Third Quarter 2011 GMO offers institutionally-oriented strategies investing in equities and fixed income in the U.S., developed international, and emerging markets. For client inquiries, please contact your Client Relationship Manager. For new business inquiries, please contact your Relationship Manager or Holly Carson at (617) 346-7501 or [email protected]Contents Global Market Review .................................................................. 6 Asset Allocation ............................................................................. 7 Performance Review and Outlook ............................................. 8 Strategy Performance Details.....................................................18 Table of Benchmarks ..................................................................67
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Third Quarter 2011
GMO offers institutionally-oriented strategies investing in equities and fixed income in the U.S., developed international, and emerging markets. For client inquiries, please contact your Client Relationship Manager. For new business inquiries, please contact your Relationship Manager or Holly Carson at (617) 346-7501 or [email protected]
Contents Global Market Review .................................................................. 6
Table of Benchmarks .................................................................. 67
2 GMO Quarterly Update
2011 Performance of GMO Strategies and Benchmarks
Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. A GIPS® compliant presentation is available at www.gmo.com.
GMO International Equity Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2011 2011 Added Year Year Year Inception
International Active EAFE 5/31/81 -18.94 -14.43 0.55 -9.80 -4.10 6.56 11.81MSCI EAFE -19.01 -14.98 -9.36 -3.46 5.03 8.61
Int'l. Active Foreign Small Companies 1/31/95 -20.05 -15.86 -0.37 -6.48 0.75 12.26 10.63S&P Developed ex-U.S. Small Cap -19.99 -15.50 -5.83 -1.10 10.18 6.14
International Intrinsic Value 3/31/87 -18.06 -12.37 2.15 -7.05 -3.85 7.15 7.60MSCI EAFE Value -19.03 -14.52 -9.99 -4.82 5.13 6.36MSCI EAFE -19.01 -14.98 -9.36 -3.46 5.03 4.45
Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. A GIPS® compliant presentation is available at www.gmo.com.
* Returns for one of the accounts in the composite are based on estimated market values for the period from and including October 2008 through February 2009. ** Returns for the composite are based on estimated market values for the period from and including October 2008 through February 2009.
Total Return Net of Fees Average Annual Total Return
GMO Emerging Equity Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2011 2011 Added Year Year Year Inception
Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. A GIPS® compliant presentation is available at www.gmo.com.
Total Return Net of Fees Average Annual Total Return
GMO Asset Allocation Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2011 2011 Added Year Year Year Inception
Tax-Managed Global Balanced 12/31/02 -6.80 -2.57 2.96 0.70 2.67 n/a 7.32GMO Tax-Managed Global Balanced Index -9.53 -5.53 -1.51 1.45 n/a 5.81
GMO Quarterly Update 5
2011 Performance of GMO Strategies and Benchmarks
Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. A GIPS® compliant presentation is available at www.gmo.com.
Total Return Net of Fees Average Annual Total Return
GMO Absolute Return Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2011 2011 Added Year Year Year Inception
Third Quarter 2011 J.P. Morgan EMBIG Returns by Country
GMO Quarterly Update 17
The U.S. dollar’s rapid September rebound hurt our
long FX positions in both developed and emerging
currencies. Overweights in Australia, Norway, and New
Zealand detracted on the developed side, while
overweight positions in Brazil, Hungary, South Africa,
Poland, Turkey, Mexico, and Russia were notable
detractors in emerging FX.
In external emerging debt strategies, country selection
and security selection were detractors. While emerging
local debt strategies benefited from instrument selection
and country selection, currency selection detracted.
Finally, the asset-backed securities reported negative
excess returns for the quarter.
Outlook
Dating the start of Europe’s troubles at May 2010
(although we could make a case for earlier), this is the
sixth quarter in which we highlight the uncertainties that
propagate as a result of a failure of European leaders to
take decisive steps to deal with their issues. Unlike an
emerging country crisis, which tends to play out on a
more compressed time scale, the Europeans are slowly
moving along Kubler-Ross’s five stages of grief: they’re
mostly past denial; clearly in the midst of anger; and
engaging in a protracted bargaining period. What’s left is
depression and acceptance, which may begin with the
forthcoming Greek write-down (which may or may not
be “officially” declared a “default;” see “denial”). The
good news is: Greece’s default is hardly a surprise, and
the current bargaining efforts are aimed squarely at
limiting the contagion and fallout from it, whether related
to other challenged sovereigns or their banks.
The sharp rise in emerging sovereign spreads and the
decline in emerging currencies have opened up
opportunities in both. We have been adding selectively
despite the poor liquidity conditions mentioned earlier.
G10 portfolios remain overweight the U.S. dollar,
although no longer U.S. dollar bonds, instead favoring
Swiss, German, and Japanese bonds, particularly relative
to Australian, U.S. and Swedish bonds.
In external debt, we continue to favor certain high-
spread countries where we believe fundamentals justify
narrower spreads. In local debt, we continue to rotate to
currencies that have underperformed and therefore
represent better value, particularly where yields have risen
as well. 0
500
1,000
1,500
2,000
2,500
12/06 12/07 12/08 12/09 12/10
Index Yield Spread to Germany in7-10 Year Gov't. Bonds (bps)
Lehman Collapse
Portugal
Greece
NetherlandsFranceBelgium
ItalySpain
Source: J.P. Morgan
Disclaimer: The views expressed herein are through the period ending September 30, 2011, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security, is not intended to be investment advice and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
GIPS ® compliant presentation is available at www.gmo.com.
GMO U.S. Core Strategy Inception: 9/30/85; Benchmark: S&P 500 Index
Performance1
The U.S. Core Strategy returned -9.3% for the third quarter of 2011, leading the -13.9% return of the S&P 500. Sector selection added to relative returns for the quarter. The strategy saw positive returns relative to the benchmark attributable to its
overweight positions in Health Care and Consumer Staples and an underweight in Financials. Underweight positions in Utilities and Consumer Discretionary detracted from returns versus the benchmark.
Stock selection also added to relative returns. Selections in Consumer Discretionary, Energy, and Consumer Staples added to returns
versus the benchmark. Individual stocks adding to relative returns in the third quarter included overweight positions in Wal-Mart Stores, Microsoft, and Google. Stock selections detracting from returns versus the benchmark included overweight positions in Hewlett-Packard and Walgreen and an underweight position in Apple.
Top Ten Holdings2,5
Risk Profile Since 9/30/854 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The S&P 500 Index is an independently maintained and widely published index comprised of U.S. large capitalization stocks. 4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. 5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Microsoft Corp. 5.1%Pfizer Inc. 4.5%Wal-Mart Stores Inc. 4.4%Oracle Corp. 4.0%Int'l. Business Machines 3.6%Google Inc. (Cl A) 3.5%Procter & Gamble Co. 2.9%Merck & Co Inc 2.8%Johnson & Johnson 2.8%Coca-Cola Co. 2.7% Total 36.3%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Intrinsic Value Strategy Inception: 5/31/99; Benchmark: Russell 1000 Value Index
Performance1
The Intrinsic Value Strategy returned -11.8% for the third quarter of 2011, leading the -16.2% return of the Russell 1000 Value index. Sector selection added to relative returns for the quarter. The strategy’s overweight positions in Health Care and Consumer Staples
and an underweight in Financials added to relative returns. An overweight position in Energy and an underweight in Utilities detracted from returns versus the benchmark.
Stock selection also added to relative returns. Selections in Information Technology, Energy, and Financials added to returns versus
the benchmark while picks in Health Care, Consumer Staples, and Industrials detracted. Individual names adding to relative returns included overweight positions in Apple, Google, and Coca-Cola. Stock selections detracting from relative returns included underweight positions in Procter & Gamble, Intel, and Bristol-Myers Squibb.
Top Ten Holdings2,5
Risk Profile Since 5/31/994 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The Russell 1000 Value Index is an independently maintained and widely published index comprised of the stocks included in the Russell 1000 Index with lower price-to-
book ratios and lower forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Pfizer Inc. 4.7%Chevron Corp. 4.5%UnitedHealth Group Inc. 3.9%ConocoPhillips 3.9%Exxon Mobil Corp. 3.4%Oracle Corp. 3.2%Apple Inc. 3.1%Microsoft Corp. 3.0%AT&T Inc. 2.9%Wal-Mart Stores Inc. 2.7% Total 35.3%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Quality Strategy Inception: 2/29/04; Benchmark: S&P 500 Index
Performance1
The Quality Strategy fell 5.3% in the third quarter while developed market indices pushed even lower, with the S&P 500 down 13.9% and MSCI World down 16.6%.
Quality stocks trumped both low quality and the market. The unraveling of the risk trade that began late in the first quarter continued through September. While quality stocks generated negative returns, their performance was better than both low quality and the market.
Defensive sectors did relatively well as investors looked for safety. Quality’s heavy weight in Consumer Staples and Health Care did well compared to Financials and Materials, where the strategy has a zero weight.
Large cap stocks beat small cap stocks both within quality and the larger universe. The recent strong relative performance of mega cap quality has not significantly changed its favorable valuation. These companies remain at a historical discount based on normalized earnings. Much of the recent price movement has been offset by a favorable shift in fundamentals.
Given recent market moves, we believe that patient investors will be compensated for owning quality companies, while taking less absolute risk than the market. Our conviction remains high that the Quality Strategy will continue to provide attractive risk-adjusted returns into the foreseeable future.
Top Ten Holdings2,4
Risk Profile Since 2/29/045
Sector Weights4
Characteristics4
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The S&P 500 Index is an independently maintained and widely published index comprised of U.S. large capitalization stocks. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011. 5 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Johnson & Johnson 6.0%Microsoft Corp. 5.9%Cisco Systems Inc. 5.5%Oracle Corp. 5.1%Philip Morris Int'l. Inc. 4.7%Coca-Cola Co. 4.6%Apple Inc. 3.9%Pfizer Inc. 3.8%Google Inc. (Cl A) 3.7%Wal-Mart Stores Inc. 3.3% Total 46.5%
GIPS ® compliant presentation is available at www.gmo.com.
GMO Growth Strategy Inception: 12/31/88; Benchmark: Russell 1000 Growth Index
Performance1
The Growth Strategy returned -7.2% in the third quarter of 2011, leading the -13.1% return of its benchmark, the Russell 1000 Growth index.
Sector selection added to relative returns. Underweight positions in Materials and Industrials and an overweight in Consumer Staples
were among the sector positions adding to relative returns during the period. Stock selection also added to relative returns for the quarter. Selections in Information Technology, Energy, and Consumer
Discretionary were among those adding to relative returns. Individual stocks adding to returns included overweight positions in Apple, McDonald’s, and Dollar General. Selections detracting from relative returns included overweight positions in Netflix, Hewlett-Packard, and 3M.
Top Ten Holdings2,5
Risk Profile Since 12/31/884 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The Russell 1000 Growth Index is an independently maintained and widely published index comprised of the stocks included in the Russell 1000 Index with higher price-
to-book ratios and higher forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Apple Inc. 8.0%Microsoft Corp. 4.1%Int'l. Business Machines 3.9%Exxon Mobil Corp. 3.9%Coca-Cola Co. 3.4%Oracle Corp. 3.3%QUALCOMM Inc. 3.0%Google Inc. (Cl A) 3.0%Wal-Mart Stores Inc. 2.6%Philip Morris Int'l. Inc. 2.5% Total 37.7%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Small/Mid Cap Value Strategy Inception: 12/31/91; Benchmark: Russell 2500 Value + Index
Performance1
The Small/Mid Cap Value Strategy returned -19.9% in the third quarter of 2011, leading its benchmark, the Russell 2500 Value index, which returned -21.1%.
Sector selection detracted from returns relative to the benchmark. An underweight position in Industrials and an overweight in
Consumer Staples added to relative returns while an overweight in Health Care and underweight positions in Utilities and Financials detracted.
Stock selection added to relative returns for the quarter. Selections in Consumer Discretionary, Health Care, and Information
Technology added to returns versus the benchmark while picks in Utilities detracted. Individual stocks adding to relative returns included overweight positions in Kinetic Concepts, Herbalife, and PetSmart. Individual names detracting from relative returns included overweight positions in Amerigroup, HollyFrontier, and Eastman Chemical.
Top Ten Holdings2,5
Risk Profile Since 12/31/914 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The Russell 2500 Value + Index is an internally maintained benchmark computed by GMO, comprised of (i) the Russell 2500 Index from 12/31/1991 to 12/31/1996 and
(ii) the Russell 2500 Value Index thereafter. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
HollyFrontier Corp. 1.6%Kinetic Concepts Inc. 1.4%Herbalife Ltd. 1.4%Abercrombie & Fitch Co. 1.3%Coventry Health Care Inc. 1.3%PETsMART Inc. 1.2%Cooper Cos. 1.1%Alliance Data Systems Corp. 1.1%Ralcorp Holdings Inc. 1.1%Church & Dwight Co. 1.0% Total 12.5%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Small/Mid Cap Growth Strategy Inception: 12/31/96; Benchmark: Russell 2500 Growth Index
Performance1
The Small/Mid Cap Growth Strategy returned -23.1% in the third quarter of 2011, trailing the -21.4% return of its benchmark, the Russell 2500 Growth index.
Sector selection had little impact on returns relative to the benchmark. Underweight positions in Telecommunication Services and
Materials and an overweight in Consumer Discretionary added to relative returns while an underweight position in Health Care and an overweight in Information Technology detracted.
Stock selection detracted from relative returns for the quarter. Selections in Health Care, Financials, and Energy added to returns
versus the benchmark while picks in Information Technology, Industrials, and Materials detracted. Individual stocks adding to relative returns included overweight positions in Jazz Pharmaceuticals, Tractor Supply Company, and Erie Indemnity. Individual names detracting from relative returns included overweight positions in Atmel Corp., Fossil, and WABCO Holdings.
Top Ten Holdings2,5
Risk Profile Since 12/31/964 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The Russell 2500 Growth Index is an independently maintained and widely published index comprised of the stocks included in the Russell 2500 Index with higher price-
to-book ratios and higher forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Fossil Inc. 3.2%HollyFrontier Corp. 2.8%Weight Watchers Int'l. Inc. 2.7%Herbalife Ltd. 2.5%Tractor Supply Co. 2.5%TIBCO Software Inc. 2.0%Alliance Data Systems Corp. 1.8%Tempur-Pedic Int'l. Inc. 1.8%Polypore International Inc. 1.8%Erie Indemnity Co. 1.6% Total 22.7%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Real Estate Strategy Inception: 5/31/96; Benchmark: MSCI U.S. REIT Index
Performance1
The Real Estate Strategy returned -13.3% for the third quarter of 2011, outperforming the -14.5% return of the MSCI U.S. REIT index.
