[PPT] - GMO North America | Europe | Asia-Pacific Fresno County Employees PowerPoint Presentation

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GMO

WM_Fresno County ERA_9-06

GMO

North America | Europe | Asia-Pacific

Fresno County Employees’ Retirement Association

September 6, 2006

Wendy Malaspina Tina Vandersteel

Presentation

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GMO

WM_Fresno County ERA_9-06

Presenters

Tina Vandersteel Ms. Vandersteel is a member of the global fixed income group, focusing on product management and research. Prior to joining GMO in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee University. She is a CFA charterholder. Wendy Malaspina Ms. Malaspina is engaged in client relations. Prior to joining GMO in 2003, she worked at Montgomery Asset Management / Wells Capital Management, most recently as a director in institutional client service and marketing. Previously, she worked as a director of client service, marketing and investor relations at Draper Advisers. Ms. Malaspina received her B.A. in International Trade from Clemson University.

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GMO

WM_Fresno County ERA_9-06

GMO Overview

* As of 6/30/2006 ** Asset allocation and absolute return assets are accounted for within underlying strategies and should not be double-counted.

GMO has successfully managed money since our founding in 1977. Experience

86 investment professionals More than 300 employees worldwide

People

We apply a blend of proven

traditional judgments and innovative quantitative methods to find undervalued securities.

Our success is based on a

disciplined, value-oriented, risk- controlled investment philosophy and a commitment to investment research. Distinctive Approach

$106 billion in global equities

($78 billion non-U.S.)

$15 billion in fixed income $36 billion in asset allocation** $7 billion in absolute return

strategies** Assets of $121 Billion* Motivation We are a private partnership Focus Investment management is our only business Discipline We carefully manage risk, seeking long-term capital appreciation Stability We have exceptionally low turnover of investment professionals Defining Characteristics San San Francisco Francisco Boston Boston London London Sydney Sydney Zurich Zurich Singapore Singapore Rotorua Rotorua

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GMO

WM_Fresno County ERA_9-06

GMO Investment Strategies

* Strategy is currently closed to new clients and additional cash flows

1 Strategy currently capacity constrained 2 Privately offered and available only to qualified purchasers. Call GMO for further information. 3 New clients and additional cash flows through Emerging Country Debt Investment Fund only. 4 New clients and additional cash flows through World Opportunities Equity Allocation Fund only.

Note: Does not include all GMO products.

North America Offices

Currency Hedged International Equity Foreign (Int’l Active Strategy)1 International Intrinsic Value International Small Companies1 Emerging Markets* Emerging Countries* Emerging Markets Quality1 International Disciplined Equity International Growth Foreign Small Companies (Int’l Active Strategy)* Global Equity

Sydney Office

Australian Equities1 Australian Core Equities Australian Market Neutral Trust* Australian Long/Short Equity* Australian Small Companies*

London Office

UK Equities World ex-UK Equities U.S. Value U.S. Core Intrinsic Value Growth Small/Mid Cap Value Small/Mid Cap Growth Tobacco-Free Core Real Estate Investment Trusts U.S. Quality

Fixed Income Absolute Return Long/Short

International Bond Emerging Country Debt1, 3 Currency Hedged International Bond Strategic Fixed Income Domestic Bond Core Plus Bond Inflation Indexed Plus Bond Short-Duration Investment Global Bond

Global Equities

Tax-Managed International Equities Tax-Managed U.S. Equities Tax-Managed Small/Mid Cap Real Return Global Balanced Asset Allocation

vs. benchmark of

60% stocks, 20% bonds, 20% cash Global Allocation Absolute Return* 2

vs. benchmark of

+5% real return per year Global Equity Allocation1, 4 Global Balanced Allocation

vs. benchmark of

65% stocks, 35% bonds

Asset Allocation

Tax-Managed Global Balanced2 Global Growth Europe ex-UK

U.S. Equities International Equities

Alternative Assets

Forestry* Alternative Asset Opportunity1 Global (Int’l Active Strategy)1 Emerging Currency Hedge2 Mean Reversion* 2 Emerging Country Debt Long/Short* 2 Market Neutral2 U.S. Aggressive2 Earnings Outlook2 Global Tactical2 Tax-Managed Absolute Return2 Multi-Strategy1,2 (combination of strategies above) Pan-European Long/Short1,2 Currency Hedge2 U.S. Tactical Opportunities1,2 Fixed Income Hedge2 International Equity Allocation1 U.S. Broad Market Short Term Market Opportunities1,2 Inflation Indexed Bond* Alpha Only

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GMO

WM_Fresno County ERA_9-06

Fresno County Employees’ Retirement Association

Periods ending July 31, 2006

Performance Gross of Management, Operating, Incentive Fees ($U.S.) Performance Net of Fees and Expenses ($U.S.)

