Fresno County Employees’ Retirement Association...Apr 13, 2012 · H.J. Heinz Company 1.02% HCA, Inc. 0.99% Ineos US Finance LLC 0.94% Virgin Media Investment Holdings Limited 0.90%

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November 2013

Fresno County Employees’ Retirement Association

2

MANAGER PERFORMANCE

MANAGER FACTOR ANALYSIS

GLOSSARY OF TERMS

Page 13

MANAGER SUMMARY COMPARISONS

TABLE OF CONTENTS

Page 3

Page 25

Page 30

MANAGER WRITE-UPS Page 35

RobM

Text Box

3

MANAGER SUMMARY COMPARISONS

4

MANAGERS OVERVIEW

ING Eaton Vance Pacific Asset

FirmOwnership

ING U.S. Investment Management (“ING US”) is spinningout via an Initial Public Offering from ING Group N.V.

Public company with shares tradedon the NYSE under ticker EV

Pacific Asset Management is a subsidiary ofPacific Life, a privately owned company.

FirmName

ING InvestmentManagement Co. LLC

Eaton VanceManagement

Pacific AssetManagement,

ProductName

ING SeniorLoan

Senior Floating-RateBank Loans

Corporate (Bank)Loan Strategy

Firm TotalAUM ($mm)

$196,099 $165,187 $3,778

Product TotalAUM ($mm)

$16,266 $37,458 $1,002

InceptionDate

4/1/2001 1/1/1989 1/1/2007

Portfolio Mgrs/DualRole PMs

9 8 6

ResearchAnalysts/Analysts

12 9 24

Avg YrsExp: PMs

24 24 20

Avg Yrs Exp:Analysts

11 8 11

Benchmark: CS BB Leveraged Loan

Data Source: Evestment Alliance and Morningstar Monthly Database

Fees: Unless otherwise indicated, all performance calculations are based on gross of fees returns including mutual fund performance

5

PERFORMANCE SUMMARY AS OF 9/2013

ING Eaton Vance Pacific Asset CS BB Leveraged LoanAlpha (5yr) 1.9 1.8 3.1 0.0Beta (5yr) 1.2 1.1 1.0 1.0R-Squared (5yr) 92.1 95.7 93.8 100.0Sharpe Ratio (5yr) 0.8 0.8 1.0 0.6Treynor Ratio (5yr) 7.0 7.0 8.6 5.4Std Dev (5yr) 10.7 9.5 8.9 8.3Tracking Error (5yr) 3.6 2.2 2.3 0.0Information Ratio (5yr) 0.8 1.1 1.5 --Max Drawdown Return (5yr) -23.8 -20.5 -16.8 -18.2Calmar Ratio (5yr) 0.4 0.4 0.5 0.3Excess Ann. Return (5yr) 3.0 2.3 3.3 0.0Significance Level (5yr) 96.6 99.0 99.9 --Skewness (5yr) 0.1 0.9 0.3 --Kurtosis (5yr) 3.9 5.0 2.1 --Hurst Exponent (5yr) 0.8 0.8 0.7 --Performance To Date1 Year 6.5 5.0 6.5 4.53 Year 7.1 6.1 7.4 5.25 Year 8.8 8.0 9.1 5.67 Year 5.9 5.6 -- 3.910 Year 6.2 5.5 -- 4.3Calendar Year Return2012 11.3 8.2 10.7 7.12011 2.0 3.5 3.3 2.52010 10.0 9.7 10.7 8.22009 52.8 45.6 39.3 31.12008 -29.3 -24.8 -19.6 -22.02007 3.0 3.0 3.5 2.52006 8.0 7.0 -- 6.62005 6.3 5.3 -- 5.52004 6.5 4.6 -- 4.52003 10.2 6.5 -- 7.12002 4.4 2.9 -- 1.92001 -- 4.7 -- 2.42000 -- 6.1 -- 6.9

6*Yield-to-3 (assumes three year accretion to par) **Limitations being greater than $100m EBITDA by issuer

PORTFOLIO CHARACTERISTICS


Annual Turnover 94% 39% --

Portfolio Holdings 349 560 127

Yield to Maturity 5.5% 4.6%* 6.1%

Effective Duration 0.1 0.2 0.5

Average Quality Issue B Ba3 B

Minimum Quality Issue CCC Not Rated Not Rated**

Preferred Benchmark Credit Suisse Leveraged Loan Index S&P LSTA Leveraged Loan Index Credit Suisse Leveraged Loan Index

7

INVESTMENT PHILOSOPHY AND PORTFOLIO CONSTRUCTION

Firm Name Investment Philosophy Portfolio Construction

ING

• Bottom-up fundamental credit analysis; some top-down approach utilized to avoid "clustered" defaults during economic downturns, although some industries avoided all together • Invest in high quality issues which the team determines a low probability of default exists. • Forecast each companies' cash flow for detailed understanding of investment risks. • Preferred characteristics: predictable, stable cash flows, high barriers to entry, and stable asset values • Believe the asymmetric profile of bank loans is a reason to invest mainly for income; minimal price appreciation possible • Relative value analysis determines over and underweights and is the primary allocation driver

• Private market-only participant (no high yield bonds) • Avoid "risky" industries and/or firms that have volatile cash flows • Highly diversified: approximately 250-350 holdings • High turnover: 94% • 50% to 60% of holdings purchased in primary market • Focus on market liquidity in order to efficiently implement tactical changes

Eaton Vance

• Bottom-up fundamental credit analysis; little to no top-down analysis utilized • Long-term performance driven primarily by fundamentals rather than behavioral forces or technical; and by income rather than price appreciation • Target attractive income-producing bank loans with low probability of default; allocating to lower-quality credit adds geometrically to risk without a comparable increase in return • High quality cash flow forecasting

• Screen loan universe using two criteria: EBITDA is greater then $75 million and deal size is greater than $200 million • High yield bonds occasionally used in strategy, combining public credit analyst research views • Highly diversified: 500+ holdings • Moderate turnover: 37% • Primary and secondary market participation • Emphasis on forecasting cash flows and less on backward-looking leverage ratio analysis

Pacific Asset

• Fundamental credit analysis is the cornerstone of the investment process • Utilization of top down assessment is incorporated to determine potential headwinds and tailwinds; used as framework to determine portfolio risk positioning. • Sector allocations are based on team-identified secular trends in industries and periodic rotations

• Screen loan universe using two criteria: EBITDA is greater than $100 million and deal size is greater than $300 million • Target first lien bank loans of non-investment grade companies, will hold some high yield bonds issues • Typically holds between 80 - 120 issuers. • Low turnover: 10% annualized excluding re-financing. • Focus on larger, rated issuers with low probability of default and an emphasis on relative value and liquidity

8

QUALITATIVE EVALUATION

Firm Name Differentiating Characteristics Potential Concerns

ING

• High emphasis on liquidity; over 98% of the portfolio is marked-to-market on a daily basis with multiple broker quotes. • Top-down strategy can play a role in the allocation decision based on credit cycle • Access to significant original issue volume offers potential for realization of original issue discount • Tracking error close to the benchmark; similar drawdowns • Risk exposure similar to the benchmark • Consistent, incremental outperformance over various time periods • Investment team has also managed over $3 billion in CLOs over the last five years

• Lack of mutual fund track record (though long composite history) • Perception of organizational risk with recent initial public offering (NYSE:VOYA) • Large increase in assets over the last three years ($8.7B as of 12/31/2010 to $16.3B as of 9/30/2013)

Eaton Vance

• Long track record and deeply experienced team • Portfolio manager has been with the firm for over twenty years • Majority of the portfolio is invested in higher quality credit rated BB-B; outperformance in down markets and underperformance in up markets • Strategy AUM is 20% of firm assets

• S&P/LSTA may not be an accurate benchmark to analyze performance given the team's focus on BB-B quality issues • Large number of holdings suggests the idiosyncratic risk may be diversified away • Large increase in assets over the last three years; currently 6.4% of the U.S. leverage loan market ($8B more capacity stated at current market size) • CFO departed Eaton Vance in Q1 2012 - no impact to this strategy • Recent move to eliminate private market restrictions to benefit from broader credit team research

Pacific Asset

• Low default rate: 0.7% for the strategy versus Moody's bank loan issuer default rate of 4% • Strong relative performance in downside market capture, as indicated by outperformance in 2008 • Strategy has outperformed 89% of its peer group since its inception in 2007

• Small AUM of $1B may result in limited access to primary deals, pricing power and access to company management • Two directors of credit research departed the firm in 3Q 2012 • Rapid growth in AUM during 2013 may lead to small deterioration of historical alpha

9

PERFORMANCE EVALUATION

Firm Name Performance Sensitivity Relative to S&P/LSTA Leveraged Explanation

ING• Risk profile is similar to S&P/LSTA Leverage Loan index • Low tracking error and high R-squared • Down market and up market alpha positive; a sign the team is able to outperform under different economic environments

• Historically, less dispersion in style selection suggests credit quality has not been materially changed through time • Incremental excess return coming from credit selection • Persistent underweight to CCC and overweight to B compared to the S&P/LSTA Leverage Loan index

Eaton Vance• Preferred index BB-B constrained credit quality although none exists; Credit Suisse has a BB credit quality index • Down market alpha is positive while the up market alpha is negative, most likely due to the persistent allocation to higher quality credit

• Persistent allocation to higher quality credit • Persistent underweight to CCC and overweight to BB compared to the S&P/LSTA Leverage Loan index

Pacific Asset Stronger alpha / lower beta a result of higher issuer concentration.• Relatively small AUM and relatively low number of holdings. • As AUM has grown, correlation to other managers / index has increased as expected

T O P 1 0 H O L D I N G S A N A L Y S I S 9 / 2 0 1 3

10

Top 10 Portfolio Holdings - Eaton Vance WeightsValeant Pharmaceuticals International, Inc. 1.24%Dell Inc. 1.15%Asurion LLC 1.05%Intelsat Jackson Holdings S.A. 1.04%H.J. Heinz Company 1.02%HCA, Inc. 0.99%Ineos US Finance LLC 0.94%Virgin Media Investment Holdings Limited 0.90%MEG Energy Corp. 0.86%Biomet Inc. 0.86%

Total 10.05%

Top 10 Portfolio Holdings - Pacific Life WeightsIntelsat Jaskson 2.67%U.S. Foods 2.15%Petco Animal Supplies 2.11%Servicemaster 2.09%Level 3 Communications 1.91%99 Cents Only Stores 1.88%Roofing Supply Group 1.75%Acosta Holdings 1.72%Fortescue Metals Group 1.63%Osmose Holdings 1.62%

Total 19.54%

Top 10 Portfolio Holdings - ING WeightsBlackboard Inc. 2.34%Fram Group Holdings Inc. 1.37%Clear Channel Communications, Inc. 1.31%RedPrairie Corporation 1.28%Asurion, LLC 1.27%Freescale Semiconductor, Inc. 1.16%Hub International Limited 1.10%Hilton Worldwide Finance, LLC 1.09%Global Tel*Link Corporation 1.09%CorpSource Finance Holdings, LLC 1.08%

Total 13.09%

S E C T O R A L L O C A T I O N A S O F 9 / 2 0 1 3

11

1%10%

10%

39%

2%9%

4%

13% 2%

11%

ING

3%

8%

24%

29%

7%

13% 7% 3% 2%

2%

Eaton Vance

8%

16%

16%

33%

3%6%

3%

6%4%

7%

Pacific Life

4%

9%

23%30%

6%

11% 7%5%

6%0%

S&P LSTA

Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Tech Telecommunication Services Utilities Other Cash

12

INVESTMENT VEHICLE INFORMATION

Vehicles Minimum Investment Expense Ratio Fee Schedule

ING1

Separate Account

Commingled Fund

Mutual Fund (IFRIX)

$75,000,000

$5,000,000

$250,000

0.50% 0.45% 0.40% 0.30%

Flat 0.45% Flat 0.40%

0.76%

First $100 Million Next $150 Million Next $250 Million Remaining balance

Accounts Under $25 MM Accounts Over $25 MM

All Assets

Eaton Vance2

Separate Account

Commingled Fund

Mutual Fund (EIBLX)

$100,000,000

$1,000,000

$250,000

0.48% 0.40% 0.35%

0.55%

0.77%

First $100 Million Next $100 Million Remaining balance

All Assets

All Assets

Pacific Asset

Separate Account

Commingled Fund

Mutual Fund (PLFRX)

$50,000,000

N/A

$500,000

0.50% 0.40% 0.30%

N/A

0.80%

First $100 Million Next $100 Million Remaining Balance

N/A

All Assets

1 For accounts under $25 million, ING offers standard reporting and quarterly call to review performance and answer questions. For accounts over $25 million, in addition to standard reporting and quarterly call, they offer annual face-to-face meeting with a member of the investment team a dedicated relationship manager. 2 Eaton Vance offers a reduced commingled fund fee of 50 bps for clients of investment consultants who will rely more heavily on their consultant for information. Under this “Service Light” model agreement portfolio managers will not travel for client meetings and access will be limited. There is also no ability to customize reporting under this fee option.