Sector selection had a positive impact on returns relative to the MSCI U.S. REIT index. An underweight position in the Industrial
GICS Sub-Industry was the leading sub-industry position adding to returns versus the benchmark. Stock selection also added to returns relative to the MSCI U.S. REIT index. Selections in the GICS Specialized and Retail sub-
industries added to relative returns while picks in Residential and Diversified detracted. In terms of individual names, an overweight in Simon Property Group and underweight positions in ProLogis and General Growth Properties added to relative returns. An overweight in Vornado Realty Trust and underweight positions in American Campus Communities and Realty Income Corp. detracted from relative returns.
Top Ten Holdings2,5
Risk Profile Since 5/31/964 Sector Weights5
Characteristics5
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI U.S. REIT Index is an independently maintained and widely published index comprised of equity securities issued by REITs. MSCI data may not be
reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder. 4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. 5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sub-Industries
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Simon Property Group Inc. 13.1%Public Storage 7.0%Equity Residential 5.7%Boston Properties Inc. 5.5%Vornado Realty Trust 5.2%HCP Inc. 4.8%AvalonBay Communities Inc. 4.4%Ventas Inc. 4.3%ProLogis Inc. 2.8%Health Care REIT Inc. 2.8% Total 55.6%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Diversified 7.0 % 7.1 %
Industrial 4.0 5.1
Mortgage 0.0 0.0
Office 15.8 16.2
Residential 18.9 18.5
Retail 26.8 26.2
Specialized 27.5 26.90.6
0.6
0.4
-0.4
0.0
-1.1
-0.1
-2 -1 0 1 2
Strategy Benchmark
Alpha -0.01 0.00
Beta 0.97 1.00R2 0.99 1.00
Sharpe Ratio 0.29 0.29
Strategy Benchmark
Dividend Yield - Hist 1 Yr Wtd Avg 4.0 % 4.1 %Market Cap - Weighted Median $Bil $10.7 $7.6Price/Earnings - Excl Neg Earnings Hist 1 Yr Wtd Avg
37.0 x 38.1 x
Price/Cash Flow - Hist 1 Yr Wtd Med 17.2 x 16.8 xReturn on Assets - 5 Yr Avg 2.7 % 2.4 %
GIPS ® compliant presentation is available at www.gmo.com.
GMO Tax-Managed U.S. Equities Strategy Inception: 7/31/98; Benchmark: Russell 3000 + Index
Performance1
The Tax-Managed U.S. Equities Strategy declined 8.2% for the third quarter of 2011, while the Russell 3000 index declined 15.3% and the S&P 500 declined 13.9%. Global equity markets continued to decline, as waves of uncertainty continued to mount. Across U.S. equity markets, all sectors finished below where they started, with Consumer Staples “only” declining 4.5% and Materials stocks declining more than 25%. The more defensive sectors generally fared better across the board. Larger capitalization stocks fared better than their small capitalization counterparts, with the Russell 1000 declining 14.7% versus the Russell 2000 decline of 21.9%.
As in the second quarter, the positive relative performance is attributed to the portfolio’s explicit allocation to high quality as well as positive returns from both sector allocation and stock selection. Overweight exposure to Consumer Staples and Health Care stocks, and underweight exposure to Financial Services and Energy stocks all contributed positively. Selection was also strong within Information Technology, Health Care, and Consumer Discretionary stocks, reflecting the high quality bias.
Looking at some of the portfolio’s largest active positions, overweight exposure to Google, Wal-Mart, Coca-Cola and Procter and Gamble all contributed positively to relative performance. An underweight to Apple, which outperformed over the period, detracted from returns.
Top Ten Holdings2,6
Risk Profile Since 7/31/985 Sector Weights6
Characteristics6
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 Market conditions, tax legislation and government regulations may limit the Strategy’s ability to utilize tax efficient strategies. After-tax returns are calculated using the
historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold investment through a tax-deferred arrangement.
4 The Russell 3000 + Index is an internally maintained benchmark computed by GMO, comprised of (i) the S&P 500 Index through 10/15/2007 and (ii) the Russell 3000 Index thereafter. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
5 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
6 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Microsoft Corp. 4.8%Pfizer Inc. 4.5%Wal-Mart Stores Inc. 4.3%Int'l. Business Machines 4.2%Oracle Corp. 4.1%Google Inc. (Cl A) 4.1%Procter & Gamble Co. 4.0%Johnson & Johnson 3.9%Coca-Cola Co. 3.7%Merck & Co Inc 3.1% Total 40.7%
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Active EAFE Strategy Inception: 5/31/81; Benchmark: MSCI EAFE Index
Performance1
The International Active EAFE Strategy narrowly outperformed the MSCI EAFE index in the third quarter; the strategy fell 18.9% and the benchmark lost 19.0%. The strategy beat its benchmark by 0.5 percentage points for the first three quarters of 2011, returning -14.4%.
Country selection was 0.8% ahead of the benchmark. An overweight position in Japan, the best performing market in the index, added to returns. The portfolio is overweight eurozone countries due to stock positions. While we continue to find the companies attractive, we are concerned with the currency and think that the euro looks expensive. We continue to hedge the overweight, giving the portfolio roughly the same euro exposure as the index. The hedge had a positive impact over the quarter. On the negative side, an overweight position in Italy subtracted from performance as investors continued to worry about the situation in Europe.
Stock selection lagged the benchmark by 0.8% in the third quarter. Holdings in Japan and the emerging markets hurt returns. Stock selection outperformed in the United Kingdom.
Top Ten Holdings2,5
Risk Profile Since 5/31/814
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published
index comprised of international large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
GICS Sectors
Regional Weights5
Characteristics5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Royal Dutch Shell PLC 3.8%Novartis AG 2.1%Vodafone Group PLC 2.1%ENI S.p.A. 2.1%British American Tobacco 1.9%BP PLC 1.9%HSBC Holdings PLC 1.8%Total S.A. 1.6%Honda Motor Co. Ltd. 1.6%NTT DoCoMo Inc. 1.5% Total 20.4%
Strategy Benchmark
Alpha 4.70 0.00
Beta 0.81 1.00R2 0.83 1.00
Sharpe Ratio 0.48 0.20
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 11.3 x 12.2 x
Price/Cash Flow - Hist 1 Yr Wtd Med 5.9 x 7.7 x
Price/Book - Hist 1 Yr Wtd Avg 1.1 x 1.2 x
Dividend Yield - Hist 1 Yr Wtd Avg 4.3 % 4.1 %
Underweight/OverweightRegion Against Benchmark (%)
Europe ex-UK
United Kingdom
Japan
Southeast Asia
Australia/New Zealand
Emerging
Cash 2.1
7.7
-6.0
-1.9
4.0
0.1
-6.1
-10 -5 0 5 10
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Int’l. Active Foreign Small Companies Strategy Inception: 1/31/95; Benchmark: S&P Developed ex-U.S. Small Cap Index
Performance1
The International Active Foreign Small Companies Strategy narrowly underperformed the S&P Developed ex-U.S. Small Cap index in the third quarter, falling 20.1% while the benchmark lost 20.0%. The strategy underperformed its benchmark by 0.4 percentage points for the first three quarters of 2011.
Country selection was 2.7% ahead of the benchmark. An overweight position in Japan, the best performing market in the index, added
1.1% to returns. Underweight positions in France and Germany added another 0.5% and 0.2%, respectively, to returns. However, an overweight position in Italy subtracted 0.3% from performance as investors continued to worry about the situation in Europe.
Stock selection lagged the benchmark by 2.8% in the third quarter. Our holdings in Japan, Germany, Switzerland, Italy, and the
emerging markets hurt returns. On the positive side, stock selection in the United Kingdom outperformed.
Top Ten Holdings2,5
Risk Profile Since 1/31/954
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The S&P Developed ex-U.S. Small Cap Index is an independently maintained and widely published index comprised of the small capitalization stock component of the
S&P Broad Market Index (BMI). The BMI includes listed shares of companies from developed and emerging countries with a total available market capitalization (float) of at least the local equivalent of $100 million USD. The S&P Developed ex-U. S. Small Cap Index represents the bottom 15% of available market capitalization (float) of the BMI in each country.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5 Regional Weights5
Characteristics5
GICS Sectors
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
COSMOS Pharmaceutical 1.8%Nihon Kohden Corp. 1.7%Companhia Hering S/A 1.4%Fuji Oil Co. Ltd. 1.2%Nabtesco Corp. 1.1%Hitachi Transport System 1.1%NHK Spring Co. Ltd. 1.1%Air Water Inc. 1.0%Takata Corp. 1.0%Sodexho Alliance S.A. 1.0% Total 12.4%
Strategy Benchmark
Alpha 5.64 0.00
Beta 0.93 1.00R2 0.94 1.00
Sharpe Ratio 0.49 0.16
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 12.5 x 14.1 x
Price/Cash Flow - Hist 1 Yr Wtd Med 7.4 x 8.3 x
Price/Book - Hist 1 Yr Wtd Avg 1.3 x 1.1 x
Dividend Yield - Hist 1 Yr Wtd Avg 3.0 % 3.1 %
Underweight/OverweightRegion Against Benchmark (%)
Europe ex-UK
United Kingdom
Japan
Southeast Asia
Canada
Australia/New Zealand
Emerging
Cash 3.3
7.1
-3.1
-7.0
-1.4
5.4
2.1
-6.4
-10 -5 0 5 10
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Intrinsic Value Strategy Inception: 3/31/87; Benchmark: MSCI EAFE Value Index and MSCI EAFE Index
Performance1 Top Ten Holdings2,5
Risk Profile Since 3/31/874
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Value Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely
published index comprised of international large and mid capitalization stocks that have a value style. Large and mid capitalization stocks encompass approximately 85% of each market’s free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5 Regional Weights5
Characteristics5
The International Intrinsic Value Strategy returned -18.1% during the third quarter of 2011, compared to the broad market MSCI EAFE index and the MSCI EAFE Value index, which each returned -19.0%.
Stock selection, sector exposures, and currency allocation all contributed to the outperformance relative to EAFE. Country allocation detracted. Stock selection was best within France, Japan, and the United Kingdom (especially among our high quality holdings). By sector, stock selection was strong in Health
Care, but weak in Energy and Utilities. Sector exposures (as a result of stock selection) added value from our overweights to Health Care and Telecommunication Services, which both outperformed the
market, and our underweights to Financials and Materials, which underperformed. Our underweight to the strong Consumer Staples sector hurt somewhat. Our currency positioning also worked well, due mainly to our underweight positions in the overvalued Australian dollar and Swiss franc. Both currencies declined
significantly in the quarter. In country allocation, our overweight to undervalued Italy and underweight to Switzerland both hurt relative performance. Italy’s market was weaker than most while
Switzerland outperformed slightly. Despite differences between MSCI EAFE and MSCI EAFE Value, the performance of the indices was similar for the quarter. GMO’s stock selection disciplines generally had solid results in the quarter as quality and value worked well. Stocks selected by intrinsic value outperformed very strongly
(the quality component did best although valuation also helped) and those ranked highly by quality-adjusted value also did better than EAFE. Stocks chosen for their strong momentum characteristics underperformed.
Individual stock positions that added significant value included overweights in pharmaceuticals GlaxoSmithKline (UK), Takeda Pharmaceutical (Japan), and AstraZeneca (UK). Stock positions that detracted significantly included overweights in utility Enel (Italy), financial ING (Netherlands), and oil company Encana (Canada).
Underweight/OverweightSector Against M SCI EAFE Value Strategy Benchmark
Sanofi-Aventis S.A. 4.5%Total S.A. 3.8%AstraZeneca PLC 3.5%Royal Dutch Shell PLC 3.2%GlaxoSmithKline PLC 2.9%ENI S.p.A. 2.2%Enel S.p.A. 1.9%E.ON AG 1.9%Novartis AG 1.9%Takeda Pharmaceutical Co. 1.8% Total 27.6%
StrategyM SCI
EAFE ValueM SCIEAFE
Alpha 2.42 0.00 0.00
Beta 0.82 1.00 1.00R2 0.86 1.00 1.00
Sharpe Ratio 0.27 0.13 0.02
StrategyM SCI
EAFE ValueM SCIEAFE
Price/Earnings - Hist 1 Yr Wtd Med 9.7 x 9.9 x 12.2 xPrice/Cash Flow - Hist 1 Yr Wtd Med 5.2 x 5.0 x 7.7 xPrice/Book - Hist 1 Yr Wtd Avg 1.1 x 1.0 x 1.2 xReturn on Equity - Hist 1 Yr Med 12.5 % 10.7 % 11.2 %Market Cap - Weighted Median $Bil $22.2 $26.9 $22.4Dividend Yield - Hist 1 Yr Wtd Avg 5.0 % 5.3 % 4.1 %
Underweight/OverweightRegion Against M SCI EAFE Value (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Growth Strategy Inception: 11/30/01; Benchmark: MSCI EAFE Growth Index and MSCI EAFE Index
Performance1 Top Ten Holdings2,5
Risk Profile Since 11/30/014
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Growth Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely
published index comprised of international large and mid capitalization stocks that have a growth style. Large and mid capitalization stocks encompass approximately 85% of each market’s free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
GICS Sectors
Regional Weights5
Characteristics5
The International Growth Strategy returned -17.0% during the third quarter of 2011, compared to the MSCI EAFE Growth benchmark and the broad market MSCI EAFE index, which each returned -19.0%.
Stock selection, sector exposures, and currency allocation all contributed to the outperformance relative to EAFE Growth. Country allocation detracted. Stock selection was best within Switzerland, the United Kingdom, and Japan (especially among our high quality holdings). By sector, stock selection was strong in Health
Care and Telecommunication Services, but weak in Industrials. Sector exposures (as a result of stock selection) added value from our overweight to Health Care, which outperformed, and underweight to Materials, which
underperformed. Our underweight to the strong Consumer Staples sector hurt somewhat. Our currency positioning also worked well, due mainly to our underweight positions in the overvalued Australian dollar and Swiss franc. Both currencies declined
significantly in the quarter. In country allocation, our overweight to Germany, which underperformed, hurt relative performance. GMO’s stock selection disciplines generally had solid results in the quarter as quality and value worked well. Stocks selected for their high quality (high, stable
profitability and low debt) had the best returns by far. Stocks selected by intrinsic value outperformed while those stocks chosen for their strong momentum characteristics underperformed.
Individual stock positions that added significant value included overweights in pharmaceuticals GlaxoSmithKline (UK) and Roche (Switzerland) and an underweight position in mining company BHP Billiton (Australia). Stock positions that detracted significantly included overweights in chemical company BASF (Germany) and financial BNP Paribas (France) and an underweight in Imperial Tobacco (UK).
