October 12, 2012 Second Floor, Financial Services ...€¦ · 09/11/2012 · Joseph Ciacciarelli...

Gwinnett County, Georgia Investment Committee of the RPMC

October 12, 2012

9:30 a.m. Second Floor, Financial Services - Dogwood Conference Room

Agenda

Call to order

1. Approval of Agenda*

2. Approval of Investment Committee Minutes* ML

3. Securities Lending BNY Mellon

4. Third Quarter 2012 Report Great-West a) Q3 2012 Performance Report b) Q3 2012 SVF Statement c) Q3 2012 Economic Review

5. Alerts for 401a/ 457b Mutual Funds Great-West

6. Janus Global Calculation Anomaly Great-West

7. Third Quarter Investment Performance Report UBS

a) Q3 2012 Performance Report b) Q4 2012 Investment Strategy Guide c) Downgraded Bonds d) Watch List Chart e) Q3 2012 Fee Schedule

8. Asset Allocation Discussion UBS 9. Status Update on Large Cap Manager Search UBS 10. 2013 Work Plan ML

Adjournment*

*Action Items

Gwinnett County, Georgia Investment Committee of the RPMC

Regular Meeting Minutes October 12, 2012 9:30 a.m.

Dogwood Conference Room - GJAC Members Present: Mike Ludwiczak, Karen Karasinski, Bill Rodenbeck, Phil Hoskins, Paul Turner, Staff Present: Aaron Bovos, Debbi Davidson, Megan Ward, Rick Reagan Others Present: Outside Counsel - Ed Emerson; UBS Members - Ray Vuicich, Allen Wright; Great West Members - Donald Erwin, Fred Minot; Advised Assets Group Members (via teleconference) - Al Cunningham, Michael Baker

Chairman Mike Ludwiczak called the meeting to order at 9:31 a.m.

1. Approval of Agenda Action: Motion to Approve: Phil Hoskins; Second: Karen Karasinski. Vote (5-0); Ludwiczak – Yes; Rodenbeck – Yes; Hoskins – Yes; Karasinski – Yes; Turner – Yes.

2. Approval of Investment Committee Minutes Regular Meeting: 8:30 A.M. September 14, 2012 Action: Motion to Approve: Karen Karasinski; Second: Phil Hoskins. Vote (5-0); Ludwiczak – Yes; Rodenbeck – Yes; Turner – Yes; Hoskins– Yes; Karasinski – Yes.

3. Review of Investment Policy for 401(a)/ 457 Great-West

Janus Global Select T Style Drift The committee discussed tracking, reporting, and communicating when style drift of investment occurs. After reviewing the criteria on the investment policy on pg. 8 - item 3, the Committee decided no formal policy change is necessary. When changes that fit this criteria occur in the future, a document will be created to identify which funds are being monitored and for what reasons and presented to the RPMC. There will also be a monthly report from Great West to monitor these changes.

4. Overview of Stable Value Fund Great-West Al Cunningham of Advised Assets Group did an overview of the County’s Stable Value Fund via teleconference and where the fund stands as of August 31, 2012. The full presentation is available on the County website. Al Cunningham and Michael Baker terminated their teleconference connection into the meeting at the conclusion of this item. 5. Investment Policy Issues with Sands Large Cap ML/ Ed Emerson

The committee discussed a request from Sands to amend the investment policy during contract negotiations. The committee decided that Sands should conform to our current policy as-is. Allen Wright will discuss this with Sands and ask for a new revised proposal.

6. 2013 Goal Setting I.C., UBS, G-W, B.C.

The committee began discussing a 2013 work plan that includes items the group wishes to accomplish over the next calendar year. 7. Securities Litigation ML Discussion about securities litigation monitoring services and whether the County should look into hiring a firm for this service occurred. Feedback will be gathered from other counties that are currently using these services before any decisions are made. 8. Comments on Vendor Renewals BNY & Bryan Cave ML Committee discussed experiences regarding both vendors and comments will be shared by Mike Ludwiczak in next RPMC meeting. 9. Topics for Next Meeting - Securities Lending - Monthly Reports from Great West - Review Janus Global Select T calculation anomaly - 2013 Work Plan

Adjournment Action: Motion to Adjourn: Phil Hoskins; Second: Karen Karasinski. Vote (5-0); Ludwiczak – Yes; Rodenbeck – Yes; Hoskins – Yes; Karasinski – Yes; Turner – Yes.

