R E T I R E M E N T P L A N S. Due Diligence Report

Transcription

1 R E T I R E M E N T P L A N S Due Diligence Report Second Quarter 2007

2 About the Due Diligence Report The Standard is proud of the care that goes into selecting and monitoring the investment options offered through our group annuity contract separate account. Standard Insurance Company works closely with StanCorp Investment Advisers, Inc., to select quality funds. Then, we hold our mutual fund partners accountable for providing competitive returns and staying true to the funds stated investment styles. When a fund fails to perform, no longer meets our monitoring criteria or drifts from its stated style or investment objective, we end the relationship. Important Note We recommend you review this report carefully as an important step in fulfilling your fiduciary responsibilities to the plan and its participants. You can easily document that you have reviewed and evaluated this information by signing and dating the cover of this document, then filing the report with your plan s important records. The report is intended for distribution only to existing contractowners who are also clients of StanCorp Investment Advisers, Inc. Do not distribute this report to plan participants. Conference Call Scheduled Learn more about the investment options offered by The Standard. Participate in our quarterly Due Diligence conference call at 1 p.m. Eastern/10 a.m. Pacific on Thursday, August 23. You ll have the opportunity to ask questions of Julie Grandstaff, vice president and managing director of StanCorp Investment Advisers, Inc., who will also discuss the fund monitoring process and comment on market conditions and individual funds. Dial-in number: Name of call: StanCorp Investment Advisers Due Diligence Call A replay of the call will be available from 3:15 p.m. Thursday, August 23, through midnight Pacific time September 23, by dialing and entering code Table of Contents About the Due Diligence Report Market Commentary Fund Commentary Watch List Statistical Analysis Fund Monitoring Summary Due Diligence Program Glossary of Terms and Tools About StanCorp Investment Advisers Plan sponsors and participants should consider the investment objectives, risks, and charges and expenses of the investment options offered under the retirement plan carefully before investing. The prospectuses for all investment options contain this and other information. Prospectuses may be obtained by calling Please read the prospectus carefully before investing. Investments are subject to market risks and fluctuate in value.

3 Market Commentary July 26, 2007 By Julie Grandstaff, CFA After a rocky first quarter, the markets took off in the second quarter. By mid April it was hard to remember there had been a significant sell off in February. All of the major equity categories were up for the quarter, led by growth stocks. The S&P 500 was up 6.28 percent for the quarter and more than 20 percent for the 12 months ending in June. The best performing equity category this quarter was large cap growth. The return on the Russell 1000 Growth Index was 6.86 percent. Mid and small cap growth returns were very near this level. International stocks, as measured by the MSCI EAFE Index, were up 6.40 percent for the quarter. Over the last year, the best performing category was international stocks, posting a 27 percent one-year return. Mid cap value was the best U.S. category with a better than 22 percent return for the year. The bond markets had a tough quarter with bond yields rising 0.38 percent over the quarter. The Lehman Brothers Intermediate Government Credit index declined 0.15 percent for the quarter; over the last year, the index was up 5.76 percent. Since quarter s end, the markets reached record highs and then dropped off again. As of July 19th, the S&P 500 was up 3.31 percent from the end of the quarter, but by July 26th, it had lost that and more. Quarter to date, the S&P is down 1.29 percent. Initially strong first quarter corporate profits and continued stability in the U.S. economy buoyed the equity markets. Earnings for the companies in the S&P 500 Index rose by 8.2 percent from the first quarter of last year. Strong overseas demand, dollar weakness and share buybacks were some of the factors contributing to earnings growth. While these factors remain in place this quarter, the markets have become concerned about rising financing costs. Credit spreads (the difference between the borrowing rate for non government issuers and government issuers) have widened significantly in the last two months. Continued problems in the sub prime mortgage market have caused investors to take a second look at how they are pricing risk. In addition, early second quarter earnings releases have been mixed. While moderate growth is still expected for the remainder of the year, rising costs may be creating a headwind for the economy. Higher food and energy costs are dampening consumer spending, and weakness in the housing market is translating into weakness in related sectors, such as furniture. So far the actual data on inflation has shown it to be relatively tame, but near the Federal Reserve s upper bound of comfort. At the end of April, the markets were expecting the Fed to cut interest rates by the end of the year due to slowing economic growth and the weak housing market. More recently, markets placed a greater probability on there being an increase in the federal funds rate target than on there being a decrease. Tight job markets and increasing labor costs are among the chief drivers of inflation concerns. There has been little to worry about on the inflation front for the last 10 years. Globalization of the economy has kept prices in check. Cheap labor in China and other developing economies not only produced cheap imports, but also ensured continued development of more efficient technologies here at home. A number of prominent economists see this era coming to a close. Now the forces that contributed to stable to declining prices are contributing to inflation as geographically diverse businesses compete for the same global resources. Growing wealth around the world is increasing demand and allowing workers to win wage increases. So far, it looks like the economy is moving in the direction Federal Reserve Chairman Ben Bernanke predicted, with growth picking up this quarter and positive indications for the rest of the year. If inflation can be kept in check, this will be positive for the markets. However the market has found much to worry about in the last couple of weeks. 3

