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GMO North America | Europe | Asia-Pacific

Fresno County Employees’Retirement AssociationSeptember 6, 2006

Wendy MalaspinaTina Vandersteel Presentation


Presenters

Tina Vandersteel Ms. Vandersteel is a member of the global fixed income group, focusing on product management and research. Prior to joining GMO in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee University. She is a CFA charterholder.

Wendy Malaspina Ms. Malaspina is engaged in client relations. Prior to joining GMO in 2003, she worked at Montgomery Asset Management / Wells Capital Management, most recently as a director in institutional client service and marketing. Previously, she worked as a director of client service, marketing and investor relations at Draper Advisers. Ms. Malaspina received her B.A. in International Trade from Clemson University.


GMO Overview

* As of 6/30/2006 ** Asset allocation and absolute return assets are accounted for

within underlying strategies and should not be double-counted.

GMO has successfully managed money since our founding in 1977.

Experience

86 investment professionalsMore than 300 employees worldwide

People

We apply a blend of proven traditional judgments and innovative quantitative methods to find undervalued securities.Our success is based on a disciplined, value-oriented, risk-controlled investment philosophy and a commitment to investment research.

Distinctive Approach

$106 billion in global equities ($78 billion non-U.S.)$15 billion in fixed income$36 billion in asset allocation**$7 billion in absolute return strategies**

Assets of $121 Billion*

Motivation We are a private partnership

Focus Investment management is our only business

Discipline We carefully manage risk, seeking long-term capital appreciation

Stability We have exceptionally low turnover of investment professionals

Defining Characteristics

San San FranciscoFrancisco

BostonBostonLondonLondon

SydneySydney

ZurichZurich

SingaporeSingapore

RotoruaRotorua


GMO Investment Strategies

* Strategy is currently closed to new clients and additional cash flows1 Strategy currently capacity constrained2 Privately offered and available only to qualified purchasers. Call GMO for further information.3 New clients and additional cash flows through Emerging Country Debt Investment Fund only. 4 New clients and additional cash flows through World Opportunities Equity Allocation Fund only. Note: Does not include all GMO products.

North America Offices

Currency Hedged International Equity

Foreign(Int’l Active Strategy)1

International Intrinsic Value

InternationalSmall Companies1

Emerging Markets*

Emerging Countries*

Emerging Markets Quality1

International Disciplined Equity

International Growth

Foreign Small Companies(Int’l Active Strategy)*

Global Equity

Sydney Office

Australian Equities1

Australian Core Equities

Australian Market Neutral Trust*Australian Long/Short Equity*

Australian Small Companies*

London Office

UK Equities

World ex-UK Equities

U.S. Value

U.S. Core

Intrinsic Value

Growth

Small/Mid Cap Value

Small/Mid Cap Growth

Tobacco-Free Core

Real Estate Investment Trusts

U.S. Quality

Fixed IncomeAbsolute Return

Long/Short

International Bond

Emerging CountryDebt1, 3

Currency HedgedInternational Bond

Strategic Fixed Income

Domestic Bond

Core Plus Bond

Inflation Indexed PlusBond

Short-Duration Investment

Global Bond

Global Equities

Tax-ManagedInternational Equities

Tax-ManagedU.S. EquitiesTax-Managed Small/Mid Cap

Real Return Global Balanced Asset Allocationvs. benchmark of

60% stocks, 20% bonds, 20% cash

Global Allocation Absolute Return* 2

vs. benchmark of +5% real return per year

Global Equity Allocation1, 4

Global Balanced Allocation

vs. benchmark of65% stocks, 35% bonds

Asset Allocation

Tax-Managed Global

Balanced2

Global Growth

Europe ex-UK

U.S. Equities International Equities

Alternative Assets

Forestry*

Alternative AssetOpportunity1

Global(Int’l Active Strategy)1

Emerging Currency Hedge2

Mean Reversion* 2

Emerging Country Debt Long/Short* 2

Market Neutral2

U.S. Aggressive2

Earnings Outlook2

Global Tactical2

Tax-Managed Absolute Return2

Multi-Strategy1,2

(combination of strategies above)

Pan-European Long/Short1,2

Currency Hedge2

U.S. Tactical Opportunities1,2

Fixed Income Hedge2

International Equity

Allocation1

U.S. Broad Market

Short Term Market Opportunities1,2

Inflation IndexedBond*

Alpha Only


Fresno County Employees’ Retirement AssociationPeriods ending July 31, 2006

Performance Gross of Management, Operating, Incentive Fees ($U.S.)

Performance Net of Fees and Expenses ($U.S.)

