2013 Pension Conference Speakers and Agenda

2013 ANNUAL
PENSION
CONFERENCE
24 APRIL 2013

1
2013 Pension Conference
Wednesday April 24, 2013, 8:00 AM – 5:00 PM
Reception: 5:00 PM – 6:00 PM
Agenda
8:00 – 8:25 AM
Registration & Networking Breakfast
8:25 – 8:30 AM Opening Remarks
Peter S. Jarvis, CFA, CEO, CFA Society Toronto
8:30 – 9:30 AM The Biology of Risk Taking
Speaker: John Coates, Professor, University of Cambridge
The title says it all: the biology of risk taking. John Coates presents
research into the ways our body guides our risk taking, research
recently surveyed in his book The Hour between Dog and Wolf.
9:30 - 10:00 AM The Canadian Pension Model. Norway vs Yale vs Canada -
A Comparison of Investment Models.
Speaker: Keith Ambachtsheer, Executive Director, Rotman
International Centre for Pension Management
This discussion will consider a new formula for the “Canada
Pension Fund Model” (which is encapsulated in the Morneau
report) that studies the application of the Model by merging
all/most Ontario public sector funds smaller than OTPP, OMERS,
HOOPP.
10:00 – 10:15 AM Networking & Coffee Break

2
10:15 – 11:00 AM Managing Extreme Risks in a Pension Plan
Speaker: Janet Rabovsky, Director, Investments, Towers Watson
Janet will explore the extreme risks that pension plans should
consider (even if they can’t always manage these unpredictable
and significant exposures). She will present a framework for
assessing the risks in a portfolio and examine how to diversify a
Plan by return drivers versus the more traditional asset and sector
categories.
11:00 - 12:15 PM LDI in a Low Interest Rate Environment
Speakers: James Davis, CFA, Vice-President, Investment
Planning & Economics, Ontario Teachers’ Pension Plan
Speakers: Malcolm Hamilton, former Partner of Mercer
Pension plans had fun in the 1990s. They earned high riskless
returns or even higher risky ones. Today’s pension plans have
much harder choices. Often they must choose between
unacceptably low returns and unacceptably high risks. LDI lets
them make the best of a bad situation; but it is still a bad situation!
Pension plans should stop using unrealistically high return
expectations to live in a past that is long gone. They must begin to
make tough decisions - about contribution rates, risk sharing and
benefit design – not just easy decisions about asset mix.
12:15 – 1:00 PM Networking Buffet Lunch
1:00 – 2:00 PM Pooling of Public Sector Asset Management
Speaker: Bill Morneau, Executive Chairman, Morneau Shepell
In May 2012, Bill Morneau was appointed by the Ontario Minister
of Finance as Pension Investment Advisor to lead in facilitating the
pooling of public sector pension fund assets. The report released
in October 2012 recommended that Ontario move to pooling the
pension assets of Ontario public sector organizations that are not
already in a jointly sponsored pension plan. This talk will review
the background of the project, and the merits and challenges of
moving to greater consolidation of pension assets in Ontario.

3
2:00 - 3:00 PM The Price of Climate Risk
Speaker: Bob Litterman, Chairman, Risk Committee, Kepos
Capital
How does an investor or even more importantly society, rationally
price unknowable risks? This is the fundamental topic explored by
Bob Litterman one of the pre-eminent thinkers in the world on the
subject of risk.
Bob will explore the appropriate pricing of climate risk, its non-
diversifiable nature, societal risk aversion and implications for
portfolio construction. He will also identify that incentives matter,
inappropriate pricing of climate risk wastes scarce resources and
as a result will present a rational pricing model and method for
thinking about how to incorporate these types of risks into asset
management.
3:00 - 3:15 PM Networking & Coffee Break
3:15 - 4:15 PM Practical Application of Alternatives for Pension Plans
Speaker: Robert Cultraro, CFA, Executive Chief Investment and
Pension Officer, Hydro One
Speaker: Julie Cays Chief Investment Officer, Colleges of Applied
Arts and Technology (CAAT), Pension Plan
Listen in on an exclusive interview moderated by Marcus Turner,
CFA, Senior Investment Consultant at Towers Watson featuring a
panel of successful CIO's on investing in alternative investments.
4:15 - 5:00 PM Is Sluggish Growth Forever?
Speaker: Avery Shenfeld, Managing Director and Chief Economist,
CIBC
Avery’s presentation will focus on the economic outlook and its
implications for equity, fixed income and foreign exchange
markets.
5:00 - 6:00 PM Closing Remarks and Networking Reception – Rooms A/B/C/D

1
2013 Pension Conference - Speakers Biographies
John Coates
Professor
University of Cambridge
John McBride Coates is a neuroscientist at the University of Cambridge and former Wall
Street trader for Goldman Sachs, Merrill Lynch and Deutsche Bank.
Coates' research focuses on the hormonal basis of financial decision making,[3] inspired
by his own experiences trading. He describes how men trading "display what may be
called [the] classical clinical symptoms of mania. They were delusional, they were
euphoric, they were over confident, they had racing thoughts [and a] diminished need for
sleep."
In 2012, Coates published The Hour Between Dog and Wolf: Risk Taking, Gut Feelings
and the Biology of Boom and Bust.
Keith Ambachtsheer
Executive Director
Rotman International Centre for Pension Management
Keith Ambachtsheer is Director of the Rotman International Centre for Pension
Management (ICPM), an Adjunct Professor of Finance, Academic Director of the
Rotman-ICPM Board Effectiveness Program, and Publisher and Editor of the Rotman
International Journal of Pension Management. His firm, KPA Advisory Services Ltd., has
provided advice to governments, industry associations, pension-plan sponsors,
foundations and other institutional investors since 1985. He is the co-founder of CEM
Benchmarking Inc. which monitors the performance of 300 pensions worldwide. Keith
has authored three books on pension management and has received numerous industry
awards.
Ambachtsheer is a four-time winner of the CFA Institute Financial Analysts Journal’s
Graham and Dodd Scrolls (1979, 1985, 1987, and 1994). In 2003 he was named one of
the 30 Most Influential People by Pensions and Investments, and in 2007 he was
honored with the Outstanding Industry Contribution Award by Investments and Pensions
Europe.
In 2011, he received the CFA Institute’s Award for Professional Excellence. This award
is presented periodically to a member of the investment profession whose exemplary
achievement, excellence of practice, and true leadership have inspired and reflected
honor upon the investment profession to the highest degree. Previous recipients include
Martin Leibowitz, Jack Bogle, Charles D. Ellis, CFA, Warren Buffett, and Sir John Marks
Templeton, CFA.
Bill Morneau
Executive Chairman
Morneau Shepell
Bill Morneau is Executive Chairman of Morneau Shepell. Under his leadership, the firm
has become the largest Canadian human resources services firm, with over 3000
employees. Bill is Chair of the Board of Directors at St. Michael’s Hospital in Toronto,
and Chair of the Board of Directors at the C.D. Howe Institute. In May 2012, he was

