FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION. Investment policies in practice Greg Romano, Executive Director, J.P. Morgan Asset Management.

FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.

Investment policiesin practice

Greg Romano, Executive Director, J.P. Morgan Asset Management 312-732-6608, [email protected]


2

Current landscapeCash levelsCorporate investment behavior


Corporate cash balances remain high

18% have balances in excess of $1 billion.

3

Source: J.P. Morgan Asset Management Global Liquidity Investment Survey 2011.

As in 2010, 30% of treasury departments have an average cash balance of more than $500 million.


Corporate investment behavior has evolved

4

Since the liquidity crisis, there is greater focus on due diligence and investment policies.

Focus on yield

Outdated policies – no systematic reviews

Decisions made by treasury team with little or no oversight by board or management team

Limited emphasis on due diligence

Pre-liquidity crisis

Heightened focus on due diligence and investment policies

Increased concern and uncertainty regarding investment portfolios

Re-evaluated investment philosophies – determined whether to manage in-house or outsource

Updated and revised investment policies

Increased due diligence on investment providers

Integrated investment oversight

Post-liquidity crisis

STRICTLY PRIVATE/CONFIDENTIAL

5

A disciplined approach for evaluating investment solutions


Benefits of a well-executed investment policy

Ensures consistent approach in all market conditions

Provides clarity so that everyone understands the policy

Imposes transparency for internal control

Helps you meet your corporate investment goals

6

With consistency and clarity, an investment policy sets the strategy for your investment decisions.


Creating a cash governance framework

7

Two key actions may help organization protect their cash investments.

Develop an investment policy that clearly and fully documents the acceptable parameters of all cash investments.

1Institute a rigorous and systemic due diligence process to review and ensure compliance with the investment policy.

2


How do you measure investment policy success?

8

Base: 447. Other included FX losses, liquidity, FFP/interest, return on risk. *New choices this year.Source: J.P. Morgan Asset Management Global Liquidity Investment Survey 2011.

For most organizations, an effective policy can help ensure return on investment and principal preservation.

Other (please specify)

Peer performance*

Accurate cash segmentation and deployment

Low volatility*

Benchmark that reflects risk and return objectives*

Accurate cash flow forecasting

Preservation of principal

Return on investment

0% 10% 20% 30% 40% 50% 60% 70%

3%

11%

16%

25%

34%

40%

58%

64%

9

Weighing the risks and rewards for cash investments — a rigorous, ongoing, sequential process

Steps toward creating an investment policy

FOR INSTITUTIONAL AND PROFESSIONAL USE | NOT FOR PUBLIC DISTRIBUTION

Performance as of May 17, 2012

The performance quoted is past performance and is not a guarantee of future results. Current performance may be higher or lower than the performance data shown. For performance current to the most recent month-end please call 1-800-766-7722 . Money market fund performance may reflect the waiver of a portion of the fund's fees. The unsubsidized 7-day SEC yield shows the fund’s performance if fees had not been waived. Performance may reflect the waiver of a portion of the fund's fees. If fees had not been waived, the 7-day SEC yield would have JPMorgan Prime Money market Fund, 0.02, JPMorgan U.S. Government Money market Fund -0.15, JPMorgan 100% Treasury Securities Money Market Fund -0.22.

** Muni Yields grossed up at a 35% tax rate* The yield shown is the 7 day SEC yield on the stated as-of-date

As of May 17, 2012 7 Day SEC 1 Month 3 Months 6 Months 9 Months 1 Year 2 Years 3 Years 5 Years

Prime Money Market Fund (Cap Shrs)* 0.19

US Government MMF (Cap Shrs)* 0.01

Tax Free Money Market Fund (Inst Shrs)* 0.07

AAA-GO's** 0.32 0.51 0.68 1.20

AA-GO's** 0.57 0.80 1.08 1.66

Pre-Refunded Securities** 0.31 0.51 0.69

Treasuries 0.07 0.09 0.14 0.16 0.19 0.29 0.40 0.73

Agencies 0.06 0.09 0.11 0.16 0.17 0.20 0.39 0.61 1.20

Commercial Paper (A-1/P-1) ABCP 0.16 0.20 0.25 0.40 0.55

Commercial Paper (A-1/P-1) Financials 0.16 0.15 0.25 0.35 0.50

Commercial Paper (A-1/P-1) Industrials 0.07 0.07 0.15 0.20 0.35

Certificates of Deposit (A-1) 0.16 0.15 0.25 0.35 0.48 0.50

Time Deposits 0.16

AA Corporate Industrials 0.30 0.37 0.44 0.59 1.00 1.58

AA Corporate Financials 0.46 0.57 0.69 1.09 1.80 2.33

A Corporate Industrials 0.30 0.42 0.49 0.74 1.10 1.83

A Corporate Financials 0.51 0.62 0.84 1.19 1.95 2.51

BBB Corporate Industrials 0.48 0.62 0.74 1.29 1.65 2.43

BBB Corporate Financials 1.05 1.27 1.69 2.29 3.20 4.23

AAA-Rated Credit Card Receivables (WAL) 0.62 0.77 0.92


Defining parameters of permissible investments

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Set the characteristics of each investment, such as credit quality and maximum maturity.

