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Home My Public Portal About2004 4th Quarter ReportFourth Quarter 2004 Fourth Quarter 2004 Investment Performance AnalysisInvestment Performance AnalysisExecutive SummaryExecutive SummaryFebruary 2005February 2005Doris Ewing, PartnerCraig Svendsen, CFASenior ConsultantOne Main Street, Cambridge, Massachusetts 02142-1524(617) 374-1300; F: (617) 374-1313www.nepc.com 1L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptMarket Environment Market Environment ––Fourth Quarter 2004Fourth Quarter 2004EQUITY MARKETSFIXED INCOME MARKETS•The Domestic Equity Marketsrose sharply in the fourth quarter, resulting in a strong 2004 return. The S&P 500 Index returned 9.2% during the quarter and finished the year returning 10.9%. Meanwhile small cap stocks, as measured by the Russell 2000 Index, gained 14.1% during the quarter. •Equities advanced as concerns over several geo-political and macro-economic events receded during the quarter, most notably a decisive U.S. presidential election and the fall of oil prices from their late-October all-time highs in the mid-$50’s. •As measured by Russell indexes, growth stocks rebounded from prior quarter losses, with small cap growth leading the charge gaining 15.1%. Large cap growth stocks returned 9.2%. Meanwhile, small cap value and large cap value stocks returned 13.2% and 10.4% respectively. For the year, growth stocks lagged value stocks across all market capitalizations. •Developed International Equity Markets performed very well during the quarter and for the year. The MSCI EAFE Index surged 15.3% in U.S. dollar terms during the quarter, and returned 20.2% for the year. •For the second consecutive year, Emerging Equity Markets was the best performing asset class both during the fourth quarter and trailing year, returning 17.2% and 25.6%, respectively. 2004 was the fourth year in a row the emerging equity markets outperformed the S&P 500. •The returns to U.S. based investors in the Developed and Emerging Markets were helped by the falling U.S. dollar.•Following their strong rebound in the third quarter, Domestic Fixed Income Markets were slightly positive. The Lehman Aggregate posted a 1.0% quarterly return. The Aggregate returned 4.3% for the year.•The Federal Open Markets Committee continued its “measured”pace for tightening monetary policy by raising the Federal Funds target rate from 1.75% to 2.25%. After five consecutive quarter-point increments following each meeting, the Fed Fund rate has increased 125 basis points since late June.•While short-term and intermediate-term interest rates rose, the long end of the yield curve declined. This fact combined with narrowing credit spreads led the Lehman Long Government/Credit to gain 2.2% during the quarter and 8.6% for the year. •Helped by declining credit spread,High Yield Bonds, as measured by the Lehman Brothers High Yield Index, gained 4.6% during the quarter and finished the year earning 11.1%. High yield bonds were the best performing domestic fixed income asset class for the second consecutive year.•Global/International Bonds continued their strong run during the quarter as the Citigroup World Government Bond Index and JP Morgan Emerging Markets Bond Index Plus surged 8.5% and 5.1%, respectively. Over the past year, the asset class has posted double digit returns benefiting from the falling US dollar. 2L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptMarket Environment Market Environment ––Fourth Quarter 2004Fourth Quarter 2004 3L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptMarket Environment Market Environment ––Fourth Quarter 2004Fourth Quarter 2004 4L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptMarket Environment Market Environment ––Fourth Quarter 2004Fourth Quarter 2004 5L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptExecutive Summary Executive Summary ––Total FundTotal FundAsset Allocation•At quarter end, the assets in the Fund totaled $149.2 million, an increase of $10.1 million for the quarter–Positive return on investment of $9.3 million–Net