4 Total Return for Quarter April 1, 2007 June 30, Large Cap Growth - Median Large Cap Blend - Median Large Cap Value - Median Index: Standard & Poor's 500 Mid Cap Growth - Median Mid Cap Blend - Median Mid Cap Value - Median Index: Russell Mid-Cap Small Cap Growth - Median Small Cap Blend - Median Small Cap Value - Median Index: Russell 2000 Foreign Large Growth Foreign Large Blend Foreign Large Value World Stock - Median Index: MSCI EAFE Balanced - Moderate Allocation Index:60% S&P/40% LB Int GC Balanced - Conservative Allocation Index:40% S&P/60% LB Int GC Intermediate Bonds - Median Index: LB Interm Gov't/Cred Percent Total Return for Year July 1, 2006 June 30, Large Cap Growth - Median Large Cap Blend - Median Large Cap Value - Median Index: Standard & Poor's 500 Mid Cap Growth - Median Mid Cap Blend - Median Mid Cap Value - Median Index: Russell Mid-Cap Small Cap Growth - Median Small Cap Blend - Median Small Cap Value - Median Index: Russell 2000 Foreign Large Growth Foreign Large Blend Foreign Large Value World Stock - Median Index: MSCI EAFE Balanced - Moderate Allocation Index:60% S&P/40% LB Int GC Balanced - Conservative Allocation Index:40% S&P/60% LB Int GC Intermediate Bonds - Median Index: LB Interm Gov't/Cred Percent Percent These returns are not indicative of any particular investment. 4

5 Fund Commentary The following comments summarize the review of funds in our lineup whose returns, risk statistics or composition over one or more important time periods is below expectations. The Harbor Bond fund is maintaining a sizeable short-term fixed income position of more than 57 percent. The average duration of the portfolio remains in line with intermediate bond funds, though the manager is working to shorten the duration. The primary causes of underperformance have been exposure to agencyissued residential mortgage debt and a lower than average exposure to investment grade corporate bonds. Agency mortgage-backed securities have underperformed the general bond market due to the increased volatility in interest rates as well as an increase in extension risk due to somewhat higher yields. The fund s performance was in the top half in the 36th and 25th percentile over the last threeand five-years, respectively. The Harbor Capital Appreciation fund returns have fallen below median in the five-year time period following below-median returns year to date and in The fund s three-year returns are in the top half of the category. This fund is an aggressive growth fund the manager focuses on strong revenue growth and company earnings that grow faster than the S&P 500. The fund holds just under 30 percent in the top 10 holdings, with its largest holding in Google. The American Century Value fund returns are below median in the three-year time period following below-median returns in the first half of 2007 and in The fund s five-year returns are in the 32nd percentile of the large value category. The management team focuses on companies that are valued in the bottom one-third of the market on at least two valuation measures. The fund currently has a lower allocation to technology, which performed better than the overall market year to date. The Fidelity Adv Equity Income fund returns are below median in the three-year time period following below-average returns in the first half of 2007 and in The fund s five-year returns are in the top half of the category. Over the last two quarters the manager has trimmed some of his smaller cap holdings following the assignment of another large cap value fund to him. Overall, the move away from smaller names may have hurt relative performance year to date. The Hotchkis Wiley Large Value fund returns have fallen below median in the three-year time period following below-average returns in the first half of 2007 and in The fund manager s approach seeks companies with above-average normalized earnings growth and focuses on those that also have above-average normalized earnings yield and dividends. Recent returns have been hurt by a well below-average allocation to energy stocks and continued holdings of some prominent home builders. The fund s five-year returns are in the top decile of the category. The Brandywine fund s five-year returns are below median. Weak relative performance in 2004 and 2003 has caused the five-year ranking to fall below median. The fund s three-year returns are in the top quartile of the mid cap growth category. Recently a heavy allocation to technology has contributed to strong performance. The return is in the top 25 percent for the quarter and top half year to date. The three-year returns for the Aston/Optimum Mid Cap fund are below average. The fund underperformed by a wide margin in 2005 pulling down the three-year percentile rank. The manager s approach is relatively aggressive for the category. The fund is concentrated and often makes significant sector bets. The manager looks for companies with rapid sales growth, low debt and reasonable valuations. Currently, the fund has about three times the category average exposure to technology stocks. The fund s five-year returns are in the top quartile of the category and year-to-date returns are in the top 25 percent for the category. The Wells Fargo Advantage Mid Cap Discipline fund returns are below median in the three-year time period following below-median returns in the first half of 2007 and in The fund is underweight in technology relative to the peer group and has no exposure to energy. Both sectors were significant contributors to market 5