Month YTD Year Year Year Inception * (000)1 3 5 Since Market Value

Annualized

Global Bond (3/12/99)

0.60 4.37 3.57 8.18 9.64 6.68 70,512

JPMorgan Global Gov't. Bond 0.80 3.41 1.30 5.52 8.03 5.22

Value Added -0.20 0.96 2.27 2.66 1.61 1.46

Month YTD Year Year Year Inception * (000)1 3 5 Since Market Value

Annualized

Global Bond (3/12/99)

0.57 4.13 3.15 7.79 9.25 6.31 70,512

JPMorgan Global Gov't. Bond 0.80 3.41 1.30 5.52 8.03 5.22

Value Added -0.23 0.72 1.85 2.27 1.22 1.09

* Periods of less than a year are not annualized

Fixed Income at GMO


GMO Fixed Income Strategies (with Benchmarks)Assets as of August 1, 2006 totaled $14,803 million

Developed Market Fixed Income$8,494 million

J.P. Morgan:EMBI GlobalEMBI Global Diversified

Emerging Country Debt$3,754 million

Absolute Return and Alternative Assets*

$2,218million

Global Fixed Income$2,042 million

J.P. Morgan:Global Government Bond Index

Non-U.S. Government Bond IndexNon-U.S. Government Bond Index (Hedged)—ex Japan

Lehman Brothers Global Aggregate Bond Index

Core U.S. Fixed Income$1,852 million

JPMorgan U.S. 3-Month Lehman Brothers Government Cash Index ($544 Million) Bond Index ($492 million)

*We trade, on behalf of GMO Sydney, the Global Tactical Strategy(assets $518 million).Global Fixed Income

Portable Alpha$4,599 million

TIPS Plus: Lehman Treasury Inflation Notes Index ($792 million)

Short Duration Plus: Lehman U.S. Treasury 1-3 Year Index ($591 million)

U.S. Core Plus: Lehman BrothersU.S. Aggregate Index ($3,216 million)

Lehman BrothersTreasury Inflation Notes Index

($816 million)

Emerging Country Debt

Alternative Asset Opportunity (Commodities)

Emerging Currency HedgeCurrency HedgeFixed Income Hedge

CoreStrategies


GMO Fixed Income Team of 16 has years of collective investment management industry experience224

At GMO Industry

Portfolio Management

Bill Nemerever, Partner, Group Co-Manager 13 32Tom Cooper, Partner, Group Co-Manager 13 26Steve Edelstein, Partner 11 24Allan Berliant 3 21Justin Klosek 4 9

Research/Product Management/Technology

Tina Vandersteel 3 16Mark Mueller, Partner 10 14George Estes, Partner 10 10Kim Sullivan 6 8Max Golts 1 2Andy Gossard 1 1

Trading/Support

Madelyn Tucker 9 16Tracey Keenan 4 16Bill O'Connell 7 8Kyle Ciano 2 3

Investment Control

Mark Puorro 13 18

Commodities and Alternatives

Investment Strategy Focus

Years

Bonds and Currencies


Asset-Backed Securities and

Corporate Credit


GMO Core Beliefs and Competitive AdvantagesRelative value is best exploited from the top down

Global Fixed Income

Cheap implementation maximizesalpha, including when

replicating the benchmark

GMO implements using instruments with low transactions costs both for benchmark replication and active management, which allows the portfolios to respond quickly to changing markets but precludes investments in illiquid securities, like corporate bonds.

Global bond markets are lessefficient

There are five times as many managers benchmarked to aggregate-style domestic indices than benchmarked to global government bond indices.

Systematic methods effectivelydeal with complex issues

GMO’s disciplined approach is a consistent, thorough, adaptable way of capturing our investment ideas. Our approach avoids the pitfalls caused by emotion.

GMO evaluates currencies and bonds separately, generating independent sources of alpha. Liking a country’s bonds does not mean we like the currency.

Currencies and bonds shouldbe evaluated separately

Currency markets are particularlyinefficient

Currency markets have relatively few dedicated currency managers. Major market participants – hedgers and Central Banks – are not primarily motivated by currency profits.


Investment Process OverviewFirst we replicate the benchmark, then we combine a variety of strategies to add value

Value-Added StrategiesBenchmark Replication

+

Invest in bonds,currencies, short-term high-quality debt &

derivatives to generate benchmark-

like returns

+ +


Opportunity Set:Emerging Country DebtJ.P. Morgan Emerging

Market Bond Index Globaland related sovereign,

hard currency emergingcountry debt exposures

Asset-backed SecuritiesAAA, floating-rate ABS

with various collateral types

Currencies

Opportunity Set:Australian dollarsCanadian dollar

EuroYen

New Zealand dollarNorwegian krone

Swedish kronaSwiss francU.K. poundU.S. dollar

Relative Value

Momentum-Plus

Security Selection

Bonds

Yield Curve

Market Selection

Rate Anticipation

Volatility

Asset-Backed Securities

Issue Selection

Issue Selection

Opportunity Set:Australian interest ratesCanadian interest ratesEuro-area interest rates