U.S. treasury securities

Minimum credit rating AAA/Aaa

Maximum maturity 3 months 6 months 1 year 3 years 5 years

Maximum portfolio exposure

No limit

Maximum issuer exposure

No limit

U.S. government agency obligations

Minimum credit rating AAA/Aaa

Maximum maturity 3 months 6 months 1 year 3 years 5 years


No limit 50% 25%


No limit

Commercial paper (include all applicable currencies USD, EUR, GBP, JPY, etc.)

Minimum credit rating A-1+/P-1 A-1/P-1A-2/P-2

Maximum maturity 1 month 3 months 6 months 13 months


No limit 50% 25% 15%


5% 3%


Segmenting cash by liquidity need and profile

12

This is the first step in determining your investment strategy and ensuring optimal return.

Risk profile Total balance sheet cash

Operating

Cash typically used for daily operating needs may be subject to unforeseen volatility

Requires preservation of principal

Late-day access

Same-day liquidity

Reserve

Investment horizon of 6 to 9 months or longer

Fairly static, same-day access not needed

Cash set aside for possible acquisition, stock buy backor R&D

Strategiccash

Restrictedcash

Operatingcash

Reservecash

Restricted

Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues

Cash collateral tied to credit agreements or derivative contracts

Strategic

No short-term forecasted use

Cash on balance sheet that has not been historically used

Investment horizon of 1 year or longer

The above chart is for illustrative purposes only.

13

Assess your tolerance for interest rate volatility

Considerations

Do you have any tolerance for volatility?

What is your maximum acceptable realized loss in a given period?

Should you have any restrictions on gains?

What data will you need to assess potential volatility in an investment strategy?

What is an appropriate impairment policy?

14

Assess your tolerance for interest rate volatility

All data as of December 31, 2011

Total rate of return

1 Year

0.10 3 Years

0.14 5 Years

1.48 10 Years

1.95 StDev*

0.52

Frequency of negative returns (rolling)

1 Month

3.33%3 Months

0.83%1 Year

0.00%Avg 1M Negative Return

(0.01)Avg 3M Negative Return

-Avg 1Y Negative Return

-

Benchmark returns (rolling)

Period Worst Average Best3 Months 0.00 0.49 1.346 Months 0.02 1.01 2.701 Year 0.10 2.13 5.292 Years 0.11 2.40 5.153 Years 0.14 2.67 5.075 Years 1.48 3.08 5.1410 Years 1.95 3.13 3.81

BofA Merrill Lynch 3-Month Treasury Bill


1 Year

0.27 3 Years

0.40 5 Years

2.06 10 Years

2.29 StDev*

0.59


1 Month

1.67%3 Months

0.00%1 Year



- Avg 1Y Negative Return

-


Period Worst Average Best3 Months 0.03 0.57 1.826 Months 0.11 1.18 3.401 Year 0.27 2.49 6.082 Years 0.31 2.79 5.713 Years 0.40 3.06 5.375 Years 2.06 3.41 5.4310 Years 2.29 3.44 4.03

BofA Merrill Lynch 6-Month Treasury Bill


1 Year

0.54 3 Years

0.72 5 Years

2.55 10 Years

2.49 StDev*

0.82


1 Month

16.67%3 Months

4.17%1 Year



(0.14)Avg 1Y Negative Return

-


Period Worst Average Best3 Months -0.30 0.62 2.526 Months 0.15 1.29 4.151 Year 0.52 2.77 6.912 Years 0.62 3.15 7.193 Years 0.72 3.41 6.185 Years 2.38 3.73 5.9910 Years 2.49 3.76 4.34

BofA Merrill Lynch 1-Year Treasury Note


1 Year

1.55 3 Years

1.55 5 Years

3.68 10 Years

3.25 StDev*

1.55


1 Month

25.00%3 Months

13.33%1 Year




(0.19)


Period Worst Average Best3 Months -1.06 0.80 3.756 Months -0.33 1.67 5.951 Year -0.35 3.53 9.162 Years 0.97 3.93 8.283 Years 1.39 4.15 7.355 Years 2.68 4.37 6.5810 Years 3.22 4.38 4.93

BofA Merrill Lynch 1-3 Year Treasuries

Above data is based on 120 monthly observations. * Annualized standard deviation of monthly returns on a trailing 10-year basis.

Source: BofA Merrill Lynch; Bloomberg

15

Assess whether greater credit risk is acceptable

Considerations

Besides using agency ratings, how will you assess and monitor credit quality of potential investments/issuers?

Do you have the ability and resources in-house to assess credit quality or should you outsource?

What will be your guidelines for credit allocation?

How often will you review credit quality and your credit risk exposures?

What is the agreed course of action if a security or issuer is downgraded, put on watch or falls below your minimum credit quality standards?