13

MANAGER PERFORMANCE

14

PERFORMANCE TO DATE AS OF 9/2013

ING Eaton Vance Pacific AssetCS BB Leveraged Loan

0123456789

1011

Tota

l Ann

ualiz

ed R

etur

n, %

10 year 7 year 5 year 3 year 1 year

10 Year 7 Year 5 year 3 year 1 year

ING 6.2 6.2 8.8 7.1 6.5

Eaton Vance 5.5 5.5 8.0 6.1 5.1

Pacific Asset -- -- 9.1 7.4 6.5

CS BB Leveraged Loan 4.3 4.3 5.6 5.2 4.5

15

EXCESS PERFORMANCE TO DATE AS OF 9/2013


-1

0

1

2

3

4

5

Exce

ss A

nnua

lized

Ret

urn,

%

10 Year 7 year 5 year 3 year 1 year

10 Year 7 year 5 year 3 year 1 year

ING 1.9 1.9 3.2 1.9 2.0

Eaton Vance 1.2 1.2 2.5 0.9 0.7

Pacific Asset -- -- 3.5 2.1 2.0

16

ANNUAL PERFORMANCE


-40-30-20-10

010203040506070

Tota

l Ann

ualiz

ed R

etur

n, %

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

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

ING -- -- 4.4 10.2 6.5 6.3 8.0 3.0 -29.3 52.8 10.0 2.0 11.3

Eaton Vance 6.1 4.7 2.9 6.5 4.6 5.3 7.0 3.0 -24.8 45.6 9.7 3.5 8.3

Pacific Asset -- -- -- -- -- -- -- 3.5 -19.6 39.3 10.7 3.3 10.7

CS BB Leveraged Loan 6.9 2.4 1.9 7.1 4.5 5.5 6.6 2.5 -22.0 31.1 8.2 2.5 7.1

17

EXCESS ANNUAL PERFORMANCE


-15-10

-505

1015202530

Exce

ss A

nnua

lized

Ret

urn,

%

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

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

ING -- 2.5 3.1 2.0 0.7 1.4 0.5 -7.3 21.7 1.8 -0.5 4.2 1.7

Eaton Vance 2.3 1.1 -0.6 0.1 -0.2 0.4 0.5 -2.8 14.5 1.5 0.9 1.2 0.6

Pacific Asset -- -- -- -- -- -- 1.0 2.4 8.2 2.5 0.8 3.6 1.3

18

ROLLING PERFORMANCE


36 Month Rolling Annualized Return

-10

-5

0

5

10

15

20

Tota

l Ann

ualiz

ed R

etur

n, %

Oct-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

36 Month Rolling Annualized Excess Return

-5

-3

0

3

5

8

Exce

ss A

nnua

lized

Ret

urn,

%

Oct-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

19

PEER GROUP RANKING


CS BB Leveraged Loan

36 Month Rolling Performance Since Inception

0

25

50

75

100

Tota

l Ret

urn

Ran

k, %

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13

Calendar Year Performance Ranking0

25

50

75

100

Tota

l Ret

urn

Ran

k, %

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

20

PERFORMANCE STATISTICS


36 Month Rolling Risk

02468

1012141618

Annu

aliu

zed

StdD

ev, %

Oct-03 Dec-05 Dec-07 Dec-09 Dec-11 Sep-13

36 Month Rolling Tracking Error

0

1

2

3

4

5

Annu

alize

d Tr

acki

ng E

rror

, %


36 Month Rolling Information Ratio

-2

-1

0

1

2

3

4

5

Info

rmat

ion

Ratio

Oct 03 Dec 05 Dec 07 Dec 09 Dec 11 Sep 13

36 Month Rolling Sharpe Ratio

-2.0-1.00.01.02.03.04.05.06.07.08.09.0

Shar

pe R

atio

Oct 03 Dec 05 Dec 07 Dec 09 Dec 11 Sep 13

21

PERFORMANCE STATISTICS


Max Drawdown Return, Oct-10 to Sep-13

-5

-4

-3

-2

-1

0

Max

Dra

wdo

wn

Retu

rn, %

-4.7

-3.6

-4.5

-3.8

Max Drawdown Return, Jan-07 to Sep-13

-35

-30

-25

-20

-15

-10

-5

0

Max

Dra

wdo

wn

Retu

rn, %

-30.0

-25.4-22.1 -22.8

36 Month Rolling Alpha, Oct-03 to Sep-13

-3

-2

-1

0

1

2

3

4

Alph

a, %


36 Month Rolling Beta, Oct-03 to Sep-13

0.300.450.600.750.901.051.201.351.501.65

Beta


22

RISK VS. RETURN


Performance vs. Risk, Jan-07 to Sep-13

0246

8101214

Tota

l Ann

ualiz

ed R

etur

n, %

0 2 4 6 8 10 12 14

Standard Deviation %

Performance vs. Risk, Apr-06 to Sep-13

0246

8101214

Tota

l Ann

ualiz

ed R

etur

n, %

0 2 4 6 8 10 12 14



0246

8101214

Tota

l Ann

ualiz

ed R

etur

n, %

0 2 4 6 8 10 12 14



0246

8101214

Tota

l Ann

ualiz

ed R

etur

n, %

0 2 4 6 8 10 12 14


23

PERFORMANCE EFFICIENCY


Excess Return vs. Tracking Error, Mar-04 to Sep-13

36 Month rolling windows, Mar 04 - Sep 13

-4

-2

0

2

4

6

8

Exce

ss A

nnua

lized

Ret

urn,

%

0 1 2 3 4 5 6

Tracking Error %

Excess Return vs. Tracking Error, Mar-02 to Sep-13

36 Month rolling windows, Mar 02 - Sep 13

-4

-2

0

2

4

6

8

Exce

ss A

nnua

lized

Ret

urn,

%

0 1 2 3 4 5 6

Tracking Error %

Excess Return vs. Tracking Error, Dec-09 to Sep-13

36 Month rolling windows, Dec 09 - Sep 13

-4

-2

0

2

4

6

8

Exce

ss A

nnua

lized

Ret

urn,

%

0 1 2 3 4 5 6

Tracking Error %

24

UP & DOWN MARKET ANALYSIS


Down Market Performance, Jan-07 to Sep-13

-2-1012

-1.1 -0.7 -0.3

Down Mkt Alpha

-2-1012 1.1 1.0 1.0

Down Mkt Beta

Up Market Performance, Jan-07 to Sep-13

0

1

21.5

0.2

1.3

Up Mkt Alpha

0

1

21.3 1.2 1.2

Up Mkt Beta

25

MANAGER FACTOR ANALYSIS

26

FACTOR ANALYSIS: ING

Calendar Year Excess Return vs. Benchmark

-25-20-15-10-50510152025303540

CS B

B Le

vera

ged

Loan

Ret

urn,

%

-15

-10

-5

0

5

10

15

20

25

Exce

ss R

etur

n, %

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Sep-13

3.1 2.0 0.7 1.4 0.5

-7.3

21.7

1.8

-0.5

4.22.0

INGExcessCS BB Leveraged Loan

12 Month Rolling Excess Return vs. Benchmark

-15-13-10

-8-5-30358

101315

Exce

ss R

etur

n, %

-5 -3 0 3 5 8 10 13 15 18 20

CS BB Leveraged Loan Return, %

ING

Regression Based Asset Style Allocation

USD, 36-month trailing window; exp. weighted

0

20

40

60

80

100

Wei

ght,

%

Mar-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13

INGBC US High Yield CS BB Leveraged Loan CS Leveraged Loan Cash

36 Month Rolling R-Squared

0

10

20

30

40

50

60

70

80

90

100Be

nchm

ark

R-Sq

uare

d, %

Mar-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13

Benchmark R-SquaredING

27

FACTOR ANALYSIS: Eaton Vance


-40

-25

-15

-5

5

15

25

35

45

55

65

CS B

B Le

vera

ged

Loan

Ret

urn,

%

-15

-10

-5

0

5

10

15

20

25

Exce

ss R

etur

n, %

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Sep-13

-0.6

0.1

-0.2

0.4 0.5

-2.8

14.5

1.5 0.9 1.2 0.7

Eaton VanceExcessCS BB Leveraged Loan


-15-13-10

-8-5-30358

101315

Exce

ss R

etur

n, %

-5 -3 0 3 5 8 10 13 15 18 20


Eaton Vance



0

20

40

60

80

100

Wei

ght,

%

Oct-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13

Eaton VanceBC US High Yield CS BB Leveraged Loan CS Leveraged Loan Cash


0

10

20

30

40

50

60

70

80

90

100Be

nchm

ark

R-Sq

uare

d, %

Oct-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13

Benchmark R-SquaredEaton Vance

28

FACTOR ANALYSIS: Pacific Asset


-70

-45

-25

-5

15

35

55

75

95

115

CS B

B Le

vera

ged

Loan

Ret

urn,

%

-15

-11-8-5-2147

101316192225

Exce

ss R

etur

n, %

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

1.02.4

8.2

2.50.8

3.62.0

Pacific AssetExcessCS BB Leveraged Loan


-15-13-10

-8-5-30358

101315

Exce

ss R

etur

n, %

-5 -3 0 3 5 8 10 13 15 18 20


Pacific Asset



0

20

40

60

80

100

Wei

ght,

%

Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Sep-13

Pacific AssetBC US High Yield CS BB Leveraged Loan CS Leveraged Loan Cash


0

10

20

30

40

50

60

70

80

90

100Be

nchm

ark

R-Sq

uare

d, %


Benchmark R-SquaredPacific Asset

29

EXCESS RETURNS CORRELATION


Excess Correlation, Jan-07 to Sep-13

0.89

0.27

ING

0.89

0.14

Eaton Vance

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

0.27

0.14

Pacific Asset

36 Month Rolling Excess Correlation, Dec-09 to Sep-13

-0.8-0.6-0.4-0.20.00.20.40.60.8

Exce

ss C

orre

latio

n

ING

-0.8-0.6-0.4-0.20.00.20.40.60.8

Exce

ss C

orre

latio

n

Eaton Vance

-0.8-0.6-0.4-0.20.00.20.40.60.8

Exce

ss C

orre

latio

n


Pacific Asset

* Correlation coefficients greater than 0.3 or lower than -0.3 can be considered statistically significant (different than zero)

30

GLOSSARY OF TERMS

31

GLOSSARY OF TERMS

Alpha (a): The excess return of a portfolio after adjusting for market risk. This excess return is attributable to the selection skill of the portfolio manager. Alpha is calculated as: Portfolio Excess Return – (Beta x Excess Market Return).

Annualized Return: Converts the Total Return to an annual basis for comparison purposes. Periods shorter than one year are not annualized.

Barclays Capital Bonds Index: Measures the performance of various bonds sectors including (but not limited to): Government, Corporate Bonds (Credit), High-Yield Bonds (“Junk Bonds”), Mortgage backed securities, and Municipal bonds.

Benchmark: Investment index used as a standard by which to measure the relative performance of an overall portfolio or an individual money manager. Appropriate benchmarks are selected based on their similarity to a portfolio or to the style of the individual money manager being measured. For example, a large cap core equity manager would be appropriately measured against the S&P 500 index. Alternatively, a fixed income core manager might be measured against the Barclays Capital Aggregate Bond index.

Benchmark R-squared: Measures how well the Benchmark return series fits the manager's return series. The higher the Benchmark R-squared, the more appropriate the benchmark is for the manager.

Beta (b): A measure of systematic, or market risk; the part of risk in a portfolio or security that is attributable to general market movements. Beta is calculated by dividing the covariance of a security by the variance of the market.

Book-to-Market: The ratio of book value per share to market price per share. Growth managers typically have low book-to-market ratios while value managers typically have high book-to-market ratios.

Calmar Ratio - The Calmar Ratio is a risk/return ratio that calculates return on a downside risk adjusted basis. Similar to other efficiency ratios it balances return in the numerator per unit risk in the denominator. In this case risk is characterized by the Maximum Drawdown.

Capture Ratio: A statistical measure of an investment manager's overall performance in up or down markets. The capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen/fallen. The capture ratio is calculated by dividing the manager's returns by the returns of the index during the up/down market, and multiplying that factor by 100.

Commingled Fund: A fund consisting of assets from several accounts that are blended together. Investors in a commingled fund investment benefit from economies of scale, which allow for lower trading costs per dollar investment, diversification and professional money management

Correlation Coefficient (r): A measure of the relative movement of returns of one security or asset class relative to another over time. A correlation of 1 means the returns of two securities move in lock step, a correlation of –1 means the returns of two securities move in the exact opposite direction over time. Correlation is used as a measure to help maximize the benefits of diversification when constructing an investment portfolio.

DJ UBS Commodity Index: A broadly diversified index that allows investors to track commodity futures price returns.

Hurst Exponent: quantifies the relative tendency of a time series either to regress the mean. A value H in the range 0.5 < H < 1 indicates a time series with long-term positive autocorrelation, meaning a high value in the series will probably be followed by another high value . A value in the range 0 < H < 0.5 indicates a time series with long-term switching between high and low values in adjacent pairs, meaning that a single high value will probably be followed by a low value. A value of H=0.5 can indicate a completely uncorrelated series.

Excess Correlation: Correlation of the excess returns (above the benchmark).

Index: A passively managed portfolio of securities that remains constant from one period to the next. Indexes are used to gauge the performance of sectors of the market or the market as a whole. In addition, indexes are used as a benchmark for measuring the performance of investment managers.

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GLOSSARY OF TERMS (Continued)

Information Ratio: A measure of a manager's ability to earn excess return without incurring additional risk. Information ratio is calculated as: alpha divided by tracking error.

Kurtosis (excess returns)- Kurtosis describes whether the series distribution is peaked or flat and how thick the tails are as compared to a normal distribution. Positive kurtosis indicates a relatively peaked distribution near the mean and tends to decline rapidly and have fat tails. Negative kurtosis indicates a relatively flat distribution near the mean.

Long Term Reversal Factor: Risk premium associated with buying past losers and selling past winners (five year time horizon).

Low Volatilty: Risk premium generated by picking low volatility stocks, measured by the MSCI USA Minimum Volatility Index.

Momentum Factor: Risk premium associated with buying past winners and selling past losers.

MSCI EAFE Index: The Morgan Stanley Capital International Europe Australia and Far East (MSCI EAFE) Index is a value-weighted index composed of equity securities traded in the countries that give the index its name. This index is a typical benchmark for international equity managers as well as the basis for many international equity index funds.

MSCI Regional Indexes: Fee float-adjusted market capitalization weighted indexes that are designed to measure the equity market performance of various regions, including (but not limited to): North America, Emerging Markets, Pacific, and Europe.

Mutual Fund: Pools of money that are managed by an investment company. They offer investors a variety of goals depending on the fund and its investment charter. For example, some funds seek to generate income on a regular basis; others seek to preserve an investor's money. Still others seek to invest in companies that are growing at a rapid pace. Mutual funds are investment companies regulated by the Investment Company Act of 1940.

Nominal Major Currencies US Dollar Index: A weighted average of the foreign exchange values of the U.S. dollar against a subset of currencies in the broad index that circulate widely outside the country of issue. The weights are derived from those in the broad index, which is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares.

Portfolio Turnover: The percentage of a portfolio that is sold and replaced (turned over) during a given time period. Low portfolio turnover is indicative of a buy and hold strategy while high portfolio turnover implies a more active form of management.

Predicted Style R-squared: Measures how well the manager's predicted style fits the manager's return series. Adding many unnecessary indices will not improve the Predicted Style R-Squared. The methodology essentially predicts the manager's style at each point in time without the data at that point with the rationale being that if the style estimates obtained so far are good, then they can be used to predict the style at the estimation point.

Price-to-Earnings Ratio: Also called the earnings multiplier, it is calculated by dividing the price of a company's stock into earnings per share. Growth managers typically hold stocks with high price-to-earnings ratios whereas value managers hold stocks with low price-to-earnings ratios.

Regression Based Asset Allocation / Asset Loading: Represents the exposure period of an investment product (called a Manager, Fund, or Index in Stylus) to various explanatory variables. It is also referred to as Style Indices or Asset Classes. These Indices can be interpreted as the Manager Betas or risk factors at a given point in time.

Return: A measure of the appreciation or depreciation in the price of an investment over a given time period. This is usually expressed as a percentage and may be annualized over a number of years or represent a single period. In addition, this percentage may be expressed gross or net of adjustments, such as dividends or fees.

Risk Premium: An expected return in excess of the risk-free rate. The premium provides compensation for the assumption of risk.

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Risk-Free Rate: The rate of interest that one can earn on an investment with no default risk. It is generally assumed to be the interest rate on a 91 day T-Bill.

R-Squared: Also called the coefficient of determination, it measures the amount of variation in one variable explained by variations in another. In the case of investments, the term is used to explain the amount of variation in a security or portfolio explained by movements in the market or the portfolio's benchmark.

Russell 2000 Index: A value-weighted small-cap stock index composed of the 2000 securities with the lowest market capitalization in the Russell 3000 index. This is one of the most common benchmarks for small-cap equity managers and is compiled by the Frank Russell Company.

Russell 6 style map: Combination of 6 Russell Indices to identify a manager investment style in terms of size/value/growth factors.

Russell Mid-Cap Index: A value-weighted index composed of the 800 smallest companies by market capitalization in the Russell 1000 index. This index is compiled by the Frank Russell Company and is used as a benchmark for mid-cap portfolios.

S&P 500 Index: A value-weighted index compiled by Standard and Poor's that is comprised of 500 of the largest companies traded on the NYSE and NASDAQ exchanges. This is the most common proxy for the equity market as a whole and is the typical benchmark for large-cap portfolios.

Sector Indices:The S&P North American Sector Indices provide investors with a suite of equity benchmarks that represent U.S. traded securities across seven broadly defined economic sectors: Consumer, Cyclical, Financial Services, Health Care, Natural Resources, Technology, and Utilities. S&P Indices uses GICS® to determine a company's sector classification. Each index is modified-capitalization weighted, which is where a stock's weight is capped at a level determined on a sector basis.

Selection return: The difference between the Manager and the Manager's Style Return.

Sharpe Ratio: A measure of portfolio efficiency. The Sharpe Ratio indicates excess portfolio return for each unit of risk associated with achieving the excess return. The higher the Sharpe Ratio, the more efficient the portfolio. Sharpe ratio is calculated as: Portfolio Excess Return / Portfolio Standard Deviation.

Short Term Reversal Factor: Risk premium associated with buying past losers and selling past winners (two month time horizon).

Significance Level (Excess Returns) - The Significance Level of a test is the probability that the test statistic will reject the null hypothesis when the hypothesis is true. Significance is a property of the distribution of a test statistic, not of any particular draw of the statistic.

Size Factor: Risk premium associated with buying small companies.

Skewness (Excess Returns)- Skewness describes the degree of asymmetry of a distribution around its mean. A distribution is said to be symmetric if has the same shape to both the left and right of the mean. A perfectly symmetrical distribution has a Skewness of 0. A positively skewed distribution has larger gains than losses, while a negatively skewed distribution has a longer tail of losses.

Small Capitalization Stocks: Also referred to as small-cap stocks, these are securities of companies whose overall market capitalization is roughly less than $1.5 billion.

Standard Deviation (s): A measure of volatility, or risk, inherent in a security or portfolio. The standard deviation of a series is a measure of the extent to which observations in the series differ from the arithmetic mean of the series. For example, if a security has an average annual rate of return of 10% and a standard deviation of 5%, then two-thirds of the time, one would expect to receive an annual rate of return between 5% and 15%.

Style Analysis: A return based analysis designed to identify combinations of passive investments to closely replicate the performance of funds.

34


Style Dispersion: Style dispersion measures the deviation around a managers average asset weights. For example, if a manager maintains constant asset exposures over the time period being analyzed then the dispersion will be zero. The more the manager varies in asset exposure over time the higher the style dispersion result will be. Style dispersion will tend to increase in times of increased market volatility and may seem to be random at times when analyzing over long periods (possibly due to change in management style or investment policy). The resulting numbers are best used when comparing to another manager and are difficult to independently interpret.

Style Map: A specialized form or scatter plot chart typically used to show where a Manager lies in relation to a set of style indices on a two-dimensional plane. This is simply a way of viewing the asset loadings in a different context. The coordinates are calculated by rescaling the asset loadings to range from -1 to 1 on each axis and are dependent on the Style Indices comprising the Map.