Yen interest rates

Swedish interest ratesSwiss interest ratesU.K. interest rates

U.S. dollar interest rates

Performance Review: Global Bonds


1-Year Performance Attribution: Total

Data as of 7/31/2006

Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Total

Global Bond Fund 1.64% -1.15% -1.05% -0.59% 0.24% 0.83% -0.23% -1.06% 3.20% 1.72% -0.90% 0.57% 3.15%J.P. Morgan Global Government Bond Index 1.83% -1.93% -1.80% -1.14% 1.04% 1.28% -0.46% -1.21% 2.19% 1.79% -0.97% 0.80% 1.30%Alpha -0.20% 0.78% 0.76% 0.55% -0.81% -0.46% 0.23% 0.16% 1.01% -0.06% 0.07% -0.23% 1.85%

Bond Market -11 -5 24 6 -14 -10 22 22 33 10 -1 -11 66 Overlays 3 6 -2 3 -12 -18 10 1 0 2 -10 -14 -29Currency -17 79 58 45 -59 -31 -22 -17 -40 0 16 6 19Emerging Markets 0 14 -3 4 3 8 11 -1 3 -6 -1 5 37LIBOR Plus 1 -1 -4 -2 4 1 5 5 -2 0 4 -3 10Trading Costs -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -1 -1 -18Issue selection/other 5 -14 3 1 -1 5 -1 7 107 -10 -1 -6 167Total alpha -20 78 76 55 -81 -46 23 16 101 -6 7 -23 185


1-Year Performance Attribution: Bond Markets

Global bond yields began rising in the second half of 2005, accelerating throughout the first half of 2006 before falling slightly in July. Major, sustained positions included overweight Sweden and underweight U.S. and U.K. We had been underweight briefly in the Euro-area in 2005 but otherwise overweight. U.S., Australian, Swiss and U.K. positions were the largest positive contributors over the past 12 months. The Swedish and Japanese overweights detracted from performance.


JPMorgan Global Government Bond Index Yield

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Total of 66 bps

Local Currency Total Bond Returns

2.1% 1.9%

-1.1% -0.9%-2.2%

4.4%

-0.1%

-0.9%

-2.6%

3.1%

0.8%

Australia Canada Denmark Euro-area Japan NewZealand

Norway Sweden Switzerland U.K. U.S.

Bond Active Weights at Quarter Ends and Current

16%

0%

-18%

0% 0%

20%

-6% -9%-15%-2%

8%



Contribution to Performance, bps

30

3 1 8

-17

0 0

-39

25 1737




1-Year Performance Attribution: Currency Markets

The U.S. dollar’s 2005 strength has evaporated in 2006, despite its continued yield advantage versus many of the major currencies. Due to the recent decrease in our U.S. dollar position, currency alpha reversed, and now is positive for the trailing 12 months. While overweights in Scandinavian countries hurt performance, underweight positions in Japanese yen and euros as well as a British sterling underweight provided gains.


Total of 19 bps

Weighted U.S. dollar performance

-4.0%

-2.0%

0.0%

2.0%

4.0%

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Currency Returns

0.8%

8.5%5.0% 5.1%

-2.0%

-9.8%

5.0%7.5%

4.4% 6.0%


Norway Sweden Switzerland U.K.

Currency Active Weights at Quarter Ends and Current

6% 2% -1%

-12%-18%

2% 6% 3% 1% 4% 7%



Contribution to Performance, bps

23

-29

35

80

-13-27

-43-62

58

-2


Norway Sweden Switzerland U.K.


Performance AttributionPerformance attribution is run daily, providing immediate feedback about the portfolios

Total

-150 b.p.

-100 b.p.

-50 b.p.

0 b.p.

50 b.p.

100 b.p.

150 b.p.

200 b.p.

250 b.p.

300 b.p.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005

20042006

Currency Markets

-200 b.p.-150 b.p.-100 b.p.

-50 b.p.0 b.p.

50 b.p.100 b.p.150 b.p.200 b.p.250 b.p.300 b.p.


2005

2004

2006

Interest Rate Markets

-80 b.p.

-60 b.p.

-40 b.p.

-20 b.p.

0 b.p.

20 b.p.

40 b.p.

60 b.p.

80 b.p.

100 b.p.


2005

2004

2006

Emerging Debt

-20 b.p.

-10 b.p.

0 b.p.

10 b.p.

20 b.p.

30 b.p.

40 b.p.

50 b.p.


2005

2004

2006

219 b.p.

78 b.p.

19 b.p.43 b.p. 29 b.p.

-15 b.p.

65 b.p.91 b.p.

156 b.p.

-53 b.p.

34 b.p.11 b.p.

-16 b.p.-42 b.p.

95 b.p.

-93 b.p.

62 b.p.

14 b.p. 14 b.p.

-6 b.p.

-4 b.p.

