Portfolio Benchmarking Government Investment Officers Association March 17, 2011 Rick Phillips President & Chief Investment Officer 702-932-5330 rphillips@mainstreetcap.com Municipal Investment Managers www.MainStreetCap.com

Municipal Investment Managers Disclosure The views expressed herein are those of the speaker and do not necessarily represent the views of Main Street Capital Advisors. Views are based on data available at the time of this presentation and are subject to change based on market and other conditions. Main Street cannot guarantee the accuracy or completeness of any statements or data. The information provided does not constitute investment advice and it should not be relied upon as such. It is not a solicitation to buy and/or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizons. All material has been obtained from sources believed to be reliable, but we make no representation or warranty as to its accuracy and you should not place any reliance on this information. Past performance is no guarantee of future results. © Copyright 2011 Main Street Capital Advisors, LLC. All Main Street logos, trademarks and service marks appearing herein are property of Main Street Capital Advisors, LLC. This document may not be copied or distributed by the recipient. This document is provided for informational purposes only. Municipal Investment Managers www.MainStreetCap.com 2

GFOA Model Investment Policy Municipal Investment Managers Safety: Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. Liquidity: The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio may be placed in money market mutual funds or local government investment pools, which offer sameday liquidity for short-term funds. Yield: The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return, relative to the risk being assumed. Securities shall generally be held until maturity, with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal. • A security swap would improve the quality, yield, or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold. Municipal Investment Managers www.MainStreetCap.com 3

Presentation Summary Discuss Pros and Cons and the Mechanics of each method of benchmarking: So you can determine which type of benchmarking is appropriate and suitable for your entity. Main Takeaways You Should Benchmark the Portfolio The Benchmark Needs to be Relevant Municipal Investment Managers www.MainStreetCap.com 4

Primary Factors to Consider Municipal Investment Managers To Be Relevant, Benchmarks Should Reflect the General Characteristics of a Portfolio’s: Sector Allocations Duration/Maturity Turnover Municipal Investment Managers www.MainStreetCap.com 5

Municipal Portfolio Structure: Typical Allocation Investment Portfolio Liquidity Portfolio (Target: 20%-30%) Primary Liquidity (1-90 Days) Secondary Liquidity (91-365 Days) Core Portfolio (Target 70%-80%) Sector Target Allocation % Money Markets 20% Treasuries 10% Agencies   Bullets (non-call) 40% Callables 30% Total 100% Operating fund, not bond proceeds More than One Benchmark Component is Usually Needed--Customize Municipal Investment Managers www.MainStreetCap.com 6

Keeping Score of Your Portfolio Municipal Investment Managers Yield Return Book Return Total Return Municipal Investment Managers www.MainStreetCap.com 7

Municipal Investment Managers Yield Return Portfolio’s Month End Average Weighted Book/Purchase Yield Security Maturity Duration Wgt Dur Par Value % of Portfolio Book Yld Wgt Yld LGIP 3/1/2011 0.00 5,000,000 4.00% 0.15% 0.01% Agency 3/31/2011 0.08 0.01 10,000,000 8.00% 0.20% 0.02% Treasury 4/30/2011 0.17 0.25% 5/31/2011 0.25 0.02 6/30/2011 0.33 0.03 0.30% 7/31/2011 0.42 8/31/2011 0.50 0.04 0.35% 0.03% 9/30/2011 0.59 0.05 10/31/2011 0.67 11/30/2011 0.75 0.06 12/31/2011 0.84 0.07 0.40% 1/31/2012 0.92 2/29/2012 1.00 Total   0.52 125,000,000 100.00% Municipal Investment Managers www.MainStreetCap.com 8

Yield Return - Custom Benchmark Municipal Investment Managers Sector Weight LGIP 4% Treasury* 48% Agency# 48% Total 100% Month-End Yields: *GB1=1 Yr T-Bill #AGDN360Y= 1Yr Agency 1.14% 12 Month Moving Avg Jun 08 to May 09 Yld Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 LGIP Yld 0.19 0.18 0.20 0.22 0.23 0.21 Tsy Yld 0.38 0.32 0.31 0.28 0.25 0.26 0.27 0.24 Agy Yld 0.48 0.50 0.49 0.44 0.34 0.30 0.29   Wgt 4% Tsy 48% Agy Wgt Yld 0.42 0.43 0.40 0.37 Municipal Investment Managers www.MainStreetCap.com 9

