International Active Update

Second Quarter 2013

Performance

GMO

The International Active EAFE Strategy outperformed the MSCI EAFE index by 1.8 percentage points in the second quarter; the strategy gained 0.8% net of fees and the benchmark fell 1.0%. Country and stock selection were both positive. The strategy lagged its benchmark by 0.4 percentage points for the first half of 2013, returning +3.7%.

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

GMOInternational Active Performance (Through June 30, 2013)

GMO International Active 3,536.7%

MSCI EAFE 1,444.4%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Performance (Year by Year %)

GMO GMO MSCI Value Added Int'l Active EAFE 1981 Jun-Dec +5.8 -1.0 +6.8 1982 +2.4 -1.9 +4.3 1983 +32.1 +23.7 +8.4 1984 +8.7 +7.4 +1.3 1985 +65.1 +56.2 +8.9 1986 +57.4 +69.4 -12.0 1987 +9.7 +24.6 -14.9 1988 +21.2 +28.3 -7.1 1989 +27.4 +10.5 +16.9 1990 -10.7 -23.4 +12.7 1991 +13.9 +12.1 +1.8 1992 -4.0 -12.2 +8.2 1993 +41.2 +32.6 +8.6 1994 +5.9 +7.8 -1.9 1995 +13.8 +11.2 +2.6 1996 +14.6 +6.0 +8.6 1997 +6.8 +1.8 +5.0 1998 +13.9 +20.0 -6.1 1999 +28.6 +27.0 +1.6 2000 -6.5 -14.2 +7.7 2001 -10.1 -21.4 +11.3 2002 -6.1 -15.9 +9.8 2003 +41.4 +38.6 +2.8 2004 +22.4 +20.2 +2.1 2005 +13.5 +13.5 -0.0 2006 +27.6 +26.3 +1.2 2007 +10.5 +11.2 -0.6 2008 -41.2 -43.4 +2.1 2009 +25.5 +31.8 -6.2 2010 +5.0 +7.8 -2.7 2011 -11.7 -12.1 +0.5 2012 +14.9 +17.3 -2.4 YTD 2013 +3.7 +4.1 -0.4 Compound Annual Rate of Return (32 Years, 1 Month) +11.9 +8.9 +2.9 S&P 500 -4.6 +20.3 +22.6 +6.3 +31.8 +18.7 +5.3 +16.6 +31.7 -3.1 +30.5 +7.6 +10.1 +1.3 +37.6 +23.0 +33.4 +28.6 +21.0 -9.1 -11.9 -22.1 +28.7 +10.9 +4.9 +15.8 +5.5 -37.0 +26.5 +15.1 +2.1 +16.0 +13.8 +10.2 Bonds AAA/AA +2.0 +42.5 +6.3 +16.9 +30.1 +19.8 -0.2 +10.7 +16.2 +6.8 +19.9 +9.4 +13.2 -5.7 +27.2 +1.4 +13.0 +10.8 -7.4 +12.9 +10.6 +16.3 +5.3 +7.9 +5.9 +3.2 +2.6 +8.8 +3.0 +12.4 +18.0 +10.7 -8.0 +11.0

International Active Update

Second Quarter 2013
Region Commentary
were many valid explanations: China released a weak purchasing managers' index (PMI); Bernanke talked of tapering U.S. quantitative easing; hedge funds that had been buying cheap puts were now aggressively shorting futures to lock in returns for the year; retail ran for the exits. But, to our mind, the driving factor was that the bond market started calling Kurodas bluff on his promise to generate the negative real rates required to maintain high equity valuations. It is with great trepidation that we, as equity investors, comment on the bond market. Prior to Abe, the JGB market was extremely quiet, with high liquidity, low carry, and low volatility. A predictable, albeit humble, living was possible and investors were largely banks and life insurance companies. Kurodas asset purchase program aimed to flatten the yield curve, but ended up having the opposite effect; it sucked private liquidity out of the market and injected volatility. Japanese banks made a run for the exits, cutting their duration and dramatically limiting their interest rate exposure. The heart of the Kuroda conundrum is this: now that his intervention in the immensely complex bond market has only served to raise rates and increase volatility, what is his next move? How can the market be confident in his ability to manufacture negative real rates? While rising rates are the long-term goal, they are also the largest short-term risk. If the bond market anticipates rising inflation too early and reestablishes high real rates, a strong yen could short-circuit the hoped-for economic recovery. In the face of the unknowable, we remain focused upon our core strength: finding selective value in Japan on a stock-by-stock basis.

