Investment Proposal prepared for. Joe Client. March 12, 2003

Transcription

1 Investment Proposal prepared for Presented by John Consultant Senior Vice President Investments Page 1

2 Table of Contents Section Page Proposal Introduction 03 Setting Goals and Objectives 04 Asset Allocation 05 Mutual Fund Selection 06 Performance Measurement 07 Investor Information 08 Proposal Summary 09 Portfolio Analysis 11 Historical Performance Comparison 12 Efficient Frontier 17 The Moderating Effect of Time 19 Investment Selection Summary 20 Investment Analytics 22 Conclusion 25 Appendix Capital Markets Charts 26 Page 2

3 Introduction Dear Joe, Thank you for completing our investor questionnaire, the first important step in the process. The questionnaire has helped to define your goals, time horizon, comfort with risk and most basic reasons for investing. A clearly defined investor profile can helpyou build a solid foundation for success. This proposal is designed to help you develop a personalized investment strategy for the assets to be invested in this Program. Your questionnaire responses were analyzed with the help of a computer model specially designed by investment experts. An investment proposal has been developed for you based on the risk score calculated by this computer model and the understanding of your investment situation that I have gathered from our discussions. Defining your investment profile and developing a suitable strategy are two fundamental steps that are followed by successful investors. As your Financial Advisor, I will be your partner throughout the process. It is important that we work together as partners, to make certain that your investment profile and strategy fit your situation and needs. We will discuss your investmentstrategy and explain the next two steps in the process: professional money management and quarterly performance measurement. As your Financial Advisor, I will work with you to help make selections for professional money management. Also, I will continually monitorthe performance of your investments to help ensure that you are on track to reach your investmentgoals. I look forward to discussing your Proposal and working with you to develop your long term investment plan. Sincerely, John Consultant Senior Vice President Investments Page 3

4 Setting Goals and Objectives Beginning with a Disciplined Process Your Financial Advisor will begin with an in depth, fact finding discussion, using a questionnaire that is the product of research and experience. Your dialogue will go beyond the easy questions to obtaina realistic view of your attitude toward risk as well as your investment objectives for the assetsto be invested in the Program. Together with your Financial Advisor, you will develop investment objectives, appropriate investment guidelines and investment selection criteria that will be reflected in your personalizedinvestment Policy Statement. This Investment Policy Statement is your guide to your long term strategy. You should refer to this statement to mark your progress and make sure your investments are performing as expected. Page 4

5 Asset Allocation The first and most important decision that any investor can make is to determine what portion of your portfolio to invest in particular asset classes. One of the largest single factors in determining investment return is asset allocation. The asset allocation decision can outweigh the timing or selection of individual securities. Once there is a clear understanding of a client s needs, the next step is to determine the appropriate combination of investment alternatives. An asset mix should reflect the client s financial condition, liquidity requirements, income needs, time horizon and tolerance for risk among other factors. We employ a risk driven asset allocation model which enables us to assist our clients in identifying their optimal asset mix (defined as a favorable or efficient combination of asset classes offering the highest reward potential within a given level of risk). Asset allocation is a long term decision. It first defines which broad asset classes are to be represented in a portfolio and, secondly, the fraction of a total portfolio which, under normal conditions, will be invested in each asset class. This allocation of assets should result from the review of the following: the portfolio s purpose, its investment objectives (e.g., preservation of capital, aggressive growth, yield) and the tolerance for fluctuations in the value of the underlying assets. Page 5

6 Mutual Fund Selection An Experienced Professional Research Team Each mutual fund offered in has been screened by a team of professional analysts and nearly every major investment style is represented. Each mutual fund is assigned by our analysts to one of several asset categories according to actual portfolio makeup rather than simply by prospectus objective. A fund that does not maintain a consistent investment style or market capitalization focus can undermine your asset allocation strategy create portfolio overlap and hinder diversification. Once you and your Financial Advisor have developed an asset allocation, you may prefer to simplify the remainder of the process by choosing from a "short list" of thoroughly researched funds. The Select List and Model Portfolios are designed to help you do so. offers a select group of quality mutual funds, accurate classification within asset class categories, performance monitoring and rebalancing. These advantages can help you obtain a well defined asset allocation strategy one designed to deliver more consistent returns, lower volatility and a greater chance of achieving your financial objectives. Page 6

