Fresno County Employees’ Retirement Association Asset Allocation Study March 1, 2006

Fresno County Employees’ Retirement Association Asset Allocation StudyMarch 1, 2006

Jeffrey MacLeanChief Executive Officer

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WURTS & ASSOCIATESPAGE 2

Overview of Presentation

I. Inputs & Assumptions

II. Analysis & Results


SECTION I

Inputs & Assumptions


Consensus Expectations - Returns

Notes: Compound Returns. Investment Consultant 1, 2, & 3 were provided by Ennis Knupp, whom performed the survey.

Asset ClassConsultant

1Consultant

2 Consultant 3Consultant

4Consultant

5Consultant

6Consultant

7

Goldman

Sachs SSGA

Large Cap U.S. Equity 7.70% 8.50% 8.70% 8.50% 8.00% 8.85% 8.40% 8.00% 7.50%

Small/Mid Cap U.S. Equity 9.85% 9.00% 7.70%

International Large 7.70% 8.50% 8.70% 8.80% 8.00% 9.25% 9.50% 8.00% 9.10%

International Small 10.00%

Emerging Markets 9.80% 10.50% 8.00% 9.90%

U.S. Core Fixed Income 5.00% 4.80% 6.10% 5.25% 5.40% 4.75% 4.50% 5.00% 4.50%

High Yield Fixed Income 6.80%

TIPS 4.40%

Foreign bonds 5.10% 4.70%

Real Estate 7.30% 7.30% 7.00% 7.50% 7.60% 7.20% 6.00%

REIT's 7.10% 7.10% 7.50% 7.20% 6.80% 5.80%

Hedge Funds/Abs Return 8.50% 6.50% 7.00%

Timber 9.40%

Commodities 4.5-7.0% 7.30%

Private Equity / Venture Capital 10.60% 11.70% 11.70% 12.80% 11.00% 11.00%

Cash 3.10% 4.20% 3.25% 3.50%

Inflation 3.00% 3.10% 2.90% 2.60% 2.90% 2.50%


Expected Rate of Inflation

Cash Bonds

U.S. Stocks

InternationalStocks

Wurts & Associates utilizes a combination of fundamental analysis and a building block approach to construct projected returns for key asset classes.

International Stocks: The historical relationship between returns for international and U.S. stocks is examined to determine if a premium should exist for international stocks. An overlay of fundamental analysis is applied for minor adjustments.

U.S. Stocks: We estimate an Equity Risk Premium based upon the historic range of premia. This is fine-tuned with fundamental returns decomposition.

Bonds: We believe that a bond’s yield is an unbiased measure of market expectations regarding future returns. Given historically low rates and the high level of fiscal and monetary stimulus, we believe rates will rise over time, and the current yield should be adjusted as a predictor of future returns.Cash: We examine the historic premium of cash instruments to inflation and compare to the current yield and inflation rate. A qualitative judgment is made about the size and sustainability of the premium given today’s environment.Inflation: We utilize the break-even inflation rate between the ten-year TIPS and conventional Treasuries as a starting point. Adjustments are made based upon our view of the macroeconomic environment.

Building Block Approach: Description


Market Implied 10 Year Inflation Estimate:

• Market expects inflation of

2.4% over next ten years.

• We believe that this

measure is too low:

•Fiscal and monetary

stimulus

•Need to “reflate away”

large public and private

debt levels.

• We leave the inflation

forecast unchanged of

2.70%.As of January 3, 2006.

Market Implied 10 Year Inflation Estimate

4.4%

2.0%

2.4%

0%

1%

2%

3%

4%

5%

Nominal Yield TIPS Yield

10 Year Yield Implied Market Inflation

Return Assumptions: Inflation


Source: Ibbotson. Data ending 12/31/2005. Current Yield on T-bill matures Feb 3, 2006: WSJ.

Compound Annual Average 1926-2005

3.73.0

0.0

1.0

2.0

3.0

4.0

5.0

30 Day T-Bill US Inflation (CPI)

Return Assumptions: Cash

Current Yield as of January 5, 2006 & 2005 Inflation

3.93.5

0.0

1.0

2.0

3.0

4.0

5.0

30 Day T-Bill 2005 US Inflation (CPI)


Starting bond yield is an excellent predictor of subsequent ten-year performance:

Source: Ibbotson. Data ending 12/31/2004. 10 Year Govt Bond Return: 50% Intermediate Gov’t & 50 LT Gov’t. Starting 10 Year Govt Bond Yield: 50% Int Govt Yield & 50% LT Govt Yield.