GMO

After the rush of Abenomics and the past quarters turbulence in Japan we decided to add a page to the quarterly with two goals: 1) to describe our positioning in Japan in the face of recent volatility; and 2) to explain what we believe to be the source of the volatility. Our overweight position in Japan was initiated well before the creation of the term Abenomics, and was based solely upon investing in good companies trading on excessively low valuations. We remain relieved that we do not need to own the market but can focus on pockets of cheapness, selecting companies with a margin of safety to insulate ourselves against risk. The companies in our portfolio are still on reasonable valuations, and while they will see better margins if the yen continues to weaken, they should still make money if yen strength returns. While Abe has altered expectations for the Japanese market, we have not changed our stock selection process. Despite short-term rates pegged at near zero for 18 years, grinding deflation left Japan with stubbornly high real rates and was one of many factors in a rising yen and deteriorating corporate earnings. Prior to the jump-start of Abenomics, the Japanese stock market was on historically low valuations and the province of lonely foreign value managers. However, the prospect of negative real rates under new central banker Haruhiko Kuroda brought in hedge funds in force. They could borrow in yen at low rates, buy cheap stocks, short the currency, and watch the magic of a falling yen push up equity prices. Retail investors spotted the cycle and joined the action. The quiet Japanese market suddenly became popular. Meanwhile, the domestic institutional investor, perhaps because of the failure of Japans quantitative easing (QE) in the early 2000s or the belief that an escape from deflation would be difficult, stayed long the bond market. On the surface, everything looked to be moving according to plan; stock and bond prices were rising together. Underneath however, the bond market was actually skeptical of Abenomics while the equity market was becoming increasingly ebullient. The extraordinary move in the Japanese stock market created some unprecedented dislocations resulting in increased fragility. When it fell in mid-May, there
* Data is that of a representative account from within the Composite.

Country Selection and Market Update

Country selection was 1.0 percentage point ahead of the benchmark. An underweight position in Australia added to returns. The market fell as its exposure to a slowing China became a negative. Our positioning in Continental Europe also added to performance, as did an overweight position in Japan.* The second quarter of the year was a bumpy ride as far as equity investors were concerned. Overall, most markets saw declines as investors grappled with divergent outcomes in the worlds major economies.

International Active Update

Second Quarter 2013
The news on the U.S. has turned unambiguously positive with politicians and investors alike hailing the slow but steady recovery. The housing market in particular, but also employment, have demonstrated sustained improvement. These happy facts have led to the coining of the new Fed phrase taper. The Fed has suggested that if benign conditions persist it may consider tapering the level of asset purchases in which it is engaged. Proving that no newly minted concept goes unpunished, both bond and equity markets in the U.S. fell as investors sulked about losing the benefit of such a powerful asset boosting tool. One other consequence of the potential change in monetary policy was that the dollar rose against most currencies. In Asia, the picture was very mixed. Japan, as discussed above, had a bumpy but quite positive quarter. In neighboring China, open talk of an economic slowdown has become common and the Peoples Bank of China (PBOC) appears to be testing the strength of the credit system by not providing liquidity when signs of distress appeared during the quarter. It is always difficult to divine the intentions behind Chinese actions but there are indications that there are some people in authority trying to bring the amount of debt in the economy under control. Europe roared into the quarter, but soon fizzled out as it became clear that the economy is still failing to grow. Germany does not want anything really bad to happen before its election in September, so its an open question as to whether ECB support will be enough to save the troubled economies. However, the president of the ECB, Mario Draghi, has insisted that he will provide the necessary support. What we have seen so far this year is the outcome of decidedly different policies enacted in the aftermath of the financial crisis of 2008/09. For the moment, the U.S. approach of aggressive deficit spending has trumped the austerity and fiscal consolidation of Europe. The Chinese approach of ordering an increase in private sector credit produced immediate results, but the PBOC appears to accept that this beast has to be tamed sooner or later, much to the consternation of investors. After two decades of stagnation, Japan has performed an X-Games worthy maneuver. For now, investors are broadly impressed but policy makers will have to make more meaningful progress with Abes three-pronged economic
* Data is that of a representative account from within the Composite.

GMO

reform program before we will know if this market is on a more sustainable path. That said, the Japanese market has been one that offers up a plethora of stock picking opportunities despite the economic scenario.

