AGENDA

Part I: Why Consider Alternative Strategies? Part II: Implementation Issues

INNOVEST PORTFOLIO SOLUTIONS, LLC 2 PART I: WHY CONSIDER ALTERNATIVE STRATEGIES?

INNOVEST PORTFOLIO SOLUTIONS, LLC 3 TRADITIONAL ASSET CLASSES DELIVERED IN 2012

INNOVEST PORTFOLIO SOLUTIONS, LLC 4 LONGER-TERM RETURNS HAVE GENERALLY BEEN LOWER …

INNOVEST PORTFOLIO SOLUTIONS, LLC 5 … AND CORRELATIONS ARE INCREASING ACROSS DEVELOPED MARKETS

INNOVEST PORTFOLIO SOLUTIONS, LLC 6 DEVELOPED MARKETS BURDENED BY DEBT

INNOVEST PORTFOLIO SOLUTIONS, LLC 7 HIGH AND PERSISTENT UNEMPLOYMENT

INNOVEST PORTFOLIO SOLUTIONS, LLC 8 EMERGING MARKETS FACE MIDDLE-INCOME TRANSITION

INNOVEST PORTFOLIO SOLUTIONS, LLC 9 UNPRECEDENTED CENTRAL BANK ACTION

INNOVEST PORTFOLIO SOLUTIONS, LLC 10 DISTORTING THE MARKETS

INNOVEST PORTFOLIO SOLUTIONS, LLC 11 IMPACT ON : FUNDAMENTALS DON’T SUPPORT PRICES

INNOVEST PORTFOLIO SOLUTIONS, LLC 12 IMPACT ON : CREDIT SPREADS ARE TIGHT

INNOVEST PORTFOLIO SOLUTIONS, LLC 13 WHERE DOES THIS LEAVE INVESTORS?

INNOVEST PORTFOLIO SOLUTIONS, LLC 14 ADJUST INVESTMENT STRATEGIES FOR NEW NORMAL

INNOVEST PORTFOLIO SOLUTIONS, LLC 15 DEFINING ALTERNATIVE INVESTMENTS

By Exclusion • Alternative investments may be any investment that are not traditional investments

By Inclusion • Funds and Managed Futures • Private Equity • Structured Products • Commodities • RlEttReal Estate and dOthRlAt Other Real Assets

16 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 16 TRADITIONAL VS. ALTERNATIVE INVESTMENTS

Four ppyrimary factors differentiate traditional vs. alternative investments

• Liquidity • Investments • Leverage Selling Restrictions • beyond Stocks andBd Bond s

Some alternative products invest in stocks and bonds, but include leverage, short selling and/or liquidity restrictions

Some alternative investments may be long-only and unldbtitiththtkbdlevered, but invest in areas other than stocks or bonds, such as commodities or real estate

17 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 17 CONTENT VS. CONTAINER

Content: The type of Container: The vehicle in alternative asset or which the strategy is strategy. deployed. • Long/Short, Market • Hedge Funds Neutralbl, • 40 Act mutual funds • Commodities • Real Estate Investment • Real Estate and Other Trusts RlAtReal Assets • Master Limited • Currencies Partnerships • Energy Infrastructure • Private Equity

18 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 18 LIQUIDITY RESTRICTIONS

These are “container” restrictions: • Many alternative investment products will have limited liquidity. Investments which lack liquidity can be an important source of returns • Some hedge funds will have a lock-up period of between one and three years • Private equity and real estate products often have long lock-ups, with fund lives that can last ten years or longer • Trade-off for liquidity • Alternative mutual funds have daily liquidity but this may result in a trade off for performance

19 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 19 LEVERAGE

• Leverage allows a fund manager to control a greater value of assets than contributed by investors • Leverage can be accomplished through borrowing, short selling, or derivatives, such as swaps or futures • Leveraged positions have higher risk and higher potential return than unleveraged positions

