International Active Update

Third Quarter 2013

Performance

GMO

The International Active EAFE Strategy returned +11.6% net of fees in the third quarter; the MSCI EAFE index also gained 11.6%. Positive stock selection was offset by negative country selection. The strategy lagged its benchmark by 0.4 percentage points for the first three quarters of 2013, returning +15.8%.

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

GMOInternational Active Performance (Through September 30, 2013)

GMO International Active 3,959.8%

MSCI EAFE 1,623.0%

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 MSCI GMO Int'l Active EAFE Value Added 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 +15.8 +16.1 -0.4 Compound Annual Rate of Return (32 Years, 4 Month) +12.1 +9.2 +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 +19.8 +11.1 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 -8.2 +10.1

International Active Update

Third Quarter 2013
Region Commentary
will survive is anyones guess, but for now stability has resumed and the countrys leadership can get back to resolving its ongoing sovereign debt and economic competitiveness challenges. Tough decisions related to the future of Europe still need to be made. In a nutshell, much depends on the stance of the new German government toward Europe. Will a reluctant Germany finally allow southern Europe to be bailed out or at least soften the demands for austerity? While some confidence has returned to Europe, as evident from financial markets, there are still many issues facing the continent. With unemployment levels at an all-time high in some countries, Europe cannot afford political apathy from Germany, an Italian crisis, or continued austerity choking the economy. Fortunately, events from the third quarter have contributed to stability and continuity in European leadership allowing governments, hopefully, to get back to putting Europe on the right path forward.

GMO

Europe emerged from the potentially rocky third quarter in a more stable position. Chancellor Merkel and the Christian Democratic Unions (CDU) election win in Germany and Prime Minister Lettas winning the Italian confidence vote have taken two of the big risks off the table for Europe. Mario Draghis steady hand at the ECB has also helped soothe market volatility. We are even seeing nascent signs of an economic recovery in Europe with leading indicators turning up. With the elections over in Germany and the potential for the proEuropean Socialists to be part of a grand coalition, it is now possible to focus on the structural issues facing the European economy. The German elections were supposed to be the big event of the year, but the re-election of the steady-handed Chancellor Merkel was without drama. However, she achieved just short of absolute majority in the Bundestag, the lower house. This combined with the failure of the Free Democrats, her former coalition partners, to cross the 5% hurdle needed to send members to the lower house has created some uncertainty as Merkel now needs to find a new coalition partner. Fortunately, the far-right anti-Europe party also failed to clear the 5% mark. The most likely scenario is a repeat of 2009, when the CDU formed a grand coalition with the Social Democrats (SPD). We believe a grand coalition is a good thing for Europe. Socialists are known to be pro-Europe and anti-austerity. Therefore, Merkel will have to soften her pro-austerity stance to accommodate her new partners and strengthen her coalition for a third term. It will still take time for the new German government to form, but at least the uncertainty and risks associated with new German leadership are gone and the market can take comfort in the continuity afforded by the current regime. Italian politics once again found its way into the spotlight, making up for the lack of drama in Germany. Berlusconi and his party threatened to pull down the government, potentially derailing the nascent European recovery. Luckily, better sense prevailed and the crisis was averted when Berlusconi retracted his threat. A senate committee vote in favor of the expulsion of Berlusconi could very well be the end of a colorful era for Italian politics. How long the Italian government
* Data is that of a representative account from within the Composite.

Country Selection and Market Update

Country selection was 0.1 percentage points behind the benchmark. An overweight position in Japan subtracted from returns. While still among the top performing countries for the year to date, the market did not keep pace in the quarter.* Economic news was dominated by Federal Reserve policies. At some point the Fed would like to bring the long-in-the-tooth quantitative easing (QE) policy to an end. It can point to some successes, like rising asset prices, particularly stocks and houses. However, it has inflated its balance sheet to the point where many would consider it a prime candidate for The Biggest Loser. Investor reaction to the possibility of even a small reduction in QE, the so-called taper, led to lower stock prices and higher bond yields. The latter fed into higher mortgage rates, which caused a slowdown in home purchases and refinancing. The deleterious prospect of the taper was felt beyond the U.S., particularly in emerging markets, where investors rediscovered the dangers of current account deficits and underlying structural problems. Brazil and India were the primary examples. So horrified was the Fed by what its musings had wrought, it decided not to throttle back on QE at its

International Active Update

Third Quarter 2013
policy meeting in September to the surprise and delight of most market participants.