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Roche Holding AG 4.3%GlaxoSmithKline PLC 3.3%Nestle S.A. 3.0%British American Tobacco 2.9%Novartis AG 1.9%BASF SE 1.6%BHP Billiton Ltd. 1.5%SAP AG 1.5%Novo Nordisk A/S 1.4%Canon Inc. 1.3% Total 22.7%
StrategyM SCI
EAFE GrowthM SCIEAFE
Alpha 2.98 0.00 0.00
Beta 0.92 1.00 1.00R2 0.97 1.00 1.00
Sharpe Ratio 0.30 0.12 0.14
StrategyM SCI
EAFE GrowthM SCIEAFE
Price/Earnings - Hist 1 Yr Wtd Med 14.7 x 14.8 x 12.2 xEarnings/Share - F'cast LT Med Growth Rate 9.3 x 11.0 x 8.7 xPrice/Book - Hist 1 Yr Wtd Avg 1.9 x 1.7 x 1.2 xReturn on Equity - Hist 1 Yr Med 16.0 % 14.1 % 11.2 %Market Cap - Weighted Median $Bil $20.3 $20.3 $22.4Dividend Yield - Hist 1 Yr Wtd Avg 3.4 % 2.9 % 4.1 %
Underweight/OverweightRegion Against M SCI EAFE Growth (%)
Europe ex-UK
United Kingdom
Japan
Southeast Asia
Canada
Australia/New Zealand
Cash 0.2
-6.2
3.5
1.6
-1.3
3.1
-0.9
-10 -5 0 5 10
Underweight/OverweightSector Against M SCI EAFE Growth Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Core Equity Strategy Inception: 1/31/02; Benchmark: MSCI EAFE Index
Performance1 Top Ten Holdings2,5
Risk Profile Since 1/31/024
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published
index comprised of international large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
GICS Sectors
Regional Weights5
Characteristics5
The International Core Equity Strategy returned -18.1% during the third quarter of 2011, compared to the MSCI EAFE index, which returned -19.0%.
Stock selection, sector exposures, and currency allocation all contributed to the outperformance relative to EAFE. Country allocation detracted.
Stock selection was best within France and Japan (especially among our high quality holdings). By sector, stock selection was strong in Health Care and Telecommunication Services, but weak in Energy and Utilities.
Sector exposures (as a result of stock selection) added value from our overweights to Health Care and Telecommunication Services, which both outperformed the market, and our underweights to Financials and Materials, which underperformed. Our underweight to the strong Consumer Staples sector hurt somewhat.
Our currency positioning also worked well, due mainly to our underweight positions in the overvalued Australian dollar and Swiss franc. Both currencies declined significantly in the quarter.
In country allocation, our overweight to undervalued Italy and underweight to Switzerland both hurt relative performance. Italy’s market was weaker than most while Switzerland outperformed slightly. Our overweight position to Canada and underweight to Australia also detracted.
GMO’s stock selection disciplines generally had solid results in the quarter as quality and value worked well. Stocks selected by intrinsic value outperformed very strongly (the quality component did best although valuation also helped) and those ranked highly by quality-adjusted value also did better than EAFE. Stocks chosen for their strong momentum characteristics underperformed.
Individual stock positions that added significant value included overweights in pharmaceuticals GlaxoSmithKline (UK), Takeda Pharmaceutical (Japan), and AstraZeneca (UK). Stock positions that detracted significantly included overweights in utility Enel (Italy), chemical company BASF (Germany), and oil company Encana (Canada).
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Sanofi-Aventis S.A. 3.9%GlaxoSmithKline PLC 3.4%AstraZeneca PLC 3.2%Total S.A. 3.1%Royal Dutch Shell PLC 3.0%ENI S.p.A. 2.0%Novartis AG 2.0%Takeda Pharmaceutical Co. 1.8%Vodafone Group PLC 1.7%E.ON AG 1.6% Total 25.7%
Strategy Benchmark
Alpha 2.46 0.00
Beta 0.95 1.00R2 0.98 1.00
Sharpe Ratio 0.31 0.17
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 10.4 x 12.2 xEarnings/Share - F'cast LT Med Growth Rate 7.3 x 8.7 xPrice/Book - Hist 1 Yr Wtd Avg 1.2 x 1.2 xReturn on Equity - Hist 1 Yr Med 11.8 % 11.2 %Market Cap - Weighted Median $Bil $21.3 $22.4Dividend Yield - Hist 1 Yr Wtd Avg 4.7 % 4.1 %
Underweight/OverweightRegion Against Benchmark (%)
Europe ex-UK
United Kingdom
Japan
Southeast Asia
Canada
Australia/New Zealand
Cash 1.5
-4.4
1.4
-0.8
2.3
-0.1
0.0
-6 -3 0 3 6
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Currency Hedged International Equity Strategy Inception: 6/30/95; Benchmark: MSCI EAFE (Hedged) Index
Performance1
The Currency Hedged International Equity Strategy returned -14.8% during the third quarter of 2011. This was ahead of the MSCI EAFE (Hedged) index, which returned -15.7%.
On average, most currencies declined relative to the U.S. dollar in the quarter. The euro and Swiss franc fell about 7.5%, the British pound about 3%, and the Australian dollar over 9% against the U.S. dollar. The
yen was strongest and the only gainer, up almost 5%. The unhedged EAFE index returned -19.0%. The Currency Hedged International Equity Strategy has historically been invested in the International Intrinsic Value and International
Growth Strategies in roughly a 50/50 mix. Near the end of the quarter, the strategy was more tilted toward Value, which currently looks more attractive. The mix now stands at about 60/40 in favor of Value over Growth.
Performance of the Currency Hedged International Equity Strategy relative to the MSCI EAFE (Hedged) index was helped by the outperformance of both the International Growth Strategy and the International Intrinsic Value Strategy relative to their respective style benchmarks.
Top Ten Holdings2,5
Risk Profile Since 6/30/954
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Index (Hedged) (net of withholding tax) is an independently maintained and widely published index comprised of
international large and mid capitalization stocks currency hedged into U.S. dollars. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
GIPS ® compliant presentation is available at www.gmo.com.
GMO Japan Equity Strategy Inception: 12/31/05; Benchmark: MSCI Japan IMI ++ Index
Performance1
The Japan Equity Strategy returned -0.1% during the third quarter of 2011. This was ahead of its benchmark, the MSCI Japan IMI index, which returned -5.5%.
Within the portfolio, stock selection was the primary reason for the outperformance. Performance was particularly good within Consumer Discretionary, Industrials, and Telecommunication Services, but also relatively
strong in Information Technology, Financials, and Health Care. Individual stock positions that added value included an overweight position in real estate developer Daito Trust Construction and
underweight positions in Toyota Motor Corp. and Honda Motor Corp. Stock positions that detracted significantly included underweights in Japan Tobacco and East Japan Railway, and an overweight in shipping company Kawasaki Kisen Kaisha.
Sector exposures also added some value, due mainly to our underweight to Information Technology, which performed poorly in the quarter.
Top Ten Holdings2,5
Risk Profile Since 12/31/054
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI Japan IMI (Investable Market Index Series) ++ Index is an internally maintained benchmark computed by GMO, comprised of (i) the MSCI Japan (MSCI
Standard Index Series, net of withholding tax) from 12/31/2005 to 6/30/2008 and (ii) the MSCI Japan IMI (MSCI Standard Index Series, net of withholding tax) thereafter. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Characteristics5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Mizuho Financial Group 5.2%KDDI Corp. 4.5%Nippon T & T Corp. 4.3%NTT DoCoMo Inc. 3.5%Sumitomo Mitsui Financial 3.4%Daito Trust Construction 2.1%Yamada Denki Co. Ltd. 2.0%Resona Holdings Inc. 1.9%Takeda Pharmaceutical Co. 1.6%Sumitomo Corp. 1.3% Total 29.8%
Strategy Benchmark
Alpha 3.66 0.00
Beta 1.08 1.00R2 0.93 1.00
Sharpe Ratio -0.12 -0.33
Strategy Benchmark
% Negative Earnings 6.3 % 5.1 %Price/Earnings - Excl Neg Earn Hist 1 Yr Wtd Med 9.7 x 14.7 xPrice/Earnings - Hist 1 Yr Wtd Med 10.1 x 15.1 xPrice/Book - Hist 1 Yr Wtd Avg 0.8 x 0.9 xReturn on Equity - Hist 1 Yr Med 8.0 % 6.4 %Market Cap - Weighted Median $Bil $2.8 $8.9Dividend Yield - Hist 1 Yr Wtd Avg 2.8 % 2.4 %
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Small Companies Strategy Inception: 10/31/91; Benchmarks: MSCI EAFE Small Cap + Index and MSCI EAFE Index
Performance1 Top Ten Holdings2,5
Risk Profile Since 10/31/914
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI EAFE (Europe, Australasia, and Far East) Small Cap + Index is an internally maintained benchmark computed by GMO, comprised of (i) the S&P Developed
ex-U.S. Small Cap Index through 5/30/2008 and (ii) the MSCI EAFE Small Cap Index (MSCI Standard Index Series, net of withholding tax) thereafter. MSCI data may not be reproduced or used for any other purpose. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5 Underweight/Overweight
Sector Against M SCI EAFE Small Cap Strategy Benchmark
The International Small Companies Strategy returned -20.4% during the third quarter of 2011, compared to the MSCI EAFE Small Cap index, which returned -18.6%. Stock selection was the main reason for the underperformance relative to the benchmark. Country allocation, currency allocation, and sector exposures all had small
positive impacts. Stock selection was especially weak within Japan, France, the United Kingdom, and Canada. By sector, our holdings in Materials, Consumer Discretionary, Industrials,
and Financials underperformed. GMO’s stock selection disciplines had weak results in the quarter as momentum underperformed. Stocks selected for their strong momentum characteristics had returns
that were worse than the index. Stocks chosen by momentum-adjusted value or by quality-adjusted value had returns that were more index-like. In country allocation, our overweight to Japan, which outperformed, and underweight to Hong Kong, which trailed, helped relative performance. Our exposure to
emerging markets was a slight drag on performance. Our currency positioning worked well, due mainly to our underweight positions in the overvalued Australian dollar and Swiss franc. Both currencies declined
significantly in the quarter. Sector exposures (as a result of stock selection) added value from our underweight to Energy stocks which lagged. Individual stock holdings that were significant positive contributors to relative performance included health care equipment company Nihon Kohden Corp (Japan), food
products company Tate & Lyle (UK), and specialty retailer DCM Holdings (Japan). Holdings that detracted significantly included chemical company Arkema (France), auto parts company Leoni (Germany), and Aareal Bank (Germany).
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Arkema 1.3%Tate & Lyle PLC 1.2%Gigas Ks Denki Corp. 1.2%DCC PLC 1.0%William Hill PLC 1.0%Inchcape PLC 0.9%Drax Group PLC 0.9%Norddeutsche Affinerie AG 0.8%Macquarie Office Trust 0.8%Calsonic Kansei Corp. 0.8% Total 9.9%
M SCI EAFE M SCIStrategy Small Cap + EAFE
Alpha 3.62 0.00 0.00
Beta 0.98 1.00 1.00R2 0.91 1.00 1.00
Sharpe Ratio 0.34 0.15 0.07
M SCI EAFE M SCIStrategy Small Cap EAFE
Price/Earnings - Hist 1 Yr Wtd Med 10.0 x 13.9 x 12.2 xPrice/Cash Flow - Hist 1 Yr Wtd Med 5.6 x 8.2 x 7.7 xPrice/Book - Hist 1 Yr Wtd Avg 0.9 x 1.1 x 1.2 xReturn on Equity - Hist 1 Yr Med 10.8 % 8.8 % 11.2 %Market Cap - Weighted Median $Bil $0.9 $0.9 $22.4Dividend Yield - Hist 1 Yr Wtd Avg 3.6 % 3.1 % 4.1 %
Underweight/OverweightRegion Against M SCI EAFE Small Cap (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Tax-Managed International Equities Strategy Inception: 8/31/98; Benchmark: MSCI EAFE Index (After Tax)
Performance1
The Tax-Managed International Equities Strategy declined 18.0% for the third quarter of 2011, while the MSCI EAFE index declined 19.0%. Global equity markets continued to decline, as waves of uncertainty continued to mount. International developed equity markets experienced a broad-based decline, both in USD and local currency terms, as Greece’s troubled path and global economic uncertainty pulled returns down across the board. Of the major countries within the index, Japan stands out by “only” declining 6.4%. Sectors clearly mattered during the quarter, as the more defensive sectors lived up to expectations, and slid downward more slowly than their more cyclical counterparts.
Within the portfolio, the modest relative outperformance reflected the offsetting performance of the quality-flavored Intrinsic Value strategy, which outperformed the market, and the Materials-laden Momentum strategy, which underperformed the market. Country selection was a moderate detractor for the period, due primarily to an overweight of Italian stocks. Sector selection, however, was a positive contributor for the quarter, led by overweight exposure to Health Care stocks, which outperformed, and underweight exposure to Financial Services, which, along with Materials, led the market downwards.
Looking at some of the portfolio’s largest active positions, overweight exposure to Health Care giants GlaxoSmithKline, AstraZeneca, and Takeda Pharmaceutical all contributed positively to returns. Overweight exposure to Enel, the Italian utility, detracted from returns.
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 Market conditions, tax legislation and government regulations may limit the Strategy’s ability to utilize tax efficient strategies. After-tax returns are calculated using the
historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold investment through a tax-deferred arrangement.
4 The Strategy’ benchmark is the MSCI EAFE Index (after tax), computed by the Manager by adjusting the return of the MSCI EAFE Index by its tax cost. The Manager estimates the MSCI EAFE Index’s after-tax return by applying the maximum historical applicable individual federal tax rate to the MSCI EAFE Index’s dividend yield and to its estimated short-term and long-term realized capital gains (losses) (arising from changes in the constituents of the MSCI EAFE Index). The MSCI EAFE (Europe, Australasia, and Far East) Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of international large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
5 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
6 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Sanofi-Aventis S.A. 4.0%AstraZeneca PLC 3.3%Total S.A. 3.2%Royal Dutch Shell PLC 3.0%GlaxoSmithKline PLC 2.8%ENI S.p.A. 2.0%Novartis AG 2.0%Enel S.p.A. 1.8%E.ON AG 1.7%Takeda Pharmaceutical Co. 1.7% Total 25.5%
Strategy Benchmark
Alpha 4.17 0.00
Beta 0.90 1.00R2 0.92 1.00
Sharpe Ratio 0.28 0.04
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 10.3 x 12.2 xPrice/Cash Flow - Hist 1 Yr Wtd Med 5.2 x 7.7 xPrice/Book - Hist 1 Yr Wtd Avg 1.2 x 1.2 xDividend Yield - Hist 1 Yr Wtd Avg 4.6 % 4.1 %Return on Equity - Hist 1 Yr Med 12.0 % 11.2 %Market Cap - Weighted Median $Bil $20.3 $22.4
Underweight/OverweightRegion Against Benchmark (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Markets Strategy Inception: 12/31/93; Benchmark: S&P/IFCI Composite Index
Performance1
The Emerging Markets Strategy fell 22.0% in the third quarter, marginally outperforming the -22.6% return of the S&P/IFCI Composite Index by 0.6%. Overall, country/sector selection added 0.9% while stock selection lost 0.3%.
