1. Youre the one that I want Oo Oo Oo A L P H A

2. Special Sponsor Tattoos (available at break) 3. Other Tattoo Choices 4. Special Custom Tattoos QUANT R / E HEDGER 5. BPs Rap Sheet

Assets & Plans

Portfolio Structure

Organization Chart

Committee Role

6. Trust Assets & Plans

• U.S. ($, billions)

• Pension 5.4

• Savings Plan7.3

• Rabbi Trusts1.0

• VEBAs 0.2

• Total 13.9

• BP Total World

• Trust Assets ($, billions)32.0

• Countries 60

• Plans 360ish

7. Pension Portfolio (U.S.)

• ASSET MIX

• Domestic Equities55%

• Foreign Equities20%

• Fixed Income17% Alternatives8%

• Cash0%

• 100%

• STYLES

• Passive25%

• Enhanced26%

• Active49%

• 100%

• Payouts:$600mm/yr

• Liquid Strategies

• # of Managers16

• # of Strategies24

• % Portable Alpha20

• Alternative Strategies

• # of Partnerships100+

• # of GPs50+

8. Staff 13 employees 1 to 3 contractors 2 vendors (Custody) Senior InvestmentManagers (4) Senior OperationsManager (1) OperationsAnalysts (3) Administrative Assistant (1) InvestmentCommittee Organization U. S. Reps from: Finance H/R Tax Pensions Sr. Mgmt (7) InvestmentManagers (3) Group VPFinance VP Global Pensions Director, Trust Investments 9. Investment Committee Role

Acts as Companys investmentfiduciaryunder ERISA

Approves InvestmentPolicy

Approves investment managerhire/firedecisions

Approves Trust Investmentsdelegations

Reviews & monitorsasset mix, investment performance, and portfolio risk

10. Investment Committee Role

Blocks & sometimes Tackles

Personalize, Personalize, Personalize

Politicize Rational Economic Decisions

and of course,Monday Morning Quarterbacksevery little nit pickin decision in the whole wide world

(Historical Experience) 11. Pensions 101 A Refresher Course 12. Pension Economics

Plan design

Discount rates

Benefit payments

Issues

Risk management

Governance

Cash flows & capitalmkts

Short-term/long-term

Pension Cost Benefits Promised Investment Return Levers

Revise plan design

Legislation

Value added (risk &return)

Org. structure/ framework

Fixed income duration

13. Pension Cost Benefits Promised Investment Return (Liabilities) Pension Finance 14. Pension Cost Benefits Promised Investment Return Pension Finance (Done Right!) Asset Mix Risk Alpha 15. TheTraditionalSponsorModel 16.

Set Target Asset Mix & Ranges

SetTarget Risk Levels & Ranges

Set Time Frames

Fund: 10-20 Years

Sponsor Investment Issues

Trustees & Management:1 Quarter

Asset/Liability Studies

17.

Risk:Low, Diversify, etc.

Compliance:Stay in Bounds

Liquidity:Pay Benefits, Expenses

Costs:Low and Lower

Typical Investment Goals

Return:Inflation + Real + V/A

18.

Passive/Active

Focus on Asset Class Allocations

Policies and Guidelines

Benchmarks and Fees

Investment Program Design

Internal/External

Manager Searches

(Core/Niche, Style/Factor, U.S./International, etc.) 19. Equities Core Style Niche Intl Equities Core Regional Emerging Fixed Interest Core International High Yield Other Real Estate Venture Capital Hedge Funds Typical Investment Program 20.

Allocate Funds to Asset Classes

Typical Investment Process

For Managers that Fail:HitDelete ,

Call Consultant, Repeat Selection Process

Choose a Few Banks, Investment

Managers, or Insurance Companies

Pray for Value Added or 1st

Quartile Results 21. Appraisal - Typical Investment Model

Big pools of capital

Controlled by committees & trustees

Peer comparisons

Gross returns & Horseraces

Labels & sound - bytes help to simplify a specialty business

Diversified Accountability

22.

Relatively career safe framework

Numerous free lunches, tickets, golf,conferences, etc.

The Process seems to work

Widely practiced (the Norm)

Summary - Typical Investment Model 23.

Money

New Standards & Accountability

So Why Change Anything?

Hard to win in Traditional Structure

A New Bonus Program

Lots of Sophisticated Competitors

Difficult to Create an Edge

Risk Management a Default Process

24. New Bonus Team Meeting 25. Initial Bonus Discussion

Can we set the targets?

• • • • How much do I get?

When will it be paid?

and many other important questions

Shouldnt equity people get more thanbond people?

Is there a maximum?

