Q Market ChartBook

Transcription

1 Q3 217 Market ChartBook Baird Private Wealth Management September 3, 217 Wealth Management Capital Markets Investment Banking Private Equity Asset Management Charlotte Chicago Frankfurt London Milwaukee Shanghai rwbaird.com

2 Table of Contents Economy & Market Domestic Equity International Equity Fixed Income Market Highlights The Markets at a Glance Returns by Asset Class S&P 5 Index Economic Growth Inflation Watch Jobs Market Housing Market Consumer Health Corporate Profitability Market Volatility Commodity Markets Energy Markets Mutual Fund and ETF Flows Fund Flow Heat Map U.S Equity Snapshot Asset Class Performance U.S. Sector Performance Investment Style Leadership Historical Market Valuations Historical Sector Valuations Mutual Fund Performance Global Market Performance Intl. Equity Performance Country Performance Sector Performance Investment Style Leadership Global Market Valuations Country Valuations Ranges Bond Market Snapshot Maturity/Credit Performance Yield and Volatility U.S. Treasury Bonds Corporate Bond Yields Bonds Spreads Mutual Fund Performance

3 Economy and Markets Q3 217 Market ChartBook

4 Q3 217 Market Highlights Economy and Market At a Glance: Markets continued the trend higher this past quarter resulting in the Dow posting its eighth consecutive positive quarter, a feat that hasn t happened in 2 years. Final revisions of Q2 GDP showed economic growth accelerated to 3.1% YoY. Subdued inflation coupled with a tight labor market and a strong GDP reading jive with the Fed s intentions to normalize its balance sheet and other measures to tighten monetary policy. Economy: After many months of disappointing readings, headline CPI showed signs of inflationary pressures returning. CPI was up 1.9% YoY in August, rising from 1.7% in July. Core CPI, met market expectations in August by climbing 1.7% YoY. Increases in gasoline and rent, up 6.3% and.4%, respectively, accounted for the majority of the boost in the headline figure. The US labor market has continued to show strength, adding an average of 197, jobs for the previous three months through August. The unemployment rate finished the quarter at 4.4% while the participation rate climbed.2% to 62.9%. Once again, investors attention has been directed towards the muted pace of wage growth. Wage growth in Q3 failed to materialize but should the labor market tighten further and inflation trends higher, expect wage pressures to build. Fed Speak: As expected, the FOMC left the federal funds rate unchanged at its September meeting but did announce its intention to begin a balance sheet normalization program in October. A large spotlight will be placed on the Fed s December meeting as market participants have increased the probability of an additional rate hike to round out the year. Domestic Equity Market Cap and Style: Among market cap segments, small cap equities experienced a nice rebound in September helping the asset class deliver a 5.7% return in Q3. Large and mid cap stocks also experienced positive returns for the quarter climbing 4.5% and 3.5% respectively. From a style standpoint, Growth continues to trounce its Value counterpoint. Sector: Leading sectors in Q3 include Information Technology (8.7%), Energy (6.8%) and Telecom (6.8%). Most companies reported Q2 earnings that beat expectations on both an earnings and revenue basis, with 73% beating on earnings and 57% beating on revenue. Performance laggards for the quarter include Consumer Staples (-1.4%) and Consumer Discretionary (.8%). Consumer Staples struggled to keep pace in Q3 as distribution partners are finding it hard to stay competitive under pressure from new technology. International Equity At a Glance: International equities experienced robust growth in Q3 with developed markets up 5.4% and emerging markets climbing 8.%. In Europe the economic recovery remains intact and much of the nervous sentiment that flooded that market earlier this year has dissipated. Global growth has stabilized leading to healthy results from Italy (13.9%), Netherlands (9.4%), and France (8.4%). Emerging markets continued to produce robust returns, led by Brazil (23.%), Russia (18.1%), and China (14.8%). The strong performance in Q3 reflects faster earnings growth, a weaker US dollar and easy global monetary policies. As more global central banks shift towards hawkish rhetoric, emerging markets could see increased volatility. Fixed Income At a Glance: The broad US bond market, as measured by the Bloomberg Barclays US Aggregate Index, returned.9%. Geopolitical tensions with North Korea coupled with mixed readings on the US economy and unease from Hurricanes Harvey and Irma put downward pressure on US rates through September. Yields saw a rebound late in the quarter following the Fed's decision to move forward with its tapering plan as well as encouraging inflation readings. The US Treasury curve ended the quarter modestly flatter with the 2s/1s spread tightening to 86bps. On the international front, global fixed income investors benefited from continued demand due to quantitative easing, a supportive economic backdrop and a weak US dollar. Taxable Bonds: Exposure to higher yielding debt was beneficial for investors this quarter. High yield and investment grade debt delivered 2.% and 1.3% respectively. US Treasuries and US Agency debt were the laggards in Q3 returning.4% each. A bias towards lower quality issues helped investors this past quarter with BBB-rated debt outperforming other investment grade issues. Municipal Bonds: Municipal bonds outperformed their taxable peers advancing 1.1% this past quarter. In Q3, investor s attention was directed toward the impacted areas of Hurricane Harvey, Irma and Maria. Broad muni market reactions were fairly muted but for debt issued by Puerto Rico and the affected coastline on the mainland, prices saw a significant drop in September. Leaders in the space were taxable municipal issues and high yield munis delivering 2.1% and 1.5% respectively. 4

5 Markets at a Glance As of September 3, 217 Trailing Returns (%) Annual Returns (%) Asset Class Last Qtr YTD 1-Year 3-Year 5-Year 1-Year Benchmark U.S. Stocks Large Cap Value (3.8) 13.5 Russell 1 Value Large Cap Grow th Russell 1 Growth Mid Cap (2.4) 13.2 Russell Midcap Small Cap (4.4) 4.9 Russell 2 International Stocks Developed Markets (.8) (4.9) MSCI EAFE (Net) Bonds Short-Term Taxable BBgBarc 1-3 Yr Govt/Credit Intermediate-Term Taxable BBgBarc Intermed. Govt/Credit Short-Term Municipal BBgBarc 1-3 Yr Municipal Intermediate-Term Municipal (.5) BBgBarc 7 Yr Municipal Cash Cash/Cash Equivalents Citi 3 Month T-bills Satellite High Yield (4.6) 2.5 BofA/ML High Yield Master II Real Estate DJ US REIT Commodities 2.5 (2.9) (.3) (1.4) (1.5) (6.8) 11.8 (24.7) (17.) Bloomberg Commodity Emerging Markets (14.9) (2.2) MSCI Emerging Mkts (Net) Source: Morningstar Direct; Russell, MSCI, Barclays, Citigroup, and Dow Jones benchmarks. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 5