6 performance during the quarter and year to date. The fund s five-year returns are in the top 27th percentile of the category. The Neuberger & Berman Genesis fund has moved well into mid cap growth territory. The managers have utilized a steady investment strategy that seeks out small companies with good cash flow and a dominant position in a niche market. In addition they focus on the less cyclical sectors, and currently have an overweight position in healthcare and energy stocks. The approach is also low turnover, and winners are allowed to run. As a result, about 49 percent of the portfolio is now in mid cap stocks while 48 percent of the fund is in small cap stocks. The remainder is in large cap. Performance is in the top 10 percent for the category year to date. The Fidelity Adv Diversified International fund returns are below the median for the three-year time period due to weak relative performance in The manager has overweight positions in Germany and Japan. While the German allocation has paid off, the Japanese allocation hasn t worked as well. In addition, the manager reduced exposure to emerging markets and energy too soon and missed some significant performance in those areas. The fund performance was above the median in each of the five calendar years prior to The fund s five-year returns are in the top 15 percent of the category. The American Century Real Estate fund returns are below the median for the three-year time period due to weak relative performance year to date, in 2006 and The underperformance has been driven by security selection since this manager maintains sub-sector allocations close to the benchmark. The fund s five-year returns are in the top 33 percent of the category. A number of the Index Funds continue to have below-median returns over one or more measurement periods. These funds are not held to the same criteria as the actively managed funds. They are only required to perform in line with their stated index. All of the funds are performing as expected relative to the index they are intended to replicate. 6

7 About the Watch List Placing an investment option on the Watch List is one action that can be taken if a fund falls short of our monitoring criteria. A fund may be placed on the Watch List for many reasons, including fund manager change style drift poor performance a change in the investment objective or operations of the fund Being placed on the Watch List is not a death sentence for the fund; it indicates an event has occurred with the fund that merits a higher level of monitoring than other investment options. A fund will be placed on the Watch List for a period not to exceed four quarters. If the fund s management takes action that can reasonably be expected to satisfy our monitoring criteria within the time specified, the fund will be removed from the Watch List without action. Plan sponsors using fund s that have been placed on the Watch List in the Asset Allocator portfolios may wish to consider replacing the Watch List fund for that purpose. While new clients cannot use Watch List funds in the Asset Allocator portfolios, we do not remove them from existing portfolios unless requested to do so. The Watch List TCW Select Equities: This fund will remain on the Watch List. The fund s three-year returns remain below the median after very weak returns in 2006 and in Second quarter returns were strong and within the top 10 percent of the category. Yearto-date returns have recovered to above median. This fund is concentrated and therefore volatile. To be reinstated in the lineup, the one-year return and the three- or five-year return as of the first quarter of 2008 must be above the median. T. Rowe Price Growth Stock: This fund will remain on the Watch List. On October 1, 2007, Rob Bartolo will assume the portfolio manager role for the fund. Rob stepped down as co-manager of the Media & Telecommunications fund on May 1, Rob has served as a member of the advisory committee for the large cap growth portfolios at T. Rowe Price, including growth stock. However, given that he has no track record in the large growth category we decided that it was prudent to place the fund on the Watch List. We will continue to monitor the transition. Franklin Small-Mid Cap Growth: The fund will remain on the Watch List. The fund now meets both the three- and five-year monitoring criteria after achieving top one-third returns for the year to date. The fund is significantly overweight in technology, specifically hardware, and has a smaller average market capitalization than its peer group. The fund was originally placed on the Watch List 7 due to weak relative returns in three of the last five years. To be reinstated in the lineup, the one-year return and the three or five-year return as of the fourth quarter of 2007 must be above the median. Oppenheimer Quest Balanced: The fund will remain on the Watch List. The fund s returns are below median in the three-year time period. Recent returns have shown an improvement. The three-month return is in the top 3 percent of the category and the year-to-date return is in the top one-third. The equity portion of the portfolio is concentrated, and as a result, the fund tends to be more volatile than its peers. The fund will remain on the Watch List through the fourth quarter of To be reinstated in the lineup, the fund return must be above the median over the previous one year and above the median in the three- or five-year time period. Fidelity Advisor Mid Cap: This fund was categorized as a mid cap blend fund, but it was reclassified as a growth fund a few quarters ago. The manager s benchmark is the S&P 400 mid cap index. On a holdings-based analysis, the fund has moved squarely into growth territory, but past returns indicate more of a blend orientation. As a result the historical returns look great in the growth category. Year to date, growth has performed somewhat better than blend and value, and this fund did not do as well as its more growth-oriented peers. Second quarter and year to

