June 27, Dear Plan Participant,

Transcription

1 Carol A. McFate, CFA Chief Investment Officer June 27, 2011 Dear Plan Participant, Effective July 29, 2011, the Diversified Inflation Fund (the Fund ) will be a new investment option available to participants invested in the Xerox 401(k) Savings Plan. To view the Fund s profile, please see the accompanying material. To make changes to your future fund elections, or to move existing assets into the Fund, log on to the Your Benefits Resources Web site at Why did we add this investment choice? Inflation is one of the biggest threats to a participant s purchasing power. The Xerox Retirement Investment Committee has approved the addition of this new investment choice, designed to provide returns in excess of inflation. The Fund s investment objective is to beat inflation, as measured by the Consumer Price Index (CPI), by 3% per year over the long term. What types of investments does the Fund hold? The Fund s portfolio manager pursues the investment objective by investing in securities that it expects will perform well during periods of rising inflation. It believes that a diversified, multi-asset approach is the best way to achieve the Fund s long-term investment objective. The Fund s investments include inflation-sensitive stocks in sectors such as energy, precious metals, climate change, natural resources and agriculture; commodities like industrial and precious metals; emerging markets inflation-linked bonds, and Treasury Inflation-Protected Securities (TIPS). In Figure 1, you can see how broad asset classes have performed over the past several decades when we ve experienced falling, stable, and rising inflation. Historically, the kinds of securities included in the Fund have performed well in times of rising inflation, whereas traditional stock and bond funds have generated negative returns. Furthermore, the asset classes represented in the Fund may provide additional diversification benefits, as these types of securities are generally not widely held by plan participants.

2 Figure 1: How has the Fund performed and who is the investment manager? Wellington Management Company, LLP has been selected as the investment manager of the Fund. The underlying fund, which launched in April 2010, is relatively new and does not have a long track record. The portfolio management team at Wellington Management has managed inflation sensitive portfolios since For Periods Ending March 31, months 6 months Since Inception Diversified Inflation Fund 4.4% 13.3% 16.7% CPI+3% The Diversified Inflation Fund was launched in April Performance illustrated above begins on April 30, 2010 and is net of investment management expenses. Performance returns for periods less than one year are not annualized. Past performance is not necessarily indicative of future results. Will there be a redemption fee associated with the Diversified Inflation Fund? Yes, the Fund will charge a redemption fee of 1% for units transferred out of the Fund if such units are held for less than 30 days. As you know, the Xerox 401(k) Savings Plan funds are intended to be long-term investments. Excessive trading reduces returns to long-term investors as it results in higher trading costs and lower returns. The redemption fee is intended to discourage excessive trading by participants. Any redemption fees assessed on the Fund will remain in the Fund. 2

3 How can I decide if the Diversified Inflation Fund is right for me? As the Fund s investment approach is designed to perform well in times of rising inflation, if you expect or seek to guard against the effects of inflation you may want to consider allocating a portion of your retirement assets to the Fund. Keep in mind that the Fund is designed to be a long-term investment. Deciding what to invest in depends on many factors including your age, risk tolerance, and time horizon. Before investing in any Fund, including this Fund, you need to decide if it s an appropriate investment given your particular goals and circumstances. Additionally, you need to understand and be comfortable with the risks associated with an investment in the Fund. There are risks associated with US and non-us stock, fixed income, derivatives and commodities. These risks are detailed in the accompanying material. Over the short or long term, an investment in the Fund may lose money. Sincerely, Footnotes to Figure 1: Source: Wellington Management Company, LLP *Periods analyzed are January 1973 through December 2010, except for TIPS which is based on March 1997 through December Bonds are represented by Barclays Capital US Aggregate Index since January 1976, Barclays US Government Bond Index from January 1973 to December Real returns are based on US CPI. A rising inflation period is defined as any month when year-over-year US CPI rose by +0.3% or more relative to the previous month; a stable inflation period is defined as any month when year-over-year US CPI was between -0.3% and +0.3% relative to the previous month; a falling inflation period is defined as any month when year-over-year US CPI fell by -0.3% or more relative to the previous month. Index Real Returns is defined as the nominal index return minus CPI. 3