Emerging markets suffered further their worst quarter since late 2008. Investor sentiment has been hit hard by the debt dynamics in Europe and the worsening global growth prospects. The quarter saw country performances as diverse as a fall of 4.7% in Peru and a 44.4% plunge in Hungary. Among sectors, the spread was tighter, with Telecommunication Services losing 10.0% and Industrials dropping 29.2%.
China’s stocks fell on signs that growth is slowing as overseas demand falters and the government maintains its focus on curbing inflation. An index of Chinese manufacturing shrank for a third month. Policymakers reiterated their determination to stabilize prices even as inflation eased to 6.2% in August from a three-year high in July. Our underweight in Chinese Financials contributed to performance.
Hungary was hammered by fears of contagion from the eurozone’s debt crisis. Investor sentiment was further hurt by a government announcement that Hungary was “far” from the full implementation of its three-year spending-cut plan that had been designed to put the budget on a sustainable path. Our overweight in Hungarian Financials, driven by this group’s low valuations, detracted from performance.
A happy combination of solid growth, dormant inflation, and low interest rates is boosting domestic spending in Indonesia. The central bank forecasts the economy to grow as much as 6.8% this year, the fastest pace since 2004, while inflation in August came in at 4.8% relative to a year earlier. The central bank left rates unchanged for a seventh month. Our overweight in Indonesian Consumer Discretionary added to performance.
The continuing spike in risk aversion impacted Russian stocks negatively as the country is perceived to be one of the riskier emerging markets. The drop in commodity prices dealt another blow given the country’s huge oil and metal exports. Prime Minister Putin declared his intention to run for the presidency. President Medvedev supported Putin and said he may take over as prime minister. The announcement brought clarity for investors but also dispelled the hope that Medvedev, regarded the more investor-friendly of the duo, would take over the top spot. Our overweight in Russian Energy, a reflection of its cheapness and positive momentum, hurt performance.
Thailand’s stock market jumped after the elections handed a decisive mandate to Yingluck Shinawatra’s Pheu Thai party, easing concerns of political stalemate. Her party’s promises of higher wages, lower taxes, and greater spending were instrumental in the victory. However, they also convinced the central bank to raise interest rates. Our overweight in Thai Financials boosted performance.
The global flight to safety manifested itself in emerging markets by the relative outperformance of the Telecommunication Services sector. Our overweight in this sector across countries such as China, Korea, and Taiwan boosted performance.
Stock selection detracted from performance in Chinese Technology but contributed positively in Chinese Energy.
Top Ten Holdings2,5
Risk Profile Since 12/31/934
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The S&P/IFCI Composite Index is an independently maintained and widely published index comprised of emerging markets stocks. 4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. 5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Vale S.A. (ADS) 4.3%OAO Gazprom ADR 4.1%Petroleo Brasileiro S/A Ord 3.5%Samsung Electronics Co. 3.3%China Mobile Ltd. (ADS) 3.2%Lukoil Oil Company ADR 2.1%Astra International 1.8%Banco do Brasil S.A. 1.5%China Petrol. & Chemical H 1.3%Rosneft OJSC GDR 1.3% Total 26.4%
Strategy Benchmark
Alpha 3.94 0.00
Beta 0.99 1.00R2 0.93 1.00
Sharpe Ratio 0.25 0.10
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 10.3 x 11.3 x
Price/Cash Flow - Hist 1 Yr Wtd Med 6.2 x 7.6 x
Price/Book - Hist 1 Yr Wtd Avg 1.5 x 1.5 x
Return on Equity - Hist 1 Yr Avg 16.0 % 14.6 %
Market Cap - Weighted Median $Bil $7.9 $5.5
Dividend Yield - Hist 1 Yr Wtd Avg 3.8 % 2.9 %
Underweight/OverweightRegion Against Benchmark (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Countries Strategy Inception: 9/30/97; Benchmark: S&P/IFCI Composite Index
Performance1
The Emerging Countries Strategy fell 22.6% in the third quarter, which was even with the -22.6% return of the S&P/IFCI Composite Index. Overall, country/sector selection added 0.2% while stock selection lost 0.2%.
Emerging markets suffered further their worst quarter since late 2008. Investor sentiment has been hit hard by the debt dynamics in Europe and the worsening global growth prospects. The quarter saw country performances as diverse as a fall of 4.7% in Peru and a 44.4% plunge in Hungary. Among sectors, the spread was tighter, with Telecommunication Services losing 10.0% and Industrials dropping 29.2%.
China’s stocks fell on signs that growth is slowing as overseas demand falters and the government maintains its focus on curbing inflation. An index of Chinese manufacturing shrank for a third month. Policymakers reiterated their determination to stabilize prices even as inflation eased to 6.2% in August from a three-year high in July. Our underweight in Chinese Financials contributed to performance.
Hungary was hammered by fears of contagion from the eurozone’s debt crisis. Investor sentiment was further hurt by a government announcement that Hungary was “far” from the full implementation of its three-year spending-cut plan that had been designed to put the budget on a sustainable path. Our overweight in Hungarian Financials, driven by this group’s low valuations, detracted from performance.
A happy combination of solid growth, dormant inflation, and low interest rates is boosting domestic spending in Indonesia. The central bank forecasts the economy to grow as much as 6.8% this year, the fastest pace since 2004, while inflation in August came in at 4.8% relative to a year earlier. The central bank left rates unchanged for a seventh month. Our overweight in Indonesian Consumer Discretionary added to performance.
The continuing spike in risk aversion impacted Russian stocks negatively as the country is perceived to be one of the riskier emerging markets. The drop in commodity prices dealt another blow given the country’s huge oil and metal exports. Prime Minister Putin declared his intention to run for the presidency. President Medvedev supported Putin and said he may take over as prime minister. The announcement brought clarity for investors but also dispelled the hope that Medvedev, regarded the more investor-friendly of the duo, would take over the top spot. Our overweight in Russian Energy, a reflection of its cheapness and positive momentum, hurt performance.
Thailand’s stock market jumped after the elections handed a decisive mandate to Yingluck Shinawatra’s Pheu Thai party, easing concerns of political stalemate. Her party’s promises of higher wages, lower taxes, and greater spending were instrumental in the victory. However, they also convinced the central bank to raise interest rates. Our overweight in Thai Financials boosted performance.
The global flight to safety manifested itself in emerging markets by the relative outperformance of the Telecommunication Services sector. Our overweight in this sector across countries such as China, Korea, and Taiwan boosted performance.
Stock selection detracted from performance in Korean Industrials and Russian Energy but contributed positively in Chinese Energy.
Top Ten Holdings2,5
Risk Profile Since 9/30/974
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The S&P/IFCI Composite Index is an independently maintained and widely published index comprised of emerging markets stocks. 4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. 5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Vale S.A. (ADS) 4.5%OAO Gazprom ADR 4.1%Petroleo Brasileiro S/A Ord 3.6%Samsung Electronics Co. 3.2%China Mobile Ltd. (ADS) 3.1%Astra International 2.3%Lukoil Oil Company ADR 2.2%Banco do Brasil S.A. 1.8%Surgutneftegaz Prf 1.6%KGHM Polska Miedz S.A. 1.5% Total 27.9%
Strategy Benchmark
Alpha 2.38 0.00
Beta 1.04 1.00R2 0.93 1.00
Sharpe Ratio 0.27 0.19
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 9.9 x 11.3 x
Price/Cash Flow - Hist 1 Yr Wtd Med 6.1 x 7.6 x
Price/Book - Hist 1 Yr Wtd Avg 1.4 x 1.5 x
Return on Equity - Hist 1 Yr Avg 15.3 % 14.6 %
Market Cap - Weighted Median $Bil $7.2 $5.5
Dividend Yield - Hist 1 Yr Wtd Avg 4.1 % 2.9 %
Underweight/OverweightRegion Against Benchmark (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Global Active Equity Strategy Inception: 8/31/00; Benchmark: MSCI World Index
Performance1
The Global Active Equity Strategy underperformed the MSCI World index by 3.1 percentage points in the third quarter, falling 19.7% while the benchmark lost 16.6%. The strategy lagged its benchmark by 2.8 percentage points for the first three quarters of 2011, returning -15.0%.
Country selection was positive in the quarter. An underweight position in Australia added to returns. The portfolio is overweight eurozone countries due to stock positions. While we continue to find the companies attractive, we are concerned with the currency and think that the euro looks expensive. We continue to hedge the overweight, giving the portfolio roughly the same euro exposure as the index. The hedge had a positive impact over the quarter. On the negative side, overweight positions in Germany and Italy subtracted from returns as investors continued to worry about the situation in Europe. An underweight position in the United States also hurt performance.
Sector selection was positive. An underweight position in the financial sector helped returns as concerns about European sovereign debt and talk of a second recession led to a sell-off in financial names. This was somewhat offset by an underweight position in Information Technology, which subtracted from performance.
Stock selection lagged the benchmark in the quarter. Positions in the United States, Germany, Japan, the Netherlands, and the emerging markets all underperformed. On the positive side, holdings in Canada and the United Kingdom beat the benchmark.
Top Ten Holdings2,5
Risk Profile Since 8/31/004
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI World Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed
markets. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
Pfizer Inc. 2.4%Vodafone Group PLC 2.3%WellPoint Inc. 2.2%British American Tobacco 2.1%Comcast Corp. (Cl A) 2.0%Microsoft Corp. 1.9%Target Corp. 1.9%J.M. Smucker Co. 1.9%Royal Dutch Shell PLC 1.8%QUALCOMM Inc. 1.8% Total 20.3%
Strategy Benchmark
Alpha 7.27 0.00
Beta 0.94 1.00R2 0.84 1.00
Sharpe Ratio 0.29 -0.14
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 12.0 x 13.3 x
Price/Cash Flow - Hist 1 Yr Wtd Med 6.8 x 8.9 x
Price/Book - Hist 1 Yr Wtd Avg 1.3 x 1.5 x
Dividend Yield - Hist 1 Yr Wtd Avg 3.5 % 3.2 %
Underweight/OverweightRegion Against Benchmark (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Global Equity Strategy Inception: 7/31/96; Benchmark: MSCI World Index
Performance1 Top Ten Holdings2,5
Risk Profile Since 7/31/964
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities. 3 The MSCI World Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed
markets. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Sector Weights5
Underweight/OverweightSector Against Benchmark Strategy Benchmark
The third quarter was the worst for stock markets since the first phase of the financial crisis in 2008/9. Global equities lost investors 16.6% in U.S. dollar terms as measured by the MSCI World index. The Global Equity Strategy beat the broader markets by 0.5% for the quarter, bringing the year to date relative performance to +1.7%.
Eurozone equities were at the center of the market collapse, underperforming the global average by almost 12 percentage points. Weakness across Europe was broadly based. Bailout recipient (and candidate for more) Greece performed worst. Bailout providers were not spared, with French and German equity markets falling by similar amounts to Italian equities. The big markets of the U.S., Japan, and the U.K. were the only places to hide (and then only in relative terms – all developed markets delivered negative absolute returns). The strategy’s market selection detracted from returns; despite the good reasons to worry about Europe, or more precisely, because of the low valuations they have produced, the strategy remains overweight in eurozone equities.
The strategy’s top-down allocation to high quality U.S. blue-chips made the most significant contribution to relative performance. In times of uncertainty, conservative companies simply look more alluring to the average market participant. From our perspective, the high quality companies look slightly less attractive, having outperformed decently since April, but still trade comfortably toward the bottom of their historic valuation range. Should the financial crisis intensify, this allocation will look even more alluring and will outperform but the main logic of the position is not one of trouble ahead, rather that high quality U.S. blue-chips still trade at undemanding prices.
The strategy’s value holdings also outperformed this quarter. A good part of this outperformance was the result of the trade-off that we make between company quality and company valuation. By contrast, simple “benchmark” value underperformed globally. Our value stocks outperformed modestly even in Europe, illustrating the potential benefits of low expectations: when sentiment deteriorates across the board, the stocks priced with the rosiest optimism have the most to lose.
The strategy received a bloody nose from its momentum investments as markets began to take the prospect of a global slowdown more seriously. In particular, the shares of European exporters with exposure to Asia (e.g., the automakers) suffered as this cycle’s Chinese incarnation of “good times will last forever” thinking was shaken by frailties in the Chinese banking sector. Our momentum focus has shifted toward less exposed companies in recent trades.
Finally, the currency positioning of the strategy contributed to returns this quarter. We favor the markets of countries with competitively priced currencies. The effective exchange rates of the U.S. dollar and sterling have flirted with 30-year lows this year while the Swiss franc and the Australian dollar have made 30-year highs. The strategy is invested accordingly; the Swiss National Bank’s moves to weaken the franc, alongside China’s inadvertent moves to weaken the Australian dollar, were therefore welcome contributors to relative returns.
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Johnson & Johnson 4.5%Coca-Cola Co. 2.8%Google Inc. (Cl A) 2.3%Royal Dutch Shell PLC 2.0%Wal-Mart Stores Inc. 2.0%Merck & Co Inc 1.9%PepsiCo Inc. 1.7%Exxon Mobil Corp. 1.7%Apple Inc. 1.5%QUALCOMM Inc. 1.5% Total 21.9%
Strategy Benchmark
Alpha 2.34 0.00
Beta 0.91 1.00R2 0.95 1.00
Sharpe Ratio 0.23 0.08
Strategy Benchmark
Price/Earnings - Hist 1 Yr Wtd Med 11.8 x 13.3 xPrice/Cash Flow - Hist 1 Yr Wtd Med 8.1 x 8.9 xPrice/Book - Hist 1 Yr Wtd Avg 1.5 x 1.5 xReturn on Equity - Hist 1 Yr Wtd Med 17.0 % 14.2 %Market Cap - Weighted Median $Bil $35.6 $29.2Dividend Yield - Hist 1 Yr Wtd Avg 3.8 % 3.2 %
Underweight/OverweightRegion Against Benchmark (%)
GIPS ® compliant presentation is available at www.gmo.com.
GMO Core Plus Bond Strategy Inception: 4/30/97; Benchmark: Barclays Capital U.S. Aggregate Index
Performance1
The Core Plus Bond Strategy returned +4.3% in the third quarter, outperforming the return of its benchmark, the Barclays Capital U.S. Aggregate index, by 0.4%. The Barclays Capital U.S. Aggregate index posted a third consecutive quarter of total return gains, returning +3.8%. Falling U.S. Treasury yields were responsible for index gains, as widening sector spreads weighed on performance.
