1. Iowa Public Employees’ Retirement System Fixed Income Performance and Strategy Presented to the IPERS Investment Board April 6th, 2001

2. IPERS Fixed Income April 6, 2001 2 PRESENTATION OUTLINE A) Role of Global Fixed Income In IPERS’ Portfolio B) IPERS’ Objective & Strategy C) IPERS’ Implementation D) Performance Review Summary E) Individual Global Fixed Income Manager Reviews

3. IPERS Fixed Income April 6, 2001 3 ROLE OF GLOBAL FIXED INCOME IN IPERS’ PORTFOLIO 1. Provide current income to fund benefit payments. 2. Diversify equity risk by serving as a lower risk asset class. 3. Provide hedge against deflation. 4. Provide incremental return by investing in inefficient markets (such as High Yield).

4. IPERS Fixed Income April 6, 2001 4 IPERS’ OBJECTIVE & STRATEGY Fixed Income Objective - IPERS’ stated objective is to outperform the Lehman U.S. Universal Bond Index by 50 basis points over a full market cycle. Fixed Income Strategy - IPERS’ strategy is to create a well diversified portfolio of fixed income securities by investing in instruments with varied characteristics. Specific strategies utilized include but are not limited to:  Tactical Exposure- The U. S. Universal Index includes allocations to Non- U.S., High Yield, CMBS, Emerging Markets and 144A securities. Managers are allowed to tactically under/over weight these sectors within specific guidelines.  Strategic Exposure- Typically, IPERS systematically over-weights mortgage and high yield bonds and under-weights Treasury securities. These sectors are deemed less efficient and can provide attractive returns on a risk-adjusted basis. Sector IPERS’ Actual* Lehman U.S. Universal* Gov’t/Agencies23%33% Corporates2121 Mortgages4433 High Yield 8 5 Non - U. S. 4 8 * Percentages are as of December 31, 2000

5. IPERS Fixed Income April 6, 2001 5 IPERS’ OBJECTIVE & STRATEGY  Passive Core- IPERS currently has 33% of its portfolio managed passively. This passive “core” limits active management risk in the domestic fixed income portfolio.  Non-Dollar Exposure- Some IPERS’ fixed income managers are allowed to invest in non-dollar bonds on a tactical basis to add incremental return.  Duration Neutral- IPERS maintains an overall portfolio duration close to the market duration. Each Manager’s discretion to vary the duration relative to their benchmark is controlled. Duration* IPERS’ Portfolio 4.76 years Lehman U.S. Universal 4.53 years Difference +0.23 years * As of 12/31/00

6. IPERS Fixed Income April 6, 2001 6 IPERS’ IMPLEMENTATION IPERS has implemented the following investment strategies and built the following manager team: (12-31-00) TARGET ACTUAL STRATEGYMANAGERPRODUCT WEIGHT WEIGHT PassiveMellon CapitalLehman Aggregate 33.0% 32.2% Total Passive 33.0% 32.2% ActiveHeitman Private Mortgage 1.0%.60% ActiveJ.P. MorganU.S. Universal 17.0% 17.6% ActiveBlackRockU.S. Universal 17.0% 17.6% ActiveWestern AssetU.S. Universal 17.0% 17.6% ActiveMiller AndersonMortgages 8.0% 8.2% ActiveOaktree Capital High Yield 7.0% 6.2% Total Active 67% 67.8% Total Portfolio 100.0% 100.0%

7. IPERS Fixed Income April 6, 2001 7 IPERS’ Core Plus Portfolios  Approximately 53% of IPERS’ Fixed Income portfolio is mandated to “Core Plus” accounts that track the Lehman U.S. Universal Index  Three managers currently follow this strategy:  BlackRock  J.P. Morgan  Western Asset  “Core Plus” - allows managers to opportunistically change portfolio weightings relative to the benchmark  Contractual constraints control risk Examples:  Mortgage Backed Securities = at least 50% and not more than 200% of index weight  Emerging Market Debt = 0% to 200% of index weight

8. IPERS Fixed Income April 6, 2001 8 FIXED INCOME COMPOSITE PERFORMANCE SUMMARY Annualized Performance (as of 12/00): 1Yr. 3Yr. 5Yr. 10Yr. IPERS Fixed Income Portfolio10.13%6.25%6.64%8.63% Lehman U. S. Universal10.83%6.02%6.44%7.97% Lehman Aggregate11.63%6.36%6.46%7.96%

9. IPERS Fixed Income April 6, 2001 9 GLOBAL FIXED INCOME PROGRAM SUMMARY Over the last 10 years, the IPERS’ fixed income composite performance has performed well against the market benchmark. This performance is primarily attributable to three factors: Implementation of strategic decisions to over-weight the less efficient market sectors and under-weight efficient sectors Longer-than-market average duration exposure during period when interest rates generally fell; Value-adding skill by majority of IPERS’ fixed income managers. Over the last year, performance was hampered due to a “flight to quality” in the marketplace. Investors opted for safer investments, such as U.S. Treasuries, in more efficient markets. This resulted in relative poor performance in less efficient markets, such as High Yield, where IPERS’ has maintained a strategic overweight.

10. IPERS Fixed Income April 6, 2001 10 DOMESTIC FIXED INCOME PERFORMANCE RELATIVE TO PUBLIC FUND PEERS

11. IPERS Fixed Income April 6, 2001 11 INDIVIDUAL GLOBAL FIXED INCOME MANAGER REVIEWS

12. IPERS Fixed Income April 6, 2001 12 Mellon Capital Management - Passive Market Index Strategy Strategy: Passively manage a portfolio of U.S. fixed income securities that closely tracks a broad market index. Benchmark: Lehman Aggregate Bond Index Annualized Performance (as of 12/00) 1Yr 3Yr 5Yr.10Yr.Inception (6/90) Mellon Capital 11.79%6.46%6.56%8.05% 8.24% Benchmark 11.63%6.36%6.46%7.96% 8.16% Excess Returns: +.16%+.10%+.10%+.09% +.08% Comments:Tracking error positive over all time periods. Continues to perform very well.

