MainStay Compass. Navigating the capital markets November 2012

Transcription

1 MainStay Compass Navigating the capital markets November 2012 All data as of 10/31/12, unless stated otherwise. NYLIM-27437

2 Contents Global Overview Global growth outlook 2 Leading indicators 3 Global Mergers & Acquisitions activity (M&A) 4 U.S. Economy GDP and economic potential 5 U.S. interest rates 6 Federal budget and debt 7 Trade-weighted U.S. dollar and current account 8 Money and credit growth 9 Corporate financial health check 10 Current trends in U.S. manufacturing 11 Housing affordability and housing prices 12 Housing supply and construction 13 Employment overview 14 Unemployment and underemployment 15 Employment indicators 16 Unemployment by educational attainment 17 Household financial health check 18 Household income and saving 19 Oil and gasoline watch 20 Consumer confidence and spending 21 International Economy Currency market overview 22 Euro Area GDP growth and business climate 23 GDP growth in the 4 largest Euro Area economies 24 Euro crisis watch: Key bond yields 25 European government budgets and debt 26 China GDP growth and manufacturing survey 27 Market Overview Asset class returns: Overview 31 Equity market valuation: Price/Earnings ratio 32 Equity markets: Mega-cap stocks vs. board equity market 33 Equity markets: Large cap, midcap and small cap 34 Equity markets: Sectors 35 Global equity market valuation: Price/Earnings ratio 36 Global dividend yields 37 Equity volatility and the VIX 38 Fund flows by asset class: Equity 39 U.S. corporate bond yields by rating 40 High-Yield credit spreads and defaults 41 Municipal bond yields and ratio 42 Municipal interest burden and historic default rates 43 Emerging market debt spreads and debt-to-gdp EM vs. DM 44 Commodities Prices 45 Fund flows by asset class: Fixed income and alternatives 46 Taking Turns at the Top Annual Rankings Annual returns for key asset class 47 Annual returns for key equity sectors 48 Annual returns for key fixed income sectors 49 Annual returns for key muni debt ratings 50 Annual returns for key alternative strategies 51 Benchmark Overview Index returns 52 Inflation Watch U.S. inflation watch 28 Euro Area inflation watch 29 China inflation watch 30 1

3 Global Growth Outlook Monthly surveys of real GDP forecasts for 2013 for G3 countries (USA, Euro Area and Japan), expressed as % change vs on average across forecasters. BRIC (Brazil, Russia, India and China viewed as a group) forecasts for 2013 are based on the most recent Consensus Economics survey of professional forecasters. 2

4 Leading Indicators OECD Leading Indicators are designed to provide early signals of turning points in economic activity. They are based on key indicators of business and consumer activity that have shown leading relationships with turning points in industrial production. A level of 100 indicates that growth in industrial production is likely to be in line with its estimated trend pace. Source: Organization for Economic Cooperation and Development (OECD). 3

5 Global Mergers & Acquisitions Activity (M&A) Quarterly global M&A deal volume. Shaded areas indicate U.S. recessions, according to NBER. 4

6 U.S. GDP and Economic Potential Both real GDP and employment (nonfarm payrolls) are expressed as indices with the value = 100 at the beginning of the recession in Q Shaded areas are recessions, according to NBER s definition. Real GDP is in 2005 USD. Potential GDP is the level of output that an economy can produce without causing inflation pressure. Comparing actual to potential GDP is therefore important when gauging inflation pressure. Estimated by the Congressional Budget Office (CBO). 5

7 U.S. Interest Rates Treasury rates are yields-to-maturity for Treasury notes and bonds of different maturities. The Fed Funds Target Rate is the short-term target rate used by the Federal Reserve in its open market operations. The 30Y mortgage rate is based on the Primary Mortgage Market Survey conducted by Freddie Mac, a weekly survey of lenders on the rates for their most popular 30-year fixed-rate mortgage product. Past performance is no guarantee of future results. It is not possible to invest in an index. 6

8 U.S. Federal Budget and Debt The chart shows federal government total spending along with federal government tax revenue, both measured relative to the size of the economy. Shaded areas are recessions, according to NBER. The chart shows the level of federal debt relative to the size of the economy. Total debt includes bonds and notes owned by the Social Security Trust Fund, which is a fund created by the government. The chart also shows the amount of federal debt held by the public. 7

9 Trade-weighted U.S. Dollar and Current Account The trade-weighted U.S. Dollar Index is a weighted average of exchange rates across U.S. trading partners with each foreign currency unit weighted according to its share of U.S. foreign trade. Shaded areas are recessions according to NBER. Past performance is no guarantee of future results. The current account is the difference between exports and imports of goods and services plus net transfers (e.g. dividends and interest payments) versus the rest of the world. Transactions in financial assets are not included. 8

