New recipes for investment success

21 May 2009

FOR PROFESSIONAL INVESTORS ONLY

Emma Douglas &Mark Johnson

2

The knives are out for pensions…

3

Try changing the ingredients

1. Your DC default option…

2. The governance of your DB scheme…

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What’s wrong with Lifestyle?

•Members hate seeing their investments fall in value

•Members don’t understand benchmarks

•Members retire earlier than they expected—In some schemes 80% retire early

•Members think managers are making tactical asset allocation decisions

I’m alright, I’m in

Lifestyle

5

Diversified Growth Strategies

•Has a return target

•Cash + 3-4% or RPI + 5%

•Multi-asset portfolio

• Invests in equities, bonds and cash

•Also property, high yield bonds, commodities, hedge funds, private equity etc

•Capital preservation bias

•No guarantee

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From a member’s perspective

Medium-low risk•Aiming for long term capital growth

•Expected to outpace inflation

•Less volatile than traditional funds

•Capture most market upside in rising markets BUT

•Capital preservation ethos helps to limit downside

•Money is being managed by experts

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Does it work?

GBP Composite data - 31 December 2003 to 31 March 2009

Source: BlackRock

Annualised Average Return (%)

Annualised Absolute Volatility (%)

FTSE All Share 1.5% 13.4%

BlackRock Target Return 5.3% 6.3%

Best Monthly Return (%)

Worst Monthly Return (%)

# of Negative Months

FTSE All Share 6.3% -13.2% 25/63

BlackRock Target Return 3.3% -6.4% 19/63

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Can we communicate?

‘Snorkelling not scuba diving’

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% Weight in Fund

 Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Jul-08

Aug-08

Sep-08

UK Equities25.1

%35.2

%13.2

%11.5

%15.2

%20.3

%15.1

%20.1

%11.8

% 9.5% 9.0%15.7

%12.1

%12.1

%14.9

%

Overseas Equities 2.2% 5.6% 0.9% 6.0% 9.5%12.0

% 8.3%10.8

% 7.5% 4.3% 4.0% 8.6% 0.6% 0.2% 1.6%

Emerging Market Equities 3.7% 8.2% 0.0% 0.0% 0.3% 2.3% 2.7% 1.9% 3.2% 5.0% 5.8% 3.0% 2.7% 2.7% 2.5%

Sector Equities 0.0% 0.0% 2.0% 1.6% 1.1% 2.2% 4.0% 5.4% 8.2% 6.7% 5.6% 5.2% 5.1% 4.7% 2.3%

Natural Resources 0.0% 0.4% 1.0% 0.4% 2.7% 0.5% 0.7% 0.2% 3.3% 2.4% 3.3% 1.7% 3.0% 3.7% 3.7%

Infrastructure 0.3% 0.3% 2.9% 2.3% 2.1% 1.0% 5.6% 8.3% 6.5% 6.0% 5.1% 4.3% 4.0% 4.0% 0.3%

Hedge Funds 0.0% 0.0% 0.0% 4.0% 5.7% 7.7%10.0

%10.7

% 8.5%10.8

%10.3

%10.4

%10.0

% 9.1% 9.1%

Global Currency 0.0% 0.0% 0.0% 4.1% 3.5% 1.2% 1.4% 1.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Property 0.3% 0.4% 0.0% 2.6% 5.7% 5.6% 7.2% 6.3% 5.2% 4.6% 3.5% 3.1% 2.0% 2.1% 2.1%

Diversified Commodities 0.0% 0.0% 0.0% 0.5% 1.0% 2.0% 2.0% 1.2% 0.8% 2.5% 3.7% 2.9% 3.5% 3.0% 2.9%

Derivative Strategies 0.0% 0.0% 0.0% 0.0% 2.3% 0.7% 1.1% 0.9% 3.0% 3.1% 4.7% 4.1% 4.0% 4.4% 5.5%

Private Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5% 1.3% 1.3% 1.0% 1.2% 1.3%

Fixed Interest & Short Duration Cash

64.4%

25.5%

15.4%

11.6%

27.2% 9.9%

11.3%

13.6% 5.9% 5.3% 6.2% 6.2% 5.0% 5.6% 8.6%

Cash 4.0%24.4

%64.5

%55.3

%23.6

%34.7

%30.6

%19.3

%36.0

%38.3

%37.5

%33.5

%47.0

%47.2

%45.2

%

                               

Total Portfolio100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%100.0

%

Not this!

Source: BlackRock. *Positions taken from the BIJF Target Return Fund, a representative account. Launch date of BIJF TR Fund June 30 2005.

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DC Target Return Fund December 2007

Looks fine in a pie chart!