• Alternative mutual funds and leverage • 40 Act mutual funds may have less leverage than hedge funds because they are regulated by the SEC and have stricter restrictions

20 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 20 SHORT SALES

• Investor tool to profit from declines in security price • In a long-short or fund, investor takes more stock-specific risk and less stock market risk • Alternative mutual funds and short sales • 40 Act mutual funds can sell short up to prospectus lim itat ions • Short sales profit from a decline in the price of an asset, but it can be difficult to hold a position for long tiidime periods • Investor does not always control the timing of closing the short sale • Broker can close position when margin losses occur (short squeeze)

21 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 21 TRADITIONAL HEDGE FUNDS

Overview: • Hedge funds provide participation in a pool of privately offered investments that use a variety of non-traditional strateggyies to try to offset risk and generate positive returns. • Hedge managers invest simultaneously, both long and short, in multiple markets (equities, fixed income, currencies, and commodities). Short selling entails borrowing a security and selling it today with the expectation of buying it back in the future at a lower price. • returns are strongly influenced by the skills of the hedge managers.

INNOVEST PORTFOLIO SOLUTIONS, LLC 22 TRADITIONAL HEDGE FUNDS

Benchmarking: • Traditional “long only” managers typically try to outperform a particular benchmark, such as the S&P 500, or Barclays Aggregate aim for positive returns Bond Index. Hedge fund managers disregard these benchmarks and and/or lower risk in all market environments.

Structure:investors each, • Traditional hedge funds usually operate as limited partnerships or limited liability companies. They rarely have more than 500 and initial investment minimums tend to be at least $1 million.

INNOVEST PORTFOLIO SOLUTIONS, LLC 23 HEDGING STRATEGIES

Relative Value Event Driven Hedged Directional or OiiOpportunistic • Equity Market Neutral • Credit/Distressed • Long/Short Credit • Merger Arbitrage/ • Long/Short Equity • Special Situations • Directional Macro • • Event Driven Equity

“Non-directional” “Directional”

Lower Risk/Reward Higher Risk/Reward

Sources: “Alternative Investments: An Introduction,” by Edward D. Patchett, Benefits & Compensation Digest, Vol. 42, No. 10, October 2005, p. 5; SkyBridge Capital.

INNOVEST PORTFOLIO SOLUTIONS, LLC 24 PROS AND CONS OF HEDGE FUNDS IN A PORTFOLIO

Pros 1) Hedgemovements funds’ inlow the correlations stock and with bond stocks markets and bonds may reduce the risk of the overall portfolio. 2) Since hedge funds’ returns are not dependent on upward , they may improve the performance of the overall portfolio . Cons 1) Bad market calls and the potential impact of leverage in hedge funds can negatively impact the risk/reward of the overall portfolio. 2) The traditional limited partnership format has several negative factors, including: high investment minimums, lock-ups, limited liquidity, lack of regulation by the SEC, the potential for fraud, the complexity and opaqueness of strategies and holdings, and typically higher costs than traditional long-only management.

INNOVEST PORTFOLIO SOLUTIONS, LLC 25 returns while taking less risk

CATEGORIES OF ALTERNATIVE RETURNS .

An obvious goal of virtually any investor is to earn superior

Return enhancers have the objective of increasing returns of a portfolio

Return diversifiers have the objective of reducing the overall portfolio risk through low or lack of correlation with the portfolio’s other assets

26 For Institutional Use Only | Not For Use with Retail InvestorsINNOVEST PORTFOLIO SOLUTIONS, LLC 26 ALTERNATIVES IN DB PLANS AND ENDOWMENTS

Endowments: 61% in Alternatives, A L including T 20.1% in E Hedge Funds R N A DB Plans: T 11% in I V Alternatives, E Data are as of 2012. including S Sources: NACUBO (National Association 4% in Hedge of College and University Business Funds Officers), Towers Watson, Compustat/FactSet, and J.P. Morgan Asset Management.