Total Currency Markets Interest Rate Markets Emerging Debt LIBOR Plus Trading Costs Issue/Other

2004

2005

First Half 2006


Global Bond Performance: Frank Russell Universe

Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. There are risks associated with investing in a fund of this type that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange rates. Performance shown is gross. Composite Inception Date: 12/31/95.

8.59

GMO Global Bond CompositeUniverse of Global Fixed Income Composites – Unhedged

Periods Ending June 30, 2006

GMO Global Bond Composite (U.S. $)JPMorgan Global Gov’t. Bond (U.S. $)

Rat

e of

Ret

urn

(%)

Periods

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

10 Years 9 Years 8 Years 7 Years 6 Years 5 Years 4 Years 3 Years 2 Years 1 Year Current Quarter

Min/Max

GMO6.115.695.35

6.67

10.72

GMO5.985.695.37

6.30

9.56

GMO5.825.665.47

6.29

9.01 GMO

6.075.895.41

6.89

9.93GMO

7.156.626.35

7.68

11.79GMO

8.349.34

10.02

14.19

GMO7.887.256.95

8.24

12.06

GMO

4.974.494.14

5.43

7.83

GMO4.223.503.42

5.276.71

GMO

0.23-0.41-0.61

1.902.90

GMO2.892.562.29

3.524.25


GMO Sources of Value AddedA diverse set of strategies adds breadth to our process

Bond Market Selection

Emerging Debt

Exposure (5%)

Currency Market

Selection (51%)

Global Bond

MarketStrategies

(44%)

Rate Anticipation

Yield curve

Volatility

Relative Value

Momentum Plus

Portfolio Positioning


Current Portfolio: Global Bond Fund


0% 2% 1%

37%

29%

0% 0% 1% 0%

6%

23%

0%

18%

0% 0%

45%

11%

0% 0%

21%

-6%-3%

9%4%


Norway Sweden Switzerland U.K. U.S.A. Emerging

JPMorgan Global Government Bond Index

GMO Global Bond Fund

0%2% 1%

37%

29%

0% 0% 1% 0%

6%

23%

0%

9%

3%0%

24%

11%

2%

6%4%

-0%

12%

31%

0%


Norway Sweden Switzerland U.K. U.S.A. Emerging

JPMorgan Global Government Bond Index

GMO Global Bond Fund

Currencies

Bond Markets

Investment Process


Benchmark ReplicationBenchmark exposures are replicated in the least expensive way to minimize tracking error

We can add value to any benchmark that can be replicated

The return of the benchmark forms the base of our portfolio’s return

We use bond futures, currency forwards, swaps, options and other instrumentsto replicate the returns of the benchmark with limited risk. When they are inexpensive, we will use index total return swaps or synthetic indices to generate benchmark exposures

Because our replication of the benchmark requires only small amountsof cash, we invest the balance of our clients’ assets in a very high-quality cash management pool, the GMO Short-Duration Collateral Fund


Benchmark ReplicationIt’s not the number of instruments in the benchmark, but rather the number of unique risks

Benchmark type Examples Replication instruments

Domestic or global government and government-related bond

•JPMorgan Government Bond Indices•Citigroup Government Bond Indices•Lehman U.S. Agency Index

Government bond and Agency bond futures, interest-rate swaps

Inflation-protected government bond

•Lehman U.S. Treasury Inflation Notes Index•Lehman Global TIPs

Bonds, inflation swaps, index total return swaps

Aggregate-style (by subcomponent)

•Lehman domestic or Global Aggregate Indices•Citigroup domestic or Global Broad Investment Grade Indices

Index total return swaps (rarely available at the aggregate level)

Securitized •Lehman Fixed-Rate MBS Index

•Lehman ABS, CMBS Indices

Mortgage TBAs, bonds, index total return swapsBonds

Investment-grade corporate credit

•Lehman U.S. or Global Corporate Index•Citigroup U.S. or Global Credit Index

Index total-return swaps, synthetic CDX indices, single-name CDS

Specialized Liability-driven Nominal pension liabilities Interest-rate swaps

Broad

Narrow


Currency Management

We believe that the fact that there are relatively few long-term investors in global currency markets allows us to exploit continuing inefficiencies

We have developed models that enable us to add value consistently by buying currencies we find undervalued and selling their overvalued counterparts

Currencies outside our clients’ benchmark universes can be sources of value-added (e.g., U.S. dollar is traded in our non-U.S. portfolios)

Approximately half of our added-value comes from this strategy


What Makes a Currency Attractive?