2
appointed by the Ontario Minister of Finance as Pension Investment Advisor, to lead in
facilitating the pooling of public sector pension fund assets. Bill is also on the boards of
AGF Management Ltd., the Canadian Merit Scholarship Foundation, The Learning
Partnership, the London School of Economics North American Advisory Committee, the
Canadian INSEAD Foundation, and Greenwood College. He is past Chair of the Board
of Directors of Covenant House. In 2012, he co-authored a book, The Real Retirement,
which is currently in bookstores across Canada. In 2002, he was named as one of
Canada’s Top 40 Under 40. Bill holds a B.A. from Western University, an M.Sc. (Econ.)
from the London School of Economics, and an M.B.A. from INSEAD.
James Davis, CFA
Vice-President, Investment Planning & Economics
Ontario Teachers’ Pension Plan
James Davis is responsible for the fund's strategic investment planning, as well as
recommending tactical risk management strategies and new asset classes for the fund.
Mr. Davis joined Teachers' in 2006 and has more than 20 years’ experience in
investment strategy and management. A CFA charterholder, Mr. Davis earned an MBA
and B.Sc. from Dalhousie University.
Malcolm Hamilton
Former Partner of Mercer
Malcolm Hamilton is a former Partner of Mercer. He specializes in the design and
funding of employee benefit plans in both the private and public sectors, with particular
emphasis on registered pension and savings plans, unregistered pension plans, and
retirement compensation arrangements. His clients include the Colleges of Applied Arts
and Technology, the Ontario Teachers' Pension Plan, Ontario Power Generation, the
Bank of Montreal and Manulife.
Malcolm graduated from Queens University in 1972 as the Gold Medalist in
Mathematics. He attended McGill as a National Research Council scholar, receiving his
M.Sc. in 1975. He became a Fellow of the Canadian Institute of Actuaries and a Fellow
of the Society of Actuaries in 1977. He is a frequent speaker at pension conferences
Janet Rabovsky
Director, Investments
Towers Watson
Janet has been with Towers Watson since 2001 and regularly consults with clients on
their DB and DC needs. In addition to working with clients, Janet is also part of the
global private equity and infrastructure research teams. Prior to joining Towers Watson,
Janet worked for the mutual fund company of a major chartered bank in Toronto where
she was responsible for the development of a number of funds and portfolios, as well as
manager selection and monitoring activities. Janet performed a similar function for a
major public sector fund management corporation in Melbourne, Australia, though her
focus was limited to Global equities at the time. Janet spent five years at an engineering
firm and mining company performing various accounting, finance and pension related
activities. Janet has a B.A. in English from the University of Toronto and an M.B.A. from
the Schulich School of Business (York University).
Bob Litterman
Chairman, Risk Committee

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Kepos Capital
Bob Litterman is the Chairman of our Risk Committee and of our Academic Advisory
Board. Prior to joining Kepos Capital in 2010, Bob enjoyed a 23-year career at Goldman,
Sachs & Co., where he served in research, risk management, investments and thought
leadership roles. He oversaw the Quantitative Investment Strategies Group, a portfolio
management business formerly known as the Quantitative Equities and Quantitative
Strategies groups, and Global Investment Strategies, an institutional investment
research group. While at Goldman, Bob also spent six years as one of three external
advisors to Singapore’s Government Investment Corporation (GIC). Bob was named a
partner of Goldman Sachs in 1994 and became head of the firm-wide risk function; prior
to that role, he was co-head of the Fixed Income Research and Model Development
Group with Fischer Black. During his tenure at Goldman, Bob researched and published
a number of groundbreaking papers in asset allocation and risk management. He is the
co-developer of the Black-Litterman Global Asset Allocation Model, a key tool in
investment management, and has co-authored books including The Practice of Risk
Management and Modern Investment Management: An Equilibrium Approach (Wiley &
Co.). Bob earned a Ph.D. in Economics from the University of Minnesota and a B.S. in
Human Biology from Stanford University. He is also the inaugural recipient of the S.
Donald Sussman Fellowship at MIT's Sloan School of Management and serves on a
number of boards, including Commonfund, the Sloan Foundation and World Wildlife
Fund.
Robert Cultraro, CFA
Executive Chief Investment and Pension Officer
Hydro One
Robert has over twenty years of extensive experience in the investment industry, which
includes investment research and fund management. Robert holds the Chartered
Financial Analyst, Chartered Alternative Investment Analyst and the Certified Investment
Manager designations. Robert is professionally affiliated with the CFA Institute, the CFA
Society Toronto, the Chartered Alternative Investment Analyst Association, and is a
Fellow of the Canadian Securities Institute. Robert is a member of the Investment
Advisory Committee for the Office of the Public Guardian and Trustee and a member of
the Investment Advisory Committee for the Pension Investment Association of Canada.
Julie Cays
Chief Investment Officer
Colleges of Applied Arts and Technology (CAAT) Pension Plan
Julie Cays is the Chief Investment Officer at the Colleges of Applied Arts and
Technology (CAAT) Pension Plan. She has extensive capital markets experience,
having spent 16 years at CIBC. She was Vice President, External Managers at
Healthcare of Ontario Pension Plan (HOOPP) until 2006 when she moved to CAAT to
head the investment team in managing the $6.5 billion pension fund for the employees
of the Ontario community colleges. Julie is the past Chair of the Board of the Pension
Investment Association of Canada and is a member of the Investment Advisory
Committee of the Financial Services Commission of Ontario. She received her degree in
economics from the University of Waterloo and has her Chartered Financial Analyst
designation.

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Avery Shenfeld
Managing Director and Chief Economist
CIBC
Avery Shenfeld is Managing Director and Chief Economist of CIBC. He has been with
CIBC since 1993 and is widely recognized as one of Canada’s leading economists for
his perceptive analysis and insight on economic developments and their implications for
financial markets. Mr. Shenfeld is a four-time winner of the Dow Jones Market Watch
forecasting award and has received awards for forecast accuracy on the U.S. and
Canadian economies by Bloomberg Markets. He has also been consistently ranked as
one of the top Canadian economists by institutional investors. Mr. Shenfeld’s prior
background includes experience in management consulting. He was on the economics
faculty at the University of Toronto and in the summer program at Harvard’s John F.
Kennedy School of Government. He has addressed numerous business groups and has
been quoted in the media in the United States, Canada, Asia and Europe. Mr. Shenfeld
holds a PhD in Economics from Harvard University.

Keith Ambachtsheer
Director, Rotman International Centre for Pension Management
Rotman School of Management, University of Toronto
April 24, 2013 - CFA Society Toronto Annual Pension Conference
Norway vs.Canada
A Comparison of Investment Models

2
Fiduciary mandate -> ‘for the sole benefit of...’
Strong governance and executive functions
Sensible investment beliefs
Right-scaled
Attract/retain top professional team
The Drucker Pension Organization

3
External Service Providers
NB Investment Management
Norges Bank
MPT Investment Model
Ministry of Finance
Norwegian Parliament
Norway Model – “Epistemic Proceduralism”

4
Investment Results - OTPP vs. Norway Fund
OTPP Since 1990 OTPP Since 1998 Norway Fund Since 1998
Return of Fund* 9.95% 7.87% 4.23%
Return of Reference Portfolio 7.66% 6.01% 3.95%
EXCESS RETURN 2.29% 1.86% 0.28%
Average Management Cost 0.15% 0.20% 0.10%
NET EXCESS RETURN 2.14% 1.66% 0.18%
Tracking Error 3.01% 2.56% 0.80%
Information Ratio ** 0.70 0.63 0.23
* To Dec 31, 2010
** Net Excess Return / Tracking Error
Investment Results – OTPP vs. Norway
Fund

5
“They own assets all over the world,
including property in Manhattan,
utilities in Chile, international airports,
and the high-speed rail line connecting
London to the Channel tunnel. They
have taken part in six of the top 100
levered buyouts in history. They have
won the attention of both Wall Street
firms, who consider them rivals, and
institutional investors, who aspire to be
like them.”
Excerpt from The Economist
(“Maple Revolutionaries,” 3 March 2012)

