Which is the Optimal Portfolio in Retirement? FOR DUE DILIGENCE ATTENDEES Van Harlow 19 May 2006

For Due Diligence purposes only. Not for distribution to the public in any form. 2 Retirement Which is the optimal portfolio in retirement? or Given my current assets and retirement expenses, which portfolio provides me with a reasonable probability of funding my retirement years?

For Due Diligence purposes only. Not for distribution to the public in any form. 3 Retirement The answer depends on: Longevity Distribution Rate Expected Returns and Volatility Portfolio Funding Profile Given my current assets and retirement expenses, which portfolio provides me with a reasonable probability of funding my retirement years?

For Due Diligence purposes only. Not for distribution to the public in any form. 4 Circa 1950 Circa 1998 Longevity Source: U.S. Census Bureau, International Programs Center, International Database, Gender and Aging: Mortality and Health, 1B/98-2. *Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2002 Revision. MaleFemaleMaleFemale Chile* Argentina Brazil Mexico Venezuela United States Life Expectancy at Birth for Selected Countries:

For Due Diligence purposes only. Not for distribution to the public in any form. 5 Life Expectancy at Birth for Selected Countries: Males 1950 and 1988 Source: U.S. Census Bureau, International Programs Center, International Database, Gender and Aging: Mortality and Health, 1B/98-2. Longevity

For Due Diligence purposes only. Not for distribution to the public in any form. 6 Life Expectancy at Birth for Selected Countries: Females 1950 and 1988 Source: U.S. Census Bureau, International Programs Center, International Database, Gender and Aging: Mortality and Health, 1B/98-2. Longevity

For Due Diligence purposes only. Not for distribution to the public in any form. 7 COUPLES (Both AGE 65) FEMALE AGE 65 Age At least one person has a 50% chance of living to 92 MALE AGE 65 Age Age % chance of living to 85 25% chance of living to 92 50% chance of living to 88 25% chance of living to 94 At least one person has a 25% chance of living to Life Spans Source: Annuity 2000 Morality Table. Figures assume you are in good health. Longevity

For Due Diligence purposes only. Not for distribution to the public in any form. 8 Retirement  Longevity  Distribution Rate  Expected Returns and Volatility  Portfolio Funding Profile

For Due Diligence purposes only. Not for distribution to the public in any form. 9 Distribution Rate 9% Withdrawal Rate 8% Withdrawal Rate 7% Withdrawal Rate 6% Withdrawal Rate 5% Withdrawal Rate COUPLES (Both Age 65) Age 8590 Probability that at least one will be alive: %63%35% 4% Withdrawal Rate Hypothetical value of assets held in a taxable account of $500,000 invested at year-end Portfolio: 50% stocks, 40% bonds, 10% cash.

For Due Diligence purposes only. Not for distribution to the public in any form *Hypothetical portfolio of assets held in a taxable account consists of 50% bonds and 50% stocks, assumes average annual return of 8.7%. Number of years a portfolio can last in distribution 10% 9% 8% 7% 6% 5% 4% Years Distribution Rate

For Due Diligence purposes only. Not for distribution to the public in any form. 11 Retirement  Longevity  Distribution Rate  Expected Returns and Volatility  Portfolio Funding Profile

For Due Diligence purposes only. Not for distribution to the public in any form. 12 Expected Returns  Long-term view of historical returns provides the best estimates for risks and correlations  A risk premium approach is best for estimating asset class returns since it provides a long-term perspective of return expectations consistent with the investment horizon of retirement portfolios

For Due Diligence purposes only. Not for distribution to the public in any form. 13 Expected Returns Risk Premium RP t RRf t Inf t Risk Premium Real risk- free return Inflation The risk premium approach to estimating expected returns identifies the market’s required return premium for accepting asset class risk and adds that to the risk- free return (real risk-free return plus inflation) R t = (1 + Inf t ) (1 + RRf t ) (1 + RP t ) – 1 where Inf t = inflation rate RRf t = real risk free rate RP t = risk premium

For Due Diligence purposes only. Not for distribution to the public in any form. 14 Expected Returns  Historical  Fundamental  Economic  Surveys Estimating the Risk Premium