7 Performance Measurement Keep Track of Your Progress A structured investment program is an ongoing process, and it may be necessary to make periodic adjustments to your strategy. Our comprehensive Quarterly Performance Monitor provides detailed information about your investments and helps you understand performance data in relation to your specific goals. Both you and your Financial Advisor will use the Monitor to fine tune your investment strategy as your goals evolve and the markets change. The Quarterly Performance Monitor assists you in: Keeping up with market developments Measuring progress toward your goals Evaluating your asset allocation Monitoring performance of investments Reviewing activity in your account Gauging and monitoring tax implications Once you have established your account(s), determined asset allocation and completed investment selections, it is necessary to objectively evaluate performance through a formal review system. The Quarterly Performance Monitor is a powerful tool used to assess the performance of your portfolio and your investment selections. In effect, this Performance Monitor can be thought of as your investment report card. Please remember that, because management styles and investment approaches tend to go in and out of favor, no one manager can perform well during every quarter of every year. In order to objectively judge a manager s performance, you should examine the performance over a full cycle of positive and negative markets, which historically averages three to five years. Page 7

8 Investor Information The following profile summarizes your characteristics as an investor based on your responses to our questionnaire. Account Approximate Investment Amount: $25,000 Profile Percentage of total investable assets: 100% Account Type: Individual Financial Situation Over the next five years, you expect your future financial situation to improve somewhat. Investment Objective: Growth Objective Time Horizon: 48 years Risk Tolerance Aggressive, which means you are willing to sustain substantial volatility or loss of principal and assume a high level of risk in pursuing higher returns. Your primary concern is the possibility that your investment may not grow enough to meet your future needs. You are also concerned with the risk of not earning a rate of return greater than the general stock market. Your are comfortable with "average" returns in both "up" and "down" markets. When faced with a historically well performing investment that has recently experienced two consecutive years of losses, you would invest more now since the price is lower. Investment Preferences Proposal Type: An asset allocation among different styles of equity and fixed income investments. Fixed Income Preference: seek higher returns International Equity Allocation: appropriate amount based on investment profile You may request a copy of your completed questionnaire from your Financial Advisor. You may revise your responses to the questionnaire and ask for a revised proposal reflecting your revisions at any time. Page 8

9 Proposal Summary Proposed Allocation We propose the asset allocation shown below for your portfolio to assist you in making an informed asset allocation decision that will help you meet your long term investment objectives with the least amount of risk. The allocation was developed by applying an investment model, which is based on generally accepted investment theories, to analyze your responses to our questionnaire. Therefore, there is an objective correlation between the proposed allocation generated by the investment model and your responses to our questionnaire. Asset Class Asset Class Proposed Allocation Name Abbreviation in % in $ US Large Cap Growth Eq LCG 15% $3,750 US Large Cap Value Eq LCV 20% $5,000 US Small/Mid Cap Growth Eq SMG 15% $3,750 US Small/Mid Cap Value Eq SMV 15% $3,750 Non US Equity INTL 30% $7,500 US Long Term FI LTFI 5% $1, % $25,000 Page 9

10 Proposal Summary The proposed asset allocation is not intended to forecast short term trends in the capital markets. Rather, it is intended to help in the strategic planning of the portfolio s asset mix, and is based on the relationship between the asset classes over long periods of time (more than full market cycles). The proposed allocation attempts to take advantage of differences in asset classes to create an asset mix that may provide you with the highest rate of return given your tolerance for risk. It is not based on specific investments and no tax considerations have been taken into account. In selecting an asset allocation, you should consider all of your assets, income and investments. Because the capital markets and economic environment change over time, it is important that you review, on a periodic basis, your actual and long term asset allocation to ensure that they continue to meet the portfolio s stated investment objective. Past performance is no guarantee of future results. Please keep in mind that FIRM NAME has no discretion with regard to your asset allocation decision in the program. Therefore, the ultimate decision will always be made by you. Page 10

11 Portfolio Analysis The chart and table below compare your Current Portfolio Allocation to your Proposed Portfolio Allocation. Current Proposed Amount Asset Portfolio Portfolio Necessary Class Allocation Allocation for Rellocation Name (Abbreviation) in % in $ in % in $ in % in $ US Large Cap Growth Eq (LCG ) 25% n/a 15% $3,750 10% n/a US Large Cap Value Eq (LCV ) 0% n/a 20% $5,000 20% n/a US Small/Mid Cap Growth Eq (SMG ) 50% n/a 15% $3,750 35% n/a US Small/Mid Cap Value Eq (SMV ) 0% n/a 15% $3,750 15% n/a Non US Equity (INTL) 0% n/a 30% $7,500 30% n/a US Long Term FI (LTFI) 0% n/a 5% $1,250 5% n/a Money Market (CASH) 25% n/a 0% $0 25% n/a 100% 100% $25,000 Page 11

