New Sources of Capital from Target Date Funds

1. New Sources of Capital from Target Date Funds Moderator: Lennine Occhino Mayer Brown Panelists: Joshua Cohen Leonard Kaplan Laurie Tillinghast Russell Investments Prudential Real Estate Investors UBS Global Real Estate – US October 16, 2012 National Association of Real Estate Investment Managers

2. Distribution of US Private Pension Plan AssetsBy Plan Type 1975 – 2009 Source: U.S. Department of Labor: Form 5500 Annual Reports

3. Distribution of US Private Pension Plan ContributionsBy Plan Type 1975 – 2009 Source: U.S. Department of Labor: Form 5500 Annual Reports

4. Custom Target Date Fund Opportunity • Assets in C-TDF about $54bn today • Projected growth to $530bn through 2015 • $450bn + increase next 3 years • Of the $3.7 trillion in TDF assets by 2020 • 37% estimated to be in customized portfolios • Approaching $2 trillion in C-TDFs in next 8-10 years Sources: Celent, CaseyQuirk, Morningstar, Consultant firms

5. Fiduciary Considerations in Using Institutional Commercial Real Estate Key Considerations Prudence Standard of Care. Same as for a Defined Benefit Plan ERISA Risk/Return The projected risk/return of the portfolio relative to the objectives of the target date/target risk fund or investment option Diversification Lower correlations with public equities and public fixed investments The Plan must offer participants the opportunity to give investment instructions among “a broad range of investment alternatives” ERISA 404(c) Liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan Cash Flow QDIA “applies generally accepted investment theories, is diversified so as to minimize the risk of large losses and that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures…,” such as balanced funds and target date funds

6. Sample Target Date Fund Glide Path Source: Russell Investments. For illustrative purposes only. Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed.

7. Why Custom? Casey Quirk/PSCAApril 2009 Survey of 397 plan sponsors. 61% use target date funds as the default. 87% use off-the-shelf target date funds. 13% use custom target-date funds.

8. Russell’s Target Date Asset Allocation (early in glide path)Process depends on client fee sensitivity and risk tolerance 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Model Portfolio Enhanced Portfolio Core Portfolio Core Portfolio + Model Portfolio + US Large Cap Equity Emerging Equity Private Real Estate US Small Cap Equity International Equity Global Equity Alternatives Global High Yield Listed Real Assets Core Fixed Income Hypothetical portfolios shown for illustrative purposes only.

9. Where does a direct RE product fit in a DC Plan? Direct RE 3-10% of a Diversified, Custom Asset allocation or Real Asset fund Target Risk Fund Custom Balanced Fund Real Asset Fund Diversified Inflation Fund Managed Account Target Date Fund • Other Criteria: • Total Plan assets equal or greater than $500M • QDIA is TDF, TRF or Balanced Fund (lifecycle, lifestyle) • Custom (generic name) with “open architecture” • Staff with “DB-like thinking”

10. DC Real Estate Fund: “30,000 Foot View” Record keeper determines NAV DC RE Fund C-TDF Overall Fund NAV determined by custodian NAV determined by RE Manager and/or 3rd Party NAV determined by fund(s) Private Real Estate Fund(s): 60-100% Liquidity Components: 0-40% (REITs and/or cash) +

11. Liquidity ManagementManaging cash flows and liquidity needs of TDF Managers and Plan Sponsors Factors to Consider • TDF Cash Flow • Rebalance methodology • Events that may trigger a material change in cash flows; i.e., reenrollment, new participant enrollment, plan design changes What to ask a Real Estate Manager • Are there liquidity queues to get in and/or out of private real estate? • Does the manager deploy a multi-fund approach or single strategy? • Utilize line of credit or back stop to guarantee liquidity Private Direct Property 60-100% TDF 15% to 40% of Plan Assets Real Estate 5% to 15% Allocation Plan Cash/REITs 0-40% Credit Line 5-15%

12. Liquidity Versus Optimal Allocations Liquidity Range 0% Private Direct Property 100% Publically Traded REITs Cash/REITs 20-40% Direct Private Property 60-80% • Optimal allocation to produce desired outcome in TDF • Trade off between liquidity and optimal allocation • What is the real liquidity risk?

13. Valuation MethodologiesRange of Approaches Valued In-house Partially outsourced to 3rd Parties Valued by 3rd Parties Individual property appraisals Appraiser review process at Fund level Intra-quarter changes; capital deployed, extra-ordinary revenue/ expenses Net operating income and changes thereto • Transparency • Integrity of the internal model • Frequency of change • Conflicts of interest • Organizational confidence in change notification process • Materiality levels • Frequency of change • Strength of market database • Organizational confidence in change notification process • Access to accounting records of manager