© 2012 Towers Watson. All rights reserved.
Managing Pension Plans in Volatile
Times
Janet Rabovsky
Director
April 2013

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 Plan sponsors have experienced three extreme market events in the
past decade
 2001/2 – 95th percentile
 2008 – 98th percentile
 2011 – 95th percentile
 Volatility has not been limited to equities – even bond markets have
been volatile since 2008!
 Given the current environment and the prospect of continued market
volatility, what options do plan sponsors have?
Managing Pension Plans in Volatile Times

60%
70%
80%
90%
100%
110%
120%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
SolvencyFundedRatio
Canadian DB Pension Plans – Solvency Ratios
Strong stock markets in
Canada helped many
Canadian plans rebuild
their funded position
through the mid-2000s
Solvency was
approaching 95% to
100% for many
plans, before Euro
crisis of 2011
Partial recovery in 2004
Pension plans were
generally in healthy
shape in the late
1990’s in part due to
the tech bubble
Bursting of
tech bubble
Financial/credit
crisis
Solvency ratio
is 83% at
March 31,
2013
Solvency ratio
fell below 75%
in 2011

 This presentation will review three main approaches that plan sponsors
can consider to help manage market volatility
 Adopting a de-risking strategy
 Managing extreme risks through thematic investing
 Creating better diversity in the return seeking portfolio
 The three approaches are NOT mutually exclusive and can be
combined
Managing Pension Plans in Volatile Times

© 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com
Journey planning
De-risking
5

Annuity
Purchase
Investment Strategy
Plan design
Many DB plan sponsors have
already closed the plan to new
entrants
Some have frozen DB accruals
Defined Benefit De-risking Is Not New
Over 50% of DB plan sponsors
intend to further de-risk their
investments in the next 12
months*
Few plan sponsors have opted
to purchase annuities although
a small fraction* are exploring
this option
* 2012 Towers Watson DB Pension Risk Survey of 115 plan sponsors.

 Initial asset-liability study usually forms the basis for developing short-
term and long-term goals and constraints
 Preparedness — particularly for organizations with complex
governance requirements — and adaptability are key
 Non-financial issues need
attention throughout the process
Developing a Journey Plan
Journey
Plan

60%
70%
80%
90%
100%
110%
120%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
SolvencyFundedRatio
Developing a Journey Plan – Matching Desire With Ability
Bursting of
tech bubble
Financial/credit
crisis
When DESIRE to de-risk is highest, ABILITY to
de-risk is lowest, and vice-versa.
Often opportunities are lost before plan
sponsor can react
Euro crisis
continued

Journey Planning
Many Paths to Plan Management
Frozen / Closed Plan
Offer Bulk Lump
Sum to TV’s
Settle/transfer
Retiree Obligations
Current
allocation
Reduce
equity
risk
Reduce
interest
rate risk
Goal
Path B
Path C
AssetStrategies
Benefit Strategies
Risk
Risk
Settle/Manage
Remaining
Obligations
There are many paths an organization can follow to reach the stated goal
Current
Path A
Alt.
Goal
Path D
Open Plan

Thematic responses
Extreme Risks
10

Macro Factors: Initial Framework 2008
Economic
imbalances
1. Rebalancing & deleveraging Consumption, savings and portfolio preferences alter
2. Financial repression & safety Misallocation of capital reduces returns, increases volatility
Adverse
demography
3. Population growth Strain on agricultural and water resources
4. Ageing Winners and losers at the stock and economic level
Degradation of
natural capital
5. Resource scarcity Resource price inflation and innovation
6. Climate change Externalities and mitigation equal winner and losers
Innovation and
technology
7. Globalization Inequality bad for political stability and potential growth
8. New technology Transformational new technologies will come on stream
Business
shake up
9. Sustainable business models Proper inclusion of ESG, adaption and capital efficiency
10.Labour and capital relations Create a workforce equipped for new environment
Government 11.Regulation Good or bad regulation will create winners and losers
12.Inter-generational equity Public finances will come under pressure to adapt
11

Extreme Risks 2011 – Ranking and Sample Hedges
12
* Our subjective measure based on the impact, the risk, and the degree of uncertainty in assessing the risk level
Risk ranking* as at 30 June 2011
Rank Risk Description Possible hedge
1 Depression Debt-deflation trap; falling growth and
incomes
Globally-diversified long-dated Sovereign nominal bonds
2 Sovereign default Default by a major developed country on its
debt
Country insurance (eg CDS)
3 Hyperinflation Extremely high inflation Real assets eg gold, globally-diversified inflation-linked bonds
4 Banking crisis Balance sheets can’t absorb another shock Nominal sovereign bonds (medium duration)
5 Currency crisis Extreme movement between floating rates Gold; foreign assets
6 Climate change Diversion of capital to mitigation uses No general hedge
7 Political crisis Rise in power of extremist groups No obvious hedge
8 Insurance crisis Insolvency within insurance sector Nominal sovereign bonds (medium duration) short insurance
equity
9 Protectionism Reversal of movement towards free trade No general hedge
10 Euro break-up At least one member leaves the Euro Long Germany (hedged)
11 Resource scarcity Peak “stuff” Depends on which resource
12 Major war A major global conflict Long neutral countries
13 End of fiat money Return to a gold standard Gold
14 Infrastructure
failure
(Temporary) interruption of grid / networks Tinned food, bottled water, guns & ammunition
15 Killer pandemic Contagious disease with very high mortality Long pharmaceutical equities, short airline equities

Transformational Changes - 2013
TransformationEconomic
imbalances
Adverse
demography
Degradation
of natural
capital
Innovation
and
technology
Business
shake up
Government
13

Portfolio Construction: Responding to Change
Bulk beta AlphaSmart beta
Equities
Sovereign
bonds
Corporate
bonds
Classic active
management
Skill in
alternatives
Thematic
Diversifying
Systematic
Tactical
asset allocation
Portfolio construction skill
14

Sample Smart Betas
Emerging wealth Sustainability
Value-weighted
equity indices
Risk-weighted
equity indices
Screened
credit
Currency carry Volatility Trend
Demographics
Systematic
Thematic
Secure income
alternatives
Core
infrastructure
Enhanced
commodities
Multi-strategy
alternative credit
Reinsurance Agriculture
Diversifying
15

Portfolio Construction
Creating Diversity
16

Portfolio Construction: Return Driver Approach
Stage 1:
ALM/LDI
Stage 2:
Portfolio
Construction
Stage 3:
Implementation
Manager selection and monitoring
Liability-matching
Physical Bonds
Return-seeking
Equity
Asset Allocation
Supporting Objectives
Illiquidity
CreditDuration
Insurance
Skill
Term
Credit
Currency
Inflation
Derivative
Instruments
Curve/
Convexity
Inflation
17

Return Drivers
18
Risk premium Investors are rewarded for bearing the risk of:
Equity
Being lower down the capital structure in the event of
corporate default
Credit Corporate bond issuers defaulting on their bond obligations
Illiquidity Holding an asset that cannot be quickly or cheaply sold
Insurance Providing protection against extreme losses
Term
The uncertain return and mark-to-market volatility of an index-
linked bond compared to holding cash
Inflation
Inflation being higher than anticipated and therefore reducing
real returns on fixed-interest bonds
Currency
The risk that the purchasing power of the currency falls due to
a currency crisis
Skill
A manager, previously considered skilful, underperforming its
benchmark