Month YTD Year Year Year Inception * (000) 1 3 5 Since Market Value Annualized

Global Bond (3/12/99)

0.60 4.37 3.57 8.18 9.64 6.68 70,512

JPMorgan Global Gov't. Bond

0.80 3.41 1.30 5.52 8.03 5.22

Value Added

0.20

0.96 2.27 2.66 1.61 1.46 Month YTD Year Year Year Inception * (000) 1 3 5 Since Market Value Annualized

Global Bond (3/12/99)

0.57 4.13 3.15 7.79 9.25 6.31 70,512

JPMorgan Global Gov't. Bond

0.80 3.41 1.30 5.52 8.03 5.22

Value Added

0.23

0.72 1.85 2.27 1.22 1.09

* Periods of less than a year are not annualized

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Fixed Income at GMO

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GMO

WM_Fresno County ERA_9-06

GMO Fixed Income Strategies (with Benchmarks)

Assets as of August 1, 2006 totaled $14,803 million

Developed Market Fixed Income

$8,494 million J.P. Morgan: EMBI Global EMBI Global Diversified

Emerging Country Debt

$3,754 million

Absolute Return and Alternative Assets*

$2,218million

Global Fixed Income

$2,042 million J.P. Morgan: Global Government Bond Index Non-U.S. Government Bond Index Non-U.S. Government Bond Index (Hedged)—ex Japan Lehman Brothers Global Aggregate Bond Index

Core U.S. Fixed Income

$1,852 million JPMorgan U.S. 3-Month Lehman Brothers Government Cash Index ($544 Million) Bond Index ($492 million)

*We trade, on behalf of GMO Sydney, the Global Tactical Strategy (assets $518 million).

Global Fixed Income

Portable Alpha

$4,599 million TIPS Plus: Lehman Treasury Inflation Notes Index ($792 million) Short Duration Plus: Lehman U.S. Treasury 1-3 Year Index ($591 million) U.S. Core Plus: Lehman Brothers U.S. Aggregate Index ($3,216 million) Lehman Brothers Treasury Inflation Notes Index ($816 million) Emerging Country Debt Alternative Asset Opportunity (Commodities) Emerging Currency Hedge Currency Hedge Fixed Income Hedge

Core Strategies

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GMO

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GMO Fixed Income

Team of 16 has years of collective investment management industry experience 224

At GMO Industry Portfolio Management Bill Nemerever, Partner, Group Co-Manager 13 32 Tom Cooper, Partner, Group Co-Manager 13 26 Steve Edelstein, Partner 11 24 Allan Berliant 3 21 Justin Klosek 4 9 Research/Product Management/Technology Tina Vandersteel 3 16 Mark Mueller, Partner 10 14 George Estes, Partner 10 10 Kim Sullivan 6 8 Max Golts 1 2 Andy Gossard 1 1 Trading/Support Madelyn Tucker 9 16 Tracey Keenan 4 16 Bill O'Connell 7 8 Kyle Ciano 2 3 Investment Control Mark Puorro 13 18

Commodities and Alternatives

Investment Strategy Focus Years

Bonds and Currencies Emerging Country Debt Asset-Backed Securities and Corporate Credit

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GMO

WM_Fresno County ERA_9-06

GMO Core Beliefs and Competitive Advantages

Relative value is best exploited from the top down

Global Fixed Income

Cheap implementation maximizes alpha, including when replicating the benchmark

GMO implements using instruments with low transactions costs both for benchmark replication and active management, which allows the portfolios to respond quickly to changing markets but precludes investments in illiquid securities, like corporate bonds.

Global bond markets are less efficient

There are five times as many managers benchmarked to aggregate-style domestic indices than benchmarked to global government bond indices.

Systematic methods effectively deal with complex issues

GMO’s disciplined approach is a consistent, thorough, adaptable way of capturing our investment ideas. Our approach avoids the pitfalls caused by emotion. GMO evaluates currencies and bonds separately, generating independent sources of alpha. Liking a country’s bonds does not mean we like the currency.

Currencies and bonds should be evaluated separately Currency markets are particularly inefficient

Currency markets have relatively few dedicated currency managers. Major market participants – hedgers and Central Banks – are not primarily motivated by currency profits.

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Investment Process Overview

First we replicate the benchmark, then we combine a variety of strategies to add value

Value-Added Strategies Benchmark Replication

+

Invest in bonds, currencies, short-term high-quality debt & derivatives to generate benchmark- like returns

+ +

Emerging Country Debt

Opportunity Set: Emerging Country Debt J.P. Morgan Emerging Market Bond Index Global and related sovereign, hard currency emerging country debt exposures Asset-backed Securities AAA, floating-rate ABS with various collateral types

Currencies

Opportunity Set: Australian dollars Canadian dollar Euro Yen New Zealand dollar Norwegian krone Swedish krona Swiss franc U.K. pound U.S. dollar