8 date returns were below average for the category. However, the one-year return is in the 11th percentile. This fund will be moved to the mid cap growth category and will remain on the Watch List until the change can be completed. We are recommending the Federated Mid Cap Index as a replacement. Plan sponsors will be notified about the timing and process shortly. Oppenheimer Small & Mid Cap Value: The fund moved from the small-cap blend to the mid-cap blend category in Morningstar as predicted. The fund meets the criteria that the one-year performance relative to the mid cap blend category be above average, and therefore we will be moving the fund to the mid cap blend category. The fund will remain on the Watch List for group annuity plans until the change can be made. We are recommending Oppenheimer Mainstreet Small Cap as the replacement in the small cap blend category. Plan sponsors will be notified about the timing and process shortly. Allianz CCM Emerging Companies: The fund is being added to the Watch List. The fund s threeand five-year returns have fallen below median after very weak performance year to date and in The quantitative score is well below acceptable levels. The below average market cap of the fund has been a detractor in the current market environment, but the primary driver of underperformance has been disappointing stock selection was the first year of underperformance after six straight years of above-median performance. The fund will remain on the Watch List through the first quarter of To be reinstated in the lineup, the fund s return must be above the median over the previous one-year and above the median in the three- or fiveyear time period. Oppenheimer Capital Appreciation: This fund has been added to the Watch List after the announcement of Bill Wilby s retirement. Comanager Marc Baylin has taken the reigns, making this the second manager change in two years. Three-year returns are below the median, but fiveyear returns remain above the median. The fund is in the top one-third year to date. Templeton Growth: We are adding this fund to the Watch List. It has failed the three- and five-year performance screen for the first time after very weak performance year to date, in 2005 and in Templeton Growth has a relatively low allocation to emerging markets, which has held it back against its peer group. A further detractor has been stock selection in some of the large mega cap value names. The fund will remain on the Watch List through the first quarter of To be reinstated in the lineup, the fund return must be above the median over the previous one-year and above the median in the three- or five-year time period. Calamos Growth: The Calamos Growth Fund will be removed from the lineup. The fund moved from the mid cap growth to the large cap growth category in Morningstar as predicted. In the large cap growth category, its relative performance is strong largely due to its previous mid cap bias. However, based on unsatisfactory conference calls with the manager and the abrupt and significant change in strategy, we have decided to remove the fund. We are recommending Neuberger Berman Manhattan as the replacement. Plan sponsors will be notified about the timing and process shortly. TCW Value Opportunity: The TCW Value Opportunity fund will be removed from the lineup. After one year on the Watch List, the fund continues to underperform its category. A replacement fund will be named and plan sponsors will be notified about the specific timing shortly. T. Rowe Price Small Cap: The fund will be removed from the lineup. After one year on the Watch List, the 12-month returns for the fund remain in the 74th percentile, and the three- and five-year returns remain below the median. We are recommending Oppenheimer Main Street Small Cap as the replacement. Plan sponsors will be notified about the timing and process shortly. As previously disclosed, the following funds will be terminated from the lineup on August 20, American Century Ultra We are recommending T. Rowe Price Blue Chip as the replacement. GE US Equity We are recommending Vanguard Index 500 as the replacement. American Century International Growth We are recommending VanKampen International Growth as the replacement. Neuberger Berman Focus we are recommending Vanguard Index 500 as the replacement. 8

9 Statistical Analysis The following pages contain a statistical analysis of each of the separate account investment options offered by The Standard to its retirement plan clients. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bonds fall. Each option is compared to an index considered by the Due Diligence Committee to be an appropriate measure of the manager s ability to add value through stock picking. Further, each chart provides information about the universe of peer funds. This report is prepared using data from Morningstar. Organization of Statistical Analysis data 1. Performance reflects performance over the reporting period and longer periods 2. Calendar Year Performance describes performance for each of the last five calendar years 3. Risk Statistics evaluates the risk of each fund in comparison with key measurements 4. Fund Statistics provides comparative information on each fund s holdings 5. Industry Diversification illustrates each fund s holdings by industry 6. Regional Exposure identifies the percentage of stocks invested in each geographical region Asset Classes Asset classes represent a method of characterizing investment options with similar investment styles and similar holdings. These characteristics can be used to anticipate the performance of the investment option during different market and economic cycles. The asset classes are listed below from most conservative to most aggressive. Stable Value A low-risk investment. Securities in this class provide a steady stream of current income and tend to have little or no change in value over the life of the investment. Intermediate Bond More volatile than the Stable Value class with the potential for a slightly higher return or a possible loss of principal. These investments are intended to provide current income and growth potential. 9 Balanced Combines both stocks and bonds in order to achieve a moderate risk/moderate return objective. This option provides an avenue for investors who want professionals to manage their asset allocation. U.S. Stocks Stock funds have three basic investment objectives: 1. Growth invests in firms that are expected to grow more rapidly than other firms; much of the value of such stocks is represented by the firm s prospects for future growth. 2. Value invests in stocks of out-of-favor firms that nevertheless offer a good long-term return; the assumption is that the value inherent in these firms will eventually be recognized. 3. Blend combines elements of both growth and value funds. Market capitalization, called market cap for short, is a measure of the size of a stock. It is calculated using this simple formula: share price times the number of shares outstanding (those offered by the firm through the financial markets). Stocks are usually grouped under three headings based on market capitalization: Large Cap: the top 5 percent of all stocks; Mid Cap: stocks that are smaller than the top 5 percent, but still among the top 20 percent; Small Cap: the bottom 80 percent of stocks. Small company investing involves specific risks not necessarily encountered in large company investing, such as increased volatility. Foreign Stock Typically, invests at least 90 percent of assets in companies domiciled outside the United States. Foreign markets are exposed to different fundamental economic and structural factors than the U.S. markets. As a result, these funds provide greater diversification, and more risk, than a U.S.-only portfolio. International investing involves such risks as currency fluctuations, economic instability and political developments.