Rolling 10 Year Return vs. Starting 10 Year Yield

0.0

3.0

6.0

9.0

12.0

15.0

1926 - 1935 1936 - 1945 1946 - 1955 1956 - 1965 1966 - 1975 1976 - 1985 1986 - 1995 1996 - 2005

10 Year Govt Bond Return Starting 10 Year Govt Bond Yield

Source: Ibbotson. Data ending 12/31/2005. 10 Year Govt Bond Return: 50% Intermediate Gov’t & 50 LT Gov’t. Starting 10 Year Govt Bond Yield: 50% Int Govt Yield & 50% LT Govt Yield.

Return Assumptions: Bonds


Relationship also holds for Lehman Aggregate Index over shorter time period:

Source: Ibbotson. Data ending 12/31/2005.

Rolling 10 Year Return vs. Starting Yield

0.0

3.0

6.0

9.0

12.0

15.0

1976 - 1985 1980 - 1989 1984 - 1993 1988 - 1997 1992 - 2001 1996 - 2005

LB Aggregate Bond LB Aggregate Bond Yield

Return Assumptions: Bonds


Yield to Maturity:

• We believe the yields will

rise moderately in response

to inflation.

• Higher reinvestment rate

will, over latter portion of

next ten years, compensate

for shorter-term price

losses.

• We estimate a 5.25% return

for (Lehman Aggregate

Index) core bonds.

Return Assumptions - Bonds

Source: Ibbotson. Data as of 12/30/2005.

Yield to Maturity

4.45.1

4.14.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

December 2004 December 2005

LB Aggregate LB Govt/Credit


The equity risk premium is the most important number in investing.

• Stocks are inherently more risky than bonds. In order to be a valid investment choice, stocks must offer a higher rate of return than bonds to attract investor capital.

• This demanded incremental difference in return is the equity risk premium and is typically defined as the long run (ten years in this case ) return difference between US equities and US government bonds.

• Since 1926, this number has averaged approximately 6.0%.

• We begin our 2006 estimate with a historic look at the premium over time. The following chart displays the starting yield of a ten-year government bond and the subsequent ten years of stock performance as measured by the S & P 500:

Return Assumptions - Equity


We estimate a 7.9% nominal return for stocks. This implies an equity risk premium of about 3.5% over a starting 10-Year Treasury bond yield¹.

• About 200 basis points less than 6.0% average of last 76 years.

• Lower end of historical risk premium distribution.


Breakdown of the Return Composition:

Dividends: Our total dividend estimate is 2.7% - 1.8% current yield, 0.3% “repurchase yield”, and 0.6% for a rising payout ratio.

Real Earnings Growth: over the 1990’s averaged 5.5% and 2.5% from 1950-2000. We feel the moderately higher 3.0% is appropriate and in line with a reasonable rate of real GDP growth.

P/E Contraction: Ratios increased from 10 to 30 over the last 76 years. Most of the increase occurred in the last 20 years. Last year, we assumed no change in valuation levels over the next ten years. P/E’s have subsequently risen causing us to project some contraction in equity prices. Therefore, we assume a contraction of -0.5% which we feel will be cushioned by lower tax rates and inflation levels.1. 10-Year Yield as of 12/30/05 was 4.4%.


Stocks usually (but not always) reward investors for their greater volatility:


Rolling 10 Year Return vs. Starting 10 Year Yield

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1926 - 1935 1936 - 1945 1946 - 1955 1956 - 1965 1966 - 1975 1976 - 1985 1986 - 1995 1996 - 2005

10 Year S&P 500 Return Starting 10 Year Govt Bond Yield

Source: Ibbotson. Data ending 12/31/2005. Starting 10 Year Govt Bond Yield: 50% Int Govt Yield & 50% LT Govt Yield.


The distribution of the ten-year equity risk premium around a starting government bond yield can vary widely. Valuations, dividend yields, investor behavior and a number of other factors can cause the number over any ten-year period to dramatically deviate from the 6% average.

Our preference over the next ten years is towards the lower end of the distribution due to high valuations and low dividend yields. However, we need a more precise estimate to model. Therefore, we will look at key fundamental components of long run stock returns.


Equity Risk Premium: Is the arithmetic difference of the S&P 500 10 year return and the 10 year starting yield.

