2006-2007 Benchmark Portfolios - All Currencies

The following model portfolios are intended for investment managers whose performance is evaluated annually by their clients, against a benchmark composed of domestic investment grade bonds and equities.

The objective of these portfolios is to maximize the probability of outperforming their benchmarks over a one-year holding period, while not exceeding the benchmark's risk.

A further constraint is that the portfolios do not take active (alpha) risk; they attempt to outperform the benchmark by including (beta) exposure to other asset classes, including real return bonds, foreign currency bonds, domestic and foreign commercial property, commodities and timber, and foreign and emerging markets equity.

We also constrain the maximum amount that can be allocated to certain asset classes. Foreign bonds, domestic and foreign commercial property, and commodities are limited to a maximum of twenty percent of the portfolio's weight. Timber and emerging markets equity are limited to ten percent each. Finally, the combined allocation to commodities and timber cannot exceed twenty percent.

To construct these portfolios, we used the same simulation optimization methodology we use to construct our target return portfolios. The model evaluates the performance of alternative asset allocations under two regimes. One incorporates asset class return and risk assumptions based on 1989-2004 historical data. The other uses forward looking return and risk assumptions derived from our asset pricing model, which uses a building block methodology. In essence, the historical regime is characterized by higher returns and lower standard deviations, while the forward-looking regime is just the opposite. The correlation matrix is the same under both regimes. Each regime has a fifty percent probability of occurring.

The expected real benchmark returns and standard deviation, as well as those for the model portfolios, reflect the combination of the two regimes. We also present the estimated probability that the model portfolio will outperform the benchmark portfolio over a twelve-month period.

Year-to-date performance is through July 31, 2006.

| The Exchange Traded Fund Market | This Month's Letters to the Editor: Products to Protect Principal - tied to an Equity Index | Global Asset Class Returns | Asset Class Valuation Update | Product and Strategy Notes: Why is the IMF Worried?; Asset Classes and Return Generating Process; It's Time for a Canadian Revolt; and How are Benchmark Indexes Chosen? | This Month's Issue: Key Points | Active Management and Risk Budgeting | 2006-2007 Benchmark Portfolios - All Currencies |