Relative Value Momentum-Plus Security Selection Bonds Yield Curve Market Selection Rate Anticipation Volatility Asset-Backed Securities Issue Selection Issue Selection

Opportunity Set: Australian interest rates Canadian interest rates Euro-area interest rates Yen interest rates Swedish interest rates Swiss interest rates U.K. interest rates U.S. dollar interest rates

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Performance Review: Global Bonds

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GMO

WM_Fresno County ERA_9-06

1-Year Performance Attribution: Total

Data as of 7/31/2006

Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06

Total

Global Bond Fund 1.64% -1.15% -1.05% -0.59% 0.24% 0.83% -0.23% -1.06% 3.20% 1.72% -0.90% 0.57% 3.15% J.P. Morgan Global Government Bond Index 1.83%

1.93%
1.80%
1.14%

1.04% 1.28%

0.46%
1.21%

2.19% 1.79%

0.97%

0.80% 1.30% Alpha

0.20%

0.78% 0.76% 0.55% -0.81% -0.46% 0.23% 0.16% 1.01% -0.06% 0.07% -0.23% 1.85% Bond Market

11
5

24 6

14
10

22 22 33 10

1
11

66 Overlays 3 6

2

3

12
18

10 1 2

10
14
29

Currency

17

79 58 45

59
31
22
17
40

16 6 19 Emerging Markets 14

3

4 3 8 11

1

3

6
1

5 37 LIBOR Plus 1

1
4
2

4 1 5 5

2

4

3

10 Trading Costs

1
1
1
2
2
2
2
2
2
2
1
1
18

Issue selection/other 5

14

3 1

1

5

1

7 107

10
1
6

167 Total alpha

20

78 76 55

81
46

23 16 101

6

7

23

185

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GMO

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1-Year Performance Attribution: Bond Markets

Global bond yields began rising in the second half of 2005, accelerating throughout the first half of 2006 before falling slightly in July. Major, sustained positions included overweight Sweden and underweight U.S. and U.K. We had been underweight briefly in the Euro-area in 2005 but otherwise overweight. U.S., Australian, Swiss and U.K. positions were the largest positive contributors over the past 12 months. The Swedish and Japanese overweights detracted from performance.

Data as of 7/31/2006

JPMorgan Global Government Bond Index Yield

2.7% 2.9% 3.1% 3.3% 3.5% 3.7% 3.9% Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06

Total of 66 bps Local Currency Total Bond Returns

2.1% 1.9%

1.1%
0.9%
2.2%

4.4%

0.1%
0.9%
2.6%

3.1% 0.8% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.

Bond Active Weights at Quarter Ends and Current

16% 0%

18%

0% 0% 20%

6%
9%
15%
2%

8% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.

Contribution to Performance, bps

30 3 1 8

17
39

25 17 37 Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.

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1-Year Performance Attribution: Currency Markets

The U.S. dollar’s 2005 strength has evaporated in 2006, despite its continued yield advantage versus many of the major currencies. Due to the recent decrease in our U.S. dollar position, currency alpha reversed, and now is positive for the trailing 12 months. While overweights in Scandinavian countries hurt performance, underweight positions in Japanese yen and euros as well as a British sterling underweight provided gains.

Data as of 7/31/2006

Total of 19 bps

Weighted U.S. dollar performance

4.0%
2.0%

0.0% 2.0% 4.0% Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06

Currency Returns

0.8% 8.5% 5.0% 5.1%

2.0%
9.8%

5.0% 7.5% 4.4% 6.0% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K.

Currency Active Weights at Quarter Ends and Current

6% 2%

1%
12%
18%

2% 6% 3% 1% 4% 7% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.

Contribution to Performance, bps

23

29

35 80

13
27
43
62

58

2

Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K.

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GMO

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Performance Attribution

Performance attribution is run daily, providing immediate feedback about the portfolios

Total

150 b.p.
100 b.p.
50 b.p.

0 b.p. 50 b.p. 100 b.p. 150 b.p. 200 b.p. 250 b.p. 300 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 2004 2006 Currency Markets

200 b.p.
150 b.p.
100 b.p.
50 b.p.

0 b.p. 50 b.p. 100 b.p. 150 b.p. 200 b.p. 250 b.p. 300 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 2004 2006 Interest Rate Markets

80 b.p.
60 b.p.
40 b.p.
20 b.p.

0 b.p. 20 b.p. 40 b.p. 60 b.p. 80 b.p. 100 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 2004 2006 Emerging Debt

20 b.p.
10 b.p.

0 b.p. 10 b.p. 20 b.p. 30 b.p. 40 b.p. 50 b.p. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 2004 2006 219 b.p. 78 b.p. 19 b.p. 43 b.p. 29 b.p.

15 b.p.

65 b.p. 91 b.p. 156 b.p.

53 b.p.

34 b.p. 11 b.p.

16 b.p.
42 b.p.

95 b.p.

93 b.p.

62 b.p. 14 b.p. 14 b.p.