Style Returns: The sum of the Return of each Style Asset multiplied by its weight for the time period.

Style R-squared: Measures how well the estimated Manager's style return series fits the manager's return series. The higher the Style R-squared, the better the fit between the manager's style and return series.

Timing return: The Manager's Style Returns in excess of the Benchmark's Style Returns.

Total Return: Total Return geometrically compounds the Returns in the series from one period to the next.

Tracking Error/Excess Standard Deviation: The standard deviation of the difference between the rate of return of a portfolio and its benchmark.

Treynor Ratio - The Treynor Ratio is defined as the ratio of the manager's excess geometrically annualized return over the portfolio Beta. Excess returns are computed versus the cash index.

Universe: Also called a peer group, a universe is a large number of portfolios of a similar style. These portfolios can be divided into deciles or quartiles and then used for performance measurement and comparative purposes. Portfolios are ranked within the universe, which tells the investor how well a manager has done relative to his or her peers.

US BLS CPI All Urban SA 1982-1984: Changes in the prices paid by urban consumers for a representative basket of goods and services, seasonally adjusted.

Value: Refers to the style of an equity manager. A value manager seeks to create returns by purchasing stocks selling at a discount to their true or intrinsic value. Typical portfolio characteristics of this strategy include a low price-to-earnings ratio, high book-to-market ratio, and high dividend yield.

Vaulation Factor: Risk premium associated with buying companies trading at a low price/book multiple.

VIX : VIX is a trademark ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.

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Manager Evaluation: ING Investment Management Co. LLC

Senior Loan Strategy Last Updated: September 2013

Strategy Basics

Asset Class: Senior Bank Loans Firm Inception: 1973 Firm Assets: $196 Billion Strategy Inception: 2001 Strategy Assets: $16.3 Billion Min. Size, MF (IFRIX*): $250,000 Fee, Mutual Fund: 0.76% All Assets Min. Comm. Fund $5 Million Fee, Comm. Fund: 0.45% < $25 Million 0.40% > $25 Million Min. Size, Sep. Acct: $100 Million Fee, Separate Account: 0.50% First $100 Million 0.45% Next $150 Million 0.40% Next $250 Million 0.30% Remaining Balance

* Institutional mutual fund assets total $671.2 million; 2010 inception.

Firm Background and History

ING Group N.V. (“ING Group”), a globally diversified financial services company based in the Netherlands began in 1973, when a predecessor firm registered as an investment adviser with the U.S. Securities and Exchange Commission. ING Group formed in 1991 with a merger of the largest Dutch insurance company and NMB Postbank Group. ING Group then made a number of investment adviser acquisitions in the 1990’s including Aeltus Investment Management, Inc., Furman Selz Capital Management LLC and ING Advisers. These firms were combined in June 2004 along with other affiliates to form an asset management division, ING Investment Management Co. LLC. Today, this business manages approximately $200 billion in assets across equity, fixed income, and multi-asset strategies. ING U.S. Investment Management (“ING US”) recently spun out from the parent ING Group in an Initial Public Offering (NYSE: VOYA). Under terms of abailout agreement between ING Group and the Netherlands government, the bank is required to divest its remaining stake in VOYA by the end of 2016.

The ING Senior Loan Group was originally organized in April 1995 as Pilgrim Investments, Inc. an investment adviser to the NYSE-listed, closed-end fund Pilgrim Prime Rate Trust. The team was acquired by ReliaStar Insurance Company in 1999; ReliaStar was purchased by ING Group in 2000. Despite name changes to ING Prime Rate Trust, the senior loan investment team remained intact throughout this period. Dan Norman and Jeff Bakalar were appointed as co-heads in January 2000 and continue to lead the group today. Headquartered in Scottsdale, Arizona, the Senior Loan Group manages senior loan portfolios and also creates Collateralized Loan Obligation (CLO) vehicles. Over the last five years, the team has launched eight CLOs, totaling over $3 billion. Strategy Background

The investment team’s emphasis is on finding attractively priced senior loan bonds while avoiding losses through defaults. In an effort to avoid those sectors they believe could experience a large percentage of defaults due to macroeconomic conditions, they utilize a top-down investment approach, whereas bottom-up, fundamental credit analysis determines those issues that are attractively valued relative to default probabilities. They believe that top-tier quality, non-investment grade loans with high liquidity in the B to BB+ range offer superior long-term risk-adjusted performance. Investing in highly liquid issues is key a component to the investment team’s ability to successfully implement tactical changes in the portfolio, in that it allows for enhanced trade execution in times of substantially reduced market liquidity. As part of the team’s philosophy, consistent implementation of their investment process is maintained through central decision-making by a small Investment Committee consisting of co-heads Dan Norman and Jeff Bakalar; and Ralph Bucher, Senior Credit Officer. They feel the potential for error arising from a single portfolio manager decision process or a decentralized multiple manager arrangement is mitigated through Investment Committee approval of every investment decision. Bureaucratic disadvantages are precluded by limiting membership to senior investment professionals actively involved in the day-to-day work.

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The investment team attempts to outperform the S&P/LSTA Leveraged Loan Index by building a broad basket of exclusively senior loans – no high yield bonds –highly liquid, which trade at attractive yields compared to similar issues, and which reflect low probabilities of default loss according to the team’s research. Key Investment Professionals

The ING Senior Loan Group is located in Scottsdale, Arizona with an additional office in London. The 24-member Senior Loan investment team is comprised of eight portfolio managers/team leaders (including Group co-Heads, Jeff Bakalar and Dan Norman), one senior credit officer (Ralph Bucher), ten investment managers/analysts, three research analysts and two traders. There are five portfolio management teams in Scottsdale responsible for particular industries, and a European team that sources overseas loans. All buy/sell decisions are made by the three-person Investment Committee. Dan Norman, Senior Vice President and Group Head Mr. Norman co-manages the Group with Mr. Bakalar, and he is co-chairman of the Group’s Investment Committee and the Loan Pricing and Valuation Committee. He has over twenty years of investment experience. He began managing senior bank debt portfolios in 1995 when ING’s predecessor acquired the management rights to ING Prime Rate Trust. Mr. Norman became the co-head of ING’s senior bank loan business in January of 2000 and with Mr. Bakalar created and implemented the ING Senior Loan Strategy and the ING Senior Loan Group in January of 2001. He began his career at Arthur Andersen & Co. in 1981 and joined ING’s predecessor in 1992. Mr. Norman received his B.A. degree in 1980 from the University of Nebraska and completed the University of Nebraska M.B.A. program in 1981. He maintains several NASD securities licenses including: Financial and Operations Principal (Series 27), General Securities Principal (Series 24), Registered Options Principal (Series 4), and General Securities Representative (Series 7). Jeff Bakalar, Senior Vice President and Group Head Mr. Bakalar co-manages the Senior Loan Group with Mr. Norman, and he is co-chairman of the Group's Investment Committee and the Loan Pricing and Valuation Committee. He has over twenty years of investment and banking experience and joined ING's predecessor in 1998 and became part of the investment team for what is now ING Prime Rate Trust. He became the co-head of ING's senior bank loan business in January of 2000 and with Mr.

Norman created and implemented the ING Senior Loan Strategy and the ING Senior Loan Group in January of 2001. Mr. Bakalar began his career as an associate with Continental Bank in 1987, serving in various credit and corporate finance roles, including establishing and managing derivatives trading lines with international bank counterparties, and structuring and monitoring various classes of asset-backed transactions. In 1994, he joined the Communications Division within The First National Bank of Chicago, ultimately serving as a senior underwriter responsible for structuring and managing leveraged transactions for issuers in the broadcasting and media sectors. Mr. Bakalar received his B.S. degree with honors in finance from the University of Illinois Chicago, and his M.B.A. in finance with highest distinction from DePaul University. Ralph Bucher, Senior Vice President and Senior Credit Officer Mr. Bucher joined the ING Investment Management Group in November 2001. He serves as a voting member of the Group’s Investment Committee and also assists in the approval of senior loan credit limits, problem loan management and loan valuations. Prior to joining ING, he was the North American Head of Special Assets for Standard Chartered Bank and has held other senior credit risk management positions with Standard Chartered and Societé Generale, as well as credit structuring and analysis positions with Commerzbank and National Australia Bank. Mr. Bucher earned a Masters of International Management at The American Graduate School of International Management in 1985 and a B.A. degree from the University of Arizona in 1983. He is also fluent in German. Process

The ING Senior Loan Group’s investment process combines top-down views with bottom-up credit analysis. Although top-down macro strategy is the start to the investment process, the investment team is primarily focused on adding value through fundamental credit and relative-value analysis. Given the asymmetric payoff of owning senior loans, i.e., limited upside with more downside risk, top-down strategy is used to avoid what the investment team calls “clustering of defaults”, which is a reference to those sectors or industries that typically experience higher defaults during a downturn in the business cycle. By avoiding defaults and investing in attractively valued senior loans with strong company fundamentals, the team attempts to protect portfolios on the downside and position the portfolio to pick up

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incremental yield with the possibility of capital appreciation as loans’ prices converge to the team’s assessment of fair value. Macro Strategy/Sector Analysis: The investment team will purposefully avoid those sector/industries they deem to a have a risk of increasing defaults. Although the investment team attempts to determine where the market is within the business and credit cycle, they typically choose to altogether avoid certain industries and sectors that are highly sensitive to changing business conditions and as a result have unpredictable cash flows. This investment philosophy leads the group to seek companies in mature industries with high barriers to entry and stable asset values, where there may be less variability in forecasting a company’s cash flow and their ability to service debt. As a consequence, health care, cable television, printing and publishing, and utilities are the majority industries represented in the portfolio. In contrast, they avoid industries with commodity-like products, unproven cash flows, and that are highly sensitive to the business cycle. The investment team has identified the apparel and fashion industries, for example, that exemplify the characteristics they avoid. Deal Screening: The investment team manages senior loan portfolios from the private side of the market, which allows them high level access to deals entering the market. As part of this, they receive material non-public information about borrowers that they can use when evaluating secondary market opportunities. Every Monday morning the investment team meets to discuss proposed transactions. Each industry team member discusses current trends and opportunities, and all existing transactions in the secondary market are analyzed to determine which are being mispriced, if any. Screening deals leads the investment team to then focus on fundamental credit analysis, which they feel is the foundation of their portfolio construction process. Fundamental Credit Analysis/ Company Analysis: Financial statement analysis is the team’s key focus in evaluating a company’s financial health. Historical operations as well as financial projections provided by the company are considered to determine the amount of free cash flow generation. A sensitivity analysis is applied to a company’s free cash flow projection in order to determine the likely change in free cash flow given assumed changes to the economic environment. Again, the team focuses on

industries that are highly likely to meet debt obligations under stressful economic scenarios. In addition to scenario analysis, the investment team also analyzes the company’s current cost- and capital structure and the impact additional borrowing will have on each. Secondary to the financial analysis, the company’s management, competitive position, market share, and its strength and weaknesses of business segments are evaluated to supplement the quantitative analysis. Quantitative credit analysis and qualitative company analysis are combined to find those companies with diversified sources of revenue, experienced management and a sufficient level of assets, all in an attempt to increase the probability of investing in loans with companies that will be able to service debt in various economic scenarios. Although an issue may be attractively priced compared to alternative opportunities, deal structure is an important consideration in this asset class and adds another layer of complexity to be analyzed. Senior loans typically have varying degrees of protection within the capital structure and are issued with covenants to protect investors. Currently, over 98% of the senior loans in the strategy’s portfolio are secured by first lien on all of the assets of the borrower and are considered senior in the capital structure. Given the more conservative approach to investing in this asset class, the team typically maintains an intentional underweight to the lowest-rated and second lien issues within the universe despite the higher yield these issues may offer. Properly analyzing the quality of pledged collateral assets and strength of financial covenants to ensure they are investor friendly is another way the investment team believes they add value, in addition to the aforementioned financial statement and relative value analysis. Buy/Sell Analysis: Before investments are considered for inclusion into the portfolio, a thoroughly written credit analysis is presented to the three-person investment committee. The largest, most liquid names in the market typical comprise the bulk of the portfolio. Those issues that are attractively priced and which trade at a discount relative to other opportunities are considered first. As mentioned, all buy/sell investment decisions require approval by the committee. Although there are no restrictions on the minimum credit ratings of loans that may be purchased, the team targets credit quality in the B to BB range and they typically avoid purchasing credit below a rating of B-. The team

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maintains a dollar-weighted average time to the next interest rate adjustment on its floating rate investments of 60 days or less. The portfolio weight to floating-rate, non-investment grade senior loans is typically over 95%, although the portfolio guidelines impose a lower threshold of at least 80%. To provide consistent diversification through time, the investment team limits portfolio industry exposure to an average of not more than 3% over 35 industries and limits issuer exposure to an average of not more than ½ to 1% per issuer. An independent pricing service can market-to-market a majority of the portfolio, which is evidence that the team does focus on including highly liquid names in the portfolio. The typical portfolio consists of over 250 positions. Overall, 50% to 60% of the loans in the portfolio are originally purchased in the primary market; this percentage varies based on the fund’s monthly cash availability and investment needs, as well as opportunities within primary versus secondary markets. Sell discipline is primarily driven by changes in the team’s internally derived and managed credit scores. The investment team believes managing default risk has been paramount to the success of the strategy’s performance. Consequently, the team states they take prompt action upon changes in their credit outlook of an issuer. Risk Management

Default risk is the greatest risk the investment team attempts to mitigate. Proper diversification and a consistently applied investment process is the primary means by which they attempt to limit defaults and is assisted by their overall philosophy: focus on high quality senior loans with the highest relative value within the asset class. To ensure issues are being assigned proper credit ratings, the investment team continuously monitors and places on watch those issues with deteriorating credit fundamentals in an attempt to stay ahead of potential market downgrades. Focused credit meetings are held regularly to discuss pertinent changes in market- or company conditions that may warrant a change in credit score. To assist the investment team’s effort in monitoring portfolio risk they use a proprietary portfolio management system, named RDS System, with key portfolio data accessible to real-time primary and secondary transaction information. As part of monitoring the credit underwriting process, RDS provides detailed transaction information, relevant documentation, portfolio manager’s recommendation, and in-depth

quantitative and qualitative analysis originated by research analysts. Prior to all primary and secondary trades being placed, the system also tests for portfolio eligibility. No trades can be executed without prior approval by the Investment Compliance Team. Over the last ten years, the average yearly default rate for the strategy has been approximately half of the S&P/LSTA Index default rate, which shows the investment team is able to mitigate some default risk. In the event an issue defaults, the investment team is experienced with the restructuring process, having chosen not to utilize a separate team to handle workouts. Instead, the original research analyst assigned to a loan transaction continues to monitor the company through bankruptcy and workout, with the Senior Credit Officer overseeing the process. The team does employ internal counsel who provides as-needed advice on bankruptcy and workout processes; however, since they are only one investor of many, the process is seldom controlled by the team. Still, when they can take a leadership role to influence the workout process, they attempt to maximize returns for all members represented by the senior lending group. Leverage is used on a case-by-case basis only in separate account vehicles and is not used in the collective trust version of this strategy. The ING Prime Rate Trust and ING Senior Income mutual funds does use leverage for investment purposes. The typical leverage is 25% and has been as high as 45%. Periods of highly volatile loan prices magnify the performance impact to those strategies that use leverage. Risk Factors and Potential Red Flags

ING U.S. Investment Management was part of ING Insurance U.S. and an indirect subsidiary of ING Group N.V. (“ING Group”) a global, diversified financial services company. The corporate structure is currently in transition as ING Group spins-off ING U.S., including ING U.S. Investment Management, as a new, standalone publicly traded entity, Voya. THe parent now owns approximately 50% of the company and expects to fully divest its interest by the end of 2016 as mandated by the Netherlands government. While these are positive developments toward a more independent investment manager, we prefer firms with a sole business focus on investment management and in which the portfolio managers and employees have majority ownership. We feel that the risk of the strategy or the organization materially changing is lessened when the company is

