CIO Course in Investment Management

1. CIO Course in Investment Management Austin, Texas June 6 – 8, 2007

2. Outline of Course Topics Topic One – Expected Returns & Measuring the Risk Premium • Two Important Concepts in Investment Management • Investor Role & Compensation, Expected Return Components • Measuring Expected Returns & Return Components • Definitions and Concepts & Historical Evidence • The Equity Risk Premium: U.S., Global, and Chilean Experience • Methods for Measuring Equity Risk Premiums: • Historical Estimates • Ibbotson Associates, Fidelity Investments/Global Financial Markets • Fundamental Estimates • Fundamental Approach to Risk Premium Estimation • Examples: Fama-French, Claus-Thomas, Arnott-Bernstein • Economic Estimates • Economic Approach to Risk Premium Estimation: Black-Litterman, Ennis Knupp Associates • Survey Estimates • Examples: CFO surveys, Ennis-Knupp Associates managers, UTIMCO consultants, TRS Topic Two – Asset Allocation: Decisions & Strategies • The Asset Allocation Decision: Overview • Examples of Strategic Allocation Policies: • UTIMCO, Texas Teachers Retirement System, Global Capital Markets • Return Decomposition and the Importance of the Asset Allocation Decision • Time-Series vs. Cross-Sectional Effects • Asset Allocation & Building Investment Portfolios • Sharpe’s Integrated Asset Allocation Model: Strategic, Tactical, Insured • Measuring Gains from Tactical Asset Allocation • Examples: Fidelity Investments, Teachers Retirement, UTIMCO, MBA Investment Fund

3. Outline of Course Topics (cont.) Topic Three – Portfolio Risk Analysis • Tracking Error: Concept & Examples – Passive & Active Mutual Funds, Chile AFPs • Risk & Expected Return Within a Portfolio • Multi-Asset Class Examples • Diversification & Portfolio Size • Advanced Risk Analytics • Total Portfolio Risk vs. Marginal Asset Risk Within a Portfolio • Marginal Contribution to Risk • Portfolio Risk-Tracking Example: Chile Pension Sistema • Measuring Portfolio Downside Risk • Semi-Variance vs. Lower-Partial Moments: Examples Topic Four – Portfolio Optimization: Analytical Techniques • Overview of the Portfolio Optimization Process • Developing the Efficient Frontier: Notion & Analytical Solution • Mean-Variance Portfolio Optimization • Unconstrained & Constrained Optimization • Measuring the Cost of Constraint • Examples: Black-Litterman Forecasts, CLP & USD Pension Investing • Portfolio Risk & How Much to Invest in Foreign Assets? • Mean-Downside Risk Optimization • Adjusting Threshold Risk Levels & Power Coefficient • Example of Unconstrained & Constrained Optimization : CLP & USD Portfolio • Alpha-Tracking Error Optimization • Notion of Relative Optimization Problem • Benchmark vs. Peer Group Comparison • Example of Unconstrained & Constrained Optimization: CLP & USD Portfolio

4. Outline of Course Topics (cont.) Topic Five – Portfolio Optimization: Case Studies • U.S. Public Pension Fund: Texas Teachers’ Retirement System • Background & Investment Problem • Initial Allocation & Overview of Mean-Variance Optimization Process • Simulation-Based Forecasted Process: How Much Equity in Portfolio? • Optimization Outcome: Strategic Asset Allocation • Chilean Pension System • Background & Investment Problem • Base Case Economic Assumption • Adjusted Mean-Variance Analysis: Notion of Resampled Efficient Frontier • Strategic Asset Allocations: Unconstrained & Constrained Portfolios • U.S. Public Endowment Fund: University of Texas System • Background & Investment Problem • Initial Allocation & Overview of Mean-Downside Risk Optimization Process • Economic Assumptions & Notion of Potential Value-Added (PVA) • Decision Factors: Selecting From a Set of Optimal Candidate Portfolios Topic Six – A New Approach to Guaranteed Income • Retirement Planning Challenges • Increase in focus on Guaranteed Income for retirees • Market risk and mortality risk • Milevsky Stochastic Present Value Approach • Modeling future retirement liabilities • Hazard rates • Extensions to the Milevsky Framework • Downside risk optimization • Longevity insurance • Bequest efficient frontier • Illustrations • Future Directions

5. Outline of Course Topics (cont.) Topic Seven – Identifying Superior Active Portfolio Management • Defining Superior Active Management • The wrong question • The problem with benchmarks and peers • Return generating models • Lessons from Prior Research • Empirical Methodology • Data • Fama-French model • Results • Distribution of alphas • Time series and cross-sectional regressions • Economic Significance • Portfolio strategies • Logit models • Investment Example Topic Eight – Demographic Changes and Economic Growth • Population Growth and Economies • Age Structure • Reasons for change • Example • Demographic and Related Factors • Dependency ratios • Child Mortality, Fertility and “Demographic Dividends” • Other • Statistical Relationships • Demographic-Based Forecasts • Logit Models • County probabilities for GDP growth

6. Outline of Course Topics (cont.) Topic Nine – Teacher Retirement System of Texas: Asset Allocation Strategies & Organizational Design Issues • Overview of Organization with Britt Harris, CIO - Past and Future Practices • Investment Process at TRS • Asset Allocation & Security Selection • Internal vs. External Management • Open Discussion of Pension Fund Investment Issues • Introduction to TRS Investment Staff and Operations

7. Biographical Sketches of Instructors – Keith C. Brown

8. Biographical Sketches of Instructors – W. Van Harlow Van Harlow is a Managing Director of the Fidelity Research Institute, a unit of Fidelity Investments, the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans and a leading online brokerage firm. Dr. Harlow joined Fidelity in 1991 as a Portfolio Manager and has held the positions of Director of Investment Risk Management and Director of Quantitative Research for Fidelity Management & Research Co. Dr. Harlow was appointed President and Chief Investment Officer of Strategic Advisers, Inc., in November 1997 and assumed responsibility for Fidelity Asset Management Services in July 2001. Prior to joining Fidelity, Dr. Harlow was a vice president at Salomon Brothers Inc., in New York City, where he was responsible for quantitative investment and trading strategies. Previously, he was an assistant professor of finance at the University of Arizona from 1986 to 1989. Dr. Harlow received a bachelor of arts degree in physics and mathematical science from Rice University in 1978 and an MBA and Ph.D. in financial economics from the University of Texas. He holds a Chartered Financial Analyst (CFA) designation. Dr. Harlow is a 1990 recipient of a Graham and Dodd Award from the Financial Analysts Federation and a Smith Breeden Distinguished Paper Award in 1996 from the Journal of Finance. He was Editor-in-Chief of the Financial Analysts Journal from 1993 to 1998. He has also served on the Council on Education and Research and the Research Foundation for the CFA Institute. His research publications have appeared in such journals as Journal of Financial Economics, Journal of Finance, Journal of Financial and Quantitative Analysis, Financial Analysts Journal, Financial Management, Journal of Portfolio Management, Journal of Investment Management, Journal of Applied Corporate Finance,Advances in Futures and Options Research and Journal of Fixed Income.

9. Access to Course Materials and Instructors • You can download electronic copies of many of the course materials (e.g., course outline, course notes, Excel spreadsheets) from the following websites: www.mccombs.utexas.edu/faculty/keith.brown/AFPcourse3.htm www.fidelityresearchinstitute.com • You can contact Keith Brown by e-mail at the following address: kcbrown@mail.utexas.edu • You can contact Van Harlow by e-mail at the following address: van.harlow@fmr.com