Stock Selection
Stock selection beat the benchmark by 0.7 percentage points in the second quarter. Holdings in Continental Europe and Japan outperformed. Stock selection in the emerging markets was negative.* The austerity packages in Europe have had a destructive effect on the economic growth. Governments are trying to undo all of their mistakes of the last 15 years with a few years of austerity. However, as we look carefully at the underlying companies, we can see that most have taken it upon themselves to improve profitability. Cost cutting by corporates across Europe is real, with an almost immediate effect on margins. We believe margins for European companies, for the most part, have bottomed; although sales continue to fall they do so at a slower pace. From Milan to Amsterdam corporate restructuring has become the norm; mostly in the form of closing old unproductive assets or asset sales. The most remarkable aspect is that it is happening at almost every company. ING, the Dutch insurer and bank, is completely revamping its corporate DNA by selling the insurance businesses globally. What will be left is a Dutch retail bank with much better margins, a change that has been very well received by investors. Mediaset, the Italian and Spanish free to air TV operator is on its second restructuring program in three years. Despite a massive collapse in ad revenue they are generating solid free cash flow and using it to pay back debt. Advertising revenue in July is expected to be up 3%, giving the stock a substantial boost over the last few weeks. July is typically an insignificant month, only accounting for 5% of annual ad revenue, but the promise of more was all the market needed to re-rate the company considerably. This small and arguably immaterial positive bit of news proves that investors are starved for growth in Europe. The economic slowdown in Europe has taken its toll on growth for many corporates, but they are fighting their way back to health. Japanese outperformance was largely a function to two factors, strong market reaction to expectations for

International Active Update

Second Quarter 2013
Abenomics, and continued weakening of the yen. The Japanese market move has been supported by increasing volumes overall, but from domestic retail in particular. The retail investor has traditionally occupied about 15% of total trading volume, but it increased to 35%. Much of the market participation has come via closed end funds sold at bank offices. In this general trend, Sumitomo Mitsui Financial Group has proven very adept at gathering retail assets. In the second quarter alone, the bank appears to have had record quarterly fee income from funds sales. The rising equity market is also good for the balance sheet as formerly written down equity holdings are being returned to the PL as extraordinary gains. We place more weight on the real cash earnings of the fee business rather than the write backs, but the strong earnings performance is better than market expectations. The weak yen has also benefited Mazda, which sells roughly 75% of its cars overseas despite almost complete domestic production. The change in the yen has greatly improved the companys profit outlook as it prepares to launch the Mazda 6 and ramps production of the Mazda 3 in Mexico. Most emerging markets were a mess in the quarter. Concerns about a financial crisis and weak growth in China set the stage, especially for those emerging economies perceived as more dependent on a Chinadriven commodities story. Copper prices slipped 14% during the quarter, iron ore by 17%, in dollar terms. Growth that was just a bit too strong in the United States darkened the stage, as rising interest rates threatened an early reduction in the monthly purchases of Treasury and mortgage securities by the U.S. Federal Reserve, without providing any significant relief for commodities; if anything, the emergence of shale gas in the United States indicates further pressure on energy exporters in the developing world. Together these two seemed to threaten weaker growth and currencies across a broad swath of the emerging world and one or two economies connected to the same themes, such as Australia. Brazils fall was exacerbated when protestors took to the streets, prompting an exodus of foreign capital even as local interest rates began to rise. What started as a protest against a hike in bus fares (which have substantially lagged inflation since the last hike) turned into a broader protest against the corrosive influence of high inflation on lower and middle class incomes amidst an atmosphere of government corruption, centered on the stadia being built for the 2014 World Cup in Brazil. Meanwhile, the once expansive empire of EBX group companies belonging to multi-billionaire Eike Batista was tottering following dismal production results at oil exploration firm OGX. The fear that Brazilian banks might go down with him made the problem worse. The companies of EBX group suffered some of the greatest damage, but a sharp exodus of investors also dried up liquidity in smaller names whose only connection is that they are also located in Brazil. We hold no EBX group companies, nor any banks that lent to the group in this account; as part of a reduction of Latin names we had sold Banco do Brasil to hold its separately listed insurance subsidiary, BB Seguridade, earlier in the year. Our worst performer in the quarter was Telefonica Brasil, the top player in the cell phone market; it outperformed the market, but that was of no help in such a weak market amidst concerns on future consumer purchasing power. Our Thai holdings also hurt performance. Our positions are in banks and property, both industries we believe are only in the middle stages of a long upcycle in that economy. Both, however, bore the brunt of selling pressure, possibly because they are heavily owned by foreign investors. We took the sell-off in the banks as an opportunity to switch out of Bangkok Bank into Kasikornbank, a superior business with a premium valuation that had declined meaningfully.