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solely focused on investment management and when employees have a stake in the company. All senior members of the ING Senior Loan Group receive long-term compensation in the form of ING stock options, performance units, and restricted stock, which are subject to a three-year vesting schedule. Approximately 15% of senior level compensation is in the form of long-term equity incentives. Dan Norman and Jeff Bakalar were appointed as co-heads of the ING Senior Loan Group in January 2000 and continue to lead the stable team which has been together for more than a dozen years. Within the ING investment management division, the Senior Loan group is already a relatively autonomous unit, which indicates the team is very likely to remain as a key unit within the independent investment management firm. The investment team believes that prudent use of leverage can increase returns while avoiding an increased degree of risk. In particular, borrowing at a floating short-term rate and investing those proceeds at a higher floating rate shields investors from the risk of rising short-term rates since the assets also adjust to the new floating rate. However, periods of highly volatile loan prices could have an increasingly negative impact on strategies that use leverage. Historically, the average leverage has been 25% and as high as 45%. Those investors that invest in the mutual fund versions of this strategy that employ leverage should be aware that leverage magnifies performance, both on the upside and on the downside. Before the financial crisis of 2008, the senior loan asset class performance exhibited similar volatility but with higher return compared to investment grade, making it an attractive alternative to high yield. Although senior loans are senior secured credit, higher in the capital structure than high yield bonds and enjoy default recovery rates that are 20% higher, senior loans did experience similar drawdowns to high yield bonds in 2008. Investors sold loans to raise liquidity and the asset class’s liquidity was tested and exposed as being less liquid than investors originally expected. As a consequence, investors should consider this strategy as a long-term investment and should not necessarily rely upon it for immediate cash liquidity needs in the event of another crisis. Liquidity risk is however mitigated by the investment team’s focus on loans that meet certain liquidity requirements. In September of 2013, Marc Boatwright, Senior Vice President, left the team. Mr. Boatwright was a Team Leader and Portfolio Manager responsible for managing the Group’s CLO vehicles in addition to some oversight of the credit research team. Mohamed Basma, Senior Vice

President, has been promoted to fill the role. Mr. Basma brings thirteen years of experience at ING and another three years of industry experience to his new role. Performance

Over the last ten years, the investment team’s conservative investment approach has experienced a default rate that is approximately half that of the S&P/LSTA Index. The lower default rate contributes to the strategy’s outperformance over the most recent three, five, and ten years compared to the index, which is evidence that the investment team’s philosophy and process has provided consistent excess return over time. The most recent ten year period ending September 30th, 2013, the strategy has outperformed the S&P/LSTA index 90 bps gross of fee; volatility has been in line with the benchmark and tracking error was less than 2.5% over the last ten years. The strategy has a higher Sharpe ratio over the long-term due to a similar volatility and higher absolute return compared to the benchmark. Historically, the strategy has performed well in various economic environments, but the team structures the portfolio to outperform particularly in times of increasing credit stress and turmoil. During the financial crisis of 2008, the strategy experienced a similar default rate and drawdown compared to the index. The investment team believes that performance during this period was driven by market liquidity, and not necessarily due to deteriorating fundamentals. As such, the performance of the strategy was driven primarily by the asset class beta risk. The following year, in 2009, the strategy outperformed the index 120 bps gross of fee as the market prices of the loans within the strategy converged to a more reasonable price given fundamentals. Recommendation

Wurts & Associates recommends the ING Senior Loan strategy to investors seeking an interest rate hedge with a portion of their fixed income allocation. This investment team has been together for over ten years and has deep experience in the private loan market, which they believe gives them a competitive advantage in finding opportunities in the secondary market. The consistently lower default rate and positive excess return relative to the index demonstrates that the investment team has a solid investment process and philosophy.

ING Senior Loan Strategy

Performance Evaluation Date as of September 30, 2013

Benchmark S&P/LSTA Leveraged Loan

Universe eA Floating-Rate Bank Loan Fixed Income

Distribution of Monthly Returns Trailing Returns vs. Benchmark

Drawdowns

Calendar Year Returns

3 Year Rolling Performance: From Mar-04 to Sep-13

Relative Performance: Last 3 Years

3 Year Rolling Excess Performance: From Mar-04 to Sep-13

Performance Statistics: Apr-01 to Sep-13

0

10

20

30

40

50

60

Fre

quency,

%

-25.00 -15.00 -7.50 0.00 7.50 15.00 22.50

Total Return, %

0

2

4

6

8

10

12

Tota

l Annualized R

etu

rn,

%

1 Year 3 Years 5 Years 7 Years Since Inception

6.5

5.0 5.0

7.1

6.0 6.0

8.7

8.2 8.2

5.9

5.1 5.1

6.2

5.3 5.3

6.3

5.3 5.3

ING Senior Loan Strategy S&P/LSTA Leveraged Loan TR S&P/LSTA Leveraged Loan

-1

0

1

2

3

Excess A

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etu

rn,

%

Mar-04 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

ING Senior Loan Strategy S&P/LSTA Leveraged Loan TR

-10

-5

0

5

10

15

20

Tota

l Annualized R

etu

rn,

%

Mar-04 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-13


Mgr Bmk Unv AvgeA Floating-Rate Bank Loan Fixed Income Average2003 10.23 9.97 9.97 9.832004 6.46 5.16 5.16 6.252005 6.27 5.06 5.06 5.802006 8.07 6.74 6.74 7.842007 3.06 2.08 2.08 2.842008 -29.27 -29.10 -29.10 -26.212009 52.85 51.62 51.62 43.042010 9.98 10.13 10.13 10.892011 2.00 1.52 1.52 3.222012 11.27 9.66 9.66 10.12

Mgr Unv AvgSharpe Ratio 1.55 1.39Excess 2.80 NAAlpha, % 0.70 0.00Beta 1.07 1.00R-Squared, % 99.59 100.00Up Mkt Capture Ratio, % 116.84 100.00Down Mkt Capture Ratio, % 104.35 100.00Batting Average 0.83 0.00

Mgr Bmk S&P/LSTALeveraged Loan

Average Return, % 1.55 1.27 1.27Batting Average 0.82 0.00 0.00Best 3 Months Jun-09 Jun-09 Jun-09Best 3 Month Return 21.41 20.38 20.38Worst 3 Months Dec-08 Dec-08 Dec-08Worst 3 Month Return -23.81 -22.94 -22.94Average Gain, % 2.91 2.72 2.72Average Loss, % -6.44 -5.09 -5.09Gain Frequency, % 86.00 82.00 82.00


-35-30-25-20-15-10

-50

Max

Dra

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-30.0 -30.1

ING Senior Loan Strategy S&P/LSTA Leveraged Loan


Risk Analysis Date as of September 30, 2013



Risk Statistics Trailing Risk vs. Benchmark

Risk/Return Analysis

3 Year Rolling Risk: From Oct-10 to Sep-13

Up/Down Market Capture Ratio: Last 3 Years

Modern Portfolio Statistics

1 Yr 3 Yrs 5 Yrs 10 YrsAlpha, % 1.09 0.70 0.31 0.78Beta 1.07 1.07 1.03 1.03R-Squared, % 99.85 99.59 99.82 99.79Annual Return, % 6.49 7.11 8.75 6.20Alpha, % 0.00 0.00 0.00 0.00

Volatility Measurements

1 Yr 3 Yrs 5 Yrs 10 YrsStandard Deviation 1.70 4.47 16.18 11.99Tracking Error 0.13 0.41 0.85 0.64

Risk-Adjusted Returns

1 Yr 3 Yrs 5 Yrs 10 YrsSharpe Ratio 3.67 1.55 0.59 0.42Treynor Ratio 0.06 0.07 0.08 0.04Information Ratio 3.82 1.59 0.54 0.52Sortino Ratio 0.00 -4.02 -27.93 -37.09Batting Average 1.00 0.83 0.65 0.80Sharpe Ratio 3.03 1.39 0.57 0.35

Annualized StandardDeviation

1Year

3Years

5Years

7Years

10Years

Manager 1.70 4.47 16.18 14.40 11.99Benchmark 1.59 4.16 15.66 14.01 11.67S&P/LSTA Leveraged Loan 1.59 4.16 15.66 14.01 11.67

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Page 8

Active Management: A method of portfolio management based on the assumption that security prices do not always reflect their true, or intrinsic, value and that this disparity will be corrected over time. Managers engaging in active management attempt to find securities priced below their intrinsic value. It is theorized that as the rest of the market realizes the security is selling below its intrinsic value, the forces of supply and demand will drive the price up and the investment will make money. Agency Securities: Obligations of agencies of the United States government but not obligations of the government itself. While not backed by the full faith and credit of the U.S. government, these securities are considered to be virtually default free because it is widely viewed that the United States government would not let one of its agencies default. Some of the agencies issuing these bonds are FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae). Alpha (α): The excess return of a portfolio after adjusting for market risk. This excess return is attributable to the selection skill of the portfolio manager. Alpha is calculated as: Portfolio Excess Return – (Beta x Excess Market Return). Arithmetic Mean: The mathematical average of a series of numbers. Asset Allocation: The way in which the assets of an investment portfolio are split among asset classes. Studies have shown that more than 90% of the variability of the return of a portfolio is due to asset allocation. Barclays Capital Aggregate Bond Index: Broadly diversified bond index that serves as a proxy for the bond market as a whole. It contains all types of fixed income securities, including mortgage- and other asset-backed securities. Barclays Capital Government/Credit Bond Index (BCGC): Index containing Treasure securities, foreign (denominated in US dollars) and domestic corporate bonds, as well as agency securities. Benchmark: Investment index used as a standard by which to measure the relative performance of an overall portfolio or an individual money manager. Appropriate benchmarks are selected based on their similarity to a portfolio or to the style of the individual money manager being measured. For example, a large cap core equity manager would be appropriately measured against the S&P 500 index. Alternatively, a fixed income core manager might be measured against the Barclays Capital Aggregate Bond index. Beta (β): A measure of systematic, or market, risk, or that part of risk in a portfolio or security that is attributable to general market movements. It is calculated by dividing the covariance of a security by the variance of the market. Book-to-Market: The ratio of book value per share to market price per share. Growth managers will typically have low book-to-market ratios while value managers will have high book-to-market ratios. Bottom Up: An approach of equity management generally referred to as stock picking. Using this approach, a manager does not rely as much on industry or economic variables as much as on the characteristics of individual companies. These managers try to find companies that will

fare well based on internal strength, possibly even in the face of adverse economic or industry movements. Collateralized Mortgage Obligations (CMOs): A security backed by a pool of pass-through securities or mortgages that has a stated maturity. These securities provide a much more stable and predictable cash flow pattern than do pass-through securities. Different classes (tranches) of bonds are issued with different maturities, “A” being the shortest maturity bond and “Z” being the longest maturity bonds. The cash flows from the underlying assets are used to pay interest and retire the bonds in order of maturity. Commercial Paper: A short-term, unsecured promissory note generally issued by corporations with high credit ratings. The maturity of these notes is usually less than 270 days. Commercial paper is considered to be part of the money market. The ratings of commercial paper range from P-1 (highest rating) to P-4 (lowest rating). Commingled Fund: A fund consisting of assets from several accounts that are blended together. Investors in a commingled fund investment benefit from economies of scale, which allow for lower trading costs per dollar investment, diversification and professional money management. Convertible Bonds: Bonds that contain an embedded call option. They are convertible into the common stock of the company issuing the bonds at some pre-specified price. The yield on these bonds is typically less than that of a non-convertible bond due to the embedded call option and the resulting increased opportunity to realize capital gains. Correlation Coefficient (r): A measure of the relative movement of returns of one security or asset class versus another over time. A correlation of 1 means the returns of two securities move in lock step over time. A correlation of –1 means the returns of two securities move in the exact opposite direction over time. Correlation is used as a measure to help maximize the benefits of diversification when constructing an investment portfolio. Credit Quality: A measure of credit worthiness of an issuing company or agency as reflected by a grade given to an interest bearing security. Credit quality is rated on a scale of AAA to D and measures the ability of the borrowing company or agency to make both interest and principal payments as set forth in the bond indenture, or contract. Diversification: The practice of selecting several assets with differing return characteristics so as to reduce overall portfolio volatility. Downside Risk: The likelihood that the return on an investment portfolio will fall below a pre-specified rate of return, e.g., the actuarial assumed rate of return. Duration: A measure of a bond’s effective term to maturity. Duration takes into account the size and timing of cash flows in order to determine the sensitivity of the price of a bond to a change in interest rates. The higher the duration, the more sensitive a bond is to interest rates changes. Efficient Frontier: A line plotted on a risk / return graph that represents alternative portfolios with the highest amount of return for a given level of risk.

Glossary of Terms

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Emerging Markets: Securities markets in less developed countries. Emerging markets are typically characterized by market inefficiencies, lack of information, lack of price continuity, little liquidity, and lack of adequate rules and regulations. There are typically a small number of players in these markets and price manipulation is common. High returns are available due to the extremely high risk associated with participation in these markets. Excess Return: Rate of return in excess of the risk-free rate, typically defined by the rate of return on short-term U.S. government obligations, i.e., T-bills. (Also known as Risk Premium.) Excess Return Ratio: A measure of a money manager’s ability to earn additional return relative to the additional risk incurred in doing so. The ratio is calculated as follows: (Portfolio Return – Benchmark Return) / Tracking Error. Geometric Mean: Equal to the annualized compound rate of return over a given period. Growth Manager: Refers to the style of an equity manager. A growth manager typically seeks capital appreciation by choosing stocks that are expected to grow at a faster rate than their peers or the market as a whole. Typical portfolio characteristics of this strategy include high price-to-earnings ratio, low book-to-market ratio, and high and sustained earnings per share growth. Index: A passively managed portfolio of securities that remains constant from one period to the next. Indexes are used to gauge the performance of sectors of the market or the market as a whole. In addition, indexes are used as a benchmark for measuring the performance of investment managers. Information Ratio: A measure of a manager’s ability to earn excess return without incurring additional risk. It can be calculated as follows: alpha divided by tracking error. Investment Grade: Investment grade bonds are bonds that are rated BBB or higher. Junk Bonds: Also called high-yield bonds, these are bonds with ratings from BB to D. They offer higher yields due to their increased risk of default. A bond rated D is already in default while a bond rated C is expected to default at some point in the future. Large Capitalization Stocks: Also referred to as large-cap stocks, these are the securities of companies whose overall market capitalization is roughly greater than $6 billion. Market Capitalization: The total value of a publicly traded company. Market capitalization is determined by multiplying the total number of shares that a company has outstanding by the market price of each of those shares. Companies are classified by market capitalization as small, medium, or large. Market Efficiency: Defined as the ability of a market to process information quickly and correctly so that every security traded in that market is always fairly priced based upon current expectations of the future. Mean-Variance Optimization: The process of building an Efficient Frontier through the evaluation of all possible combinations of selected asset classes with different risk and return characteristics.

Medium Capitalization Stocks: Also referred to as mid-cap stocks, these are the securities of companies whose overall market capitalization is roughly between $1.5 billion and $6 billion. Modern Portfolio Theory: Principles underlying analysis and evaluation of rational portfolio choices based on risk-return trade-offs and investment diversification. MSCI EAFE Index: The Morgan Stanley Capital International Europe Australia and Far East (MSCI EAFE) Index is a value-weighted index composed of equity securities traded in the countries that give the index its name. This index is a typical benchmark for international equity managers as well as the basis for many international equity index funds. Mutual Fund: Pools of money are managed by an investment company. They offer investors a variety of goals depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor’s money. Still others seek to invest in companies that are growing at a rapid pace. Mutual funds are investment companies regulated by the Investment Company Act of 1940. Passive Management: A method of portfolio management that is based on the belief that all securities are fairly priced and that there are no additional returns to be made from security selection. Often called a buy and hold strategy or indexing, this method comes from purchasing a well-diversified portfolio of securities and holding them indefinitely. Pass-Through Securities: A pool of mortgages is formed and then shares in the pool are issued. Holders of the shares receive the cash flows from the underlying mortgage pool (i.e. the interest and principal payments). One problem with pass-through securities is the unpredictable nature of the cash flows due to events such as prepayment of the underlying mortgages. Policy Index: A customized performance benchmark designed to reflect the characteristics of an investment portfolio. The policy index represents the return that would have been produced by passive investment in the target asset allocation of a plan. Portfolio Excess Return: The rate of return of a portfolio over and above the risk-free rate. Portfolio excess return is attributed to the amount of additional market risk born by the portfolio plus the skill of the portfolio manager. Portfolio Turnover: The percentage of a portfolio that is sold and replaced (turned over) during a given time period. Low portfolio turnover is indicative of a buy and hold strategy while high portfolio turnover implies a more active form of management. Price-to-Earnings Ratio: Also called the earnings multiplier, it is calculated by dividing the price of a company’s stock into earnings per share. Growth managers typically hold stocks with high price-to-earnings ratios whereas value managers hold stocks with low price-to-earnings ratios. Price-Weighted Index: An index whose value is simply the arithmetic average of the prices of the securities that the index contains. In this type of index securities with the highest prices will have the greatest effect on the value and return of the index. The Dow-Jones Industrial average is an example of a price-weighted index.