INNOVEST PORTFOLIO SOLUTIONS, LLC 27 PORTFOLIO CHARACTERISTICS

Combining less-than-perfectly correlated assets can improve portfolios’ risk/reward characteristics.

INNOVEST PORTFOLIO SOLUTIONS, LLC 28 ASSET CLASS CORRELATIONS

INNOVEST PORTFOLIO SOLUTIONS, LLC 29 WHY ADD ALTERNATIVES?

The Potential to Improve the Risk/Reward of the Portfolio

INNOVEST PORTFOLIO SOLUTIONS, LLC 30 HELPS TO CONTROL VOLATILITY AND THE DOWNSIDE EXPERIENCE

INNOVEST PORTFOLIO SOLUTIONS, LLC 31 LIMITS PARTICIPATION IN FALLING MARKETS AND ALSO RISING MARKETS

INNOVEST PORTFOLIO SOLUTIONS, LLC 32 PERIODIC TABLE OF INVESTMENTS

Annual Returns for Key Indices (2003 - 2012) - Ranked in order of Performance (Best to Worst)

INNOVEST PORTFOLIO SOLUTIONS, LLC 33 PERFORMANCE

INNOVEST PORTFOLIO SOLUTIONS, LLC 34 HEDGE FUNDS AND RISING INTEREST RATES

The Hedge Fund Research Institute (HFRI) Fund Weighted Composite had positive returns in:

78% of the months when the yield rose on the 10-Year Treasury (49 out of 63 months from January 2002 to March 2013)

70% of the months when the yield rose on 90-Day T-Bills (52 out of 74 months from January 2002 to March 2013)

Sources: Bloomberg and Neuberger Berman.

INNOVEST PORTFOLIO SOLUTIONS, LLC 35 PROJECTED RISK AND RETURN

14

12 turns Private 10 Equity

Equities Annual Re ee 8 Real Hedge Estate Funds 6 rm Averag

4 d Long-Te ee 2 Fixed Income

Project 0 0102030405060 Projected Long-Term Standard Deviation

Five-year projections. Source: Innovest Portfolio Solutions, as of April 2013.

INNOVEST PORTFOLIO SOLUTIONS, LLC 36 PART II: IMPLEMENTATION ISSUES

INNOVEST PORTFOLIO SOLUTIONS, LLC 37 IF HEDGING IS SO GREAT, WHY DON”T ALL DC PLANS CONTAIN HEDGE FUNDS?

Traditional roadblocks to implementing hedging strategies in DC plans: •Liquidity • Transparency • Education • Fees

INNOVEST PORTFOLIO SOLUTIONS, LLC 38 HOW TO GAIN HEDGING EXPOSURE

• The trend of packaging alternative investment strategies within mutual funds continues unabated, with new products being introduced regularly and asset flows gaining momentum. • Growth is being driven by several factors: – Investors are looking for ways to bolster portfolio performance, protect capital, and lower volatility. – Traditional managers want to tap higher-fee areas. – Alternative managers would like to expand and diversify their client base.

Source: Morningstar.

INNOVEST PORTFOLIO SOLUTIONS, LLC 39 HOW TO GAIN HEDGING EXPOSURE

NbNumber of fFdiEhAliA Funds in Each Alternative Asset Class

100

90

80

70

60

50

# of Funds 40

30

20

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Long/Short Equity Multi-Alternative Market Neutral Managed Futures Bear Market Currency Source: Morningstar. INNOVEST PORTFOLIO SOLUTIONS, LLC 40 ASSETS IN ALTERNATIVE MUTUAL FUNDS

Mutual Fund Assets in Each Alternative Asset Class 25

20 )) 15

d Assets $Bln d Assets 10 nn Fu

5

0

Long/Short Equity Multialternative Equity Market Neutral Managed Futures Bear Market Currency

Source: Morningstar.