cash inflows of $0.8 million•The Fund’s allocation to equities was 58.6% (excluding manager cash), above the new target equity weighting of 50%•Relative to the Public Funds peer group, the 58.6% equity commitment ranked at the 63rdpercentilePerformance•The Total Fund gained 6.7% in the quarter, which ranked in the 77thpercentile of the Public Funds universe•For the trailing year, the Total Fund’s 9.0% return ranked in the 85thpercentile of the Public Funds universe•Asset allocation decisions had a negative impact on performance as the allocation index lagged the policy index by 90 basis points; active management detracted60 basis points from the trailing one-year return•For the longer-term three-and five-year periods, the Fund ranked in the 60thand 49thpercentiles of Public Funds, respectively•Over the three-year period, active management detracted 110 basis points and deviations from policy added 170 basis points; over the five-year period, active management detracted 120 basis points and deviations from policy contributed 250 basis points•Returns over the three-year and five-year periods were earned with slightly lower levels of risk than the median Public Fund 6L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptAsset Allocation as of 12/31/04Asset Allocation as of 12/31/043%10%9.6%10%9.4%27%13.1%6.8%12.2%10.3%29.6%27%5%8%7.4%1.7%5%5%Equities 50.0%Fixed Income 40.0%Equities 59.3%*Fixed Income 40.7%Large Cap EquityInt’l EquitySmallDomestic EquityInvescoARK 5.1%TimesSq.4.3%GrowthBD&HWaddellValueAllianceWindsor IICoreVGDomestic FICore FixedIncome Research GarnerCashInt’l EquityDomestic EquitySmallCapLarge Cap EquityDomestic FICore FixedCurrent Asset Allocation**Current Asset Allocation**Policy Target Asset Allocation*Policy Target Asset Allocation*VanguardAsset Alloc.EMInt’l DevHYGBREMkNeutGBGlobalBrandywineEq: 8.2%FI: 2.1%* Approved by Board of Directors on June 10, 2004**Includes Manager Cash 7L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEquity Weighting vs. Median Public FundEquity Weighting vs. Median Public FundAs of December 31, 2004** Excludes Manager Cash 8L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptTotal Fund Performance vs. Public Fund UniverseTotal Fund Performance vs. Public Fund UniverseAs of December 31, 2004Policy Index:Calculated by taking the target asset class weights times the return of the respective passive benchmark (re-balanced monthly). Measures the effectiveness of Plan Structure.Allocation Index:Calculated by taking the actual asset class weights times the return of the respective passive benchmark. Measures the effectiveness of deviating from target weights.Composite: Actual Plan results. When compared to the allocation index, it measures the effectiveness of the managers.*Returns are gross of fees.The public funds universe included 213 public funds with assets of $713 billion at the end of December 2004. 9L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptTotal Fund Performance vs. Public Fund UniverseTotal Fund Performance vs. Public Fund UniverseAs of December 31, 2004Policy Index:Calculated by taking the target asset class weights times the return of the respective passive benchmark (re-balanced monthly). Measures the effectiveness of Plan Structure.Allocation Index:Calculated by taking the actual asset class weights times the return of the respective passive benchmark. Measures the effectiveness of deviating from target weights.Composite: Actual Plan results. When compared to the allocation index, it measures the effectiveness of the managers. 