6 b.p.
4 b.p.

Total Currency Markets Interest Rate Markets Emerging Debt LIBOR Plus Trading Costs Issue/Other 2004 2005 First Half 2006

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Global Bond Performance: Frank Russell Universe

Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. There are risks associated with investing in a fund of this type that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange rates. Performance shown is gross. Composite Inception Date: 12/31/95.

8.59

GMO Global Bond Composite Universe of Global Fixed Income Composites – Unhedged Periods Ending June 30, 2006

GMO Global Bond Composite (U.S. $) JPMorgan Global Gov’t. Bond (U.S. $) Rate of Return (%) Periods

10.00
5.00

0.00 5.00 10.00 15.00 20.00 10 Years 9 Years 8 Years 7 Years 6 Years 5 Years 4 Years 3 Years 2 Years 1 Year Current Quarter Min/Max GMO

6.11 5.69 5.35 6.67 10.72

GMO

5.98 5.69 5.37 6.30 9.56

GMO

5.82 5.66 5.47 6.29 9.01

GMO

6.07 5.89 5.41 6.89 9.93

GMO

7.15 6.62 6.35 7.68 11.79

GMO

8.34 9.34 10.02 14.19

GMO

7.88 7.25 6.95 8.24 12.06

GMO

4.97 4.49 4.14 5.43 7.83

GMO

4.22 3.50 3.42 5.27 6.71

GMO

0.23

0.41
0.61

1.90 2.90

GMO

2.89 2.56 2.29 3.52 4.25

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GMO Sources of Value Added

A diverse set of strategies adds breadth to our process

Bond Market Selection

Emerging Debt Exposure (5%)

Currency Market Selection (51%) Global Bond Market Strategies (44%)

Rate Anticipation Yield curve Volatility Relative Value Momentum Plus

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Portfolio Positioning

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GMO

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Current Portfolio: Global Bond Fund

Data as of 7/31/2006

0% 2% 1% 37% 29% 0% 0% 1% 0% 6% 23% 0% 18% 0% 0% 45% 11% 0% 0% 21%

6%
3%

9% 4% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.A. Emerging JPMorgan Global Government Bond Index GMO Global Bond Fund

0% 2% 1% 37% 29% 0% 0% 1% 0% 6% 23% 0% 9% 3% 0% 24% 11% 2% 6% 4%

0%

12% 31% 0% Australia Canada Denmark Euro-area Japan New Zealand Norway Sweden Switzerland U.K. U.S.A. Emerging

JPMorgan Global Government Bond Index GMO Global Bond Fund

Currencies Bond Markets

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Investment Process

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Benchmark Replication

Benchmark exposures are replicated in the least expensive way to minimize tracking error

We can add value to any benchmark that can be replicated The return of the benchmark forms the base of our portfolio’s return We use bond futures, currency forwards, swaps, options and other instruments

to replicate the returns of the benchmark with limited risk. When they are inexpensive, we will use index total return swaps or synthetic indices to generate benchmark exposures

Because our replication of the benchmark requires only small amounts

f cash, we invest the balance of our clients’ assets in a very high-quality cash

management pool, the GMO Short-Duration Collateral Fund

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Benchmark Replication

It’s not the number of instruments in the benchmark, but rather the number of unique risks

Benchmark type Examples Replication instruments Domestic or global government and government-related bond

JPMorgan Government Bond Indices
Citigroup Government Bond Indices
Lehman U.S. Agency Index

Government bond and Agency bond futures, interest-rate swaps Inflation-protected government bond

Lehman U.S. Treasury Inflation Notes Index
Lehman Global TIPs

Bonds, inflation swaps, index total return swaps Aggregate-style (by subcomponent)

Lehman domestic or Global Aggregate Indices
Citigroup domestic or Global Broad Investment

Grade Indices Index total return swaps (rarely available at the aggregate level) Securitized

Lehman Fixed-Rate MBS Index
Lehman ABS, CMBS Indices

Mortgage TBAs, bonds, index total return swaps Bonds Investment-grade corporate credit

Lehman U.S. or Global Corporate Index
Citigroup U.S. or Global Credit Index

Index total-return swaps, synthetic CDX indices, single- name CDS Specialized Liability-driven Nominal pension liabilities Interest-rate swaps Broad Narrow

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Currency Management

We believe that the fact that there are relatively few long-term investors in

global currency markets allows us to exploit continuing inefficiencies

We have developed models that enable us to add value consistently by buying

currencies we find undervalued and selling their overvalued counterparts

Currencies outside our clients’ benchmark universes can be sources of value-

added (e.g., U.S. dollar is traded in our non-U.S. portfolios)

Approximately half of our added-value comes from this strategy

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What Makes a Currency Attractive?