Meeting was adjourned at 11:32 a.m.

Next meeting is Friday November 9, 2012 at 8:30 a.m. in the DoFS Dogwood Conference Room on the 2nd floor of GJAC at 75 Langley Drive Lawrenceville, GA 30046.

Information Security Identification: Confidential

Securities Lending

November 9, 2012

Presentation to:

Gwinnett County Public Employee Retirement Plans

Information Security Identification: Confidential2

I. Program Overview

II. Intrinsic Lending Overview

III. Asset Management Overview

IV. Risk Management

V. Performance

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James SlaterGlobal Head of

Securities Lending

Larry MannixChief Investment Officer

Cash Collateral Reinvestment Strategies

Kurt WoetzelBNY Mellon

Head of Global Operations, Technology and Collateral Services

William KellyDeputy Business Head

and Global Head of Client Management

& Business Development

Nancy SullivanGlobal Head of

Fixed Income Lending

Robert ChiuchGlobal Head of Equity Trading

Jeannine LehmanSecurities Lending Business Executive

for EMEA

Michael McAuleyGlobal Head of Product Strategy

David DiNardoChief Operating Officer


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Larry MannixChief Investment Officer

Cash Collateral Reinvestment Strategies

Robert PiersonStrategic Investments

Robert Fort, Jr.Manager

Core Strategy

Portfolio ManagersJulian AnantarowPeter Lyons, CFARobert Mignemi

Steve Russo

Charles FelixManager

Term Strategy

Senior Portfolio ManagersDessie Bonacci

James McGovernBrian Wiese

Portfolio ManagersPaul Brockway1

Simon Toon1

Associate Portfolio Manager

James Douglas1

James SlaterGlobal Head of

BNY Mellon Securities Lending

J. Charles CardonaChief Executive Officer

BNY Mellon Cash Investment Strategies


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J. Charles CardonaChief Executive Officer

BNY Mellon Cash Investment Strategies

Thomas GamelloSenior Credit Manager

William Browne, CFACo-Manager of Credit Risk & Research

Patrick SeidenSenior Credit Analyst

Walidah Abdul KareemJunior Credit Analyst

Rebecca GlenSenior Credit Analyst

Dan BeagleCo-Manager of Credit Risk & Research

Corwin LeungSenior Credit Analyst

Robert MotroniJunior Credit Analyst

Guri VirdiHead of CIS Risk

Julie Hung FischerSenior Credit Analyst

Firmino De SousaSovereign Analyst

Quincy Hershey, CFACredit Analyst

Tomaisha AndersonCredit Analyst

Keith LawlerSenior Credit Analyst

Daniel Gerhardy, CFACredit Analyst


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Brian Rogan BNY Mellon

Chief Risk Officer

Joseph CiacciarelliChief Risk Officer

Pershing/BDS/GCS

Evan FraserSenior Risk Manager

Risk Management

Enterprise-wide Market Risk

Guri VirdiHead of the

CIS Market Risk Group

George MalangaEnterprise-wide

Credit Risk

Mark Rogers Global Financial Services (Borrower Underwriting)

Mark MusiBNY Mellon

Chief Compliance & Ethics Officer

Scott ShawBroker Dealers,

Clearing & Trading (Compliance & Ethics)

TBDInvestment Management

Global Head of Risk & Compliance

(CIS Oversight)

David GilhooleyHead of Capital Markets &

Treasury Risk Management

Brendon DonnellanInvestment Management

U.S. Head of Risk & Compliance

(CIS Oversight)

Karen CaddickSenior Risk OfficerRisk ManagementSecurities Lending

Felicia Antonio Global Liquidity Services/

Corporate Initiatives(Compliance & Ethics)


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• Conservative credit policy and procedures

