1309813_3

Think Function, Not Form

Wendy M. Cromwell, CFA, Director of Strategic Asset Allocation

Wellington Management Company, LLP

®

The Challenge

Agenda

Balancing Risk Exposures – Helpful Tools

Case Study

2309813_3

Challenges with Traditional Asset Allocation

Rolling 12-Month Return in CAD, January 1974 – February 2012 (%)

Correlation = 0.95Correlation 0.95

*66.7% MSCI World/33.3% MSCI Canada**1980 – 2012 50% DEX Core Bond/50% DEX Long Bond, 1973 – 1979 DEX Long Bond Sources: MSCI, DEX, Wellington Management

Challenges with Traditional Asset Allocation

Percent Over-reliant on equities

Equities driven by one type of economic environment

Actual results may differ significantly from projections

3309813_3

GlobalEconomic Environments Over Time

Global GDP and Inflation, Y/Y % Change with Market Environment Time Periods

Data: 1972 – 2011Sources: Datastream, Wellington Management

CanadaEconomic Environments Over Time

Canada GDP and Inflation, Y/Y % Chg with Market Environment Time Periods

Data: 1972 – 2011Sources: Datastream, Wellington Management

4309813_3

Most investors define investment policy by asset class allocations

Think Function, Not Form

Correlation between asset class allocations and future five-year returns have been negative

Defining policy by function of allocation may help investors to avoid ill-timed policy changes

Think Function, Not Form

Relative Performance by Economic Environment

Ri iGlobal equities

Corporate spreadsPrivate equity

EMD

Global bonds

Canadian equitiesInflation-sensitive

equitiesCommodities

Inflation-linked

Rising

Growth Absolute Return/Active Risk

Real estate

Global bondsCanadian bonds

bondsGold/precious metals

Falling

RisingFalling Inflation

5309813_3

Think Function, Not FormAsset Class Performance by Global Market Environment

Average Monthly Real Returns in CAD, 1973 – February 2012

Non Precious PreciousNon-Precious PreciousMSCI World Metals Metals Canadian MSCI

Environments1 World Bonds2 Commodities3 Commodities Bonds4 Canada

Growth 4.0% 1.6% 1.6% 0.1% 2.2% 3.1%

Weak Growth -2.5 1.1 -3.8 -2.2 1.1 -4.8

Inflation 1.0 0.6 1.8 1.9 1.3 3.4

1See Economic Environments Over Time slide for details2Citigroup World Govt Bond Hedged CAD 1985 – 2012, Barclays Capital US Intm Government Hedged CAD 1973 – 19843Equal-weighted average of GSCI Agriculture, Industrial Metals, and Energy Total Return 1983 – 2012; GSCI Total Return 1973 – 1982450% DEX Universe Bond /50% DEX Long Bond 1980 – 2012; DEX Long Bond 1973 – 1979Sources: MSCI, Citigroup, Barclays Capital, Goldman Sachs, DEX, Datastream, Wellington Management

Stagflation -1.4 0.4 4.3 4.9 -0.2 0.4

Where Are We Now?

Economic Environment of Various Markets

Ri iRising

Growth

US

AustraliaIndia

Falling

Falling RisingInflation

CanadaChina

IndiaEurope

6309813_3

The Challenge

Agenda

Balancing Risk Exposures – Helpful Tools

Case Study

“Think Function, Not Form” framework

Balancing Risk ExposuresHelpful Tools

Risk parity

Opportunistic niche betas

Active risk and absolute return

7309813_3

Risk ParityPursuit of Balance

GSCINon- GSCI Barclays

Citigroup Precious Precious CapitalCitigroup Precious Precious CapitalMSCI MSCI Canadian WGBI Metal Metal GILBWorld Canada Bonds* Hedged Commodities Commodities Hedged

Volatility 13.2% 17.1% 5.0% 2.9% 15.4% 16.4% 4.8%

Balanced FundWeights 40.0% 20.0% 40.0% 0.0% 0.0% 0.0% 0.0%Contribution to Risk 58.3 35.3 6.4% 0.0 0.0 0.0 0.0

Risk Parity FundyWeights 35.0% 0.0% 0.0% 149.0% 24.0% 16.0% 34.0%Contribution to Risk 25.3 0.0 0.0 24.5 24.9 13.0 12.4

*50% DEX Universe Bond /50% DEX Long BondData: 1998 – February 2012

Risk ParityPursuit of Balance

Annualized Standard Deviation, 1998 – February 2012 (%)

See previous slide for underlying asset mixes

8309813_3

Risk ParityPursuit of Balance

12-Month Return Difference, December 1998 – February 2012 (%)Risk Parity Outperforms