26. Some Real Issues Also Surfaced 1.What was our teams purpose? 3.What value addedcouldwe provide? 2.What value addeddidwe provide? 4.What about risk? Started to look a lot like our process forreviewing a new manager? 27. Clarity Comes to the Pension Team 1.5% Value Added 2.0% Risk (residual) Incentive:An 8% bonus So now what do we do? Time: Rolling 3 year periods INFO RATIO0.75 Fund Goals: 28. WE WERE SHOCKED& APPALLED 29. RETURNShavealways been thename of thegame , NOT RISK ! 30. Since when did RISK Become so darn IMPORTANT ? 31. CASH BONDS EQUITY Risk Return Asset Class Frontier: Traditional Investment Model 32. CASH BONDS EQUITY Risk Return Equity Value Added CashV/A BondV/A Asset Class Value Added: Traditional Investment Model 33. CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A Asset Class Value Added: AssetClass Allocation Drives The Total Fund Alpha! Traditional Investment Model 34. Slowly We Begin to See the Light 35. Shake Up The Traditional Model CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A 36. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Shake Up The Traditional Model 37. CASH BONDS EQUITY Risk Return Equity Value Added Cash V/A Bond V/A Shake Up The Traditional Model 38. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model 39. V. A. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Shake Up The Traditional Model 40. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model 41. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake Up The Traditional Model 42. CASH BONDS EQUITY Risk Return Equity Value Added Bond V/A Cash V/A Shake UpTheTraditional Model 43. Birth ofThe AlphaPhilosophy 44. A Few Key Points

Its a process that offersnew ways

Its a process for financially

It doesnot eliminate Risk

It doesnot create Alpha

Its a very differentway of thinking

re-engineering returns(i.e., return streams) to manage risk 45. The Alpha Philosophy Begins With Return (or Return Expectations) for amanager or a portfolio TOTAL RETURN 46. Total Return Consists ofTwo Components --TheMarketandAlpha TOTAL RETURN MARKET RETURN ALPHA RETURN The Alpha Philosophy 47. Each Return Component Has A Unique Distribution ofOutcomes (most folks call thisRisk ) Residual Risk Market Risk(Beta) TOTAL RETURN MARKET RETURN ALPHA RETURN The Alpha Philosophy 48. The Components Can Also Be Separated (more about this later) TOTAL RETURN MARKET RETURN ALPHA RETURN ALPHA RETURN MARKET RETURN The Alpha Philosophy Resid Market (Beta) Surprise, Surprise 49. Market Return can be anIndex, Benchmark, Sector, or any security universe. TOTAL RETURN MARKET RETURN (INDEX) ALPHA RETURN ALPHA RETURN MARKET RETURN (INDEX) The Alpha Philosophy Resid Market (Beta) 50. Summary - The Alpha Philosophy

Return Streams Can BeDivided

These Streams can be madePortable

A Form of Investment LEGOs

Into Two Key Pieces

Investment Strategies Produce

Return Streams

Each Stream Has AUnique

Risk/Return Profile 51. Now EveryoneJoin Hands and Repeat:

And Again_ Its all about Alpha &Resid

Its all about Alpha &Resid

Try Again_ Its all about Alpha &Resid

52. Okay, Can I hear a Hallelujah & an Amen? Lets try that again uh1 uh2 uh3 Hal le lu jah & A men ARE YOU WITH ME? 53. Gee ThisAlpha Philosophycould Improve The Way WeBuild Portfolios ? ? ? ? 54. How Might ThisAlpha PhilosophyImprove The Way WeBuild Portfolios ? ? ? ? The New Bonus is in the Bag-come to me new bass boatcome to me. 55. Time Check:

• • • • We are now at about the same point as when a manager says please turn to page 53 in our presentation material

• • • • You of course know this means 20 to 30 more minutes and the pain will go away.

56. Converting thePhilosophy into Reality 57. This process is a little Tricky:

• • • • What we are trying to do is re-arrange a managers normal Total Return performance bydeleting the marketcomponent andadding a new streamto create asynthetic total returnamount.

• • • • I promise this wont hurt too much.

58. Philosophy into Reality Phase I TOTAL RETURN MARKET RETURN ALPHA RETURN Step 1:Review: Total Return Comprised ofa Market and an Alpha Component (S&P 500) 59. TOTAL RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Step 2:To start remix, we need to eliminatei.e., Sell Off the unwanted Market Return

• (Can be done by selling short securities orfutures or a swap)

Philosophy into Reality Phase I Note: These are theD- words (SHORT SALE) 60. TOTAL RETURN CASH RETURN ALPHA RETURN Step 3:Short Selling the Market cancels out (X) themarket portion of managers total return,producing a Cash Type Return. (Referred to as theShort Rebate ) MARKET RETURN MARKET RETURN Philosophy into Reality Phase ISHORT REBATE 61. Philosophy into Reality Phase ITOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN Result:Alpha immediately becomesPorted i.e., Transported to theCash Return number (such as LIBORor a T-Bill type return) PORTING ALPHA RETURN 62. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING ALPHA RETURN 63. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING 64. Philosophy into Reality Phase ITOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING 65. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN MARKET RETURN ALPHA RETURN Result:Alpha is Ported to Cash PORTING 66. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING 67. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING 68. Philosophy into Reality Phase I TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to Cash PORTING 69. TOTAL RETURN CASH RETURN CASH RETURN MARKET RETURN ALPHA RETURN MARKET RETURN Result:Alpha is Ported to a Cash Return Bottom Line: We just created a Synthetic Cash Plus Strategy Philosophy into Reality Phase I 70. Phase I Alpha Porting NOTE :Process is Country (Region) SpecificMay Differ in Logistics, Rules, Process.