10L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptTotal Fund Performance vs. Public Fund UniverseTotal Fund Performance vs. Public Fund UniverseYears Ending December 31, 2004 11L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptTotal Fund Risk/ReturnTotal Fund Risk/Return-8%-6%-4%-2%0%2%4%6%8%10%12%2%4%6%8%10%12%14%16%18%20%22%Risk (% Standard Deviation)Annualized ReturnTotal Public Funds Total Public Funds ––Total Return vs. Risk Total Return vs. Risk --3 Years Ending 12/31/04 3 Years Ending 12/31/04 S&P 500LB AggregateMSD CompositeAllocation IndexMedian Public FundPolicy IndexValueRankValueRankComposite6.9%6010.5%59Allocation Index8.0%3010.3%63Policy Index6.3%8011.1%40S&P 5003.6%18.5%LB Aggregate6.2%3.7%Median Public Fund7.3%10.7%Annualized ReturnStandard Deviation 12L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptTotal Fund Risk/ReturnTotal Fund Risk/Return-8%-6%-4%-2%0%2%4%6%8%10%12%2%4%6%8%10%12%14%16%18%20%22%Risk (% Standard Deviation)Annualized ReturnTotal Public Funds Total Public Funds ––Total Return vs. Risk Total Return vs. Risk --5 Years Ending 12/31/04 5 Years Ending 12/31/04 S&P 500LB AggregateMSD CompositeAllocation IndexMedian Public FundPolicy IndexValueRankValueRankComposite4.1%499.5%73Allocation Index5.3%268.8%82Policy Index2.8%8710.6%36S&P 500-2.3%18.0%LB Aggregate7.7%3.6%Median Public Fund4.1%10.2%Annualized ReturnStandard Deviation 13L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptPerformance Summary (12/31/04)Performance Summary (12/31/04)LastPublicLastPublicLastPublicLastPublic% of QuarterRank1 YearRank3 YearsRank5 YearsRankMarket ValuePortfolioMSD Composite (GROSS)6.7%779.0%856.9%604.1%49$149,201,714100.0%Median Public Fund7.6%11.0%7.3%4.1% Allocation Index7.0%9.6%8.0%5.3% Policy Index7.0%10.5%6.3%2.8%Balanced Manager / Tactical Asset AllocationVanguard Asset Allocation Fund8.5%2311.6%25N/AN/A$15,322,96910.3% Custom Benchmark6.4%9.6%5.5%2.0%Median Balanced Manager6.7%9.8%6.2%3.8%Large Cap EquityTotal Large Cap Equity$47,827,06232.1%AllianceBernstein9.1%6711.2%866.2%705.2%66$13,634,4609.1%Windsor II10.2%3818.8%309.0%33N/A$5,785,3773.9% S&P Barra Value9.9%15.7%6.5%2.5% Russell 1000 Value10.4%16.5%8.6%5.3%Median Large Cap Value Manager9.8%15.6%7.9%7.0%Waddell & Reed6.9%902.6%96N/AN/A$13,762,0539.2%BDH&S6.1%934.5%900.8%55N/A$4,524,6443.0% Russell 1000 Growth9.2%6.3%(0.2%)(9.3%)Median Large Cap Growth Manager9.7%9.4%1.2%(4.8%)Vanguard S&P 500 Index Fund9.3%5010.9%503.7%49(2.2%)59$10,120,5286.8% Standard & Poors 5009.2%10.9%3.6%(2.3%)Median Large Cap Core Manager9.3%10.9%3.6%(1.9%)Small Cap EquityTotal Small Cap Equity$14,034,4909.4%Ark12.8%5519.1%8714.9%87N/A$7,568,3075.1% Russell 2000 Value13.2%22.3%16.5%17.2%Median Small Cap Value Manager13.2%23.8%18.9%19.4%TimesSquare15.5%2012.2%57N/AN/A$6,466,1834.3% Russell 2000 Growth15.1%14.3%5.8%(3.6%)Median Small Cap Growth Manager13.7%13.0%7.6%4.1% 14L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptPerformance Summary (12/31/04)Performance Summary (12/31/04)LastLastLastLast% of Quarter1 Year3 Years5 YearsMarket ValuePortfolioInt'l EquityINVESCO14.1%5821.6%3112.9%452.0%51$14,277,7159.6% EAFE (After Taxes) 15.3%20.3%11.9%(1.1%) CITI EPAC15.5%20.4%12.1%(0.8%)Median International Equity Manager14.4%20.5%12.2%2.6%Core FixedTotal Core Fixed Income$44,226,11929.6%Income Research & Management0.7%793.7%835.9%757.3%82$37,832,31825.4%Garner Asset Management0.5%913.3%915.4%917.0%91$6,393,8014.3% Lehman Int. Govt./Credit0.4%3.0%5.7%7.2% Lehman Aggregate Bond1.0%4.3%6.2%7.7%Median Core Fixed Income Manager1.0%4.6%6.4%7.9%Global FixedBrandywine Global Bond FundN/AN/AN/AN/A$11,015,5687.4% Citi World Gov't Bond8.5%10.4%14.9%8.8%CashCash Account0.4%1.0%N/AN/A$2,497,7911.7% 90 Day U.S. T-Bills0.5%1.3%1.4%3.0% 15L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSTEN BEST AND WORST PERFORMERSSECTOR OVER/UNDER WEIGHTS VS. RUSSELL 1000 VALUE1.53.3-3.3-4.95.0-1.1-1.9-3.00.0-3.78.1-15-10-5051015Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesMisc.Manager Performance Manager Performance ––Alliance BernsteinAlliance BernsteinTOP TEN EQUITY PORTFOLIO HOLDINGS 16L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSTEN BEST AND WORST PERFORMERSSECTOR OVER/UNDER WEIGHTS VS. RUSSELL 1000 VALUE-2.24.00.6-4.66.01.7-0.91.4-3.7-2.2-10-50510Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesManager Performance Manager Performance ––Windsor II FundWindsor II FundWELLS FARGO3.0%OCCIDENTAL PETROLEUM2.7%CITIGROUP2.6%CONOCOPHILLIPS2.6%BANK OF AMERICA2.5%ALTRIA GROUP2.5%JPMORGAN CHASE2.4%CENDANT CORP2.4%CHEVRON TEXACO2.1%IMPERIAL TOBACCO2.1%STOCKRETURNMGM MIRAGE24.8MONSANTO CO20.7HUMANA INC.19.6PUBLIC SERVICE ENTERPRISES19.2SCHERING-PLOUGH CORP.17.0CIGNA CORP.16.5MERK & CO.16.3NATIONAL SEMICONDUCTOR CORP16.2PULTE HOMES15.6MARSH & McCLENNAN COS.15.1STOCKRETURNUNOCAL CORP.