6 7% 6% 5% 5% Returns by Asset Class As of September 3, 217 Year-to-Date Performance of Various Asset Classes 45% Market Cap U.S. Sectors International Markets 43% Emerging Markets Fixed Income 4% 35% 32% 3% 25% 2% 27% 2% 28% 25% 21% 27% 26% 24% 24% 15% 14% 12% 11% 16% 14% 12% 12%12% 16% 15%14% 12% 12% 13% 1% 7% 7% 5% % 2% 3% 2% 2% 2% -5% -1% -5% -7% Source: Morningstar Direct. Asset classes are represented by the following benchmarks: Large Cap (S&P 5), Mid Cap (Russell Mid Cap), Small Cap (Russell 2), Cons. Discretionary (S&P 5 Sectors/Consumer Discretionary), Cons. Staples (S&P 5 Sectors/Consumer Staples), Energy (S&P 5 Sectors/Energy), Financials (S&P 5 Sectors/Financials), Health Care (S&P 5 Sectors/Health Care), Industrials (S&P 5 Sectors/Industrials), Info. Technology (S&P 5 Sectors/Info. Technology), Materials (S&P 5 Sectors/Materials), Telecom. (S&P 5 Sectors/Telecommunications), Utilities (S&P 5 Sectors/Utilities), Real Estate (S&P 5 Sectors/Real Estate), Australia ((MSCI Australia), Canada (MSCI Canada), France (MSCI France), Germany (MSCI Germany), Japan ((MSCI Japan), Switzerland ((MSCI Switzerland), United Kingdom (MSCI United Kingdom), United States (S&P 5), Brazil (MSCI Brazil), China (MSCI China), India (MSCI India), Korea (MSCI Korea), Mexico (MSCI Mexico), Russia (MSCI Russia), South Africa (MSCI South Africa), Taiwan (MSCI Taiwan), Agency (BBgBarc US Agency), Broad Market (BBgBarc US Agg. Bond), Corporate (BBgBarc US Corporate IG), High Yield (BBgBarc US Corporate HY), Municipal (BBgBarc Municipal), TIPS (BBgBarc US Treasury US TIPS), Treasury (BBgBarc US Treasury) 6

7 Adjusted Closing Level S&P 5 Index As of September 3, 217 Year-to-Date Performance of the S&P 5 Index 2,55 Q1: +6.1% Q2: +3.1% Q3: +4.5% 2,5 2,45 2,4 2,35 2,3 2,25 2,2 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Source: Standard and Poor s. The S&P 5 Index, computed by the Standard & Poor's Corporation, is a well known gauge of stock market movements determined by the weighted capitalization of the 5 leading U.S. common stocks. Indices are unmanaged and it is not possible to invest directly in an index. 7

8 Contribution to GDP Grow th (%) GDP Grow th (%) Economic Growth As of June 3, 217 US GDP Growth Sep-97 Sep-99 Sep-1 Sep-3 Sep-5 Sep-7 Sep-9 Sep-11 Sep-13 Sep-15 Contribution to U.S. GDP Growth Personal Consumption Private Investment -8 Govt. Spending Next Exports -1 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Gross Domestic Product (GDP) GDP is a basic measure of U.S. economic output. Alternatively, it can be thought of as the final value of all goods and services produced within the U.S. Positive GDP growth signals an expanding economy. GDP is comprised of four major categories: personal consumption, private investment, government spending and net exports. Source: US Department of Commerce: Bureau of Economic Analysis (GDP Growth) 8

9 Year-Over-Year Change in CPI Inflation Watch As of August 31, 217 Historic CPI Level 6 4 Headline CPI Core CPI 2-2 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Headline CPI Core CPI: Headline less Food and Energy Components Weight (%) 12-mo Change (%) Components Weight (%) 12-mo Change (%) Headline CPI Core CPI Housing Food Transportation Energy Food & Beverage Medical Care Education/Communication 7 (2.6) Recreation Apparel/Clothing 2 (.5) Consumer Price Index (CPI) A common measure of inflation, Headline CPI tracks a broad basket of goods and services relatable to most consumers. Core CPI excludes Food and Energy due to the volatile nature of those categories and the distortive effect it can have on the broader inflation measure. Other Source: Bureau of Labor Statistics; Baird Analysis. CPI figures lag one month. 9

10 Participation Rate (%) Wage Grrowth (%) Change in Payroll (s) Unemployment Rate (%) Jobs Market As of August 31, 217 Jobs Gained/Lost Unemployment and Underemployment Rates , Aug-7 Aug-9 Aug-11 Aug-13 Aug-15 Aug-17 Labor Force Participation U-3 Unemployment Rate U-6 Underemployment Rate Aug-7 Aug-9 Aug-11 Aug-13 Aug-15 Aug-17 Wage Growth (y/o/y%) Aug-7 Aug-9 Aug-11 Aug-13 Aug-15 Aug-17 Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Source: US Department of Labor: Bureau of Labor Statistics. Data will lag one month and is subject to revision. Wage growth is calculated quarterly and will lag one quarter. 1

11 Index Level Units (s) Index Level Housing Market As of August 31, 217 S&P/Case Shiller Home Price Index (2 City) Average Selling Price of New and Existing Homes $375, $325, Median Price (New Homes) Median Price (Existing) 18 $275, $225, $175, 1 Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Housing Affordability Index Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 $125, Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Home Starts/Sales 7,5 7, 6,5 6, 5,5 5, 4,5 4, 3,5 New Housing Starts Existing Home Sales Consumer Price Index (CPI) A common measure of inflation, Headline CPI tracks a broad basket of goods and services relatable to most consumers. Core CPI excludes Food and Energy due to the volatile nature of those categories and the distortive effect it can have on the broader inflation measure. 3, Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Source: Standard & Poor s, US Department of Commerce: Bureau of Economic Analysis. 11

12 Personal Savings Rate (%) Index Level Consumer Spending Growth (%) Consumer Health As of August 31, 217 University of Michigan Consumer Sentiment Survey Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Personal Savings Rate 12 Consumer Spending Growth (y/o/y%) Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Personal Income Per Capita $4, Consumer Price Index (CPI) $38, $36, $34, A common measure of inflation, Headline CPI tracks a broad basket of goods and services relatable to most consumers. Core CPI excludes Food and Energy due to the volatile nature of those categories and the distortive effect it can have on the broader inflation measure. Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 $32, Aug-7 Aug-8 Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Source: Thomas Reuters/University of Michigan, US Department of Commerce: Bureau of Economic Analysis. 12