12 Historical Performance Comparison While past performance is never a guarantee of future results, a thoughtful review of history can help you understand the performance characteristics of different types of investments and make better investment decisions. In this section, you can compare the past performance of different broad market indices to your current portfolio and our proposed allocation. The figures below do not depict actual or projected performance of your current investment or the investment options available in. The following table shows the performance of different broad market indices for the last 20 years ending 12/2002. Annualized Periods Over Last 20 Years* Asset Category* Last 5 Years Last 10 Years Last 20 Years Worst Quarter Worst 12 Months Best 12 Months U.S. Large Cap Growth 3.8% 6.7% 10.9% 23.4% 45.6% 49.4% U.S. Large Cap Core 0.5% 9.1% 12.4% 22.4% 28.4% 48.3% U.S. Large Cap Value 1.1% 10.8% 13.4% 21.4% 16.9% 47.1% U.S. Small/MidCap Growth 3.1% 5.2% n/a 27.1% 42.8% 80.9% U.S. Small/MidCap Core 1.5% 9.2% 11.5% 25.9% 24.2% 46.8% U.S. Small/MidCap Value 3.5% 11.4% n/a 24.9% 26.1% 44.6% Non U.S. Equity 2.6% 4.2% 10.4% 21.1% 28.2% 90.4% Global Equity 1.7% 6.6% 11.0% 18.3% 27.8% 59.2% Long Term Fixed Income 7.6% 7.6% 9.5% 3.1% 4.1% 28.9% Intermed. Term Fixed Income 7.4% 7.0% 8.8% 2.0% 1.9% 24.5% Municipal Fixed Income 5.9% 5.8% n/a 2.8% 1.2% 11.6% Money Market 4.2% 4.5% 5.8% 0.3% 1.7% 10.0% Non U.S. Fixed Income 5.0% 6.4% n/a 6.9% 7.8% 53.8% Mortgage Backed Securities 7.3% 7.3% 9.9% 3.9% 1.4% 35.7% Balanced 3.3% 8.7% 11.4% 11.6% 13.1% 31.9% Convertibles 4.7% 8.3% 10.1% 15.4% 24.5% 42.8% REITS 3.2% 10.5% 11.9% 14.5% 21.1% 40.5% Sector Specific Styles 0.5% 9.3% 12.6% 22.6% 26.6% 48.1% High Yield 0.3% 5.8% n/a 10.2% 10.1% 46.1% Current portfolio* 0.3% 6.1% n/a 19.0% 32.7% 48.3% Proposed allocation* 0.0% 7.8% n/a 18.4% 23.4% 45.4% *Based on broad market indices. See important information on the Historical Performance Comparison on accompanying page. Results for worst quarter, worst 12 months and best 12 months based on available returns over the past 20 years. Page 12

13 Historical Performance Comparison The performance of different investments should always be considered in the context of risk, as well as reward. The following table plots the reward (measured by average annualized return) and the risk (measured by standard deviation, a common statistical measure) of the asset classes, as well as your current portfolio and our proposed allocation. The figures below do not depict actual or projected performance of your current investment or the investment options available in. The following table shows the performance of different broad market indices for the last five years ending 12/2002. Risk vs. Return 5 years ending 12/2002 Average Cumulative Risk Number of Annualized Return Total Return (Standard Deviation) Negative Quarters Current Portfolio* 0.3% 1.5% 25.7% 11 Proposed Allocation* 0.0% 0.4% 20.7% 10 *Based on broad market indices. See important information on the Historical Performance Comparison on accompanying page. Page 13

