FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION February 6, 2008 - - PowerPoint PPT Presentation

Peter Palfrey, CFA

Vice President, Senior Portfolio Manager

Kenneth M. Johnson

Vice President, Client Portfolio Manager

FRESNO COUNTY EMPLOYEES RETIREMENT ASSOCIATION

February 6, 2008

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CONTENTS

Investment Results Portfolio Characteristics Market Review & Outlook Guideline Summary Overview of High Yield and Bank Loans Account Team /Appraisal of Holdings

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INVESTMENT RESULTS THROUGH 12/31/2007

Annualized Since 2007 2-Year 3-Year 4 -Year 5-Year Inception

Fresno County Employees Retir. Assn. - Gross 7.17% 6.44% 5.06% 5.12% 5.53% 4.56% Fresno County Employees Retir. Assn. - Net 6.91% 6.17% 4.79% 4.87% 5.27% 4.31% Lehman Aggregate Bond Index * 6.97% 5.64% 4.56% 4.50% 4.63% 5.46%

Inception 07/31/2001 *Lehman Universal from 7/31/2001 to 6/30/2003; and Lehman Aggregate from 6/30/2003 to 12/31/2007 Returns over one year are annualized. Information is reported on a trade date basis. Data Source: Bloomberg, Lehman Brothers Research

Fresno County Employees Retirement Association

4 Non USD 7% Treasury 17% High Yield 8% US Credit 22% Asset-backed 3% Mortgage-backed 34% CMBS 7% Cash 2%

FIXED INCOME PORTFOLIO STATISTICS: Period ending 12/31/2007

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index

CMBS 6% Mortgage-backed 38% Asset-backed 1% US Credit 23% Agency 10% Treasury 22%

Fresno County Employees Retirement Association: Characteristics

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index Yield to Maturity

5.26% 4.92%

Average Maturity

9.19 years 6.66 years

Effective Duration

5.70 years 4.55 years

Coupon Rate

5.26% 5.45%

Average Quality

Aa2 Aa2

Duration used is: Effective Data source: Lehman Brothers Research

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Fresno County Employees Retirement Association: Characteristics

SECTOR ALLOCATION CHANGE: 12/31/06 – 12/31/07 (%)

7.00 1.01 0.82 0.25 0.00

• 0.08
• 0.12
• 0.54
• 2.7
• 5.63
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 Non-US Dollar US Treasury US Credit MBS US Agency Cash Convertibles CMBS ABS US High Yield

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Maturity Distribution

FIXED INCOME PORTFOLIO STATISTICS: Period ending 12/31/2007

8% 0% 10% 19% 18% 27% 40% 43% 11% 5% 13% 6%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Under 1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years Over 20 Years

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index

73% 79% 1% 5% 2% 8% 16% 7% 8% 0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% AAA AA A BAA BA & Below

Fresno County Employees Retirement Assn. Lehman Aggregate Bond Index

Quality Distribution Fresno County Employees Retirement Association: Characteristics

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Duration/Yield Curve Security/Industry Specific

Duration has been maintained at approximately 125% of benchmark duration, in response to

• ngoing credit gridlock and the continuing correction in the U.S. residential housing market.

FOMC is expected to ease at least another 50-75 bps through the first quarter, 2008, depending on the severity of the credit contraction. Emphasis on a combination of shorter and longer maturities (barbell) has been maintained based on current yield curve outlook and longer term monetary policy uncertainty. Tactical use of “TIPS” based on near to intermediate term inflation concerns in market, due to current elevated food and energy prices, and increased market concern over the potential need for excessive Fed monetary policy stimulus. Defensive positioning has been maintained to help protect against ongoing market

• turbulence. Strategic positions include UST’s, TIPS, Agency-backed MBS and JPY exposure.

Recently reduced underweight to investment grade corporate bonds, as valuations became more attractive. Reduced overweight to high yield corporate bonds remains; becoming more attractive. – Emphasis continues to be on higher yielding securities that have stable to improving credit trends. – Credit spreads approaching more attractive levels in recent months, particularly in select financial names. Increased weighting to Agency-backed mortgages, including GNMA-backed MBS; approaching market-neutral weighting. – Recent underperformance of the MBS sector has provided a more attractive entry point – Potential extension/prepayment risk needs to be managed through security and maturity sector selection Non-Dollar exposure has recently been consolidated in an increased JPY position, capturing gains in NOK, CHF, and ISK. JPY has been a key hedge against market risk aversion. Maintaining credit exposure to those industries that we believe will perform best in the present “late-economic cycle” environment.