4 Tier 2: Focused Strategy Actively Managed Funds Diversified Inflation Fund Fund Facts Fund Category: Specialty Manager: Wellington Management Company, LLP Investment Objective: The Fund seeks to provide long-term returns in excess of inflation, as represented by CPI +3%, by investing in asset categories that can offer stronger performance in rising inflation environments. This Fund is moderate to aggressive and is invested in fixedincome securities, stocks and commodity-related securities globally. Among asset classes, stocks are typically considered more risky than bonds, and commodities can be more risky than stocks. Since the portfolio also invests in bonds, it has the potential to be less risky than either stocks or commodities alone. The Fund can lose money over the short or even longer term, and in either a rising or falling inflationary environment. Performance As of December 31, 2010 (See Notes on Performance) 3-mo 6-mo Since Inception Diversified Inflation Fund 8.5% 19.5% 11.8% CPI +3% Notes on Investment Performance Returns are shown net of management expenses. Benchmark results are the CPI +3% Index. Diversified Inflation Fund was launched in April Performance illustrated above begins on April 30, Past results are not necessarily indicative of future performance. Risk/Return Profile Potential Return Income Index Funds International Stock Index Small Cap Stock Index Mid Cap Stock Index Large Cap Stock Index Bond Index Potential Risk Global REIT Diversified Inflation Bond Actively Managed Funds Small Cap Stock Mid Cap Stock Large Cap Stock International Stock Xerox Stock How Your Money Is Invested The Fund utilizes a diversified, multi-asset approach, which invests in asset classes that have historically performed well during periods of rising inflation. The Fund s investments include inflation-sensitive stocks, in sectors such as energy, precious metals, climate change, natural resources and agriculture; commodities, emerging markets inflation-linked bonds and Treasury Inflation-Protected Securities (TIPS). As inflationary conditions evolve, the managers will include exposure to sectors and markets they believe will do well, given their view on the sources of future inflation. The Fund strives to provide long-term returns in excess of inflation, as represented by CPI +3%, with moderate-to-large fluctuations in value Review Since the Fund s inception in April 2010, the Fund has returned 11.8%, significantly outperforming its benchmark return of 3.2%. The year experienced significant volatility as concerns surrounding a double-dip recession in the U.S. mounted, weak U.S. jobs reports were released, and economic uncertainty in other regions of the world persisted, namely in Europe, given fiscal stability concerns. U.S. equities generated another year of double-digit returns principally as a result of supportive monetary and fiscal stimulus programs implemented globally. In the U.S., during the fourth quarter, the Fed implemented QE2 (the second round of quantitative easing introduced by the Federal Reserve; a program designed to further stimulate the economy) and the current Administration passed the extension of the Bush-era tax cuts. These two programs put equity markets on an upward trajectory for the rest of the year. All asset classes within the Fund posted positive returns for the year. As of December 31, 2010, TIPS comprised approximately 50% of the Fund. The Barclays Capital TIPS Index returned 6.3% for the year. The other sectors of the portfolio, which include global natural resource stocks, as represented by the S&P Global Natural Resource Index, returned 11.0% for the year. Commodities, as represented by the DJ-UBS Commodity Index, returned 16.8% for the year. Annual Expense Ratio Investment Management % Plan Administration % Total Fund Expenses 0.90% 1 Annual rate as of December 31, Average for 2010 as of December 31, 2010; rates may fluctuate in the future as asset levels and fixed fees change. 1