10 U.S. Money and Credit Growth M2 is a measure of the money supply that includes both physical bills and coins as well as bank accounts to which clients have fairly immediate access. Commercial and industrial bank loans are bank loans made to businesses and corporations for the purpose of providing working capital or financing major purchases of e.g. equipment. Source: Federal Reserve. 9

11 U.S. Corporate Financial Health Check These corporate indicators are based on the Federal Reserve s quarterly Flow-of-Funds Accounts for all non-farm, non-financial corporations. Shaded areas indicate U.S. recessions, according to NBER. Past performance is no guarantee of future results. 10

12 Current Trends in U.S. Manufacturing The Institute of Supply Management (ISM) Report on Business contains a monthly survey of U.S. manufacturing activity, with details on key activity indicators such as new orders, inventories, employment, prices, etc. Numbers above 50 indicate growing activity, while numbers below 50 indicate declining activity. The trends in new orders and inventories are important indicators of the near-term outlook for manufacturing activity. 11

13 U.S. Housing Affordability and Housing Prices The average home price is based on the most recent 12 months of existing homes sold (from National Association of Realtors). A 20% downpayment and a 30-year conventional fixed rate mortgage (using data from Federal Reserve) are assumed. The estimated mortgage payment is only indicative and income taxes, property taxes and insurance are not included in the calculation. The Federal Housing Finance Agency (FHFA) Index includes only repeat-sales of houses sold to or guaranteed by Fannie Mae or Freddie Mac. The S&P/Case-Shiller Index is based on the 20 largest U.S. cities. The National Association of Realtors price estimate is based on reports by realtors and includes all sales of existing homes (houses and condos). All indices are seasonally adjusted. 12

14 U.S. Housing Supply and Construction The ratio of the number of homes currently for sale and monthly sales is an indicator of the supply/demand balance in the housing market: How many months does it take on average to sell a home? Source: National Association of Realtors. Housing starts measure the number of new homes for which construction has been initiated during any given month, while building permits measure the number of building permits for new homes issued during the month. Both statistics are annualized. 13

15 U.S. Employment Overview Employment is measured via the non-farm payroll measure, based on a monthly survey of establishments. Source: Bureau of Labor Statistics. Total contribution to employment growth by industry since the trough of employment in Feb

16 U.S. Unemployment and Underemployment Various measures of unemployment and underemployment, the latter referring to broader measures of labor market weakness, such as e.g. statistics on people who are employed part-time but are looking for a full-time job without finding one. The official unemployment rate canbesensitivetoshiftsinthelaborforce(thenumberofpeopleofworkingagewhoareactivelyseekingajob),anditisimportantto monitor alternative measures of labor market weakness. Shaded areas are recessions, according to NBER. Source: Bureau of Labor Statistics. 15

17 U.S. Employment Indicators Shaded areas indicate U.S. recessions, according to NBER. 16

18 Unemployment By Educational Attainment The Bureau of Labor Statistics tracks unemployment by different categories of educational attainment. The trends of unemployment rates are interesting to watch, as they may be indicative of key trends within different segments of the labor market. 17

19 U.S. Household Financial Health Check Source: Federal Reserve. Shaded areas indicate U.S. recessions, according to NBER. 18

20 U.S. Household Income and Saving Personal disposable income is total personal income (wages, salaries and transfer income) minus current taxes, i.e. the amount available for consumption. The year-over-year growth rate is shown on a 3-month moving average basis. Shaded areas are recessions, according to NBER. The personal savings rate measures the percentage of total disposable income that is not consumed. The chart shows the savings rate on a 12-month moving average basis. 19

21 Oil and Gasoline Watch Data for gasoline prices are from the American Automobile Association (AAA). Shaded areas indicate U.S. recessions, according to NBER. 20

22 U.S. Consumer Confidence and Spending Shaded areas indicate U.S. recessions, according to NBER. 21

23 Currency Market Overview Shaded areas indicate U.S. recessions, according to NBER. 22

24 Euro Area GDP Growth and Business Climate The Euro Area Business Climate Indicator is based on a monthly survey of the manufacturing industry, with survey questions covering production trends, order books, export orders, inventories and expectations. The index gives an indication of current economic activity. Source: European Commission. 23

25 GDP Growth in the 4 Largest Euro Area Economies These 4 countries account for approximately 76% of total Euro Area GDP (Germany: 27%, France: 21%, Italy: 17%, Spain: 12%). The stated percentages do not sum to 76% due to rounding. Source: Eurostat. 24

26 Euro Crisis Watch: Key Bond Yields Portugal, Ireland, Italy and Spain Yield-to-Maturity (YTM) for 10Y government bonds. Note that Greece s yield is shown on the right axis, while the other yields are shown on the left axis. Past performance is no guarantee of future results. 25