13 Corporate Profits /GDP Corporate Profitability As of June 3, 217 S&P 5 Earnings Per Share (EPS) $1,4 $1,2 Earnings Per Sh (right axis) Revenues Per Sh (left axis) $14 $12 $1, $1 $8 $8 $6 $6 $4 $4 $2 $2 $ Jun-2 Jun-3 Jun-4 Jun-5 Jun-6 Jun-7 Jun-8 Jun-9 Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Corporate Profits (% of GDP) $ Corporate Profitability 12% 9% 6% 3% Jun-7 Jun-9 Jun-11 Jun-13 Jun-15 Jun-17 Earnings power ultimately drives long-term changes to stock prices. These two charts display how profitable US corporations are. The top chart measures earnings (top line growth) and revenue (bottom line growth) of the companies within the S&P 5 Index. The bottom chart displays corporate profitability (after taxes) in terms of total US GDP growth. Source: BEA, Bloomberg, Standard & Poors, Baird analysis. Past performance is not a guarantee of future results. 13

14 Percent of Trading Days VIX Level Market Volatility As of September 3, 217 Historic VIX Level Oct-7 Oct-8 Oct-9 Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Quarterly S&P 5 Trading Volatility 8% % of days up/down 2% or more VIX (CBOE Volatility Index) % of days up/down 1-2% 6% 4% 2% % The VIX measures the implied volatility of S&P 5 future options. Simply put, it measures the expected volatility of the S&P 5 Index over the next 3 days. The higher the index, the higher the expected volatility. It is also commonly referred to as the fear index. Q3 217 Q2 217 Q1 217 Q4 216 Q3 216 Q2 216 Q1 216 Q4 215 Q3 215 Q2 215 Q1 215 Q4 214 Q3 214 Q2 214 Q1 214 Q4 213 Q3 213 Q2 213 Q1 213 Q4 212 Q3 212 Q2 212 Q1 212 Q4 211 Q3 211 Q2 211 Q1 211 Q4 21 Q3 21 Q2 21 Q1 21 Q4 29 Q3 29 Q2 29 Q1 29 Q4 28 Q3 28 Q2 28 Q1 28 Q4 27 Q3 27 Source: Standard & Poor s; CBOE; Baird Analysis. 14

15 WTI Oil Price ($/b) London PM Gold ($/oz) Commodity Markets As of September 3, 217 Year-to-Date Returns of Various Commodity Types (%) Oil Prices $16 Gold Prices $2, $14 $12 $1 $8 $1,5 $1, $1,283 $6 $51.67 $4 $5 $2 $ Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Source: U.S. Dept of Energy; London PM Gold Fix Index; Baird Analysis. Broad Market is represented by the Bloomberg Commodity Index, specific commodity types are reported segments of that index. See important disclosures and definitions included with this publication. $ Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 15

16 Total U.S. Oil Production (mmbb/d) Baker Hughes Oil & Gas Rig Count Global Oil Supply and Demand (MMbb/d) Supply / Demand Imbalances (MMbb/d) WTI Oil Price ($/b) Henry Hub Natural Gas Price ($/mmbtu) Energy Markets As of September 3, 217 Oil Prices (West Texas Intermediate) $16 $14 Natural Gas Prices (Henry Hub) $16 $14 $12 $12 $1 $8 $6 $51.67 $1 $8 $6 $4 $2 $4 $2 $3.1 $ Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 $ Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Total U.S. Oil Production (LH) and Rig Count Index (RH) Global Oil Supply and Demand (LH) and Supply Imbalance (RH) 1,5 9,5 8,5 7,5 6,5 5,5 4,5 Total Oil Production Total Active Rig Count 2,5 2, 1,5 1, Global Over/Under Supply Supply Demand Undersupply Oversupply 3,5 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16-4 Source: U.S. Energy Information Administration; Bloomberg; Baird Analysis. 16

17 Mutual Fund and ETF Flows As of August 31, 217 Annual Mutual Fund and ETF Flows ($ millions) Calendar Year Net Flow s ($M) YTD Money Market 34, ,1 (29,49) (431,64) (6,745) 23,827 4,622 24,8 52,648 84,147 16,2 Municipal Bond 14,353 12,758 75,969 16,43 (8,574) 54,251 (56,361) 32,748 21,822 33,533 3,963 Taxable Bond 112,649 61,1 333, ,664 19, ,181 34,92 11,193 29,82 199,59 2,32 Allocation 45,974 (21,999) 6,453 18,527 19,37 29,553 61,961 51,267 (2,669) (51,899) 7,66 US Equity 37, (33,563) (21,54) (45,395) (41,163) 175, ,39 (6,53) (8,997) 41,51 International Equity 174,946 (41,542) 63,246 91,729 19,51 61,56 2,74 153,487 29,444 12,42 15,962 Alternative 11,561 19,82 28,434 24,6 23,172 17,92 49,512 2,76 2,516 (296) 1,256 Commodities 6,542 12,37 36,636 24,972 8,171 11,928 (32,89) (3,317) (1,526) 14, Biggest % Gainers/Losers by Asset Class Top 1 In-Flow s Trailing 1-Year Top 1 Out-Flow s Trailing 1-Year (as a % of assets) Grow th Rate (as a % of assets) Grow th Rate Industrials 49.4% Prime Money Market -35.% Financial 44.6% Utilities -11.2% Ultrashort Bond 41.1% Allocation--85%+ Equity -9.4% Bank Loan 31.7% Money Market - Tax-Free -8.6% Money Market - Taxable 2.7% Commodities Precious Metals -7.7% Inflation-Protected Bond 18.2% World Allocation -6.9% Foreign Small/Mid Blend 17.7% Health -6.1% Preferred Stock 15.7% Large Grow th -4.9% Corporate Bond 14.4% Allocation--7% to 85% Equity -4.% Energy Limited Partnership 14.3% Muni California Long -4.% Annual Fund Flows The examination of annual mutual fund and ETF flows shows the investment pattern of the average investor by broad asset class. For example, in 28 investors exited stocks when the markets fell. In 29, large amounts of capital went to fixed income, but little flowed back to stocks. Source: Morningstar Direct; Baird Analysis. Asset classes with less than $25 billion invested were excluded from the analysis. 17