INNOVEST PORTFOLIO SOLUTIONS, LLC 41 HEDGED MUTUAL FUNDS

Pros of Hedged Mutual Funds 1) Daily liquid 2) No lock-up 3) Low investment minimums 4) Typically less expensive than hedge fund limited partnerships Cons of Hedged Mutual Funds 1) Hedged mutual funds often have short track records 2) The essential diversification of strategggqies and managers requires extra due diligence 3) Typically more expensive than traditional long-only mutual funds 4) May underperform traditional illiquid hedge fund strategies over time due to the reliance on liquid strategies

INNOVEST PORTFOLIO SOLUTIONS, LLC 42 CURRENT EXPOSURE IN TDFS

Target Date DateFunds: Funds:Median MedianAsset AssetAllocation AllocationLevels Levels Across 2050 Funds to Retirement Income Funds Asset Class Median Allocation U.S. Large Cap 35.00% U.S. Mid Cap 11.00% U.S. Small Cap 4.00% IilInternat ionalEi Equity 18. 00%00% Emerging Markets Equity 4.00% Total Median Equity 72% Core FiFixe ddI Income 20. 00%00% High Yield Fixed Income 2.00% Short Term Fixed Income 4.00% TIPS 100%1.00% Total Median Fixed Income 27% REITS 1% As of 12/31/2012 Source: S&P Indices, S&P Target Date Index Series INNOVEST PORTFOLIO SOLUTIONS, LLC 43 COMPARISON OF ASSET CLASS RETURNS

Based on data observations of 2,465 DB plans and 1,684 DC plans. Source: CEM Benchmarking. INNOVEST PORTFOLIO SOLUTIONS, LLC 44 COMMITTEE OR BOARD CHALLENGES

• Benchmarking – There is not always an appropriate or clean benchmark – Shorter track records require an even better understanding of the strategy – Without a clear benchmark it is difficult to separate “skill” from “luck”

• Skewed returns – Alternatives often have an symmetrical payoff

• Regret Bias –Hedddged or r ikisk-managedflid portfolios may not fully participate in a bull market – Can the Committee or Board stay the course?

INNOVEST PORTFOLIO SOLUTIONS, LLC 45 CONTINUING ROADBLOCKS TO HEDGE FUNDS IN DC PLANS

• Due Diligence • Education • Fees • Fiduciary Concerns

INNOVEST PORTFOLIO SOLUTIONS, LLC 46 Q & A

Wha t ques tions are on your m in d?

INNOVEST PORTFOLIO SOLUTIONS, LLC 47 APPENDIX

INNOVEST PORTFOLIO SOLUTIONS, LLC 48 HEDGING STRATEGIES: RELATIVE VALUE

RelRela tive e va lue e ar bitrage ge s tra tegietegies see eekk t too t ak kee ad van nttage ge o off spec pecificific re ella tive e pricing anomalies, while also seeking to maintain minimal exposure to systematic undervalued, while selling short another security perceived to be overvalued market risk. This may be achieved by purchasing one security perceived to be . Relative value arbitrage strategies, which may be used alone or in combination, include:

Equity Market Neutral- strategies seek to generate profits by taking both long and short positions in securities. Equity Market Neutral seeks to generate profits through the successful selection of equity securities while reducing the effects of market-wide or, in some cases, industry sector-wide price movements by simultaneously taking long and short positions in “matched” equities in approximately equal volumes. To the extent a manager is unable to maintain a balanced position because of trade execution delays, this strategy will not be market neutral and will be exposed to potential losses. Statistical Arbitrage is a relative value , “systematic” (meaning largely automated) trading strategy that seeks to exploit short-term and long ter volatility. The success of the investment activities of any manager employing statistical arbitrage is heavily dependent on the mathematical models used by the manager in attempting to exploit short-term and long -term relationships among prices and volatility. m relationships among stock prices and INNOVEST PORTFOLIO SOLUTIONS, LLC 49 HEDGING STRATEGIES: RELATIVE VALUE, CONTINUED

Long/Short Credit strategies of credit securities seek to generate profits through the successful selection of credit securities while reducing the effects of market-wide or, in some cases, industry sector-wide price movements.