Balanced Fund Outperforms

Risk Parity Balanced Difference

Return 5.6% 5.5% 0.1%Risk* 3.3 8.4 -5.1Sharpe Ratio 0.6 0.2 0.4Correlation 0.6

*Standard deviationSee previous slide for underlying asset mixes

The Challenge

Agenda

Balancing Risk Exposures – Helpful Tools

Case Study

9309813_3

Using the Full Tool KitMore Balanced Risk Exposures

Rising

Traditional 60/40 MixFull Tool Kit

70%

13%

14%

3%

Rising

Falling

Growth

Rising

Falling

Growth

49%

16%

15%

7%13%

See Using the Full Tool Kit – Better Risk-Adjusted Returns slide for details

RisingFalling InflationRisingFalling Inflation

Impact of Adding 25% Risk Parity

% Allocation Contribution to Risk

60%

16%

14%

4%6%

Rising

Falling

Growth

*15% Canadian equity, 30% global equityTotals may not add up due to rounding

RisingFalling Inflation

10309813_3

Second Step…Add Niche Opportunistic Investments

Examples: Opportunistic Equity and Opportunistic Fixed Income

Example of Themes Emphasized

Selected European exposureFinancialsEnduring assets

Opportunistic Equity Opportunistic Fixed Income

Selected European exposureFinancialsEnduring assets

EMD (nominals, ILBs, and corporates)High yield/bank loansSelected European exposureg

Shale gasGlobal agriculture

Tactical market exposures Tactical market exposures

Enduring assetsShale gasGlobal agriculture

p p

Second Step…Add 12.5% Niche Opportunistic Investments

% Allocation Contribution to Risk

Rising

Falling

Growth

RisingFalling Inflation

59%

16%

14%

4%7%

Niche Investments: 60% equity/40% fixed income*14.0% Canadian, 22.5% global equityTotals may not add up due to rounding

RisingFalling Inflation

11309813_3

Third Step…Add Explicit Global Inflation Hedges

Allocation

25% I fl ti iti itiRi i

Growth

Falling

RisingFalling Inflation

25% Inflation-sensitive equities25 Diversified commodities25 Precious metals commodities20 Global inflation-linked bonds

5 EM inflation-linked bonds

100%

Rising

RisingFalling Inflation 100%

Impact of Adding 10% Explicit Global Inflation Hedges

12 5

% Allocation Contribution to Risk

55%

16%

15%

6%8%

12.5Rising

Falling

Growth

RisingFalling Inflation

Niche Investments: 60% equity/40% fixed income*6.5% Canadian equity, 22.5% global equityTotals may not add up due to rounding

RisingFalling Inflation

12309813_3

Final Step…Add 10% Absolute Return

% Allocation Contribution to Risk

49%

16%

15%

7%13%

12.5 Rising

Falling

Growth

Niche Investments: 60% equity/40% fixed income*5.0% Canadian equity, 17.5% global equity Totals may not add up due to rounding

RisingFalling Inflation

Active RiskMarket Environments Provide Different Opportunities

High

HighLow Pairwise Stock Correlations

High

StockReturn

Dispersion

Theoretical best forpure stock picking

Calm - usually good

Crises

Best for macro;

Low

for stock picking worst for stock picking

13309813_3

Active Risk – Where Are We Now?Stock Correlations Down From Recent Highs

Average Pairwise Correlation, MSCI World, Trailing 13 WeeksWith Mean and ±1 Standard Deviation Bands, 1988 – March 2012

+1 St Dev

MeanMean

-1 St Dev

Data through 10 March 2012Sources: MSCI, Wellington Management

Using the Full Tool KitMore Balanced Risk Exposures

Traditional 60/40 MixFull Tool Kit

Rising

70%

13%

14%

3%

Rising

Falling

Growth

Rising

Falling

Growth

49%

16%

15%

7%13%

See Using the Full Tool Kit – Better Risk-Adjusted Returns slide for details

RisingFalling InflationRisingFalling Inflation

14309813_3

Traditional 60/40 Full Tool Kit

Absolute return – 10.0%

Using the Full Tool KitBetter Risk-Adjusted Returns

Niche investments – 12.5Inflation hedges – 10.0Risk parity – 25.0Traditional bonds1 40% 20.0Traditional equity 602 22.53

100% 100.0%

Projected net return 6.3% 7.4%Projected net return 6.3% 7.4%Projected risk 10.0% 8.9%Return/risk 0.63 0.84% return from beta 92% 73%% return from alpha 8 27150% Canadian long bonds/50% Canadian core bonds2 20% Canadian equity, 40% global equity317.5% global equity, 5.0% Canadian equityBased on Wellington Management 5-year capital market expectations. Actual results may differ significantly from projections.

Think Function, Not FormMore Balanced Risk Exposures

Rising

Contribution to Risk

Rising

Growth

49%

15%

13%

Inflation RisingFalling

Falling

16%7%

13%