Creating Diversity: Potential Risk and Return Drivers
.
Government
bonds
Return Drivers
Cash
Alternative
credit
Corporate
bonds
Equities
Hedge funds
Private
markets beta
Private
markets alpha
Currency CommoditiesInsurance Volatility
Equity risk premium
Credit risk premium
Illiquidity risk premium
Insurance risk premium
Term risk premium
Inflation risk premium
Currency risk premium
Skill risk premium
Multiple Risk Premiums
Asset Classes
19

Adding Diversity……
 Approaches that change the way risk and return
premiums are earned.
 Exposure to different stages of a company’s life
cycle (private equity, high yield, emerging
markets, leveraged loans)
 Change in ratio of skill to market exposure
 Examples include:
 Global Tactical Asset Allocation
 Hedge Funds
 “Alternative betas”, including non-market
capitalization weighted equity and beta
strategies that look to access certain market risk
factors.
 Multi-strategy alternative credit
 Multi-asset strategies
 Assets that change the economic exposure of the
portfolio, as well as the mix of risk and return
premia
 Examples include:
 Real estate (direct and listed)
 Infrastructure
 Timberland
 Agriculture
 Commodities
Diversity: Strategic Asset Allocation Diversity: Implementation Approaches
 There are two broad ways to access alternative forms of risk premia and / or add diversity
to a traditional portfolio:
20

Diversifying Return Drivers
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Passive Global Equity Current Portfolio Long-Only Diversified
Portfolio
Liquid, Diversified Portfolio Current Model Portfolio
Public Market Equities Credit Strategies Alternative Betas Hedge Funds Private Markets Investment Grade FI Cash
Passive Global
Equity
Current Portfolio
Long-Only
Diversified
Portfolio
Liquid, Diversified
Portfolio
Current Model
Portfolio
Public Market Equities 100% 99% 70% 50% 34%
Non-US Developed 40.0% 22.2% 22.2% 18.3% 10.5%
US Large Cap 40.4% 47.7% 29.4% 18.3% 10.5%
US Small Cap 7.1% 20.7% 10.0% 5.0% 3.0%
Emerging Markets 12.5% 8.7% 8.7% 8.7% 10.0%
Credit Strategies 0% 0% 15% 15% 15%
Alternative Betas 0% 0% 4% 9% 9%
Hedge Funds 0% 0% 0% 15% 15%
Private Markets 0% 1% 11% 11% 24%
Investment Grade FI 0% 0% 0% 0% 0%
Cash 0% 0% 0% 0% 3%
21

Creating Diversity – Improving Outcomes
Passive Global
Equity
Current Portfolio
Long-Only
Diversified
Portfolio
Liquid, Diversified
Portfolio
Current Model
Portfolio
7.0% 7.2% 6.9% 6.2% 6.5%
18.2% 19.0% 14.2% 11.1% 9.6%
7.5% 7.5% 7.5% 7.2% 7.5%
13.9% 14.5% 11.0% 8.7% 7.5%
6.7% 7.0% 7.1% 6.8% 7.1%
15.2% 15.9% 11.9% 9.4% 8.1%
(433.8) (452.3) (309.5) (225.0) (173.0)
4.2% 4.5% 4.7% 4.3% 4.7%
15.0% 15.7% 11.8% 9.3% 8.0%
0.28 0.29 0.39 0.47 0.58
* Downside Risk is measured as Conditional Value at Risk (CVaR95). CVaR95 is the average of the lowest 5% of results.
Absolute Return
Year 1 exp. return
Standard deviation
Year 10 exp. return
Standard deviation
Downside Risk*
Ten year exp. return - annualized
Standard deviation (%pa)
Return vs. Cash
Ten year exp. Return - annualized
Tracking error (%pa)
Information Ratio
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Credit Illiquidity Insurance Term/Inflation Currency Skill
Passive Global Equity Long-Only Diversified Portfolio Liquid, Diversified Portfolio Current Model Portfolio
Attribution of Return
22

Monitoring Macro Risk Exposures
X = Has less exposure than the Benchmark
X = Has greater exposure than the Benchmark
Note: Shaded areas represent changes from last quarter. Grey represents less exposure, yellow represents more.
ManagerA
ManagerB
ManagerC
ManagerD
ManagerE
ManagerF
ManagerG
ManagerH
ManagerI
ManagerJ
ManagerK
ManagerL
Long Bond Yields Decrease X
Corporate Spreads Widen X X
Consumer Spending Weakness X X X X X X X
Banking Sector Issues X X X X X X X X X
Global Inflation X X
Continued Japanese Deflation X X X
Euro Break-Up X X X X X X X
Base Metal Price Decreases X X X X X
Oil Price Decreases X X X X X X
Emerging Markets Slowdown X X X X X
Global Recession X X X X X X X X X
Poor Quality Rally (poor relative
performance during junk rally)
X X X X X X X X

Bringing It Altogether
24

Bringing It Altogether
Portfolio Strategy Options
1. Risk
identification
 Defining financial framework within which plan needs to be run.
Understanding fiduciary and sponsor constraints
 Develop a Journey Plan to reduce the overall impact of the Pension
Plan on the Plan Sponsor
2. Risk
reduction
 Sponsors have a non-uniform utility to risk and reward – more surplus
has a diminishing value whereas more loss is increasingly painful
 De-risk by increasing your allocation to liability matching assets,
and/or
 Purchase sufficient protection against severe outcomes (when it is
cost-effective to do so)
 Diversify the drivers of return
3. Risk
mitigation
 Ensuring that the sponsor doesn’t have too much exposure to things
that can hurt them when they can least afford it
 Building more diverse portfolios with better balance between
exposures
 Dynamic asset allocation (reserved for high governance
organizations)
25

Contact Details
 Janet Rabovsky, MBA
 Tel: 416.960.7089
 Email: janet.rabovsky@towerswatson.com
26

Disclaimer
This document was prepared for general information purposes only and should not be
considered a substitute for specific professional advice. In particular, its contents are not
intended by Towers Watson to be construed as the provision of investment, legal,
accounting, tax or other professional advice or recommendations of any kind, or to form the
basis of any decision to do or to refrain from doing anything. As such, this document should
not be relied upon for investment or other financial decisions and no such decisions should
be taken on the basis of its contents without seeking specific advice.
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takes no account of subsequent developments after that date. In addition, past performance
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Copyright © 2012 Towers Watson. All rights reserved.