Ten-year U.S. Treasury yields fell by 123 basis points to 1.9%, and 2-year yields fell by 19 basis points to 0.2%. Despite having suffered their first-ever rating downgrade in August, U.S. Treasuries had their best quarterly return since Q4 2008, rising by 6.5%. The Federal Reserve vowed to keep short-term rates near zero through 2013 and added a “twist” to policy designed to flatten the yield curve by buying longer-dated bonds as part of its quantitative easing policy.
The overall option-adjusted spread of the Barclays Capital U.S. Aggregate index widened by 36 basis points, with sector spreads widening by as much as 108 basis points (CMBS), and by as little as 10 basis points (U.S. Agencies). CMBS spreads widened the most during the quarter, consistent with general weakening in the broader markets.
Developed markets interest-rate positioning was responsible for third quarter gains. While unable to fully offset gains, exposures to GMO Short Duration Collateral Fund (SDCF) and GMO World Opportunity Overlay Fund (WOOF) contributed negatively for a second consecutive quarter, followed by negative contributions from developed markets currency selection and exposure to emerging country debt via the GMO Emerging Country Debt Fund.
Risk Profile Since 4/30/973
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Barclays Capital U.S. Aggregate Index is an independently maintained and widely published index comprised of U.S. fixed rate debt issues having a maturity of at least one year and rated investment grade or higher.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund. 6 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,6
Characteristics4,5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Inflation Indexed Plus Bond Strategy Inception: 5/31/06; Benchmark: Barclays Capital U.S. Treasury Inflation Notes Index
Performance1
The Inflation Indexed Plus Bond Strategy returned +4.6% in the third quarter, outperforming the Barclays Capital U.S. Treasury Inflation Notes index by 0.1%. The index reported a third consecutive quarter of total return gains, reporting +4.5% for the third quarter of 2011. The real yield curve flattened during the quarter, as real 2-year yields rose by 51 basis points, real 10-year yields fell by 53 basis points; longer-dated real yields (> 20 years) fell by 136 basis points.
Issue selection and developed markets interest-rate positioning were responsible for third quarter gains. While unable to fully offset
gains, exposures to GMO Short Duration Collateral Fund (SDCF) and GMO World Opportunity Overlay Fund (WOOF) contributed negatively for a second consecutive quarter, followed by negative contributions from exposure to emerging country debt via the GMO Emerging Country Debt Fund and developed markets currency selection.
Risk Profile Since 5/31/063
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Barclays Capital U.S. Treasury Inflation Notes Index is an independently maintained and widely published index comprised of Inflation-Protection Securities issued by the U.S. Treasury (TIPS).
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund. 6 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,6
Characteristics4,5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Bond Strategy Inception: 12/31/93; Benchmark: J.P. Morgan Non-U.S. Government Bond Index
Performance1
The International Bond Strategy returned +0.7% in the third quarter, underperforming the J.P. Morgan Non-U.S. Government Bond index return of +1.5% by 0.7%. The yield of the J.P. Morgan non-U.S. Government Bond index fell by 36 bps during the month, with falling yields across all benchmark countries contributing to index gains.
Government bond markets rallied across the board during the quarter: in local currency J.P. Morgan Global Bond index terms, gains were the highest in the U.K. (+8.8%) and lowest in Japan (+1.2%). Setting the stage early in the quarter for a bond market rally was the weak July U.S. jobs report. Later, speculation that the Bank of England would expand its monetary stimulus to boost a flagging recovery prompted the fall in gilt yields. Despite having suffered their first-ever rating downgrade in August, U.S. Treasuries had their best quarterly return since Q4 2008, rising by 6.5%. In other bond markets, the eurozone (+8.0%), Sweden (+7.4%), Canada (+6.1%), Australia (+5.8%), and Switzerland (+4.7%) also reported total return gains.
Global yield curves (measured by the difference between 10-year and 2-year swap rates) flattened across the board during the quarter, with curves in the U.S. and the U.K. flattening the most.
In currencies, most of the quarter’s movements were concentrated in September, although the yen briefly took a 3% dive in August when the Bank of Japan intervened. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began. EURCHF was mostly unchanged, but both fell about 7.5% dollar relative. Commodity currencies also suffered, with Australian dollar and Norwegian krone down 9.2% and 8.6%, respectively.
In policy actions, the ECB and Sweden each raised policy interest rates by 25 bps during the quarter, to 1.5% and 2%, respectively. The Swiss cut rates by 25 bps before embarking on their fx intervention. In the U.S., the Fed, already in ZIRP, announced plans to buy longer-maturity bonds with the aim of “twisting” the yield curve flatter. Having renewed the central bank swap lines last quarter, they came in handy a few times this quarter, with the Fed providing liquidity in USD to the ECB and the SNB.
Exposures to GMO Short Duration Collateral Fund (SDCF) and GMO World Opportunity Overlay Fund (WOOF) contributed negatively for a second consecutive quarter, driving Q3 losses. Negative contributions also came from developed markets currency selection and exposure to emerging country debt via the GMO Emerging Country Debt Fund. Developed markets interest-rate positioning contributed positively to the strategy, however.
Risk Profile Since 12/31/933
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan Non-U.S. Government Bond Index is an independently maintained and widely published index comprised of non-U.S. government bonds with maturities of one year or more..
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund. 6 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,6
Characteristics4,5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Currency Hedged International Bond Strategy Inception: 9/30/94; Benchmark: J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) +
Performance1
The Currency Hedged International Bond Strategy returned +4.7% in the third quarter, outperforming the J.P. Morgan Non-U.S. Government Bond ex-Japan Hedged index total return of +4.5% by 0.2%. The yield of the J.P. Morgan non-U.S. Government ex-Japan Hedged Bond index fell by 57 basis points during the quarter.
Government bond markets rallied across the board during the quarter: in local currency J.P. Morgan Global Bond Index terms, gains were the highest in the U.K. (+8.8%) and lowest in Japan (+1.2%). Setting the stage early in the quarter for a bond market rally was the weak July U.S. jobs report. Later, speculation that the Bank of England would expand its monetary stimulus to boost a flagging recovery prompted the fall in gilt yields. Despite having suffered their first-ever rating downgrade in August, U.S. Treasuries had their best quarterly return since Q4 2008, rising by 6.5%. In other bond markets, the eurozone (+8.0%), Sweden (+7.4%), Canada (+6.1%), Australia (+5.8%), and Switzerland (+4.7%) also reported total return gains.
Global yield curves (measured by the difference between 10-year and 2-year swap rates) flattened across the board during the quarter, with curves in the U.S. and the U.K. flattening the most.
In currencies, most of the quarter’s movements were concentrated in September, although the yen briefly took a 3% dive in August when the Bank of Japan intervened. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began. EURCHF was mostly unchanged, but both fell about 7.5% dollar relative. Commodity currencies also suffered, with Australian dollar and Norwegian krone down 9.2% and 8.6%, respectively.
In policy actions, the ECB and Sweden each raised policy interest rates by 25 bps during the quarter, to 1.5% and 2%, respectively. The Swiss cut rates by 25 bps before embarking on their fx intervention. In the U.S., the Fed, already in ZIRP, announced plans to buy longer-maturity bonds with the aim of “twisting” the yield curve flatter. Having renewed the central bank swap lines last quarter, they came in handy a few times this quarter, with the Fed providing liquidity in USD to the ECB and the SNB.
Developed markets interest-rate positioning was responsible for third quarter gains. While unable to fully offset gains, exposures to GMO Short Duration Collateral Fund (SDCF) and GMO World Opportunity Overlay Fund (WOOF) contributed negatively for a second consecutive quarter, followed by negative contributions from exposure to emerging country debt via the GMO Emerging Country Debt Fund and developed markets currency selection.
Risk Profile Since 9/30/943
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) + is an internally maintained benchmark computed by GMO, comprised of (i) the J.P. Morgan Non-U.S. Government Bond Index (Hedged) prior to 12/31/2003 and (ii) the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) thereafter.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund. 6 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,6
Characteristics4,5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
Performance1
GMO Global Bond Strategy Inception: 12/31/95; Benchmark: J.P. Morgan Global Government Bond Index
The Global Bond Strategy returned +2.5% during the third quarter, underperforming the J.P. Morgan Global Government Bond index return of +3.1% by 0.6%. The yield of the J.P. Morgan Global Government Bond index fell by 51 bps during the month, with falling yields across all benchmark countries contributing to index gains.
Government bond markets rallied across the board during the quarter: in local currency J.P. Morgan Global Bond index terms, gains were the highest in the U.K. (+8.8%) and lowest in Japan (+1.2%). Setting the stage early in the quarter for a bond market rally was the weak July U.S. jobs report. Later, speculation that the Bank of England would expand its monetary stimulus to boost a flagging recovery prompted the fall in gilt yields. Despite having suffered their first-ever rating downgrade in August, U.S. Treasuries had their best quarterly return since Q4 2008, rising by 6.5%. In other bond markets, the eurozone (+8.0%), Sweden (+7.4%), Canada (+6.1%), Australia (+5.8%), and Switzerland (+4.7%) also reported total return gains.
Global yield curves (measured by the difference between 10-year and 2-year swap rates) flattened across the board during the quarter, with curves in the U.S. and the U.K. flattening the most.
In currencies, most of the quarter’s movements were concentrated in September, although the yen briefly took a 3% dive in August when the Bank of Japan intervened. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began. EURCHF was mostly unchanged, but both fell about 7.5% dollar relative. Commodity currencies also suffered, with Australian dollar and Norwegian krone down 9.2% and 8.6%, respectively.
In policy actions, the ECB and Sweden each raised policy interest rates by 25 bps during the quarter, to 1.5% and 2%, respectively. The Swiss cut rates by 25 bps before embarking on their fx intervention. In the U.S., the Fed, already in ZIRP, announced plans to buy longer-maturity bonds with the aim of “twisting” the yield curve flatter. Having renewed the central bank swap lines last quarter, they came in handy a few times this quarter, with the Fed providing liquidity in USD to the ECB and the SNB.
Exposures to GMO Short Duration Collateral Fund (SDCF) and GMO World Opportunity Overlay Fund (WOOF) contributed negatively for a second consecutive quarter, driving Q3 losses. Negative contributions also came from developed markets currency selection and exposure to emerging country debt via the GMO Emerging Country Debt Fund. Developed markets interest-rate positioning contributed positively to the strategy, however.
Risk Profile Since 12/31/953
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. Returns for one of the accounts in the composite are based on estimated market values for the period from and including October 2008 through February 2009.
2 The J.P. Morgan Global Government Bond Index is an independently maintained and widely published index comprised of government bonds of developed countries with maturities of one year or more.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund. 6 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,6
Characteristics4,5
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Country Debt Strategy Inception: 4/30/94; Benchmark: J.P. Morgan EMBI Global + Index
Performance1
The Emerging Country Debt Strategy returned -3.9% in the third quarter, behind the J.P. Morgan Emerging Market Bond Index Global return of -1.8% by 2.1%. The index spread widened by 177 basis points to 465 basis points during the period, while the yield on the 10-year U.S. Treasury bond fell 123 basis points to 1.9%.
The eurozone continued to dominate headlines, as the widespread economic slowdown made fiscal adjustment even more challenging to achieve and banks were hit by the extension of sovereign risk beyond the PIGS. French banks looked the weakest due to their exposure to eurozone governments and other banks. French (AAA) sovereign CDS widened by over 100 basis points to 187 basis points during the period on the assumption that the state would have to assist in recapitalizing them. This spread was just 7 basis points wider than Panama (BBB-). Spain (AA) and Italy (A) also widened precipitously past nearly all emerging sovereigns, raising concerns that the European bail-out fund would not be large enough to contain the crisis. An imminent Greek default is priced into CDS and bonds, as the government has not been able to qualify for another disbursement from the IMF/EU/ECB Troika, and the voluntary private-sector restructuring initiative has not gained much traction. Liquidity in the emerging cash bond market dried up and the average bid-offer spread widened 52 basis points to 119 basis points at the end of the quarter. New issuance fell 63% from Q3 of 2010 to $32 billion, its lowest level since Q1 of 2009. Emerging currencies lost 8.9% against the dollar, after rising by 5.2% in the first half of the year
The biggest index gainers were Chile (+5.1%), Peru (+4.4%), Lebanon (+2.7%), and Mexico (+2.3%). Spreads widened on all countries in the index, but less so for these four. Chile and Mexico are both investment-grade credits with solid fundamentals, and they benefited from the flight to quality. Peruvian President-elect Humala surprised the market with more investor-friendly economic policies than expected. Lebanon does not have a high credit rating or good policies, but most of its bonds are held by local banks or expatriate Lebanese who do not sell when the market falls.
The worst performers of the quarter were Argentina (-20.1%), Belarus (-17.5%), Ukraine (-11.1%), and Iraq (-10.7%). They are all weak credits that suffered disproportionately in the market downturn. Argentina is shut out from private external markets because it is still in default on obligations to both the private and public sectors. Belarus is experiencing a severe balance-of-payments crisis, but has not been willing to submit to the remedies required to qualify for support from the IMF. Ukraine’s situation is similar to that of Belarus, but not as extreme. Both are trying to raise money abroad without falling into the clutches of the Russians. Iraq’s idiosyncratic risks are less tolerated when the market shuns risk in general.
Market selection accounted for 240 basis points of negative alpha. The overweight in Argentina caused most of that, subtracting 186 basis points, and the Iraq and Ivory Coast overweights cost 19 and 13 more, respectively. The underweight in Russia helped performance, adding back 13 basis points of alpha.
Security selection, including allocations outside the index, was positive by 39 basis points. Holdings in Mexico and Philippines underperformed the index, while in Iraq and Argentina they outperformed. The outside-index allocation to Congo was a positive contributor. Negative returns from asset-backed securities (7% of the portfolio) cost 9 basis points.
Risk Profile Since 4/30/943
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. Returns for one of the accounts in the composite are based on estimated market values for the period from and including October 2008 through February 2009.
2 The J.P. Morgan EMBI Global (Emerging Markets Bond) Index + is an internally maintained benchmark computed by GMO, comprised of (i) the J.P. Morgan Emerging Markets Bond Index (EMBI) through 8/31/1995, (ii) the J.P. Morgan EMBI+ through 12/31/1999, and (iii) the J.P. Morgan EMBIG thereafter.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Regional Weights4
Characteristics4
* Central Eastern Europe, Middle East, and Africa
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Country Local Debt Investment Strategy Inception: 2/29/08; Benchmark: J.P. Morgan GBI-EM Diversified Index
Performance1
The GMO Emerging Country Local Debt Investment Strategy returned -10.8% in the third quarter, underperforming the J.P. Morgan GBI-EM Diversified (GBI-EMD) by 0.5%. As in the second quarter, instrument selection and country selection were positive, while currency selection and the collateral pool detracted.
