Termination of US Large Cap Equity Managers and hiring of US Large Cap Passive Index Manager, UM

1. Termination of US Large Cap Equity Managers and hiring of US Large Cap Passive Index Manager, UM University of Missouri Board of Curators Finance Committee Meeting January 28, 2010 c

2. Recommendation Recommendation to terminate two of the four US Large Cap Active Equity Managers and to hire a passive index manager to manage a portion of the US Large Cap Equity Allocation. d

3. Analysis of US Large Cap Equity Managers • The University reviewed its four US large cap equity managers in its ongoing manager review process using criteria based on the quarterly analysis of performance and other relevant factors: • On a quarterly basis, managers are evaluated over rolling three year periods against two benchmarks – their peer universe and an appropriate index. If either is negative staff conducts a formal review. • Other events triggering a formal review include key man/portfolio manager changes, style drift, unusual portfolio volatility, and other non-performance issues. • The formal review takes into consideration all relevant factors and results in a decision to terminate or a decision to retain. • If the University decides to retain, the manager is placed on a “watch list” until the problem is resolved. • Any termination recommendations are brought before the Board. e

4. Large Cap US Equity Manager PerformanceRetirement Fund f

5. Recommended Manager Changes • We recommend that Alliance and American Century be retained as active managers within the U.S. equity composite while Bernstein and Earnest be terminated and replaced with an allocation to an index fund. • Of the three underperforming managers, American Century was selected to be retained for the following reasons: • They recognize their underperformance and have taken steps to improve their stock selection process • Management has met with the University twice in the last year to address performance • They reduced annual management fees from approximately 0.47% to 0.42% or about $60,000 • They best compliment Alliance in the portfolio (Russell 1000 Value and Growth) g

6. Active versus Passive Investing for the US Large Cap Equity Allocation • At its February 2009 meeting the Board approved utilization of passive strategies for equity allocations where appropriate: • Cost: Management fees for a large cap U.S. equity index fund are approximately 5 bps as compared with 40-50 bps for the Funds large cap active equity managers. • No dilution of outperforming managers: most of the outperformance is attributable to a few managers within the composite. • Oversight: The new asset allocation policy has resulted in new active mandates in emerging market debt and high yield. Reducing the number of active U.S. equity managers allows the staff and consultant to focus their attention on the remaining active managers. • Defined benefit plans with assets between $1-5 billion indexed an average of about 30% of their U.S. equity assets. * * Greenwich Associates survey, 2008 h

7. Index Fund Managers • We recommend that the Retirement and Endowment Funds retain the Russell 1000 large cap index strategy managed by Mellon Capital, whose parent, Bank of New York Mellon, acts as custodian for the Retirement and Endowment Funds. • Due to the existing custody relationship with the University, Mellon has offered a discounted fee of about 3 basis points. • The commingled funds will be custodied at Bank of New York Mellon. • Mellon is one of the largest index managers in the world and manages over $50 billion in large cap US equity strategies. • It has a successful record of closely tracking index fund returns over many years. • The commingled funds offer daily liquidity and there may be transactions costs savings associated with contributing securities “in-kind” to the funds from the terminated managers. i

8. Summary of Recommendations • Terminate Bernstein (US Large cap value) and Ernest ( US Large cap core) as investment managers for the Retirement and Endowment Funds • Hire BNY Mellon to manage a US Large Cap Index portfolio (Russell 1000 Index) representing 40% of the US Equity allocation • Retirement - $150 million or 6% of the total portfolio • Endowment – $92.5 million or 8.4% of the total portfolio j

9. Resulting US Equity Allocation k