18 Fund Flow Heat Map As of August 31, 217 Mutual Fund and ETF Net Flow (YoY % Grow th) Asset Class YTD US Equity Large Cap Grow th -1.%.% -1.2% -2.3% -4.2% -3.1% -3.9% -1.6% -1.8% -8.2% -2.6% Large Cap Blend 1.2% 2.6% 4.9% -.9% -.3%.7% 1.8% 6.5% 6.9%.6% 2.8% Large Cap Value 3.9% -.3% -2.9% -5.2% -.1%.%.5% 5.4% 2.8% -1.8% -1.4% Mid Cap Grow th.4% 5.7% -5.6% -.5%.5% -4.8% -4.3% 2.2% -3.6% -9.3% -1.7% Mid Cap Blend 4.3% 2.1% -3.7% 4.9% 3.6% -1.4% 2.5% 15.% 6.2% -.1% 1.4% Mid Cap Value 1.8% 1.2% -4.9% -1.4%.8% -1.% -4.8% 8.6%.5% -6.2% -2.9% Small Cap Grow th -1.4% -2.% -2.1% 4.4%.% -1.% -3.8% 4.4% -7.4% -7.1% -1.7% Small Cap Blend 8.6% -2.8% 1.9% 4.6% 3.4% -3.6% -3.% 1.% 2.1%.%.6% Small Cap Value 6.2% -2.3% 7.2% 4.2% 7.6% -3.4% -4.6% 4.4% -.5% 1.1%.% International Equity Internationl Grow th 16.3% 9.3% -2.9% 3.3%.3% -2.7% -2.1% 4.4% -.7% -2.1% 1.6% International Blend 24.7% 19.9%.4% 6.9% 1.5% 5.2% 4.1% 17.8% 15.3% 6.4% 11.3% International Value 11.8% 1.% -7.% -5.2% 4.4% 5.6% 7.5% 1.2% 9.5% -1.5% 4.% Emerging Markets 18.1% 19.5% 3.6% 32.6% 27.5% 7.4% 19.2% 9.4% 3.5% -.3% 11.% Global Equity 12.3% 8.8% -4.8% -5.3% -4.2% -5.4% -6.2% 5.2% 2.5% -5.%.3% Fixed Income Short-Term Bond -4.9% 2.4%.3% 7.3% 28.7% 7.8% 19.2% 12.5% 6.5% 2.% 6.7% Intermediate-Term Bond 11.6% 16.1% 2.3% 26.7% 9.8% 5.2% 12.8% -7.5% 4.8% 8.9% 7.8% High Yield Bond 3.3% 2.7% 3.5% 28.3% 11.3% 12.% 15.7% 2.% -5.4% 3.6% -3.9% Bank Loan 29.5% -7.9% -26.9% 38.3% 78.% 32.6% 24.% 93.4% -14.3% 5.9% 14.4% TIPS -3.1% 6.7% 39.% 55.5% 1.9% 11.6% 6.1% -23.9% -2.2% 6.9% 1.9% Short-Term Muni -5.6% 4.6% 27.4% 15.5% 1.2% 4.% 11.7% 2.2% 7.4% 1.9% 4.3% Intermediate-Term Muni 7.4% 8.8% 9.7% 22.9% 7.1% 2.% 14.4% -9.5% 13.4% 8.7% 6.4% High Yield Muni 25.5% 1.3% -5.7% 27.6% 5.% -1.5% 22.6% -15.% 17.1% 5.2% 9.% Source: Morningstar Direct; Baird Analysis. >1% 5% to 1% 3% to 5% 3% to % % to -3% -3% to -5% -5% to -1% <-1% 18

19 Domestic Equity Q3 217 Market ChartBook

20 U.S. Stock Market Snapshot As of September 3, 217 Bellw ethers Source: Morningstar Direct. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. Representative Last Qtr YTD 1-Year 3-Year 5-Year 1-Year Std. Dev. Max. Loss P/E EPS Gr. Div. Yld. Benchmark S&P (8.4) S&P 5 DJIA (9.) Dow Jones Industrial Avg. Market Cap Mega (8.4) Russell Top 5 Large (8.6) Russell Top 2 Mid (12.8) Russell Midcap Small (16.8) Russell 2 Micro (21.) 16.8 (3.3) 1.3 Russell Micro Cap Style Value (1.4) Russell 3 Value Core (8.8) Russell 3 Grow th (8.8) Russell 3 Growth S&P 5 Sectors Trailing Returns (%) 5-Year Risk Stats Other Metrics Consumer Discretionary (8.) S&P 5/Cons. Disc. Consumer Staples (1.3) (7.5) S&P 5/Cons. Staples Energy 6.8 (6.6).2 (5.7) (38.7) S&P 5/Energy Financials (15.2) S&P 5/Financials Health Care (13.1) S&P 5/Health Care Industrials (11.3) S&P 5/Industrials Information Technology (8.2) S&P 5/Info. Tech. Materials (22.7) S&P 5/Materials Telecomm 6.8 (4.7) (.1) (12.6) S&P 5/Telecomm Utilities (12.7) S&P 5/Utilities 2

21 Return (%) Domestic Asset Class Performance As of September 3, 217 Performance by Market Cap and Style Large Cap Mid Cap Small Cap Large Value Large Growth Mid Value Mid Growth Small Value Small Growth Last Quarter Year-to-Date Source: Morningstar Direct. Asset classes are represented by the following benchmarks: S&P 5 (Large Cap), Russell Midcap (Mid Cap), Russell 2 (Small Cap), Russell 1 Value (Large Value), Russell 1 Growth (Large Growth), Russell Midcap Value (Mid Value), Russell Midcap Growth (Mid Growth), Russell 2 Value (Small Value), and Russell 2 Growth (Small Growth). See important disclosures and definitions included with this publication. 21

22 Domestic Asset Class Performance As of September 3, 217 S&P 5 Index: Performance by Sector (Latest Quarter) Info. Tech. 8.6 Energy 6.8 Telecomm 6.8 Materials 6. Financials 5.2 S&P Industrials 4.2 Health Care 3.7 Utilities 2.9 Real Estate.9 Cons. Disc..8 Cons. Staples Return (%) S&P 5 Index: Performance by Sector (YTD) S&P 5 Sector Statistics P/E Ratio (TTM) P/E Ratio (NTM) Dividend Yield (%) EPS Grow th (%) S&P 5 Index Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Info. Tech Materials Real Estate Telecomm Utilities Info. Tech Health Care 2.3 Materials 15.8 S&P Industrials 14.1 Financials 12.5 Cons. Disc Utilities 11.9 Real Estate 9.8 Cons. Staples 6.6 Telecomm -4.7 Energy Return (%) Source: Morningstar Direct. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 22