For Due Diligence purposes only. Not for distribution to the public in any form. 15 Other Approaches to Estimating the Risk Premium Historical evidence –Ibbotson Associates (US Markets, 2004)8.0% –Jorian and Guetzmann (Journal of Finance, 1999)4.3% –Siegel (Financial Analysts Journal, 1992) 0.6% - 5.9% –Dimson, Marsh and Stanton (Business Strategy Review, 2000)5.8% Fundamental Estimates ⁃ Fama and French (University of Chicago, 2000) 2.55% % ⁃ Ibbotson and Chen (Financial Analysts Journal, 2003)4.0% ⁃ Claus and Thomas (Journal of Finance, 2001)3.0% ⁃ Arnott and Bernstein (Financial Analysts Journal, 2002) 0% - 2.4% Economic Estimates ⁃ Mehra and Prescott (Journal of Monetary Economics, 1985)<1.0% Surveys ⁃ Welch (Journal of Business, 2000)4.0% ⁃ Graham and Harvey (Duke University, 2001) 3.9% - 4.7% Literature Review US Equity Risk Premium Estimates

For Due Diligence purposes only. Not for distribution to the public in any form. 16 Historical Real Returns Source: Global Financial Data % 0% 5% 10% 15% 20% 25% Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA Chile Argentina Greece Israel Mexico South Africa Annualized Volatility Equities Bonds

For Due Diligence purposes only. Not for distribution to the public in any form. 17 Risk Premium versus Cash -5% 0% 5% 10% 15% 20% Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA Chile Argentina Greece Israel Mexico South Africa Annualized Risk Premium, % Equities-Cash Bonds-Cash 7.17% 3.07%

For Due Diligence purposes only. Not for distribution to the public in any form. 18 Risk Premium versus Bonds -5% 0% 5% 10% 15% Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA Chile Annualized Risk Premium, % 4.21%

For Due Diligence purposes only. Not for distribution to the public in any form. 19 Historical Volatilities 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA Chile Argentina Greece Israel Mexico South Africa Annualized Volatility Equities Bonds

For Due Diligence purposes only. Not for distribution to the public in any form. 20 Asset Class Assumptions Risk and Return Assumptions Note: 10-year CLP bond yield is 6.15% 10-year UF bond yield is 2.85%

For Due Diligence purposes only. Not for distribution to the public in any form. 21 Correlations (Unhedged Peso) 1/93 -2/06 Risk and Return Assumptions Domestic StocksDeveloped StocksEmerging StocksDomestic BondsDomestic Cash Domestic Stocks100.0%35.3%67.1%18.3%-0.2% Developed Stocks100.0%62.3%5.1%6.3% Emerging Stocks100.0%23.5%5.2% Domestic Bonds100.0%20.7% Domestic Cash100.0%

For Due Diligence purposes only. Not for distribution to the public in any form. 22 Portfolio Allocations Fund AFund BFund CFund DFund E Stocks %20.2%18.4%12.6%0.0% Domestic Stocks 27.2%18.9%11.5%5.6%0.0% Developed Stocks 33.4%21.8%13.0%6.2%0.0% Emerging Markets Bonds 7.8%19.1%34.7%48.4%86.0% Cash 13.3%20.0%22.3%27.2%14.0% Risk and Return Assumptions

For Due Diligence purposes only. Not for distribution to the public in any form. 23 Portfolio Risks and Returns Fund AFund BFund CFund DFund E Expected 9.61%8.73% Nominal Returns Expected 6.15%5.30% Real Returns Volatility 12.14%9.63% Risk and Return Assumptions 7.95% 4.55% 7.33% 7.08% 3.70% 5.00% 6.37% 3.01% 4.08%

For Due Diligence purposes only. Not for distribution to the public in any form. 24 Retirement  Longevity  Distribution Rate  Expected Returns and Volatility  Portfolio Funding Profile

For Due Diligence purposes only. Not for distribution to the public in any form. 25 The Profile is determined using historical simulations to understand a portfolio’s ability to fund a retirement horizon of varying lengths and with differing degrees of confidence Portfolio Funding Profile Portfolio in Distribution Fund C with Constant Real Peso Withdrawal (6% initial)

