MAY 11, 2015 Questions and answers about Russell Tax-Managed Model Strategies allocation changes Summary The global financial markets are dynamic, never constant nor predictable. We believe investors should have a welldiversified portfolio that is built on a foundation of strong capital markets research. Russell follows a regular, methodical process of evaluating the asset allocation of our multi-asset portfolios. We review the positions of our portfolios in relation to current market conditions and our capital markets forecasts annually to determine if strategic asset allocation shifts are required. Russell s Tax-Managed Model Strategies are held primarily in taxable accounts by tax sensitive investors. Because model reallocations have tax implications, the Russell Tax-Managed Model Strategies reallocate less frequently than Russell s other multi-asset portfolios. The last reallocation for the Russell Tax-Managed Model Strategies was in 2011. Now, however, Russell has developed two new funds with tax-aware strategies. These funds are intended to be used in the Russell Tax-Managed Model Strategies to help further the models tax-managed objectives. By adding the Russell Tax-Managed International Equity Fund and the Russell Tax Exempt High Yield Bond Fund, the overall allocation to tax-aware funds in the Tax-Managed Model Strategies will increase to more than 90%. The Russell Tax-Managed International Equity Fund will provide tax-managed exposure to non-u.s. emerging and developed markets. The Russell Tax Exempt High Yield Bond Fund will provide access to high yield municipal debt securities whose income is exempt from federal income tax. The reallocation of the Russell Tax-Managed Model Strategies is scheduled to occur on or about June 1, 2015. The objective for the reallocation is to strive to achieve high after-tax returns, which is achieved by 1) incorporating two new tax-aware funds, thereby increasing exposure to funds that are explicitly tax-aware; and 2) adjusting the modest amount of diversifying assets in the portfolio. THIS MATERIAL IS FOR FINANCIAL PROFESSIONAL USE ONLY AND NOT FOR DISTRIBUTION TO CURRENT OR POTENTIAL INVESTORS. RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES
Comparison of current vs. new allocations for the Russell Tax-Managed Balanced Model Strategy Please see the document titled Comparison of Current and New Allocations for the Russell Tax-Managed Model Strategies, Effective on or around June 1, 2015 for fund allocation information for all the Tax-Managed Model Strategies. What new funds are being added and why? The Russell Global Infrastructure Fund is being added to provide potential diversification within the alternatives asset class. While not tax-managed, Russell believes this fund has the potential to enhance the Models return while also contributing to portfolio diversification. The Russell Tax-Managed International Equity Fund will replace the Russell International Developed Markets Fund and the Russell Emerging Markets Fund, providing tax-managed exposure to both non-u.s. developed and emerging markets equities. Adding the Russell Tax Exempt High Yield Bond Fund to the Tax-Managed Model Strategies is intended to help improve the tax efficiency of the models by increasing expected after-tax returns. This Fund seeks to provide a RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES / P 2
higher level of current tax exempt income than the Russell Tax Exempt Bond Fund and provides diversification within Fixed Income that allows for the removal of the Russell Global Opportunistic Fund, which is not tax-aware. Which funds are being removed and why? The Russell International Developed Markets Fund and Russell Emerging Markets Fund will be replaced by the new Russell Tax-Managed International Equity Fund. The Russell Global Opportunistic Credit Fund is being removed to make way for the Russell Tax Exempt High Yield Bond Fund that Russell feels will offer improved after-tax return potential at the Model level. Why is equity exposure being added to four of the models, but being reduced in the most aggressive Equity Growth Tax-Managed Model Strategy? Equity exposure is increasing in the models to align their risk profile with the Russell Model Strategies. Each set of models is strategically positioned to reflect Russell s view on fixed income in a rising rate environment that is likely to persist over several years. In the Equity Growth model, with the inclusion of the new funds and reduction in equities, volatility can potentially be reduced while the same level of growth potential is maintained. How are the weighted average expenses of the Russell Tax-Managed Model Strategies changing? The blended expense ratios of the Tax-Managed Model Strategies are not expected to materially change as a result of the reallocations. What are the tax implications of the reallocation to shareholders in the Russell Tax-Managed Models reallocation? Russell limits the number of reallocations and changes for the tax-managed models, as changes may have tax consequences for investors. For the Russell Tax-Managed International Equity Fund, possible tax consequences will vary from investor to investor and will be a function of each investor s adjusted cost basis in the underlying shares being bought or sold. The majority of any tax consequence will likely come from two events: Liquidating shares of the Russell International Developed Markets Fund and transitioning to the new Russell Tax-Managed International Equity Fund Liquidating shares of the Russell Emerging Markets Fund and transitioning to the new Russell Tax-Managed International