GMO

Stock Selection
Stock selection beat the benchmark by 0.2 percentage points in the third quarter. Holdings in Continental Europe and Australia outperformed. Stock selection in Japan and the emerging markets was negative.* Stock selection in Continental Europe was positive as a mix of positions delivered. The holding in Socit Gnrale did well during the quarter because the French bank announced strong second quarter earnings and is now closer to meeting its 2015 ROE target of 10%. With the current cost-cutting program, the goal now looks achievable by management. We sold the name because the stock already reflects a lot of the good news and we believe the remaining upside is limited. We are finding better value in other companies in the sector. Veolia Environment, a French utility, benefited last quarter as its massive restructuring plan gained credibility among investors. With signs that leading indicators may be turning positive in Europe, the company should benefit because of its high leverage to recovering European waste and water volumes. We also completely sold this position, as we believe that the stock now fairly values the potential benefit of Veolias restructuring plan. Spains Atresmedia, a media company, was another strong performer this quarter as investors keep rerating this segment of the market. In the past five years, the Spanish broadcast TV players have consolidated and drastically cut costs. A duopoly now controls 90% of the TV advertising market and should be able to demonstrate some pricing power as soon as the economy recovers. A rerating of several industrial stocks helped push the Australian portfolio to outperform for the month of September. This was nothing more than value asserting itself, with little good news to speak of for Leighton Holdings, Toll Holdings, or Asciano, all of which outperformed the market. Indeed, the first is a global construction company with its business under threat from many angles, but this was reflected in the price. We have since sold the position. The latter two are logistics firms where subdued business conditions for several years have forced them to cut costs. Any upturn in volumes should lead to nice operating leverage coming through.

Just as Fed watching dominated the U.S., so Deutschland watching preoccupied Europe in the run-up to the federal election in the second half of September. As was widely anticipated, Angela Merkel scored a handsome electoral victory, but as mentioned above, she will have to do without the support of her current coalition partners, the Free Democrats, who failed to meet the 5% threshold to gain entry to parliament. Ms. Merkel now has to negotiate with the Greens and/or the SPD to form a new government. Investors appeared to welcome the endorsement of the chancellor who may hew to a less stringent form of austerity now that she will have a new political partner. Japan also saw the electoral endorsement of an incumbent with the triumph of the prime ministers party in the elections to Japans upper house, allowing the market to continue its enthusiasm for Abenomics. Economic data from China has been mixed, with continuing strength in housing but not so much in consumption. Australia has taken a hit from the fall-off in demand for its commodity exports. So far in 2013 equity markets have climbed the proverbial wall of worry with the alacrity of Spiderman. Returns have been exceptionally strong even as the taper caper has demonstrated that investors need the punch bowl close at hand, despite generally positive economic news and corporate earnings. In the U.S., we have the spectacle of debt negotiations between Congress and the president, which have added another level of uncertainty to the mix. It seems likely that a resolution will be reached and we are not about to second-guess this unpredictable process; instead we continue to focus on individual companies and their valuations. We still find many opportunities in Europe while the number available in Japan has diminished after the very strong run starting in late 2012. We are less sanguine about emerging markets as the likely tightening of U.S. monetary policy in the coming months will provide a headwind, just as the very easy policies after the financial crisis provided a tailwind.

* Data is that of a representative account from within the Composite.