GMO

Currency and Hedging

Most currencies fell relative to the U.S. dollar in the quarter. The most extreme was the Australian dollar, which lost 12.1% as weakness in China affected the market. On the positive side, the euro gained 1.2% relative to the U.S. dollar. In the first quarter we hedged some of our exposure to the Japanese yen. We have an overweight position in Japan, and the account was hedged such that the exposure of the portfolio to the Japanese yen was closer to that of the benchmark. As of the end of June, 1.1% of the account was hedged. The hedge against the yen added to returns in the quarter.

International Active Update

Second Quarter 2013

GMO
June 30, 2013
MSCI EAFE Sector Performance Second Quarter YTD 2013
5.6% -4.6% -3.3% -1.3% 0.7% -1.7% 1.1% -8.7% 5.0% 3.9% 13.4% 5.9% -4.9% 4.0% 12.8% 3.8% 6.5% -13.1% 11.3% 2.4%

Sector Weights and Performance

Sector Weight June 30, 2013 GMO Int'l Active* MSCI EAFE
18.7% 7.4% 6.1% 28.9% 7.3% 13.7% 4.2% 6.1% 4.6% 3.0% 11.7% 11.8% 7.0% 25.0% 10.5% 12.7% 4.4% 8.0% 5.2% 3.8%

Sector
Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Telecommunication Services Utilities

GMO Parameter Profile Actual P/BK, P/E, P/CF, and Yield

June 30, 2013
Price-toBook 1.3 1.5 (13%) Price-toEarnings 15.0 17.1 (12%) Price-toCash Flow 8.4 10.4 (19%)

Region/Country GMO* MSCI EAFE GMO Premium/(Discount) to MSCI EAFE

(weighted median)

(weighted median)

Yield 3.3% 3.3% 0%

International Active Update

Second Quarter 2013
MSCI EAFE Country and Currency Returns
June 30, 2013 GMO MSCI EAFE Int'l Active Weight Weight
22.6% 2.6% 8.7% 9.4% 2.0% 0.8% 9.2% 2.8% 0.2% 21.7% 0.3% 0.3% 1.1% 1.1% 0.5% 3.0% 0.8% 3.1% 1.7% 0.0% 0.1% 8.0% 0.0% 0.0%

GMO
25.8% 4.2% 9.7% 12.3% 5.8% 0.0% 4.7% 2.2% 0.0% 17.0% 0.0% 0.3% 0.8% 0.0% 0.2% 1.1% 0.4% 1.4% 0.0% 0.0% 0.0% 6.2% 5.0% 3.0% 10.3% 1.7% 1.5% 1.4% -0.4% -0.7% -0.4% -1.8% -1.9% 1.2% -2.0% -4.2% -4.8% -5.0% -5.6% -4.3% -4.7% -1.4% -2.5% -4.2% -11.1% -2.8% -2.0%

Country Japan Netherlands Germany France Italy Finland Switzerland Spain Portugal MSCI EAFE United Kingdom Austria Ireland Denmark Belgium Israel Hong Kong Norway Sweden Singapore Greece New Zealand Australia Emerging Markets Cash

MSCI EAFE Return in Local Currency

2013 Q2 MSCI EAFE Currency Return -6.1% 1.2% 1.2% 1.2% 1.2% 1.2% -0.1% 1.2% 1.2% -2.2% -0.2% 1.2% 1.2% 1.2% 1.2% -0.2% 0.1% -4.4% -3.5% -2.1% 1.2% -7.8% -12.1%

MSCI EAFE Return in $US 4.4% 3.0% 2.7% 2.6% 0.8% 0.5% -0.3% -0.6% -0.7% -1.0% -2.2% -3.1% -3.6% -3.9% -4.4% -4.4% -4.6% -5.8% -6.1% -6.3% -10.0% -10.4% -13.9%

* Data is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy. This information is supplemental to the GIPS compliant presentation of the strategy that has preceded this report in the last 12 months or accompanies it. GIPS compliant presentations of composite performance are also available at www.gmo.com. 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. The returns assume the reinvestment of dividends and other income. Fees are disclosed in Part II of GMOs Form ADV and are also available in each strategys compliant presentation. Composite performance is supplemental to the GIPS compliant presentation for the strategy that was made available on GMO's website in October of 2012.. Performance is shown compared to the MSCI EAFE Index, a broad-based securities market index that measures large capitalization international stocks. Broad-based indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly into an index. Information about the composite is as of the period-end noted above, subject to change without notice and not intended as investment advice. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.mscibarra.com)

Copyright 2013 by GMO LLC. All rights reserved.

International Active Update

Second Quarter 2013

GMO

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