5 Appendix About Investment Risk Your investment return is determined by changes in the value of the investments held by the Fund and the reinvestment of the income earned on the Fund s investments and is reduced by applicable expenses, including investment management fees and other expenses. The value of the underlying investments and the value of the Fund may fluctuate on any given day; therefore, the value of your investment in a Fund when redeemed may be more or less than its original cost. Performance of a Fund for dates subsequent to the date of the most recent performance information presented herein may be different. Past performance is not a guarantee of future results. Moreover, there can be no assurance that the Fund will achieve its investment objective. In addition to reviewing the attached description of the Diversified Inflation Fund, please carefully read the following descriptions of certain investment risks that are inherent in an investment in the Fund. General Risks Associated with Equity Investments The price of equity securities may fluctuate in response to issuer, market, political, economic and other conditions, and these fluctuations, particularly in the short term, may be significant. Different equity securities may react differently to such conditions. Equity funds can be described in terms of the market capitalization of the companies they hold in their portfolio. Market capitalization is a commonly used measure of the size and value of a company and can be calculated by multiplying the current stock price per share by the number of outstanding shares. Large capitalization funds generally invest in companies with very large market capitalizations (e.g., greater than $12 billion). Mid capitalization funds generally invest in companies with midsize market capitalizations (e.g., from $1.5 billion to $12 billion). Small capitalization funds generally invest in companies with smaller market capitalizations (e.g., less than $1.5 billion). Securities issued by mid and small cap companies may be more vulnerable to adverse business and economic developments than are securities issued by large cap companies and, therefore, may be more susceptible to fluctuations in price. Stocks of small-size companies have special risks associated with them, such as limited product lines, markets and financial resources, as well as greater market volatility than securities of larger and more-established companies. Risks Associated with Fixed-Income Investments Funds investing in fixed-income instruments are subject to several risks including, but not limited to, credit quality, interest rate (duration) and mortgage prepayment risk. As the credit quality of a fixed-income security decreases, generally the risk of credit-related losses increases. In addition, the value of fixed-income securities will change with prevailing interest rates. With respect to duration a cash-flow-weighted measure of how long it takes for you to be paid back by the borrower the longer the duration, the more interest rate risk you are assuming. Mortgage prepayment risk is the risk that a mortgage will be prepaid when interest rates fall below the rate paid on the mortgage or the risk that it will not be prepaid when rates rise above the rate paid on the mortgage. A fund that invests in non-investment-grade, fixed-income securities takes on a significantly greater level of credit risk, price volatility and liquidity risk than does a fund that invests in high-quality, investment-grade, fixed-income securities. Highquality, fixed-income securities include fixed-income securities rated investment grade (Baa3/BBB or above) by one or more of the nationally recognized rating agencies or, if unrated by the nationally recognized rating agencies, are deemed to have similar risk characteristics. 2

6 High-yield securities are those rated below investment grade (Baa3/BBB ) by one or more of the nationally recognized rating agencies or, if unrated by the nationally recognized rating agencies, are deemed to have similar risk characteristics. Bonds that are not rated investment grade generally are considered to pose greater investment risks than bonds that are rated investment grade. Lower-quality, high-yield bonds may fluctuate in value more than higher-quality bonds and, during periods of market volatility, may be more difficult to sell at the desired time and price. Additionally, high-yield securities may have more difficulty making scheduled payments of principal and interest than would investment-grade, fixed-income securities. Risks Associated with International Investments Investments in securities of non-u.s.-domiciled issuers and securities denominated in foreign currencies could be affected by political and financial instability abroad and may be more volatile than U.S. investments. In addition, there is the possibility of adverse exchange control regulations, expropriation, taxation, or limitations on the removal of securities or other assets from foreign countries. Many non-u.s. financial markets are less liquid and subject to less government supervision than U.S. markets are, and may have less-developed trading markets and exchanges. Many non-u.s. companies are not subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to U.S. companies. Commodities Risk Exposure to the commodities markets may be more volatile than investments in traditional equity or fixed-income securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, interest rate changes or events affecting a particular commodity or industry. Risks Associated with Currency Hedging and the Use of Derivatives The Fund may invest a portion of its assets in securities denominated in foreign currencies. The values of these securities will fluctuate based on changes in currency exchange rates. The Fund may employ a variety of investments and techniques to hedge against currency and other risks or to gain market exposure, including spot and forward foreign exchange transactions and currency swaps, listed or over-the-counter options on currencies, currency futures and options on currency futures, and other derivative instruments. Derivatives can be volatile, and the market for many such instruments is or can become illiquid, which may impact their prices radically. Utilizing these instruments at inopportune times may lower investment returns or result in a loss significantly greater than the investment cost of the derivative instrument itself. Risks Associated with Frequent Trading in Fund Shares or Units Frequent purchases and sales of Fund shares can reduce the returns to long-term shareholders/unit holders in various ways, such as by increasing costs to a fund (such as brokerage commissions), or by requiring the Fund to hold a greater portion of assets in cash than would normally be optimal, or by diluting the value of Fund shares or units of long-term shareholders/unit holders where fluctuations in markets are not fully priced into the Fund s net asset value. In addition, the Fund imposes a redemption fee to discourage excessive or short-term trading of Fund shares or units. There is a risk that a fund s policies and procedures, including redemption fees, will prove ineffective in whole or in part in preventing frequent trading. Consistent with applicable law and a fund s constituent documents, the Fund may later alter its policies at any time without prior notice. 3