High short-term yields…when risk aversion is low

Strong current account …when risk aversion is high

Positive price momentum

Positive bond market momentum

Relative Value

Momentum-Plus


Current Account/Gross Domestic Product (GDP)17.8%

7.0%3.8% 2.7%

-0.3%

-2.7%-5.9% -7.0% -7.8%

13.5%

Norway Switzerland Sweden Japan Canada Euro land U.K. Australia U.S.A. NewZealand

Safest Riskiest

Risk Aversion Index

0.0

0.2

0.4

0.6

0.8

1.0

Jul 05 Oct 05 Jan 06 Apr 06 Jul 06

Three-Month Libor7.4%

5.5%4.8% 4.3%

3.2% 3.1% 2.6%1.6%

0.4%

6.1%

NewZealand

Australia U.S.A. U.K. Canada Euro land Norway Sweden Switzerland Japan

Risk Aversion Index

Current AccountBalance (Riskiness)

Currency Relative Value ModelWe prefer high-yielding currencies especially when risk aversion is low, but we move to safe currencies when risk aversion is high

Relative Short-term Interest Rate

Risk averse:Reduce weight inrisky currencies

Risk Seeking: rank by yield


With risk aversion low, we pay less

attention to a currency’s

riskiness and go for yield


Currency Valuation: Risk Aversion ExampleCurrency active weights are modulated by changes in the risk aversion weight

Source: GMO, updated through 12/31/2003

Risk Aversion and Currency Active Weights

-20%

-10%

0%

10%

20%

Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-040.00

0.25

0.50

0.75

1.00

Australian dollar

weight (left)

Swiss franc weight (left)

Risk Aversion

Index (right)


Yield Momentum in 10-Year Bonds2.2%

1.5% 1.5%0.9% 0.9% 0.8%

0.5%0.1%

-0.2%

1.9%

Switzerland Japan Euro land Australia U.S.A. U.K. Sweden NewZealand

Canada Norway

Currency Momentum: Range of Short-to-Long Moving Averages

-4%-2%0%2%4%

Australia U.K. Sweden Euro land NewZealand

Norway Switzerland Canada Japan

Yield Curve Slope: 10-Year Swap versus 3-Month LIBORBasis Points 165151124100100

3

(18)(29)(48)

(158)

NorwayJapanSwedenSwitzerlandEuro landCanadaU.K.AustraliaU.S.A.NewZealand

Currency Momentum-Plus ModelsCurrency momentum alone tells only part of the story

Relative Bond Yield Momentum

Relative Yield Curve Slope

Relative Currency Momentum



Global Bond Management

Our valuation models rank daily eight global bond markets

We over and underweight markets in the same fashion as absolute return managers

Our bond markets universe includes more countries than are in the various benchmarks we use

We rigorously manage risk and invest primarily using low-cost derivatives such as bond futures, interest rate and total return swaps


What Makes a Bond Market Attractive?

High real yields

Steep yield curve slopes

Recent underperformance

Market Selection


Yield Curve Slope: 10-Year Swap versus 3-Month LIBORBasis Points151

124100 100

3

(18) (29) (48)

Japan Sweden Switzerland Euro land Canada U.K. Australia U.S.A.

6-Month Change in 10-Year YieldBasis Points

50 48 4742 39 38

16

49

Euro land U.S.A. Switzerland Australia U.K. Japan Sweden Canada

Real 10-Year Yields

3.0%2.2% 2.1% 2.1%

1.8%1.3% 1.3%

2.4%

Australia Canada U.K. Sweden U.S.A. Euro land Japan Switzerland

Relative Recent Bond Market Performance

Relative Yield Curve Slope

Relative Real Yield

Bond Market Selection ModelsWe like high real yields, steep slopes, and recently lagging bond markets



Bond Market Selection ExampleWhen all factors line up, the over/underweights are unambiguous

Source: GMO, updated through 4/30/2003

Yield curve slopes: 10-year less 3 months

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3/12/2003 3/26/2003 4/9/2003 4/23/2003

Canada

U.K.

Universe

Real yields

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3/12/2003 3/26/2003 4/9/2003 4/23/2003

Universe Average

Canada

U.K.

Yield trend

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

3/12/2003 3/26/2003 4/9/2003 4/23/2003

U.K.

Canada

Universe Average

Active weights

-12%

-8%

-4%

0%

4%

8%

12%

3/12/2003 3/26/2003 4/9/2003 4/23/2003

Canada

U.K

Universe Average


Downward yield momentum

Steep slopes

U.S. dollar strength

Equity markets weakness

Rate Anticipation

What Makes Global Bonds Attractive?


Bond Rate Anticipation ModelWe like bonds in general when yields have positive downward momentum, when slopesare high, when the U.S. dollar is strong, and when equity markets are weak

Moving Average Change in Global Yields

-0.3%-0.2%-0.1%0.0%0.1%0.2%0.3%0.4%0.5%


Data as of 7/31/2006Sources: J.P. Morgan, Morgan Stanley

Average Slope of Yield Curves in Euroland, U.K. and U.S.A.

0 b.p.

40 b.p.

80 b.p.

120 b.p.