Distribution of Equity Risk Premium 1926-2004

9.8

6.2 6.0

2.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

75th Percentile mean median 25th Percentile

Distribution of Equity Risk Premium 1926-2004

1%

6% 6% 6%

19%

14%

19%

7%6%

3%

14%

0%

5%

10%

15%

20%

25%

-4 -2 0 2 4 6 8 10 12 14 More


To better understand where the risk premium will fall over the next ten years, it is important to decompose the average return of the stock market over the last 78 years:

1926-2003 1950’s 1960’s 1970’s

1980’s 1990’s2006-2014 Est.

Dividends 4.3% 5.3% 3.3 % 4.0 % 4.6 % 2.7 % 2.7%

Real Earnings Growth

2.0% 1.7 % 2.9 % 2.3 % 0.2 % 5.2 % 3.0%

P/E Expansion/Contraction

0.9% 9.4 % -1.0 % -7.7 % 7.6 % 7.3 % -0.5%

Inflation 3.0% 2.2 % 2.5 % 7.4 % 5.1 % 2.9 % 2.7%

Total 10.4% 19.4% 7.8 % 5.9 % 17.6 % 18.2 % 7.9%

Source: Ibbotson, Standard & Poor’s, Haver, Robert Shiller, and Morgan Stanley Research. Historical data is rounded.

Return Assumptions – Equity


Small stocks have historically displayed a risk premium of their own to large cap stocks given their historical higher volatility.

Return Assumptions – Small Stocks

Source: Ibbotson. Data ending 12/31/2005.U.S. Small Stock Premium: The historical small stock premium is derived as the geometric difference between U.S. Small Stocks total returns and S&P 500 total returns.US Small Stock index: The Small Company Stock return series is the total return achieved by the Dimensional Fund Advisors (DFA) Small Company 9/10 (for ninth and tenth deciles) Fund. The Fund invests in a broadly diversified cross section of small companies.

Premium 1926-2005

12.6%10.4%

2.3%

0%

5%

10%

15%

U.S. Small Stock S&P 500

Annual Return Premium

Rolling 10 Year Return

-10%

-5%

0%

5%

10%

15%

20%

1926 - 1935 1938 - 1947 1950 - 1959 1962 - 1971 1974 - 1983 1986 - 1995

US Small Stock Premium Average


Small stocks have historically displayed a risk premium of their own to large cap stocks given their historical higher volatility.

Return Assumptions – Small Stocks

Source: Ibbotson. Data ending 12/31/2005. Table was derived using quarterly observations. U.S. Small Stock Premium: The historical small stock premium is derived as the geometric difference between U.S. Small Stocks total returns and S&P 500 total returns.

5 Year Compound

Average Small Stock Premium

Small Stock Subsequent

10 Year Compound Average Performance

Quartiles Range Low

Median Max

1st -19.6 to -4.6 -6.4 3.7 16.6

2nd -4.5 to 1.5 -2.9 4.6 12.0

3rd 1.5 to 8.5 -3.8 4.2 13.3

4th 8.9 to 26.2 -5.8 -0.9 10.9

5 Year Compound Average for Small Stock Premium ending

12/31/05 = 15.8%


-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

1926 - 1928 1938 - 1940 1950 - 1952 1962 - 1964 1974 - 1976 1986 - 1988 1998 - 2000

US Small Stock Premium Average


Previously, we examined long term (20 years) results of international and domestic stocks that showed no distinct premium. However, when measured in 10-year periods, international stocks and U.S. stocks show shifting leadership characteristics.

Return Assumptions – International Large

Source: Ibbotson. Data ending 12/31/2005.

Compound Average 1970-2005

11.1% 11.1%

0%

5%

10%

15%

MSCI EAFE S&P 500


0%

5%

10%

15%

20%

25%

30%

1970 - 1979 1975 - 1984 1980 - 1989 1985 - 1994 1990 - 1999 1995 - 2004

S&P 500 MSCI EAFE



We begin our assessment of relative performance differential over the next ten years by looking at the difference in dividend yields. Beginning in the late 90’s, international stocks began to show a distinct premium in annual dividend yields.