27 European Government Budgets and Debt General government balances forecast for 2012 relative to the size of each economy and sorted with the largest deficits at the bottom. The green marker shows the 10-year average government balance, and the vertical line marks the 3% maximum deficit that Euro Area countries have agreed not to breach unless special circumstances apply. Source: European Commission. Government debt forecasts for the end of 2012 viewed relative to thesizeofeacheconomy(gdp)andsortedwiththelargestdebt ratios at the top. The blue marker indicates the debt/gdp level forecasted by the European Commission at the end of The European Commission publishes updated forecasts twice-yearly (spring and fall). 26

28 China GDP Growth and Manufacturing Survey The chart shows year-over-year growth rates of China s real Gross Domestic Product. The Purchasing Managers Index is a survey of Chinese manufacturers. The Index is based on responses to survey questions on new orders, production, employment, inventories and exports and gives a monthly indication of activity in Chinese manufacturing. Source: National Bureau of Statistics of China. 27

29 U.S. Inflation Watch Overall inflation is measured via 1-year changes in the Personal Consumption Expenditures (PCE) Price Index. This is the measure preferred by the Federal Reserve.Theindexisbased on the Consumer Price Index but takes into account the fact that the composition of consumer spending changes over time. The bar chart shows a breakdown of inflation by category over the most recent year using the Consumer Price Index. Note that energy prices affect several categories, most notably transportation and housing. Consumers inflation expectations are measured via the University of Michigan survey. Bond markets expectations are estimated via a comparison between inflation-protected (i.e. indexed) treasury notes and nominal (non-indexed) treasury notes. Inflation expectations are important to watch as they have historically played an important role in price and wagesetting as well as for monetary policy. 28

30 Euro Area Inflation Watch The chart shows the year-over-year percentage change in the Harmonised Index of Consumer Prices for the Euro Area, which is the measure of inflation the European Central Bank (ECB) uses to define and assess price stability in the Euro Area as a whole. The ECB aims to maintain inflation below, but close to, 2% over the medium term. Source: Eurostat, European Central Bank. 29

31 China Inflation Watch The chart shows year-over-year growth rates of China s Consumer Price Index. The chart shows China s money supply as measured by M2, which includes bills and coins, demand deposits (e.g. checking accounts) and other types of savings vehicles to which clients have fairly immediate access. 30

32 Asset Class Returns: Overview The chart shows the total returns, including dividends or coupons, generated by a range of asset classes during while this chart shows how the asset classes have done in 2012 so far. Past performance is no guarantee of future results. It is not possible to invest in an index. 31

33 Equity Market Valuation: Price/Earnings Ratio The P/E ratio measures the ratio of the market value of the average S&P 500 company and its per-share earnings. A forecast of earnings 12 months ahead, based on a survey of analysts, is used. Shaded areas indicate recessions, according to the National Bureau of Economic Research (NBER). Past performance is no guarantee of future results. 32

34 Mega-Cap Stocks versus the Broader Equity Market The chart shows the P/E ratio for the Russell Top 200 Index, representing the 200 largest U.S. Companies, compared to the P/E ratio for the broader Russell 3000 Index. P/E ratios are based on 12M forward earnings forecasts. Shaded areas indicate recessions. This chart compares the P/E ratios directly, showing the difference between P/E ratios for Russell Top 200 companies and the broader Russell 3000 Index. Historically, the 200 largest companies have often traded at lower P/E ratios due to lower growth expectations. 33

35 Equity Markets: Large Cap, Midcap and Small Cap The chart shows how much $100 invested 1 year ago is worth The P/E ratios measure the ratio of the market value of the now for different size categories of the U.S. Equity market. average company in each index and its per-share earnings. Forecasts of earnings 12 months ahead, based on surveys of analysts, are used. Shaded areas indicate recessions, according to NBER s definition. Past performance is no guarantee of future results. It is not possible to invest in an index. 34

36 Equity Markets: Sectors The chart above shows how different sectors within the S&P 500 Index performed during while this chart shows how the sectors have performed in 2012 so far. Past performance is no guarantee of future results. It is not possible to invest in an index. 35

37 Global Equity Market Valuation The P/E ratio measures the ratio of the market value of the average MSCI All Country (AC) World company and its pershare earnings. A forecast of earnings 12 months ahead, based on a survey of analysts, is used. There is no guarantee that the forecast will be realized. Shaded areas indicate U.S. recessions, according to the National Bureau of Economic Research (NBER). 36

38 Global Dividend Yields Dividend Yields show the return an investor would get on equities even if equity prices remained unchanged. They are calculated as the dividends paid out over the most recent 12 months, as a % of the current equity price. 37