1-Year Change in USD and MSCI World Equity

-15%-10%

-5%0%5%

10%15%20%


USD Real Effective Exchange Rate

MSCI World Equity Index

Equity Weakness

U.S. Dollar Strength

Yield Curve Slope

Yield Momentum

Flat yield curves are negative for

bonds

Global yields are no longer moving upward, which is less negative for

bonds

Currently equity weakness is neutral for

bonds, while USD weakness is negative


Other Ways We Make Money in Bonds

Global yield curve slopes

Opportunistic butterfly positionsYield Curve

Volatility Mean reversion in interest-rate volatility


Three-Month Change in 3-month, 3-month Forward RatesBasis Points43

3530 28

20 1914

9

Sweden Australia Euro land Japan Switzerland U.S. U.K. Canada

Other Bond Models: ExampleAn additional risk budget is given to a series of bond strategies designed to addrelatively uncorrelated sources of value to the portfolios: slope model example

Relative Swap Slopes


Forward Markets

Inclined to flatten Inclined to steepen

Static Return

Static Carry Including Rolldown(Duration Neutral Hedge Ratio)1.3%

0.6%

-0.3%-1.3%

-2.6% -2.7%

-4.4%-5.3%

U.S. (4.1) Canada (4.2) Australia (3.9) U.K. (4.2) Japan (4.5) Euro land (4.2) Switzerland (4.4)

Sweden (4.2)

Yield Curve Slope: 10-Year Swap versus 2-Year SwapBasis Points118

75 7145 38

14

-5 -8

Japan Switzerland Sweden Euro land Canada U.S. Australia U.K.


Portfolio Allocation

We have built a customized risk management system to model the active risks in our portfolios

We budget our portfolio risks in a structured fashion, targeting specific tracking errors for each strategy

Each trading day new market information is incorporated in our portfolios to accommodate changing economic and market conditions

On a daily basis we attribute performance to our various strategies, gaining valuable information to control and allocate risk

While allocations are performed based on the underlying strategies, an added layer of risk control exists to limit exposures by bond market, by currency, and by the deviation of the portfolio duration from the benchmark


Risk ModelRisk model transforms alpha forecasts into bond and currency active weights


18%

-2%

7%

-18%

0%

-6%

-9%

-15%

8%

1%

-13%

-18%

2%

6%

3%

0%

6%

7%

20%

0%

-25% -15% -5% 5% 15% 25%

Australia

Canada

Euro land

Japan

NewZealand

Norway

Sweden

Switzerland

U.K.

U.S.A.

Covariance Matrix

* 1.5%-2.5% for global bond portfolios, 15% for Currency Hedge Fund and Fixed Income Hedge Fund

Currency MarketForecasts

Bond MarketForecasts

Risk ModelMaximizes expected

return subject totracking error*

constraint

Active Weights

Trading Costs


Exposure Risk Statistics

Current & Range

Tracking error 1.5% ▐ 2.5%

Duration difference -2yr ▐ +2yr

Bond weights -25% ▐ ▐ +25%

Currency weights -25% ▐ ▐ +25%

Portfolio Risk Exposures and ImplementationTracking error is the primary risk measure, while credit rating distribution qualifies the cash collateral backing derivatives exposures


Active Management is Key to Capturing ValuePortfolio positions adjust to pick up relative opportunities on a daily basis


Daily Active Weight: Switzerland Bond Market

-8%

-6%

-4%

-2%

0%

2%

4%

6%

7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31

Daily Active Weight: Australian dollar

-4%

-2%

0%

2%

4%

6%

8%

10%

7/3 7/4 7/5 7/6 7/7 7/10 7/11 7/12 7/13 7/14 7/17 7/18 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31


Implementing global bond and currency allocations:-To minimize transaction costs we typically gain our exposure to currency and bond markets using derivatives such as forwards, futures, swaps and options

-The choice of instrument rests on relative value models as well as on our strategy of adding well-priced convexity when available to limit downside risks

Investing underlying cash collateral:-Given our macro views on the outlook for asset-backed sectors, and current portfolio positioning, we select complementary AAA-rated issues that carry a liquidity or complexity yield premium

-We do not reach for yield by reducing asset credit quality

Earning a credit spread:We use a small (0-5%), relatively stable allocation to our Emerging Country Debt fund to earn the asset class’ yield spread and take advantage of the Fund’s alpha, generated almost exclusively through security selection

Security SelectionSome of our value-added comes from diverse security selection choices