Convertible Arbitrage strategggies generall y involve the simultaneous purchase and short sale of issues of the same company. Often, the arbitrage involves the purchase of a convertible bond issued by the issuer and the short sale of that issuer’s common stock. Convertible bonds are vulnerable to systematic risk, and, as to the issuers of the bonds selected for investment, there is risk of bankruptcy orrelated significant fixed credit income risk. securities, No assurance while can neutralizing be given that exposure a manager to interest will be rateable to locate investment opportunities or to correctly exploit price discrepancies. risks Fixed Income Arbitrage strateggyies analyze a variet y of fixed income securities across several markets and seek to exploit pricing inefficiencies between

. Losses may be incurred from spread positioning due to price differential. Fixed income arbitrage managers tend to utilize significant amounts of leverage , take both long and short positions, and employ options, futures and other strategies. They may also trade using various mortgage strategies. Such positions entail a substantial risk that the price differential could change unfavorabl y, caus ing a loss to the sprea d pos ition.

INNOVEST PORTFOLIO SOLUTIONS, LLC 50 transactional events HEDGING STRATEGIES: EVENT DRIVEN

Event driven strategies involve investing in opportunities created by significant , such as spin-offs, mergers and acquisitions, bankruptcies, recapitalizations and share buy backs. Sub-strategies include credit/distressed strategies, merger arbitrage/special situations, and event driven equity. Some managers classified as multi-strategy event driven use a combination of the sub-strategies. Because there is substantial uncertainty concerning the outcome of transactions involving financially troubled companies or situations in which the managers may invest, there is a potential risk of loss by the managers of their entire investment in such companies.

Credit/Distressed Strategies involve investing in an array of credit instruments including: investment grade corporate bonds, high yield debt, bank debt, emerging market bonds, asset backed securities, credit default swaps and collateralized debt obligations (CDOs). Investors that trade credit can be long or short depending on their . All credit instruments are susceptible to default, interest rate and liquidity risks. Distressed strategies involve invest experiencing financial financial difficulties difficulties, including companies which may be subject to or threatened with bankruptcy, reorganization or liquidity proceedings, companies in default on outstanding obligations to creditors and companies experiencing decreasing revenues or earnings. Investments in troubled entities may involve substantial financial ments in obligations of companies and business risks that can result in substantial or at times event total losses .

INNOVEST PORTFOLIO SOLUTIONS, LLC 51 HEDGING STRATEGIES: EVENT DRIVEN, CONTINUED

Merger Arbitrage/Special Situations involve the purchase and sale of securities of companies involved in corporate reor , such as mergers, exchange offers, cash tender offers, spin-offs, leveraged buy-outs, restructuringgqs and liquidations. The mana ger will also consider other investment techniques designed to maximize profits and/or hedge against losses presented by the transaction. These techniques include short selling, options trading, trading in securities convertible into ganizations and business combinations significantreorggganization corporate and investin tran g in financial futures or other futures markets that the manager deems to be a potentially profitable investment strategy or hedge. Merger arbitrage investments generally could incur significant losses when anticipated merger or exchangeable for the se or acquisition transactions are not consummated. sition in the form of a substantive reorganization

Event Driven Equity strategies opportunistically target companies undergoing a curities involved in the (distressed or non-distressed), spin-off, merger, take-out, recapitalization, asset sale, change of control, dividend change or share buyback. Event driven equity strategies can be passive, “politely” activist, or, at times, hostile in nature. One of the key definitional points is that the strategy primarily focuses on the equity portion of the .

