Real Assets for the Future

SACRSState Association of County

Retirement Systems

5/14/2009

2

NATURAL RESOURCESCOMMODITY SUPER-CYCLESCommodity super-cycles

Source: DSPBlackrock

There have been 6 commodity super-cycles in the past 250 years

3

NATURAL RESOURCESRETURNS ADJUSTED FOR INFLATION (2/31/92 – 12/31/08)

Long-only natural resource strategies

Commodities, when adjusted for inflation, tend to revert to the mean in the short-term

Past performance is not a guide to future performance. Assumes no contributions or withdrawals and reinvestment of dividends / capital gains. See disclaimer page for further explanation.

4

NATURAL RESOURCES MARKET PERSPECTIVE

0

100

200

300

400

500

600

700

800

900

Dec

-69

Mar

-70

Jun-

70S

ep-7

0D

ec-7

0M

ar-7

1Ju

n-71

Sep

-71

Dec

-71

Mar

-72

Jun-

72S

ep-7

2D

ec-7

2M

ar-7

3Ju

n-73

Sep

-73

Dec

-73

Mar

-74

Jun-

74S

ep-7

4D

ec-7

4M

ar-7

5Ju

n-75

Sep

-75

Dec

-75

Mar

-76

Jun-

76S

ep-7

6D

ec-7

6M

ar-7

7Ju

n-77

Sep

-77

Dec

-77

Mar

-78

Jun-

78S

ep-7

8D

ec-7

8M

ar-7

9Ju

n-79

Sep

-79

Dec

-79

Mar

-80

Jun-

80S

ep-8

0D

ec-8

0

Inde

x

Goldman Sachs Commodity Index performance (1970 – 1980)1

-37% decline from Dec-1974 to

Jul-1977.

+153% gain from Aug-1977 to

Oct-1980.

1. Source: Bloomberg 2. Hedge funds are speculative and involve risk. See disclaimer page for further explanation..

5

NATURAL RESOURCESINFLATION HEDGEEnergy stocks can offer a potentially strong hedge against inflation, performing 18% in top quintile inflation over 20 years

Top Quintile Inflation

Source: MIG 2009 Annual Asset Study Past performance is not a guide to future performance. 1. Energy Sector of the S&P 500

6

NATURAL RESOURCESINFLATION HEDGEEnergy stocks narrowly underperforms equities in bottom quintile inflation

Bottom Quintile Inflation

Source: MIG 2009 Annual Asset Study Past performance is not a guide to future performance. 1. Energy Sector of the S&P 500

1

7

NATURAL RESOURCESRETURN ON $100,000 (1/31/05 – 3/31/09)

Active vs. Passive Natural Resource Strategies

Past performance is not a guide to future performance. Assumes no contributions or withdrawals and reinvestment of dividends / capital gains. See disclaimer page for further explanation.

8

HEDGE FUNDSRISK VS. RETURN (1/31/05 – 3/31/09)

AN

NU

AL

RE

TU

RN

RISK (Standard Deviation) BETA

AL

PH

A

HFRX current month and prior three month values are left as estimates and are subject to change. Source: HFRI Fund Weighted Composite (Hedge Fund Research). Hedge funds are speculative and involve risk. Assumes no contributions or withdrawals, reinvestment of dividends / capital gains. See disclaimer page for further explanation.

9

EXPANDED INVESTMENT UNIVERSE CREATES OPPORTUNITIES

Investments in a passive commodity index are typically limited to the front month contract.

Broader market provides opportunity for directional and relative value investors

Natural Resources hedge funds can invest with managers who utilize deferred contracts and several delivery locations providing a much wider investment universe and opportunity set.

Graphs show investment opportunities at front month and deferred contracts that are available to both investor types.

10As of March 31, 2009

– Despite the recent high volatility in commodity prices, correlation between commodity markets tends to be low. This allows for greater investment and trading opportunities.

– The correlation matrix below shows the 3-year correlation between select individual commodities on a monthly basis.