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Relative Return: The difference between the rate of return of a portfolio and its benchmark. Residual Risk: The portion of total risk attributable to the unique risk of a given portfolio or security (also known as unsystematic risk). The key goal of diversified portfolio is to reduce residual risk to the greatest extent possible. It is calculated by subtracting market risk (or Beta) from total risk. Risk Premium: An expected return in excess of the risk-free rate. The premium provides compensation for the assumption of risk. Risk-Free Rate: The rate of interest that one can earn on an investment with no default risk. It is generally assumed to be the interest rate on a 91 day T-Bill. R-Squared: Also called the coefficient of determination, it measures the amount of variation in one variable explained by variations in another. In the case of investments, the term is used to explain the amount of variation in a security or portfolio explained by movements in the market or the portfolio’s benchmark. Russell 2000 Index: A value-weighted small-cap stock index composed of the 2000 securities with the lowest market capitalization in the Russell 3000 index. This is one of the most common benchmarks for small-cap equity managers and is compiled by the Frank Russell Company. Russell Mid-Cap Index: A value-weighted index composed of the 800 smallest companies, by market capitalization, in the Russell 1000 index. This index is compiled by the Frank Russell Company and, as its name implies, is used as a benchmark for mid-cap portfolios. S & P 500 Index: A value-weighted index compiled by Standard and Poor’s that is comprised of 500 of the largest companies traded on the NYSE and NASDAQ exchanges. This is the most common proxy for the equity market as a whole and is the typical benchmark for large-cap portfolios. Sharpe Ratio: A measure of portfolio efficiency. The Sharpe Ratio indicates excess portfolio return for each unit of risk associate with achieving the excess return. The higher the Sharpe Ratio, the more efficient the portfolio. It can be calculated as: Portfolio Excess Return / Portfolio Standard Deviation. Small Capitalization Stocks: Also referred to as small-cap stocks, these are securities of companies whose overall market capitalization is roughly less than $1.5 billion. Standard Deviation (σ): A measure of volatility, or risk, inherent in a security or portfolio. The standard deviation of a series is a measure of the extent to which observations in the series differ from the arithmetic mean of the series. For example, if a security has an average annual rate of return of 10% and a standard deviation of 5%, then two-thirds of the time, one would expect to receive an annual rate of return between 5% and 15%. Systematic Risk: Often called market risk, it is risk that is due to macroeconomic factors and as such this type of risk affects all risky assets and cannot be reduced through diversification. Top Down: An approach to equity management whereby the manager first forms an opinion on the direction of the economy as a whole. Next, the manager determines how their economic forecast will affect

certain industries and finally how the industry effect will apply to individual companies within those industries. Tracking Error: The standard deviation of the difference between the rate of return of a portfolio and its benchmark. Treasury Securities: Obligations of the United States government, which are considered free of default risk. Universe: Also called a peer group, a universe is a large number of portfolios of a similar style. These portfolios can be divided into deciles or quartiles and then used for performance measurement and comparative purposes. Portfolios are ranked within the universe, which tells the investor how well a manager has done relative to his or her peers. Unsystematic Risk: Also called company specific risk, it is risk that is unique to a particular company due to things such as the nature of their business or their use of leverage. Unsystematic risk can be reduced or eliminated by holding a well-diversified portfolio. Value: Refers to the style of an equity manager. A value manager seeks to create returns by purchasing stocks selling at a discount to their true, or intrinsic, value. Typical portfolio characteristics of this strategy include a low price-to-earnings ratio, high book-to-market ratio, and high dividend yield. Value-Weighted Index: An index whose value is computed by determining the relative weightings of each of the securities that it contains by dividing each securities total market capitalization by the total market capitalization of all of the securities in the index. This weight is then applied to a base value for the index, usually 100. The change in the index is computed by recalculating the relative weightings using the current market capitalization for each security divided by its base time period market capitalization and multiplying the sum of all the new weightings by the initial index value. In a value-weighted index companies with the largest market capitalization will have the greatest effect on the return of the index due to their larger relative weighting. The S & P is an example of a value-weighted index. Weighted Average Maturity (WAM): A measure of the overall maturity of a bond portfolio that can assist an investor in determining a portfolio’s sensitivity to changes in interest rates. The higher the weighted average maturity, the greater the effect of a change in interest rates on portfolio value.

Page 1

Manager Evaluation: Eaton Vance Management

Senior Floating-Rate Bank Loans Last Updated: September 2013

Strategy Basics

Asset Class: Senior Bank Loans Firm Inception: 1924 Firm Assets: $169 Billion Strategy Inception: 1999 Strategy Assets: $42 Billion Min. Size, MF (EIBLX): $250,000 Fee, Mutual Fund: 0.77% All Assets Min. Comm. Fund $1 Million Fee, Comm. Fund:* 0.55% All Assets Min. Size, Sep. Acct: $150 Million Fee, Separate Account: 0.48% First $100 Million 0.40% Next $100 Million 0.35% Remaining Assets

* 0.50% under a “Service Lite” model agreement where portfolio managers will not travel for clients meetings and access will be limited. There is also no ability to customize reporting under this fee option.


Eaton Vance was formed in 1979 by the merger of two investment managers, Eaton & Howards and Vance Sanders & Company – a publicly traded company. Its roots, however, trace back to 1924 when employees of Learoyd, Foster & Company and predecessor firm of Vance, Sanders & Company started the first mutual fund, Massachusetts Investors Trust. Eaton Vance today is a public company in which all voting shares of Eaton Vance Management are deposited into a trust and the trustees are all officers of Eaton Vance or its affiliates. Non-voting shares of Eaton Vance are publicly traded and listed on the NYSE under the symbol EV. Eaton Vance is well-known by its tax-managed funds, but today tax-exempt assets represent much less than 20% of firm assets under management. Retail assets remain around 59%, institutional assets at 34% and the remaining 7% on behalf of high net worth clients. These assets are spread across 31% fixed income, 33% equity, 30% implementation services (via their newest subsidiary Parametric Portfolio Associates), and 6% alternative strategies. Eaton Vance’s AUM totals around $169 billion;

including subsidiaries of Atlanta Capital, Parametric, Fox Asset Management and Hexavest increases the total to $273 billion. The senior loan strategy, which is this focus of this analysis, has approximately $42 billion in assets. Of the strategies Eaton Vance manages, they consider this a key focus of the firm, not only because it makes up nearly 25% of the firm AUM, but because they are one of the few managers with experience and team history going back to 1989. Of the bank loan mutual fund universe, the mutual fund for this strategy, ticker EIBLX, has one of the longest track records and one of the highest total assets in the Bank Loan sector at over $14B. Strategy Background The senior bank loan investment team focuses exclusively on adding value through avoiding defaults, which have a costly effect on performance due to the asymmetric payoff characteristic of bank loans (i.e., limited upside potential with greater downside risk). They remain cognizant that over the long run bank loan performance should be driven by credit fundamentals and not by behavioral forces or technical flows. As such, the team utilizes a fundamental, bottom-up approach to investing with a focus on credit analysis. Their philosophy leads the investment team to target attractive income-producing bank loans with a low probability of default over the entire credit cycle, placing less emphasis on loans with potential price appreciation. They believe attempting to enhance portfolio yield by reaching for lower-quality credit adds geometrically to risk without a comparable increase in return. Nearly the entire portfolio is invested in higher-quality credit rated BB-B to avoid the unattractive risk-reward characteristics inherent with lower-quality bank loans. The conservative philosophy of investing for income rather than price appreciation means the team targets small over-/underweights relative to the benchmark. Of the approximately 1,100 issues in the benchmark, the portfolio typically invest in 350-450 issues of higher credit quality, with broad diversification by industry, geography,

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type of transaction and borrower. In addition, the team avoids loans to technology companies that need high growth in order to meet debt obligations; they also avoid loans that are not current on principal and interest payments. Due to the large amount of assets managed in this strategy, the team is typically invited to participate in new issue loans coming to market. As a consequence, the majority of loans within the portfolio are new issue, although this ebbs and flows with market trends and the team’s assessment of valuations. Additionally, the team may have some pricing power when invited to new issues; however, the expectation to take large positions in favorable issues can result in a lack of agility in the marketplace. In October 2013, the team announced their intention to largely forego private status in favor of combining their internal team’s views in both private loans and publicly-traded high yield bonds. This is a slight change to their historical practice of remaining a private market participant in all but a few select issues. Instead, now they will elect private status only on those issues that are in restructuring or workout to participate in those negotiations. Most of the team’s bank loan strategies invest solely in bank loans, instead of mixing bank loans with some allocation to high yield. The exception is the Floating Rate High Income fund, ticker EIFAX, which can invest up to 20% in high yield. The commingled fund and the mutual fund (EILBX) versions of the recommended strategy use no leverage. In addition, the commingled fund does not opportunistically allocate to out-of-benchmark high yield issues. The EILBX version can and does allocate a small portion to high yield, although historically the allocation has been below 2% and in most years it has none. Key Investment Professionals

Eaton Vance’s Bank Loan team consists of eight portfolio managers, four of whom are dedicated portfolio managers, and nine credit analysts. Scott Page is head of the Bank Loan team and has been with Eaton Vance since inception of the team. Scott Page, Vice President, Director of Senior Loan Funds Mr. Page has been a member of Eaton Vance’s Bank Loan Team since 1989 and was named Co-Director in July 1996. In November 2007, he was named Director of Bank Loans. Prior to Eaton Vance, Mr. Page was an Investment Officer

at Dartmouth College Investment Office, assistant Vice President at within Citicorp’s Leverage Finance group, and Credit Review Officer at Chase Manhattan Bank. Mr. Page earned his MBA from the Amos Tuck School at Dartmouth College in 1987 and his BA from Williams College in 1981. He is a current CFA Charterholder. John Redding, Vice President, Portfolio Manager Mr. Redding has been a member of Eaton Vance’s Bank Loan Team since 1998. In September 2005, Mr. Redding relocated to London to lead the group’s entry into the European loan market. Mr. Redding previously focused on credit analysis; asset-backed transactions; and stressed loan situations, including serving on several steering committees for lender syndicates. Prior to joining Eaton Vance, he worked as a Leveraged Loan Credit Analyst for Erste Bank and Creditanstalt-Bankverein. Mr. Redding earned his BS from the State University of New York at Albany and is a current Board Member of the LMA. Craig Russ, Vice President, Portfolio Manager Mr. Russ is a co-manager for several Eaton Vance senior loan funds and has been a member of the Bank Loan Team since 1997. Prior to joining Eaton Vance, Mr. Russ was a Vice President in the Specialized Lending Division of State Street Bank. Mr. Russ is a graduate of Middlebury College and studied at the London School of Economics and Political Science. Andrew Sveen, Vice President, Head Trader, Portfolio Manager Mr. Sveen has been a member of the Eaton Vance Bank Loan Team since 1999. He previously worked at State Street Bank as a Credit Analysts assigned to median and communications. Mr. Sveen earned his MBA from the William E. Simon School at the University of Rochester and his BA from Dartmouth College. He is a CFA Charterholder. Michael Kinahan, Vice President, Structured Portfolio Manager Mr. Kinahan has been a member of the Bank Loan Team since 2000 and is responsible for structuring, analyzing and managing the Bank Loan team’s structured products and several institutional accounts. Mr. Kinahan joined Eaton Vance in 1998 and previously served as the Manager of Financial Planning and Analysis. Prior to joining Eaton Vance, he was an accounting manager with Australian Portfolio Managers in Sydney, Australia and an audit manager at Deloitte & Touche, LLP in Boston. Mr. Kinahan earned his BS from the University of Southern California. He is a CFA Charterholder.

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Other Considerations While there have been no departures on the Senior Floating Rate Loan strategy, in the third quarter of 2013, the team added Howard Tiffen as a Senior Portfolio Advisor. Mr. Tiffen will report directly to Mr. Scott Page and Mr. Craig Russ to support the global sales and market efforts specifically for this strategy. On a firm level, Mr. Scott Ruddick, Managing Director of Institutional, resigned from Eaton Vance and is in the process of being replaced. Wurts & Associates does not believe this will have a material impact on this strategy at this point in time. Process

The Eaton Vance Senior Loan group utilizes a bottom-up, fundamental process to build a portfolio that is highly diversified across industry and issuers while attempting to achieve a lower default rate compared to the benchmark. They screen the investable universe using a systematic process with four categories: fundamental credit analysis, quantitative analysis, relative value analysis, and structural analysis. All issues are assigned an internal risk rating using these four categories. The resulting portfolio consists of 350-450 loans, typically with a higher credit quality in the BB-B range, which has historically outperformed in down markets given the lower realized defaults. The investment team whittles down the 1,200 loan universe to approximately 800 issues using two criteria: 1) EBITDA > $75 million and 2) Deal size > $200 million. Compared to smaller-sized companies, larger companies typically have stronger collateral, predictable cash flows, diversified revenues sources, and multiple financing options. Smaller deal size, on the other hand, is usually accompanied by higher illiquidity risk that the team finds unfavorably rewarded. In addition to these two criteria, the investment team avoids industries where business conditions can change abruptly, such as high technology, or that do not bear leverage well, such as oil and gas, and commodity-driven companies. Qualitative Credit Analysis: Fundamental measures such as company scale and market position within an industry, along with the industry outlook are reviewed to determine cash flow risk, companies’ ability to generate sufficient cash to meet debt obligations. Ultimately, cash flow generation is the focal point of their entire process.

The portfolio managers often visit companies, talk with management and attend due diligence presentations in an attempt to understand a company’s business, its opportunities going forward, and reasons for obtaining funding. They also maintain contacts with competitors, suppliers, customers, and financial industry sponsors to gain a second-layer perspective of the company. A qualitative assessment can quickly weed out obviously unattractive companies and encompasses “big picture” ideas, but it will often lack the necessary detail needed for analysts to determine an issuers rating. Therefore, a large part of the analyst’s time is spent reviewing quantitative assessments and business projections. Quantitative Analysis: Primary investment team focus is on cash flow rather than debt/capitalization ratios. These ratios are emphasized by the rating agencies and are often inaccurate because they are backward-looking. While the investment team believes these measures are important, ratios can change quickly depending on a company’s prospects, so a better analysis looks to the ability of a company to generate sufficient cash flow to meet debt payments under multiple future scenarios. This becomes the framework by which the team analyzes credit. Other measures such as historical operating performance and financial condition, as well as stability of enterprise value are also reviewed as part of this analysis. Financial information and business plans provided by the company and agent bank are used to construct cash flow projections. From there, scenario analysis determines probability-based cash flows and stress tests summarize worst-case scenarios. The investment team does receive and use material non-public information (monthly budgets, interim financial statements and information gained from private management meetings) as part of their credit analysis. In addition, as syndicated lenders issuing collateralized loan obligations (CLOs), they have substantial direct access to company management, which adds another informational layer that arguably gives this team a competitive edge. Structural Analysis: Due to the senior position of bank loans within the capital stack, varying degrees of collateral quality and deal structures, investment teams must consider the structure of each issue by assessing the legal documents. As such, the team often utilizes legal review by outside counsel as needed. In addition to outside counsel, the investment team includes two recovery experts in the event of loan defaults: David Aloise and David McKown, both of whom have been with Eaton

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Vance for over 12 years. They frequently take an active role in negotiations to benefit investors in case an issuer defaults. This duo played a larger role during 2009, when approximately 8% of the portfolio was in default. Relative Value Analysis: The team may find an issue fundamentally attractive, but priced richly relative to other, similar issues with strong fundamentals. A review of technical market conditions (supply and demand), primary versus secondary market pricing, and comparative assessments of risk/returns versus other market opportunities influence the relative value analysis. Portfolio Construction: All four categories are given a score of one through five and are combined to form an overall score for each issue. An issue with a score of one is considered to be the lowest risk whereas one with a score of 5 is the highest. The analysts write a detailed report summarizing the reason for each component score and include the aforementioned qualitative and quantitative data, as well as details of the deal including amount, LIBOR spread, tenor, ratings for senior and junior debt, agent in the deal, collateral, prepayment provisions, industry and origin, and repayment schedule. This report is known as the “bank loan credit report” which is an input into the investment team’s proprietary web-based monitoring and portfolio management system. This system integrates credit information and all research in one, central location that analyst and portfolio managers can access anywhere. Analysts present their reports to the investment team’s portfolio manager who then approves the buy. Once a new recommendation is included in the portfolio, the analyst who originally made the recommendation is responsible for tracking and monitoring the issue. The portfolio manager makes the allocation decision based on the relative risk ranking of the issue. The following table reflects targeted holdings of relative risk ranking within the portfolio:

Relative Risk Ranking

Position Size # of Holdings % of Market Value

1 0.8%-1.5% 20% 30% 2 0.6%-0.8% 20% 25% 3 0.4%-0.6% 20% 20% 4 0.3%-0.4% 20% 15% 5 <0.3% 20% 10%