LDI in a Low Yield Environment
2013 Annual Pension Conference
CFA Society Toronto – April 24, 2013
James Davis, CFA
Vice-President, Strategy and Asset Mix
& Chief Economist
Asset Mix & Risk Department

2 What do we mean by LDI?
In a perfect world we
would:
 Fully hedge all the
risks inherent in
our liabilities
 Construct the
optimal Sharpe
ratio portfolio
 Employ leverage to
earn the highest
rate of return
LIABILITY HEDGE PORTFOLIO
(LHP)
PROFIT SEEKING PORTFOLIO
(PSP)
Manage risk of liabilities,
e.g., real rate sensitivity,
inflation
Earn the real rate of return
required to meet liabilities
AssetsLiabilities

3
But Teachers’ doesn’t live in a perfect world!

4 Fast Facts about Teachers’
 Largest single-profession (DB) plan in
Canada; membership of 372,000
current, former and retired teachers
(and their survivors)
 Jointly sponsored by the Ontario
government and Ontario Teachers’
Federation
 Plan benefits are indexed to inflation
(Conditional inflation protection for
benefits accrued post 2009)
 Need to file a balanced funding
valuation at least once every three
years
 Requires a real return of about 5% pa
to have a fully funded plan in 20 years
 C$129.5 billion in net assets (2012)
 200 investment professionals;
investments well diversified globally,
across various asset classes
 Strong performance-driven, incentive-
based culture
 10.1% average rate of return and
annualized value added over
benchmarks of 2.2% since 1990

5
Plan demographics are impacting our investment
decisions
1. Teachers are living longer and collecting pension benefits longer
2. Teachers contribute for a shorter period than they collect benefits
3. The plan is mature and will mature further
1970 1990 2012
Expected Credit at
Retirement (years) 27 29 26
Expected Years on
Pension 20 25 31
Active Teachers
Per Retiree
Average Contribution
Rate 5.2% 8.0% 11.0%
Increase in Contribution
Rate for 10% Loss on
Assets
0.6% 1.9% 4.7%
10:1 4:1 1.5:1

6
Our plan maturity makes us sensitive to the path of
returns
40
60
80
100
120
2011 2015 2019 2023 2027 2031
Funding
Ratio
68%
100%
Shuffled
path
Return
Index
0
50
100
150
200
250
300
2011 2016 2021 2026 2031
Source: Cardano, OTPP
 Two paths for asset returns
providing the same
geometric rate of return:
Blue: Assumes actual path of
MSCI returns from 1990 –
2010 is repeated
Red: Assumes four annual
MSCI returns are
swapped to produce early
losses
 OTPP is sensitive to the
pattern of returns
 Our funding ratio is worse if
the losses occur up-front
Same
starting
point
Same
ending
point
Same
starting
point
Different
ending
points
Actual
path

7
Benefits
Contributions
Return
Our LDI objective is a sustainable balanced plan
What a balanced plan means
for us?
 Earning a return high enough
to ensure plan sustainability;
and
 Maintaining stability of
benefits and contribution
rates at their target levels

8
LDI means balancing short- and long-term investment
horizons
Source: Bloomberg, OTPP Asset Liability Model
Risk Contribution To Liabilities*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 5 9 13 17 21 25 29 33 37 41 45 49
Investment Horizon (years)
Change in real yield Level of real yield Inflation
* Assuming no longevity risk* Proxied by Canadian RRBs; does not consider Plan’s demographics.

9 We cannot fully hedge our real interest rate exposure
DRIVERS:
 Correlation with Plan
liabilities
 Risk tolerance
 Level of real yields
 Best hedging asset is
Canadian RRBs
CONSTRAINTS:
 Insufficient supply
 Counterparty risk if
derivatives are used
 Liquidity usage
Source: OTPP
Liability
DV01
REAL RETURN BONDS
Asset
DV01
NOMINAL BONDS
MISMATCH TO LIABILITY
DV01

10
Nominal bonds are becoming less helpful for
our Plan as yields move lower
3-Year Reward/Risk for
Long Canada Nominal Bonds
3-Year Correlation Between Canadian
Nominal and Real Return Bonds
Starting yield Starting yield
Higher Lower Higher Lower
Source: OTPP Asset Liability Model

11
To meet our LDI objective, we must rely on the
investment attributes of a broad spectrum of assets
Key desirable asset attributes:
 Provide potential as a source of diversified value add
 Provide stable returns
 Provide long-term inflation adjusted growth
 Generate cash flow
 Mitigate real rate sensitivity of liabilities
 Mitigate inflation sensitivity of assets or allow inflation pass-through
 Facilitate leveraging
 Provide reliable source of liquidity when required
LHP PSP
0
Real
Return
Bonds
TIPS
Nominal
Cdn Bonds
DM
Sovereign
Bonds
Regulated
Infrastructure
Core Real
Estate
Timberlands
IG Corporate
Bonds
GDP-Driven
Infrastructure Equities
Commodities
Long-term
Equities
Absolute
Return
Strategies
Private
Capital
EM
Sovereign
Bonds
Dividend
Equities
HY
Corporate
Bonds

12
Asset classes behave differently in different economic
environments; our asset allocation is dynamic
Economic Regime Map
High growth /
Low inflation
High growth /
High inflation
Low growth /
High inflation
Low growth /
Low inflation
GDP Growth
CPI Inflation
Equities
Corporate Bonds
EM Debt
Commodities
Inflation-Sensitive Equities
Real Estate
Growth Infrastructure
Nominal Bonds
TIPS / RRBs
Gold / Precious Metals
Regulated Infrastructure

13
Our Asset-Liability Model allows us to do “what-if”
scenarios …
18% 20% 22% 24% 26% 28% 30% 32%Increasing Worst Case Contribution Rate
Asset Mix #1 in normal
environment
(equilibrium)
Asset Mix #1
in low yield
environment
WORST:
Higher Worst-Case Contribution Rate
Higher Average Contribution Rate
BEST:
Lower Worst-Case Contribution Rate
Lower Average Contribution Rate
DecliningAverageContributionRate
RISK
REWARD
A low yielding regime is
detrimental to our goal of
stability and sustainability

14
… and to identify better asset mixes to improve our
reward-risk tradeoff
Asset Mix #1 in normal
environment
(equilibrium)
Asset Mix #1
in low yield
environment
WORST:
BEST:
RISK
REWARD
Asset Mix #2, #3
and #4 in low yield
environment
Our objective is to move
to the upper left by
improving our asset mix
A low yielding regime is
detrimental to our goal of
stability and sustainability

15
Five reasons why the current low yield environment
could be with us longer than we would like
1. Historical precedent
2. Low rates are necessary
3. Demographics
4. De-risking and risk management
 Risk parity / Bonds as insurance
 LDI
5. Policy induced regime changes
 Deflation
 Financial repression
#
#
#
#
#

16
Historical US 10-year Real Yields*
*Breakeven inflation is proxied by 10-year moving average of
realized inflation.
Source: OTPP, Global Financial Data
#1: There is a historical precedent for lower yields
Historical US 10-year Nominal Yields
+ s
Post WW II
Great
Depression
Post WW II
- s
+ s
- s
WW I

17 #2: Low yields are justified by current conditions
Source: Federal Reserve, Bloomberg, OTPP
US Monetary Aggregates
$ BillionMoney Supply: M2 to M0 (Ratio)
M0 (R)
Ratio of M2 to M0

18 #3: Demographic trends support lower yields
US Labor Force Participation Rate US Real Yields and Demographics
(from 1981 to 2012)
% %
Source: OTPP, BLS, Global Insight

19
Correlation Between US Stock and Bond Returns
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
87 89 91 93 95 97 99 01 03 05 07 09
Historical Correlation
3
4
5
6
7
8
9
Percent
Rolling 5-yr Correlation
10-yr Bond Yield (RHS)
#4: Nominal bonds are a good tail risk hedge even at
low yields
ρ = -0.67
Source: Global Financial Database, Global Insight, Shiller, OTPP
Shiller P/E vs. 10-year Bond Yields
Less Diversification
More Diversification
0
5
10
15
20
25
30
35
40
45
50
2 4 6 8 10 12 14 16
US 10-Year Yield, percent
Shiller P/E
ρ = +0.82

20 #4: Many DB plans are waiting to de-risk
Source: Morgan Stanley
Funding Ratio Sensitivity Analysis

21
#5: Two different macro economic regimes can lead
to yields remaining low or even heading lower
Economic Regime Map
GDP Growth
CPI Inflation
 Nominal yield > Nominal GDP
 Inflation < target
 Arises from a policy mistake, e.g.,
austerity
 Nominal yield < Nominal GDP
 Inflation > target
 Arises from a deliberate policy
choice, e.g., inflate away debt
2. FINANCIAL REPRESSION
1. DEFLATION

22 Deflation: Two historical examples
Source: Global Financial Data, DataInsight
Yields too high
relative to GDP
Very low
inflation
Yields too high
relative to GDP
Very low
inflation

23
Deflation: Our simulated scenario reflects a sustained
period of extremely low yields
Initial
BE
In normalization,
breakeven
increases
In deflation,
breakeven
decreases

24
Deflation: Even with such low yields, bonds are the
favored asset class
Simulated Asset Class Real Returns Policy Asset Mix Under Different Scenarios

25
Financial Repression: The US experienced financial
repression post WWII
Source: Global Financial Data, CBO
Yields too
low
relative to
GDP
High
inflation
%%
US Debt-to-GDP US Financial Repression
(1946-1952)
Due to financial
repression, debt
declined by 3-4% of
GDP per year.

