SEATTLE | 206.622.3700 LOS ANGELES | 310.297.1777 www.wurts.com

NCTR

October 2012

What would be the annualized return if on the 10th year the portfolio experiences a -30% return?

Compound Return 10 Years at 10% return produces an annualized return of 10%

P R O B L E M : L A R G E D R A W D O W N S

The Importance of Limiting Drawdowns 9 years at 10% return plus a one year return of -30% produces an annualized return of 5.14%

2

P R O B L E M : A S S E T A L L O C A T I O N

Buy and Hold

Mean-Variance Optimization

Black-Litterman Model

Endowment Model

Risk Parity

Programmatic Tail Risk Hedging

Risk Allocation Strategy

3

Government Bonds Corporate Bonds Equities TIPS Commodities Real Estate & Infrastructure Absolute Return & Other

O P T I M A L D O L L A R A L L O C A T I O N ?

Average Public Fund

Bridgewater GMO AQR

PIMCO Goldman Sachs

4

Government Bonds Corporate Bonds Equities TIPS Commodities Real Estate & Infrastructure Absolute Return & Other

Average Public Fund Goldman Sachs PIMCO

Bridgewater AQR GMO

O P T I M A L R I S K A L L O C A T I O N ?

5

I N V E S T M E N T P R I N C I P L E S

Principles

Valuation

Risk

Diversification

6

R I S K & R E T U R N D R I V E R S

Alpha Hard to find, but worth the effort

Sophisticated Beta “Hedge Fund” beta

Private Beta Obtain risk exposures through private assets

Public Beta Liquid access to primary, secondary and tertiary risk factors

Alpha

Sophisticated Beta

Private Beta

Public Beta

7

A S S E T S C O N T A I N M U L T I P L E R I S K F A C T O R S

8

Corporate Bond Interest Rate

Credit Spread

Volatility

Currency

Inflation

Bonds for Safety? NOTE: Not all Bonds are created equal!

I M P L E M E N T A T I O N

9

‘Liquid’ Beta & Alpha

Illiquid Beta & Alpha

Liquid Beta & Alpha

Hedge Funds & Real Return Managers

Rates

Real Estate Infrastructure

Timber Agriculture

Energy

Private Equity

Distressed

Debt

Bank Loans

Mezzanine Debt

Credit Equity Inflation Currency

Rates

Domestic

International

Emerging Markets

Curve

Duration

Liquidity

Country

Credit

Investment Grade

High Yield

Emerging Markets

Private

Curve

Duration

Liquidity

Country

Sector

Equity

Domestic

International

Emerging Markets

Private

Country

Value

Momentum

Sector

Size

Inflation

TIPS

Commodities

Private

Country

Curve

Duration

Liquidity

Currency

Developed

Emerging Market

Country

Carry

Primary Risk Factors

Secondary Risk Factors

Tertiary Risk Factors

R I S K F A C T O R B U I L D I N G B L O C K S

10

D I V E R S I F I C A T I O N : R I S K F A C T O R S

11

88%

38%

-20%

0%

20%

40%

60%

80%

100%

120%

60 / 40 Wurts Portfolio

Equity Rates Credit Currency Inflation

Diversified Risk Portfolio

R I S K D A S H B O A R D L E V E L I

12

Risk Allocation Allocations by risk buckets and asset class analysis

Risk Diversification Diversification: risk factors, geographic, economic sensitivity, and ex ante returns

Active Risk Budgeting Who and where are the active risks

Primary Risk Factor Analysis Attributes of Rates, Credit, Equity, Inflation and Currency risk buckets

Performance Review Did the portfolio meet the objectives?

Performance Attribution Positive and negative contributions to absolute and relative returns

“Although risk measurement is difficult, risk is ignored at one’s peril, as many investors discovered in 2008 and 2009.”

-World Economic Forum; Measurement, Governance and Long-term Investing, 2012

Not a System!

Risk is NOT just the standard deviation of returns!

Risk is first and foremost the risk of losing principal. At what point is the drawdown too deep?

Risk is failing to meet the demands of the organization.

Risk is an unexpected negative event.

W H A T I S R I S K M A N A G E M E N T ?

13

Culture

Alignment of Risk &

Objectives

Defining Boundaries

Communication Tool

Seizing Opportunities

Deployment of Capital

Risk Response

-40% -30% -20% -10% 0% 10% 20% 30%

1972 - 1974 Oil Crisis (Dec. to Sep.)

1987 Market Crash (Oct. 14 to Oct. 19)

1989 - 1990 Nikkei Stock Price Correction

1992 - 1993 European Currency Crisis

1994 US Rate Hike

1997 - 1999 Oil Price Decline

2007 - 2008 Oil Price Rise

2001 Dot-com Slowdown

2007-2009 Subprime Mortgage Meltdown

2009-2010 July - January

60 / 40 Wurts Portfolio

T A I L R I S K

14

Tail-Risk Management

Diversified Risk Portfolio

Objectives Investment Beliefs

Risk Tolerance Spending Plan Strategic Asset Allocation

Executive Team Compensation Plan Communication Protocol

Staffing Managers Management

E L E M E N T S O F G O V E R N A N C E

BOARD

15

Mission & Philosophy

Risk Allocation

Structure

Implementation STAFF