14 Historical Performance Comparison This performance comparison uses broad market indices to represent investment categories, also called asset classes. There is no guarantee that these asset classes will continue to perform as they have in the past. Furthermore, the investment options available in the Program may invest in different securities, and thus, perform better or worse than the indices to which they are compared. Performance data for all investment options in the are available from your Financial Advisor. Indices are not actively managed and, unlike managed investment products, incur no transaction costs or other expenses. Investors should be aware that they cannot actually invest directly in an index. The performance of the indices used are obtained from sources believed to be reliable but we cannot make any representation to their accuracy or completeness. The total returns, including the reinvestment of all dividends and distributions, of the following indices were used to produce this analysis. It may be possible there are other asset allocations that performed more efficiently than our proposed allocation during the stated time period. Two main factors make this possible. First, allocations are developed using data that extends far beyond the beginning of the time period used for the performance comparison. Second, allocations are subject to some subjective constraints that are imposed to ensure practicality. Broad Market Indices used in the historical performance comparison: Asset Category (Abbreviation) Broad Market Index Earliest available returns U.S. Large Cap Growth (LCG) Russell 1000 Growth September 1981 U.S. Large Cap Value (LCV) Russell 1000 Value Index September 1981 U.S. Large Cap Core (LCC) Russell 1000 Index September 1981 U.S. Small/MidCap Growth (SMG) Russell 2500 Growth Index March 1986 U.S. Small/MidCap Value (SMV) Russell 2500 Value Index March 1986 U.S. Small/MidCap Core (SMC) Russell 2500 Index September 1981 Non U.S. Equity (INTL) Morgan Stanley Capital International EAFE Index September 1981 Global Equity (GBL) Morgan Stanley Capital International World Index September 1981 Long Term Fixed Income (LTFI) Lehman Bros. Govt./Credit Index September 1981 Intermediate Term Fixed Income (ITFI) Lehman Bros. Govt./Credit Intermediate Bond Index September 1981 Municipal Fixed Income (MUNI) Lehman Bros. Municipal 5 yr. Index March 1988 Mortgage Backed Securities (MBS) SSB Mortgage Index September 1981 Money Market (CASH) Salomon Bros. 90 Day Treasury Bill Index September 1981 Non U.S. Fixed Income (INTF) SSB Non US World Government Bond Index September 1985 Balanced (BAL) 60% Russell 1000/40%LB Govt./Credit Intermediate September 1981 Convertibles (CONV) First Boston Convertible Bond Index March 1982 Real Estate Investment Trust(REIT) NAREIT Share Price Equity Index September 1981 Sector Specific (SECT) S&P 500 Index September 1981 High Yield (HYLD) Lehman Bros. High Yield Composite Bond Index September 1983 Page 14

15 Historical Performance Comparison (Index Definitions) First Boston Convertible Securities Index: This index generally includes 250 to 300 issues. To be included, convertible bonds and preferreds must be rated B or better by Standard & Poor s (quality related adjustments are made at the end of each calendar year), convertibles must have a minimum issue size of $50 million, and preferreds must have a minimum of 500,000 shares outstanding. Eurobonds are also included if they are issued by US domiciled companies, rated B or higher by Standard & Poor s, and have an issue size greater than $100 million. Lehman Brothers Government/Corporate Intermediate Bond Index: is composed of all bonds that are investment grade (rated BAA or higher by Moody s or BBB or higher by S&P, if unrated by Moody s) with maturities between 1 and 9.99 years. Total return of the index includes price appreciation/depreciation and income as a percentage of the original investment. Lehman Brothers Government/Corporate Bond Index: is composed of all bonds that are investment grade (rated BAA or higher by Moody s or BBB or higher by S&P, if unrated by Moody; s). Issues must have at least one year to maturity. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization. Lehman Brothers Municipal Bond Index: is a broad based total return index comprising 8,000 investment grade, fixed rate, and tax exempt issues, with a remaining maturity of at least one year, including state and local general obligation, revenue, insured, and pre refunded bonds that are selected from issues larger than $50 million dated since January Lehman High Yield Composite Bond Index: is a market value weighted index that tracks the daily price only, coupon, and total return performance of non investment grade, fixed rate, publicly placed, dollar denominated, and non convertible debt registered with the U.S. Securities and Exchange Commission. Morgan Stanley Capital International Europe, Australia, Far East Index (MSCI EAFE): The MSCI EAFE Index is a market capitalization weighted index composed of companies representative of the market structure of 20 Developed Market countries in Europe, Australia and the Far East. The index is calculated in US Dollars. Morgan Stanley Capital International World Index: is a market capitalization weighted index composed of companies representative of the market structure of 21 Developed Market countries in North America, Europe and the Asia/Pacific Region. Page 15