26
Financial Repression: Our simulated scenario reflects
a sustained period of extremely low yields
Initial
BE
In normalization,
breakeven
increases
In financial
repression,
breakeven
increases
even more

27
Financial Repression: Higher inflation and moderate
growth favor commodities and real assets
Simulated Asset Class Real Returns
Policy Asset Mix Under Different Scenarios

28
In both low yield scenarios, our expected returns fall
short of what we require to meet our liabilities
Real Yield
at t=10
-1.3%0.5%2.2%
Smaller
Gap
Gap

29
Improving the asset mix will help but will not likely be
sufficient if these scenarios come to pass
Asset Mix
in normal
environment
Asset Mix
in deflation
WORST:
BEST:
RISK
REWARD
Improved Asset Mix
in deflation
Asset Mix
in financial repression
Improved Asset Mix
in financial repression

30
Our base case assumptions favor normalization as the
more likely scenario
Simulated Paths for US 10-Year Nominal Yield
Risk scenarios
Most likely

31
Some positive signs: De-leveraging is progressing and
policy makers have made credible decisions … so far
Vows not to repeat the
mistakes of the 1930s
Whatever it
takes Pace of austerity
must depend on
economic conditions
Committed to stop
deflation

32 Key takeaways
 Plan demographics and market constraints pose significant challenges
 Our liabilities are large and are very sensitive to real rates
 Our plan maturity makes us increasingly less tolerant of volatility
 Our LDI objectives of stability and sustainability become more difficult to
achieve in a low yield environment
 There are several reasons why yields could remain low
 Different low yielding environments necessitate very different asset mix
responses:
 Deflation favors bonds or assets generating high quality cash flows
 Financial repression favors real assets and commodities
 Ultimately, an investment solution may not be adequate and plan design
changes may be required

33
James Davis, CFA
Vice President, Strategy & Asset Mix and Chief Economist
Asset Mix & Risk, Ontario Teachers’ Pension Plan
Q & A

Bill Morneau, Executive Chairman, Morneau Shepell
Pooling of Public Sector Asset Management
CFA Pension Conference, April 24, 2013, 1:00 pm

Morneau Shepell2
Agenda
• Defined benefit pension plans in context
• The government pension challenge
• The case for pooling BPS pension assets
• Project overview:
- Facilitating pooled asset management for
Ontario’s public sector institutions
• Implementation challenges

Morneau Shepell3
Defined benefits pension plans in context
• Canadian retirement income security is a
success story

Morneau Shepell4
Defined benefits pension plans in context
• Defined benefit pension plans are in secular
decline
• Federal efforts in retirement emphasize
personal responsibility

Morneau Shepell5
The government pension challenge
• The private sector/public sector pension
divide will widen
• Solvency deficits will likely persist in the
medium term
• Healthcare costs will force continued
government restraint efforts
• To facilitate negotiation, “No stone left
unturned” will need to be the government
mantra

Morneau Shepell6
The case for pooling Broader Public Sector
pension assets
• Government needs to better understand the
pension situation
• There is clearly a case for cost-efficiency
• Alternative asset classes are difficult to cost-
effectively source and manage
• Other cost-efficiency approaches, such as
administration opportunities, or plan mergers,
are more difficult

Morneau Shepell7
Project overview: Facilitating pooled asset
management for Ontario's public sector institutions
• “The government intends to introduce framework
legislation in the fall of 2012 that would pool
investment management functions of smaller public-
sector pension plans in Ontario… The government
will appoint an advisor to develop the framework,
working with affected stakeholders and building on
Ontario’s internationally-recognized model for
pension plan management.”
– 2012 Ontario Budget, page 79. March 27, 2012

Morneau Shepell8
• Process:
• More than 40 consultations and numerous written
submissions were considered
- Broader public-sector pension and investment
fund administrators
- Representatives of broader public sector labour
groups
- Current and former leaders of large pension and
investment funds
- Representatives of Ontario’s investment
management community

Morneau Shepell9
• Financial review:
• Pooling would support investment management
savings for participating institutions
- Once fully implemented, pooling could save
participating institutions $82 million to $130 million
annually
- Pooling could also enhance returns by supporting
greater diversification and improved risk management
- Government would provide start-up funding of $50
million over a three year period, to be recovered from
the new entity

Morneau Shepell10
• Key recommendation:
• A new, independent Corporate entity should be
established to manage pooled investments on behalf
of participating institutions
- Asset allocation decisions would remain the
responsibility of participating institutions
- The Board of Directors would be self-regenerating,
and feature six independent professional and five
representative members

Morneau Shepell11
• Key recommendation:
• Legislation would compel the participation of
selected broader public sector pension plans
- Total assets under management of up to $100
billion
- Defined contribution and supplemental plans, as
well as endowment funds could invest on a
voluntary basis
- Participating institutions would be permitted to
withdraw after a cooling-off period

Morneau Shepell12
Implementation challenges
• Financial benefits from pooling will be
unevenly distributed, at least initially
• Mandating participation presents legitimate
concerns
• Time to fully establish the new entity is at
least three years

Thank You
Bill Morneau
Morneau Shepell

1
Bob Litterman
Prepared for CFA Society Toronto
April 24, 2013
The Price of Climate Risk

3
Is Uncertainty About
Climate Change Real?

4
Is a Devastating Natural Disaster
Outside the Realm of Possibility?

6
Does it Matter How High we
Fill this Reservoir?

7
Should Adding Emissions to the
Atmosphere be Priced
Appropriately?

8
What is the Appropriate Price
for Carbon Emissions?

9
The Reservoir – The Lake – The Flood
The Johnstown Flood

13
Think about dynamic optimization
With Uncertainty, Tipping Points And Nonlinear Responses

14
Where should climate risk be priced?
There are 2 kinds of risk:
High risk aversion
Low risk aversion
Zero
The price of climate risk today
Non-diversifiable
Risk
Diversifiable risk Expected damage
risk
premium

The Equity Risk Premium
US Historical Real Returns
Data are from http://www.econ.yale.edu/~shiller/data.htm
ERP = 4.75%
Stock real return = 6.4%
Bond real return = 1.6%
A consistent 475 basis points per year for the last 140 years

Equities pay off primarily in good states of nature
Consider a portfolio that pays off in bad states of nature
Data are from http://www.econ.yale.edu/~shiller/data.htm
16
An equally risky portfolio
long bonds and short equities earns
-310 basis points

17
What does the Equity Risk Premium have
to do with Pricing Climate Risk?
Pricing carbon emissions is a risk management
problem involving trade-offs between consumption
today and potential bad outcomes in the distant
future
This trade-off depends crucially on the degree
of societal risk aversion
Societal risk aversion can be calibrated to the
equity risk premium

18
Economic impacts depend on future
temperatures which are very uncertain
Science: 25 March 2012

Climate modelers generally use a low curvature in
the context of a standard CRRA utility function
Counter to intuition, in the standard utility function increasing the
risk aversion makes curbing emissions less urgent
Higher curvature has two impacts:
1) it increases the risk premium, but
2) it also increases the risk free discount rate
The second impact dominates and causes the price to decrease
Lord Nicholas Stern, for example, set a
degree of curvature that implies an
equity risk premium of around 12 basis
points,
more than 30 times too low relative to
observed risk premia
19
Estimates of the social cost of carbon
from Anthoff, Tol, and Yohe (2009)
emissions
prices
Increasing risk aversionWhy???

