Management of Deposit Insurance Funds 16 November 2006 Michael Wilson

01 Egypt Benchmarks 1 Management of Deposit Insurance Funds Investment management goals Risk management Benchmark selection Conclusions

01 Egypt Benchmarks 2 Investment management goals Capital preservation Maximise returns … these can be contradictory

01 Egypt Benchmarks 3 How can we refine these goals? Capital preservation – Over what time period? – With what probability? Maximise returns – Subject to what risk? – In what currency?

01 Egypt Benchmarks 4 Where does return come from? Returns … benchmark usually dominates risk and return Excess Benchmark Returns from active management of portfolio Returns from passive management of benchmark

01 Egypt Benchmarks 5 Management of Deposit Insurance Funds Management goals Risk management Benchmark selection Conclusions

01 Egypt Benchmarks 6 Risk management: What are the risks? Interest rate risk Currency risk Credit risk Liquidity risk

01 Egypt Benchmarks 7 Management of Deposit Insurance Funds Management goals Risk management Benchmark selection Conclusions … the biggest risk of all

01 Egypt Benchmarks 8 As portfolios grow, broader benchmarks usual Reserves Goals Long term growth Buffer tranche Liquidity provision Benchmarks Full maturity index, equities 1-3 index 3 month bills / cash Increasing returns and risks

01 Egypt Benchmarks 9 Risk versus return for US Indices Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December December 2006 $ Returns (%) US Treasuries 1-3 years 1-5 years 1-10 years 1-30 years

01 Egypt Benchmarks 10 US Treasuries: Historical ranges provide indication of likely future returns Data: Annual return data; JP Morgan traded indices; returns in USD data from December September Chart shows average, high and low annual performance during rolling years in sample period $ Returns (%) 1-3 year 1-5 Year 1-10 Year 1-30 Year Max = 17.34% (Dec 1995) Min = -2.90% (Dec 1994)

01 Egypt Benchmarks 11 Unhedged markets add risk $ Returns (%) US Treasuries Global Govt. Unhedged 1-3 years 1-5 years 1-10 years 1-30 years 1-10 years 1-3 years 1-5 years 1-30 years Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December December 2006

01 Egypt Benchmarks 12 Hedged markets reduce risk and improve risk/return ratio $ Returns (%) US Treasuries Global Govt. Hedged Global Govt. Unhedged 1-3 years 1-5 years 1-10 years 1-30 years 1-10 years 1-3 years 1-5 years 1-30 years 1-5 years 1-3 years 1-10 years Data: Quarterly return data annualised; JP Morgan traded indices; returns in USD, currency hedged versus unhedged; data from December December 2006

01 Egypt Benchmarks 13 Management of Deposit Insurance Funds Management goals Risk management Benchmark selection Conclusions

01 Egypt Benchmarks 14 Conclusions Management goals –Capital preservation and maximise returns contradictory –Need to define more precisely Risk management –Most risk is from benchmark –Interest rate, credit and currency are major market risks Benchmark selection –Unhedged returns historically more volatile than single currency US$ indices –Currency hedged indices historically lower volatility –1-3 year indices offer good protection against annual negative returns

01 Egypt Benchmarks 15 Any forecasts or opinions expressed are JPMorgan’s own at the date of this document and may be subject to change. The value of investments and the income from them may fluctuate and your investment is not guaranteed and investors may not get back the full amount invested. Past performance is not a guide to future performance. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile than other markets and the risk to your to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made. Telephone lines are recorded and may be monitored for security and training purposes JPMorgan Asset Management