10 Description of the indexes Russell 1000 Growth: Market capitalization-weighted index of those Russell 1000 firms with higher price-tobook ratios and higher forecasted growth values. The Russell 1000 measures the performance of the 1,000 largest companies in the Russell The Russell 3000 represents approximately 98 percent of the investable U.S. equity market. Standard & Poor s 500: A market capitalizationweighted index of 500 widely held stocks. The index is designed to measure performance of the broad domestic economy through changes in the market value of 500 stocks representing all major industries. Barra Large Cap Growth: Market capitalizationweighted index of the stocks in the Standard & Poor s 500 Index having the higher price-to-book ratios. The index consists of approximately half of the S&P 500 on a market-capitalization basis. MSCI US Prime Market Growth: Market capitalizationweighted index of stocks in the US Prime Market 750 Index (aggregation of the Large Cap 300 and Mid Cap 450 Indices) having higher forecasted growth values. MSCI US Prime Market Value: Market capitalizationweighted index of stocks in the US Prime Market 750 Index (aggregation of the Large Cap 300 and Mid Cap 450 Indices) having lower forecasted growth values. Russell 1000 Value: Market capitalization-weighted index of those Russell 1000 firms with lower price-tobook ratios and lower forecasted growth rates. The Russell 1000 measures the performance of the 1,000 largest companies in the Russell The Russell 3000 represents approximately 98 percent of the investable U.S. equity market. Barra Large Cap Value: Market capitalization-weighted index of the stocks in the Standard & Poor s 500 Index having the lower price-to-book ratios. The index consists of approximately half of the S&P 500 on a market-capitalization basis. Standard & Poor s MidCap 400: Consists of 400 domestic stocks chosen for market size, liquidity and industry representation. Companies meeting the selection criteria, but already in the S&P 500, are excluded. Designed to measure the performance of the mid-cap segment of the U.S. equity market. Russell Mid Cap Growth: Market-weighted total return index that measures the performance of the companies within the Russell Mid Cap Index having higher price-to-book ratios and higher forecasted growth values. Russell Mid Cap Index: Measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Mid Cap Index represents approximately 25 percent of the total market capitalization of the Russell 1000 Index. Russell Mid Cap Value: Market-weighted total return index that measures the performance of the companies within the Russell Mid Cap Index having lower price-to-book ratios and lower forecasted growth values. Wilshire 4500: Measures the performance of all smalland mid-cap U.S. stocks. It is constructed from the Dow Jones Wilshire 5000 index, with the stocks in the S&P 500 removed. Standard & Poor s Completion: Measures the performance of small- and mid-cap U.S. stocks. The index is a subset of the S&P Total Market Index, excluding S&P 500 companies. Russell 2000 Growth: Market-weighted total return index that measures the performance of the companies within the Russell 2000 Index having higher price-to-book ratios and higher forecasted growth values. Russell 2000: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 represents approximately 8 percent of the total market capitalization of the Russell 3000 Index. MSCI US Small Cap 1750: Market capitalizationweighted index of the 1,750 smallest companies in the MSCI US Investable Market 2500 Index. The MSCI US Small Cap 1750 represents approximately 12 percent of the U.S. equity universe. Barra Small Cap Value: A market capitalizationweighted index of the stocks in the Standard & Poor s SmallCap 600 having the lowest price-to-book ratios. The index consists of approximately half of the S&P 600 on a market-capitalization basis. 10

11 MSCI US Small Value: Market capitalization-weighted index of stocks in the US Small Cap 1750 Index having lower forecasted growth values. Russell 2000 Value: Market-weighted total return index that measures the performance of the companies within the Russell 2000 Index having lower price-tobook ratios and lower forecasted growth values. MSCI EAFE (Europe, Australasia and Far East): The Morgan Stanley Capital International EAFE Index is an aggregate of 21 individual country indexes that collectively represent many of the major markets of the world. This index is widely accepted as a benchmark for international stock performance. MSCI World: The index includes all 23 MSCI developed market countries. Lehman Brothers Intermediate Government/ Corporate Index: Index includes both corporate and government securities, including bonds with maturities up to 10 years. Standard & Poor s Health Care: Market capitalizationweighted index designed to measure the performance of U.S. publicly traded health care companies. FTSE4Good US Select: Market capitalization-weighted index composed primarily of large- and mid-cap stocks that have been screened for certain social and environmental criteria. Wilshire REIT: Market capitalization-weighted index designed to measure the performance of U.S. publicly traded equity Real Estate Investment Trusts. Goldman Sachs Technology Industry Composite: Market capitalization-weighted index designed to measure the performance of U.S. publicly traded equity technology companies. Lehman Brothers Long-Term Credit: Index includes investment grade bonds with maturities greater than 10 years. 11