-6.1FIRST ENERGY CORP.-6.4KERR-McGEE CORP.-6.5APACHE CORP.-6.5ANADARKO PETROLEUM CO-6.7AMERADA HESS CORP.-7.0ALCOA INC.-7.5NEENAH PAPER INC.-7.7LOCKHEED MARTIN CORP.-8.7PETRO-CANADA-10.5TOP TEN EQUITY PORTFOLIO HOLDINGS 17L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSTEN BEST AND WORST PERFORMERSSECTOR OVER/UNDER WEIGHTS VS. RUSSELL 1000 GROWTH3.1-0.43.73.4-7.23.3-1.3-0.10.0-1.2-3.3-10-50510Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesMisc.Manager Performance Manager Performance ––Waddell & ReedWaddell & ReedTOP TEN EQUITY PORTFOLIO HOLDINGS 18L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSTEN BEST AND WORST PERFORMERSSECTOR OVER/UNDER WEIGHTS VS. RUSSELL 1000 GROWTH3.3-2.14.8-14.80.54.46.16.54.0-12.7-20-15-10-505101520Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesManager Performance Manager Performance ––BDH&SBDH&STOP TEN EQUITY PORTFOLIO HOLDINGS 19L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSSector Over/Under Weights vs. Russell 2000 Value8.62.4-3.010.12.8-5.5-3.60.0-16.1-1.05.3-20-15-10-505101520Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesMiscellaneousManager Performance Manager Performance ––Ark Asset ManagementArk Asset ManagementTEN BEST AND WORST PERFORMERSTOP TEN EQUITY PORTFOLIO HOLDINGS 20L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEQUITY PORTFOLIO CHARACTERISTICSSECTOR OVER/UNDER WEIGHTS VS. RUSSELL 2000 GROWTH-4.41.90.93.2-0.71.8-1.8-0.12.41.0-4.3-10-50510Cons DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesMiscellaneousManager Performance Manager Performance ––TimesSquareTimesSquareTEN BEST AND WORST PERFORMERSTOP TEN EQUITY PORTFOLIO HOLDINGS 21L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptManager Performance Manager Performance ––Income ResearchIncome ResearchPORTFOLIO ANALYSISAVERAGE MATURITY % HELDSECTOR ALLOCATIONMBS13.1%Corporates56.6%Govt/Agency22.5%ABS0.8%Muni's2.4%Utilities4.6%7.5%0.0%34.1%16.9%19.9%16.6%5.1%0%20%40%60%80%100%Other / NRBelow BaaBaaAAaAaaGov't2.8%19.8%15.0%19.9%11.7%23.0%7.8%0%20%40%60%80%100%Unclassified20.0 +10.0 - 20.05.0 - 10.03.0 - 5.01.0 - 3.00.0 - 1.0YearsCREDIT DISTRIBUTION 22L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptManager Performance Manager Performance ––Garner Asset Mgmt.Garner Asset Mgmt.PORTFOLIO ANALYSISAVERAGE MATURITY % HELDSECTOR ALLOCATIONCorporates91.5%Govt2.9%5.6%75.0%8.5%10.9%0%20%40%60%80%100%Other / NRBelow BaaBaaAAaAaaGov't6.1%0.0%41.2%4.9%17.3%24.9%5.6%0%20%40%60%80%100%Unclassified20.0 +10.0 - 20.05.0 - 10.03.0 - 5.01.0 - 3.00.0 - 1.0YearsMBS5.6CREDIT DISTRIBUTION 23L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptManager Performance Manager Performance ––INVESCOINVESCOSECTOR ALLOCATIONPORTFOLIO COUNTRY WEIGHTSFrance5.3%Total North America/Cash4.2%Japan21.4%U.K.21.8%Germany3.2%Australia/New Zealand1.6%Other Pacific Basin1.6%Other Europe35.4%0%5%10%15%20%25%Consumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInfo TechnologyMaterialsTelecom ServicesUtilitiesMiscellaneousTOP TEN HOLDINGSSTOCK% HOLDINGNovartis2.5%Fuji Photo Film2.5%Royal Bank of Scotland2.3%BASF AG2.3%GlaxoSmithKline PLC2.3%Nokia Corp.2.2%Reed Elsevier PLC2.1%Michelin2.1%Diageo2.1%Danske Bank A/S2.1% 24L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptManager Performance Manager Performance ––BrandywineBrandywinePORTFOLIO COUNTRY WEIGHTSPORTFOLIO CHARACTERISTICCitigroup WorldGov't Bond IndexBrandywine5.68 Yrs2.61 YrsDuration2.78%3.5%YTM Average Quality AAAAA+Maturity 3.08 Yrs7.3 Yrs3.89%Coupon 4.1% 25L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptEquity Funds 3 Year Risk AnalysisEquity Funds 3 Year Risk Analysis 26L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptBond Funds 3 Year Risk AnalysisBond Funds 3 Year Risk Analysis 27L:\Clients/St Louis MSD/IPA/Executive Reports /2003/MSD 3Q 2003 Executive Report.pptBond Funds 5 Year Risk AnalysisBond Funds 5 Year Risk Analysis