Source: GMO

Dividend Yield DifferentialMSCI EAFE minus S&P 500

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05

Dividemd Yield December 2005

2.4

1.8

0.0

1.0

2.0

3.0

4.0

5.0

MSCI EAFE S&P 500


What impact does a starting dividend premium have on the next ten years of performance? We compared the 10-year performance ( between the MSCI EAFE and S&P 500) and the starting dividend yield differential (EAFE dividend yield minus S&P 500 dividend yield). The table below summarizes:


Dividend Advantage (EAFE over S&P)

% Time EAFE Outperformed the

S&P 500

Average Return Differential

Over .75% 100% 4.6%

.74% to .25% 88% 2.9%

.24% to (-.25%) 48%

(-.26%) to (-.75%) 54%

(-.76%) to (-1.25%) 48%

(-1.26%) to (1.75%) 37%

Under (-1.76%) 52%

Notes: The first observation compared the 10 year, January 1970 to December 1979, annualized return differential (MSCI EAFE minus S&P 500) with the 12/31/1969 dividend yield differential (EAFE dividend yield minus S&P 500 dividend yield). The second observation compared the 10 year performance, February 1970 to January 1980, with the 1/31/70 dividend yield differential. Data as of 12/31/2005.

For the next ten years, we believe it will be in the 0.7% ballpark translating to a nominal return expectation of 8.6%.


Given the lack of historical data for emerging markets, we measured rolling 5-year periods. Emerging markets and U.S. stocks show shifting leadership characteristics.

Return Assumptions – Emerging Markets

Source: Ibbotson and MSCI. Data ending 12/31/2005.


-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Jan-88 - Dec-92 Mar-90 - Feb-95 May-92 - Apr-97 Jul-94 - Jun-99 Sep-96 - Aug-01 Nov-98 - Oct-03 Jan-01 - Dec-05

S&P 500 MSCI Emerging

Average Compound Return 1988-2005

14.3%12.0%

2.3%

0%

5%

10%

15%

MSCI Emerging S&P 500

Annual Return Premium


• Majority of real estate returns come from income return.– NCREIF income return stood at

8.0% ending June 2005• Price appreciation of properties

roughly lags the inflation rate.– U.S. Inflation averaged 4.2%

from 1978 – 2005 (ending June)

• We estimate a 6.1% ten-year return for private, core real estate portfolios.– Pricing risk caused by

continued low interest rates and increased institutional demand for that asset class will lead to values appreciating slower than our inflation estimate – 2.7%

– Leading to a realized income return from real estate in the 4.5% range

Source: SSR Realty Advisors, NCREIF

Return Assumptions – Real Estate

NCREIF Propery ReturnJanuary 1978 - June 2005

1.6%

8.0%

4.2%

0%

2%

4%

6%

8%

10%

12%

14%

NCREIF PropertyReturn

Inflation

Price Appreciation Income Return


Asset Class Proxy PeriodStandard

DeviationWurts’ 2006Assumptions

Large Cap U.S. Equity S&P 500 1945-2004 16.8% 16.0%

Small / Mid Cap U.S. EquityIbbotson U.S. Small Stock 1945- 2004 26.6%

22.0%Russell 2000 1979-2004 24.5%

International Large MSCI EAFE 1970-2004 20.7% 19.0%

International Small MSCI EAFE Small Cap 1993-2004 20.1% 28.0%

Emerging Markets MSCI Emerging 1988-2004 30.8% 35.0%

U.S. Core Fixed Income

Ibbotson U.S. LT Corporates

1945-2004 9.1%6.0%

LB Aggregate 1970-2004 7.5%

High Yield Fixed Income LB High Yield 1983-2004 8.9% 10.0%

TIPSML Inflation-linked Securities

1998-2004 4.6% 5.0%

Real Estate NCREIF Property 1978-2003 6.2% 12.0%

REIT’s NAREIT 1972-2003 18.7% 15.0%

Liquid Alternatives / Hedge Funds

HFRI Fund of Funds Composite

1990-2004 9.5% 8.0%

Private Equity / Venture Capital

Cambridge Private Equity 1987-2003 12.9% 35.0%

Cash U.S. 30 day T-Bill 1945-2004 1.5% 1.50%

Inflation U.S. Inflation (CPI) 1945-2004 2.3% 2.0%

Source: Ibbotson, Hedge Fund Research, and Cambridge. Return observations are annual.