Portfolio managers typically overweight issues with a risk ranking of 1 compared to issues with a risk ranking of 5. These weightings are fairly static over time in an attempt

to systematically optimize risk and return. Allocations are made regardless of benchmark weights, so tracking error is not considered when making allocations. The 350-450 names within the portfolio and maximum position size ensures that the portfolio tracking error will be kept within a reasonable range over time. As part of the monitoring process, analysts continually re-evaluate the risk ranking of each issue as they receive new information. Positions that receive a higher risk ranking may be trimmed to conform to position sizes reflected in the table above. In contrast, portfolio managers may add to those positions that receive a better risk ranking. In addition, the investment team meets on a formal basis at least twice a week to discuss market conditions and individual credits. During these meetings analysts present findings to the portfolio managers, who ultimate make final buy and sell decisions. Although meetings are held frequently to discuss individual names, the team’s focus on income rather than price appreciation leads to a lower portfolio turnover; an average of 37% over the last ten years with an average holding period of approximately 1.5-3 years. Risk Management

The investment team remains focused on higher credit quality loans to mitigate default risk. Of these, they assign a proprietary risk rating for each issue and assign allocation limits to each rating, overweighting higher quality ratings compared to lower quality ratings. Although they do not use tracking error to measure relative risk compared to the benchmark, the highly diversified holdings across industries ensure that the portfolio is properly diversified. Analysts continually monitor their assigned credits and update issuer’s relative risk rankings as they receive information. Frequently held meetings, where analysts are able to discuss relevant concerns, facilitates proper communication to portfolio managers who then can take quick action to mitigate risk. As part of this, the team utilizes a web-based database they describe as a credit monitoring and portfolio management system. This system is another layer of their risk management. Eaton Vance’s compliance department also receives a daily feed of holdings and trades directly from the custodian to ensure trades are within client guidelines. Risk Factors and Potential Red Flags

Page 5

This strategy currently has approximately $42 billion assets, which is higher by $26 billion from four years ago, and represents around 6.7% of the U.S. leveraged loan market. The investment team is comfortable managing assets up to 8% of the total market, which is an additional $8 billion at the current size of the market. Part of this growth in assets can be attributed to the inflows from investors seeking a hedge against rising rates without giving up yield. Many managers in this space have experienced a similar percentage increase in their assets. Typically, assets increasing at this rate create a concern, but given the depth and experience team we believe they can handle the increased assets under management using the same philosophy and process. We will continue to monitor excessive asset growth going forward, but more realistically, the issue will be one of massive technical flows out of the bank loan space which could adversely impact market pricing and liquidity. Impacts to the bank loan team or, more generally, to the Eaton Vance organization in that case are not expected to be material. The mutual fund version of this strategy, ticker EIBLX, has a historical tracking error of around 1.0% compared to the composite. Higher tracking error over the last five years is attributed to a small high yield bond allocation (bonds are typically more volatile than bank loans). Before the investment team made a decision to invest in high yield opportunistically, the tracking error between the two had been much tighter. Also, comparable tracking error in 2008 was wide due to the mutual fund’s large outflows during a time of low liquidity, i.e., performance suffered for remaining investors because of the wide bid-ask spreads in the market at that time. While fund guidelines state that the investment team can allocate up to 20% in high yield bonds, the maximum historical allocation is 3.2%. Before the financial crisis of 2008, the senior loan asset class performance exhibited similar volatility but with higher return compared to investment grade, making it an attractive alternative to high yield. Although senior loans are senior secured credit, higher in the capital structure than high yield bonds and enjoy default recovery rates that are 20% higher, senior loans did experience similar drawdowns to high yield bonds in 2008. Investors sold loans to raise liquidity and the asset class’s liquidity was tested and exposed as being less liquid than investors originally expected. As a consequence, investors should consider this strategy as a long-term investment and should not necessarily rely upon it for immediate cash liquidity needs in the event of another crisis. Liquidity risk

is mitigated by the investment team’s focus on loans that meet certain liquidity requirements. Performance

The investment team’s focus on higher quality credit is evident in the strategy’s performance over the last ten years. In markets where CCC-rated credit and highly cyclical names rally this strategy underperforms. In contrast, in a year such as 2008 the strategy composite outperformed 430 bps gross of fee, not only because the loans within the portfolio did not sell-off as much, but also because it experienced a default rate that was approximately half that of the S&P/LSTA Leveraged Loan index. The outperformance can be attributed both to their credit quality allocation and credit selection, credit selection being the main source where they attempt to add value. Long-term absolute performance does not look attractive relative to the S&P/LSTA Leverage Loan index, but this is mainly because of the strategy’s persistent allocation to higher quality credit. The higher allocation to higher quality credit has led to a tracking error up to two percent, though lately it has been near the upper bound. The three, five, and ten year gross of fee excess return is 10 bps, 20 bps, and 20 bps, respectively, as of 09/30/2013. Given the strategy’s lower volatility, the Sharpe ratio is higher relative to the benchmark which means absolute performance is being efficiently rewarded for the risk taken compared to the benchmark. Given the investment team’s choice to consistently overweight high quality credit, performance relative to the Credit Suisse BB Leveraged Loan index provides a better perspective into fund performance. The three, five, and ten year gross of fee excess return is 170 bps, 230 bps, and 30 bps, respectively, as of 09/30/2013. Regression-based attribution analysis reveals risk exposure to this index that is material though variable through time. Recommendation

Wurts & Associates recommends the Eaton Vance Senior Floating Rate strategy to investors seeking an interest rate hedge with a portion of their fixed income credit allocation. Clients that would like a more defensively-postured portfolio, with a consistent underweight to lower credit quality compared to the S&P/LSTA Leverage Loan index will find this strategy compelling. In addition, this strategy has one of the longest observable track

Page 6

records and a deeply experienced team making it a top-tier choice within the bank loan universe.

Eaton Vance: EV BL





Drawdowns


3 Year Rolling Performance: From Mar-02 to Sep-13


3 Year Rolling Excess Performance: From Mar-02 to Sep-13

Performance Statistics: Apr-99 to Sep-13

0

10

20

30

40

50

60

70

Fre

quency,

%

-12.80 -7.20 -4.00 -0.80 2.40 5.60 8.80

Total Return, %

0

2

4

6

8

10

12

Tota

l Annualized R

etu

rn,

%

1 Year 3 Years 5 Years 7 Years Since Inception

5.0 5.0

6.1 6.0

8.08.2

5.6

5.15.5

5.3 5.4 5.3

Eaton Vance: EV BL S&P/LSTA Leveraged Loan

-3

-2

-1

0

1

2

3

Excess A

nnualized R

etu

rn,

%


Excess

-10

-5

0

5

10

15

20

Tota

l Annualized R

etu

rn,

%



Mgr Bmk Unv Avg2003 6.48 9.97 9.83

2004 4.62 5.16 6.25

2005 5.32 5.06 5.80

2006 7.03 6.74 7.84

2007 3.04 2.08 2.84

2008 -24.82 -29.10 -26.21

2009 45.64 51.62 43.04

2010 9.65 10.13 10.89

2011 3.47 1.52 3.22

2012 8.23 9.66 10.12

MgrSharpe Ratio 1.84

Excess 0.14

Alpha, % 1.22

Beta 0.80

R-Squared, % 97.07

Up Mkt Capture Ratio, % 92.94

Down Mkt Capture Ratio, % 70.60

Batting Average 0.47

Mgr Bmk

Average Return, % 0.44 0.43

Batting Average 0.48 0.00

Best 3 Months Apr-09 - Jun-09 Apr-09 - Jun-09

Best 3 Month Return 18.45 20.38

Worst 3 Months Sep-08 - Nov-08 Sep-08 - Nov-08

Worst 3 Month Return -22.22 -25.48

Average Gain, % 0.83 0.97

Average Loss, % -1.76 -1.84

Gain Frequency, % 85.06 81.03


-35

-30

-25

-20

-15

-10

-5

0

Max

Dra

wd

ow

n R

etu

rn, %

-30.1

Max Drawdown Return

Eaton Vance: EV BL









1 Yr 3 Yrs 5 Yrs 10 YrsAlpha, % 0.63 1.22 0.58 0.58

Beta 0.87 0.80 0.90 0.89

R-Squared, % 94.93 97.07 97.70 97.74

Annual Return, % 5.02 6.08 8.01 5.53


1 Yr 3 Yrs 5 Yrs 10 YrsStandard Deviation 1.46 3.18 9.47 7.20

Tracking Error 0.39 0.94 1.80 1.44


1 Yr 3 Yrs 5 Yrs 10 YrsSharpe Ratio 3.30 1.84 0.84 0.54

Treynor Ratio 0.06 0.07 0.09 0.04

Information Ratio 3.43 1.91 0.85 0.77

Sortino Ratio -0.44 -4.86 -26.11 -36.03

Batting Average 0.33 0.47 0.47 0.50


1Year

3Years

5Years

7Years

10Years

Manager 1.46 3.18 9.47 8.61 7.20

Benchmark 1.63 3.90 10.44 9.62 8.04

0

1

2

3

4

5

6

7

8

9

10

11

Tota

l Annualized S

tdD

ev,

%

1 Year 3 Years 5 Years 7 Years 10 Years


3 Year Risk/Return

0

3

6

8

11

Tota

l Annualized R

etu

rn,

%

0 2 3 5 6


0

5

10

15

20

Tota

l Annualized S

tdD

ev,

%



3 Year Alpha/Beta

-8

-4

0

4

8

12

Alp

ha,

%

-1.0 0.0 1.0 2.0 3.0

Beta


-5

-2

0

2

5

7

Excess A

nnualized R

etu

rn,

%

0 2 3 5 6



Eaton Vance: EV BL


0

56

113

169

225

Up M

kt

Captu

re R

atio,

%

-100 0 100 200 300 400


eA Floating-Rate Bank Loan Fixed Income Eaton Vance: EV BL S&P/LSTA Leveraged Loan

Page 9

Active Management: A method of portfolio management based on the assumption that security prices do not always reflect their true, or intrinsic, value and that this disparity will be corrected over time. Managers engaging in active management attempt to find securities priced below their intrinsic value. It is theorized that as the rest of the market realizes the security is selling below its intrinsic value, the forces of supply and demand will drive the price up and the investment will make money. Agency Securities: Obligations of agencies of the United States government but not obligations of the government itself. While not backed by the full faith and credit of the U.S. government, these securities are considered to be virtually default free because it is widely viewed that the United States government would not let one of its agencies default. Some of the agencies issuing these bonds are FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae). Alpha (α): The excess return of a portfolio after adjusting for market risk. This excess return is attributable to the selection skill of the portfolio manager. Alpha is calculated as: Portfolio Excess Return – (Beta x Excess Market Return). Arithmetic Mean: The mathematical average of a series of numbers. Asset Allocation: The way in which the assets of an investment portfolio are split among asset classes. Studies have shown that more than 90% of the variability of the return of a portfolio is due to asset allocation. Barclays Capital Aggregate Bond Index: Broadly diversified bond index that serves as a proxy for the bond market as a whole. It contains all types of fixed income securities, including mortgage- and other asset-backed securities. Barclays Capital Government/Credit Bond Index (BCGC): Index containing Treasure securities, foreign (denominated in US dollars) and domestic corporate bonds, as well as agency securities. Benchmark: Investment index used as a standard by which to measure the relative performance of an overall portfolio or an individual money manager. Appropriate benchmarks are selected based on their similarity to a portfolio or to the style of the individual money manager being measured. For example, a large cap core equity manager would be appropriately measured against the S&P 500 index. Alternatively, a fixed income core manager might be measured against the Barclays Capital Aggregate Bond index. Beta (β): A measure of systematic, or market, risk, or that part of risk in a portfolio or security that is attributable to general market movements. It is calculated by dividing the covariance of a security by the variance of the market. Book-to-Market: The ratio of book value per share to market price per share. Growth managers will typically have low book-to-market ratios while value managers will have high book-to-market ratios. Bottom Up: An approach of equity management generally referred to as stock picking. Using this approach, a manager does not rely as much on industry or economic variables as much as on the characteristics of individual companies. These managers try to find companies that will fare well based on internal strength, possibly even in the face of adverse economic or industry movements.

Collateralized Mortgage Obligations (CMOs): A security backed by a pool of pass-through securities or mortgages that has a stated maturity. These securities provide a much more stable and predictable cash flow pattern than do pass-through securities. Different classes (tranches) of bonds are issued with different maturities, “A” being the shortest maturity bond and “Z” being the longest maturity bonds. The cash flows from the underlying assets are used to pay interest and retire the bonds in order of maturity. Commercial Paper: A short-term, unsecured promissory note generally issued by corporations with high credit ratings. The maturity of these notes is usually less than 270 days. Commercial paper is considered to be part of the money market. The ratings of commercial paper range from P-1 (highest rating) to P-4 (lowest rating). Commingled Fund: A fund consisting of assets from several accounts that are blended together. Investors in a commingled fund investment benefit from economies of scale, which allow for lower trading costs per dollar investment, diversification and professional money management. Convertible Bonds: Bonds that contain an embedded call option. They are convertible into the common stock of the company issuing the bonds at some pre-specified price. The yield on these bonds is typically less than that of a non-convertible bond due to the embedded call option and the resulting increased opportunity to realize capital gains. Correlation Coefficient (r): A measure of the relative movement of returns of one security or asset class versus another over time. A correlation of 1 means the returns of two securities move in lock step over time. A correlation of –1 means the returns of two securities move in the exact opposite direction over time. Correlation is used as a measure to help maximize the benefits of diversification when constructing an investment portfolio. Credit Quality: A measure of credit worthiness of an issuing company or agency as reflected by a grade given to an interest bearing security. Credit quality is rated on a scale of AAA to D and measures the ability of the borrowing company or agency to make both interest and principal payments as set forth in the bond indenture, or contract. Diversification: The practice of selecting several assets with differing return characteristics so as to reduce overall portfolio volatility. Downside Risk: The likelihood that the return on an investment portfolio will fall below a pre-specified rate of return, e.g., the actuarial assumed rate of return. Duration: A measure of a bond’s effective term to maturity. Duration takes into account the size and timing of cash flows in order to determine the sensitivity of the price of a bond to a change in interest rates. The higher the duration, the more sensitive a bond is to interest rates changes. Efficient Frontier: A line plotted on a risk / return graph that represents alternative portfolios with the highest amount of return for a given level of risk. Emerging Markets: Securities markets in less developed countries. Emerging markets are typically characterized by market inefficiencies, lack of information, lack of price continuity, little liquidity, and lack of

Glossary of Terms

Page 10

adequate rules and regulations. There are typically a small number of players in these markets and price manipulation is common. High returns are available due to the extremely high risk associated with participation in these markets. Excess Return: Rate of return in excess of the risk-free rate, typically defined by the rate of return on short-term U.S. government obligations, i.e., T-bills. (Also known as Risk Premium.) Excess Return Ratio: A measure of a money manager’s ability to earn additional return relative to the additional risk incurred in doing so. The ratio is calculated as follows: (Portfolio Return – Benchmark Return) / Tracking Error. Geometric Mean: Equal to the annualized compound rate of return over a given period. Growth Manager: Refers to the style of an equity manager. A growth manager typically seeks capital appreciation by choosing stocks that are expected to grow at a faster rate than their peers or the market as a whole. Typical portfolio characteristics of this strategy include high price-to-earnings ratio, low book-to-market ratio, and high and sustained earnings per share growth. Index: A passively managed portfolio of securities that remains constant from one period to the next. Indexes are used to gauge the performance of sectors of the market or the market as a whole. In addition, indexes are used as a benchmark for measuring the performance of investment managers. Information Ratio: A measure of a manager’s ability to earn excess return without incurring additional risk. It can be calculated as follows: alpha divided by tracking error. Investment Grade: Investment grade bonds are bonds that are rated BBB or higher. Junk Bonds: Also called high-yield bonds, these are bonds with ratings from BB to D. They offer higher yields due to their increased risk of default. A bond rated D is already in default while a bond rated C is expected to default at some point in the future. Large Capitalization Stocks: Also referred to as large-cap stocks, these are the securities of companies whose overall market capitalization is roughly greater than $6 billion. Market Capitalization: The total value of a publicly traded company. Market capitalization is determined by multiplying the total number of shares that a company has outstanding by the market price of each of those shares. Companies are classified by market capitalization as small, medium, or large. Market Efficiency: Defined as the ability of a market to process information quickly and correctly so that every security traded in that market is always fairly priced based upon current expectations of the future. Mean-Variance Optimization: The process of building an Efficient Frontier through the evaluation of all possible combinations of selected asset classes with different risk and return characteristics. Medium Capitalization Stocks: Also referred to as mid-cap stocks, these are the securities of companies whose overall market capitalization is roughly between $1.5 billion and $6 billion.

