Rest of World

0

1

2

3

4

5

6

7

8

9

10

Bill

ion

s o

f P

eo

ple

In 2014, the ten largest countries accounted for approximately 60% of the world’s 7.2 billion people.

34

The World’s Most Populated Countries –2050 Projection

Source: Population Reference Bureau

India China Nigeria U.S. Indonesia Pakistan Brazil Bangladesh

Congo Ethiopia Rest of World

0

1

2

3

4

5

6

7

8

9

10

Bill

ion

s o

f P

eo

ple

In 2050, it is expected that the ten largest countries will account for approximately 55%

of the world’s 9.7 billion people.

Congo and Ethiopia are expected to replace Russia and Japan in the Top 10.

35

36

0

1

2

3

4

5

6

7

8

9

10

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Asia Africa Europe Latin America North America Oceania

Glo

bal

pop

ulat

ion

(b

illio

ns)

Global Population by Region

Source: United Nations. 2008 estimates

Demographic SnapshotDeveloped Markets

Source: JP Morgan

Developed

GDP per Capita Population

% under Age of 20

Investment% of GDP

U.S. $53,101 316 mm 26% 20%

Canada 51,990 35 22 24

Germany 44,999 81 18 17

France 43,000 64 24 19

U.K. 39,567 64 24 14

Japan 38,491 127 18 21

Italy 34,715 60 19 17

37

Demographic SnapshotEmerging Markets

Source: JP Morgan

Emerging

GDP per Capita Population

% under Age of 20

Investment% of GDP

Korea $24,329 50 mm 22% 26%

Russia 14,819 143 21 24

Brazil 11,311 198 33 18

Mexico 10,630 118 38 22

China 6,747 1,361 20 48

India 1,505 1,243 38 35

38

Demographic SnapshotDeveloped Markets vs. Emerging Markets

Source: JP Morgan

GDP per Capita Population

% under Age of 20

Investment% of GDP

Developed Average $46,184 747 mm 23% 19%

Emerging Average 5,745 3,113 29 37

Includes countries shown on previous two slides

39

Perceived Retirement Shortfall by Country

Sources: JP Morgan, HSBC

Average U.K. U.S. France Canada AUS Sin-gapor

e

Brazil China India Mexico UAE0

5

10

15

20

25

108

14

911 11

9

1210 10

9 9

810

7

108

10

8

11

10

58

6

Savings expected to last (years) Expected savings shortfall (years)

40

Hourly Compensation Costs in Manufacturing

Sources: Goldman Sachs, ISI. Data through 2012; China and U.S. estimated through 2014.

Bel

gium

Sw

eden

Ger

man

y

Fra

nce

Net

herla

nds

Irel

and

U.S

.

Can

ada

Japa

n

Ital

y

U.K

.

Spa

in

Sin

gapo

re

Sou

th K

orea

Gre

ece

Bra

zil

Tai

wan

Pol

and

Mex

ico

Chi

na

Phi

lippi

nes

0

5

10

15

20

25

30

35

40

45

50

5552

50

46

40 4038 37 37

3534

31

27

24

2119

119

86

42

Ho

url

y W

ag

es

(U

.S. D

olla

rs)

41

42

Trends Too Important to Ignore

• U.S. Energy Independence

• A Revolution in Communication

Source: U.S. Energy Information Administration

43

Production of OilMillions of barrels per day

Source: JP Morgan, EIA. 2014 and 2015 are estimates.

Production 2013 2014 2015Growth

since 2013

U.S. 12.3 13.9 14.9 20.7%

OPEC 36.0 36.0 35.9 -0.3

Other 41.8 42.1 41.9 0.4

Global 90.2 92.0 92.8 2.9%

44

Consumption of OilMillions of barrels per day

Source: JP Morgan, EIA. 2014 and 2015 are estimates.

Consumption 2013 2014 2015Growth

since 2013

Japan 4.5 4.4 4.2 -6.4%

Europe 13.6 13.5 13.4 -1.9

U.S. 19.0 19.0 19.1 0.7

China 10.6 11.0 11.3 6.9

Other 42.8 43.6 44.3 3.6

Global 90.5 91.4 92.3 2.0%

45

Oil Imports as a Percent of GDPVarious developed and emerging countries

Sources: JP Morgan, EIA, IMF

Canada U.K. U.S. Italy France Germany Japan Russia Brazil China South Africa

India-6

-4

-2

0

2

4

6

-3.6

0.91.6

2.2 2.4 2.4

3.6

-13.6

0.700000000000001

2.4

4.85.3

Russian net oil exports are 13.6% of GDPNet exporters

Net importers

46

Don’t Hang Up

A Revolution in Communication

47

Global Smartphone Shipments

Sources: The Economist, IDC

2011 2012 2013 2014 20180

0.5

1

1.5

2

</= $99 $100-$199 $200-$299 $300-$399 $400-$499 >/=$500

estimate forecast

48

Showering

XXX

Car

Exercise

Movies

Coffee

Books

Alcohol

Chocolate

Newspapers

Fast Foods

0 10 20 30 40 50 60 70 80

9

17

22

44

47

49

52

58

68

70

77%

Mobile Internet Addiction

Sources: The Economist, BCG. Survey conducted in September 2014.

Query: What would Europeans be willing to give up for a week Before giving up their mobile internet access?

49

50

Investment Outlook

Where Are We Today

and Where Are We Headed

51

Optimism

Excitement

Euphoria

Thrill Anxiety

Denial

Fear

Desperation

Panic

Capitulation

Despondency

DepressionHope

Optimism

Relief

Point of maximum financial risk

Point of maximum financial opportunity

The Investing Cycle

US Eq Lg Cap US Eq S/mid Cap Int’l Developed Emerging Mkts Fixed Income

1995 37.6 33.5 11.2 -5.2 19.3

1996 23.0 17.2 6.1 6.0 2.9

1997 33.4 25.7 1.8 -11.6 9.8

1998 28.6 8.6 20.0 -25.3 9.5

1999 21.0 35.5 27.0 66.4 -2.1

2000 -9.1 -15.8 -14.2 -30.6 11.9

2001 -11.9 -9.3 -21.4 -2.4 8.5

2002 -22.1 -17.8 -15.9 -6.0 11.0

2003 28.7 43.9 38.6 56.3 4.7

2004 10.9 18.1 20.3 26.0 4.2

2005 4.9 10.0 13.5 34.5 2.4

2006 15.8 15.3 26.3 32.6 3.8

2007 5.5 5.4 11.2 39.8 7.2

2008 -37.0 -39.0 -43.4 -53.2 5.7

2009 26.5 37.4 31.8 79.0 4.5

2010 15.1 28.6 7.8 19.2 6.6

2011 2.1 -3.8 -12.1 -18.2 8.7

2012 16.0 17.9 17.3 18.2 4.8

2013 32.4 38.1 22.8 -2.6 -2.4

2014 13.7 7.6 -4.9 -2.2 6.0

Data: S&P 500, DJ U.S. Completion TSM, MSCI EAFE, MSCI EM, Barclays Capital Government/Credit52

53

Global Themes in 2015

• U.S. stocks fairly valued with selective opportunities in active management

• International hedged stocks could outperform U.S. stocks

• Currency management will continue to be important

• Commodity prices will remain volatile• Interest rates will diverge in U.S. and global

markets due to timing of quantitative easing

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It’s a Small, Small World 1939 - A Great Church Now Maintains a Great Pension ProgramThe Annual Report of the Board of Pensions of the Presbyterian Church in the United States of America 1939

2015 - Secure Benefits in Uncertain Times