Consider also how you expect to be notified of a downgrade event or threat in a timely way. Is this information that can be captured in-house or tasked to a third party?

16

Assess whether greater credit risk is acceptable

Source: Barclays Live; Bloomberg; BofA Merrill LynchPlease note that Loss Frequencies and Benchmark Returns data is based on 120 monthly observations. * Annualized standard deviation of monthly returns on a trailing 10-year basis. Charts are shown for illustrative and discussion purposes only.

Interest rate spreads can alter perceptions on credit risk


1 Year

1.71 3 Years

3.58 5 Years

4.39 10 Years

3.95 StDev*

2.18


1 Month

26.67%3 Months

15.00%1 Year




(0.43)


Period Worst Average Best3 Months -2.43 0.99 4.306 Months -2.19 2.05 5.761 Year -0.43 4.33 8.78

BofA ML 1-3 Yr Corp AAA rated


1 Year

1.45 3 Years

4.44 5 Years

4.23 10 Years

3.90 StDev*

2.16


1 Month

25.00%3 Months

16.67%1 Year




(0.48)


Period Worst Average Best3 Months -2.96 0.97 4.746 Months -2.43 2.01 7.271 Year -0.73 4.3010.51

BofA ML1-3 Yr Corp AA rated


1 Year

1.67 3 Years

6.42 5 Years

3.76 10 Years

3.84 StDev*

3.64


1 Month

25.00%3 Months

15.00%1 Year




(5.07)


Period Worst Average Best3 Months -10.22 0.97 7.346 Months -10.27 2.0011.321 Year -8.05 4.2516.90

BofA ML 1-3 Yr Corp A rated


1 Year

2.18 3 Years

9.54 5 Years

5.86 10 Years

5.10 StDev*

3.41


1 Month

24.17%3 Months

15.83%1 Year




(3.35)


Period Worst Average Best3 Months -7.48 1.27 9.516 Months -7.19 2.5915.081 Year -5.04 5.4523.11

BofA ML 1-3 Yr Corp BBB rated

basi

s po

ints

All data as of December 31, 2011

17

Assess whether to extend maturity both at the security and portfolio level

Considerations

Does the yield curve merit longer-term investment?

What proportion of the portfolio should you allocate to different maturities, given your liquidity requirements?

What should be the maximum duration for the overall portfolio?

What will be the agreed course of action if immediate liquidity requirements cannot be met?

18

Review your investment policy

How and by whom in the company will the investment policy be approved, reviewed and modified?

On what frequency will the investment policy be formally reviewed?

In what circumstances, if any, can exceptions to the investment policy be made – and how would these be approved?

Considerations

Compliance

Objective BenchmarkPermissible investments

Tax-aware investing

Credit qualityMaximum portfolio

exposures

Maximum issuer

exposuresRealized gain

Realized lossLiquidity targets

Reporting Custody

Evaluation ComplianceDisaster recovery

Periodic reviews

Investment Policy

19

Decide how your investment strategy will be executed

Do you want an investment strategy imposed and managed locally, regionally or globally?

Do you want to use in-house resources or outsource?

What will be the process and criteria for selecting and monitoring third-party providers?

What type of metrics and reports will be required and how frequently?

ConsiderationsLocal

Held to maturity Available for sale

In-house Outsource

Regional Global

Yieldversus

total return


20

Wrap-up


Establishing broad investment parameters

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When developing your investment policy, consider your objectives, benchmarks and scope.

Objectives

Necessary liquidity Required preservation of capital Maximizing returns Fiduciary control Compliance Diversification

Benchmarks

Risk and volatility tolerance Investment horizon Return expectations

Scope

Global coverage – or, are all subsidiaries and corporate entities separate

Manage in-house, use external managers, or both

Segmentation differences (e.g., working capital, reserve cash and strategic cash)

Global policy – investment options in multiple currenciesand jurisdictions


Monitoring your investments

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Ongoing monitoring is essential to ensure that your portfolio remains within guidelines.

Reporting

Board of directors Senior management Accounting Frequency Format

Compliance

Approvals Updates Exceptions Remediation

Evaluation

Performance Reporting Frequency


Review

1. Consider cash segmentation

2. Create a governance framework

3. Establish investment parameters, including objectives, benchmarks and scope

4. Determine permissible investments

5. Define characteristics of investments, such as credit rating and diversification by security type

6. Monitor investments

7. Ensure compliance with rigorous due diligence

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7 steps to establishing and maintaining an effective investment policy.


Conclusion

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The “right” investment policy can vary significantly from one organization to another, depending on these factors:

Liquidity requirement

Cash flows

Comfort level

Treasuryresources


Important information

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This material is intended to report solely on the investment strategies and opportunities identified by J.P. Morgan Asset Management. Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Asset Management and/or its affiliates and employees may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as underwriter, placement agent, advisor or lender to such issuer. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION. Investment policies in practice Greg Romano, Executive Director, J.P. Morgan Asset Management.

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