16 Historical Performance Comparison (Index Definitions) NAREIT Share Price Equity Index: All of the data is based upon the last closing price of the month for all tax qualified Real Estate Investment Trusts (REITs) listed on the New York Stock Exchange, AMEX, and the NASDAQ National Market System. The data is market weighted. Russell 1000 Index: consists of the 1,000 largest securities in the Russell 3000 Index. This large capitalization (market oriented) index represents the universe of stocks from which most active money managers typically select. The Russell 3000 Index is composed of the 3,000 largest U.S. securities, as determined by total market capitalization. Russell 1000 Growth Index: measures the performance of those Russell 1000 companies with higher price to book ratios and higher forecasted growth values. The Russell 1000 Index consists of the 1,000 largest securities in the Russell 3000 Index. The Russell 3000 Index is composed of the 3,000 largest U.S. securities, as determined by total market capitalization. Russell 1000 Value Index: measures the performance of those Russell 1000 companies with lower price to book ratios and lower forecasted growth values. The Russell 1000 Index consists of the 1,000 largest securities in the Russell 3000 Index. The Russell 3000 Index is composed of the 3,000 largest U.S. securities, as determined by total market capitalization. Russell 2500 Index: Measures the performance of the 2,500 smallest companies in the Russell 3000 Index, which represents approximately 23% of the total market capitalization of the Russell 3000 Index. Russell 2500 Value Index: Measures the performance of those Russell 2500 companies with lower price to book ratios and lower forecasted growth values. Russell 2500 Growth Index: Measures the performance of those Russell 2500 companies with higher price to book ratios and higher forecasted growth values. S&P 500 Index: Covers 500 industrial, utility, transportation, and financial companies of the US markets (mostly NYSE issues). The index represents about 75% of NYSE market capitalization and 30% of NYSE issues. SSB Mortgage Index: is the mortgage component of the Salomon Smith Barney Broad Investment Grade Bond Index. It includes 30 and 15 year GNMA, FHLMC and FNMA pass throughs, and FNMA and FHLMC balloon mortgages. Coupons must have at least $1 billion in aggregated face amount outstanding to be included in the index. SSB Non U.S. World Government Bond Index: market capitalization weighted index consisting of the government bond markets of the following countries: Australia, France, Portugal, Austria, Germany, Spain, Belgium, Italy, Sweden, Canada, Ireland, Switzerland, Denmark, Japan, United Kingdom, Finland, Netherlands. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year. Rebalanced monthly. SSB 90 Day Treasury Bill Index: This index is constructed by purchasing equal dollar amounts of three month Treasury bills at the beginning of three consecutive months. As each bill matures, all proceeds are rolled over or reinvested in a new three month bill. Page 16

17 Efficient Frontier What is the Efficient Frontier? The efficient frontier defines the set of portfolios that provide the highest targeted return for each possible level of portfolio risk. Typically broad asset classes, such as large cap equities, small cap equities, long term fixed income, etc., are used as inputs in calculating the shape of the frontier. Calculating the shape of the frontier requires estimates for each of the asset classes targeted return, targeted risk, and targeted return correlation between asset classes. These three sets of information collected for all asset classes are known as the "capital market assumptions." Taken together, the capital market assumptions describe the likelihood of achieving particular combinations of returns in the future. The process used to calculate the frontier is called mean variance optimization. In the chart below we have graphed the risk return trade off described by the asset classes listed and our current capital market assumptions. These assumptions have been developed in conjunction with anindependent investment research firm. These assumptions are estimates provided for illustrativepurposes and are not reflective of any historical performance results of any investment manager ormutual fund offered through the program. Page 17

18 Efficient Frontier Since higher targeted returns are typically associated with higher levels of risk, the frontier rises as one moves to the right along the horizontal axis that measures risk. Each point along the frontier consists of a portfolio structure that assigns percentages of the portfolio to the underlying asset classes. Typically, low risk portfolios contain large weightings in fixed income securities such as bonds. As one moves further to the right along the frontier, the weighting on equities typically rises. At the extreme right, the optimal portfolio may consist of a 100% weighting in a single risky asset class such as small capitalization stocks. It is important to remember that the targeted risk and return figures were developed by applying ahistorical perspective to the current market environment. They reflect our best effort to predictaverage annual return and risk that will be experienced over the long term. While in any givenyear the actual return experienced for your portfolio will almost certainly vary from these averagesthe principles of this chart will generally apply. The greater the targeted risk of your portfolio,the greater the likelihood that a single year s return will deviate from the targeted return. It may be possible there are other asset allocations that performed more efficiently than our proposedallocation during the stated time period. Two main factors make this possible. First, allocations are developed using data that extends far beyond the beginning of the time period used forthe performance comparison. Second, allocations are subject to some subjective constraints that are imposed to ensure practicality. Page 18

19 The Moderating Effect of Time The Effect of Investment Time Horizon Investment time horizon is an important factor in determining one s risk tolerance. As the length of horizon increases, the more likely it is that good and bad investment outcomes offset, increasing the probability of being near the targeted return. The graph below shows how the length of your investment time horizon can affect the range of targeted returns on your selected allocation. It is based on a mathematical formula using data that takes into account the historical risk measurements of certain indices as well as the current interest rate environment. The upper and lower bounds for each holding period define the range of outcomes that you could have expected 95% of the time. The annualized dispersion of your targeted return decreases with time. The ranges of returns for the selected asset allocation are hypothetical and are not presented toillustrate the performance of any one security or asset class. Even though the annualized dispersion around the targeted return decreases with time, the extremes ofactual changes in your wealth increases with the investment horizon. This implies that, although youare less likely to lose money over a long horizon than a short horizon, the magnitude of your potentialloss increases with the duration of your investment horizon. The good news is that the probability ofexperiencing such an extreme decreases with time. Keep in mind, though, these returns are based onhistorical data and that past performance is no guarantee of future results. Therefore, there is noguarantee that the targeted ranges of return will be attained. Individual results will vary. Page 19