13. IPERS Fixed Income April 6, 2001 13 J.P. Morgan Investment Management - Active Strategy: Invest in a portfolio of fixed income securities whose characteristics resemble the overall dollar denominated bond market. J.P. Morgan will tend to own a variety of Treasuries, non-dollar bonds, and both public and private corporate and mortgage securities. J.P. Morgan has limited discretion to manage duration and, therefore, seeks to add value through security selection and rotation among sectors based on relative value. Benchmark: Lehman U.S. Universal Index since 1/1/00; Lehman Aggregate from 10/15/85 to 1/1/00. Annualized Performance (as of 12/00): 1 Yr.3 Yr.5 Yr. 10Yr.Inception(9/85) J.P. Morgan 11.23%6.65%7.11% 8.71% 10.07% JPM Custom 10.83%6.35%6.45% 8.31% 9.68% Excess Returns +.50%+.30%+.66%+.40% +.39% Comments: Continues to perform well over all time periods.

14. IPERS Fixed Income April 6, 2001 14 BlackRock Financial Management - Active Strategy: Invest in a portfolio of fixed income securities whose characteristics resemble the overall dollar denominated bond market. BlackRock will tend to own a variety of Treasuries, hedged non-dollar bonds, both public and private corporate securities, and public mortgage securities. BlackRock has limited discretion to manage duration and, therefore, seeks to add value through security selection and rotation among sectors based on relative value. Benchmark: Lehman U.S. Universal Index Comments: Performance measurement began January 1, 2000. Annualized Performance (as of 12/00): 1Yr. BlackRock 10.69% Lehman Universal 10.83% Excess Returns: -0.14%

15. IPERS Fixed Income April 6, 2001 15 Western Asset - Active Strategy: Invest in a portfolio of fixed income securities whose characteristics resemble the overall dollar denominated bond market. Western Asset will tend to own a variety of Treasuries, hedged non-dollar bonds, both public and private corporate securities, and public mortgage securities. Western Asset has limited discretion to manage duration and, therefore, seeks to add value through security selection and rotation among sectors based on relative value. Benchmark: Lehman U.S. Universal Index Comments: Performance measurement began January 1, 2000. Annualized Performance (as of 12/00): 1Yr. Western Asset 11.49% Lehman Universal 10.83% Excess Returns: +0.66%

16. IPERS Fixed Income April 6, 2001 16 Miller Anderson Sherrerd-Active Mortgage Bond Strategy Strategy: Focuses primarily on high quality mortgages and mortgage-backed securities with a secondary emphasis on asset-backed securities, commercial mortgages, mortgage derivatives and non-dollar bonds. Miller Anderson utilizes original economic analysis and proprietary risk models to forecast interest rates and build a portfolio with high expected real returns and low prepayment risk. Benchmark: Lehman Mortgage Index Annualized Performance (as of 12/00): 1Yr 3Yr 5Yr.10Yr.Inception (6/85) Miller Anderson 10.11%5.92%6.84%8.28% 9.57% Benchmark 11.17%6.59%6.92%7.82% 9.14% Excess Returns: -1.06%-0.67%-0.08%+.46% +.43% Comments: Short-term and mid-term under-performance starting to impact longer-term performance. Miller Anderson’s “style” is under review to determine if it is still appropriate within IPERS’ risk- controlled fixed income structure.

17. IPERS Fixed Income April 6, 2001 17 Oaktree Capital Management –Active U.S. High Yield Bonds Strategy:Focuses on non-investment grade debt of solvent U.S. corporations. Oaktree’s investment process utilizes bottom-up, fundamental credit research and risk- controlled portfolio construction methods while emphasizing higher quality, cash yielding, senior debentures and avoiding undue principal risk. Benchmark: Salomon Cash Pay High Yield Bond Index Annualized Performance (as of 12/00): 1Yr. Inception (1/98) Oaktree -4.34% 0.05% Benchmark-4.42% -1.19% Excess Returns: +.08% +1.24% Comments: Continues to outperform benchmark.

18. IPERS Fixed Income April 6, 2001 18 Heitman Capital Mortgage - Commercial Mortgage Program Strategy: Focuses on high quality commercial mortgages. Benchmark: Lehman Brothers Corporate Bond Index Annualized Performance (as of 12/00): 1Yr. 3Yr. 5Yr. Inception (6/92) Heitman9.63%8.09%8.22% 9.00% Lehman Corporate Index9.40%5.22%5.81% 7.39% Excess Returns: +0.23%+2.87%+2.41%+1.61% Comments: All loans continue to perform as specified in their contracts. Board approved small add-on loan in 2001. Portfolio will terminate as existing loans mature.

19. IPERS Fixed Income April 6, 2001 19 Mellon Bond - Active Cash Management Strategy: Actively invests in cash equivalents with minimal additional risk with the purpose of earning a yield greater than T- Bills. Benchmark: Merrill Lynch 91-day Treasury Bill Annualized Performance (as of 12/00): 1Yr. 3Yr. 5Yr. Inception (7/95) Mellon Bond7.48%6.08%5.80% 5.93% Benchmark6.18%5.41%5.38% 5.41% Excess Returns: +1.30%+0.67%+0.42%+0.52% Comments: Continues to add value over benchmark.