Short-Duration Collateral Fund (SDCF): Quality and Diversification

Quality Distribution

Interest Rate Duration

Percent Floating RateSpread to LIBOR 0.1%Market Value $5.9 billion

92%

Portfolio Breakdown

0.25 yearsSpread Duration 0.1 years

Please see Appendix for SDCF guidelinesData as of July 31, 2006

Cash 1.1%

AAA Non-Insured 87.8%

US Agency 1.2%

U.S. Treasury 0.0%

Non-AAA 0.5%

AAA Insured 9.4%

All Triple-A Rated 99.5%

UK Residential

Business Loans 6%CDO 10%

CMBS 6%

MBS Residential 2%

Other 5%

Student Loans 7% ABS Residential 23%

6%Treasury 0%

Agency 1%

Auto 12%

Australian Residential 4%

Insurance Financing 1%

Credit Cards 17%


Summary

Global currency and bond markets offer fixed income managers dramatically more opportunities to add value than domestic bond markets

Opportunities in currency and bond markets can be exploited independently

Our valuation models and implementation techniques give us the ability to outperform any benchmark

The value we add using our valuation models can be enhanced through thoughtful security selection

Our team of experienced investment professionals focuses on investment strategies where we have a significant competitive advantage

The value we add complements and diversifies that of other managers

Appendix


GMO Fixed Income PerformanceThrough July 2006

Performance data quoted represents past performance. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Yield will fluctuate. Performance shown is net of fees and expenses after reimbursement from the manager. The Fund may have a transaction fee at purchase and/or redemption which is paid to the Fund to cover trading costs. Average Annual Total Return figures reflect these fees; Total Return figures net of fees do not. There are risks associated with investing in a fund that invests in securities of foreign countries, such as erratic market conditions, economic and political instability, and fluctuations in currency exchange rates. J.P. Morgan EMBI Global represents the J.P. Morgan EMBI prior to 8/95, J.P. Morgan EMBI + through 12/31/99 and the J.P. Morgan EMBI Global thereafter.

As of 7/31/2006Total Return Net of Fees Average Annual Total Returns (Net Trans. Costs)

Fixed Income Fund/ Inception Month YTD YTD Value One Five Ten Since

Benchmark Date 2006 2006 Added Year Year Year Inception

Domestic Bond Fund 8/18/1994 1.12 0.53 0.24 1.47 5.02 6.53 6.74Lehman Brothers U.S. Government 1.19 0.29 1.24 4.48 6.14 6.42Core Plus Bond Fund 4/30/1997 1.17 0.48 -0.14 2.63 6.22 N/A 6.81Lehman Brothers U.S. Aggregate 1.35 0.62 1.46 4.79 N/A 6.24International Bond Fund 12/22/1993 0.51 4.21 -0.37 2.16 10.79 6.19 7.86JPMorgan Non-U.S. Gov't. Bond 0.67 4.57 1.46 9.21 4.81 5.85Currency Hedged Int'l. Bond Fund 9/30/1994 1.35 -0.66 -0.25 1.82 5.84 8.22 9.99JPMorgan Non-U.S. Gov't ex-JPN Hdg Bond + 1.34 -0.41 1.27 4.70 7.02 7.97Global Bond Fund 12/28/1995 0.57 4.13 0.72 3.15 9.25 6.69 6.68JPMorgan Global Gov't. Bond 0.80 3.41 1.30 8.03 5.45 5.20Emerging Country Debt Fund 4/19/1994 3.37 5.59 3.02 11.90 20.55 17.95 19.83JPMorgan EMBI Global + 3.27 2.56 8.31 12.75 11.66 13.12Inflation Indexed Plus Bond Fund 5/31/2006 1.28 1.40 -0.52 N/A N/A N/A 1.40Lehman Brothers U.S. Treasury Inflation Notes 1.63 1.92 N/A N/A N/A 1.92Strategic Fixed Income Fund 5/31/2006 0.52 0.60 -0.33 N/A N/A N/A 0.60Lehman Brothers U.S. Treasury 1-3 Year 0.75 0.93 N/A N/A N/A 0.93


GMO Short-Duration Collateral Fund: GuidelinesEffective 9/2/2004

Pre NPF Current

I. Issue/Issuer Limits Asset-Backed Securities Single Issue None 3% Corporate Securities Single Issuer 5% 3% Total per Issuer None 5% All Single Issues > 2% None 25%

II. Servicer limit* None 5%

III. Industry Limits Total (Including Insured)

Credit Card 25% 25% 40% Auto Financing 25% 25% 40% US Residential Home Equity None 25% 40% US Residential Prime Mortgages None 25% 40% CMBS None 25% 40% CDO None 25% 40%

Other 25% 15% 25%

Pre NPF CurrentIV. Sector Limits

CBO: Emerging Collateral 25% 10%CBO: High-Yield Collateral 25% 10% USAid None 20%Gov’t Sponsored Enterprises None 15% eachGovernment Repo None 15%

V. Credit LimitsIssues Rated Below AA- ** 2% per issuerAll Issues Rated Below AA- None 10%All Issues Rated Below A- 5% 5%

VI. Insurance Wrap Limits Per Insurer*** None 25%

* No Issues will be purchased whose servicer does not meet the standards set forthin the Fund’s investment guidelines.