Historical Risk


Historical Correlations

Large US Equity 1.00

Small/Mid US Equity 0.79 1.00

International Large 0.69 0.54 1.00

International Small 0.52 0.61 0.83 1.00

Emerging Markets 0.61 0.70 0.56 0.62 1.00

US Core Fixed Income 0.25 0.15 0.23 -0.30 -0.17 1.00

High Yield Fixed Income 0.53 0.54 0.42 0.34 0.50 0.37 1.00

TIPS -0.60 -0.34 -0.49 -0.25 -0.31 0.72 -0.24 1.00

Real Estate -0.03 -0.08 0.04 -0.23 -0.23 -0.16 -0.15 -0.20 1.00

REITs 0.59 0.71 0.49 0.39 0.32 0.43 0.55 0.13 -0.071.00

Hedge Funds 0.45 0.55 0.36 0.41 0.59 -0.09 0.24 -0.18 -0.220.20

1.00

Private Equity/Venture 0.66 0.60 0.48 0.42 0.40 -0.13 0.28 -0.38 0.090.25

0.60 1.00

Cash -0.08 -0.06 -0.11 -0.38 -0.10 0.12 -0.06 -0.06 0.43

-0.10

0.11

-0.04 1.00

Inflation (CPI) -0.23 -0.14 -0.25 0.02 -0.15 -0.19 -0.19 0.24 0.33

-0.19

0.10

-0.12 0.33

1.00

Note: The history used to calculate correlation is the common date range between the pair of asset classes. (The previous page shows date ranges for all asset classes.). Correlation is calculated using quarterly returns.

Larg

e U

S

Smal

l/Mid

US

Inte

rnat

iona

l

Emer

ging

Mkt

sU

S Cor

e FI

Hig

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eld

FI

TIPS

Rea

l Est

ate

REIT

sH

edge

Fun

dsPr

ivat

e E

quity

Cas

h

(CPI

)

Int’l

Sm

all


Consensus Expectations - Returns

Notes: Compound Returns. Investment Consultant 1, 2, & 3 were provided by Ennis Knupp, whom performed the survey.

Asset ClassHistorical Returns

(Period)

10 Year Estimates

Avg. ConsensusReturns

2006 Wurts’Returns

2006 Wurts’ Standard

Deviation

Large Cap U.S. Equity 10.4% (1926-2005) 8.24% 7.90% 16.0%

Small/Mid Cap U.S. Equity 12.6% (1926-2005) 8.85% 8.50% 22.0%

International Large 11.2% (1970-2005) 8.62% 8.60% 19.0%

International Small 7.0% (1993-2005) n/a 9.10% 28.0%

Emerging Markets 14.3% (1988-2005) 9.55% 9.60% 35.0%

U.S. Core Fixed Income 5.3% (1926-2005) 5.03% 5.30% 6.0%

High Yield Fixed Income 9.6% (1984-2005) n/a 6.50% 10.0%

TIPS 7.9% (1998-2005) n/a 4.70% 5.0%

Real Estate 9.5% (1978-2004) 7.13% 6.10% 12.0%

REIT’s 10.7% (1972-2004) 6.92% 6.60% 15.0%

Liquid Alternatives/Hedge Funds 9.9% (1990-2005)

7.33% 7.50% 8.0%

Private Equity/Venture Capital 13.7% (1987-2004)

11.47% 10.90% 35.0%

Timber 15.4% (1991-2005) n/a 8.30% 14.0%

Commodities 7.8% (1991-2005) n/a 6.50% 12.5%

Cash 3.7% (1926-2004) 3.51% 3.50% 1.5%

Inflation 3.0% (1926-2004) 2.83% 2.70% 2.0%


Wurts’ Expected Correlation Assumptions

Large US Equity 1.00

Small/Mid US Equity 0.80 1.00

International Large 0.70 0.55 1.00

International Small 0.55 0.60 0.85 1.00

Emerging Markets 0.65 0.70 0.55 0.60 1.00

US Core Fixed Income 0.25 0.10 0.20 0.00 0.00 1.00

High Yield Fixed Income 0.55 0.55 0.40 0.35 0.50 0.30 1.00

TIPS 0.00 0.00 0.00 0.00 0.00 0.70 -0.10 1.00

Real Estate -0.05 -0.10 0.05 -0.25 -0.25 -0.15 -0.15 -0.20 1.00

REITs 0.60 0.70 0.50 0.40 0.30 0.45 0.55 0.15 -0.101.00

Liquid Alts / Hedge Funds 0.45 0.55 0.35 0.40 0.60 -0.10 0.25 -0.20 -0.20

0.20

1.00

Private Equity/Venture 0.70 0.60 0.50 0.40 0.40 -0.20 0.30 -0.30 0.100.25

0.60

1.00

Cash -0.10 -0.10 -0.15 -0.40 -0.10 0.15 -0.10 -0.10 0.45

-0.10

0.10

-0.05 1.00

Inflation (CPI) -0.25 -0.15 -0.25 -0.15 -0.30 -0.20 -0.20 0.25 0.35

-0.20

0.10

-0.15 0.35

1.00

Note: The history used to calculate correlation is the common date range between the pair of asset classes. (The previous page shows date ranges for all asset classes.). Correlation is calculated using quarterly returns.

