© 2008 Northern Trust Corporation northerntrust.com The Northern Trust Experience A C C E S S. E X P E R T I S E. S E R V I C E. Lori R. Runquist Director, Alternative Investment Strategies John D. Skjervem Chief Investment Officer, Personal Financial Services Avoiding Common Investment Mistakes

© 2008 Northern Trust Corporation northerntrust.com Bonds Common Investment Mistakes:

The Northern Trust Experience Actively Managed Bond Funds vs. Laddered Bond Portfolios Actively Managed Bond Funds Total return investment approach Superior risk management: Broad diversification by state, region, sector and security Precise duration management and yield curve positioning Competitive bidding and scale reduces transaction costs Overnight liquidity Laddered Bond Portfolios Provide regular, certain income and principal payments Transparent portfolio holdings Often positioned as free of charge Investors allocate assets to municipal bonds to provide both capital preservation and current, tax exempt income generation. These objectives can be met through either a laddered bond portfolio or through actively managed bond funds.

The Northern Trust Experience Income Generation Funds monthly distributions result in more consistent income stream Total return approach provides capital appreciation opportunities Adaptable to changing yield curve conditions * Reflects the average yield for a typical 1-10 year laddered portfolio. Calculation assumes 50bps account management fees. ** Calculation net of mutual fund fees.

The Northern Trust Experience Active Management Active management mitigates risks and can capitalize on yield, maturity and credit opportunities Funds provide cost effective liquidity facility Better, dynamic interest rate (i.e., duration) and reinvestment risk management Superior diversification profile Bond Funds Can Capitalize On Yield Spread Opportunities

The Northern Trust Experience Lower Costs Commissions are a hidden but material fee in laddered bond portfolios Larger trading denominations in bond funds allow for lower transaction costs Strong inverse relationship between transaction costs and par value traded

The Northern Trust Experience Summary: Funds v. Ladders Bond FundBond Ladder Income Generation Total Return Risk (i.e., duration) management Fees & Transaction Costs ?? Liquidity Diversification Transparency

© 2008 Northern Trust Corporation northerntrust.com Hedge Funds Common Investment Mistakes:

The Northern Trust Experience Why Invest in Hedge Funds? As a Hedge to Equities: Diversified hedge fund strategies can generate positive returns in down markets As a Fixed Income Alternative: Bond-like risk with greater upside potential in diversified Fund of Funds As an Equity Alternative: Some clients pursue an aggressive hedge fund approach seeking alpha from individual managers

The Northern Trust Experience Annualized Returns (Net of Fees) January 1990 – March 2008 Hedge Fund of Funds¹ S&P 500 Index Lehman Aggregate Bond Index US 90 Day Treasury Bills Hedge FOF * S&P 500 LB Aggregate 90 Day T-Bill ¹Source: Hedge Fund Research, Inc., HFRI Fund-of-Funds Index consists of approximately 800 fund of funds. **Year-toDate performance through 3/31/08. * The HFRI Fund-of-Funds Index is shown net of fees. All other indexes are shown gross of fees and expenses. It is not possible to invest directly in an index. Past performance is no guarantee of future results ** Hedge Fund Performance

The Northern Trust Experience Return Volatility – Hedge Fund of Funds vs. S&P 500 During the most difficult periods of equity performance**, hedge fund of funds outperformed the S&P by an average of 511 basis points (see last set of bars) If a line is drawn through all of the green bars (hedge fund of funds) the slope is much flatter, less volatile, than the blue bars (S&P) 37 Months33 Months Over 5% +3 to 5%1 to 3%1 to -1%-1 to -3% less than -3% 30 Months32 Months55 Months Average Monthly Returns for the 219 Months Between January 1990 – March Months *Past performance is not indicative of future returns + Indicates months when the S&P 500 return was greater than 5% **Defined as when the S&P return was less than -3% Source: HFRI Fund of Funds Index consists of approximately 800 fund-of-funds. HFRI Fund of Funds Index is net of fees and S&P 500 index is gross of fees. Between January 1990 and March 2008, hedge fund of funds outperformed the S&P 500 in 95% of the down months and have historically exhibited lower volatility than that of the public equity markets.*

The Northern Trust Experience Common Mistake – Insufficient Diversification Chasing Hedge Fund returns during strong markets can lead to disaster when markets correct July / August 2007 double digit losses Subprime, CDOS Statistical arbitrage sell off Suspended redemptions Diversified Fund of Funds vs Direct Selection Managers sourced differently Due diligence completed thoroughly Risk monitored actively

The Northern Trust Experience Fund of Funds Solution Role of Hedge Funds should be: Capital preservation Measured growth Diversified exposure Not wealth creation via speculation 1998 Mortgage-Backed Securities squeeze 1999 Quant Equity L/S momentum-to-value reversal LTCM: highly leveraged illiquid positions caused normally uncorrelated strategies to converge

© 2008 Northern Trust Corporation northerntrust.com Chasing After or Running from Short-Term Investment Performance Common Investment Mistakes:

The Northern Trust Experience Would You Hire This Manager? ManagerBenchmarkExcess Return Annualized Return

The Northern Trust Experience Or This Manager? ManagerBenchmarkExcess Return Annualized Return

The Northern Trust Experience Taking a Long Term View 12/31/95 to 12/31/00 12/31/00 to 12/31/03 12/31/95 to 06/30/07 Manager Benchmark Excess Return Conclusion: The manager performed as expected. Adhering to a relative value approach within the large cap value style, this manager delivered consistent out- performance in rising market environments but trailed its benchmark in a downturn.

The Northern Trust Experience Cause For Concern? Is this cause for concern? The manager (-9.7% return) underperformed its benchmark (+2.7% return) by -12.4% in Q3 06!