Higher curvature across states of
nature is required to fit the very
significant equity risk premiums
that we observe in the market
While lower intertemporal curvature
is required to fit the relatively
low risk free rates
that we observe in the market
Risk aversion Intertemporal substitution
20
Epstein-Zin utility can be calibrated to both
high risk premia and low interest rates
consumption ( time, states of nature ) consumption ( time, states of nature )
u
t
i
l
i
t
y
u
t
i
l
i
t
y

The rigidity of standard utility functions explains
why in most climate models increased
risk aversion lowers the price of emissions
21

22
Higher societal risk aversion shifts the
appropriate emissions price path upward
Increasing risk aversion

23
One cost of delay is higher future emissions prices
Another is increased risk of catastrophic outcomes

24
Bad news
Good news
The resolution of uncertainty about risk will impact prices over time
as will surprises in the development of new mitigation technology
Emissions prices should be expected to fluctuate

Optimal climate policy should be sensitive
to the potential for bad outcomes in the lower tail
25
cost today
expected
bad draw

26
We implore you to support the European Union’s innovative efforts to place a price
on carbon.
Addressing emissions in this sector by negotiating a global pricing system through
the International Civil Aviation Organization (ICAO) would send an important signal
that carbon pricing is an effective way to correct a major market failure—the
growing concentration of greenhouse gases in the atmosphere.
…Because emissions are not priced, the world is wastefully using up a scarce
resource, the earth’s ability to safely absorb greenhouse gas emissions. We are
also failing to make appropriate investments in capital that would reduce future
greenhouse gas emissions. Our selfish inaction pushes increased costs onto
future generations, and dangerously increases the probability of extreme
events with major impacts on their welfare…
Economists Speak Out
On March 14, 2012 six Nobel laureates, and 20 other leading
economists wrote to President Obama as follows:
http://www.worldwildlife.org/who/media/press/2012/WWFPresitem27292.html
Kenneth Arrow, William Sharpe, Eric Maskin,
Thomas Sargent, Christopher Sims, Joe Stiglitz,…

27
“I think a global carbon tax is blindingly obvious and should have been
introduced 15 years ago, and that would have been completely fair.
Every single airline in the world would have been treated in the same
way.
As an airline owner, I’m sure I’ll get told off when I get home – but ideally
there should be a fair global tax with everybody taking a little bit of pain.
It’s not massive.
And if that happened, we would get on top of the problem.”
At least one airline executive agrees:
Sir Richard Branson, Chairman of Virgin Airlines, speaking at
a State Department Conference, April 26, 2012:

Waiting on the
World to Change
By Avery Shenfeld, Chief Economist & Managing Director
April 2013

| 2
Canadian Household Savings Rate
Source: Statistics Canada, CIBC
0
5
10
15
20
25
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
%

| 3
Pensions: Fewer Covered, Less Certainty
Workers Covered by
Registered Pension Plans
31
32
33
34
35
36
37
38
92 94 96 98 00 02 04 06 08 10
% of workforce
Source: Statistics Canada, CIBC
0
5
10
15
20
25
30
35
92 02 11
Workers Covered by
Defined Benefit
Registered Pension Plans
% of workforce

| 4
Share of Canadians Facing 20% or More Drop
in Living Standards on Retirement
0%
10%
20%
30%
40%
50%
60%
1940-1944
1945-1949
1950-1954
1955-1959
1960-1964
1965-1969
1970-1974
1975-1979
1980-1984
1985-1989
Birth Cohort

| 5
World GDP Growth: No Pick-up Until 2014
-2
0
2
4
6
8
10
12
2010A 2011A 2012E 2013E 2014E
Eurozone US China World
% chg

| 6
Fiscal Tightening Weighs on Global Growth (R)
Little Room for Monetary Policy Offset (L)
0
1
2
3
4
5
6
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
%
Global Monetary Policy Index
(Developed Economies)
Source: Central Bank News
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2009 2010 2011 2012 2013
Source: IMF, CIBC
Change in Cyclically Adj. Deficit
Advanced Economies (% of GDP)

| 7
Italy, Spain Fail to Boost Competitiveness
Source: Eurostat
-15%
-10%
-5%
0%
5%
10%
Ger Ita Spa Ire Por Gre
Chg (past year)
Chg (since 2008)
Labour costs per hour in euro

| 8
China: Not As Much Gain Where it Counts
As Resource Imports Still Lackluster
-35
-30
-25
-20
-15
-10
-5
0
5
Lumber Crude Oil Unwrought
Copper &
Products
y/y % chg in China's import volumes
from all countries
Note: two-month averages
to smooth New Year's
distortions
Source: Markit, HSBC, Bloomberg, CIBC
-5
0
5
10
15
20
25
30
35
40
Jan-11Jun-11Nov-11Apr-12Sep-12Feb-13
46
47
48
49
50
51
52
53
54
55
China Imports (L)
China PMI (R )
Yr/Yr Index

| 9
Not the China of a Decade Ago
Source: CEIC
32
34
36
38
40
42
44
46
48
50
52
95:Q3 98:Q1 00:Q3 03:Q1 05:Q3 08:Q1 10:Q3 13:Q1
Industrial (L) Services (L )
% of GDP
Note: 4-qtr moving averages

| 10
Fiscal Drag Delays US Acceleration
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
No fiscal drag CIBC base case Full fiscal cliff
2013 US GDP growth forecasts

| 11
Low US Interest Rates Are Finally Seeing Results
Source: Fannie Mae, MBA, Bloomberg, CIBC
0
500
1000
1500
2000
2500
Q1-1990
Q3-1992
Q1-1995
Q3-1997
Q1-2000
Q3-2002
Q1-2005
Q3-2007
Q1-2010
Q3-2012
Housing Starts (thousands)
70
80
90
100
110
120
Jan-05
Apr-06
Jul-07
Oct-08
Jan-10
Apr-11
Jul-12
Housing-related sales*
Other (ex-gasoline)
US Retail Spending
(Nov'07 = 100)
*furnishing, appliances
& building materials

| 12
Canada No Longer Outpacing US;
Bank of Canada On Hold Until 2015
2013 2014
US 2.0% 3.2%
Canada 1.5% 2.4%

| 13
A Key Ingredient to the US Crash Missing Here
Non-Conforming
Mortgages as a Share of
Total Outstanding
0
5
10
15
20
25
Canada 2012 US 2006
%
0
20
40
60
80
100
120
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Cities with above avg non-conforming
exposure
Cities with below avg non-conforming
exposure
Index June 2006=100