Sector

Updated as of 1/16/08

Fresno County Employees Retirement Association

PORTFOLIO THEMES – CORE PLUS

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SPREAD COMPARISON: 2007 VS. 2000-2002*

Bond Market Environment

*Most Securitized products peaked in 2000/2001, while Corporate products did not peak until 2002 Source: Lehman Brothers, history through December 31, 2007

• Spreads in certain sectors have reached or exceeded previous cyclical peaks, potentially creating

buy opportunities

200 400 600 800 1000 1200 Agency MBS CMBS ABS IG Corporates High Yield Emerging bps Peak 2007 OAS Peak 2000-2002 OAS

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U.S. CORPORATES: HIGH YIELD OAS

Bond Market Environment

Option Adjusted Spread (bps)

Monthly Data Source: Lehman Brothers; History Through December 2007

200 400 600 800 1000 1200

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

200 400 600 800 1000 1200

U.S. Corporate High Yield 5-Year Average

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MORTGAGES SHOULD BENEFIT FROM HISTORICALLY CHEAP VALUATIONS

Bond Market Environment MBS spreads have widened substantially; portfolios should benefit as product overhang is absorbed

Source: Lehman Brothers, history through December 2007, monthly data 60 80 100 120 140 160 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 Spread (bps) MBS Yield Spread MBS Average

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OUR POSITION IN THE YEN SERVES AS AN EFFECTIVE FLIGHT-TO-QUALITY HEDGE

Bond Market Environment

Source: JP Morgan, history through December 2007, monthly data

• During periods of risk aversion, historically carry-trade investors ‘unwind’ their trades, which helps

strengthen the currency

65 75 85 95 105 115 125 Dec-79 Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Japanese Yen Trade W eighted Index Value 10-Y r Moving Average

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DURATION MANAGEMENT: JUN 2006 – DECEMBER 2007

Data source: Loomis Sayles, LP, Lehman Brothers, Bloomberg

Bond Market Environment

• 0.4
• 0.3
• 0.2
• 0.1

0.0 0.1 0.2 0.3 0.4 0.5 0.6 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Duration (Years) 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 5.3 Treasury Yield (%) City of Livonia Employees Retirement System - Fixed Income Duration Less Lehman Aggregate Index Duration 10-Year Treasury

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• The portfolio benchmark is the Lehman Brothers US Aggregate Index
• Account may not hold more than 5% market value in any one issuer excluding US

Government and Agencies

• Account may hold up to 20% of the market value in securities rated below Moody,

Standard & Poor, or Fitch Baa3/BBB-/BBB- at time of purchase

• Account may not hold any securities with Moody, Standard & Poor, or Fitch rating

below B3/B-/B-. In the case of splits ratings, the highest of the three shall be used.

• Account may hold non investment grade emerging market securities
• Portfolio duration will be +/- 30% to the Benchmark
• Account may not hold more than 10% market value in non-US dollar denominated

securities

• Account may hold up to 5% market value in cash and cash equivalents

GUIDELINE SUMMARY

Fresno County Employees Retirement Association

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Fresno County Employees Retirement Association : Points of Discussion

1 Addition of High Yield capability in the portfolio 2 Opportunistic Investment in Bank Loans within the Core Plus Strategy Fresno County Employees Retirement Association

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• A significant and growing asset class
• Current market offers attractive opportunities
• Attractive risk/reward characteristics
• Compelling diversification benefits

LOOMIS SAYLES’ VIEW OF HIGH YIELD

MALR000491

This presentation is a service provided by Loomis Sayles. It is for informational purposes and it should not be construed as investment advice. We believe the information in this presentation is reliable, but we cannot guarantee its accuracy. Opinions expressed reflect subjective judgments and will evolve as future events unfold.

High Yield Bonds

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GROWTH OF THE US HIGH YIELD BOND MARKET, 1987-2006

Source: Federal Reserve estimate

200 400 600 800 1,000 1,200 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Billions High Yield market is a significant asset class with over $1 trillion in debt outstanding. High Yield Bonds

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REPRICING OF RISK AND VOLATILITY: JANUARY 2006 – DECEMBER 2007

Bond Market Environment

Source: Lehman Brothers, Haver Analytics

HIGH YIELD SPREADS VS. VIX: JAN 2006 – DEC 2007 HIGH YIELD SPREAD VS. VIX: JAN 2006 – DEC 2007

200 250 300 350 400 450 500 550 600 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Spread (bps) 10 12 14 16 18 20 22 24 26 VIX Index Value

U.S. High Yield Spread VIX (Right Scale)

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Source: Zephyr StyleAdvisor, Lehman

COMPELLING DIVERSIFICATION BENEFITS

Lehman US High Yield Lehman US Aggregate Lehman US Government Lehman US Credit Lehman MBS Lehman 10Yr US Treasury S&P 500 Lehman US High Yield 1.00 0.27 0.18 0.42 0.26 0.17 0.53 Lehman US Aggregate 0.27 1.00 0.98 0.98 0.95 0.96 0.02 Lehman US Government 0.18 0.98 1.00 0.94 0.90 0.99