39 Equity Volatility and the VIX Realized volatility measures the magnitude of fluctuations observed in the market on a day-to-day basis. Volatility is here measured on a rolling 1-year basis and is calculated using daily closing prices. The chart gives an overview of how volatility has historically varied over several decades. The Volatility Index (VIX) is estimated from 1 month-ahead S&P 500 stock index option prices. Since a key driver of option prices is volatility, this chart therefore gives a picture of recent movements in investors expectations of near-term volatility. Source: Chicago Board of Exchange (CBOE). Past performance is no guarantee of future results. 38

40 Fund Flows by Asset Class - Equity All figures are in $Millions Total Assets YTD Latest 12-mo Asset Class Latest Mo-end Net Flows Net Flows Net Flows Net Flows Net Flows Net Flows Net Flows U.S. Equity Large Value $587,016 -$15,133 -$23,172 -$18,580 -$15,947 -$20,725 -$26,216 -$3,770 Large Blend $1,105,824 -$5,516 -$16,779 -$4,952 -$7,216 $7,816 $4,603 $8,419 Large Growth $836,855 -$22,643 -$37,546 -$38,980 -$39,633 -$17,990 -$18,058 -$10,727 Total $2,529,695 -$43,291 -$77,497 -$62,512 -$62,795 -$30,899 -$39,671 -$6,079 M id-cap Value $104,783 -$1,507 -$2,733 -$1,272 $954 $1,954 -$4,606 $3,004 M id-cap Blend $173,847 -$2,935 -$5,589 -$2,006 $892 $2,391 -$9,310 $1,108 M id-cap Growth $210,517 -$6,359 -$11,367 -$10,985 -$1,146 $869 -$10,150 $2,955 Total $489,147 -$10,800 -$19,689 -$14,263 $699 $5,214 -$24,066 $7,067 Small Value $72,834 -$1,589 -$2,288 -$1,466 $4,342 $2,638 $1,395 -$2,501 Small Blend $138,534 -$3,352 -$5,610 -$2,126 $798 $746 -$2,422 -$3,026 Small Growth $119,666 -$3,042 -$5,235 -$2,727 -$585 $3,317 -$3,090 -$3,094 Total $331,033 -$7,984 -$13,133 -$6,319 $4,556 $6,701 -$4,116 -$8,621 U.S.Equity Total $2,933,562 -$52,864 -$92,918 -$70,298 -$53,897 -$21,561 -$42,392 -$17,200 International Equity Foreign Large Caps $685,628 $10,825 $848 $3,243 $19,980 $16,259 -$26,908 $72,518 Foreign Sm/M id Caps $62,875 $1,300 $226 $1,169 $4,229 $1,705 -$5,941 -$1,580 Emerging M kts $218,958 $18,113 $20,425 $18,705 $31,242 $16,100 -$921 $11,717 Intl Equity Total $967,460 $30,238 $21,499 $23,116 $55,452 $34,064 -$33,771 $82,655 Global Equty World Stock $267,302 -$14,039 -$20,196 -$15,314 -$8,601 -$12,109 -$21,212 $29,111 Global Equity Total $267,302 -$14,039 -$20,196 -$15,314 -$8,601 -$12,109 -$21,212 $29,111 Total Equity $4,168,324 -$36,665 -$91,616 -$62,496 -$7,047 $394 -$97,375 $94,566 Source: Strategic Insights/SimFund MF data as of 9/30/12 - Asset and net flow data is for open-end funds only. 39

41 U.S. Corporate Bond Yields by Rating Category The chart shows the current levels of corporate bond yields compared with levels at 12/31/2011 and historical averages. IG Overall shows the yield for Investment Grade corporate bonds (rated BBB- and above), whereas HY Overall shows the yield for High Yield corporate bonds (rated BB+ and below). Past performance is no guarantee of future results. 40

42 High-Yield Credit Spreads and Defaults The High-Yield spread is the difference between the yield on a weighted average of High-Yield corporate bonds and a comparable Treasury note. The default rate is a weighted average of default rates over the most recent 12 months, measuring the percentage of high-yield bonds (by amount outstanding) that was hit by default. Past performance is no guarantee of future results. It is not possible to invest in an index. 41

43 Municipal Bond Yields The top chart shows the yield on the Barclays Capital Municipal Bond 10Y Index, an index consisting of investment-grade rated (BBB-/Baa3 or above) Municipal Bonds with maturities between 9 and 12 years, compared with the yield on a 10- year Treasury note. The bottom chart shows the Muni yield as a % of the Treasury note yield. Past performance is no guarantee of future results. 42

44 Municipal Interest Burden and Default Rates The state and local interest burden is calculated as total interest paid by state & local governments, measured as a % of total state & local tax revenue. Municipal bonds have historically had lower default rates and higher recovery rates then corporate bonds of comparable credit quality. Source: Moody s Investors Service Past performance is no guarantee of future results. 43

