0% 20% 40% 60% 80% 100%

How Do U.S. Pension Plans Invest?

15% Other

17% International

Canada

Sweden

53%

31%

16%

U.K.

Australia

26%36%

38%

Switzerland

31% 35%34%

Japan

Domestic Equity and Fixed Income

International Equity and Fixed Income

Other (includes cash, real estate, and other alternatives)

Investable Universe ($90 trillion)

U.S. Equity and Bonds

Other

Non-U.S. Equity and Bonds(includes EM equity and bonds)

Country Concentration of Investments (as a percentage of the largest 500 global money managers’ AUM)

How Do Others Invest?

Germany7%

Canada 5%

France7%

Netherlands 3%Switzerland 4%

U.S. 48%

Japan 8%

U.K. 7%

Other 11%

13%

51%

36%

How does the average U.S. pension plan’s domestic bias stack up against that of other developed countries? Taking a look at how investments really break out may surprise you. Flip the page to see more detailed discussions of the evolution in global equity markets and emerging markets as well as global population trends. We also highlight seven key aspects of non-U.S. investing that you may want to consider when assessing your asset allocation strategy.

Going Global?

Source: P&I/Towers Watson World 500 Money Managers, P&I, December 24, 2012.

Source: UBS Global Asset Management (as of 12/31/2012)

Sources for Country-based Pension Figures:Australia: Rainmaker (9/30/2011). Canada: PIAC (12/31/2011). Japan: Pension Fund Association, R&I and The Life Insurance Association of Japan (3/31/2011). Sweden: Kirstein Nordic Investor Survey 2011 (12/31/2011). Switzerland: Pensionskassenstatistik Swisscanto and UBS estimates (12/31/2011). UK: WM (12/31/2011).

68% Domestic

29%

18%

53%

32%

16%

52%

47% 29% 24%

Founded in 1973, Callan Associates Inc. is one of the largest independently owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, decision support, and advice to a broad array of institutional investors.

For more information, please contact your Callan consultant.

San Francisco Atlanta Chicago800.227.3288 800.522.9782 800.999.3536

Denver New Jerseywww.callan.com 855.864.3377 800.274.5878

May 2013 | © 2013 Callan Associates Inc.

Source: Callan (9/30/2011)

-4% -2% 0% 2% 4% 6% 8% 10%

Taiwan

Russia

Mexico

S. Korea

India

China

Brazil

U.S.

U.K.

Japan

Italy

Germany

France

Canada

0% 50% 100% 150% 200% 250%

GDP Growth Rate2012 Estimate

Public Debt (% of GDP)2012 Estimate

Emerging Markets

Developed Markets

1.9%

0.1%

0.7%

-2.3%

0.2%

-0.1%

2.2%

1.3%

7.8%

6.5%

2.0%

4.0%

3.4%

1.3%

1.9%

0.1%

0.7%

-2.3%

0.2%

-0.1%

2.2%

1.3%

7.8%

6.5%

2.0%

4.0%

3.4%

1.3%

84.1%

89.9%

81.7%

126.1%

214.3%

88.7%

73.6%

54.9%

31.7%

51.9%

33.7%

35.4%

12.2%

36.0%

84.1%

89.9%

81.7%

126.1%

214.3%

88.7%

73.6%

54.9%

31.7%

51.9%

33.7%

35.4%

12.2%

36.0%

Europe

Latin

Amer

ica

Asia & A

ustra

lia

0% 5% 10% 15% 20% 25% 30%

Taiwan

Russia

Mexico

S. Korea

India

China

Brazil

U.S.

10-Year Public Equity Returns(as measured by relevant index)

7.7%

26.2%

19.4%

18.0%

15.4%

19.7%

14.0%

9.6%

7.7%

26.2%

19.4%

18.0%

15.4%

19.7%

14.0%

9.6%

Emerging Markets

Source: MSCI, Russell (as of 12/31/2012)

Sources: Global Finance, CIA World Factbook as of April 11, 2013 Source: Callan

Considerations for Non-U.S. Investments• Products. The vast majority of active international equity products are managed

against the MSCI EAFE or the MSCI ACWI ex USA, but international small cap, emerging markets, global, and regional strategies are also available.

• Managing country exposure. Do you need to retain the existing range of specialist exposures as you move toward a global equity approach? Often, country exposure is simply realigned to an appropriate neutral position, whether defined by market capi-talization or customized preferences.