• Dedicated research team• Regular reviews• Oversight committees• Conservative guidelines• Trading and control systems

Client retains risk

Borrower Operational Investment

Risk Borrower does not return lent security

Interest or dividends are not posted, delivery fails, failure to adequately mark to market, etc. as a result of negligence or misconduct of BNYM

Investment subject to interest rate risk, credit risk, liquidity risk and market risk

Mitigating Factor

BNYM provides remedy as outlined in the Securities Lending Authorization Agreement

Controls• Independent approval• Continuous review• Diversification• Mark-to-Market• Borrowing limits• Limited # of borrowers• Contractual borrower • default provisions

• Extensive policies/procedures• Cross-training• Contractual settlement• Automatic posting of distributions• Contractual provisions

BNYM provides remedy as outlined in the Securities Lending Authorization Agreement

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Gwinnett County Public Employee Retirement Plans 2010 Asset Class Lendable On-Loan % On-Loan Gross Earnings Client Earnings Spread Return

Agencies 1,852,039 5,713 0.31% $11 $7 0 0MBS 29,856,511 0 0.00% $0 $0 0 0Treasuries 70,494,977 31,702,646 44.97% $55,822 $33,496 18 8US Corporates 79,623,068 3,486,273 4.38% $6,963 $4,179 20 1US Equities 244,930,079 37,152,408 15.17% $71,333 $42,823 19 3Non-US Equities 55,095,271 10,567 0.02% $1,198 $719 0 0Total 481,851,945 72,357,607 15.02% $135,327 $81,224 19 3

Gwinnett County Public Employee Retirement Plans 2011 Asset Class Lendable On-Loan % On-Loan Gross Earnings Client Earnings Spread Return

Agencies 179,272 31,786 17.73% $39 $23 0 0MBS 42,583,470 0 0.00% $0 $0 0 0Treasuries 91,805,202 61,777,663 67.29% $110,583 $66,352 18 12US Corporates 84,278,072 6,083,205 7.22% $10,241 $6,147 17 1US Equities 256,827,100 31,170,517 12.14% $67,568 $40,555 22 3Non-US Equities 73,468,071 67,607 0.09% $1,611 $967 0 0Non-US Fixed Income 113,442 0 0.00% $0 $0 0 0Total 549,254,631 99,130,778 18.05% $190,043 $114,044 19 3

Gwinnett County Public Employee Retirement Plans January - September 2012 Asset Class Lendable On-Loan % On-Loan Gross Earnings Client Earnings Spread Return

Agencies 5,563,800 673,153 12.10% $2,653 $1,592 53 6MBS 53,179,111 0 0.00% $0 $0 0 0Treasuries 95,825,785 71,674,451 74.80% $60,408 $36,247 11 8US Corporates 86,776,331 682,425 0.79% $2,578 $1,547 50 0US Equities 294,564,389 9,322,656 3.16% $38,575 $23,151 55 2Non-US Equities 75,566,076 747,740 0.99% $7,437 $4,462 0 0Non-US Fixed Income 580,311 0 0.00% $0 $0 0 0Total 612,055,803 83,100,424 13.58% $111,651 $66,999 18 2


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2011 January - September 2012

Rank Cusip Top 10 US Governments Client Earnings Rank Cusip Top 10 US Governments Client Earnings

1 912828RC6 UNITED STATES TREASURY NOTE $17,380 1 912828SJ0 UNITED STATES TREASURY NOTE $3,8512 912828PZ7 UNITED STATES TREASURY NOTE $4,875 2 912828SF8 UNITED STATES TREASURY NOTE $2,8563 912828QA1 UNITED STATES TREASURY NOTE $3,728 3 912828SM3 UNITED STATES TREASURY NOTE $2,4044 912828RF9 UNITED STATES TREASURY NOTE $3,647 4 912828SV3 UNITED STATES TREASURY NOTE $2,3265 912828PX2 UNITED STATES TREASURY NOTE $2,416 5 912828SH4 UNITED STATES TREASURY NOTE $2,3086 912828QF0 UNITED STATES TREASURY NOTE $2,138 6 912828ST8 UNITED STATES TREASURY NOTE $2,1737 912828QS2 UNITED STATES TREASURY NOTE $2,003 7 912828SC5 UNITED STATES TREASURY NTS $1,7338 912828RU6 UNITED STATES TREASURY NOTE $1,856 8 912828SD3 UNITED STATES TREASURY NOTE $1,7169 912828RQ5 UNITED STATES TREASURY NOTE $1,794 9 912828TJ9 UNITED STATES TREASURY NOTE $1,507