23 12-Mo Performance Differential (%) 12-Mo Performance Differential (%) 12-Mo Performance Differential (%) Investment Style Leadership As of September 3, 217 Large Cap vs. Small Cap (Rolling 12-Month Periods) 2 15 Large Cap Outperforms Small Cap Outperforms -2 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Value vs. Growth (Rolling 12-Month Periods) Defensive vs. Cyclical (Rolling 12-Month Periods) 2 Value Outperforms 4 Defensive Outperforms Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Growth Outperforms Cyclical Outperforms -4 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Source: Morningstar Direct. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 23

24 P/E Ratio (TTM) P/E Ratio (TTM) P/E Ratio (TTM) Historical Market Cap Valuations As of September 3, 217 S&P 5 Valuation History S&P 5 P/E Average +1 Std. Dev. 1-Year Average P/E Average -1 Std. Dev. 5 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Mid Cap Valuations History 25 Small Cap Valuation History Mid Cap 1-Year Average P/E Average +1 Std. Dev. Average -1 Std. Dev. 5 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Small Cap 1-Year Average P/E Average +1 Std. Dev. Average -1 Std. Dev. 5 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Source: Morningstar Direct. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 24

25 LT Earnings Growth P/E Ratio Historical Sector Valuation and Growth Ranges As of September 3, 217 S&P 5 Sectors: 1-Year P/E Valuation Range LEGEND Year High 1 Current 5 Cons. Disc. Cons. Staples Energy Financials Health Care Industrials Info Tech Materials Telecomm Utilities S&P 5 Sectors: 1-Year Earnings Growth Range 25 Average Year Low Cons. Disc. Cons. Staples Energy Financials Health Care Industrials Info Tech Materials Telecomm Utilities Source: Morningstar Direct. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 25

26 Percent of Total Percent of Total Mutual Fund Over/Under Performance (Equity Funds) As of September 3, 217 Percent of Funds Outperforming Market Benchmarks (Trailing 1 Year) 1% 75% 5% 25% % 28% Large Growth 66% Large Value 54% Mid Growth 68% Mid Value 38% Small Growth Percent of Funds Outperforming Market Benchmarks (Trailing 5 Years) 1% 75% 5% 25% % 21% Large Growth 29% Large Value 23% 22% Mid Growth Mid Value 3% Small Growth Mutual Fund Style Universe: Style-specific universe of mutual funds as categorized by Morningstar. Number of funds in each category as of June 217: 362 for Large Growth, 298 for Large Value, 178 for Mid Growth, 13 for Mid Value, 25 for Small Growth, 19 for Small Value, 154 for International, and 213 for Global. Source: Morningstar Direct; S&P 5, MSCI, and Russell benchmarks; Baird Analysis. See important disclosures and definitions included with this publication. 25% Small Value 47% Small Value 42% 41% Int'l 41% Int'l Global 55% Global % Underperform % Outperform % Underperform % Outperform Mutual Fund Performance Active investment managers often have a primary objective of outperforming a relevant market benchmark based on the fund s investment style. In certain periods, active managers can find it easier or more difficult to outperform. This chart examines seven main assets classes, detailing what percentage of mutual fund managers overor under-performed in a given period. This provides useful context when assessing mutual funds that you may own. 26

27 International Equity Q3 217 Market ChartBook

28 Global Market Performance As of September 3, 217 Year-to-Date Performance Canada 11.9% UK Europe 15.7% 23.4% Russia 1.6% Germany 25.% France 27.9% S&P % Spain 29.6% China 43.4% Japan 14.6% Mexico 26.4% India 24.1% Hong Kong 27.8% Brazil 26.9% South Africa 12.7% Australia 12.5% Source: Standards & Poor s (S&P 5); MSCI benchmarks (country returns). All performance is measured in USD. See important disclosures and definitions included with this publication. 28

29 International Equity Snapshot As of September 3, 217 Trailing Returns (%) Annual Returns (%) Asset Class/Region Last Qtr YTD 1-Year 3-Year 5-Year 1-Year Benchmark Broad Developed Markets Developed Markets (USD) (.8) (4.9) MSCI EAFE (Net) USD Developed Markets (Local Currency) MSCI EAFE (Net) Local Currency Effect (USD - Local Returns) (2.8) (3.9) (1.3) (4.3) (6.1) (1.8) Broad Emerging Markets Emerging Markets (14.9) (2.2) MSCI Emerging Markets (Net) BRIC (13.3) (2.6) MSCI BRIC Returns by Style Value (5.7) (5.4) MSCI EAFE Value Grow th (3.) 4.1 (4.4) MSCI EAFE Growth Large Cap (2.1) (5.5) MSCI EAFE Large Cap Mid Cap (2.1) MSCI EAFE Mid Cap Small Cap (4.9) MSCI EAFE Small Cap Returns by Region Europe (2.3) (5.7) MSCI Europe Japan (3.7) MSCI Japan Pacific (ex Japan) (8.4) (.3) MSCI Pacific ex Japan Source: Morningstar Direct; MSCI benchmarks. Performance greater than one year is annualized. Performance is represented by the benchmark listed in the representative benchmark column. See important disclosures and definitions included with this publication. 29

30 Emerging Markets Developed Markets International Country Performance As of September 3, 217 Selected Country Performance (Latest Quarter) Selected Country Performance (Year to Date) Italy 13.9 Italy 32.6 Netherlands 9.4 Netherlands 31.6 France 8.4 Spain 29.6 Germany 7.7 France 27.9 Sweden 5.5 Sweden 26.5 MSCI EAFE 5.4 Germany 25. U.K. 5.2 Switzerland 21.5 Spain 4.3 MSCI EAFE 2. Japan 4.1 U.K Australia 3.2 Japan 14.6 Switzerland 2. Australia 12.5 Brazil 23. China 43.4 Russia 18.1 South Korea 32.4 China 14.8 MSCI Em. Mkts 27.8 MSCI Em. Mkts 7.9 Brazil 26.9 South Africa 4. Mexico 26.4 India 3. India 24.1 South Korea 2.7 Taiwan 23.5 Malaysia 1.8 Malaysia 15.9 Mexico 1.5 Indonesia 15.2 Taiwan 1.4 South Africa 12.7 Indonesia -1. Russia Return (%) Return (%) Source: Morningstar Direct.; MSCI Indices; Baird Analysis. All returns are reported in USD. MSCI EAFE (Developed markets) and MSCI EM (Emerging markets) are broad benchmarks representing many countries. Includes the 1 largest countries by weighting in the benchmark. See important disclosures and definitions included with this publication. 3