High short-term yields…when risk aversion is low Strong current account …when risk aversion is high Positive price momentum Positive bond market momentum

Relative Value Momentum-Plus

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Current Account/Gross Domestic Product (GDP)

17.8% 7.0% 3.8% 2.7%

0.3%
2.7%
5.9%
7.0%
7.8%

13.5% Norway Switzerland Sweden Japan Canada Euro land U.K. Australia U.S.A. New Zealand Safest Riskiest

Risk Aversion Index

0.0 0.2 0.4 0.6 0.8 1.0 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06

Three-Month Libor

7.4% 5.5% 4.8% 4.3% 3.2% 3.1% 2.6% 1.6% 0.4% 6.1% New Zealand Australia U.S.A. U.K. Canada Euro land Norway Sweden Switzerland Japan

Risk Aversion Index Current Account Balance (Riskiness)

Currency Relative Value Model

We prefer high-yielding currencies especially when risk aversion is low, but we move to safe currencies when risk aversion is high

Relative Short-term Interest Rate

Risk averse: Reduce weight in risky currencies Risk Seeking: rank by yield Data as of 7/31/2006

With risk aversion low, we pay less attention to a currency’s riskiness and go for yield

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Currency Valuation: Risk Aversion Example

Currency active weights are modulated by changes in the risk aversion weight

Source: GMO, updated through 12/31/2003

Risk Aversion and Currency Active Weights

20%
10%

0% 10% 20% Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 0.00 0.25 0.50 0.75 1.00

Australian dollar weight (left) Swiss franc weight (left) Risk Aversion Index (right)

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Yield Momentum in 10-Year Bonds

2.2% 1.5% 1.5% 0.9% 0.9% 0.8% 0.5% 0.1%

0.2%

1.9% Switzerland Japan Euro land Australia U.S.A. U.K. Sweden New Zealand Canada Norway

Currency Momentum: Range of Short-to-Long Moving Averages

4%
2%

0% 2% 4% Australia U.K. Sweden Euro land New Zealand Norway Switzerland Canada Japan

Yield Curve Slope: 10-Year Swap versus 3-Month LIBOR

Basis Points

165 151 124 100 100 3 (18) (29) (48) (158) Norway Japan Sweden Switzerland Euro land Canada U.K. Australia U.S.A. New Zealand

Currency Momentum-Plus Models

Currency momentum alone tells only part of the story

Relative Bond Yield Momentum Relative Yield Curve Slope Relative Currency Momentum

Data as of 7/31/2006

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Global Bond Management

Our valuation models rank daily eight global bond markets We over and underweight markets in the same fashion as absolute return

managers

Our bond markets universe includes more countries than are in the various

benchmarks we use

We rigorously manage risk and invest primarily using low-cost derivatives such

as bond futures, interest rate and total return swaps

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What Makes a Bond Market Attractive?

High real yields Steep yield curve slopes Recent underperformance

Market Selection

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Yield Curve Slope: 10-Year Swap versus 3-Month LIBOR

Basis Points

151 124 100 100 3 (18) (29) (48)

Japan Sweden Switzerland Euro land Canada U.K. Australia U.S.A.

6-Month Change in 10-Year Yield

Basis Points

50 48 47 42 39 38 16 49 Euro land U.S.A. Switzerland Australia U.K. Japan Sweden Canada

Real 10-Year Yields

3.0% 2.2% 2.1% 2.1% 1.8% 1.3% 1.3% 2.4% Australia Canada U.K. Sweden U.S.A. Euro land Japan Switzerland

Relative Recent Bond Market Performance Relative Yield Curve Slope Relative Real Yield

Bond Market Selection Models

We like high real yields, steep slopes, and recently lagging bond markets

Data as of 7/31/2006

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Bond Market Selection Example

When all factors line up, the over/underweights are unambiguous

Source: GMO, updated through 4/30/2003

Yield curve slopes: 10-year less 3 months

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3/12/2003 3/26/2003 4/9/2003 4/23/2003 Canada U.K. Universe

Real yields

1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8% 3.0% 3/12/2003 3/26/2003 4/9/2003 4/23/2003 Universe Average Canada U.K.

Yield trend

0.5%
0.4%
0.3%
0.2%
0.1%

0.0% 0.1% 0.2% 3/12/2003 3/26/2003 4/9/2003 4/23/2003 U.K. Canada Universe Average

Active weights

12%
8%
4%

0% 4% 8% 12% 3/12/2003 3/26/2003 4/9/2003 4/23/2003

Canada U.K Universe Average

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Downward yield momentum Steep slopes U.S. dollar strength Equity markets weakness

Rate Anticipation

What Makes Global Bonds Attractive?

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Bond Rate Anticipation Model

We like bonds in general when yields have positive downward momentum, when slopes are high, when the U.S. dollar is strong, and when equity markets are weak

Moving Average Change in Global Yields

0.3%
0.2%
0.1%

0.0% 0.1% 0.2% 0.3% 0.4% 0.5% Jul 05 Oct 05 Jan 06 Apr 06 Jul 06

Data as of 7/31/2006

Sources: J.P. Morgan, Morgan Stanley

Average Slope of Yield Curves in Euroland, U.K. and U.S.A.