45 Emerging Market Debt Emerging Market Bond Yield spreads are based on the J.P. Morgan EMBI Global Diversified Index. This index caps the weights of countries with larger debt stocks at 10%. The chart shows the difference in yields on Emerging Market bonds versus U.S. Treasury yields of comparable maturity. The chart shows how key Emerging Markets (together accounting for roughly 80% of the J.P. Morgan EMBI Global Diversified Index) compare to developed countries and China in terms of government debt-to-gdp ratios. The chart shows 2012 levels based on IMF definitions of gross government debt and includes IMF projections to

46 Commodity Prices Commodity price indices are shown with January = 100. Commodity markets are important to monitor, as they sometimes contain early warning signals of inflation. In the case of metals used in manufacturing and construction, commodity prices may also contain signals about economic activity. In addition, many commodities play a role as investment objects, e.g. gold, and they may therefore serve as a gauge of investor sentiment. 45

47 Fund Flows by Asset Class Fixed Income and Alts. All figures are in $Millions Total Assets YTD Latest 12-mo Asset Class Latest Mo-end Net Flows Net Flows Net Flows Net Flows Net Flows Net Flows Net Flows Taxable Fixed Income U.S. Govt. Bonds $187,111 $3,352 $7,669 -$2,119 $1,893 $10,642 $21,965 -$154 U.S. IG Corp. Bonds $1,303,742 $116,409 $139,848 $44,938 $104,440 $190,924 $11,165 $63,156 High Yield Bond $244,071 $27,958 $38,726 $13,374 $10,892 $20,244 $1,061 $1,148 M ultisector Bond $154,147 $14,987 $15,909 $9,796 $6,214 $10,338 $966 $18,496 Nontraditional Bond $52,215 -$286 -$4,233 $8,018 $27,852 $9,460 -$2,461 -$243 Infl-Protected Bond $113,865 $6,385 $10,310 $8,826 $8,102 $19,454 $8,579 $1,793 Bank Loan $66,175 $5,302 $4,343 $13,721 $16,631 $4,235 -$7,470 -$3,160 World Bond $155,047 $6,408 $5,554 $21,247 $24,416 $17,261 $3,675 $14,911 EM Bonds $69,462 $16,514 $18,499 $11,774 $13,393 $2,517 $670 $1,637 Taxable FI Total $2,345,835 $197,029 $236,625 $129,575 $213,833 $285,075 $38,150 $97,584 Tax-Exempt Fixed Income M uni Nat. Long $98,458 $4,904 $5,684 -$4,754 $869 $5,123 $1,144 $2,148 M uni Nat. Interm $128,190 $11,592 $15,004 $1,281 $5,034 $17,579 $7,921 $4,710 M uni Nat. Short $97,386 $8,854 $12,196 $3,167 $7,591 $35,016 $6,627 $1,102 High Yield M uni $70,234 $9,894 $10,787 -$1,371 $1,820 $7,242 -$2,729 $391 M uni Single State $85,654 $3,900 $4,488 -$4,888 -$662 $4,525 $292 $1,159 M uni California $52,065 $2,348 $2,615 -$2,678 -$1,842 -$3 -$1,339 $1,598 M uni New York $39,574 $1,560 $1,789 -$2,539 -$868 $1,019 -$1,007 $904 Tax-Exempt FI Total $571,561 $43,052 $52,563 -$11,782 $11,942 $70,501 $10,909 $12,012 Total Fixed Income $2,917,396 $240,081 $289,188 $117,793 $225,775 $355,576 $49,059 $109,596 Alternatives Long/Short Equity $26,400 $4,457 $5,569 $1,805 $2,901 $2,100 $2,054 $752 M arket Neutral $19,081 $736 $692 $1,880 $4,644 $3,998 $899 $56 M ultialternative $19,393 $4,078 $5,843 $4,574 $3,891 $1,573 -$575 $962 Other Alternatives $16,623 $2,448 $1,566 $3,835 $4,280 $1,744 -$1,544 $584 Total Alternatives $81,497 $11,719 $13,670 $12,094 $15,716 $9,415 $834 $2,354 Source: Strategic Insights/SimFund MF data as of 9/30/12 - Asset and net flow data is for open-end funds only. 46

48 Taking Turns at the Top Asset Classes Annual Total Returns Ranked in Order of Performance Past performance is no guarantee of future results. The chart above represents the fluctuating performance for various indices that represent certain asset classes, ranking them from highest to lowest based on annual total returns. Stocks tend to be most volatile, whereas bonds may offer a fixed rate of return. Small-company and mid-cap growth and value stocks are more volatile than large-company growth and value stocks, are subject to significant price fluctuations and business risks, and are thinly traded. There are also additional risks associated with bonds and foreign/international investing. Foreign currency fluctuations, political and economic stability, and differences in accounting standards may apply. Floating rate loans are generally considered to have speculative characteristics that involve default risk or principal and interest, collateral impairment, non-diversification, borrower industry concentration and limited liquidity. Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Source: Morningstar, December 31, Annual total returns for key asset classes. Indices are unmanaged and one cannot invest directly into an index. The indices above do not represent the performance of any specific investment. 47