Equity Fund (this tax-managed fund includes emerging markets) For example, an investor with $100,000 in the Balanced Tax-Managed Model Strategy would have approximately: Before reallocation: o $17,000 in the Russell International Developed Equity Fund (17% target weight). o $4,000 in the Russell Emerging Market Fund (4% target weight). After reallocation: o $20,000 invested in new Russell Tax-Managed International Equity Fund will be purchased (20% target weight). Similarly, for the Russell Tax Exempt High Yield Bond Fund, possible tax consequences will vary from investor to investor and will be a function of each investor s adjusted cost basis in the underlying shares being bought or sold. Introduction of this fund represents a liquidation of a third fund, the Russell Global Opportunistic Credit Fund. Additionally, a portion of an investor s shares of the Russell Tax Exempt Bond Fund will be sold in order to invest in RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES / P 3
the Russell Tax Exempt High Yield Bond Fund. While the appreciation of the Russell Tax Exempt Bond Fund has not been as great as the equity funds, this event could potentially cause a capital gain distribution. Please see reallocation table for the specific allocation changes by Model. This includes the removal of the Russell Global Opportunistic Credit Fund, Russell Emerging Markets Fund and the Russell International Developed Markets Fund and the introduction of the new Russell Tax Exempt High Yield Bond Fund and Russell Tax- Managed International Equity Fund, and other changes related to new target weights. These changes may have tax consequences depending on the adjusted cost basis of underlying shares being sold. Specific questions about tax consequences of clients Model Strategy account reallocation should be directed to your home office or a tax advisor. When will the Tax-Managed Model Strategy quarterly fund performance fact sheet reflect the June allocation changes? The second quarter, 2015 (June 30, 2015) Russell Tax-Managed Model Strategy fact sheets, which will be published around the second week of July, will reflect the new allocations that will take effect on or around June 1. The performance data will be as of June 30, 2015 and will reflect the performance incorporating the historical and new underlying fund allocations. Information about the new Russell Tax-Managed International Equity Fund This fund provides tax-managed exposure to equity securities in emerging and developed international markets, mostly via investments in large and medium capitalization companies. At launch, this new Fund will be the only multi-manager tax-managed international equity mutual fund available in the U.S. marketplace for advisors to use with their clients. Investment objective: The Fund seeks to provide long term capital growth on an after-tax basis. Primary Benchmark: Russell Global ex-u.s. Large Cap Index (Net Dividend) Investment strategies: The Fund has a non-fundamental policy to invest, under normal circumstances, at least 80% of the value of its net assets plus borrowings for investment purposes in equity securities. The Fund invests principally in equity securities, including common stocks and preferred stocks, issued by companies economically tied to non-u.s. countries, including emerging market countries, and in depositary receipts. The Fund s securities are denominated principally in foreign currencies and are typically held outside the U.S. The Fund s investments span most of the developed nations of the world to maintain a high degree of diversification among countries and currencies. Under normal market conditions, the Fund will invest at least 40%, and may invest up to 100%, of its assets in equity securities economically tied to non-u.s. countries. The Fund may also invest in equity securities of U.S. companies. The Fund considers the following countries to have developed markets: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. As a general rule, the Fund considers emerging market countries to include every other country. The Fund invests principally in large and medium capitalization companies, but may also invest in small capitalization companies. For more information on the Russell Tax-Managed International Equity Fund, please see the fund-specific materials available on RussellLINK, or contact your Russell sales associate. RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES / P 4
Information about the new Russell Tax Exempt High Yield Bond Fund The Russell Tax Exempt High Yield Bond Fund will provide access to high yield municipal debt securities whose income is exempt from federal income tax. Investment objective: The Fund seeks to provide a high level of current income that is exempt from federal tax, and as a secondary objective, total return. Primary Benchmark: 40% Barclays Municipal Bond Index / 60% Barclays High Yield Municipal Bond Index Investment strategies: The Fund has a fundamental policy to invest, under normal circumstances, at least 80% of the value of its net assets plus borrowings for investment purposes in fixed income investments the income from which is exempt from federal income tax. The Fund invests principally in municipal debt obligations providing federal tax-exempt interest income, but may invest up to 20% of the value of its net assets plus borrowings for investment purposes in municipal debt securities, the interest on which is subject to the alternative minimum tax. The Fund generally intends to invest a substantial portion of its assets in medium- to lowquality municipal debt securities including municipal debt