0 b.p. 40 b.p. 80 b.p. 120 b.p. Jul 05 Oct 05 Jan 06 Apr 06 Jul 06

1-Year Change in USD and MSCI World Equity

15%
10%
5%

0% 5% 10% 15% 20% Jul 05 Oct 05 Jan 06 Apr 06 Jul 06

USD Real Effective Exchange Rate MSCI World Equity Index

Equity Weakness U.S. Dollar Strength Yield Curve Slope Yield Momentum

Flat yield curves are negative for bonds Global yields are no longer moving upward, which is less negative for bonds Currently equity weakness is neutral for bonds, while USD weakness is negative

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Other Ways We Make Money in Bonds

Global yield curve slopes Opportunistic butterfly positions

Yield Curve Volatility

Mean reversion in interest-rate

volatility

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Three-Month Change in 3-month, 3-month Forward Rates Basis Points

43 35 30 28 20 19 14 9 Sweden Australia Euro land Japan Switzerland U.S. U.K. Canada

Other Bond Models: Example

An additional risk budget is given to a series of bond strategies designed to add relatively uncorrelated sources of value to the portfolios: slope model example

Relative Swap Slopes

Data as of 7/31/2006

Forward Markets

Inclined to flatten Inclined to steepen

Static Return

Static Carry Including Rolldown (Duration Neutral Hedge Ratio)

1.3% 0.6%

0.3%
1.3%
2.6%
2.7%
4.4%
5.3%

U.S. (4.1) Canada (4.2) Australia (3.9) U.K. (4.2) Japan (4.5) Euro land (4.2) Switzerland (4.4) Sweden (4.2)

Yield Curve Slope: 10-Year Swap versus 2-Year Swap Basis Points

118 75 71 45 38 14

5
8

Japan Switzerland Sweden Euro land Canada U.S. Australia U.K.

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Portfolio Allocation

We have built a customized risk management system to model the active risks

in our portfolios

We budget our portfolio risks in a structured fashion, targeting specific tracking

errors for each strategy

Each trading day new market information is incorporated in our portfolios to

accommodate changing economic and market conditions

On a daily basis we attribute performance to our various strategies, gaining

valuable information to control and allocate risk

While allocations are performed based on the underlying strategies, an added

layer of risk control exists to limit exposures by bond market, by currency, and by the deviation of the portfolio duration from the benchmark

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Risk Model

Risk model transforms alpha forecasts into bond and currency active weights

Data as of 7/31/2006 18%

2%

7%

18%

0%

6%
9%
15%

8% 1%

13%
18%

2% 6% 3% 0% 6% 7% 20% 0%

25%
15%
5%

5% 15% 25%

Australia Canada Euro land Japan New Zealand Norway Sweden Switzerland U.K. U.S.A.

Covariance Matrix

* 1.5%-2.5% for global bond portfolios, 15% for Currency Hedge Fund and Fixed Income Hedge Fund

Currency Market Forecasts Bond Market Forecasts Risk Model

Maximizes expected return subject to tracking error* constraint

Active Weights

Trading Costs

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Exposure Risk Statistics

Current & Range Tracking error 1.5% ▐ 2.5% Duration difference

2yr ▐

+2yr Bond weights

25% ▐

▐ +25% Currency weights

25% ▐

▐ +25%

Portfolio Risk Exposures and Implementation

Tracking error is the primary risk measure, while credit rating distribution qualifies the cash collateral backing derivatives exposures

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Active Management is Key to Capturing Value

Portfolio positions adjust to pick up relative opportunities on a daily basis

Data as of 7/31/2006 Daily Active Weight: Switzerland Bond Market

8%
6%
4%
2%

0% 2% 4% 6% 7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31 Daily Active Weight: Australian dollar

4%
2%

0% 2% 4% 6% 8% 10% 7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31

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Implementing global bond and currency allocations:

To minimize transaction costs we typically gain our exposure to currency and bond

markets using derivatives such as forwards, futures, swaps and options

The choice of instrument rests on relative value models as well as on our strategy of

adding well-priced convexity when available to limit downside risks

Investing underlying cash collateral:

Given our macro views on the outlook for asset-backed sectors, and current portfolio

positioning, we select complementary AAA-rated issues that carry a liquidity or complexity yield premium

We do not reach for yield by reducing asset credit quality

Earning a credit spread:

We use a small (0-5%), relatively stable allocation to our Emerging Country Debt fund to earn the asset class’ yield spread and take advantage of the Fund’s alpha, generated almost exclusively through security selection

Security Selection

Some of our value-added comes from diverse security selection choices

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Short-Duration Collateral Fund (SDCF): Quality and Diversification