NATURAL RESOURCES PORTFOLIO BENEFITS

Source : Internal

  Wheat Sugar Corn Crude Oil Gold Natural Gas Soybean Cotton Copper

Wheat 1.00                

Sugar -0.27 1.00              

Corn 0.71 -0.16 1.00            

Crude Oil 0.67 -0.01 0.74 1.00          

Gold 0.68 0.09 0.73 0.42 1.00        

Natural Gas 0.48 -0.12 0.72 0.81 0.26 1.00      

Soybean 0.86 -0.10 0.92 0.76 0.84 0.60 1.00    

Cotton 0.83 -0.11 0.71 0.84 0.46 0.67 0.78 1.00  

Copper 0.29 -0.06 0.18 0.66 -0.23 0.61 0.16 0.62 1.00

11

COMMODITY MARKETS IN 2009

Energy

Crude oil has been extremely volatile so far in 2009, trading between the high 50’s and low 30’s throughout thequarter. The energy bulls view this as a long-term buying opportunity based on 4 views:

Declining non-OPEC production Reduced capital expenditures from Exploration & Production companies on a worldwide basis Significant decline rates at existing OPEC oil fields A great inflation hedge as central banks around the world print money

Natural gas has extremely weak fundamentals, with bearish supply data and weak industrial demand on a globalbasis

Precious Metals

Gold continues to be a favorable theme amongst several managers, via both gold bullion and gold equities. Themetal is perceived as a safe haven as investment demand nears an all time high and central banks continue to

printmoney.

Base Metals

Given the divergence in prices in these commodities, managers are actively playing this field on a metal by metalbasis.

Agricultural Commodities

Like base metals, managers have been commodity specific when it comes to agricultural commodities, as manyhave differing supply/demand fundamentals.

12

DISCLAIMER

An investor cannot invest directly in an index. Index performance does not reflect fees and expenses of investing. Past performance is not a guide to future performance. Hedge Funds are speculative and involve risks, which may include (without limitation) those related to the use of leverage, options, derivative instruments, distressed securities, futures, illiquid investments and short sales, timing of initial investment and asset diversification. Multi-manager funds are dependent not only on the investment performance of individual managers but also on the ability to effectively allocate the fund's assets. Investors may not receive the full amount invested upon redemption. Exchange rate fluctuations may affect Fund returns. There is no assurance that the Fund’s objective will be attained. This material is not an offer or solicitation to subscribe for shares in any Fund, and does not constitute investment advice. Sales of shares in a Fund are made on the basis of the offering circular only and cannot be offered in any jurisdiction in which such offer is not authorized. Investment in the Permal Fund may not be suitable for all investors and prospective investors should consult their professional advisers as to suitability, legal, tax and economic consequences of an investment in the Fund.

Hedge Fund Research, Inc. (HFR) is a research firm specializing in the collection, aggregation, and analysis of alternative investment information. The estimates contained in HFR Quarterly Industry Reports are based upon the HFR Database, which tracks the hedge fund industry (including fund of hedge funds). The HFR Database currently consists of information on over 6,800 funds and fund-of-funds Information on their hedge fund universe of established and emerging managers is collected directly from the fund managers and/or their respective offshore administrators. HFR has monitored and tracked performance and administrative data internally on over 11,000 domestic and international funds. www.hfr.com.

HFRI Indices are equally weighted performance indexes, utilized by numerous hedge fund managers as a benchmark for their own hedge funds. The HFRI are broken down into 37 different categories by strategy, including the HFRI Fund Weighted Composite, which accounts for over 2000 funds listed on the internal HFR Database. Funds included in the HFRI Monthly Indices must: report monthly returns, report net of all fees returns, report assets in USD, have at least $50 Million under management or have been actively trading for at least twelve (12) months. HFRI was launched in January 1990 and is updated three times a month.

HFRX Indices currently consist of eight single strategy indices and an asset-weighted Global Hedge Fund Index. In addition to meeting HFRI criteria, fund must be open to new transparent investment and meet track record and minimum asset size. Most HFRX Indices are priced daily. The inception date of the HFRX is 04/01/2003. Index values and returns provided prior to the inception dates were calculated by means of retroactive application of the index model.

Investor/Altvest Database - An extensive hedge fund on-line database of more than 2,700 hedge funds and hedge products with integrated analytical and reporting tools.

April 30, 2009 [LMIS-P100-LNR.E-0409]