12 Fund monitoring summary at a glance The following chart identifies areas in which investment options don t meet the minimum criteria in the categories indicated. It s not uncommon for a fund to fail to meet one or more of the monitoring criteria. Failing to meet one or even a few monitoring criteria is not an indication that a fund is inappropriate for the investment lineup. The color of the boxes identifies whether a fund is or is not meeting the criteria. Red means the fund statistics are below the minimum in the category stated. Yellow means the fund statistics are meeting the minimum requirement but not exceeding it. Green means the fund statistics exceed the minimum requirement. N/A means the fund does not have history in that category. Glossary of terms used on the following pages Watch List: Yes indicates that a fund has been placed on the Watch List because it falls short of our monitoring criteria. T indicates that a fund terminated from our lineup. Return is the total return earned by the fund during the period. This includes capital appreciation plus dividends and capital gains distributions, if any. Sharpe Ratio is a measure of risk-adjusted return. It measures the return of the fund over and above the return on the risk-free asset (defined as the three-month Treasury bill) per unit of risk (defined as the standard deviation of the fund s return). The purpose of the measure is to determine whether the fund s risk is justified by the additional return generated. The larger the Sharpe ratio, the better the manager s performance. Expense Ratio is the ratio of total internal expenses to fund assets as reported by the most recent Morningstar report. The expenses include, but are not limited to, items such as legal and custody charges, management fees and sales charges such as 12b-1 fees. Performance statistics are net of the expense ratio. Asset Allocator Yes/No: The fund is or is not available for use in the asset allocator portfolios. 12

13 THE STANDARD GROUP ANNUITY INVESTMENT OPTIONS SUMMARY SHEET FOR PERIOD ENDING JUNE 30, Year 3-Year 5-Year 5-Year Watch Expense Return Sharpe Return Sharpe Asset Closed FUNDS List Ratio > Below Ratio Below Below Ratio Below Allocator To New Average Median Median Median Median Yes/No Plans Intermediate Bonds Dodge & Cox Income Yes Goldman Sachs Core Fixed Income Ins Yes Harbor Bond Yes Vanguard Total Bond Index Yes Large Cap Growth American Cent-20thC Ultra T No Yes BlackRock Large Cap Growth I Yes Harbor Capital Appreciation Yes Oppenheimer Capital Appreciation Y Yes No Yes TCW Select Equities Instl Yes No Yes T. Rowe Price Blue Chip Growth Yes T. Rowe Growth Stock Yes No Yes Vanguard Growth Index Yes Vanguard Growth Index Admiral Yes Vanguard Morgan Growth Yes Vanguard Morgan Growth Adm Yes Large Cap Blend Amer Cent Inc & Grow Inv Yes Davis NY Venture Y Yes GE U.S. Equity Y T No Yes Neuberger Berman Focus Trust T No Yes Vanguard 500 Index Yes Vanguard 500 Index Admiral Yes Vanguard Institutional Index Instl Yes Vanguard Primecap Yes Yes Large Cap Value American Beacon Large Cap Value Inst Yes American Cent Value Yes BlackRock Large Cap Value I Yes 13

14 THE STANDARD GROUP ANNUITY INVESTMENT OPTIONS SUMMARY SHEET FOR PERIOD ENDING JUNE 30, Year 3-Year 5-Year 5-Year Watch Expense Return Sharpe Return Sharpe Asset Closed FUNDS List Ratio > Below Ratio Below Below Ratio Below Allocator To New Average Median Median Median Median Yes/No Plans Fidelity Adv Equity Income I Yes Hotchkis Wiley Large Value I Yes Yes T. Rowe Price Equity Income Yes Van Kampen Growth and Income I Yes Vanguard Value Index Yes Vanguard Value Index Admiral Yes Vanguard Windsor II Yes Vanguard Windsor II Admiral Yes Mid Cap Growth Brandywine No Calamos Growth A T No Yes Franklin Small-Mid Cp Gr Adv Yes No Yes Munder Mid-Cap Core Growth Y Yes Neuberger Berman Manhattan Inst Yes Rainier Small Mid Equity Instl Yes Yes T. Rowe Price Mid Cap Growth Yes Yes Vanguard Mid-Cap Growth Index Inv Yes Mid Cap Blend Aston/Optimum Mid Cap I Yes California Invmt S&P Mid Cap Index Yes Federated Mid-Cap Index Yes Fidelity Adv Mid Cap Instl Yes No Yes Vanguard Extended Mkt Index Yes Vanguard Extended Mkt Index Admiral Yes Vanguard Strategic Equity Yes 14