20 Investment Selection Summary Asset Category/ Proposed Selected Target Dividend Investment Selections Allocation Allocation Balance Reinvest U.S. Large Cap Growth Equity 15% PIMCO Rcm LC Gr D MF DLCNX 15% $3,750 PI % $ U.S. Large Cap Core Equity % $ U.S. Large Cap Value Equity 20% Lord Abbett Affiliated A MF LAFFX 20% $5,000 PI % $ U.S. Small/Mid Cap Growth Equity 15% Calamos Growth A MF CVGRX 15% $3,750 PI % $ U.S. Small/Mid Cap Core Equity % $ U.S. Small/Mid Cap Value Equity 15% Lord Abbett Md Cap Val A MF LAVLX 15% $3,750 PI % $ Non U.S. Equity 30% First Eagle Sgn Oversea A MF SGOVX 30% $7,500 PI % $ Global Equity % $ U.S. Long Term Fixed Income 5% Target Total Return MF TATBX 5% $1,250 PI % $ U.S. Intermediate Term Fixed Income % $ Mortgage Backed Securities % $ Municipal Fixed Income % $ Non U.S. Fixed Income % $ U.S. Govt Money Market % $ Other % $ Total 100% $25,000 Page 20

21 Investment Selection Summary A glossary defining the broad market indices and the style benchmarks for investment selections listed above is available upon request. A menu listing all available investment options in the Program is available upon request. Securities products and investment advisory services offered through Prudential Securities, 199 Water Street, New York, NY 10292, Member SIPC, and Prudential Financial Planning Services, which is a division of Pruco Securities, 751 Broad Street, NJ 07102, Member SIPC. Pruco Securities and Prudential Securities are both Prudential companies. Prudential Financial is a service mark of Prudential, Newark, NJ, and its affiliates. Please call your Financial Advisor for a prospectus for any fund identified in the Proposal. The prospectus contains complete information including all charges and expenses. Read it carefully before you invest or send money. Page 21

22 Investment Analytics Listed below are the investment options you have selected for your portfolio: Manager Name Investment Style Amount Risk Category PIMCO Rcm LC Gr D MF US Large Cap Growth Eq $3,750 Moderate Lord Abbett Affiliated A MF US Large Cap Value Eq $5,000 Moderate Calamos Growth A MF US Small/Mid Cap Growth Eq $3,750 Aggressive Lord Abbett Md Cap Val A MF US Small/Mid Cap Value Eq $3,750 Aggressive First Eagle Sgn Oversea A MF Non US Equity $7,500 Moderately Conservative Target Total Return MF US Long Term FI $1,250 Conservative PIMCO Rcm LC Gr D MF, U.S. Large Cap Growth Equity Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Historical Price/Earnings Similar Risk Category Moderate Earnings Growth Lower Broad Market Index S&P 500 Index Dividend Yield Lower Style Index Russell 1000 Growth Volatility (Std Deviation) Lower Turnover 109% Average Company Size # of Securities Held 68 Diversification (R sq) 85% Median Market Capitalization ($millions) $0 Lord Abbett Affiliated A MF, U.S. Large Cap Value Equity Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Historical Price/Earnings Similar Risk Category Moderate Earnings Growth Lower Broad Market Index S&P 500 Index Dividend Yield Lower Style Index Russell 1000 Value Volatility (Std Deviation) Similar Turnover 62% Average Company Size # of Securities Held 102 Diversification (R sq) 73% Median Market Capitalization ($millions) $0 Page 22

23 Investment Analytics Calamos Growth A MF, U.S. Small/Mid Cap Growth Equity Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Historical Price/Earnings Lower Risk Category Aggressive Earnings Growth Similar Broad Market Index Russell Midcap Index Dividend Yield Lower Style Index Russell MidCap Growth Volatility (Std Deviation) Similar Turnover 206% Average Company Size # of Securities Held 49 Diversification (R sq) 61% Median Market Capitalization ($millions) $0 Lord Abbett Md Cap Val A MF, U.S. Small/Mid Cap Value Equity Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Historical Price/Earnings Higher Risk Category Aggressive Earnings Growth Higher Broad Market Index Russell Midcap Index Dividend Yield Lower Style Index Russell MidCap Val Volatility (Std Deviation) Similar Turnover 65% Average Company Size # of Securities Held 48 Diversification (R sq) 45% Median Market Capitalization ($millions) $0 First Eagle Sgn Oversea A MF, Non U.S. Equity Page 23