31 International Economic Sector Performance As of September 3, 217 MSCWI ACWI Ex U.S. Performance by Sector (Latest Quarter) Energy 12.7 Materials 1.6 Info. Tech. Cons. Disc Sector Weighting (%) of the MSCI ACWI Ex U.S. Index MSCI ACWI ex US 6.2 Financials Industrials Utilities Telecomm Cons. Staples Health Care Energy 6.4 Utilities 3.2 Telecomm 4.4 Real Estate 3.3 Financials Return (%) Materials 8. MSCWI ACWI Ex U.S. Performance by Sector (Year to Date) Info. Tech Health Care 7.7 Industrials 11.8 Industrials Materials MSCI ACWI Ex US Cons. Disc Info. Tech. 11. Cons. Staples 9.8 Cons. Disc Financials 2.5 Utilities 19.1 Cons. Staples 17.5 Health Care 16.6 Telecomm 12.9 Energy Return (%) Source: Morningstar Direct; Baird Analysis. Sectors based on global industry classification standards (GICS). The MSCI ACWI Ex US Index is a benchmark designed to measure developed market and emerging market performance excluding the U.S. See important disclosures in appendix. 31

32 12-Mo Performance Differential (%) 12-Mo Performance Differential (%) 12-Mo Performance Differential (%) Investment Style Leadership As of September 3, 217 U.S. vs. International (Rolling 12-Month Periods) 3 U.S. Outperforms Int l Outperforms -3 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Developed vs. Emerging Markets (Rolling 12-Month Periods) Value vs. Growth (Rolling 12-Month Periods) 5 4 Developed Outperforms 15 Value Outperforms Emg. Markets Outperforms -5 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17-1 Growth Outperforms -15 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Source: Morningstar Direct. Returns based on 12-month performance, calculated monthly over the most recent 1-year period. Benchmark proxies are as follows: S&P 5 (U.S.), MSCI EAFE (Int l), MSCI EAFE Value (Value) and MSCI EAFE Growth (Growth), MSCI EAFE (Developed markets), and MSCI EM (Emerging markets). See important disclosures and definitions included with this publication. 32

33 P/E Ratio (TTM) P/E Ratio (TTM) Global Stock Market Valuations As of September 3, 217 Historical P/E Ratio S&P 5 MSCI EAFE MSCI EM 4 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Current P/E Ratio of Selected Countries Europe Asia-Pacific Emerging Markets UK France Switzerland Germany Spain Japan Australia Hong Kong Singapore China S. Korea Brazil S. Africa India Mexico Russia Source: Standards & Poor s (S&P 5); MSCI benchmarks (country returns). All performance is measured in USD. US is measured by the S&P 5 Index, Developed International is measured by the MSCI EAFE Index, Emerging International is measured by the MSCI EM Index. P/E ratios are based on trailing 12 month earnings. See important disclosures and definitions included with this publication

34 P/E Ratio P/E Ratio Country Valuation Ranges As of September 3, 217 Developed Markets: 7-Year P/E Valuation Ranges LEGEND 7-Year High 1 5 Current Emerging Markets: 7-Year P/E Valuation Ranges 35 Average Year Low 5 Source: Morningstar Direct. USA is represented by the S&P 5. All other countries are represented by the respective MSCI country benchmark. P/E ratios are based on trailing 12 month earnings. See important disclosures and definitions included with this publication. 34

35 Fixed Income Q3 217 Market ChartBook

36 Bond Market Snapshot As of September 3, 217 Characteristics Trailing Returns (%) Annual Returns (%) Bond Types Yield (%) Duration Last Qtr YTD 1-Year 3-Year 5-Year 1-Year Benchmark Broad Developed Markets U.S. Taxable Bonds BBgBarc US Aggregate Bond U.S. Municipal Bonds BBgBarc Municipal Bond International Bonds (2.4).2 (.7) (6.) (3.1) BBgBarc Glbl Agg. Bond ex US Broad Emerging Markets Emerging Market Bonds BBgBarc Emerging Markets Taxable Bond Categories Treasuries (1.7) BBgBarc US Treasury Agencies (1.6) BBgBarc US Government Mortgage-Backed BBgBarc US MBS Inv-Grade Corporate (.7) 7.5 BBgBarc US Corporate IG High Yield Corporate (4.6) 2.5 BofA/ML High Yield Master II Municipal Bond Categories Insured BBgBarc Municipal Insured State GO (.4) BBgBarc Municipal State GO Local GO (.1) BBgBarc Municipal Local GO Revenue BBgBarc Municipal Revenue High Yield BBgBarc High Yield Muni Source: Morningstar Direct; Barclays benchmarks. Individual security types are subsets of either the Barclays U.S. Aggregate or Municipal Bond benchmarks. Duration, measured in years, is a relative term that expresses the price sensitivity of an investment/benchmark to changes in interest rates. All else equal, the lower the duration, the less price sensitivity to interest rate changes. See important disclosures and definitions included with this publication. 36

37 Return (%) Return (%) Performance by Maturity and Credit Quality As of September 3, 217 Taxable Bonds Short-Term Intermediate Long-Term AAA AA A Baa Below Baa QTR YTD (High Yield) Municipal Bonds Short-Term Intermediate Long-Term AAA AA A Baa Below Baa (High Yield) QTR YTD Source: Bloomberg; Baird Analysis. Ratings are as defined by Bloomberg and represent bonds in the Barclays Aggregate Bond index (taxable bonds) and Barclays Municipal Index (municipal bonds). Short-term maturity is defined as 1-3 years, intermediate is 5-7 years for taxable and 6-8 for municipal, long-term is 1+ years for taxable and 8-12 years for municipal. See important disclosures and definitions included with this publication. 37

38 Yield (%) Yield and Volatility Characteristics of Various Bond Types As of September 3, 217 The Relationship Between Yield and Volatility 6 HY Municipal Bank Loans High Yield 4 Emerging Mkts Mortgage-Backed Corporate Broad Bond Market Municipal 2 Treasury International Year Historical Volatility (Standard Deviation) Source: Morningstar Direct; Barclays benchmarks. Individual security types are subsets of either the Barclays U.S. Aggregate or Municipal Bond benchmarks. Bond types are represented by the following indices: Barclays Aggregate Bond (Broad Bond Market), Barclays US MBS (Mortgage-Backed), Merrill Lynch High Yield Master II (High Yield), Barclays IG Corporate (Corporate), Barclays Municipal (Municipal), Barclays US Treasury (U.S. Treasury), Barclays Global Aggregate ex USD (International), and S&P/LSTA Leveraged Loan (Bank Loans). Indices are unmanaged and are used to measure and report performance of various sectors of the market. Past performance is no guarantee of future results and diversification does not ensure against loss. Direct investment in indices is not available. See important disclosures and definitions included with this publication. 38