• 0.05

Lehman US Credit 0.42 0.98 0.94 1.00 0.91 0.93 0.10 Lehman MBS 0.26 0.95 0.90 0.91 1.00 0.86 0.04 Lehman 10Yr US Treasury 0.17 0.96 0.99 0.93 0.86 1.00

• 0.07

S&P 500 0.53 0.02

• 0.05

0.10 0.04

• 0.07

1.00

Correlation of Returns (12/31/84-12/31/06) High Yield Bonds

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Bank Loan Asset Class

Normally secured by the collateral of the borrower – Collateral can be inventory, plant, equipment, etc. Bank loans are not securitized or structured instruments Lead bank (agent bank) usually retains a meaningful portion of

the loan value through syndication

Typically, the bank loan is the most senior part of the

borrower’s capital structure

Usually protected by tight loan covenants Floating-rate obligations that reset frequently

– 3-Month LIBOR +200-400 bps typical

Standardized settlements capital structure Par loans T+7 Bank Loan Collateralized Senior Debt Subordinated Debt Preferred Stock Common Stock

S E N I O R I T Y ( H i g h t

• L
• w

)

CORPORATE CAPITAL STRUCTURE

Loans Made By Commercial Banks To Corporate America

WHAT ARE BANK LOANS?

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Bank Loan Asset Class

BANK LOANS ARE TRADING AT HISTORICALLY ATTRACTIVE SPREADS

36-month spreads

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 BB Loans B Loans

Loans have only been at this level of spreads in the midst of recession and high default rates,

neither of which exists today.

While the odds of a recession are relatively high, it seems that loans are already pricing in

significant credit stress. Thus their prospective return over the next year or two appears relatively attractive, especially versus high yield bonds.

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Bank Loan Asset Class

Subprime meltdown widened structured spreads on CDOs, in turn making

CLOs difficult to finance, which removed over 50% of the demand base from loans.

LCDX, a bank loan derivative index, started trading in May, allowing

shorting/hedging for the first time.

A significant overhang of 2007 LBOs pressures secondary loan prices. A significant percentage of trading reflects asset category investing, not credit-

by-credit investing. This has raised correlations between loans and other asset classes just as fundamentals suggest greater separation should occur.

Weakness in high yield and equities has been translated to loans more than was

the case historically.

FACTORS BEHIND THE CURRENT LOAN PRICES

22 Note: Please see Glossary of Indices at the end of this brochure. Data source: Credit Suisse, Ibbotson Associates

Past performance is no guarantee of future results. Correlations of Credit Suisse Leveraged Loan Index vs. Assets – 1992 –2006

1992 - 2006 Credit Suisse Leveraged Loan Index U.S. 30 Day T-Bill

• 0.01

U.S. IT Gvt

• 0.16

U.S. LT Gvt

• 0.05

ML Mortgage

• 0.10

ML Corp 0.06 LB AAA Corp.

• 0.03

S&P 500 0.14 Wilshire 5000 0.17 JPM-EMBI Fixed Rate 0.04 MSCI EAFE 0.12 Gold 0.02 U.S. Inflation

• 0.06

Credit Suisse High Yield Index 0.48

HISTORICALLY LOW CORRELATIONS WITH OTHER ASSET CLASSES

Reasons To Consider Bank Loans

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Bank Loan Asset Class

Strong fundamentals (seniority, security, lack of duration) Low financing costs make levered investment in loans attractive Loans represent an attractive flight-to-quality choice for high yield funds/investors Loomis has one of the largest and most experienced research staffs in the institutional bank

loan market

The Loomis Sayles Senior Loan Fund LLC has a high quality bias

REASONS TO INVEST IN BANK LOANS WITH LOOMIS

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ACCOUNT TEAM

Contact Information Teresa H. Woo Portfolio Analyst Email twoo@loomissayles.com Phone 617-748-1712 Fax 617-482-5032 Kenneth M. Johnson Vice President, Client Portfolio Manager Email kjohnson@loomissayles.com Phone 617-960-2033 Fax 617-482-5032 Peter W. Palfrey, CFA Vice President, Senior Portfolio Manager Email ppalfrey@loomissayles.com Phone 617-346-9798 Fax 617-542-1358 Sara L. Alcaide Administrative Assistant Email salcaide@loomissayles.com Phone 617-346-9836 Fax 617-482-5032

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This report is a service provided to customers of Loomis Sayles for informational purposes and is not a recommendation to purchase or sell securities. The performance shown is gross of management fees. Past performance is not a guarantee of future results. Loomis Sayles believes the information contained in this report is reliable but we do not guarantee its accuracy.