PanAgora Asset Management provides institutions worldwide with a wide range of investment management services. Organized in 1985 and incorporated in 1989, PanAgora is privately owned by its principals, Putnam Investments, and Nippon Life Insurance Company in Japan. Headquartered in Boston, the firm manages $13.4 billion in assets (as of June 30, 2005) for pension plans, endowments, foundations, unions, and financial service providers around the globe. The firm also maintains partnerships in Europe, Asia and in Canada.

Investment Philosophy
PanAgora's investment philosophy is predicated on the belief that significant inefficiencies exist in the global capital markets, and that a structured investment process offers the best way to exploit these inefficiencies. PanAgora's structured process merges traditional investment theory with quantitative investment techniques. Investment theory and portfolio manager experience serve as the foundation for all investment strategies. Quantitative techniques verify, refine, and apply these ideas to the portfolio management process. The benefits of this approach are:

• Incorporating investment theory into the beginning of the process allows the firm to distinguish between relationships that will be useful in forecasting the future rather than those that merely illustrate recent history.
• PanAgora's use of quantitative methods brings objectivity to the investment process. When applied with discipline, these techniques can consistently exploit inefficiencies because they are not hindered by the emotions that cloudother investors' judgment.

Investment Process
Three distinct steps describe PanAgora's investment process:

• Forecasting Returns
• Risk Control and Portfolio Construction
• Implementation

In the first step, PanAgora develops valuation models to predict an asset's future return. Value and growth investment styles, represented by factors such as price-to-book and return-on-equity, are used in many of the firm's products. Technical analysis is also employed by using factors based on return momentum and reversal. The firm's portfolio managers use regression analysis and other statistical techniques to put these ideas into a consistent format.

PanAgora typically controls risk in two ways: through optimization and active position limits. Optimization considers every possible combination of assets to determine the best mix with the maximum risk-adjusted, expected return. This process builds and maintains portfolios with low risk relative to the benchmark.

PanAgora uses active position limits, defined as the most any holding can be overweighted or underweighted, to diversify the active portfolio positions. The goal is to prevent the excessive risk that can come from very concentrated positions. For example, position limits protect portfolios against unforeseeable events. Once the optimization process, which incorporates the position limits, is completed, the portfolios are ready for implementation.

PanAgora implements the recommendations resulting from its investment process in a disciplined manner. Since many market inefficiencies ultimately result from investors' emotions and behavioral tendencies, a disciplined approach prevents the firm from falling prey to the same human emotions it exploits. Markets are constantly evolving, however, so the firm is diligent in revisiting, refining, and evaluating its products in order to adapt to structural changes in the markets. Under very extreme conditions, PanAgora’s Investment Committee may override its process' recommendations by reducing its active positions, or in some cases, by reverting to benchmark weights.

Quantitative Research
Research plays a central role in PanAgora's investment process. The firm's internal quantitative research team oversees all product development and enhancements in collaboration with the portfolio managers. Financial experts outside the firm are consulted for their objective input; the most notable example being PanAgora's Academic Advisory Committee, which is comprised of highly distinguished academics with expertise in financial economics and forecasting.

PanAgora's research process uses statistical tools to supplement its investment judgment—not replace it. The firm requires that investment ideas be tested against actual data as realistically as possible before implementation. Creating such a testing environment requires part of the historical data be set aside during model development. Only after the model is completed in-sample will the holdback sample be used to simulate portfolio performance. All simulations reflect the types of risk constraints, turnover limits, and transaction costs encountered when managing portfolios. The ability to assess each strategy's level of outperformance before implemention gives PanAgora a competitive edge in quality control.