10 912828QJ2 UNITED STATES TREASURY NOTE $1,760 10 31398AU34 FEDERAL NATL MTG ASSN $1,439

Rank Cusip Top 10 US Equities Client Earnings Rank Cusip Top 10 US Equities Client Earnings

1 252603105 DIAMOND FOODS INC $6,343 1 73179V103 POLYPORE INTERNATIONAL INC $2,7882 464286848 ISHARES MSCI JAPAN INDEX FUND $3,532 2 464287499 ISHARES RUSSELL MIDCAP INDEX F $2,2153 464286103 ISHARES MSCI AUSTRALIA INDEX F $2,897 3 80105N105 SANOFI $2,0534 80105N105 SANOFI $2,511 4 204386106 CIE GENERALE DE GEOPHYSIQUE-VE $1,7665 204386106 CIE GENERALE DE GEOPHYSIQUE-VE $1,371 5 464286103 ISHARES MSCI AUSTRALIA INDEX F $1,2946 617700109 MORNINGSTAR INC $888 6 464286848 ISHARES MSCI JAPAN INDEX FUND $1,2327 198516106 COLUMBIA SPORTSWEAR CO $849 7 198516106 COLUMBIA SPORTSWEAR CO $9758 608554101 MOLEX INC $825 8 393122106 GREEN MOUNTAIN COFFEE ROASTERS $9379 345550107 FOREST CITY ENTERPRISES INC $772 9 169905106 CHOICE HOTELS INTERNATIONAL IN $638

10 M22465104 CHECK POINT SOFTWARE TECHNOLOG $766 10 705560100 PEET'S COFFEE & TEA INC $586

Rank Cusip Top 10 US Corporates Client Earnings Rank Cusip Top 10 US Corporates Client Earnings

1 544152AB7 LORILLARD TOBACCO CO $849 1 544152AB7 LORILLARD TOBACCO CO $8672 02360XAM9 AMEREN ENERGY GENERATING CO $792 2 001055AJ1 AFLAC INC $2083 931142CR2 WAL-MART STORES INC $344 3 620076BB4 MOTOROLA SOLUTIONS INC $1384 460377AB0 ARCELORMITTAL USA LLC $322 4 105756BS8 BRAZILIAN GOVERNMENT INTERNATI $1165 893526DK6 TRANSCANADA PIPELINES LTD $292 5 37247DAK2 GENWORTH FINANCIAL INC $766 20173MAE0 GREENWICH CAPITAL COMME GG7 A4 $246 6 406216AZ4 HALLIBURTON CO $397 37247DAK2 GENWORTH FINANCIAL INC $213 7 06051GEQ8 BANK OF AMERICA CORP $288 87927VAW8 TELECOM ITALIA CAPITAL SA $163 8 460377AB0 ARCELORMITTAL USA LLC $269 172967FS5 CITIGROUP INC $148 9 06366RHA6 BANK OF MONTREAL $22

10 03938LAQ7 ARCELORMITTAL $144 10 90261AAB8 UBS AG STAMFORD CT $13

Gwinnett County Performance Report

Currency: Base Currency

Grouped by: Morningstar Category

Calculated on: 10/26/2012 2:44:11 PM

Exported on: 10/26/2012 2:46:47 PM

Group/Investment

Return

(Annualized)

