Global Asset Management

In highly volatile markets, several core equity strategies struggled in the third quarter. Our actively managed Global Equity composite underperformed its benchmark in the quarter and remains below benchmark for most longer-term periods. This was largely due to negative stock selection in diversified financials, energy, pharmaceuticals and technology hardware, only partially offset by strong stock selection in retailing, banks and utilities.

The US Equity and US Equity 130-30 long-short strategies also underperformed, largely due to underweight positions in the materials and energy sectors and an overweight position in financials. Stock selection also detracted from results. European and Asian core equity performances were weak as well, although their respective 130-30 long-short strategies outperformed. Most small cap capabilities performed well.

On the other hand, all growth equity capabilities outperformed their respective benchmarks in third quarter with the exception of the US Small Cap Growth capability. The largest contributor to the outperformance of the US Large Cap Growth capability was stock selection in the consumer services area. The US Mid Cap Growth capability was ahead of its benchmark, driven largely by both sector allocation and stock selection in the healthcare sector. The US Small Cap Growth capability was negatively impacted by stock selection in the consumer discretionary sector. It was also overweight to energy and underweight in materials. In addition to the US Growth offerings, the newly established Global (ex US) Growth capabilities significantly outperformed their respective benchmarks on strong stock selection.

Fixed income markets experienced a turbulent third quarter as adverse price movements in several non-government sectors lowered the relative returns of a number of active bond strategies in the US, as well as broader strategies that had exposure to these non-government sectors, for example, the Absolute Return Bond and global portfolios.

Balanced portfolios had mixed performance versus their benchmarks over the quarter. Asset allocation performance varied according to the specific portfolio. Positive contributors to performance included overweight positions towards emerging market equities and underweight positions in US bonds and German and Japanese equities. The main negative contributors to performance included an overweight position to US equities and underweight positions in Canadian and Australian equities.

Currency performance was flat in the quarter. Positive contributions came from overweight positions to the Japanese yen, Swedish krona and Swiss franc. Negative contributions arose from underweight positions to the euro and the Canadian and Australian dollars.

The Dynamic Alpha Strategies (DAS) generally posted modest positive returns over the quarter. Returns from its chosen market exposures contributed positively to performance. Selection of stocks detracted from performance in balanced and DAS portfolios.

Alternative and quantitative investments' funds experienced mixed performance over the quarter as each strategy was affected by the market turmoil differently. The O'Connor single manager hedge fund strategies were positive on the whole, with strong performance in the global fundamental long / short market neutral strategy, its largest strategy allocation. O'Connor strategies negatively impacted by the market conditions included merger and acquisition trading as well as quantitative strategies. On the multi-manager side, the fund of hedge fund strategies posted a mixed performance for the quarter as the dislocations in the credit markets - followed by unusual activity in model driven strategies - broadly hurt hedge fund performance.

Overall assets in our global real estate business were flat in third quarter. The direct real estate business saw strong net new money inflows, particularly into Continental Europe.

The relative performance of our global real estate security capability was negative in third quarter, predominantly due to stock selection and, to a lesser degree, to our regional allocation in North America, Asia and Europe. Longer-term performance against benchmark remains positive.