The GBI-EM Diversified fell by 10.3% in the third quarter, its worst quarterly fall since the inception of the benchmark in 2002. Spot currencies returned -11.7%, and local currency bonds returned +1.4%. Such results noticeably trailed those of their developed markets counterparts (as measured by the J.P. Morgan GBI ex-U.S. index). The comparable figures in developed markets were +3.0% for bonds and -1.6% for fx.
With the U.S. dollar’s rapid September rebound, all emerging currencies except the Chinese renminbi fell relative to the dollar. The most pronounced losses were among those in the euro’s orbit and those with big commodity export exposures. In the first group were Poland (-16.6%), Hungary (-16.3%), Romania (-10.1%), Czech Republic (-8.9%), and, of course, the euro (-7.5%). Commodities witnessed heavy declines, with the energy complex down 10% to 15%, industrial metals down 10% to 20%, and softs down 6% to 38%, although gold ended up 8%. Commodity-sensitive currencies with double-digit declines included Brazilian real (-17.0%), South African rand (-15.7%), Mexican peso (-15.5%), and Russian ruble (-13.4%).
The quarter saw a dramatic reversal of fortunes for a number of currencies whose authorities had been trying to stem the tide of inflows as late as August. Japan intervened to weaken the yen in August. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began.
The spillover into emerging currencies has so far been via the channels mentioned above: exposure to the eurozone economy and/or commodities prices, the latter sinking in response to lower global growth expectations. Liquidity deteriorated, with bid-ask spreads widening on all currency pairs, and volumes declining.
Somewhat ironically, the only emerging currency to rise in spot terms this month was Chinese renminbi, +1.2% (exactly the same as last quarter). As September closed, U.S. Senator Schumer was bringing the long-awaited “Currency Exchange Rate Oversight Reform Act of 2011,” more regularly referred to as the “anti-China bill,” to the senate floor. Although CNY has been a top performer this year (second only to the yen), Schumer still has it in his sights. Interestingly, the non-deliverable forward market is going the other way: from pricing appreciation for the currency over the next few years, the forwards now price a depreciation.
Local currency bonds fared much better than the currencies, although early-quarter gains were more than halved in September as the bonds started to sell off as well. What had been a 3.6% quarter-to-date gain for the bonds measured in local currency at the end of August was only a 1.4% gain by quarter end. Of the ratings actions in emerging, nearly all were upgrades to ratings or outlooks: Czech Republic, Brazil, Peru, Romania Israel, and Turkey. Fitch did warn about China’s local debt in the context of tightening policies there, however.
In performance attribution, currency positioning detracted, with overweights in Brazilian real, Hungarian forint, Turkish lira, and South African rand the main detractors, while underweights in Czech crown, Taiwan dollar, Singapore dollar, and Canadian dollar partially offset. The collateral pool detracted. Country selection was positive, particularly the overweight in Chile and the underweight in Russia. Finally, instrument selection was positive.
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income. Returns for the composite are based on estimated market values for the period from and including October 2008 through February 2009.
2 The J.P. Morgan GBI-EM (Government Bond Index-Emerging Markets) Diversified Index is an independently maintained and widely published index of global local emerging markets consisting of regularly traded, liquid fixed-rate, domestic currency government bonds.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
5 Regional weights are duration adjusted.
Currency Weights4 Regional Weights4,5
Characteristics4
* Central Eastern Europe, Middle East, and Africa
Risk Profile Since 2/29/083
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Asset Allocation Bond Strategy Inception: 3/31/09; Benchmark: Citigroup 3-Month T-Bill Index
Performance1
Risk Profile Since 3/31/093
Quarterly Strategy Attribution
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011. 5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund.
Characteristics4,5
The Asset Allocation Bond Strategy returned +0.8% during the third quarter, outperforming the Citigroup 3-Month Treasury Bill index return by 0.8%. U.S. 3-month Treasury bill rates fell by 4 basis points to end the quarter at 0.02%.
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended Global Balanced Asset Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of S&P 500, MSCI ACWI (MSCI Standard Index Series, net of withholding tax) and Barclays Capital Aggregate or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The Global Balanced Asset Allocation Strategy finished the quarter down 6.6%, outperforming its benchmark by 3.7%. Global equity markets beat a hasty, hefty retreat this quarter, with the broad index of global markets suffering a decline of over 17%. The defensive posture of the portfolio meant that it
was well-positioned for this market downturn. First, the roughly 5% underweight to stocks mitigated some of the loss. More importantly, however, the long-standing tilt toward quality stocks, as represented by a large allocation to the Quality Strategy as well as the quality bias embedded in the international equity strategies, also served the portfolio well. The avoidance of small cap was particularly helpful as the “risk off” trade fell into high gear this quarter – small cap stocks around the globe were hammered. On the downside, our continued overweight to emerging equity acted as a modest headwind to performance this quarter, as emerging suffered the largest declines, with the broad benchmarks posting losses greater than 20%. The overweight to bonds and cash was the right call this quarter, as global yields fell dramatically. It is important to note that the portfolio had largely avoided long duration in the U.S. given our views that Treasuries were simply too expensive. But we did embed duration as a deflation hedge through a long position in New Zealand and Australian bonds. This exposure benefited the portfolio tremendously, as New Zealand and Australian yields fell precipitously, in line with the global phenomenon, but starting from a much higher level. Strategic Fixed Income, the strategy in which we embedded this position, was the best-performer in the Global Balanced Asset Allocation Strategy this quarter.
Implementation finished the quarter as a strong contributor. The spotlight clearly belonged to the Quality Strategy. Its outperformance of over 850 basis points buffered the overall portfolio from a steeper loss. The three international strategies – International Intrinsic Value, International Growth, and International Core Equity – all outperformed their respective benchmarks. Alpha Only and Strategic Fixed Income, both relatively large holdings, also beat their respective cash benchmarks.
Throughout a good portion of 2011, the markets had been able to hold the constant stream of sobering news at bay. And while it would be convenient to isolate a single incident that caused the dam to break – the historic downgrading of U.S. Treasuries, for example – in reality, it was more as if the persistent “put on a happy face” practice finally gave way to a pretty dismal reality. Evidence of a slowing China (one of the last remaining areas of continued hope), the rapidly growing unease surrounding sovereign debt in Europe, the existential debates surrounding the euro, continued evidence of weak housing and employment in the U.S., political waffling and dysfunction in the U.S. and amongst European union members, and the specter of a double-dip without any Fed ammunition left … all of these had been known and supposedly “discounted” for many months. But not so. The quarter has to be characterized as powerful rivers converging and finally overwhelming the dam.
This breach, while painful in the short term, provides more attractive valuations on a number of fronts, and the strategy’s large store of “dry powder” means that we are well-positioned to put money to work in now-cheaper assets.
Risk Profile Since 6/30/884
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition (65% MSCI ACWI / 35% Barclays U.S. Aggregate)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Real Return Global Balanced Asset Allocation Strategy Inception: 6/30/04; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended Real Return Global Balanced Asset Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI World (MSCI Standard Index Series, net of withholding tax), Barclays Capital Aggregate, and Citigroup 3-Month T-Bill or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The Real Return Global Balanced Asset Allocation Strategy returned -4.9% for the quarter, outperforming its benchmark by 4.8%. Global equity markets beat a hasty, hefty retreat this quarter, with the broad index of global markets suffering a decline of over 17%. The defensive posture of the
portfolio meant that it was well-positioned for this market downturn. First, the roughly 5% underweight to stocks mitigated some of the loss. More importantly, however, the long-standing tilt toward quality stocks, as represented by a large allocation to the Quality Strategy as well as the quality bias embedded in the international equity strategies, also served the portfolio well. The avoidance of small cap was particularly helpful as the “risk off” trade fell into high gear this quarter – small cap stocks around the globe were hammered. On the downside, the out-of-benchmark allocation to emerging equity acted as a modest headwind to performance this quarter, as emerging suffered the largest declines, with the broad benchmarks posting losses greater than 20%. The allocation decisions in bonds and cash also helped the strategy this quarter, as global yields fell dramatically. It is important to note that the portfolio had largely avoided long duration in the U.S., given our views that Treasuries were simply too expensive. But we did gain duration exposure as a deflation hedge through a long position in New Zealand and Australian bonds. This exposure benefited the portfolio tremendously, as New Zealand and Australian yields fell precipitously, in line with the global phenomenon, but starting from a much higher level. Strategic Fixed Income, the strategy in which we embedded this position, was the best-performer in the Real Return Global Balanced Asset Allocation Strategy this quarter.
Implementation finished the quarter as a strong contributor. The spotlight clearly belonged to two strategies – the Quality Strategy, which added 850 basis points over its benchmark, and Multi-Strategy, which delivered almost 600 basis points of excess return over cash. The international strategies – International Intrinsic Value and International Growth – both outperformed their respective benchmarks.
The defensive position heading into the quarter gave way, of course, to more attractive pricing on many fronts. The strategy has maintained a fair amount of “dry powder” and will likely be putting it to work, especially in international stocks.
Risk Profile Since 6/30/044
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(60% MSCI World / 20% Citigroup 3-Mo. T-Bill / 20% BC U.S. Agg.)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Global Allocation Absolute Return Strategy Inception: 7/31/01; Benchmark: CPI Plus 5% Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The CPI (Consumer Price Index) Plus 5% Index is an internally maintained (monthly) benchmark based on the CPI Index for All Urban Consumers US All Items which is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services. The CPI Plus 5% Index is calculated by adding 5% annualized to the return of the CPI Index.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
Performance1
The Global Allocation Absolute Return Strategy returned -1.6% in the quarter. Despite the large decline in global equity markets this quarter, our roughly 40% exposure to equity was aided by strong performance
from the underlying strategies. The Quality Strategy – our largest equity holding – posted only modest losses. Strategic Fixed Income’s exposure to long-duration Australian and New Zealand bonds helped it post positive returns. The absolute return strategies, Alpha Only and Multi-Strategy, also delivered strong positive returns of over 4% and 6%, respectively.
Risk Profile Since 7/31/014
Quarterly Strategy Attribution
Absolute Strategy Weights3 Strategy Composition3
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
Performance1
GMO Real Return Asset Allocation Strategy Inception: 12/31/09; Benchmark: CPI Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The CPI (Consumer Price Index) for All Urban Consumers US All Items is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
The Real Return Asset Allocation Strategy returned +1.6% in the third quarter, outperforming its target by 0.4%. Against a backdrop of world equity markets and risk assets more generally selling off, the strategy’s return was positive this quarter.
Solid performance by the Quality vs. Junk (and small cap) position added the vast majority of excess returns. Positive contributions also came from a basket of short Chinese equity positions, a position in long duration Australia and New Zealand bonds, and solid performance by the holding in Multi-Strategy. Headwinds this quarter were primarily equity and equity-related in that the long exposure to emerging was hurt by the dramatic sell-off in emerging equity. In addition, the dividend swaps were hurt by continued volatility surrounding Europe in general and European banks in particular.
Quarterly Strategy Attribution
Equities4 Inflation / Deflation Themes4
Inflation
Deflation
Currencies4 Absolute Return4
Risk Profile Since 12/31/093 Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Global All Country Equity Allocation Strategy Inception: 12/31/93; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended Global All Country Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI ACWI (All Country World Index) (MSCI standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The Global All Country Equity Allocation Strategy returned -13.2% for the quarter, outperforming its benchmark by 4.2%. Global equity markets beat a hasty, hefty retreat this quarter, with the broad index of global markets suffering a decline of over 17%.
The defensive posture of the portfolio meant that it was well-positioned for this market downturn. The long-standing tilt toward quality stocks, as represented by both a large allocation to the Quality Strategy, as well as the quality bias embedded in the international equity strategies, also served the portfolio well. The avoidance of small cap was particularly helpful as the “risk off” trade fell into high gear this quarter – small cap stocks around the globe were hammered. On the downside, the overweight to emerging equity acted as a modest headwind to performance this quarter, as emerging suffered the largest declines, with the broad benchmarks posting losses greater than 20%.
From an implementation perspective, the Quality Strategy outperformed its benchmark by over 850 basis points and was responsible for the lion’s share of this quarter’s alpha.
Risk Profile Since 12/31/934
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(MSCI ACWI)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Global Developed Equity Allocation Strategy Inception: 3/31/87; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended Global Developed Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI World (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The Global Developed Equity Allocation Strategy returned -13.0% for the quarter, outperforming its MSCI World benchmark by 3.6%.
Global equity markets beat a hasty, hefty retreat this quarter, with the broad index of global markets suffering a decline of 17%. The defensive posture of the portfolio meant that it was well-positioned for this market downturn. The long-standing tilt toward quality stocks, as represented by a large allocation to the Quality Strategy as well as the quality bias embedded in the international equity strategies, also served the portfolio well. The avoidance of small cap was particularly helpful as the “risk off” trade fell into high gear this quarter – small cap stocks around the globe were hammered. On the downside, the out-of-benchmark allocation to emerging equity acted as a modest headwind to performance this quarter, as emerging suffered the largest declines, with the broad benchmarks posting losses greater than 20%.
From an implementation perspective, the Quality Strategy outperformed its benchmark by over 850 basis points and was responsible for the lion’s share of this quarter’s alpha.
Risk Profile Since 3/31/874
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(MSCI World Index)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO International All Country Equity Allocation Strategy Inception: 2/28/94; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended International All Country Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI ACWI (All Country World) ex-U.S. Index (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The International All Country Equity Allocation Strategy returned -19.3% for the quarter, outperforming its benchmark by 0.5%. Implementation added the vast majority of the excess return.
The roughly 3% overweight to emerging markets acted as a headwind to performance this quarter, as emerging markets were some of
the worst performers. On the positive side, the decision to hold Flexible Equities, which has a large Japanese equity exposure, helped as Japan equities did not lose as much value.
From an implementation standpoint, strong performance by the International Growth Strategy created a net positive alpha for the
overall strategy.
Risk Profile Since 2/28/944
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(MSCI ACWI ex-U.S. Index)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO International Developed Equity Allocation Strategy Inception: 11/30/91; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended International Developed Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI EAFE (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The International Developed Equity Allocation Strategy returned -18.2% for the quarter, outperforming its benchmark by 0.8%. Essentially all of the outperformance came from implementation.
The roughly 3% overweight to emerging markets acted as a headwind to performance this quarter, as emerging markets were some of
the worst performers. On the positive side, the decision to hold Flexible Equities, which has a large Japanese equity exposure, helped as Japan equities did not lose as much value.
From an implementation standpoint, strong performance by the International Growth Strategy created a net positive alpha for the
overall strategy.
Risk Profile Since 11/30/914
Quarterly Strategy Attribution
Strategy Composition3 Benchmark Composition
(MSCI EAFE Index)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO U.S. Equity Allocation Strategy Inception: 2/28/89; Benchmark: Blended Benchmark
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO blended U.S. Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of S&P 500, Russell 3000 or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The U.S. Equity Allocation Strategy finished the quarter with a return of -7.5%, outperforming its benchmark by 7.1%. Virtually all of the outperformance came from implementation.