Quality Distribution

Interest Rate Duration Percent Floating Rate Spread to LIBOR 0.1% Market Value $5.9 billion 92%

Portfolio Breakdown

0.25 years Spread Duration 0.1 years

Please see Appendix for SDCF guidelines Data as of July 31, 2006

Cash 1.1% AAA Non- Insured 87.8% US Agency 1.2% U.S. Treasury 0.0% Non-AAA 0.5% AAA Insured 9.4%

All Triple-A Rated 99.5%

UK Residential Business Loans 6% CDO 10% CMBS 6% MBS Residential 2% Other 5% Student Loans 7% ABS Residential 23% 6% Treasury 0% Agency 1% Auto 12% Australian Residential 4% Insurance Financing 1% Credit Cards 17%

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Summary

Global currency and bond markets offer fixed income managers dramatically

more opportunities to add value than domestic bond markets

Opportunities in currency and bond markets can be exploited independently Our valuation models and implementation techniques give us the ability to

utperform any benchmark

The value we add using our valuation models can be enhanced through

thoughtful security selection

Our team of experienced investment professionals focuses on investment

strategies where we have a significant competitive advantage

The value we add complements and diversifies that of other managers

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Appendix

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GMO Fixed Income Performance

Through July 2006

Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. Performance shown is net of fees and expenses after reimbursement from the manager. The Fund may have a transaction fee at purchase and/or redemption which is paid to the Fund to cover trading costs. Average Annual Total Return figures reflect these fees; Total Return figures net of fees do not. There are risks associated with investing in a fund that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange

rates. J.P. Morgan EMBI Global represents the J.P. Morgan EMBI prior to 8/95, J.P. Morgan EMBI + through 12/31/99 and the J.P. Morgan EMBI

Global thereafter. As of 7/ 31/ 2006 Total Return Net of Fees Average Annual Total Returns (Net Trans. Costs)

Fixed Income Fund/

Inception Month YTD YTD Value One Five Ten Since

Benchmark

Date 2006 2006 Added Year Year Year Inception Domestic Bond Fund 8/ 18/ 1994 1.12 0.53 0.24 1.47 5.02 6.53 6.74

Lehman Brothers U.S. Government

1.19 0.29 1.24 4.48 6.14 6.42 Core Plus Bond Fund 4/ 30/ 1997 1.17 0.48

0.14

2.63 6.22 N/ A 6.81

Lehman Brothers U.S. Aggregate

1.35 0.62 1.46 4.79 N/A 6.24 International Bond Fund 12/ 22/ 1993 0.51 4.21

0.37

2.16 10.79 6.19 7.86

JPMorgan Non-U.S. Gov't. Bond

0.67 4.57 1.46 9.21 4.81 5.85 Currency Hedged Int'l. Bond Fund 9/ 30/ 1994 1.35

0.66
0.25

1.82 5.84 8.22 9.99

JPMorgan Non-U.S. Gov't ex-JPN Hdg Bond +

1.34

0.41

1.27 4.70 7.02 7.97 Global Bond Fund 12/ 28/ 1995 0.57 4.13 0.72 3.15 9.25 6.69 6.68

JPMorgan Global Gov't. Bond

0.80 3.41 1.30 8.03 5.45 5.20 Emerging Country Debt Fund 4/ 19/ 1994 3.37 5.59 3.02 11.90 20.55 17.95 19.83

JPMorgan EMBI Global +

3.27 2.56 8.31 12.75 11.66 13.12 Inflation Indexed Plus Bond Fund 5/ 31/ 2006 1.28 1.40

0.52

N/ A N/ A N/ A 1.40

Lehman Brothers U.S. Treasury Inflation Notes

1.63 1.92 N/A N/A N/A 1.92 Strategic Fixed Income Fund 5/ 31/ 2006 0.52 0.60

0.33

N/ A N/ A N/ A 0.60

Lehman Brothers U.S. Treasury 1-3 Year

0.75 0.93 N/A N/A N/A 0.93

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GMO Short-Duration Collateral Fund: Guidelines

Effective 9/2/2004

Pre NPF Current I. Issue/Issuer Limits Asset-Backed Securities Single Issue None 3% Corporate Securities Single Issuer 5% 3% Total per Issuer None 5% All Single Issues > 2% None 25% II. Servicer limit* None 5%

III. Industry Limits

Total (Including Insured) Credit Card 25% 25% 40% Auto Financing 25% 25% 40% US Residential Home Equity None 25% 40% US Residential Prime Mortgages None 25% 40% CMBS None 25% 40% CDO None 25% 40% Other 25% 15% 25% Pre NPF Current IV. Sector Limits CBO: Emerging Collateral 25% 10% CBO: High-Yield Collateral 25% 10% USAid None 20% Gov’t Sponsored Enterprises None 15% each Government Repo None 15% V. Credit Limits Issues Rated Below AA- ** 2% per issuer All Issues Rated Below AA- None 10% All Issues Rated Below A- 5% 5% VI. Insurance Wrap Limits Per Insurer*** None 25%

* No Issues will be purchased whose servicer does not meet the standards set forth in the Fund’s investment guidelines. ** ALF represented that it primarily owned investment -grade securities. *** Wrapped issues are not coun ted in issuer, servicer , industry or sector limits above. However, within wrapped issues the limits above apply. Note: All limits apply at time of purchase.

