Global Asset Management

Global, US, European and Japanese equities strategies all outperformed in the quarter, benefiting from positive stock selection and our correct positioning for a market shift away from commodities, industrials and energy, all sectors that have outperformed the market in the past few years. Portfolios generally benefited from exposure to large cap stocks with stable earnings. Asia and emerging markets equities strategies did not perform well over the quarter. Performance suffered from our underweight exposure to some of the larger Chinese companies that gained significantly within the relevant benchmark indices.

Our actively managed global equity composite exceeded its benchmark in the quarter, with stock selection in software and services, banks and insurance the main contributors. Our limited exposure to energy also helped performance, as the significant decline in oil prices made it the worst-performing sector in the quarter. Stock selection in technology hardware and equipment detracted from performance.

The growth equity capabilities saw their main composites exceed their respective benchmarks in the quarter. The US Large Cap Growth capability was bolstered by its selection of consumer, health care and materials stocks, while the US Small Cap Growth benefited from information technology, industrials and health care stocks.

Our global fixed income portfolios were positioned with interest rate exposure shorter than their benchmark indices in third quarter, which had a negative impact on relative returns and detracted from our recent longer-term outperformance. The quarter saw increasing demand for collateralized debt obligation products and inflows into cash management, global bond and absolute return products.

Most individual country fixed income portfolios also underperformed in third quarter due, as above, to short interest rate exposures but by a smaller margin and with less effect on longer-term relative returns.

Our main multi-asset capabilities, such as Global Securities Portfolio, outperformed their benchmarks over the quarter. Securities selection in the underlying equity and bond funds generally made positive contributions to performance, as did the asset allocation strategy. The currency strategy detracted from performance. The Dynamic Alpha Strategy funds posted solid gains in the quarter. Market allocation contributed positively to absolute returns, as did security selection. The currency strategy had a negative impact.

In alternative and quantitative investments, our fund of funds’ performance in the quarter reflected the mixed hedge fund market environment of low equity market volatility and uncertain macroeconomic expectations. The most noteworthy occurrence for hedge funds took place in September, with the demise of Amaranth. This did not materially affect our investor returns. The O’Connor funds continued their positive performance, with particularly strong risk-adjusted returns for the quarter and year to date.

Investor demand for real estate remained robust during third quarter 2006. Most notably in Japan, the retail property fund managed by Mitsubishi Corp.–UBS Realty Inc. completed a global follow-on equity offering. This was the largest equity issuance of the fund’s five follow-on offerings. The European real estate securities product exceeded its benchmark for the quarter, the Australian and global securities products were flat, while the US underperformed. Performance in private real estate funds again provided solid returns.