The key driver of alpha was the outperformance of the Quality Strategy, which beat its benchmark by over 850 basis points. Our
underweight to small and mid cap stocks also contributed positively.
Risk Profile Since 2/28/894
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(Russell 3000 Index)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Alpha Only Strategy Inception: 7/31/94; Benchmark: Citigroup 3-Month T-Bill Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011. 4 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
Performance1
The Alpha Only Strategy was up 4.7% for the quarter, outperforming its cash benchmark. Positive alpha from the Quality Strategy was the key driver this quarter.
Quarterly Strategy Attribution
Long Exposure3 Short Exposure3
Risk Profile Since 7/31/944
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Tax-Managed Global Balanced Strategy Inception: 12/31/02; Benchmark: GMO Tax-Managed Global Balanced Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The GMO Tax-Managed Global Balanced Index is an internally computed benchmark comprised of (i) 60% MSCI ACWI (All Country World Index) (MSCI standard Index Series, net of withholding tax) and (ii) 40% Barclays Capital Muni 7 Year (6-8) Index. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market; Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
Performance1
The Tax-Managed Global Balanced Strategy declined 6.8% for the third quarter of 2011, while the blended benchmark declined 9.5%. Global equity markets experienced a broad-based decline, both in USD and local currency terms, as Greece’s troubled path and global economic uncertainty pulled returns down across the board. Japan was somewhat insulated from the decline, dropping 6.4% for the quarter. U.S. equity markets fared slightly better than the remainder of global equity markets, with the S&P 500 declining 13.9%. Both MSCI EAFE ex-Japan and MSCI Emerging Markets fell over 22%. Municipal bonds fared better, advancing 3.1% for the quarter.
Within the portfolio, asset allocation was a moderately positive factor. While the overweight to high quality stocks within U.S. equities added value, an overweight of international equities and underweight of municipal bonds detracted from relative returns. The allocation to alternative assets contributed positively, as did the allocation to Japanese equities. Within implementation, the portfolio benefited from positive selection by global equity stock selection strategies, despite poor results from stocks selected for their strong momentum characteristics. Selection strategies that incorporated high quality into their evaluation posted strong results. Implementation within emerging equities was a moderately negative factor for the quarter, but was offset by gains from the portfolio’s alternative asset portfolios.
Risk Profile Since 12/31/024
Quarterly Strategy Attribution
Strategy Composition3
Strategy Weights Relative to Benchmark3
Benchmark Composition
(GMO Tax-Managed Global Balanced Index)
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011. Exposure information is not normalized and shown as a percent of total net assets.
Performance1
The growing fears of a global slowdown, the European sovereign crisis, and a hard landing in China drove risk assets down in the third quarter, with the S&P 500 posting its sixth worst quarter in the last 40 years (-13.9%). The general turmoil in the markets also introduced a sustained heightened level of volatility as the CBOE VIX index (which started the quarter at 16) ended just shy of 40. As we would expect, our strategies were negatively impacted over this period of time, with the aggregate strategy down 10.4% for the quarter.
The biggest negative impact for the quarter (-6.5%) came from our equity strategies, which seek to buy undervalued securities. We used the market volatility during the quarter to rotate into more attractive positions, but our holdings collectively underperformed the S&P 500, producing returns more in line with the Russell 2000 index (down 21.9% for the quarter). Some of our large cap, higher quality holdings held up well, but they were swamped by the disappointment in some of our smaller and more volatile names. While we prefer large cap stocks when viewed from a top down perspective, we continue to think there is select value outside of the large cap space and maintain a mix of holdings across the capitalization range.
Our volatility strategies also suffered in this market (-3.3% impact), but most of the pain came in August, with the steady drop over several consecutive days early in the month accounting for a significant portion of the negative contribution. In fact, despite the fact that markets were significantly down again in September, our volatility strategies were flat as option premia were high enough to compensate for the negative price movement.
Our merger arbitrage strategy was the one (faint) bright spot for the quarter. While the market collapse in August caused spreads to widen quickly, merger arbitrage turned out to be a relative safe haven and by the end of the quarter turned positive for us (+0.1% impact). While the gains were modest, spreads remain at very attractive levels and we continue to find new opportunities.
Risk Profile Since 9/30/003
Quarterly Strategy Attribution
Current Profiles4 Sector Exposure4
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011. Exposure information is not normalized and shown as a percent of total net assets.
Performance1
The Tactical Opportunities Strategy generated gains of 32.8% in the third quarter of 2011. The negative absolute returns generated on the high quality long portfolio were more than offset by the strong returns of the low quality short portfolio.
The flight to quality that started in the second quarter continued into the third. Investors favored defensive sectors like Health Care
and Consumer Staples over cyclical sectors like Industrials and Materials. Concern in the Financials sector both domestically and abroad drove these stocks lower. The short position in Financials contributed
more than one-third of the strategy’s total return. Large cap stocks beat small cap stocks both within quality and the larger universe. The recent strong relative performance of mega cap
quality companies, held in the long portfolio, compared to lower quality non-mega cap companies, held in the short portfolio, has not significantly changed the valuation gap. The recent price moves have been mostly offset by a shift in fundamentals in favor of quality. While the valuation gap has slightly compressed, mega cap quality remains historically cheap relative to non-mega low quality.
The strategy’s average net exposure for the quarter was neutral.
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Country Debt Long/Short Strategy Inception: 3/31/96; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently maintained and widely published index comprised of three month U.S. dollar Euro-deposits. The duration of the Index is generally 90 days.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
The Emerging Country Debt Long/Short Strategy fell 1.3% in the third quarter of 2011, underperforming its benchmark, the J.P. Morgan U.S. 3 Month Cash index, by 1.3%. The strategy invests mostly in countries in the J.P. Morgan Emerging Bond Market index (EMBIG), which returned -1.8% for the quarter.
The portfolio has a beta of 0.5 to the credit spread risk of the J.P. Morgan EMBIG. Its interest rate duration is low, so the dramatic
123-basis-point fall in U.S. interest rates didn’t help the strategy. Due to its positive spread duration, the big widening in spreads for the asset class, from 289 to 465 basis points, hurt performance.
The strategy targets absolute return by taking long and short positions in the same countries. Large holdings in Argentina and
Venezuela contributed to the negative returns, as the spreads in those countries rose higher as their bond prices fell.
Risk Profile Since 3/31/963
Quarterly Strategy Attribution
Characteristics4 Regional Weights4
* Central Eastern Europe, Middle East, and Africa
EMBIG Beta 0.5
Modified Duration 2.2
Spread Duration 3.4 Yrs.
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Currency Hedge Strategy Inception: 7/31/03; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently maintained and widely published index comprised of three month U.S. dollar Euro-deposits. The duration of the Index is generally 90 days.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
In the third quarter of 2011, the Currency Hedge Strategy returned -4.1%, compared to its benchmark, the J.P. Morgan U.S. 3 Month Cash index, which gained 0.1%.
Most of the quarter’s currency movements were concentrated in September, although the yen briefly took a 3% dive in August when the Bank of Japan intervened. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began. EURCHF was mostly unchanged, but both fell about 7.5% dollar relative.
Commodity currencies also suffered, with Australian dollar and Norwegian krone down 9.2% and 8.6%, respectively. Commodities witnessed heavy declines, with the energy complex down 10% to 15%, industrial metals down 10% to 20%, and softs down 6% to 38%, although gold ended with a rise of 8%.
In policy actions, the ECB and Sweden each raised policy interest rates by 25 basis points during the quarter, to 1.5% and 2%, respectively. The Swiss cut rates by 25 basis points before embarking on their fx intervention. In the U.S., the Fed, already in ZIRP, announced plans to buy longer-maturity bonds with the aim of “twisting” the yield curve flatter. Having renewed the central bank swap lines last quarter, they came in handy a few times this quarter, with the Fed providing liquidity in USD to the ECB and the SNB.
In performance attribution, the cross-market strategy was unsuccessful, although opportunistic positions were helpful. In the cross-market strategy, negative contributions came from the longs in Australian dollar, Norwegian krone, and New Zealand dollar, partially offset by shorts in Canadian dollar and the euro.
Risk Profile Since 7/31/033
Quarterly Strategy Attribution
Performance Attribution4 Currency Weights4
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently maintained and widely published index comprised of three month U.S. dollar Euro-deposits. The duration of the Index is generally 90 days.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
The GMO Fixed Income Hedge Strategy posted its best quarterly performance in its six-year history, returning +11.9% in the third quarter, outperforming its benchmark, the J.P. Morgan U.S. 3 Month Cash index, by 11.8%. The yield curve strategy drove gains for the quarter, followed by gains provided by cross-market strategies and tactical duration positions.
Government bond markets rallied across the board during the quarter: in local currency J.P. Morgan Global Bond Index terms, gains were the highest in the U.K. (+8.8%) and lowest in Japan (+1.2%). Setting the stage early in the quarter for a bond market rally was the weak July U.S. jobs report. Later, speculation that the Bank of England would expand its monetary stimulus to boost a flagging recovery prompted the fall in gilt yields. Despite having suffered their first ever rating downgrade in August, U.S. Treasuries had their best quarterly return since Q4 2008, rising 6.5%. The Federal Reserve vowed to keep short-term rates near zero through 2013 and added a “twist” to policy designed to flatten the yield curve by buying longer-dated bonds as part of QE. In other bond markets, the eurozone (+8.0%), Sweden (+7.4%), Canada (+6.1%), Australia (+5.8%), and Switzerland (+4.7%) also reported total return gains.
Global yield curves (measured by the difference between 10-year and 2-year swap rates) flattened across the board during the quarter, with curves in the U.S. and the U.K. flattening the most.
In central bank news, the ECB and Riksbank each raised rates by 25 basis points to 1.5% and 2.0%, respectively, while the Swiss National Bank cut its interest rate target by 25 basis points to zero.
The main yield curve strategy led gains during the quarter, as the Japanese yield curve flattened. Cross-market strategy gains followed, as long duration positions, in the U.S., eurozone, Canada, Switzerland, and Australia, performed well thanks to the bond market rally. Short positions in the U.K., Sweden, and Japan only partly offset gains.
Tactical Duration Overlay positions added value during the quarter, as the strategy maintained a slightly long duration in the front end of the U.S. curve through mid-quarter. As short-end rates approached 0%, the strategy removed the overweight and now has no position.
Risk Profile Since 8/31/053
Quarterly Strategy Attribution
Performance Attribution4 Country Weights4
GMO Fixed Income Hedge Strategy Inception: 8/31/05; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
Strategy Net Contribution (%)
Cross-Market
Tactical Duration Overlay
Yield Curve
Volatility
Opportunistic
Cash Mgmt./ABS/Fees/Other 0.1
0.1
0.0
5.6
2.5
3.6
-6 -3 0 3 6
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Emerging Currency Hedge Strategy Inception: 3/31/06; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently maintained and widely published index comprised of three month U.S. dollar Euro-deposits. The duration of the Index is generally 90 days.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
In the third quarter of 2011, the Emerging Currency Hedge Strategy returned -8.4%, its worst quarterly performance since Lehman Brothers collapsed in 2008. The strategy’s benchmark, the J.P. Morgan U.S. 3 Month Cash index, gained 0.1%. Negative relative performance resulted nearly entirely from currency positioning.
With the U.S. dollar’s rapid September rebound, all emerging currencies except the Chinese renminbi fell relative to the dollar. The
most pronounced losses were among those in the euro’s orbit and those with big commodity export exposures. In the first group were Poland (-16.6%), Hungary (-16.3%), Romania (-10.1%), Czech Republic (-8.9%), and of course the euro (-7.5%). Commodities witnessed heavy declines, with the energy complex down 10% to 15%, industrial metals down 10% to 20%, and softs down 6% to 38%, although gold ended with a rise of 8%. Commodity sensitive currencies with double-digit declines included Brazilian real (-17.0%), South African rand (-15.7%), Mexican peso (-15.5%), and Russian ruble (-13.4%).
The quarter saw a dramatic reversal of fortunes for a number of currencies whose authorities had been trying to stem the tide of
inflows as late as August. Japan intervened to weaken the yen in August. Then, as September opened, the Swiss National Bank stunned the market by setting a floor in EURCHF at 1.2, a level 17% higher than the August lows. Presumably they were preparing themselves to counteract the inflow of funds fleeing the eurozone, whose authorities made a vague pledge on July 21 to “do everything possible to keep Greece in the eurozone” and then promptly disappeared for July/August holidays. Once September arrived, however, and the impossible conditions for Greece’s compliance became clear, the stampede from euros began.
How this spilled over into emerging currencies has so far been via the channels mentioned above: exposure to the eurozone economy
and/or commodities prices, the latter sinking in response to lower global growth expectations. Liquidity deteriorated, with bid-ask spreads widening on all currency pairs, and volumes declining.
Somewhat ironically, the only emerging currency to rise in spot terms this month was Chinese renminbi, +1.2% (exactly the same as
last quarter). As September closed, U.S. Senator Schumer was bringing the long-awaited “Currency Exchange Rate Oversight Reform Act of 2011,” more regularly referred to as the “anti-China bill,” to the senate floor. Although CNY has been a top performer this year (second only to the yen), Schumer still has it in his sights. Interestingly, the non-deliverable forward market is going the other way: from pricing appreciation for the currency over the next few years, the forwards now price a depreciation.
Currency positioning was mostly negative this quarter. Longs everywhere detracted, and shorts added, given the dollar’s uniform
direction. The China short was a push, with carry offsetting spot. Out-of-model shorts in Czech crown, Singapore dollar, and Canadian dollar were the main positive contributors.
Risk Profile Since 3/31/063
Quarterly Strategy Attribution
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Mean Reversion Strategy Inception: 2/28/02; Benchmark: Citigroup 3-Month T-Bill Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
The third quarter of 2011 was a strong one for the Mean Reversion Strategy, which had a return of +7.3%. It was a very bad quarter for equities, with the S&P 500 down 13.9%, MSCI EAFE dropping 19.0%, and MSCI Emerging tumbling 22.6%. Quality had a very good quarter in relative terms, falling only 5.3%, while the Russell 2000 underperformed substantially, falling 22%. Junk did even worse, falling around 29%. As a result, our quality trades were a big plus in the quarter, adding around 7%. The other significant winners within equities in the quarter were our China related shorts. These fell about 35% in the quarter, significantly outpacing the fall in emerging and the S&P 500. While the position only averaged around 7% of NAV in the quarter, it added about 1.5% viewed against the S&P 500 and 1% against emerging. Japan was also a plus, falling around 6%, which enabled our position to add about 70 basis points. The big losers in the quarter were the dividend swaps, which cost 70 basis points as they fell over 20% in the quarter, and our emerging long position, which cost around 90 basis points as it underperformed the S&P 500 significantly.