International Active Update

Third Quarter 2013
Japanese stock underperformance over the quarter was concentrated in three large holdings: retailer Yamada Denki, auto manufacturer Nissan, and telecom provider KDDI. Yamada Denki is the Best Buy of Japan and specializes in home appliance sales in a large store format. After completing an acquisition of regional competitor Best Denki in 2012, the market was concerned about an increase in inventories at the combined entity. We expected an orderly disposition of the excess inventory as Best Denki was digested by Yamada. We, along with the market, were shocked at the first quarter earnings release, which revealed a material deterioration of the gross profit margin, implying bad pricing owing to either: (1) disorderly disposal of inventory; or (2) increasing consumer use of online shopping for large item purchases; or (3) both. As the quarter progressed, it became clear that the problem was both. With margins, according to our analysis, in secular decline, we took our lumps and exited the stock. Nissan negatively surprised the market with the intention to invest $2.5bn in India to produce commercial vehicles. Investors would rather the company focus on existing brands and product segments. Lastly, KDDI, a mobile operator that has seen successful subscriber and earnings growth through the effective use of the iPhone, suffered as market expectations built that market share leader, NTT DoCoMo, would finally adopt Apples hit product. Emerging markets underperformed the developed markets this quarter, and our position in those countries hurt returns. Stock selection in Taiwan was negative due to our investment in HTC, a maker of smartphones. The company reported disappointing sales for its new flagship phone, as the high end smartphone market started slowing and dominant products by Apple and Samsung squeezed out the smaller players.

GMO

Currency and Hedging

All benchmark currencies rose relative to the U.S. dollar in the quarter. The most extreme was the New Zealand dollar, which climbed 7.8%, and for major currencies the UK pound, which rose 6.7%. The euro climbed 4.1% relative to the U.S. dollar. The Feds surprise decision not to follow through with the taper led to broad U.S. dollar weakness. In the third quarter we closed our hedge against the Japanese yen. For the period of the quarter in which we held the position it detracted slightly from performance, but from its inception in February it added value. As of the end of September the account was unhedged.

International Active Update

Third Quarter 2013

GMO
September 30, 2013
MSCI EAFE Sector Performance Third Quarter YTD 2013
13.0% 6.7% 10.5% 12.7% 5.9% 14.2% 10.2% 14.9% 17.7% 9.5% 28.2% 13.0% 5.1% 17.2% 19.4% 18.6% 17.3% -0.2% 31.0% 12.1%

Sector Weights and Performance

Sector Weight September 30, 2013 GMO Int'l Active* MSCI EAFE
17.8% 8.9% 5.5% 27.9% 5.4% 15.2% 3.8% 7.3% 4.7% 3.6% 11.8% 11.2% 6.9% 25.4% 9.9% 13.0% 4.3% 8.2% 5.5% 3.7%

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

September 30, 2013
Price-toBook 1.4 1.6 (13%) Price-toEarnings 16.1 16.8 (4%) Price-toCash Flow 9.1 10.8 (16%)

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

(weighted median)

(weighted median)

Yield 3.1% 3.1% 0%

*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.

International Active Update

Third Quarter 2013
MSCI EAFE Country and Currency Returns
September 30, 2013 GMO Int'l Active MSCI EAFE Weight Weight
0.0% 0.9% 3.2% 2.1% 0.3% 0.1% 0.3% 9.8% 3.2% 2.6% 1.1% 1.2% 8.7% 21.7% 8.0% 0.2% 9.1% 0.8% 3.0% 21.6% 1.5% 0.4% 0.0% 0.0%

GMO
0.0% 0.0% 2.6% 5.9% 0.4% 0.0% 0.3% 16.5% 1.4% 4.8% 0.0% 1.1% 10.1% 18.0% 5.9% 0.0% 2.4% 0.3% 1.1% 23.3% 0.0% 0.4% 2.0% 3.6% 28.3% 21.6% 20.7% 14.9% 14.2% 8.7% 12.2% 10.8% 9.6% 9.9% 9.2% 9.1% 8.2% 4.9% 9.6% 7.5% 6.3% 4.6% 7.5% 8.9% 5.4% 3.4% -1.0%

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

MSCI EAFE Return in Local Currency

2013 Q3 MSCI EAFE Currency Return 4.1% 4.1% 4.1% 4.1% 4.1% 7.8% 4.1% 4.1% 5.2% 4.1% 4.2% 4.1% 4.1% 6.7% 2.1% 3.7% 4.1% 4.6% 1.6% 0.0% 1.0% 1.1% 3.2%

MSCI EAFE Return in $US 33.6% 26.6% 25.7% 19.6% 18.9% 17.2% 16.8% 15.4% 15.2% 14.4% 13.7% 13.6% 12.7% 12.0% 11.9% 11.6% 10.7% 9.5% 9.1% 8.9% 6.7% 4.5% 2.2%

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 September of 2013. 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

Third Quarter 2013

GMO

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