Modern Portfolio Theory: Principles underlying analysis and evaluation of rational portfolio choices based on risk-return trade-offs and investment diversification. MSCI EAFE Index: The Morgan Stanley Capital International Europe Australia and Far East (MSCI EAFE) Index is a value-weighted index composed of equity securities traded in the countries that give the index its name. This index is a typical benchmark for international equity managers as well as the basis for many international equity index funds. Mutual Fund: Pools of money are managed by an investment company. They offer investors a variety of goals depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor’s money. Still others seek to invest in companies that are growing at a rapid pace. Mutual funds are investment companies regulated by the Investment Company Act of 1940. Passive Management: A method of portfolio management that is based on the belief that all securities are fairly priced and that there are no additional returns to be made from security selection. Often called a buy and hold strategy or indexing, this method comes from purchasing a well-diversified portfolio of securities and holding them indefinitely. Pass-Through Securities: A pool of mortgages is formed and then shares in the pool are issued. Holders of the shares receive the cash flows from the underlying mortgage pool (i.e. the interest and principal payments). One problem with pass-through securities is the unpredictable nature of the cash flows due to events such as prepayment of the underlying mortgages. Policy Index: A customized performance benchmark designed to reflect the characteristics of an investment portfolio. The policy index represents the return that would have been produced by passive investment in the target asset allocation of a plan. Portfolio Excess Return: The rate of return of a portfolio over and above the risk-free rate. Portfolio excess return is attributed to the amount of additional market risk born by the portfolio plus the skill of the portfolio manager. Portfolio Turnover: The percentage of a portfolio that is sold and replaced (turned over) during a given time period. Low portfolio turnover is indicative of a buy and hold strategy while high portfolio turnover implies a more active form of management. Price-to-Earnings Ratio: Also called the earnings multiplier, it is calculated by dividing the price of a company’s stock into earnings per share. Growth managers typically hold stocks with high price-to-earnings ratios whereas value managers hold stocks with low price-to-earnings ratios. Price-Weighted Index: An index whose value is simply the arithmetic average of the prices of the securities that the index contains. In this type of index securities with the highest prices will have the greatest effect on the value and return of the index. The Dow-Jones Industrial average is an example of a price-weighted index. Relative Return: The difference between the rate of return of a portfolio and its benchmark.

Page 11

Residual Risk: The portion of total risk attributable to the unique risk of a given portfolio or security (also known as unsystematic risk). The key goal of diversified portfolio is to reduce residual risk to the greatest extent possible. It is calculated by subtracting market risk (or Beta) from total risk. Risk Premium: An expected return in excess of the risk-free rate. The premium provides compensation for the assumption of risk. Risk-Free Rate: The rate of interest that one can earn on an investment with no default risk. It is generally assumed to be the interest rate on a 91 day T-Bill. R-Squared: Also called the coefficient of determination, it measures the amount of variation in one variable explained by variations in another. In the case of investments, the term is used to explain the amount of variation in a security or portfolio explained by movements in the market or the portfolio’s benchmark. Russell 2000 Index: A value-weighted small-cap stock index composed of the 2000 securities with the lowest market capitalization in the Russell 3000 index. This is one of the most common benchmarks for small-cap equity managers and is compiled by the Frank Russell Company. Russell Mid-Cap Index: A value-weighted index composed of the 800 smallest companies, by market capitalization, in the Russell 1000 index. This index is compiled by the Frank Russell Company and, as its name implies, is used as a benchmark for mid-cap portfolios. S & P 500 Index: A value-weighted index compiled by Standard and Poor’s that is comprised of 500 of the largest companies traded on the NYSE and NASDAQ exchanges. This is the most common proxy for the equity market as a whole and is the typical benchmark for large-cap portfolios. Sharpe Ratio: A measure of portfolio efficiency. The Sharpe Ratio indicates excess portfolio return for each unit of risk associate with achieving the excess return. The higher the Sharpe Ratio, the more efficient the portfolio. It can be calculated as: Portfolio Excess Return / Portfolio Standard Deviation. Small Capitalization Stocks: Also referred to as small-cap stocks, these are securities of companies whose overall market capitalization is roughly less than $1.5 billion. Standard Deviation (σ): A measure of volatility, or risk, inherent in a security or portfolio. The standard deviation of a series is a measure of the extent to which observations in the series differ from the arithmetic mean of the series. For example, if a security has an average annual rate of return of 10% and a standard deviation of 5%, then two-thirds of the time, one would expect to receive an annual rate of return between 5% and 15%. Systematic Risk: Often called market risk, it is risk that is due to macroeconomic factors and as such this type of risk affects all risky assets and cannot be reduced through diversification. Top Down: An approach to equity management whereby the manager first forms an opinion on the direction of the economy as a whole. Next, the manager determines how their economic forecast will affect certain industries and finally how the industry effect will apply to individual companies within those industries.

Tracking Error: The standard deviation of the difference between the rate of return of a portfolio and its benchmark. Treasury Securities: Obligations of the United States government, which are considered free of default risk. Universe: Also called a peer group, a universe is a large number of portfolios of a similar style. These portfolios can be divided into deciles or quartiles and then used for performance measurement and comparative purposes. Portfolios are ranked within the universe, which tells the investor how well a manager has done relative to his or her peers. Unsystematic Risk: Also called company specific risk, it is risk that is unique to a particular company due to things such as the nature of their business or their use of leverage. Unsystematic risk can be reduced or eliminated by holding a well-diversified portfolio. Value: Refers to the style of an equity manager. A value manager seeks to create returns by purchasing stocks selling at a discount to their true, or intrinsic, value. Typical portfolio characteristics of this strategy include a low price-to-earnings ratio, high book-to-market ratio, and high dividend yield. Value-Weighted Index: An index whose value is computed by determining the relative weightings of each of the securities that it contains by dividing each securities total market capitalization by the total market capitalization of all of the securities in the index. This weight is then applied to a base value for the index, usually 100. The change in the index is computed by recalculating the relative weightings using the current market capitalization for each security divided by its base time period market capitalization and multiplying the sum of all the new weightings by the initial index value. In a value-weighted index companies with the largest market capitalization will have the greatest effect on the return of the index due to their larger relative weighting. The S & P is an example of a value-weighted index. Weighted Average Maturity (WAM): A measure of the overall maturity of a bond portfolio that can assist an investor in determining a portfolio’s sensitivity to changes in interest rates. The higher the weighted average maturity, the greater the effect of a change in interest rates on portfolio value.

Manager Evaluation: Pacific Asset Management

Corporate (Bank) Loan Strategy Last Updated: November 2013

Strategy Basics

Asset Class: Bank Loans Firm Inception: 2007 Firm Assets: $4.3 Billion Strategy Inception: 2007 Strategy Assets: $1.2 Billion Min. Size, MF (PLFRX): $500,000 Fee, Mutual Fund: 0.76% All Assets Min. Comm. Fund Not Available Min. Size, Sep. Acct: $50 Million Fee, Separate Account: 0.50% First $100 Million 0.40% Next $100 Million 0.30% Remaining Balance


Pacific Asset Management is a division of Pacific Life Fund Advisors LLC, which is a wholly owned subsidiary of Pacific Life Insurance Company (Pacific Life), located in Newport Beach, California. Pacific Asset Management is focused only on the fixed income asset class with six strategies, including bank loans, high yield corporate bonds, investment grade bonds, and money market securities. Pacific Asset management began in May of 2007 as a subsidiary of Pacific Life Fund Advisors LLC, following a path similar to PIMCO and Montauk Triguard which were also created within the Pacific Life umbrella prior to their respective spin‐outs from the parent company. Strategy Background

The Corporate (Bank) Loan strategy attempts to outperform the Credit Suisse Leveraged Loan Index utilizing a selective approach focusing on the larger, rated issuers with $100 million in EBITDA and an issue size larger than $300 million. The team believes its fundamental credit analysis is the cornerstone of their approach which allows them to maintain a low default experience and emphasizes relative value and liquidity. They combine their credit analysis with a top‐down macroeconomic awareness that assists in the risk positioning of the portfolio. When

possible, the team tries to identify broad secular trends in industries and will concentrate a portion of the portfolio to benefit from those sector tailwinds. The portfolio contains 80 – 125 issuers with an average of a B rating. The team typically holds a portion of the portfolio in high yield bonds, though usually less than 10% of the portfolio. Turnover for the strategy has also been relatively low at about 10% excluding refinance activity since loans are callable by the borrower. Key Investment Professionals

The Pacific Asset Management Corporate (Bank) Loan team consists of three lead portfolio managers, Jason Rosiak, JP Leasure and Michael Marzouk. The team is supported by five analysts as well as other support staff throughout the firm. JP Leasure, Senior Managing Director Mr. Leasure is a Senior Managing Director for Pacific Asset Management and is a member of the Executive Investment Committee. He serves as the firm’s Head of Credit Research and is the Co‐Portfolio Manager for the Corporate (Bank) Loan Strategy. Mr. Leasure joined Pacific Life in 1997 and was formerly a senior member of Pacific Life’s credit research team, responsible for overseeing approximately $10 billion of Pacific Life’s portfolio of investment grade corporate public bonds and leveraged loans, and he also served as a member of Pacific Life’s Workout Committee. Prior to joining Pacific Life, he was a member of Credit Lyonnais’ Leveraged Finance Group. Mr. LEasure has over 15 years of investment and banking experience and holds a bachelor’s degree from the University of California, Los Angeles and an MBA from Columbia University. Jason Rosiak, Senior Managing Director Mr. Rosiak is Co‐Head and Senior Managing Director for Pacific Asset Management; he oversees the firm’s portfolio management activities and is a member of the Executive Investment Committee. Previously, Mr. Rosiak held senior positions at UBS Investment Bank, from 2006 to 2007, and Pacific Investment Management Company (PIMCO) from 1996 to 2005. While at PIMCO, he was a

Senior Vice President and served as a Portfolio Manager and Head of High‐Yield Trading. With over 18 years’ experience in corporate and asset backed securities on both the buy and sell‐side, Mr. Leasure holds a bachelor’s degree in economics from the University of California, Los Angeles and an MBA from the University of Southern California. Michael Marzouk, CFA, Managing Director and PM Mr. Marzouk is a Managing Director and Portfolio Manager of Pacific Asset Management. In addition to serving as a Portfolio Manager for the Corporate (Bank) Loan Strategy, he has responsibility for credit research in the Telecommunications and Cable sectors. Prior to joining the firm, Mr. Marzouk was a Vice President in the Leveraged Finance Group at the Royal Bank of Scotland, where he was primarily responsible for originating and structuring bank debt instruments and high yield bonds. Previously, he also worked at UBS Investment Bank, Prudential Financial and Deutsche Bank. Mr. Marzouk has over 15 years of professional Investment experience. He received his BA from the University of California, Los Angeles and an MBA from the Anderson School of Management at UCLA. Process

The Corporate (Bank) Loan group’s investment process combines top‐down views with bottom‐up credit analysis. Their top‐down outlook seeks to identify economic headwinds or tailwinds and helps determine portfolio risk positioning. The team reviews various economic releases and news and credit events that could be expected to impact the portfolios or new issue calendar. Their top‐down assessment influences the strategy’s sector allocations which are formally evaluated on a quarterly basis. These quarterly sector reviews are led by sector analysts who discuss macroeconomic influences on each sector and identify themes and industry dynamics over short‐ and long‐term horizons. These secular trend considerations drive benchmark‐relative portfolio sector allocations and ratings quality tilts. The team screens investment opportunities for companies with a sustainable competitive position, strong management team, and the ability to generate free cash flow. Other reasons for initiating coverage might include a favorable industry trend or temporary dislocation in the marketplace. Once issues with these characteristics are identified, credit analysts perform fundamental analysis on each security under consideration.

A company’s cash flow generation and ability to service debt is the primary concern and are linked to the company’s cost structure, competitive position and quality of the management team. Strength of balance sheet and asset value are also critical considerations as the team reviews the entire capital structure to identify relative value opportunities for each issuer. The team then focuses on debt terms and covenants to understand what options exist for repayment under distressed scenarios if triggered. All members of the credit team participate in the investment decision process in which the analyst presents their evaluation and assessment of the opportunity. If the team agrees in the fundamental support for the loan, they will then discuss the relative value merits of the issue, both on a standalone basis and in the context of the portfolio’s diversification and alignment with secular themes. Once investments are included in the portfolio, periodic credit updates are included in the firm’s proprietary system, Credit Monitor. This system aggregates information such as portfolio holdings, sector outlooks, internal analyst comments, legal documents, investment theses support, financial models, and recovery analyses for portfolio management, operations, and credit teams. Analysts are held accountable for their investment recommendations. If watch list criteria are triggered, an immediate review of the issue is initiated and discussed with the portfolio manager. If issues enter a distressed status, the team will evaluate whether recovery value is likely to be higher than current market offers and may elect to remain in an issue to realize a higher value through restructuring or liquidation if supported.

Risk Management

The team relies on a collaborative culture to encourage constant communication and sharing of ideas. As areas of concern arise for an issuer, the team discusses opportunities and threats, evaluating situations based on the entire team’s experience and background as credit analysts and investment professionals. The team is primarily concerned with default risk which they attempt to mitigate by applying thorough credit analysis, cash flow and business environment evaluation. They also demonstrate a preference for higher quality, below investment grade issues, an approach which has

led to only two defaults in the fund’s history: Idearc and Charter Communications. Charter was a large issuer with asset coverage and junior debt in the capital structure which ultimately remained current pay in bankruptcy and recovered par. Sector exposures are allowed to be triple the index weight, industries may be held up to 15% max and any one issuer may not represent more than 10% of the portfolio. The strategy flexibly allows for up to 10% of the portfolio to be invested in investment grade, high yield, convertible bonds and private placements. In extreme situations the strategy may hold up to 20% in government or sovereign securities, though the team does not anticipate this occurring. Risk Factors and Potential Red Flags

Pacific Life Insurance was the original parent of Pacific Investment Management Company (PIMCO) until eventually spinning out the bond manager as an independent asset management firm. The current team, responsible for managing the insurance company’s internal assets, was formed as a subsidiary asset management division in 2007 and permitted to solicit third party capital to manage alongside the insurance company’s general account assets. Captive management teams often face difficulty retaining key professionals who may be attracted to the possibility of obtaining equity participation in independent competitors. While not an immediate concern, the possibility of future organizational events is worth monitoring. The existing team is relatively small and growing quickly. The firm counts 15 investment professionals and shares another 25 administration professionals with the parent, Pacific Life. Two team members – both credit analysts, one a Director and the other an Associate – resigned in 2012 and quickly replaced. The team added another analyst so far this year and has plans to hire additional people as assets grow. Assets for the Corporate (Bank) Loan strategy have grown rapidly over the past two quarters. As recently as March 2013, the team managed just less than $500 million in this strategy and as of September 2013 now report more than $1.2 billion, driven largely by an increase in the retail mutual fund channel. As a firm, assets under management have grown from $3.4 billion as of March 2013 to $4.3 billion as of September 2013, again driven by

increases in retail loan and high yield bond flows. Should retail investors get spooked by market volatility, they may initiate redemption activity that could lead to rapid liquidation of portfolio holdings. Since the bank loan market has historically been less liquid than higher grade bond markets, aggressive asset sales could lead to lower marks‐to‐market as seen during the liquidity crisis that affected this market in 2008 and 2009. Investor should be prepared for elevated volatility during periods of market stress. Performance

For the third quarter of 2013, Pacific Asset’s Corporate (Bank) Loan Strategy outperformed the Credit Suisse Leveraged Loan Index by 10 basis points, returning 1.5% placing its trailing twelve month return at 6.5% versus 5.8% for the benchmark. Since its inception in 2007, the fund has returned 6.6% versus 4.5% for the Credit Suisse Leveraged Loan Index. During this time, the strategy has benefitted from incoming investor cash flows as a result of strong relative performance during 2008. The strong relative performance was achieved primarily during the fourth quarter as markets violently sold off more than 20% and the strategy was able to outperform by more than 700 bps. It is important to note the strategy had only one account of $160 million invested in 51 issues during this time. The strategy now has more than $1 billion with twice as many issues and may not demonstrate the same level of downside protection in a similar event. Despite the recent trend of lower rated qualities out‐performing, the team feels that the Fed’s monetary policy relating to QE will drive investors to manage duration risk through high quality, floating rates. They further believe their conservative philosophy and deep credit research will continue to protect performance and generate strong risk adjusted returns going forward. Recommendation

Pacific Asset Management’s Corporate (Bank) Loan Strategy deserves consideration as a competitive option in the rapidly growing bank loan space. The team is experienced and nimble with a strong culture of credit analysis and a robust, repeatable process in place to conservatively manage the growth in assets.