US OE World Stock

Oppenheimer Global Y -1.10

Benchmark 1: MSCI World NR USD -2.15

Peer Group: Morningstar Category = US OE World Stock

Number of investments ranked

Peer Group Median -1.97

US OE Foreign Large Blend

Artisan International Inv -2.33

Dreyfus Intl Stock Index -5.64

Benchmark 1: MSCI ACWI Ex USA NR USD -4.12

Peer Group: Morningstar Category = US OE Foreign Large Blend



US OE Small Blend

Royce Low Priced Stock Svc 1.94

Benchmark 1: Russell 2000 TR USD 2.21

Peer Group: Morningstar Category = US OE Small Blend


Peer Group Median 1.70

US OE Intermediate-Term Bond

PIMCO Total Return Admin 8.65

Vanguard Total Bond Market Index Signal 6.53

Benchmark 1: Barclays US Govt/Credit 5-10 Yr TR USD 8.39

Peer Group: Morningstar Category = US OE Intermediate-Term Bond



US OE Large Growth

American Funds Growth Fund of Amer A 0.06

Fidelity Contrafund 2.81

Janus Twenty T 1.57

Benchmark 1: Russell 1000 Growth TR USD 3.24

Peer Group: Morningstar Category = US OE Large Growth



US OE Moderate Allocation

Fidelity Puritan 2.97

Great-West Moderate Profile I Init 2.86

Great-West Moderately Cnsrv Prfl I Init 3.61

10/1/2007

9/30/2012

5-Yr Return

Janus Balanced T 5.28

Benchmark 1: Morningstar Moderately Aggr Target Risk 2.04

Peer Group: Morningstar Category = US OE Moderate Allocation



US OE Mid-Cap Growth

Artisan Mid Cap Inv 4.89

Baron Growth Retail 2.65

Neuberger Berman Genesis Tr 3.87

Benchmark 1: Russell Mid Cap Growth TR USD 2.54

Peer Group: Morningstar Category = US OE Mid-Cap Growth



US OE Large Blend

American Funds Invmt Co of America A -0.17

Great-West Aggressive Profile I Init -0.51

Nuveen Tradewinds Value Opportunities I 3.60

TIAA-CREF Equity Index Instl 1.32

Benchmark 1: Russell 1000 TR USD 1.22

Peer Group: Morningstar Category = US OE Large Blend



US OE Mid-Cap Value

American Century Mid Cap Value A 3.57

Perkins Mid Cap Value T 2.49

Benchmark 1: Russell Mid Cap Value TR USD 1.73

Peer Group: Morningstar Category = US OE Mid-Cap Value



US OE Small Value

Columbia Small Cap Value II Z 1.51

Benchmark 1: Russell 2000 Value TR USD 1.35

Peer Group: Morningstar Category = US OE Small Value



US OE Large Value

Invesco Growth and Income Y 0.83

Benchmark 1: Russell 1000 Value TR USD -0.90

Peer Group: Morningstar Category = US OE Large Value



US OE High Yield Bond

JPMorgan High Yield A Load Waived 7.97

Benchmark 1: BofAML US HY Master II TR USD 9.07

Peer Group: Morningstar Category = US OE High Yield Bond



US OE Diversified Emerging Mkts

Oppenheimer Developing Markets Y 3.67

Benchmark 1: MSCI EM NR USD -1.28

Peer Group: Morningstar Category = US OE Diversified Emerging Mkts



US OE Conservative Allocation

Great-West Conservative Profile I Init 4.24

Benchmark 1: Morningstar Moderately Cons Target Risk 4.33

Peer Group: Morningstar Category = US OE Conservative Allocation



US OE Aggressive Allocation

Great-West Moderately Agg Profile I Init 1.80

Benchmark 1: Morningstar Aggressive Target Risk 0.76

Peer Group: Morningstar Category = US OE Aggressive Allocation



Key

Underperformed benchmark over 3 yr annualized return

Underperformed peer group over 3 yr annualized return

Underperformed benchmark over 5 yr annualized return

Underperformed peer group over 5 yr annualized return

Peer group

percentile

+/- Display

Benchmark 1

Return

(Annualized)