INNOVEST PORTFOLIO SOLUTIONS, LLC 52 HEDGING STRATEGIES: HEDGED DIRECTIONAL AND OPPORTUNISTIC

• Long/Short Equity Strategies, or directional equity strategies involve identifying companies that have the potential to perfor thddlhhflhat are expected to do poorly (the short portfolio). Managers seeklk to actively manage market exposure by shifting the allocation between long and short investments over time depending on stock selection opportunities and the manager’s outlook for the equity markets. Because the combinedm well (the long/short long portfolio) portfolio and generally those will h ave l ong equi ty mark et exposure, i t h as th e potenti al to generate attracti ve returns during rising equity markets. Managers may look for investment opportunities in the U.S., international, global or emerging markets.

INNOVEST PORTFOLIO SOLUTIONS, LLC 53 due to the frequent employment of leverage HEDGING STRATEGIES: HEDGED DIRECTIONAL AND OPPORTUNISTIC, CONTINUED

• Directional Macro Strategies require well-developed risk management procedures . Managers using such strategies may include Commodity Trading Advisors that trade primarily futures , options on futures contracts and foreign exchange contracts. Two types of strategies employed by directional macro managers are discretionary and systematic trading.

– Discretionaryor models to trading identify strategies and capitalize seek to dynamically allocate capital to relativelymarkets short term trading opportunities around the world. Directional strategies seek to participate in rising and declining markets when the trend appears strong and are justified by fundamentals.

– Systematic trading strategies generallyon rely trends on computerized in financial and trading commodity systems

. This systematic approach allows investment managers to seek to take advantage of price patterns in a very large number of markets. The trading models may be focused on technical or fundamental factors or a combination of factors.

INNOVEST PORTFOLIO SOLUTIONS, LLC 54 GORDON TEWELL, CFA, CPC | PRINCIPAL

Gordon is a Principal, Consultant and member of Innovest’s Investment Committee, which makes decisions on investment related research and due diligence. He is also a member of the Capital Markets Research Group, responsible for asset allocation studies and portfolio construction and Innovest’s Due Diligence Group, responsible for both qualitative and quantitative manager and retirement plan vendor due diligence. Gordon has more than 18 years of retirement plan industry experience. Gordon’ s consulting relationships are focused on retirement plans, due mainly to Gordon’s experience with providing services to and directly managing a variety of retirement plans and in-depth understanding of IRS and DOL rules and regulations concerning retirement plans. Gordon’s other responsibilities at Innovest include retirement plan benchmarking and vendor search analysis activity providing fiduciary oversight and significant cost saving opportunities to Innovest clients. His views on plan design and industry trends have been published in Pensions & Investments and Plan Sponsor , among others. Prior to joining Innovest, Gordon was a plan sponsor, managing multiple retirement plans for the City of Westminster in Colorado. Before his time as a plan sponsor, he was an Assistant Vice President with The Retirement Group at Merrill Lynch. Most of his time at Merrill was spent in a client relationship role overseeing all aspects of plan management, but included time spent in investment consulting, and plan conversion and implementation. Gordon is a graduate of Colorado State University, graduating with a Bachelors of Science degree in Economics and a minor in mathematics. Gordon is a Chartered Financial Analyst (CFA) and is a member of theCFAInstituteandtheCFASocietyofColorado.Additionally, Gordon has received the Certified Pension Consultant (CPC) designation from the American Society of Pension Professionals and Actuaries (ASPPA). CPCs work alongside employers to formulate, implement, administer, and maintain qualified retirement plans. Gordon is a certified Behavioral Finance Analyst, educating plan sponsors to apply proven behavioral finance solutions to improve plans and participant outcomes. He is a member of ASPPA, the Denver Chapter of the Western Pension and Benefits Conference and a Board member of the Colorado Public Plan Coalition. Gordon and his wife Deb spend their free time traveling throughout the U.S., much of this time spent on their bicycles. Gordon is the president of a Colorado-based volunteer bicycle touring group that organizes week- long bicycle tours throughout the world. When not bicycling or hiking in the Colorado Mountains, Gordon and DbDeb voltlunteer at thei r lllocal YMCA,assitiisting with programs that promote hlthhealthyspiitirit,midind,and bdbody.

INNOVEST PORTFOLIO SOLUTIONS, LLC 55