Yield Return: Pros and Cons Municipal Investment Managers Ease of Calculation Ease of Understanding (presenting to governing boards) Helpful for Budgeting Interest Income Cons: Does Not Account for Realized Capital Gains or Losses Subject to Yield To Maturity Assumptions Municipal Investment Managers www.MainStreetCap.com 10

Yield to Maturity Assumption What is the YTM? 1% or 3% or %? Step-Up Example: 5 Year Maturity, Annual 1% Steps, Purchased at Par Coupons: Yr 1 -- 1% Yr 2 -- 2% Yr 3 -- 3% Yr 4 -- 4% Yr 5 -- 5% Avg -- 3% Future Coupon Payments Are Reinvested at the Purchase Yield What is the YTM? 1% or 3% or %? Municipal Investment Managers www.MainStreetCap.com 11

Municipal Investment Managers Book Return + Accrued/Received Interest +/- Amortization or Premiums/Discounts +/- Realized Gains/Losses Average Daily Book Balance for the Period = Book Return Municipal Investment Managers www.MainStreetCap.com 12

Municipal Investment Managers Total Return + Accrued/Received Interest +/- Amortization or Premiums/Discounts +/- Realized Gains/Losses +/- Unrealized Gains/Losses Time Weighted Invested Value for the Period (Market Value Based) = Total Return Municipal Investment Managers www.MainStreetCap.com 13

Interest Rates Decline 50 Basis Points for the Month Calculation of Return Book Return vs Total Return Interest Collected 300,000 Plus Accrued Interest at End of Period 150,000 Less Accrued Interest at Beginning of Period (100,000) Less Accrued Interest at Purchase During Period (50,000) Interest Earned During Period   Adjusted by Premiums and Discounts 50,000 Adjusted by Realized Capital Gains or Losses 100,000 Adjusted by Mark-to-Market N/A Earnings During Period 450,000 Daily Weighted Balance for Period 100,000,000 Book Rate of Return - Period 0.45% Book Rate of Return - Annualized 5.40% Interest Collected 300,000 Plus Accrued Interest at End of Period 150,000 Less Accrued Interest at Beginning of Period (100,000) Less Accrued Interest at Purchase During Period (50,000) Interest Earned During Period   Adjusted by Premiums and Discounts N/A Adjusted by Realized Capital Gains or Losses 100,000 Adjusted by Mark-to-Market 750,000 Earnings During Period 1,050,000 Daily Weighted Balance for Period 100,000,000 Total Rate of Return - Period 1.05% Total Rate of Return - Annualized 12.60% Mark-to-Market: $100,000,000 x 1.5 duration x .50%= $750,000 Public Fund Investment Managers www.MainStreetCap.us 14 14

Book Return – Under the Hood Municipal Investment Managers Sample Benchmark Composition: (Combined Liquidity and Core Portfolio) Sector Maturity Index Bberg Ticker Moving Average LGIP 1 Day N/A Monthly Distb. Rate Agy Discount Notes 0-6 Months 3 Mon Discount Notes AGDN090Y 6 Month Commercial Paper 0-3 Months A1/P1 45 Day Dealer CP DCPB045Y 3 Month CDs A1/P1 45 Day CDs DCDB45D Agy Bullets 1-3 Years 1-3 Yr Agency Bullets G1PB 12 Month Agy Callables 1-3 Yr Agency Callables G1PC T-Notes 1-3 Yr Treasuries G102 Corporate Notes 1-3 Yr Corp Notes A-AAA C1A1 Municipal Investment Managers www.MainStreetCap.com 15

Yield & Book Return Benchmark Municipal Investment Managers The views Municipal Investment Managers www.MainStreetCap.com 16

Moving Average Benchmarks Municipal Investment Managers Date 12 MMA 24 MMA Var Dec-01 3.70 4.95 -1.25 Dec-02 2.55 3.12 -0.58 Dec-03 1.64 2.09 -0.45 Dec-04 2.41 2.02 0.38 Dec-05 3.89 3.15 0.74 Dec-06 4.80 4.35 0.45 Dec-07 4.26 4.53 -0.27 Dec-08 1.91 3.09 -1.17 Dec-09 0.95 1.43 -0.48 Dec-10 0.65 0.80 -0.15 Avg 2.68 2.95 -0.28 Municipal Investment Managers www.MainStreetCap.com 17

