1. 1 Oregon Short-Term Fund 2008 OMFOA Spring Conference March 11, 2008 Linda Haglund – Deputy State Treasurer Perrin Lim – Sr. Fixed Income Investment Officer Office of the State Treasurer

2. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 2 Oregon Short Term Fund – Management structure and implementation 1. Role of Oregon Investment Council (OIC) 2. Investment Process of OSTF Sources of information Forecasting Research Market analysis – pricing

3. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 3 Role of OIC Oversight of state financial assets and local government deposits in OSTF Treasurer & staff implement directions of OIC PERS, SAIF, Common School Fund, State Agency accounts and the OSTF Current Assets under management: over $78 Billion Establishes unique investment policy for each account Total Portfolio Asset Class Allocation Asset Class Specific Manager or Fund Specific (OSTF)

4. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 4 First step in policy development – Know your client Purpose of funds Volatility/Risk tolerance Return objective Liquidity Requirements For the OSTF, the OIC looks for input from the Oregon Short Term Fund Board.

5. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 5 Common elements for all include: 1. Type of Securities Governments, corporate, stocks, real estate, private equity, commercial paper, private placements. Large cap vs. small cap Domestic vs. International 2. Risk of the securitys characteristics Emerging vs. Developed Market Maturity limits and Duration target for Bonds Security rating minimum/maximum 3. Prohibited Investments 4. Compliance/monitoring/reporting 5. Benchmark Expected return over the benchmark 6. Time frame for evaluation Longer term assets – market cycle 3-5 years Short term assets –90 days, rolling, over time

6. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 6 Total Portfolio Asset Class Allocation Policy Example – OPERF Policy Mix and Return Expectations for OPERF Regular Account 1 Based on capital market forecasts developed by the Councils investment consultant, SIS, for the next two to three market cycles. 2 Total Fund expected returns are simply the weighted averages of the asset class returns. Sample

7. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 7 Manager or Fund Specific Policy Example - OSTF SAMPLE ELEMENTS...... Maturity Distribution of Portfolio A. 50% of the portfolio must mature within 93 days. B. A maximum of 25% of the portfolio may mature over one year. C. No investment may mature in over 3 years as measured from settlement date.

8. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 8 Sample OSTF Policy Elements… continued Diversification and Limitations of Portfolio A. Eligible Securities: 1) U.S. Treasury Securities a. 100% of the portfolio may be in U.S. Treasury securities. 2) U.S. Government Agency Securities a. 100% of the portfolio may be in U.S. Government Agency securities. b. 33% maximum of portfolio per agency issuer. Additional Securities include: Corporate Indebtedness Negotiable Certificates of Deposit (NCDs) B. All portfolio investments will be denominated in US$ only. C. 10% maximum of portfolio per issuer on all securities and support commitments with the exception of U.S. Treasury (100% maximum) and Government Agency securities (33% per issuer). Bankers' Acceptances (BAs) etc, etc…

9. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 9 Sample OSTF Policy Elements… continued CREDIT QUALITY Total weighted average credit quality of the portfolio shall be a minimum of AA or Aa2. PORTFOLIO LIMITATION No commitments to buy or sell securities may be made more than 14 business days prior to the…

10. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 10 For OSTF, OIC hands this investment road map to Perrins team Next step, develop a process to implement. Many with solid policies in place, still stumbled. How did we miss the recent landmines?

11. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 11 The Oregon Short-Term Fund (OSTF)… Employs an active team managed strategy that incorporates a top-down economic and interest rate outlook combined with bottom- up security selection, seeking to add value while adhering to a disciplined risk control process.

12. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 12 Staffs Investment Objectives Preservation of Principal Liquidity A Market Rate of Return

13. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 13 Portfolio Construction As detailed in OSTF Portfolio Rules, generally consists of: High Quality, Top-Tier Commercial Paper High Quality Corporate and Bank Obligations US Agencies US Treasuries

14. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 14 Value can be added through three main strategies: 1. Sector Allocation Ongoing research, analysis, and evaluation of market sectors with respect to current market prices, i.e. spread or risk premium

15. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 15 Value can be added through three main strategies: 2. Issue Selection Primarily a bottom-up process to uncover mispriced or undervalued credits and/or securities

16. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 16 Value can be added through three main strategies: 3. Weighted Average Maturity (WAM) Exposure Target WAM based on domestic (and international) macro- economic factors as well as the general political environment Staff weighs its views vs. market expectations, increasing WAM as views diverge and vice versa as views converge Goal is to add value based on the longer term trend and positioning the funds WAM accordingly, not timing the market

17. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 17 OSTF Investment Process Investment Outlook OSTF Portfolio Rules Sector Allocation OSTF Implementation Monitoring & Controls Interest Rate Exposure Issue Selection External Manager Resources Internal Research Third Party ResearchRatings AgenciesStreet Research

18. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 18 How Did OST Staff Avoid Recent Landmines? Investment Policy – Dictates all portfolio decisions Always keep in mind investment objectives 1. Preservation of Principal 2. Liquidity 3. Yield

19. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 19 How Did OST Staff Avoid Recent Landmines? Staff Outlook – Results in general portfolio structure Experience over past market cycles is a huge benefit! Better to be lucky than good… Learn from past mistakes…to help prevent them in the future Not a Black and White Science

20. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 20 Overview of Security Selection Process 1 Short Term or Long Term? US Treasuries, Agencies or Credit? Always consider worst case scenario 1 The OSTF Investment and Security Selection Processes are appropriate for the OSTF only.

21. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 21 Overview of Security Selection Process Relative Value in Credit Why not buy all issues that fit portfolio guidelines? Citigroup Inc. (C) versus CIT Group Inc. (CIT) Credit Curves are an important indicator (fixed vs. float, 2 yr vs. 10 yr) Balance Sheet Analysis Debt Ratio Trends Cash Flow Analysis Near Term Maturities Credit Facilities Current Credit Profile, Ratings 10-K Reports: Managements Discussion and Analysis Event Risk: LBOs, Share Repurchases

22. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 22 Credit Curves (spread versus Libor) 2 2 Approximate spreads as of February 29, 2008

23. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 23 Balance Sheet Analysis Liquidity – Cash & Near Cash Amounts

24. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 24 Debt Ratio Trends

25. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 25 Cash Flow Analysis

26. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 26 Near Term Maturities

27. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 27 Related Securities, Credit Facilities (e.g. see Bank Loans)

28. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 28 Credit Profile

29. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 29 Summary: Take Aways Investment Policy dictates investment of assets Mistakes happen…Goal is to learn and minimize in the future Know what one buys…Dont rely only on ratings Always consider Worst Case Scenario/Reaching for Yield – Sleep Factor If 2-year US Treasuries bought and 2-year Treasuries increase 200 b.p.? If credit bought and issuer experiences negative headlines

30. 2008 OMFOA Spring Conference March 11, 2008 OSTFB 30 OSTF Statistics & Compliance