24 Investment Analytics Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Historical Price/Earnings Higher Risk Category Moderately Conservative Earnings Growth Higher Broad Market Index MSCI EAFE Dividend Yield Lower Style Index MSCI EAFE VAL Volatility (Std Deviation) Lower Turnover 27% Average Company Size # of Securities Held 0 Diversification (R sq) 70% Median Market Capitalization ($millions) $0 Target Total Return MF,U.S. Long Term Fixed Income Characteristics Specific to the Strategy Characteristics Relative to the Broad Market Index Investment Type Mutual Fund Maturity Risk Category Conservative Duration Lower Broad Market Index LB US Govt. Credit Yield Lower Style Index LB US Govt. Credit Credit Quality Similar Expected Credit Quality AAA 50% AA 20% A 20% BBB or Lower 10% For additional information on any Mutual Funds, see the Prospectus. The prospectus contains complete information including all charges and expenses. Read it carefully before you invest or send money. This page must be accompanied or preceded by a prospectus for any mutual fund analyzed. See Glossary for definitions. Page 24

25 Conclusion Investing for your future is a highly personal and highly challenging process. You have taken the first steps toward building a portfolio that truly meets your needs, and working together, you and I will continue our partnership in helping you reach your investment goals. The recommendations held within the proposal have been selected based on your analyzed questionnaire responses and reflect your individual situation and objectives. The next steps for us are to finalize an appropriate asset allocation, and select a mixture of investments that fulfill your long term needs. Once that is complete we can discuss the final step in our investment consulting process, the ongoing evaluation of your investments. Also, please take advantage of these additional services available to you through the Program: Comprehensive Quarterly Account Monitor to help you understand performance data and track your goals. Online Account Access for instant access to portfolio information and current program enhancements. Proposed Allocation Updates to help you evaluate when changes are needed as your objectives and the markets change. Automatic Portfolio Re balancing. Thank you for this opportunity to present the Program to you for your consideration. Page 25

26 Capital Markets Charts A study of 82 large pension plans over a ten year time span, by Gary Brandon & Gilbert Beebower in 1991, indicated that asset allocation determined by investment policy explained 91.50% of the variation in quarterly total plan returns. Investors accept volatility when they choose to take more risk in an effort to obtain higher return. However, through the use of proper asset allocation techniques, this market risk can be lessened. Source: Financial Analyst Journal, May June 1991 Note: The numbers do not add to 100% because of other factors. Past performance is no guarantee of future results. For illustrative purposes only. This does not reflect the performance of any specific investment. Page 26

27 Capital Markets Charts This chart shows the power of diversifying one s portfolio among various assets. Many times when growth stocks are performing well, value stocks are doing poorly. And visa versa. In addition, when small cap stocks are in favor, large cap stocks may be out of favor. Similarly, many times when domestic equity is in favor, international equity is not. Source: Ibbotson Associates. Past performance is not indicative of future results. The indices are presented to provide you with an understanding of their historic long term performance, and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index. Value=S&P 500 Value, Growth=S&P500 Growth, Small=Russell2000, Large=Russell1000, Int l = MSCI EAFE. See Glossary of Indices for index descriptions. Page 27

28 Capital Markets Charts: Glossary The indices are presented to provide you with an understanding of their historic long term performance, and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index. Past performance is not a guarantee of future results. Individual investor results will vary. Small Stocks: For , the small company stock return series is the total return achieved by the Dimensional Fund Advisors (DFA) Small Company 9/10 Fund. This fund is a market value weighted index of the ninth and tenth deciles of the New York Stock Exchange (NYSE), plus stocks listed on the American Stock Exchange (AMEX) and over the counter (OTC) with same or less capitalization as the upper bound of the NYSE ninth decile. The equities of smaller companies from are represented by the historical series developed by Professor Rolf W. Banz. This is composed of stocks making up the fifth quintile of the NYSE. For 1981, Dimensional Fund Advisors, Inc. updated the returns using Professor Banz s methods. The price of small company stocks generally are more volatile than those of large company stocks. Large Stocks: The large stock total return index is based upon the Standard and Poor s composite index. The S&P 500 is an unmanaged weighted index of 500 stocks providing a broad indicator of price movement. Long Term Corporate Bonds: For , corporate bond total returns are represented by the Salomon Brothers Long Term High Grade Corporate Bond Index. The index includes nearly all AAA and AA rated bonds. Over , the total returns were calculated by summing the capital appreciation returns and the income returns. For the period , Ibbotson and Sinquefeld backdated the Salomon Brothers Index, using Salomon Brothers monthly yield data with a methodology similar to that used by Salomon for Capital appreciation returns were calculated from yields assuming a 20 year maturity, a bond price equal to par, and a coupon equal to the beginning of the period yield. For the period , the Standard & Poor s monthly High Grade Corporate Composite Yield data were used, assuming a 4% coupon and a 20 year maturity. The conventional present value formula for bond price was used for the beginning and end of the month prices. Long Term Government Bonds: The total returns on long term government bonds from are constructed with data from the "Wall Street Journal." Over , data are obtained from the Government s file at the Center for Research in Security Prices (CRSP), Graduate School of Business, University of Chicago. Each year, a one year bond portfolio with a term of approximately 20 years and a reasonably current coupon and whose returns did not reflect potential tax benefits, impaired negotiability, or special redemption or call privileges, was used. Where callable bonds had to be used, the term of the bond was assumed to be a simple average of the maturity and first call dates minus the current date. The bond was held for the calendar year and returns were computed. Page 28