DC Target Return Fund March 2009

Property, 3.0%

Overseas Equities, 3.0%

Hedge Funds, 6.0%Short DurationFixed Income

Portfolio,28.0%

Cash &Derivatives

Cover28.0%

Emerging Market Equities, 9.0%

Sector Equities, 3.0%

UK Equities11.0%

Infrastructure, 7.0%

Private Equity, 2.0%

UK Equities15.5%

Natural Resources, 2.2%

Diversified Commodities, 3.5%

Derivative Strategies, 2.9%

Overseas Equities, 4.2%

Hedge Funds, 5.5%

Private Equity Funds, 1.2%Infrastructure, 0.2%

Credit &Convertibles

22.1%

GovernmentBonds8.1%

Cash &Derivatives

Cover20.9%

Emerging Markets, 4.3%

Short Duration Fixed Income Portfolio, 9.4%

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What challenges are DB clients facing?

Anything but a quiet life!

The DayJob

DB PlanClosings

AccountingChanges

‘Perfect Storm’ inMarkets

ActuarialChanges

VolatileFundingLevels

IncreasedComplexity

RegulatoryChanges

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Where Has Effort Been Invested?

Typical Trusteetime spent

Mismatch between value and time spent

Selection of Managers

Manager Structure

Dynamic Asset Allocation

Strategic Asset Allocation

Contributionto overall success

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What is Fiduciary Management?

Fiduciary Management involves (partial) outsourcing of the day to day management of the Pensions Scheme to a Fiduciary Manager• The Fiduciary Manager is responsible for a number of key

functions traditionally undertaken by client

• The key benefit for clients is that one single party is accountable for the design, implementation and oversight of the plan’s investment activities

• Partnership approach allows the sponsor and the pension fund to focus on high-level strategic objectives

Success requires a close partnership between the Sponsor/Pension Fund, their Advisors and the Fiduciary

Manager

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Why Fiduciary Management?

Pension Fund Trustees and Sponsors are faced with• Greater emphasis on risk management - requires a higher

level of diversification and data• Increased complexity of financial products, creation of new

asset classes• Increased regulatory requirements and introduction of

international accounting standards• Increased complexity of Governance and Compliance rules• Cross over between strategy and tactics driven by market

volatility, shorter timeframes and more diverse allocations

‘In –Sourcing’ to get the benefits of an in house manager but without the limitations

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Examples of Fiduciary Management

Full

• Board of Trustees responsible for setting strategic objectives and monitoring

• BlackRock responsible for strategic advice, dynamic asset allocation, portfolio structure, manager selection

Partial

• Members wished to outsource the management of their alternatives portfolio

• BlackRock responsible for the selection, implementation and risk monitoring across hedge funds, private equity, property, infrastructure and commodities

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Fiduciary Management Illustration

Client

Fiduciary Manager

Custodian Risk

Management

Asset Allocation

Portfolio Implement-

ation

Performance Monitoring

Fiduciary Managed

Actuary/

Consultant

Portfolio Manager(s)

Custodian Performance Measurement

Risk Management

Traditionally Managed

Process should capture all interdependencies to meet aclient’s objectives

Actuary/

Consultant

Client

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Tracking Pension Scheme Funding Level Development

Coverage ratio 2007 - 2008 weekly and monthly

1.15

1.20

1.25

1.30

1.35

1.40

1.45

01/ 10/ 2007 31/ 12/ 2007 31/ 03/ 2008 30/ 06/ 2008 29/ 09/ 2008

Weekly

MonthlySource: BlackRock.

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A Client’s Perspective of a Fiduciary Relationship

Source: BlackRock

Tactical investmentsMonitor and select fiduciary

Investment performanceAsset allocation policyBenefits Consultancy

Benchmark selection

Funding

Set risk budget

Valuation assumptions

Implement asset allocationManage all suppliers

Comprehensive reporting - risk and performance

Scheme administration

Guidance on strategyHedging strategy

Manager monitoring and de-selectionBenefits policy, payment structure

Manager selection/ termsCashflow management

Portfolio constructionCovenant managementMonitor Fiduciary

Investment strategy (Investment Input)

Investment strategy Investment Strategy (Liability Perspective)

Risk modelling and managementScheme GovernanceActuarial

Fiduciary ManagerTrusteesConsultant

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Bringing it All Together

Discuss SchemeInvestment

Objectives & ALM Study StrategicAdvice

Risk &Performance

Analysis

ClientService &Reporting

YourPensionScheme

Portfolio

Construction &Implementation

Long TermInvestment

Strategy

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So if you want a healthier pension scheme …

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… maybe there is a simpler ingredient

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Any questions?

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The following notes should be read in conjunction with the attached document:

1. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Services Authority. Registered office: 33 King William Street, London, EC4R 9AS. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

2. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

3. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

4. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

5. Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document.

6. Unless otherwise specified, all information contained in this document is current as at May 2009.

THIS MATERIAL IS FOR DISTRIBUTION TO PROFESSIONAL CLIENTS AND SHOULD NOT BE RELIED UPON BY ANY OTHER PERSONS.