39 Yield (%) 6mo 2yr 3yr 5yr 1yr 2yr 3 yr Yield (%) 1-Year U.S. Treasury Rate (%) U.S. Treasury Bonds As of September 3, 217 U.S. Treasury Yield Curve 3.5 Historical U.S. Treasury Rates /3/17 Current Qtr 3.5 9/3/16 Last Year 2. 1 Maturity Current U.S. Treasury Yields by Maturity mo 6 mo 2 yr 3 yr 5 yr 1 yr 3 yr Source: U.S. Department of Treasury; Baird Analysis. See important disclosures and definitions included with this publication. 39

40 Yield (%) 3mo 6mo 5 yr 1yr 2yr 3yr Yield (%) U.S. Treasury Bonds As of September 3, 217 U.S. Municipal and Treasury Yield Curve Treasury Municipal. Maturity Yield Comparisons of Treasury and Municipal Bonds 6 Treasury Municipal Tax-Equivalent Yield mo 6mo 1yr 2yr 3yr 5yr 7yr 1yr 2yr 3yr Source: U.S. Department of Treasury; Bloomberg. Municipal yields are based on the Barclays AAA GO Bond Index. The Tax-Equivalent Yields assumes a 39.6% federal tax rate and full exemption of those taxes. See important disclosures and definitions included with this publication. 4

41 Effective Yield (%) Effective Yield (%) Average Default Rate (%) Effective Yield (%) Effective Yield (%) Av erage Def ault Rate (%) Corporate Bond Yields As of September 3, 217 Investment Grade Bonds: Historical Yields Investment Grade Bonds: Current Yield and Historic Default Rate Sep-7 Sep-9 Sep-11 Sep-13 Sep-15 Sep AAA AA A BBB 1 High Yield Bonds: Historical Yields High Yield Bonds: Current Yield & Historic Default Rate Sep-7 Sep-9 Sep-11 Sep-13 Sep-15 Sep-17 BB B CCC Source: BofA/Merrill Lynch, Standard & Poor s. Investment Grade Bonds are represented by the BofA/ML US Corporate Bond Index; High Yield Bonds are represented by the BofA/ML High Yield Master II Index. Historic default rates provided by Standard & Poor s and encompass the period from 1/1/81 to 12/31/15. See important disclosures and definitions included with this publication. 41

42 Spread over Treasury Bond (bps) Bond Spreads As of September 3, 217 Average Option-Adjusted Spread: Max/Min/Avg 1,5 1,4 1, Average Current 1,2 1,1 1, (1) High Yield Corporate MBS Global Agencies Current/Historical Spreads (%) High Yield Corporate MBS Global Agencies High Average Low Current Source: Barclays, Bloomberg. The length of each bar represents the range of a particular spread relative to an appropriate Treasury benchmark over the past 1 years. The maximum and minimum spreads are capped at the 95th and 5th percentiles to account for outliers. The data point marked current represents the most recent quarter. Past performance is not a guarantee of future results and this chart is not intended to be a valuation tool. 42

43 Bond Sector Yields and Returns As of September 3, 217 Sector Statistics Returns Bond Sector Avg. Maturity Avg. Yield Credit Quality YTD 1-Year Benchmark U.S. Treasuries Short-Term 2.9 yrs. 1.6% AA+ 1.1% -.1% BBgBarc US Treasury 1-5 Yr Intermediate-Term % AA+ 2.6% -2.1% BBgBarc US Treasury 5-1 Yr Long-Term % AA+ 3.8% -3.8% BBgBarc US Treasury 1-2 Yr TIPS % AA+ 1.7% -.7% BBgBarc US Treasury US TIPS Broad Market Aggregate Bond 8.2 yrs. 2.5% AA 3.1%.1% BBgBarc U.S. Aggregate Bond IG Corporates % AA+ 5.2% 2.2% BBgBarc U.S. Corporate IG HY Corporates % B 7.% 8.9% BBgBarc U.S. High Yield - 2% Issuer Cap Floating Rates % A+ 1.8% 2.3% BBgBarc U.S. Floating Rate Notes MBS % AAA 2.3%.3% BBgBarc U.S. Mortgage Backed Securities ABS % AA+ 1.6%.9% BBgBarc Asset-Backed Securities Price Impact of a 1% Rise/Fall in Interest Rates 15% +1% -1% 11.2% 1% 5% % -5% -1% 2.8% -2.7% 6.8% -6.3% 8.1% -7.4% -9.8%.1% -.1% 2.3% -2.2% 3.6% -3.9% 4.3% 4.7% 6.2% -6.1% -5.6% -6.1% 8.1% -7.% -15% 1-5 Yr Treasury 5-1 Yr Treasury TIPS 1-2 Yr. Treasury Floating Rate ABS HY Corporates MBS Municipals Total Bond Market IG Corporates Source: Barclays, Baird Analysis. Sector yields reflect yield to worst. Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates)) + (.5 * Price * Convexity * (Change in Interest Rates)^2). Chart is for illustrative purposes only. Past performance is not indicative of future results. 43

44 Percent of Total Percent of Total Mutual Fund Over/Under Performance (Bond Funds) As of September 3, 217 Percent of Funds Outperforming Market Benchmarks (Trailing 1 Year) 1% 75% 5% 86% 77% % Underperform % Outperform 25% % Short Term Taxable Intermediate Taxable Short Term Municipal Intermediate Municipal 14% 23% Mutual Fund Performance Percent of Funds Outperforming Market Benchmarks (Trailing 5 Years) 1% 75% 5% 25% % 77% 86% Short Term Taxable Intermediate Taxable Short Term Municipal Intermediate Municipal Mutual Fund Style Universe: Style-specific universe of mutual funds as categorized by Morningstar. Number of funds in each category as of March 217: 13 for Short-Term Taxable, 227 Intermediate Term Taxable, 5 for Short-Term Municipal, and 77 for Intermediate Municipal. Source: Morningstar Direct; Barclays benchmarks; Baird Analysis. See important disclosures and definitions included with this publication. 26% 4% % Underperform % Outperform Active investment managers often have a primary objective of outperforming a relevant market benchmark based on the fund s investment style. In certain periods, active managers can find it easier or more difficult to outperform. This chart examines four main assets classes, detailing what percentage of mutual fund managers overor under-performed in a given period. This provides useful context when assessing mutual funds that you may own. 44