Pacific Asset Management






3 Year Rolling Performance: From Dec-09 to Sep-13


3 Year Rolling Excess Performance: From Dec-09 to Sep-13

Performance Statistics: Jan-07 to Sep-13

0

5

10

15

20

25

30

35

Fre

quency,

%

-16.00 -10.00 -6.00 -2.00 2.00 6.00 10.00 14.00

Total Return, %

0

2

4

6

8

10

12

Tota

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%

1 Year 3 Years 5 Years Since Inception

6.4

5.0

7.4

6.0

9.1

8.2

6.5

5.3

Pacific Asset Management S&P/LSTA Leveraged Loan

-4

-3

-2

-1

0

1

2

Excess A

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%


Excess

0

2

4

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Tota

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%



Mgr Bmk Unv Avg2007 3.51 2.08 2.84

2008 -19.55 -29.10 -26.21

2009 39.28 51.62 43.04

2010 10.66 10.13 10.89

2011 3.36 1.52 3.22

2012 10.65 9.66 10.12

MgrSharpe Ratio 1.57

Excess 1.29

Alpha, % 0.96

Beta 1.07

R-Squared, % 94.69

Up Mkt Capture Ratio, % 121.09

Down Mkt Capture Ratio, % 108.30

Batting Average 0.67

Mgr Bmk

Average Return, % 1.59 1.23

Batting Average 0.63 0.00

Best 3 Months Jun-09 Jun-09

Best 3 Month Return 13.58 20.38

Worst 3 Months Dec-08 Dec-08

Worst 3 Month Return -15.86 -22.94

Average Gain, % 3.80 4.03

Average Loss, % -4.47 -6.33

Gain Frequency, % 74.07 74.07










1 Yr 3 Yrs 5 YrsAlpha, % 0.09 0.96 2.76

Beta 1.27 1.07 0.73

R-Squared, % 95.54 94.69 94.14

Annual Return, % 6.44 7.36 9.10


1 Yr 3 Yrs 5 YrsStandard Deviation 2.07 4.57 11.71

Tracking Error 0.61 1.09 5.16


1 Yr 3 Yrs 5 YrsSharpe Ratio 3.01 1.57 0.79

Treynor Ratio 0.05 0.07 0.12

Information Ratio 3.12 1.61 0.78

Sortino Ratio 0.00 -4.17 -20.50

Batting Average 0.75 0.67 0.55


1Year

3Years

5Years

Manager 2.07 4.57 11.71

Benchmark 1.59 4.16 15.66

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3 Year Risk/Return

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3 Year Alpha/Beta

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eA Floating-Rate Bank Loan Fixed Income Pacific Asset Management S&P/LSTA Leveraged Loan

Active Management: A method of portfolio management based on the assumption that security prices do not always reflect their true, or intrinsic, value and that this disparity will be corrected over time. Managers engaging in active management attempt to find securities priced below their intrinsic value. It is theorized that as the rest of the market realizes the security is selling below its intrinsic value, the forces of supply and demand will drive the price up and the investment will make money. Agency Securities: Obligations of agencies of the United States government but not obligations of the government itself. While not backed by the full faith and credit of the U.S. government, these securities are considered to be virtually default free because it is widely viewed that the United States government would not let one of its agencies default. Some of the agencies issuing these bonds are FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae). Alpha (): The excess return of a portfolio after adjusting for market risk. This excess return is attributable to the selection skill of the portfolio manager. Alpha is calculated as: Portfolio Excess Return – (Beta x Excess Market Return). Arithmetic Mean: The mathematical average of a series of numbers. Asset Allocation: The way in which the assets of an investment portfolio are split among asset classes. Studies have shown that more than 90% of the variability of the return of a portfolio is due to asset allocation. Barclays Capital Aggregate Bond Index: Broadly diversified bond index that serves as a proxy for the bond market as a whole. It contains all types of fixed income securities, including mortgage‐ and other asset‐backed securities. Barclays Capital Government/Credit Bond Index (BCGC): Index containing Treasure securities, foreign (denominated in US dollars) and domestic corporate bonds, as well as agency securities. Benchmark: Investment index used as a standard by which to measure the relative performance of an overall portfolio or an individual money manager. Appropriate benchmarks are selected based on their similarity to a portfolio or to the style of the individual money manager being measured. For example, a large cap core equity manager would be appropriately measured against the S&P 500 index. Alternatively, a fixed income core manager might be measured against the Barclays Capital Aggregate Bond index. Beta (): A measure of systematic, or market, risk, or that part of risk in a portfolio or security that is attributable to general market movements. It is calculated by dividing the covariance of a security by the variance of the market. Book‐to‐Market: The ratio of book value per share to market price per share. Growth managers will typically have low book‐to‐market ratios while value managers will have high book‐to‐market ratios. Bottom Up: An approach of equity management generally referred to as stock picking. Using this approach, a manager does not rely as much on industry or economic variables as much as on the characteristics of individual companies. These managers try to find companies that will

fare well based on internal strength, possibly even in the face of adverse economic or industry movements. Collateralized Mortgage Obligations (CMOs): A security backed by a pool of pass‐through securities or mortgages that has a stated maturity. These securities provide a much more stable and predictable cash flow pattern than do pass‐through securities. Different classes (tranches) of bonds are issued with different maturities, “A” being the shortest maturity bond and “Z” being the longest maturity bonds. The cash flows from the underlying assets are used to pay interest and retire the bonds in order of maturity. Commercial Paper: A short‐term, unsecured promissory note generally issued by corporations with high credit ratings. The maturity of these notes is usually less than 270 days. Commercial paper is considered to be part of the money market. The ratings of commercial paper range from P‐1 (highest rating) to P‐4 (lowest rating). Commingled Fund: A fund consisting of assets from several accounts that are blended together. Investors in a commingled fund investment benefit from economies of scale, which allow for lower trading costs per dollar investment, diversification and professional money management. Convertible Bonds: Bonds that contain an embedded call option. They are convertible into the common stock of the company issuing the bonds at some pre‐specified price. The yield on these bonds is typically less than that of a non‐convertible bond due to the embedded call option and the resulting increased opportunity to realize capital gains. Correlation Coefficient (r): A measure of the relative movement of returns of one security or asset class versus another over time. A correlation of 1 means the returns of two securities move in lock step over time. A correlation of –1 means the returns of two securities move in the exact opposite direction over time. Correlation is used as a measure to help maximize the benefits of diversification when constructing an investment portfolio. Credit Quality: A measure of credit worthiness of an issuing company or agency as reflected by a grade given to an interest bearing security. Credit quality is rated on a scale of AAA to D and measures the ability of the borrowing company or agency to make both interest and principal payments as set forth in the bond indenture, or contract. Diversification: The practice of selecting several assets with differing return characteristics so as to reduce overall portfolio volatility. Downside Risk: The likelihood that the return on an investment portfolio will fall below a pre‐specified rate of return, e.g., the actuarial assumed rate of return. Duration: A measure of a bond’s effective term to maturity. Duration takes into account the size and timing of cash flows in order to determine the sensitivity of the price of a bond to a change in interest rates. The higher the duration, the more sensitive a bond is to interest rates changes. Efficient Frontier: A line plotted on a risk / return graph that represents alternative portfolios with the highest amount of return for a given level of risk.

Glossary of Terms

Emerging Markets: Securities markets in less developed countries. Emerging markets are typically characterized by market inefficiencies, lack of information, lack of price continuity, little liquidity, and lack of adequate rules and regulations. There are typically a small number of players in these markets and price manipulation is common. High returns are available due to the extremely high risk associated with participation in these markets. Excess Return: Rate of return in excess of the risk‐free rate, typically defined by the rate of return on short‐term U.S. government obligations, i.e., T‐bills. (Also known as Risk Premium.) Excess Return Ratio: A measure of a money manager’s ability to earn additional return relative to the additional risk incurred in doing so. The ratio is calculated as follows: (Portfolio Return – Benchmark Return) / Tracking Error. Geometric Mean: Equal to the annualized compound rate of return over a given period. Growth Manager: Refers to the style of an equity manager. A growth manager typically seeks capital appreciation by choosing stocks that are expected to grow at a faster rate than their peers or the market as a whole. Typical portfolio characteristics of this strategy include high price‐to‐earnings ratio, low book‐to‐market ratio, and high and sustained earnings per share growth. Index: A passively managed portfolio of securities that remains constant from one period to the next. Indexes are used to gauge the performance of sectors of the market or the market as a whole. In addition, indexes are used as a benchmark for measuring the performance of investment managers. Information Ratio: A measure of a manager’s ability to earn excess return without incurring additional risk. It can be calculated as follows: alpha divided by tracking error. Investment Grade: Investment grade bonds are bonds that are rated BBB or higher. Junk Bonds: Also called high‐yield bonds, these are bonds with ratings from BB to D. They offer higher yields due to their increased risk of default. A bond rated D is already in default while a bond rated C is expected to default at some point in the future. Large Capitalization Stocks: Also referred to as large‐cap stocks, these are the securities of companies whose overall market capitalization is roughly greater than $6 billion. Market Capitalization: The total value of a publicly traded company. Market capitalization is determined by multiplying the total number of shares that a company has outstanding by the market price of each of those shares. Companies are classified by market capitalization as small, medium, or large. Market Efficiency: Defined as the ability of a market to process information quickly and correctly so that every security traded in that market is always fairly priced based upon current expectations of the future. Mean‐Variance Optimization: The process of building an Efficient Frontier through the evaluation of all possible combinations of selected asset classes with different risk and return characteristics.

Medium Capitalization Stocks: Also referred to as mid‐cap stocks, these are the securities of companies whose overall market capitalization is roughly between $1.5 billion and $6 billion. Modern Portfolio Theory: Principles underlying analysis and evaluation of rational portfolio choices based on risk‐return trade‐offs and investment diversification. MSCI EAFE Index: The Morgan Stanley Capital International Europe Australia and Far East (MSCI EAFE) Index is a value‐weighted index composed of equity securities traded in the countries that give the index its name. This index is a typical benchmark for international equity managers as well as the basis for many international equity index funds. Mutual Fund: Pools of money are managed by an investment company. They offer investors a variety of goals depending on the fund and its investment charter. Some funds, for example, seek to generate income on a regular basis. Others seek to preserve an investor’s money. Still others seek to invest in companies that are growing at a rapid pace. Mutual funds are investment companies regulated by the Investment Company Act of 1940. Passive Management: A method of portfolio management that is based on the belief that all securities are fairly priced and that there are no additional returns to be made from security selection. Often called a buy and hold strategy or indexing, this method comes from purchasing a well‐diversified portfolio of securities and holding them indefinitely. Pass‐Through Securities: A pool of mortgages is formed and then shares in the pool are issued. Holders of the shares receive the cash flows from the underlying mortgage pool (i.e. the interest and principal payments). One problem with pass‐through securities is the unpredictable nature of the cash flows due to events such as prepayment of the underlying mortgages. Policy Index: A customized performance benchmark designed to reflect the characteristics of an investment portfolio. The policy index represents the return that would have been produced by passive investment in the target asset allocation of a plan. Portfolio Excess Return: The rate of return of a portfolio over and above the risk‐free rate. Portfolio excess return is attributed to the amount of additional market risk born by the portfolio plus the skill of the portfolio manager. Portfolio Turnover: The percentage of a portfolio that is sold and replaced (turned over) during a given time period. Low portfolio turnover is indicative of a buy and hold strategy while high portfolio turnover implies a more active form of management. Price‐to‐Earnings Ratio: Also called the earnings multiplier, it is calculated by dividing the price of a company’s stock into earnings per share. Growth managers typically hold stocks with high price‐to‐earnings ratios whereas value managers hold stocks with low price‐to‐earnings ratios. Price‐Weighted Index: An index whose value is simply the arithmetic average of the prices of the securities that the index contains. In this type of index securities with the highest prices will have the greatest effect on the value and return of the index. The Dow‐Jones Industrial average is an example of a price‐weighted index.

Relative Return: The difference between the rate of return of a portfolio and its benchmark. Residual Risk: The portion of total risk attributable to the unique risk of a given portfolio or security (also known as unsystematic risk). The key goal of diversified portfolio is to reduce residual risk to the greatest extent possible. It is calculated by subtracting market risk (or Beta) from total risk. Risk Premium: An expected return in excess of the risk‐free rate. The premium provides compensation for the assumption of risk. Risk‐Free Rate: The rate of interest that one can earn on an investment with no default risk. It is generally assumed to be the interest rate on a 91 day T‐Bill. R‐Squared: Also called the coefficient of determination, it measures the amount of variation in one variable explained by variations in another. In the case of investments, the term is used to explain the amount of variation in a security or portfolio explained by movements in the market or the portfolio’s benchmark. Russell 2000 Index: A value‐weighted small‐cap stock index composed of the 2000 securities with the lowest market capitalization in the Russell 3000 index. This is one of the most common benchmarks for small‐cap equity managers and is compiled by the Frank Russell Company. Russell Mid‐Cap Index: A value‐weighted index composed of the 800 smallest companies, by market capitalization, in the Russell 1000 index. This index is compiled by the Frank Russell Company and, as its name implies, is used as a benchmark for mid‐cap portfolios. S & P 500 Index: A value‐weighted index compiled by Standard and Poor’s that is comprised of 500 of the largest companies traded on the NYSE and NASDAQ exchanges. This is the most common proxy for the equity market as a whole and is the typical benchmark for large‐cap portfolios. Sharpe Ratio: A measure of portfolio efficiency. The Sharpe Ratio indicates excess portfolio return for each unit of risk associate with achieving the excess return. The higher the Sharpe Ratio, the more efficient the portfolio. It can be calculated as: Portfolio Excess Return / Portfolio Standard Deviation. Small Capitalization Stocks: Also referred to as small‐cap stocks, these are securities of companies whose overall market capitalization is roughly less than $1.5 billion. Standard Deviation (): A measure of volatility, or risk, inherent in a security or portfolio. The standard deviation of a series is a measure of the extent to which observations in the series differ from the arithmetic mean of the series. For example, if a security has an average annual rate of return of 10% and a standard deviation of 5%, then two‐thirds of the time, one would expect to receive an annual rate of return between 5% and 15%. Systematic Risk: Often called market risk, it is risk that is due to macroeconomic factors and as such this type of risk affects all risky assets and cannot be reduced through diversification. Top Down: An approach to equity management whereby the manager first forms an opinion on the direction of the economy as a whole. Next, the manager determines how their economic forecast will affect

certain industries and finally how the industry effect will apply to individual companies within those industries. Tracking Error: The standard deviation of the difference between the rate of return of a portfolio and its benchmark. Treasury Securities: Obligations of the United States government, which are considered free of default risk. Universe: Also called a peer group, a universe is a large number of portfolios of a similar style. These portfolios can be divided into deciles or quartiles and then used for performance measurement and comparative purposes. Portfolios are ranked within the universe, which tells the investor how well a manager has done relative to his or her peers. Unsystematic Risk: Also called company specific risk, it is risk that is unique to a particular company due to things such as the nature of their business or their use of leverage. Unsystematic risk can be reduced or eliminated by holding a well‐diversified portfolio. Value: Refers to the style of an equity manager. A value manager seeks to create returns by purchasing stocks selling at a discount to their true, or intrinsic, value. Typical portfolio characteristics of this strategy include a low price‐to‐earnings ratio, high book‐to‐market ratio, and high dividend yield. Value‐Weighted Index: An index whose value is computed by determining the relative weightings of each of the securities that it contains by dividing each securities total market capitalization by the total market capitalization of all of the securities in the index. This weight is then applied to a base value for the index, usually 100. The change in the index is computed by recalculating the relative weightings using the current market capitalization for each security divided by its base time period market capitalization and multiplying the sum of all the new weightings by the initial index value. In a value‐weighted index companies with the largest market capitalization will have the greatest effect on the return of the index due to their larger relative weighting. The S & P is an example of a value‐weighted index. Weighted Average Maturity (WAM): A measure of the overall maturity of a bond portfolio that can assist an investor in determining a portfolio’s sensitivity to changes in interest rates. The higher the weighted average maturity, the greater the effect of a change in interest rates on portfolio value.

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Fresno County Employees’ Retirement Association...Apr 13, 2012 · H.J. Heinz Company 1.02% HCA, Inc. 0.99% Ineos US Finance LLC 0.94% Virgin Media Investment Holdings Limited 0.90%