49 Taking Turns at the Top U.S. Equity Sectors Annual Total Returns Ranked in Order of Performance Past performance is no guarantee of future results. The Dow Jones U.S. is designed to consistently measure the stock performance of companies within the top 95% of the U.S. market based on float-adjusted market capitalization (Shares available for trading). Industry indexes are constructed by categorizing the component stocks of the Dow Jones U.S. into the 10 Industries, 18 Supersectors, 39 Sectors, and 104 Subsectors of the Industry Classification Benchmark (ICB). A separate index is maintained for each group at each of the four levels. Source: Morningstar, December 31, Indices are unmanaged and one cannot invest directly in an index. The indices above do not represent the performance of any specific investment. 48

50 Taking Turns at the Top Fixed Income Sectors Annual Total Returns Ranked in Order of Performance Past performance is no guarantee of future results. The chart above represents the fluctuating performance for various indices that represent certain asset classes, ranking them from highest to lowest based on annual total returns. A fixed income investment pays a fixed rate of return and usually refers to government, corporate, or municipal bonds. A convertible bond is a type of debt security that can be converted into equity securities of the issuing corporation. A municipal bond is a debt obligation of a state or local government entity. A U.S. Government bond invests in bonds and notes issued both by the United States and its federal agencies. High yield bonds are generally considered speculative because they present a greater risk of loss than higher-quality debt securities and may be subject to greater price volatility. Foreign investments may be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developing markets. Floating rate loans are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, non-diversification, borrower industry concentration and limited liquidity. Source: Morningstar, December 31, Indices are unmanaged and one cannot invest directly in an index. The indices above do not represent the performance of any specific investment. 49

51 Taking Turns at the Top Muni Debt Ratings Annual Total Returns Ranked in Order of Performance Past performance is no guarantee of future results. Source: Barclays, 3/31/12. The rating breakdowns listed above are based on subsets of the Barclays Municipal Bond Index and Barclays Municipal High Yield Index. An investment cannot be made directly into an index. Past performance is no guarantee of future results. 50

52 Taking Turns at the Top Alternatives Annual Total Returns Ranked in Order of Performance Past performance is no guarantee of future results. Source: Zephyr StyleAdvisor, 12/31/11. Past performance is no guarantee of future results. Please refer to slide 57 for Index definitions. It is not possible to invest directly into an index. Diversification cannot ensure a profit or guarantee against a loss. 51

53 Index Returns As of October 31, 2012 Source: FactSet BC is the abbreviation for Barclays Capital Past performance is no guarantee of future results. It is not possible to invest in an index. 52

54 Index Definitions Barclays Capital Municipal Bond Index-The U.S. Municipal Indices cover the USD-denominated long term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds. Barclays Capital U.S. Aggregate Bond Index -The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. Barclays Capital U.S. Government Bond Index-The U.S. Government/Credit Index is the non-securitized component of the U.S. Aggregate Index and was the first macro index launched by Barclays Capital. The U.S. Government/Credit Index includes Treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year), Government-Related issues (i.e., agency, sovereign, supranational, and local authority debt), and Corporates. MSCI EAFE Index -The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. As of June 2007 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI World Index-The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of June 2007 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Russell 3000 Index-The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. Russell 1000 Index-The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected. Russell 1000 Value Index-The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The Russell 1000 Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics. Russell 1000 Growth Index-The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. 53

55 Index Definitions Russell Midcap Index-The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000 companies. The Russell Midcap Index is constructed to provide a comprehensive and unbiased barometer for the mid-cap segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap opportunity set. Russell Midcap Value-The Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap Value Index is constructed to provide a comprehensive and unbiased barometer of the mid-cap value market. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap value market. Russell Midcap Growth Index-The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap Growth Index is constructed to provide a comprehensive and unbiased barometer of the mid-cap growth market. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap growth market. Russell 2000 Index-The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. Russell 2000 Growth Index-The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Growth Index is constructed to provide a comprehensive and unbiased barometer for the small-cap growth segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set and that the represented companies continue to reflect growth characteristics. Russell 2000 Value Index-The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set and that the represented companies continue to reflect value characteristics. S&P 500 Index-Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. Dow Jones Industrials Average Index: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. 54