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Capsule Biographies: Fixed Income

William Nemerever

Mr. Nemerever is a member of the executive committee and co-manages GMO’s global fixed income area with Tom
Cooper. Prior to joining GMO in 1993, he worked at Boston International Advisors where he founded the quantitative

global fixed income effort. Previously, he was in charge of several Fidelity Investments fixed income groups, head of the fixed income department at State Street Bank & Trust Co., a portfolio manager at Wells Fargo, and a portfolio manager, equity analyst and actuary at John Hancock. Mr. Nemerever earned his B.S. in Mathematics at the University of Washington and his M.S. in Actuarial Science from Northeastern University. He is a CFA charterholder. Thomas Cooper

Mr. Cooper co-manages GMO’s global fixed income area with Bill Nemerever. Before joining GMO in 1993, he was

a managing director at Boston International Advisors. Prior to joining Boston International, he worked at Goldman Sachs Asset Management, Western Asset Management and State Street Bank & Trust Co. Mr. Cooper received his M.B.A. from the University of California (Berkeley) and earned a B.A. from Oberlin College. He is a CFA charterholder. Steve Edelstein

Mr. Edelstein works with GMO’s global fixed income group as a portfolio manager. Prior to joining GMO in 1995,

he was a vice president and fixed income options and futures strategist with Morgan Stanley. Mr. Edelstein has also worked with First Boston in the fixed income proprietary trading, government trading and risk management groups, and as a financial model builder and programmer with Lehman Brothers’ Kuhn Loeb. He holds his M.S. in Economic and Social Statistics from Cornell University and earned a B.S. from the State University of New York at Oneonta. George Estes

Mr. Estes is responsible for credit analysis for GMO’s emerging country debt portfolios. Prior to joining GMO in

1996, he was director for Latin America and Canada for the Burger King Corporation. Mr. Estes holds a B.A. in German from the University of Virginia and an M.B.A. in Finance from the University of California at Berkeley. Mark Mueller

Dr. Mueller is the director of research for the algorithmic trading group and is a consulting director of research for the

fixed income group. Since joining GMO in 1997, he has also served as the director of research for the fixed income

group. Prior to joining GMO, he worked at Goldman Sachs in the fixed income proprietary trading group, and earlier

at Morgan Stanley as a quantitative analyst in equity derivatives. Dr. Mueller holds a B.S. in Physics from the Massachusetts Institute of Technology and a Ph.D. in Physics from Stanford University.

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Capsule Biographies: Fixed Income

Allan Berliant

Mr. Berliant is a member of the global fixed income group. Prior to joining GMO in 2003, he worked at Hartford

Investment Management Company as director of asset-backed securities. Previously, he was a vice president within Structured Asset Research at Zurich Scudder Investments. Mr. Berliant earned his B.S. from The Johns Hopkins University and his M.B.A. from University of Chicago. Max Golts

Dr. Golts is a member of GMO’s global fixed income group, focusing on quantitative research. Prior to joining GMO

in 2005, he worked on fixed income analytics and strategies for State Street Global Markets. Previously, he did volatility research at Fort Hill Capital Management. Dr. Golts earned his undergraduate degree from Kiev University and his Ph.D. in Mathematics from Yale University. Tracey Keenan

Ms. Keenan works with GMO’s global fixed income group as a finance/repo trader. Prior to joining GMO in 2002,

she held various positions at Standish Mellon, most recently as assistant vice president of fixed income trading. She earned her B.A. in political science from Stonehill College and her M.B.A. in Finance from Suffolk University. Justin Klosek

Mr. Klosek is a member of the global fixed income group. Prior to joining GMO in 2002, he worked on the fixed

income teams of both Morgan Stanley Asset Management and Long-Term Capital Management. Mr. Klosek earned his B.S.E. in Civil Engineering and Operations Research from Princeton University and his M.S. in Civil Engineering from Massachusetts Institute of Technology. He is a CFA charterholder. Madelyn Tucker

Ms. Tucker is a trader for the global fixed income group. Prior to joining GMO in 1997, she worked at Fidelity

Investments where she traded asset backed corporate and mortgage securities, and monitored benchmarks for trust

funds. Prior to that, she was director of financial systems development at Cherry Webb. Ms. Tucker earned her

M.B.A. from the Simmons School of Management. Tina Vandersteel

Ms. Vandersteel is a member of the global fixed income group, focusing on product management. Prior to joining

GMO in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee

University. She is a CFA charterholder.

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