15 3-Year 3-Year 5-Year 5-Year Watch Expense Return Sharpe Return Sharpe Asset Closed FUNDS List Ratio > Below Ratio Below Below Ratio Below Allocator To New Average Median Median Median Median Yes/No Plans Mid Cap Value Artisan Mid Cap Value Yes Fidelity Value Yes Yes Goldman Sachs Mid Cap Value Instl Yes Hotchkis Wiley Md Val I Yes Yes JP Morgan Mid Cap Value I Yes Yes Neuberger Berman Regency Trust Yes T. Rowe Price Mid Value Yes Yes TCW Value Opportunities Instl T No Yes Vanguard Mid-Cap Value Index Inv Yes Wells Fargo Advantage Mid Cap Discpl I Yes Small Cap Growth Alger Small Cap Growth Institutional I Yes Allianz CCM Emerging Companies Instl Yes No Fidelity Advisor Small Cap Instl Yes First American Small Cap Select Y Yes Jennison Small Company Z Yes T. Rowe Price New Horizons Yes Vanguard Explorer Yes Yes Vanguard Explorer Admiral Yes Yes Vanguard Small Cap Growth Index Yes Small Cap Blend Munder Small-Cap Value Y Yes Neuberger&Berman Genesis Trust Yes Yes Oppenheimer Main St Small Cap Y Yes Oppenheimer Small & Mid Cap Value A Yes No Yes Pennsylvania Mutual Inv Yes T. Rowe Price Small Cap Stk T No Yes Undiscover Mgr Behavioral Value IS Yes Vanguard Small Cap Index Yes Vanguard Small Cap Index Admiral Yes 15

16 THE STANDARD GROUP ANNUITY INVESTMENT OPTIONS SUMMARY SHEET FOR PERIOD ENDING JUNE 30, Year 3-Year 5-Year 5-Year Watch Expense Return Sharpe Return Sharpe Asset Closed FUNDS List Ratio > Below Ratio Below Below Ratio Below Allocator To New Average Median Median Median Median Yes/No Plans Small Cap Value Allianz NFJ Small Cap Value Instl Yes American Beacon Small Cp Val Inst Yes Vanguard Small Cap Value Index Yes Foreign Large Growth Amer Cent Intl Growth T No Yes Van Kampen International Growth I Yes William Blair Intl Growth I Yes Yes Foreign Large Blend American Beacon Intl Eq Index Inst Yes Dreyfus Intl Stock Index Yes Fidelity Adv Diversified Intl I Yes UMB Scout International Yes Foreign Large Value AllianceBernstein Intl Val I Yes Dodge & Cox International Stock Yes Harbor International Instl Yes World Stock Oppenheimer Global Y No Templeton Growth Adv Yes No Yes Balanced - Conservative Allocation Vanguard LifeStrat Cons Growth No Balanced - Moderate Allocation American Beacon Balanced Instl Yes Dodge & Cox Balanced Yes Yes Fidelity Balanced Yes Yes GE Strategic Investment Y Yes Oppenheimer Quest Balance Y Yes No Yes Van Kampen Equity and Income I Yes Vanguard LifeStrat Growth No Vanguard LifeStrat Mod Growth No Vanguard STAR Yes Vanguard Wellington Yes Vanguard Wellington Admiral Yes 16

17 3-Year 3-Year 5-Year 5-Year Watch Expense Return Sharpe Return Sharpe Asset Closed FUNDS List Ratio > Below Ratio Below Below Ratio Below Allocator To New Average Median Median Median Median Yes/No Plans Specialty Communications T. Rowe Price Media & Telecom No Specialty Financial BlackRock Global Financial Svcs I No Speciality Health T. Rowe Price Health Sciences No Vanguard Health Care No Specialty Natural Resources Vanguard Energy No Specialty Real Estate AmCent Real Estate Inv No Specialty Technology Allianz RCM Technology Instl No Socially Responsible Vanguard FTSE Social Index Inv No Specialty Long Bond Vanguard Long-Term Investment-Grade Fund No Intermediate Government BlackRock Government Inc Inv Instl Yes High Yield Bond Goldman Sachs High Yield Instl No 17