56 Index Definitions NASDAQ Composite Index : A market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures. Russell 3000 Growth Index: A market capitalization weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above average growth. The index is used to provide a gauge of the performance of growth stocks in the U.S. Companies within the Russell 3000 that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index. Russell 3000 Value Index: A market-capitalization weighted equity index maintained by the Russell Investment Group and based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Bank of America/ML U.S. High Yield Bonds: Tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. MSCI Emerging Equities : An unmanaged index considered representative of stocks of developing countries. Barclays Capital Global Aggregate: The Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets.. Barclays Capital U.S. Treasury - Bills (1-3M): Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. Barclays Capital U.S. Aggregate -- Government: The U.S. Government Index is comprised of the U.S. Treasury and U.S. Agency Indices. The U.S. Government Index includes Treasuries (public obligations of the U.S. Treasury that have remaining maturities of more than one year) and U.S. agency debentures (publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government). The U.S. Government Index is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index. Barclays Capital U.S. Aggregate Government Treasury: The U.S. Treasury Index includes public obligations of the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. In addition, certain special issues, such as state and local government series bonds (SLGs), as well as U.S. Treasury TIPS, are excluded. STRIPS are excluded from the index because their inclusion would result in double-counting. Securities in the index roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. The U.S. Treasury Index was launched on January 1, Barclays Capital U.S. Aggregate Government Agency: The U.S. Agency Index includes native currency agency debentures from issuers such as Fannie Mae, Freddie Mac, and Federal Home Loan Bank. It is a subcomponent of the Government-Related Index (which also includes non-native currency agency bonds, sovereigns, supranationals, and local authority debt) and the U.S. Government Index (which also includes U.S. Treasury debt). The index includes callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government (such as USAID securities). The U.S. Agency Index is a component of the U.S. Aggregate Index and the U.S. Universal Index. Index returns are available back to January,

57 Index Definitions Barclays Capital U.S. Aggregate TIPS: On March 1, 1997, Barclays Capital launched the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) Index (Series-L), a rules-based, market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury. The U.S. TIPS Index (Series-L) is a subset of the Global Inflation-Linked Index (Series-L), with a 38.5% market value weight in the index (as of December 31, 2010), but is not eligible for other nominal Treasury or Aggregate indices. To prevent the erosion of purchasing power, TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers, or the CPI-U (CPI). Barclays Capital U.S. Aggregate - Credit: The US Credit Index comprises the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. The US Credit Index was called the US Corporate Investment Grade Index until July 2000, when it was renamed to reflect its inclusion of both corporate and non-corporate issuers. Index history is available back to The US Credit Index is a subset of the US Government/Credit Index and the US Aggregate Index. Barclays Capital U.S. Aggregate Securitized - CMBS: The U.S. CMBS Investment Grade Index measures the market of conduit and fusion CMBS deals with a minimum current deal size of $300mm. The index is divided into two subcomponents: the U.S. Aggregate-eligible component, which contains bonds that are ERISA eligible under the underwriter's exemption, and the non-u.s. Aggregate-eligible component, which consists of bonds that are not ERISA eligible. The U.S. CMBS Investment Grade Index was launched on January 1, Barclays Capital U.S. Aggregate MBS: The U.S. Mortgage-Backed Securities (MBS) Index covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Introduced in 1986, the GNMA, FHLMC, and FNMA fixed-rate indices for 30- and 15-year securities were backdated to January 1976, May 1977, and November 1982, respectively. Balloon securities were added in 1992 and removed on January 1, year securities were added in July On April 1, 2007, agency hybrid adjustable-rate mortgage (ARM) passthrough securities were added to the index. Hybrid ARMs are eligible until 1 year prior to their floating coupon date. Barclays Capital U.S. Aggregate ABS: The U.S. Fixed-Rate Asset-Backed Securities (ABS) Index covers fixed-rate ABS with the following collateral types: credit cards, autos, home equity loans and stranded-cost utility (rate reduction bonds). To be included in the index, an issue must have a fixed-rate coupon structure, have an average life greater than or equal to one year, and be part of a public offering. Manufactured housing asset-backed securities were removed from the U.S. ABS Index on January 1, The index was introduced in January 1992 when it was also added to the U.S. Aggregate Bond Index in its entirety. Barclays Capital U.S. High Yield: The U.S. Corporate High-Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt. It was created in 1986, with history backfilled to July 1, The U.S. Corporate High-Yield Index is part of the U.S. Universal and Global High- Yield Indices. Barclays Capital U.S. Floating Rate Notes: On October 1, 2003, the US Floating-Rate Note (FRN) Index was launched, measuring the performance of investment-grade floating-rate notes across corporate and government-related sectors. This index is not part of the US Aggregate Index, which is a fixed coupon index. Barclays Capital Municipal High Yield: An unmanaged index consisting of non-investment grade, unrated or below Ba1 bonds. 56