• Managing currency exposure. Holding foreign currencies can impact total fund vol-atility, particularly when more than 30% of assets are exposed. Investors that hedge currency exposure must assess how to best implement the hedge.

• Relevant costs. Investment management transaction and custody costs are higher for non-U.S. equity portfolios than for U.S. portfolios. Tax laws also vary and can im-pact total returns.

• Transition plan. Moving from distinct U.S./non-U.S. allocations to a global equity ap-proach requires a thoughtful, well-timed transition plan.

• Riskprofile.Risk management should be explicitly addressed and risk profiles moni-tored on an ongoing basis.

• Monitoring performance. You may need to evaluate U.S. exposure relative to a U.S. benchmark, non-U.S. exposures relative to non-U.S. benchmarks, and the total equity exposure relative to an appropriate global benchmark. A single global equity index or a custom benchmark may be appropriate, depending on investor needs.

1970

22.4%

6.3%5.3%66.1%

30.1%

14.3%

2.3%

45.5%

6.6%

1997

23.2%

16.5%

4.1%

12.6%

43.7%

2012

MSCI CanadaMSCI Emerging Markets

MSCI USA

MSCI Europe MSCI Asia

World Market Capitalization

What Has Changed?Global equity markets have grown and evolved substantially over the past four decades. As measured by MSCI, the global opportunity set for equity investing now includes 23 markets in developed countries and dozens more in emerging and frontier economies. This represents a dramatic shift from 35 or 40 years ago when the U.S. and a handful of exchanges in Europe dominated equity investment opportunities.

Over the past 20 years, institutional investors have built significant non-U.S. equity allocations for a number of reasons, including the expanded investment opportunity set, the potential for higher returns, and diversification benefits. Some investors are now contemplating a global public equity market allocation rather than distinct U.S. and non-U.S. allocations.

Consider: • In 1970, the U.S. accounted for two-thirds of the market capitalization of all stocks. Today

the U.S. is approximately 40% of the global equity market capitalization.• Emerging economies’ share of world stock market capitalization has nearly doubled in the

last 15 years, from 6.6% in 1997 to 12.6% in 2012.

Emerging MarketsIn most developed economies, GDP is still below 2007 levels. Meanwhile, the output of emerging economies jumped by 20% over the same period. Emerging markets are growing at a much faster pace than developed nations and now represent 38% of global GDP, twice their share just 20 years ago. At the same time, public debt as a percentage of GDP is signifi-cantly lower overall in emerging markets.

Here is another way to measure it: Today nearly one-fourth of all revenues generated by For-tune Global 500 firms come from emerging market companies; in 1995, that figure was just 4%.1

While investments in emerging markets have surged, U.S. investors are still underweight in the sector relative to its global economic share. This is in part due to heightened risk, as emerging markets have higher volatility than developed markets.

1. The Economist, August 6, 2011.

2002 2007 2012

0

250

500

750

1000

EmergingMarkets

Global Non-U.S.

555

660

852

108

222

454

104160

313

Num

ber o

f Pro

duct

s

% of World Population % of MSCI ACWI

0% 10% 20% 30% 40% 50%

India

China

U.S.

0

500

1,000

1,500

2,000

1950 1970 1990 2010 2030 2050

Population Growth and Projections

Population vs. MSCI ACWI

China India Europe U.S. Brazil Russia

Source: Richard Hokenson, United Nations

Source: Callan, MSCI, Population Reference Bureau

Mill

ions

Present day (2013)

Equity Product Availability in Callan’s Database

% of World Population % of MSCI ACWI

0% 10% 20% 30% 40% 50%

India

China

U.S.

0

500

1,000

1,500

2,000

1950 1970 1990 2010 2030 2050

Population Growth and Projections

Population vs. MSCI ACWI

China India Europe U.S. Brazil Russia

Source: Richard Hokenson, United Nations

Source: Callan, MSCI, Population Reference Bureau

Mill

ions

Present day (2013)

Population TrendsBetween now and 2050, the world’s population is expected to grow by 2.3 billion people, eventually reaching 9.1 billion. The combined purchasing power of the global middle classes is es-timated to more than double by 2030 to $56 trillion. Over 80% of this demand will come from Asia. Most of the world’s new middle class will live in the emerging world, and almost all will live in cities—often in smaller cities not yet built. This surge of urbanization will stimulate business while requiring large infra-structure investments.

Sources: PIA Investment Advisors, FactSet (MSCI) and Callan

Source: Ernst & Young