| 14
Credit Score Trend Not Threatening to Banks
Current
Good
Risky
Highly
risky
Very
Good
Moderate
Source: Equifax, CIBC
2008
Good
Risky
Highly
risky
Very
Good
Moderate

| 15
Limited Fuel for Consumption
Stagnating Income
26,400
26,800
27,200
27,600
28,000
28,400
11Q1
11Q2
11Q3
11Q4
12Q1
12Q2
12Q3
12Q4
Real household
disposable income
per capita ($)
Consumer Credit
36
38
40
42
44
46
48
05 06 07 08 09 10 11 12
% of hdi
Source: Statistics Canada

| 16
Canada: Building Fewer Houses/Condos
Swamps Energy Sector Rebound
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
Energy Production Housing
2012 2013
Contribution to GDP (%-pts)
+0.2%
-0.5%

| 17
Canada’s Firms Less Eager to Invest (L)
While US Firms Ramp Up (R)
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2005
2007
2009
2011
2013
plan
Canada: growth in business capital
spending
40
50
60
70
80
Jan-2006M
ay-2007Sep-2008Jan-2010M
ay-2011Sep-2012
US non-defense capital goods
ex-aircraft orders (US$ bns)

| 18
Source: Bloomberg, CIBC
Average
2012 2013 (f) 2014 (f)
Oil (WTI) $/bbl 94 93 98
Natural Gas $/Mn Btu 2.75 3.50 3.75
Gold $/troy oz 1657* 1400* 1200*
Copper $/lb 3.62 3.50 4.00
Lumber** $/'000 bd ft 287 410 435
Potash $/tonne 430 430 450
* end of period **1st Futures
Cyclical Commodities Await 2014

| 19
Cost of Bottlenecks to Remain High Even After
Recent Spread Improvements
0
5
10
15
20
25
30
35
40
23-Aug
11-Sep
28-Sep
17-Oct
5-Nov
22-Nov
11-Dec
28-Dec
16-Jan
4-Feb
21-Feb
12-Mar
29-Mar
$Bn annualized, 30 day mov. avg
Note: Revenue loss based on
"normal" WTI premium of $2/bbl vs
Brent and $17/bbl discount of
Western Canada Select to WTI
$15.2 bn
$16.5 bn
2014 2015
Projected
Source: NEB, Bloomberg, CIBC

| 20
Source: US Department of Energy
Shale Oil Revolution Shifts the US Supply Curve
(L); Import Share of US Market % (R)
0
1
2
3
4
5
6
7
8
1990 1995 2000 2005 2010 2015
Shale/Other Tight
Other Lower 48 onshore
Lower 48 offshore
Alaska
production, mn bbl/day
30
35
40
45
50
55
60
65
95 99 03 07 11 15 19 23
imports/US oil consumption (%)

| 21
Exports Stall on Volumes (L),
Energy No Longer to Blame (R)
90
100
110
120
130
Jan-2007
Nov-2007
Sep-2008
Jul-2009
May-2010
Mar-2011
Jan-2012
Nov-2012
Export Volume Index
80
90
100
110
120
130
140
Aug-2009
Jan-2010
Jun-2010
Nov-2010
Apr-2011
Sep-2011
Feb-2012
Jul-2012
Dec-2012
Export Index (2010=100)
Energy
exports
Ex-
energy
Exports

| 22
Capital Inflows Have Left Canadian Dollar
Overvalued Relative to Trade Fundamentals
Source: IMF, BIS, CIBC
-15%
-10%
-5%
0%
5%
10%
15%
Indonesia
Japan
Germany
China
India
Thailand
SAfrica
Korea
Mexico
EuroArea
Brazil
USA
Switzerl.
UK
Canada
Australia
Spain
Overvaluation/undervaluation (%)
*relative to each country's trading
partners; midpoint of estimated
range

| 23
Current Account Deficit (L)
Leaves C$ Tied to Yield Spread (R)
-25
-20
-15
-10
-5
0
5
10
15
Q4-2005
Q1-2007
Q2-2008
Q3-2009
Q4-2010
Q1-2012
-6%
-4%
-2%
0%
2%
4%C$ bn
billions
Share of GDP
Canada: Current
Account Balance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Apr-08
Aug-09
Dec-10
Apr-12
Aug-13
Dec-14
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Cdn - US 2 yr spread (L)
CADUSD (R)
Fcst
US$ per
%

| 24
US Broad Money Still Below Trend:
Inflation not a Threat
600
800
1,000
1,200
1,400
1,600
Jan-00
Jun-01
Nov-02
Apr-04
Sep-05
Feb-07
Jul-08
Dec-09
May-11
Oct-12
US Divisia M4 Index (1967=100)

| 25
ETFs: The Elephant in the Room
Source: World Gold Council
0
500
1000
1500
2000
2500
3000
IMF ETFs Chinese
Government
Russian
Government
Holdings of gold, metric tonnes*
*China has not released official gold holdings since 2009. The
US is the largest holder at 8,100 tonnes, with Germany at
3,400.

| 26
6% Joblessness
Was Consistent with Fed Funds Rate at 1%
0%
2%
4%
6%
8%
10%
12%
Sep-1996 Jun-2000 Mar-2004 Dec-2007 Sep-2011
Unemployment
Rate
Fed Funds
Target Rate
FF Rate @ 1%
with 6%
joblessness
Source: Haver Analytics, CIBC

| 27
Stimulus Goes Well Beyond Zero Funds Rate
-6%
-4%
-2%
0%
2%
4%
6%
2004 2008 2012
Fed Funds
Rate
Equivalent
stimulus
impact
(including
QE)
Source: Rudebusch (FRBSF Economic Letter, 2010), Haver Analytics, Federal Reserve, CIBC

| 28
Bond Yields Drift Modestly Higher in H2 2013
Anticipating End of QE
0
1
2
3
4
5
Feb-08 Dec-08 Oct-09 Aug-10 Jun-11 Apr-12 Feb-13 Dec-13
2-Yr Canadas 10-Yr Canadas 10-Yr US Treasuries
% 3.0% US10yr
2.4% BE CPI
0.40% US2yr
1.7% US10yr
2.5% BE CPI
0.23% US2yr

| 29
Why is the TSX Sucking Wind?
Q1 Appreciation (%)
-15
-10
-5
0
5
10
15
Total Energy Financials Materials
TSX S&P 500

| 30
Dividend Yield:
Canada’s Comparative Advantage
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Dividend yield gap TSX Composite S&P 500
12-month trailing (%)
Historical average=57
Source: Haver Analytics, CIBC

| 31
Stocks Look Cheap vs. Historical or 2014 Earnings
Source: Bloomberg
0
10
20
30
40
50
60
Aug-65
Aug-70
Aug-75
Aug-80
Aug-85
Aug-90
Aug-95
Aug-00
Aug-05
Aug-10
Avg since 1965 = 20.2
17.9
Apr-13
Real stock prices/average
inflation-adj earnings, last 10 yrs 7.3%
1.7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
TSX Yield on 2014
Earnngs
10-Year Canada

| 32
Waiting on the World to Change
 Canada lagging US; No growth pick-up in
2013. But Bank of Canada wont ease rates.
 US has more upside in retailing, housing
 Housing corrects, but Canada is not the US
 Canadian dollar softer ahead, rallies through
parity in 2014
 For now, favour less-cyclical, dividend paying
equities
 Anticipation of better 2014 drives “risk on”
trade in late 2013, lifting commodities and
bond yields
 Exports and capital spending key to better
growth and TSX in 2014

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PLEASE VISIT:
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