The non-equity positions were mixed. The biggest winners were our CDS positions, which added 90 basis points across European financials and China related positions. Other pluses were currencies, which added 60 basis points as the Australian and New Zealand dollar fell in the quarter and the Swiss franc undid a chunk of its extraordinary strength in the first part of the quarter. Our bond positions apart from the IL Gilts were a slight positive, adding 15 basis points, as strong performance from Australian and New Zealand bonds outweighed strength in Japan and Switzerland and falling CPI breakevens in Japan.
The notable losers were our volatility positions, where our volatility puts lost much of the value they had accreted, costing us 60 basis points. The biggest loser was the IL Gilts position, which cost 1.3% as rates fell significantly all across the IL curve. The Credit Opportunities Strategy fell 1.7% due to very substantial spread widening. This directly cost the strategy 5 basis points given our 3% holding. As of quarter end, we are increasing that allocation to 5% given the more attractive valuations.
The quarter saw a number of changes to the portfolio. The weight in the China shorts rose to 9% and then fell back down to about 4% as we put on positions and then closed them out as stocks fell to our targets. We continued rebalancing the quality/junk trades more in favor of quality and less junk and small, given the better risk/reward trade-off to that side of the trade. We decreased the IL Gilt position as our view of the risk/reward trade-off in this position deteriorated as investors showed their willingness to buy medium-term IL bonds with negative real yields.
We also took off a portion of our European financial CDS, reduced our Swiss franc short by half, and increased the size of our U.S. housing long position. The portfolio is currently maintaining an ex-ante beta of around zero.
Risk Profile Since 2/28/023
Quarterly Strategy Attribution
Fixed Income Exposure4 Equity Exposure4
Currency Exposure4 Other4
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
GIPS ® compliant presentation is available at www.gmo.com.
GMO Systematic Global Macro Strategy Inception: 3/31/02; Benchmark: Citigroup 3-Month T-Bill Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
The Systematic Global Macro Strategy added 2.9% during the September quarter. Global equity markets fell for three consecutive months and the S&P 500 index closed the quarter 13.9% lower. While the euro debt crisis dominated the financial press headlines, concerns about the health of the U.S. economy and a downgrade of the U.S. government’s credit rating ensured poor investor sentiment. Over this period, our long position in U.S. bonds contributed positive returns, as did our equity market selection and commodity selection strategies.
The strategy added 2.1% in July with equity, currency, and bond market positions adding value. Equity market positions added 1.6% due mostly to a large short position in Australia, which underperformed the MSCI World index (in local currency), falling 4.9% versus -2.7%. In currencies, a long position in Japanese yen added value as it appreciated by almost 5.0% over the U.S. dollar.
The July gains were offset in August as the strategy returned -2.3% as equity market selection let us down. Our largest short position in Australia was the main offender, losing 2.6% as the Australian market (down 2.0%) outperformed most other equity markets by a decent margin. During August, the strategy established a long position in the Italian equity market. The Italian market was very cheap according to our valuation models, but poor sentiment had restricted the portfolio from holding a long position. When our momentum model signalled that the Italian market was oversold, the strategy established a 10% long position. Another meaningful change in portfolio strategy was the introduction of a long position in the VIX index. Our positive outlook for VIX futures was mostly due to a positive roll yield, while its negative correlation to equity markets also contributed to its 5% portfolio weighting.
The ability of the strategy to adjust positions in response to changing market conditions during August helped performance in September. We added 3.2% during this month as global equity markets continued their fall. The strategy switched to a net short equity markets allocation in early September, while new long positions in the Italian equity market and the VIX index also added value. Commodity market selection helped performance too, with a long position in cattle and a short position in silver adding value.
Risk Profile Since 3/31/023
Quarterly Strategy Attribution
Bond Market Selection4
Currency Selection4
Commodity Markets4
Equity Market Selection4
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
Commodity Net Weight (%)CattleSugarCottonSoybeansHogsWheatNatural GasSilverNet Commodities 6.0
-5.0-5.0-5.0
3.03.0
5.05.05.0
-10 -5 0 5 10
Country Net Weight (%)ItalyUnited KingdomUnited StatesNetherlandsSingaporeVolatility IndexTaiwanKoreaJapanSwedenCanadaAustraliaNet Equity Markets -17.0
GIPS ® compliant presentation is available at www.gmo.com.
GMO Multi-Strategy Inception: 10/31/02; Benchmark: Citigroup 3-Month T-Bill Index
1 Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
2 The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills. 3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross. 4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2011.
Performance1
The Multi-Strategy portfolio returned +5.9% for the quarter, outperforming its cash benchmark. Five of the nine strategies posted positive performance, with Tactical Opportunities, Mean Reversion, and Fixed Income Hedge doing
particularly well. Tactical Opportunities (+32.8%) and Mean Reversion (+7.3%) were propelled by the flight to quality in the equity markets.
The largest headwind came from Aggressive Long/Short, which posted double-digit losses. The general turmoil in the markets
introduced a sustained heightened level of volatility as the CBOE VIX index (which started the quarter at 16) ended just shy of 40. As we would expect, our strategies within this portfolio were negatively impacted over this period of time, with the aggregate strategy down 10.4% for the quarter.
Risk Profile Since 10/31/023
Quarterly Strategy Attribution
Strategy Composition4
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since2011 2011 Year Year Year Inception
3 Month LIBOR The 3 Month LIBOR represents the London Inter-Bank Offered Rate for a 3 month deposit in U.S. dollars during a given month.
Barclays Capital U.S. Aggregate Index
The Barclays Capital U.S. Aggregate Index is an independently maintained and widely published index comprised of U.S. fixed rate debt issues having a maturity of at least one year and rated investment grade or higher.
Barclays Capital U.S. Treasury Inflation Notes Index
The Barclays Capital U.S. Treasury Inflation Notes Index is an independently maintained and widely published index comprised of Inflation-Protection Securities issued by the U.S. Treasury (TIPS).
Citigroup 3-Month T-Bill Index The Citigroup 3-Month Treasury Bill Index is an independently maintained and widely published index comprised of short-term U.S. Treasury bills.
Citigroup 3-Month T-Bill ++ Index
The Citigroup 3-Month Treasury Bill ++ Index is an internally maintained benchmarked computed by GMO, comprised of 3 Month LIBOR from 5/31/2003 to 8/31/2009, and Citigroup 3-Month Treasury Bill Index thereafter.
CPI Index The CPI (Consumer Price Index) for All Urban Consumers US All Items is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services.
CPI Plus 5% Index The CPI (Consumer Price Index) Plus 5% Index is an internally maintained (monthly) benchmark based on the CPI Index for All Urban Consumers US All Items which is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services. The CPI Plus 5% Index is calculated by adding 5% annualized to the return of the CPI Index.
GMO Blended Global All Country Equity Allocation Index
The blended Global All Country Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI ACWI (All Country World Index) (MSCI standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended Global Balanced Asset Allocation Index
The blended Global Balanced Asset Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of S&P 500, MSCI ACWI (MSCI Standard Index Series, net of withholding tax) and Barclays Capital Aggregate or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended Global Developed Equity Allocation Index
The blended Global Developed Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI World (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended International All Country Equity Allocation Index
The blended International All Country Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI ACWI (All Country World) ex-U.S. Index (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended International Developed Equity Allocation Index
The blended International Developed Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI EAFE (MSCI Standard Index Series, net of withholding tax) or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended Real Return Global Balanced Asset Allocation Index
The blended Real Return Global Balanced Asset Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of MSCI World (MSCI Standard Index Series, net of withholding tax), Barclays Capital Aggregate, and Citigroup 3-Month T-Bill or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Tax-Managed Global Balanced Index
The Tax-Managed Global Balanced Index is an internally computed benchmark comprised of (i) 60% MSCI ACWI (All Country World Index) (MSCI standard Index Series, net of withholding tax) and (ii) 40% Barclays Capital Muni 7 Year (6-8) Index. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Blended U.S. Equity Allocation Index
The blended U.S. Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of S&P 500, Russell 3000 or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
Benchmarks and Indices GMO measures each strategy’s performance against a specific benchmark or index (each, a “Benchmark”), although no strategy is managed as an “index strategy” or “index-plus” strategy. Actual composition of a strategy’s portfolio may differ to varying degrees from that of its Benchmark. Indices are not managed and do not pay fees and expenses. One cannot invest directly in an index. In some cases, a strategy’s Benchmark differs from the broad based index against which performance is shown in the strategy’s prospectus. GMO may change a strategy’s benchmark from time to time.
68 GMO Quarterly Update
Full Name Description
J.P. Morgan EMBI Global Index
The J.P. Morgan EMBI Global (Emerging Markets Bond) Index is an independently maintained and widely published index comprised of debt securities of countries, including Brady bonds, sovereign debt, local debt, and Eurodollar debt, all of which are U.S. dollar denominated.
J.P. Morgan EMBI Global + Index
The J.P. Morgan EMBI Global (Emerging Markets Bond) Index + is an internally maintained benchmark computed by GMO, comprised of (i) the J.P. Morgan Emerging Markets Bond Index (EMBI) through 8/31/1995, (ii) the J.P. Morgan EMBI+ through 12/31/1999, and (iii) the J.P. Morgan EMBIG thereafter.
J.P. Morgan Global Government Bond Index
The J.P. Morgan Global Government Bond Index is an independently maintained and widely published index comprised of government bonds of developed countries with maturities of one year or more.
J.P. Morgan GBI-EM Diversified Index
The J.P. Morgan GBI-EM (Government Bond Index-Emerging Markets) Diversified Index is an independently maintained and widely published index of global local emerging markets consisting of regularly traded, liquid fixed-rate, domestic currency government bonds.
J.P. Morgan Non-U.S. Government Bond Index
The J.P. Morgan Non-U.S. Government Bond Index is an independently maintained and widely published index comprised of non-U.S. government bonds with maturities of one year or more.
J.P. Morgan Non-U.S. Government Bond Index (hedged) (ex-Japan) +
The J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) + is an internally maintained benchmark computed by GMO, comprised of (i) the J.P. Morgan Non-U.S. Government Bond Index (Hedged) prior to 12/31/2003 and (ii) the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) thereafter.
J.P. Morgan U.S. 3 Month Cash Index
The J.P. Morgan U.S. 3 Month Cash Index is an independently maintained and widely published index comprised of three month U.S. dollar Euro-deposits. The duration of the Index is generally 90 days.
J.P. Morgan U.S. 3 Month Cash + Index
The J.P. Morgan U.S. 3 Month Cash + Index is an internally maintained benchmark computed by GMO, comprised of (i) the Barclays Capital U.S. Treasury 1-3 Year Index from 5/31/2006 to 9/29/2006 and (ii.) the J.P. Morgan U.S. 3 Month Cash Index thereafter.
MSCI EAFE Growth Index The MSCI EAFE (Europe, Australasia, and Far East) Growth Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of international large and mid capitalization stocks that have a growth style. Large and mid capitalization stocks encompass approximately 85% of each market’s free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI EAFE Index The MSCI EAFE (Europe, Australasia, and Far East) Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of international large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI EAFE (Hedged) Index The MSCI EAFE (Europe, Australasia, and Far East) Index (Hedged) (net of withholding tax) is an independently maintained and widely published index comprised of international large and mid capitalization stocks currency hedged into U.S. dollars. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI EAFE Small Cap + Index
The MSCI EAFE (Europe, Australasia, and Far East) Small Cap + Index is an internally maintained benchmark computed by GMO, comprised of (i) the S&P Developed ex-U.S. Small Cap Index through 5/30/2008 and (ii) the MSCI EAFE Small Cap Index (MSCI Standard Index Series, net of withholding tax) thereafter. MSCI data may not be reproduced or used for any other purpose. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI EAFE Value Index The MSCI EAFE (Europe, Australasia, and Far East) Value Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of international large and mid capitalization stocks that have a value style. Large and mid capitalization stocks encompass approximately 85% of each market’s free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI Japan IMI ++ Index The MSCI Japan IMI (Investable Market Index Series) ++ Index is an internally maintained benchmark computed by GMO, comprised of (i) the MSCI Japan (MSCI Standard Index Series, net of withholding tax) from 12/31/2005 to 6/30/2008 and (ii) the MSCI Japan IMI (MSCI Standard Index Series, net of withholding tax) thereafter. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI U.S. REIT Index The MSCI U.S. REIT Index is an independently maintained and widely published index comprised of equity securities issued by REITs. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI World Growth Index The MSCI World Growth Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed markets large and mid capitalization stocks that have a growth style. Large and mid capitalization stocks encompass approximately 85% of each market’s free float-adjusted market capitalization. Style is determined using a multi-factor approach based on historical and forward-looking characteristics. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
MSCI World Index The MSCI World Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global developed markets. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
Russell 1000 Growth Index The Russell 1000 Growth Index is an independently maintained and widely published index comprised of the stocks included in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
Russell 1000 Value Index The Russell 1000 Value Index is an independently maintained and widely published index comprised of the stocks included in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
MSCI Emerging Markets Index The MSCI Emerging Markets Index (MSCI Standard Index Series, net of withholding tax) is an independently maintained and widely published index comprised of global emerging markets large and mid capitalization stocks. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
GMO Quarterly Update 69
Full Name Description
Russell 2500 Growth Index The Russell 2500 Growth Index is an independently maintained and widely published index comprised of the stocks included in the Russell 2500 Index with higher price-to-book ratios and higher forecasted growth values. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
Russell 2500 Value + Index The Russell 2500 Value + Index is an internally maintained benchmark computed by GMO, comprised of (i) the Russell 2500 Index from 12/31/1991 to 12/31/1996 and (ii) the Russell 2500 Value Index thereafter. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
Russell 3000 + Index The Russell 3000 + Index is an internally maintained benchmark computed by GMO, comprised of (i) the S&P 500 Index through 10/15/2007 and (ii) the Russell 3000 Index thereafter. Russell Investments is the source and owner of the Russell index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is GMO’s presentation of the data. FCR is not responsible for the formatting or configuration of this material or for any inaccuracy in GMO’s presentation thereof.
S&P 500 Index The S&P 500 Index is an independently maintained and widely published index comprised of U.S. large capitalization stocks.
S&P Developed ex-U.S. Small Cap Index
The S&P Developed ex-U.S. Small Cap Index is an independently maintained and widely published index comprised of the small capitalization stock component of the S&P Broad Market Index (BMI). The BMI includes listed shares of companies from developed and emerging countries with a total available market capitalization (float) of at least the local equivalent of $100 million USD. The S&P Developed ex-U. S. Small Cap Index represents the bottom 15% of available market capitalization (float) of the BMI in each country.
S&P/IFCI Composite Index The S&P/IFCI Composite Index is an independently maintained and widely published index comprised of emerging markets stocks.