29 Capital Markets Charts: Glossary T Bills: For the U.S. Treasury Bill Index, data from the "Wall Street Journal" are used from ; the CRSP U.S. Government Bond File is the source until Each month, a one bill portfolio containing the shortest term bill having not less than one month to maturity is constructed. To measure holding period returns for the one bill portfolio, the bill is priced as of the last trading day of the current month. International Stocks: The returns for International Stocks are based on the Morgan Stanley Capital International Europe, Australia, Far East Index (MSCI EAFE) for the period MSCI EAFE is a market value weighted average of over 900 securities listed on stock exchanges in the developed countries in the regions listed above. The index includes reinvestment of gross dividends before deduction of withholding taxes. Inflation: The Consumer Price Index for all Urban Consumers (CPI U), not seasonally adjusted, is used to measure inflation, which is the rate of change of consumer good prices. All of the security returns are measured from one month end to the next month end. CPI commodity returns are collected during the month. Thus, measured inflation rates lag the other series by about one half month. Prior to January 1978, the CPI (as compared with CPI U) was used. Both inflation measures are constructed by the U.S. Department of Labor, Bureau of Labor Statistics. Government bonds and Treasury bills are guaranteed by the US Government and, if held to maturity, as with all bonds offer a fixed rate of return and principal value. Stocks offer long term growth potential but may fluctuate more and provide less current income than other investments. Alpha:A measure of relative value added as compared to a blended market index. The alpha measures the risk adjusted return above (+) / below ( ) the security market line. The security market line represents the blend between U.S. T bills and a market index. A positive alpha implies that the manager has added value to the return of the portfolio over that of the market. Returns with negative alpha do not reflect any positive contribution by the manager over the performance of the market. An alpha of zero implies that a manager has provided a return that is equivalent to the market return for the manager s specific risk class. Alpha does not factor in volatility risk. Alpha assumes the manager is fully diversified. Alpha will vary from quarter to quarter, so the alpha of any five year period should be used carefully. Alpha = Return (Beta x Index Return) Beta: is a measure of how a manager s portfolio has performed in relationship to the market (market or systematic risk). A manager that has performed directly in line with the market will have a beta of 1.00 A manager whose returns were more volatile than the market will have a beta of greater than 1.00, and a manager with less volatile returns will have a beta of less than Disregarding the impact of stock selection (unsystematic risk), over 3 5 year, we expect a fully diversified portfolio with a beta of 1.20 to have about a 20% higher return than the market. Similarly, for a portfolio with a beta of.80, we expect a 20% lower return than the market over time. Page 29

30 Capital Markets Charts: Glossary R squared: measures how well a portfolio is diversified against the market index. The more diversified a portfolio is, the less risk related to an individual security (unsystematic risk) it has. R squared values can range from 0 to 1.00, with the market index at 1.00 For a portfolio with an R squared of.90, 90% of the portfolio risk can be attributed to "being in the market" (systematic risk). The remaining 10% is associated with company/issue specific (unsystematic) risk. Higher R Squared indicates more reliable alpha and beta statistics and are useful in assessing a manager s investment style. Standard deviation: measures the volatility of a portfolio s returns compared to the average return of the portfolio. Approximately 68% of the time, the total return will vary from its average total return by no more than plus or minus the deviation figure. Since it measures total variation of return, standard deviation is a measure of total risk, unlike beta, which measures market risk. Correlation: This statistic measures how well a portfolio s returns have moved in tandem with an index or other portfolios. Correlation coefficients fall between 1.00 and A correlation coefficient of 1.00 between a portfolio and an index means that the portfolio returns have moved in perfect tandem with the index. (If the index goes up, the portfolio goes up). A correlation coefficient of 1.00 means that the portfolio returns have moved in perfect negative tandem with the index. (If the index goes up the portfolio goes down). Page 30

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