Book Return: Pros and Cons Municipal Investment Managers Matches Budgeting Process Closely Matches Actual Cash Flows Cons: Subject to Manipulation of Realized Gains/Losses May Not Reflect Portfolio’s Market Volatility Changes (The Primary Reason for GASB 31) Municipal Investment Managers www.MainStreetCap.com 18

Total Return Parameters/Rules Bank of America/Merrill Lynch 1-3 Year Treasury and Agency Index (Ticker: G1A0) Issue Size: $250 Million and Up (Agy*), $1 Billion and Up (Tsy*) Monthly Rebalanced Index “Buys” all Tsy and Agy Fixed Rate Securities Between 1-3 Yrs Index “Sells” all Tsy and Agy Fixed Rate Securities Less Than 1 Yr “Buys” Newly Added Securities at the Bid Side – Worth about 12’ish Basis Points Annually *Non-Subordinated # Non-TIPS Municipal Investment Managers www.MainStreetCap.com 19

1-3 Yr Govt Index Sector Allocation Municipal Investment Managers Percent Tsy 76.2% FNMA 7.4% FHLMC 6.6% FHLB 4.7% FFCB 0.8% TVA 0.2% Corp FDIC 4.1% Total 100% Municipal Investment Managers www.MainStreetCap.com 20

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Municipal Investment Managers % of Mkt Val Bullets 95.2% Calls 4.8% # of Issues Bullets 260 Calls 231 Total 491 % of Issues Bullets 53% Calls 47% Municipal Investment Managers www.MainStreetCap.com 22

1-3 YR Govt Index Duration Municipal Investment Managers Month-Start 1.82 Duration 1.74 Month-End Jan 2011 Mar 2010 Oct 2010 Municipal Investment Managers www.MainStreetCap.com 23

1-3 YR Govt Callable Index Duration Municipal Investment Managers Mar 2010 Oct 2010 Jan 2011 Municipal Investment Managers www.MainStreetCap.com 24

Municipal Investment Managers *Book Return= 12 Mon Moving Avg of Index Month-End Yield Municipal Investment Managers www.MainStreetCap.com 25

1-3 Yr Govt Index Components of Return Municipal Investment Managers www.MainStreetCap.com 26

Price* vs Coupon Return Municipal Investment Managers 1-3 Govt Index: Price* vs Coupon Return 1991 to 2010 Year 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Avg Price 3.2 -0.9 -5.4 4.1 -1.2 0.2 0.6 -2.8 1.7 2.6 1.2 -1.7 -2.2 -1.8 0.0 2.5 -1.6 0.02 Coupon 8.5 7.2 6.4 6.0 6.9 6.2 5.9 5.8 4.7 3.7 3.5 4.2 4.6 2.8 2.2 5.25 Total 11.7 6.3 5.4 11.0 5.0 6.7 7.0 3.1 8.1 8.4 2.0 1.0 7.1 2.3 5.27 Price Return*: .4% = .02% Coupon Return: 99.6% = 5.25% Total Return: 100.0% = 5.27% Price Return=Mark-to-Market Change Book Return (Coupon) and Total Return are basically the same over the long run Municipal Investment Managers www.MainStreetCap.com 27

Total Return Implications Municipal Investment Managers “The total rate of return implies that a dollar of wealth is equally meaningful to the investor, whether that wealth is generated by the secure income from a 90-day Treasury bill or by the unrealized appreciation in the price of a share of common stock (or bond).” (CFA Institute curriculum) Municipal Investment Managers www.MainStreetCap.com 28

Municipal Investment Managers Conclusions To Adhere To the 3rd Object of Your Investment Policy-You Need to Benchmark Your Portfolio to See if it’s Earning a “Market Rate of Return” It’s Okay to Use All Three Measures Book Return and Total Return Are More Sophisticated Measures and Capture More Information Book Return Is Generally More Congruent With Most Municipalities’ Budgeting Programs Total Return Captures the Mark-to-Market Volatility of a Portfolio Municipal Investment Managers www.MainStreetCap.com 29