Larg

e U

S

Smal

l/Mid

US

Inte

rnat

iona

l

Emer

ging

Mkt

sU

S Cor

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Hig

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eld

FI

TIPS

Rea

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REIT

s

Liqu

id A

lts

Priv

ate

Equ

ity

Cas

h

(CPI

)

Int’l

Sm

all


Wurts’ Expected Alpha Assumptions

Data as of 12/31/2005.1.Alpha is the excess return of a portfolio calculated as Portfolio Return – Benchmark Return. For this analysis, Small/Mid Cap Equity and International Equity alpha figures adjusted to 1.50% and 1.00%, respectively, to match assumptions of other Avista Corp. benefit plans.2.International small cap is over 5 years. International small universe data is from eVestment Alliance. 3.Fund of funds level. Excess net return is not applicable since the index return and median return are the same.

Asset Class

Ten Year ICC Universe

Median Return (A)

Ten Year Benchmark

Return (B)

Average Mgmt. Fee

(C)

Alpha¹ = Excess Net

Return (=A-B-C)

Ten Year Forecasts of Active Mgmt.

Alpha

Large Core US Equity 9.19% 9.28% 0.60% -0.69% 0.50%

Small/Mid Core US Equity 15.22% 9.26% 0.85% 5.11% 2.00%

International Equity 11.05% 6.18% 0.75% 4.12% 1.25%

Emerging Markets 8.10% 6.98% 1.25% -0.13% 2.50%

International Small Cap² 14.50% 5.10% 1.25% 8.15% 2.00%

US Core Fixed Income 6.50% 6.16% 0.35% -0.01% 0.25%

Real Estate 12.11% 12.09% 1.00% -0.98% 0.00%

Hedge Funds³ n/a n/a 1.0 -2.0% n/a 0.00%

Private Equity³ n/a n/a 1.0 -2.0% n/a 0.00%


Wurts’ Expected Alpha Assumptions

*Independent Consultants Cooperative Universe Median net of expected fees versus comparable index - a result above 0.00% indicates the median manager in the asset class added value. Data for small cap equity goes back to 1990.

Rolling 10 Year Excess Net Return

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Large Core Large Value Large Growth

Small Core International Core Bonds


SECTION II

Analysis & Results


Allocation

Market Value: $2.479 Billion

Investment Policy Manager Allocation

As of 12/31/05

Artisan 2.4%

S&P Flagship 6.2%

INTECH 5.9%

TCW 4.4%

A.J.O. L.P. 7.3%

Wellington 6.4%

Kalmar Investments 2.3%

Blackrock 8.6%

Bradford 6.8%Loomis Sayles 5.4%

WAMCO 8.1%

Brandywine Funds 5.2%

Mondrian Investments 4.9%

Oechsle 6.5%

Franklin 7.8%

Other 11.8%

Active Large Cap US Equity

22%

Passive Large Cap US Equity

6%

Small/Mid Cap US Equity 10%

International Large 12%

Emerging Markets 6%

US Core Fixed Income 30%

Global Fixed Income 3%

Private Equity/VC 6%

Real Estate 5%


Projected Return:10 Year Forecast

Asset Class Policy

Large Cap U.S. Equity 28%

Small/Mid Cap U.S. Equity 10%

International Large Cap Equity 12%

Emerging Markets Equity 6%

U.S. Core Fixed Income 30%

Global Fixed Income 3%

Private Equity 6%

Real Estate 5%

Expected Return 8.15%

Standard Deviation 11.53%

Sharpe Ratio 0.40

Active Alpha¹ 0.69%

Return with Active Alpha 8.84%

I. Active Alpha (0.69%) = (22% x 0.50%) (Large Cap U.S. Active) + (10% x 2.0%) (Small Cap U.S. Active) + (12% x 1.25%) (Int’l. Large Cap) + (6% x 2.5%) (Emerging Mkts.) + (30% x 0.25%) (U.S. Core Fixed Income). 0% Active Alpha for Global Fixed Income, Private Equity, and Real Estate.


Best/Worst Case Scenarios

Percentile

1 Year 3 Year 5 Year 10 Year

5th 28.7% 19.58% 16.90% 14.27%

25th 16.15% 12.70% 11.66% 10.62%

50th 8.15% 8.15% 8.15% 8.15%

75th 0.71% 3.79% 4.76% 5.74%

95th -9.11% -2.18% 0.06% 2.37%

Documents

Fresno County Employees’ Retirement Association Asset Allocation Study March 1, 2006