45 Appendix and Important Disclosures

46 Disclosures Disclaimers This is not a complete analysis of every material fact regarding any company, industry or security. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Past performance is not a guarantee of future results. Style Definitions Large Growth: equity securities of large capitalization companies having growth stock characteristics (high price to earnings, high return on equity and low dividend yield. Based upon the Russell 1 Growth Index. Large Value: equity securities of large capitalization companies having value stock characteristics (low forecasted price-to-earnings ratio, low price-to-book ratio, high dividend yield). Based upon the Russell 1 Value Index. Mid Growth: equity securities of middle capitalization companies having growth stock characteristics (high price to earnings, high return on equity and low dividend yield). Based upon the Russell Midcap Growth Index. Mid Value: equity securities of middle capitalization companies having growth stock characteristics (high price to earnings, high return on equity and low dividend yield). Based upon the Russell Midcap Value Index. Small Growth: equity securities of small capitalization companies having growth stock characteristics (high price to earnings, high return on equity and low dividend yield). Small capitalization stock may be subject to additional risks including illiquidity. Based upon the Russell 2 Growth Index. Small Value: equity securities of small capitalization companies having value stock characteristics (low price-toearnings ratio, low price-to-book ratio, high dividend yield). Small capitalization stocks may be subject to additional risks including illiquidity. Based upon the Russell 2 Value Index. International: a free floatadjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada, consisting of 21 developed market country indices. Based upon the MSCI EAFE Index. Satellite: these asset classes, as defined by Baird, include commodities, real estate, high yield bonds and emerging markets. Representative benchmarks are as follows: Dow Jones UBS Commodity (commodities), Dow Jones US REIT (real estate), BofA High Yield Master II (high yield), and MSCI Emerging Markets (emerging markets). Short Term Taxable: Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of one to 3.5 years. Based upon the Barclays 1-3 Year Govt/Credit Index. Intermediate Taxable: Intermediate-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of 3.5 to six years. Based upon the Barclays Intermediate Gov t/credit Index. Short Term Municipal: Muni national short portfolios invest in bonds issued by various state and local governments to fund public projects. These portfolios have durations of less than 4.5 years. Based upon the Barclays 3 Year Municipal Index. Intermediate Term Municipal: Muni national short portfolios invest in bonds issued by various state and local governments to fund public projects. These portfolios have durations of 4.5 to 7 years. Based upon the Barclays 7 Year Municipal Index. GICS The Global Industry Classification Standard ("GICS") is the exclusive property of Morgan Stanley Capital International Inc. ("MSCI") and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and is licensed for use by Robert W. Baird & Co. Inc. MSCI and S&P hereby provided all information "as is" and expressly disclaim all warranties. Without limiting any of the foregoing, in no event shall MSCI or S&P have any liability. Domestic Equity Benchmarks S&P 5 Index: A representative sample of 5 leading companies in leading industries of the U.S. economy. Considered a large-cap index. Russell 3 Growth Index: Measures the performance of those Russell 3 Index companies with higher price-to-book ratios and higher forecasted growth values. An all-cap index. Russell 3 Value Index: Measures the performance of those Russell 3 Index companies with lower price to- book ratios and lower forecasted growth values. An all-cap index. Russell Top 5 Index: Measures the performance of the 5 largest companies in the Russell 1 Index, which represents approximately 4% of the total market capitalization of the Russell 1 Index. A mega-cap index. Russell Top 2 Index: Measures the performance of the 2 largest companies in the Russell 1 Index, which represents approximately 68% of the total market capitalization of the Russell 1 Index. A large-cap index. Russell 1 Growth Index: Measures the performance of those Russell 1 Index companies with higher price-to-book ratios and higher forecasted growth values. A large-cap index. Russell 1 Value Index: Measures the performance of those Russell 1 Index companies with lower price to- book ratios and lower forecasted growth values. A large-cap index. Russell 1 Defensive/Dynamic Index: Measures the performance of those Russell 1 Index companies based in terms of volatility of price and earnings, leverage and return on assets. The Russell 1 Defensive Index includes those with relative stability and less sensitivity to economic cycles. The Russell 1 Dynamics Index includes those with less stability and greater sensitivity to economic cycles. Russell Midcap Index: Measures the performance of the 8 smallest companies of the Russell 1 Index, which represents approximately 36% of the total capitalization of the Russell 1 Index. A mid-cap index. Russell Midcap Growth Index: Measures the performance of those Russell Midcap Index companies with higher price-to-book and higher forecasted growth values. A midcap index. Russell Midcap Value Index: Measures the performance of those Russell Midcap companies with lower price-to book and lower forecasted growth values. A mid-cap index. Russell 2 Index: Measures the performance of the 2, smallest companies in the Russell 3 Index, which represent approximately 1% of the total market capitalization of the Russell 3 Index. A small-cap index. Russell 2 Growth Index: Measures the performance of those Russell 2 Index companies with higher price-to-book ratios and higher forecasted growth values. A small-cap index. Russell 2 Value Index: Measures the performance of those Russell 2 Index companies with lower price-to- book ratios and lower forecasted growth values. A small-cap index. Russell Microcap Index: Measures the performance of smallest 1 companies in the Russell 2 Index, which represents less than 3% of the total market capitalization. A micro-cap index. Dow Jones U.S. Real Estate: Measures the performance of Real Estate Investment Trusts (REIT) and other companies that invest directly or indirectly through development, management or ownership, including properties. Dow Jones Industrial Average: A price-weighted index composed of 3 actively-traded large cap stocks. Bloomberg Commodity: Aims to provide broadly diversified representation of commodity markets and represents 2 commodities, weighted based on economic significance and market liquidity. S&P 5 High/Low Quality Index: The S&P Quality Rankings System measures growth and stability of earnings and dividends within the S&P 5 Index. The S&P 5 High Quality Index tracks stocks identified by Standard & Poor s as high quality (ranked A and above); The S&P 5 Low Quality Index tracks stocks identified by Standard & Poor s as low quality (ranked B and below). The Russell Indices are a trademark of the Frank Russell Company. Russell is a trademark of the Frank Russell Company. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. This and other information is found in the prospectus or summary prospectus. For a prospectus or summary prospectus, contact your Baird Financial Advisor. Please read the prospectus carefully before investing.