GMO’s quarterly performance update for the second quarter ended June 30, 2016.

Performance of GMO Strategies and Benchmarks

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GMO Benchmark?Free Allocation Strategy

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Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.

The chart above shows the past performance of the Benchmark?Free Allocation Composite (the “Composite”). Prior to January 1, 2012, the accounts in the Composite served as the principal component of a broader real return strategy. Beginning January 1, 2012, accounts in the composite have been managed as a standalone investment.

The CPI (Consumer Price Index) for All Urban Consumers U.S. All Items is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services.

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Equity

Positioning: U.S. equities rose during the quarter and so they remain an expensive asset class. Although most non?U.S. equities declined in local currency terms in the second quarter (the notable exceptionbeing the U.K.), developed ex?U.S. equities still offer muted expected returns.We continue to concentrateour allocations in themost compelling areas, including emerging markets value and  international value primarily across Europe and Japan, while our exposure to the U.S. remains biased toward high quality positions.

At the end of the second quarter, equities represented approximately41% of the portfolio. Our top?down equityand regional equity targets remained unchanged during the quarter, but underlying position exposures did change as we eliminated our fundamentallysourced equity positions and built a dedicated allocation to high quality equities, predominantlyin the U.S.

Results: Equities declinedmodestly, detracting from portfolio returns during the quarter, due largely to exposures to European stocks and poor selection within emergingmarkets. In particular, Consumer Discretionary positions in theU.K., Germany, and France and Financials positions in France underperformed.Strong performance in Brazil Financials andUtilities in emerging equities was more than offset by weakness in South Korea Consumer Discretionary, fundamental China IT positions, and China Financials.U.S. fundamental positions were additive due primarily to strength in U.S. Consumer Discretionary (drivenmainly by Amazon.com).

Alternative Strategies

Positioning: We remain underwhelmed by the opportunities available across equity markets and look for other ways to get paid for taking risk. Alternative strategies represent diversifying ways to generate returns. Alternative strategies are comprised of merger arbitrage, Special Opportunities, Systematic Global Macro, and relative value interest rates & FX. At the end of the second quarter,  alternative strategies represented approximately 18% of the portfolio, having modestly decreased over the period as we reduced the weight in relative value interest rates& FX.

Results: During the quarter, alternative strategiescontributed to portfolio returns, rising 1.3%. Systematic GlobalMacro delivered strong returns of 5.4% due primarily to currency positions (long yen and NZD/short GBP and USD) and equity exposures (long U.K./short Japan).Merger arbitrage declined as two deals (Allergan?Pfizer and Office Depot?Staples) broke and another (Abbot Labs?Alere) saw the probability of a break rise. Relative value interest rates& FX rose modestly as currency positions (short EUR and CHF/long USD) were additive,while opportunistic positions and interest?rate strategies detracted. Special Opportunities was downmodestly for the quarter as positive returns on stock and bond positions in Canada Energy were offset by negative returns for U.S. Consumer Discretionary and Financials equity positions.

Fixed Income

Positioning: Sovereign rates once again rallied across the globe during the quarter and remain low (even negative), leaving few opportunities for traditional durationexposures. Spreads in some credit assets look attractive, but underlying duration exposures and concerns about potentially rising default rates limit ourenthusiasm. TIPS also performed well, driving yields even lower to an unimpressive 0.09% on 10? year U.S. TIPS. The overall exposure to our fixed income allocation declined to 13% as we eliminated ourTIPS position and broad?based exposure to high yield. The fixed income portfolio is comprised of asset?backed securities, Emerging Country Debt,and a select number of distressed credit opportunities.

Results: The fixedincome allocation contributedto portfolio performance as all strategies delivered positive returns. Emerging CountryDebt delivered strong returns of 7.3% due both to the decline in underlying Treasury yields as well as spread tightening. In addition, oilproducing countries,which we were overweight, benefitted from a strong rebound in oil prices. TIPS rallied as well (up 2.7%) as yields fell as breakeven rates narrowed 25 basis points.Our asset?backed positions rose 1.5% while distressed credit holdings, inclusiveof our broad?based high yield position, also delivered a gain, increasing 1.2%.

Cash

Positioning: Cash consists of U.S. T?bills and other high quality short duration government and agency securities. The portfolio’s cash allocation increased 15% during the quarter to approximately28%, due largely to the sale of our TIPS position. Cash represents an important “dry powder” asset in an investment environment offering limited opportunities.

Results: The allocation to cash had minimal impact on portfolio returns.

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