securities that are the subject of bankruptcy proceedings, that are in default as to the payment of principal or interest, or that are rated in the lowest rating category by a nationally recognized statistical rating organization ( NRSRO ). The Fund generally expects to invest between 30% and 60% of its assets in municipal debt securities that are rated below investment grade by one or more NRSROs (commonly referred to as high-yield or junk bonds ), including those in default, or in unrated securities judged to be of comparable quality. The Fund may invest in industrial development bonds. The Fund employs multiple money managers unaffiliated with RIMCo, each with its own expertise in the municipal debt securities market. RIMCo manages the portion of the Fund s assets that RIMCo determines not to allocate to the money managers. Assets not allocated to managers include the Fund s liquidity reserves and assets which may be managed directly by RIMCo to effect the Fund s investment strategies and/or to actively manage the Fund s overall exposures to seek to achieve the desired risk/return profile for the Fund. RIMCo may use strategies based on indexes that represent the desired exposures, including index replication and optimized index sampling, or utilize quantitative or qualitative analysis or quantitative models designed to assess Fund characteristics and identify a portfolio which provides the desired exposures. A portion of the Fund s net assets may be illiquid securities. The Fund may invest in commercial paper. The Fund may also invest in puts, stand-by commitments and demand notes (including variable rate demand notes). The Fund may enter into repurchase agreements. The Fund usually, but not always, seeks to limit the effect of holding cash reserves on the Fund s exposures by investing in pre-refunded municipal bonds. The Fund usually, but not always, invests in pre-refunded municipal bonds to provide the Fund with longer duration exposure. Duration is a measure of sensitivity to interest rate changes and not time. RIMCo may choose to invest in pre-refunded municipal bonds to manage Fund exposures in order to seek to achieve the desired risk/return profile for the Fund. For more information on the Russell Tax Exempt High Yield Bond Fund, please see the fund-specific materials available on RussellLINK, or contact your Russell sales associate. RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES / P 5
For more information: Call Russell at 800-787-7354 or visit www.russell.com Fund objectives, risks, charges and expenses should be carefully considered before investing. A summary prospectus, if available, or a prospectus containing this and other important information can be obtained by calling 800-787-7354. Please read a prospectus carefully before investing. www.russell.com Mutual fund investing involves risk. Principal loss is possible. Non-U.S. markets, which may include developed, emerging, and frontier markets, entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes and foreign taxation. Non-U.S. securities may be less liquid and more volatile than U.S. securities. The risks associated with non-u.s. securities may be amplified for emerging markets securities. Because frontier markets are among the smallest, least developed, least liquid, and most volatile of the emerging markets, investments in frontier markets are generally subject to a greater risk of loss than investments in developed or traditional emerging markets. Small capitalization (small cap) investments generally involve stocks of companies with a market capitalization based on the Russell 2000 Index. Investments in small cap, micro cap, and companies with capitalization smaller than the Russell 2000 Index are subject to the risks of common stocks, including the risks of investing in securities of large and medium capitalization companies. Investments in smaller capitalization companies may involve greater risks as, generally, the smaller the company size, the greater these risks. In addition, micro capitalization companies and companies with capitalization smaller than the Russell 2000 Index may be newly formed with more limited track records and less publicly available information. Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase a Fund's exposure to risks associated with rising rates. Investment in non-u.s. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries. Investments in infrastructure-related companies have greater exposure to the potential adverse economic, regulatory, political and other changes affecting such entities. Investment in infrastructure related companies are subject to various risks including governmental regulations, high interest costs associated with capital construction programs, costs associated with compliance and changes in environmental regulation, economic slowdown and surplus capacity, competition from other providers of services and other factors. Investment in non-u.s. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries. Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets. Model Strategies represent target allocations of Russell funds; these models are not managed and cannot be invested in directly. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group Copyright Russell Investments 2015. All rights reserved. Securities products and services offered through Russell Financial Services, Inc., member FINRA, part of Russell Investments. First used: May 2015 RFS 15-15143 RUSSELL INVESTMENTS // QUESTIONS AND ANSWERS ABOUT RUSSELL TAX-MANAGED MODEL STRATEGY ALLOCATION CHANGES / P 6
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