The Northern Trust Experience What Happened, Part I? This manager pursues a corporate restructuring strategy that is concentrated in the industrial, energy and financial sectors. During Q3 06, Telecom and Information Technology outperformed, returning 11.9% and 3.7% respectively. The managers annualized tracking error had been ~ 7% since 1995 which implied a 95% chance that the manager would perform +/- 14% relative to its benchmark over the course of a 1 year period.

The Northern Trust Experience What Happened, Part II? After a thorough quantitative and qualitative review of the portfolio, we determined performance was within expectations given the managers stated strategy and positioning. In Q4 06, performance rebounded sharply further contributing to managers excellent long term track record. Although niche managers can add significant value over time, we recommend pairing niche managers with complementary managers in the same asset class to reduce overall portfolio risk while still retaining upside alpha opportunities. Created with MPI Stylus Next 3 Quarters Sep-06 - Jun Total Return, % Sep-06Dec-06Mar-07Jun-07 ManagerBenchmark

The Northern Trust Experience Manager Termination A Story of Two Large Cap Value Managers … Manager A hired 1/1/ Manager A: 1.68%-5.38% Russell 1000 Value:15.63% 7.33% Cumulative 2 year excess return = Manager B hired 7/1/ Manager B:30.13%14.93% Russell 1000 Value:30.03%16.49% Cumulative 2 year excess return = Which manager was terminated shortly thereafter? % -1.56%

The Northern Trust Experience Our sell discipline reinforces our proven methodology. Key portfolio professionals Other investment professionals Ownership change Product capacity Firm growth Unexpected performance Risk exceeds portfolio guidelines Fundamental strategy shift Inconsistent discipline PerformanceProcess ChangeFirm ChangeStaff Change Reasons for Termination Manager Termination Manager A Action: Manager B was terminated in No Extended, but not unexpected Manager B Yes ?? OK

The Northern Trust Experience Manager Termination What happened subsequently … Manager A:35.22%16.84% -6.27%41.52%19.73%9.64%17.61% Russell 1000 Value: Excess return:28.20%22.44% 9.25%11.49% 3.24%2.69% -4.63% Results: Manager A returned 18.26% (annualized) versus 7.80% for the Russell 1000 Value over this period 2005 Manager B: 5.67% (manager composite performance) Russell 1000 Value: 7.05 Excess return:-1.38% Results: We terminated Manager B across programs at the end of October Assets at the firm went from $9.7billion at the end of 3Q 05 to $38 million by September 2006.

© 2008 Northern Trust Corporation northerntrust.com Private Equity Common Investment Mistakes:

The Northern Trust Experience Market Outlook General widespread perception that returns have peaked Too much money chasing too few deals Unreasonable valuation environment Credit markets have contracted Source: Callan Associates, Private Markets Trends, Winter

The Northern Trust Experience Private Equity Fund Raising Source: Private Equity Analyst, January 2008

The Northern Trust Experience 2007 Global Buyout Activity Source: 2008 Preqin Global Private Equity Review

The Northern Trust Experience 2007 Buyout Deal Info – Regional Breakdown Source: 2008 Preqin Global Private Equity Review

The Northern Trust Experience 2007 Buyout Activity 2,215 total transactions (1,007 in 2006) 21 deals represent over 1/3 of total announced value Bifurcation of the buyout market Performance measurement implications Source: 2008 Preqin Global Private Equity Review

The Northern Trust Experience Other Sectors Distressed & Stressed Small/Mid Cap LBOs Deep Value Plays International Buyouts Country Specific Funds Mega & Large Cap Deals Return Expectation x Return Expectation 2.5x + Return expectations are gross of all fees. Venture Capital Return Expectation 3x +

The Northern Trust Experience Market Timing Oversimplification of future performance expectations Not understanding bifurcation of Private Equity markets can lead investors to mistakenly choose to miss investment periods Regular re-uppings of commitments every two (2) years maintains consistent investment exposure

The Northern Trust Experience Targeting an Allocation to Private Equity – Model Approach Requires committing to consecutive fund-of-funds every other year 1 st commitment equal to 100% of target allocation, and 80% to every subsequent fund After 3 rd commitment allocations become self funding 7% target reached and sustained Model Approach Note: All projections are based on assumptions. These assumptions are based on a model that, on average, a private equity investment will earn an overall 15% net internal rate of return and a 1.75x multiple on invested capital. Total investor portfolio is also assumed to grow 7% annually in nominal terms. Actual results may vary significantly from projections. Past results are not necessarily indicative of future performance. Information provided for illustrative purposes and not intended as an indication of any strategy employed by Northern Trust. Information should not be considered investment advice or a recommendation of any investment strategy or security described herein as it does not take into account an investors own circumstances.

The Northern Trust Experience Targeting an Allocation to Private Equity – Excluding Funds Committing to every other fund-of-funds results in an underallocation versus 7% target (new commitment every fourth year instead of every second year) It is possible to use a higher commitment rate every other fund to reach target, but this commonly creates inconsistent exposure to vintage years and portfolio companies 7% target NOT sustained Excluding Funds Underweight due to excluding funds Note: All projections are based on assumptions. These assumptions are based on a model that, on average, a private equity investment will earn an overall 15% net internal rate of return and a 1.75x multiple on invested capital. Total investor portfolio is also assumed to grow 7% annually in nominal terms. Actual results may vary significantly from projections. Past results are not necessarily indicative of future performance. Information provided for illustrative purposes and not intended as an indication of any strategy employed by Northern Trust. Information should not be considered investment advice or a recommendation of any investment strategy or security described herein as it does not take into account an investors own circumstances.

© 2008 Northern Trust Corporation northerntrust.com Thank You Avoiding Common Investment Mistakes