Establishes the base Structure-. needed to Develop customized. Asset Class Strategies

ProducesSynthetic Cashor an

Absolute ReturnStrategy 71. Time Perspective:

• • • • Using golf as the analogy, were about at the 15 thhole.

• • • • Using baseball as the analogy, were around the 7 th inning.

• • • • Using work as the analogy, were near that point in the afternoon when you just need a couple minutes shuteye.

72. CreatingCustomizedStrategies (This is the good part!) Phase II 73. ALPHA RETURN CASH RETURN Step 1:We Start With the Philosophy to Reality - Phase II Synthetic Cash Strategy from Phase I 74. FUTURES (SWAP) RETURN ALPHA RETURN CASH RETURN + Step 2:To Reintroduce Desired Market Returni.e., Exposure we buy futures or (use aswap) The D-words again Philosophy to Reality - Phase II 75. + ALPHA RETURN CASH RETURN ALPHA RETURN CASH RETURN Result #1:Lots of colorful boxes FUTURES (SWAP) RETURN FUTURES (SWAP) RETURN Philosophy to Reality - Phase II 76. + NEW MARKET RETURN ALPHA RETURN ALPHA RETURN CASH RETURN ALPHA RETURN CASH RETURN Result #2:We have Created aNewSynthetic Market Return (or Asset Class)Keepingour Original Alpha FUTURES (SWAP) RETURN FUTURES (SWAP) RETURN Philosophy to Reality - Phase II 77.

Alpha Can BePorted to Almost

Porting Alpha ProducesSynthetic

Active Strategies Any Asset Class (i.e. Return Stream) AND..... Summary Phase II Customized Alpha Porting

Porting Alpha MakesAsset Class

A Second Tier Decision 78.

OffersManagersAn Alternative

Way toBuild New Specialty Products Summary Phase II Alpha Porting

OffersAlternative Processto

Achieve Aggregate Fund Alpha and Resid Goals 79. Investment Managers Hiring Criteria

Location, Location, Location (e.g. Bermuda, Scotland, Hawaii, Pebble Beach)

Access to Theatre Tickets, Concerts, etc.

Frequently praising our intellect and youthful looks.

Access toselectedcourses (and knowing which ones they are).

Great client conferences

10 years of simulated data (if more than 6 factormodel, 20 years)

Subscribes to the Money Market Directory & can spell ERISA.

Calls weekly to see if there has been a change in manager line up

And finally, showing appropriate interest in every piece of crap (including jokes) we choose to discuss.

80.

Use traditional processes (interviews, site visits, etc.) same as most other folks

Focus on Alpha Drivers.Portability and Risk (not like other folks)

Fundamental soundness and consistency of investment process

Issues that are Not Critical:

• Assets under management, longevity, etc

• Specialist vs. multi-product firms

• 5 Years of Performance Data

• Peer group rankings

Finding a Good Manager 81.

Difficulty is knowing one when you have one

Not allowing Horse Race mentality (note: we are benchmark nerds)

Monitor performance, positions, and risk posture daily

Pulling the trigger is often the single most difficult decision

• Is the process broken ?

• Has the anomaly run its course ?

• Have personnel or ownership changes impacted the process ?

• Has the manager grown too fast ?

Keeping a Good Manager 82.

I am never wrong, I am sometimes a little early and sometimes a little late, but I am never wrong

The models not broken, the market is perverse

The team is working extra hard to bring things back to normal, we think only minor changes are required

I just dont get it, everything seems to be working just fine, the alpha just isnt there right now..

. Would you like the red or the white with dinner ?

And of course

This is unprecedented, it has to get back to normal

Best Excuses for Poor Performance 83. Sales People

Our view

• The Good

• The Bad, and

• The Ugly

Do some homework (Please!)

Know the time zones

Planes do not always land on time

Having a meeting does not mean you got the account

84. Sales People

Know the client before entering the building

Dont push product, push solutions

Dont become a nuisance (3 phone calls per year is max)

Knowledge of Investment Process is key, otherwise bring technical support

Do not attempt to cover each page of the marketing brochure.

Ifimportant, at least make it interesting (use color, large print, etc).

Just stopping by should be no more than 30 minutes.

85. Client Relations

BPs Perfect Client Book (or Sales Book forthat Matter)

• Cover (Preferably with correct company name, there may have been a merger or two)

• Page 1 :THIS PAGE LEFT INTENTIONALLY BLANK

• Appendix:This concludes our formal remarks, any questions ?

• Back Cover (Nothing too fancy)

86. And Now Our Special Alpha Finale! 87. 88.