For Due Diligence purposes only. Not for distribution to the public in any form. 26 Portfolio Funding Profile A Funding Profile reflects the number of retirement years that a particular portfolio might be expected to support expenses in retirement as a function of inflation-adjusted withdrawal rates Consistent with Fidelity’s retirement approach, the number of funding years are indicated at the 50% and 90% confidence level, reflecting portfolio longevity in average and extended down markets

For Due Diligence purposes only. Not for distribution to the public in any form. 27 Portfolio Funding Profile Solid end points = Average Market Conditions (50% Confidence) Transparent end points = Extended Down Markets (90% Confidence) The Impact of Withdrawal Rates on Portfolio Longevity in Extended Down Markets and Average Markets Note: Fund E is never optimal to hold 50% Mortality 75% Mortality

For Due Diligence purposes only. Not for distribution to the public in any form. 28 Portfolio Funding Profile Solid end points = Average Market Conditions (50% Confidence) Transparent end points = Extended Down Markets (90% Confidence) 3% 4% 5% 6% 7% 8% Years Survived Inflation-Adjusted Withdrawal Rate Fund E Fund D Fund C Fund B Fund A 60+ years 83 The Impact of Withdrawal Rates on Portfolio Longevity in Extended Down Markets and Average Markets Note: A 5% initial inflation-adjusted withdrawal is probably the maximum distribution Note: Funds B, C & D are attractive portfolios for a range of withdrawal rates

For Due Diligence purposes only. Not for distribution to the public in any form. 29 Portfolio Funding Profile  Fund E does not appear to be attractive to hold  A 5% initial inflation-adjusted withdrawal rate is probably the maximum distribution to fund a retirement beginning at age 65  Funds B, C and D are attractive portfolios for a broad range of withdrawal rates Observations

For Due Diligence purposes only. Not for distribution to the public in any form. 30 Portfolio Funding Profile  What if the Chilean equity risk premium is 4% instead of 5%?  With if equity volatilities were 20% higher than assumed in the base case?  What if all equity risk premiums were lower than assumed in the base case? Sensitivity Analysis

For Due Diligence purposes only. Not for distribution to the public in any form. 31 Portfolio Funding Profile Solid end points = Average Market Conditions (50% Confidence) Transparent end points = Extended Down Markets (90% Confidence) 4% Chilean Equity Risk Premium The Impact of Withdrawal Rates on Portfolio Longevity in Extended Down Markets and Average Markets Note: Results similar to base case

For Due Diligence purposes only. Not for distribution to the public in any form. 32 2% 4% 6% 8% 10% 12% Years Survived Inflation-Adjusted Withdrawal Rate Fund E Fund D Fund C Fund B Fund A Solid end points = Average Market Conditions (50% Confidence) Transparent end points = Extended Down Markets (90% Confidence) 67 Equity Volatilities 20% Higher than Base Case The Impact of Withdrawal Rates on Portfolio Longevity in Extended Down Markets and Average Markets Portfolio Funding Profile Note: Fund D is an attractive portfolio

For Due Diligence purposes only. Not for distribution to the public in any form. 33 2% 4% 6% 8% 10% 12% Years Survived Inflation-Adjusted Withdrawal Rate Fund E Fund D Fund C Fund B Fund A Solid end points = Average Market Conditions (50% Confidence) Transparent end points = Extended Down Markets (90% Confidence) Equity Risk Premiums Lower than Base Case The Impact of Withdrawal Rates on Portfolio Longevity in Extended Down Markets and Average Markets Portfolio Funding Profile Note: Funds C and D are attractive for all withdrawal rates

For Due Diligence purposes only. Not for distribution to the public in any form. 34 Conclusions  A 5% initial inflation-adjusted withdrawal rate is probably the maximum distribution to fund a retirement beginning at age 65  In the scenarios examined, Fund E does not appear to be attractive  Funds B, C, and D have attractive funding profiles under the base case assumptions  In scenarios more favorable to bonds, not surprisingly, Funds C and D have attractive profiles Which is the Optimal Portfolio in Retirement?