58 Index Definitions The Hedge Fund Research Incorporated (HFRI) Fund of Funds Diversified Index is a non-investable product of diversified fund of funds. The Index is equal weighted (fund weighted) with an inception of January Fund of Funds classified as 'Diversified' exhibit one or more of the following characteristics: invests in a variety of strategies among multiple managers; historical annual return and/or a standard deviation generally similar to the HFRI Fund of Fund Composite index; demonstrates generally close performance and returns distribution correlation to the HFRI Fund of Fund Composite Index. A fund in the HFRI Fund of Funds Diversified Index tends to show minimal loss in down markets while achieving superior returns in up markets. The HFRI Equity Hedge (Total) Index consists of equity hedge strategies that maintain positions both long and short in primarily equity and equity derivative securities. The HFRI Equity Market Neutral Index consists of equity market neutral strategies that employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. The HFRI Fixed Income Convertible Arbitrage Index includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a convertible fixed income instrument. The HFRI Merger Arbitrage Index consists of merger arbitrage strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction. The HFRI Macro (Total) Index consists of investment managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. The HFRI Relative Value (Total) Index consists of strategies maintaining positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. The HFRI Event-Driven (Total) Index consists of strategies maintaining positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. The HFRI Distressed/Restructuring Index consists of distressed restructuring strategies that employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings. The HFRI Emerging Markets (Total) Index covers all 5 emerging markets: Asia Ex Japan, Russia/East Europe, Latin America, MENA, and Multi-Emerging market. The HFRI Yield Alternatives Index is comprised of yield alternatives strategies that employ an investment thesis predicated on realization of a spread between related instruments in which one or multiple components of the spread contains a derivative, equity, real estate, MLP, or combination of these or other instruments. Index results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index. 57

59 About Risk Debt Securities- Investors buy debt instruments primarily to profit through interest payments. Governments, banks and companies raise cash by issuing or selling debt securities to investors. Debt securities may be bought directly from those issuers or in the secondary trading markets. Some debt securities pay interest at fixed rates of return, while others pay interest at variable rates. Interest may be paid at different intervals. Some debt securities do not make regular interest payments, but instead are initially sold at a discount to the principal amount that is to be paid at maturity. The risks involved with investing in debt securities include (without limitation): Credit risk: The purchaser of a debt security lends money to the issuer of that security. If the issuer does not pay back the loan, the holder of the security may experience a loss on its investment. Maturity risk: A debt security with a longer maturity may fluctuate in value more than a debt security with a shorter maturity. Market risk: Like other securities, debt securities are subject to the forces of supply and demand. Low demand may negatively impact the price of a debt security. Interest rate risk: The value of debt securities usually changes when interest rates change. Generally, when interest rates go up, the value of a debt security goes down and when interest rates go down, the value of a debt security goes up. High yield securities (commonly referred to as junk bonds ) have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. Floating rate loans are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, borrower industry concentration, and limited liquidity. Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and are more vulnerable to changes in the economy. Equity Securities- Publicly held corporations may raise needed cash by issuing or selling equity securities to investors. When you buy the equity securities of a corporation you become a part owner of the issuing corporation. Equity securities may be bought on stock exchanges, such as the New York Stock Exchange, NASDAQ Stock Market, Inc. ("NASDAQ"), the American Stock Exchange, foreign stock exchanges, or in the over-the-counter market, such as NASDAQ's Over-the- Counter Bulletin Board. Investors buy equity securities to make money through dividend payments and/or selling them for more than they paid. The risks involved with investing in equity securities include (without limitation): Changing economic conditions: Equity securities may fluctuate as a result of general economic conditions, including changes in interest rates. Industry and company conditions: Certain industries or individual companies may come in and out of favor with investors. In addition, changing technology and competition may make the equity securities of a company or industry more volatile. Small Cap Stocks- The general risks associated with equity securities and liquidity risk are particularly pronounced for securities of companies with market capitalizations that are small compared to other publicly traded companies. These companies may have limited product lines, markets or financial resources or they may depend on a few key employees. Securities of small-capitalization companies may trade less frequently and in lesser volume than more widely held securities, and their values may fluctuate more sharply than other securities. They may also trade in the over-the-counter market or on a regional exchange, or may otherwise have limited liquidity. Growth Securities- Equity securities which typically trade at higher multiples of current earnings than other securities. Therefore, the values of growth stocks may be more sensitive to changes in current or expected earnings than the values of other securities. The principal risk of investing in growth stocks is that investors expect growth companies to increase their earnings at a certain rate that is generally higher than the rate expected for non-growth companies. If these expectations are not met, the market price of the stock may decline significantly, even if earnings showed an absolute increase. Growth stocks also typically lack the dividend yield that can cushion stock prices in market downturns. 58