** ALF represented that it primarily owned investment -grade securities.*** Wrapped issues are not coun ted in issuer, servicer , industry or sector limits above.

However, within wrapped issues the limits above apply.Note: All limits apply at time of purchase.


Capsule Biographies: Fixed IncomeWilliam Nemerever Mr. Nemerever is a member of the executive committee and co-manages GMO’s global fixed income area with Tom

Cooper. Prior to joining GMO in 1993, he worked at Boston International Advisors where he founded the quantitative global fixed income effort. Previously, he was in charge of several Fidelity Investments fixed income groups, head of the fixed income department at State Street Bank & Trust Co., a portfolio manager at Wells Fargo, and a portfolio manager, equity analyst and actuary at John Hancock. Mr. Nemerever earned his B.S. in Mathematics at the University of Washington and his M.S. in Actuarial Science from Northeastern University. He is a CFA charterholder.

Thomas Cooper Mr. Cooper co-manages GMO’s global fixed income area with Bill Nemerever. Before joining GMO in 1993, he was a managing director at Boston International Advisors. Prior to joining Boston International, he worked at Goldman Sachs Asset Management, Western Asset Management and State Street Bank & Trust Co. Mr. Cooper received his M.B.A. from the University of California (Berkeley) and earned a B.A. from Oberlin College. He is a CFA charterholder.

Steve Edelstein Mr. Edelstein works with GMO’s global fixed income group as a portfolio manager. Prior to joining GMO in 1995, he was a vice president and fixed income options and futures strategist with Morgan Stanley. Mr. Edelstein has also worked with First Boston in the fixed income proprietary trading, government trading and risk management groups, and as a financial model builder and programmer with Lehman Brothers’ Kuhn Loeb. He holds his M.S. in Economic and Social Statistics from Cornell University and earned a B.S. from the State University of New York at Oneonta.

George Estes Mr. Estes is responsible for credit analysis for GMO’s emerging country debt portfolios. Prior to joining GMO in 1996, he was director for Latin America and Canada for the Burger King Corporation. Mr. Estes holds a B.A. in German from the University of Virginia and an M.B.A. in Finance from the University of California at Berkeley.

Mark Mueller Dr. Mueller is the director of research for the algorithmic trading group and is a consulting director of research for the fixed income group. Since joining GMO in 1997, he has also served as the director of research for the fixed income group. Prior to joining GMO, he worked at Goldman Sachs in the fixed income proprietary trading group, and earlier at Morgan Stanley as a quantitative analyst in equity derivatives. Dr. Mueller holds a B.S. in Physics from the Massachusetts Institute of Technology and a Ph.D. in Physics from Stanford University.


Capsule Biographies: Fixed IncomeAllan Berliant Mr. Berliant is a member of the global fixed income group. Prior to joining GMO in 2003, he worked at Hartford

Investment Management Company as director of asset-backed securities. Previously, he was a vice president within Structured Asset Research at Zurich Scudder Investments. Mr. Berliant earned his B.S. from The Johns Hopkins University and his M.B.A. from University of Chicago.

Max Golts Dr. Golts is a member of GMO’s global fixed income group, focusing on quantitative research. Prior to joining GMO in 2005, he worked on fixed income analytics and strategies for State Street Global Markets. Previously, he did volatility research at Fort Hill Capital Management. Dr. Golts earned his undergraduate degree from Kiev University and his Ph.D. in Mathematics from Yale University.

Tracey Keenan Ms. Keenan works with GMO’s global fixed income group as a finance/repo trader. Prior to joining GMO in 2002, she held various positions at Standish Mellon, most recently as assistant vice president of fixed income trading. She earned her B.A. in political science from Stonehill College and her M.B.A. in Finance from Suffolk University.

Justin Klosek Mr. Klosek is a member of the global fixed income group. Prior to joining GMO in 2002, he worked on the fixed income teams of both Morgan Stanley Asset Management and Long-Term Capital Management. Mr. Klosek earned his B.S.E. in Civil Engineering and Operations Research from Princeton University and his M.S. in Civil Engineering from Massachusetts Institute of Technology. He is a CFA charterholder.

Madelyn Tucker Ms. Tucker is a trader for the global fixed income group. Prior to joining GMO in 1997, she worked at Fidelity Investments where she traded asset backed corporate and mortgage securities, and monitored benchmarks for trust funds. Prior to that, she was director of financial systems development at Cherry Webb. Ms. Tucker earned her M.B.A. from the Simmons School of Management.

Tina Vandersteel Ms. Vandersteel is a member of the global fixed income group, focusing on product management. Prior to joining GMO in 2004, she worked at J.P. Morgan Chase & Co. in fixed income research, developing quantitative arbitrage strategies for emerging markets and high yield bonds. Ms. Vandersteel earned her B.A. from Washington & Lee University. She is a CFA charterholder.


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(617) 330-7500 | www.gmo.com

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