18 Performance The following seven pages summarize performance of the investment options relative to peer funds. For perspective, performance figures for benchmark indexes are also provided. Information about the universe of funds with similar styles is provided, including figures for funds at the 25th, 50th and 75th percentiles. Investment options are listed alphabetically within each category. Plan sponsors and participants should consider the investment objectives, risks, and charges and expenses of the investment options offered under the retirement plan carefully before investing. The prospectuses for all investment options contain this and other information. Prospectuses may be obtained by calling Please read the prospectus carefully before investing. Investments are subject to market risks and fluctuate in value. Glossary of terms used on the following pages Expense Ratio is the ratio of total internal expenses to fund assets as reported by the most recent Morningstar report. The expenses include, but are not limited to, items such as legal and custody charges, management fees and sales charges such as 12b-1 fees. Performance statistics are net of the expense ratio. Returns reflect mutual fund expenses, but not fees charged by The Standard. Return is the total return earned by the fund during the period. This includes capital appreciation plus dividends and capital gains distributions, if any. Rank represents the relative performance of the investment option compared to funds with similar investment style as determined by Morningstar. Rank of 1 means that the fund was the top performer relative to its peer funds, while a rank of 100 would denote the worst performer among peer funds. 18

19 THE STANDARD GROUP ANNUITY INVESTMENT OPTIONS Performance as of June 30, 2007 Expense 12 B-1 3-Month 3-Year 5-Year 10-Year Annualized Annualized Annualized Fund Name Ratio Return Rank Return Rank Return Rank Return Rank Return Rank Large Cap Growth Amer Century Ultra Inv BlackRock Large Cap Growth I Harbor Capital Appr Oppenheimer Capital Appreciation Y TCW Select Equities Instl T. Rowe Blue Chip Growth T. Rowe Growth Stock Vanguard Growth Index Vanguard Growth Index Admiral Vanguard Morgan Growth Vanguard Morgan Growth Adm Idx: Russell 1000 Growth Idx:Barra Lg Gr/MSCI Prime Mkt Gr Universe 25th Percentile Universe Median Universe 75th Percentile Large Cap Blend Amer Cent Inc & Grow Inv Davis NY Venture Y GE U.S. Equity Y Neuberger Berman Focus Trust Vanguard 500 Index Vanguard 500 Index Admiral Vanguard Institutional Index Instl Vanguard Primecap Idx: Standard & Poor's Universe 25th Percentile Universe Median Universe 75th Percentile Large Cap Value American Beacon Large Cap Value Inst Amer Cent Value Inv BlackRock Large Cap Value I Fidelity Adv Equity Income I Hotchkis Wiley Large Value I T. Rowe Price Equity-Income Year 19

20 THE STANDARD GROUP ANNUITY INVESTMENT OPTIONS Performance as of June 30, Year 5-Year 10-Year Expense 12 B-1 3-Month 1-Year Annualized Annualized Annualized Fund Name Ratio Return Rank Return Rank Return Rank Return Rank Return Rank Large Cap Value (continued) Van Kampen Growth and Income I Vanguard Value Index Vanguard Value Index Admiral Vanguard Windsor II Vanguard Windsor II Admiral Idx: Russell 1000 Value Idx:Barra Lg Val/MSCI Prime Mkt Val Universe 25th Percentile Universe Median Universe 75th Percentile Mid Cap Growth Brandywine Calamos Growth A Franklin Small-Mid Cp Gr Adv Munder Mid-Cap Core Growth Y Neuberger Berman Manhattan Inst Rainier Small Mid Equity Instl T. Rowe Price Mid Cap Growth Vanguard Mid-Cap Growth Index Inv Idx: Russell Midcap-Growth Universe 25th Percentile Universe Median Universe 75th Percentile Mid Cap Blend Aston/Optimum Mid Cap I California Invmt S&P Mid Cap Index Federated Mid-Cap Index Fidelity Adv Mid Cap Instl Vanguard Extended Mkt Index Vanguard Extended Mkt Index Admiral Vanguard Strategic Equity

21 Expense 12 B-1 3 Month 3 Year 5 Year 10 Year 1 Year Annualized Annualized Annualized Fund Name Ratio Return Rank Return Rank Return Rank Return Rank Return Rank Mid Cap Blend (continued) Idx: Russell Mid-Cap Idx: Standard & Poor's Mid-Cap Idx: Wilshire 4500/S&P Completion Index Universe 25th Percentile Universe Median Universe 75th Percentile Mid Cap Value Artisan Mid Cap Value Fidelity Value Goldman Sachs Mid Cap Value Instl Hotchkis Wiley Md Val I JP Morgan Mid Cap Value I Neuberger Berman Regency Trust T. Rowe Price Mid Value TCW Value Opportunities Instl Vanguard Mid-Cap Value Index Inv Wells Fargo Advantage Mid Cap Discpl I Idx: Russell Mid-Cap Value Universe 25th Percentile Universe Median Universe 75th Percentile Small Cap Growth Alger Small Cap Growth Institutional I Allianz CCM Emerging Companies Instl Fidelity Advisor Small Cap Instl First American Small Cap Select Y Jennison Small Company Z T. Rowe Price New Horizons Vanguard Explorer Vanguard Explorer Admiral Vanguard Small Cap Growth Index Idx: Russell 2000 Growth Universe 25th Percentile Universe Median Universe 75th Percentile