+/- Display

Benchmark 1

Peer group

percentile

33 1.05 7.92 0.44 38

7.48

539 743

7.24

12 1.79 6.54 3.37 6

61 -1.52 1.63 -1.55 71

3.17

600 739

2.72

45 -0.27 7.26 -5.72 97

12.99

513 597

12.42

5 0.26 7.42 -1.49 38

48 -1.86 6.11 -2.81 74

8.91

880 1,004

7.02

68 -3.18 10.03 -4.70 74

22 -0.43 13.98 -0.75 19

43 -1.67 8.12 -6.61 94

14.73

1,316 1,516

11.80

23 0.92 10.96 1.33 10

25 0.82 7.68 -1.95 75

12 1.57 7.13 -2.50 85

10/1/2007

9/30/2012

5-Yr Return

10/1/2009

9/30/2012

3-Yr Return

2 3.24 8.24 -1.39 60

9.63

669 770

8.65

10 2.36 16.92 2.19 9

35 0.12 14.90 0.17 22

20 1.33 13.31 -1.42 43

14.73

599 673

12.92

58 -1.40 9.99 -3.29 65

65 -1.74 9.24 -4.03 75

4 2.37 7.24 -6.04 93

20 0.10 13.18 -0.09 13

13.27

1,325 1,521

11.03

13 1.84 12.48 -1.38 36

25 0.75 8.27 -5.59 89

13.86

296 343

11.67

60 0.16 12.05 0.33 43

11.72

254 290

11.72

20 1.73 9.40 -2.43 67

11.84

940 1,058

10.40

26 -1.10 11.37 -1.23 54

12.60

449 513

11.44

3 4.95 9.86 4.23 4

5.63

243 355

5.19

32 -0.09 6.60 -1.07 74

7.67

476 561

7.79

17 1.03 8.47 -1.77 54

10.24

343 371

8.60

Assets

Investment Type Par Value % of Portfolio

AGENCY - MBS - GNMA PASS-THROUGHS 2.12$ 2.8%

AGENCY - MBS - FGLMC/FHLMC PASS-THROUGHS 22.14$ 29.0%

AGENCY - MBS - FNMA PASS-THROUGHS 32.68$ 42.8%

AGENCY - MBS - ADJUSTABLE RATE MORTGAGES 1.14$ 1.5%

AGENCY - MBS - VENDEE 2.71$ 3.5%

AGENCY - CMO - FLOATER 0.69$ 0.9%

AGENCY - CMO - GUARANTEED FINAL MATURITY 0.09$ 0.1%

AGENCY - CMO - PLANNED AMORTIZATION CLASS 0.43$ 0.6%

AGENCY - CMO - SEQUENTIAL 1.75$ 2.3%

AGENCY - CMO - VERY ACCURATELY DEFINED MATURITY 5.95$ 7.8%

AGENCY - CMBS 4.66$ 6.1%

Total Par Value of Long Term Holdings 74.36$ 97.5%

Net Short Term 1.91$ 2.5%

Total Par Value of Assets 76.27$ 100.0%

Book Value of Assets 78.71$

Market Value of Assets 82.38$

Market Value of Assets to Book Value of Liabilities 104.5%

Average Life 3.35 Years

Average Duration 2.30 Years

Average Rating (S&P / Moody's / Fitch's)

Gwinnett County 457 Stable Value Fund

September 30, 2012

(In Millions)

Quarterly Statement as of

AA+/AAA/AAAAverage Rating (S&P / Moody's / Fitch's)

Liabilities

Book Value Liabilities (participant account balances) $78.84 (In Millions)

Returns/Credited Rates

Current yield of the portfolio based on BV of assets 3.14%

Amortization of realized gains/losses AND of BV asset / BV liability differential -0.09%

Net investment return 3.05%

Investment Management fees -0.40%

Fee paid to Plan Account -0.20%

Investment return after expenses 2.45%

3rd Quarter credited rate to participants 2.65%

4th Quarter credited rate to participants 2.35%

AA+/AAA/AAA

Confidential - Do not disclose or disseminate 1 For Plan Sponsor use only - Not for use with Plan Participants

Gwinnett County 457 Stable Value Fund


September 30, 2012


Summary of Investments in Separate AccountSummary of Investments in Separate Account

Invested Assets

Cash2%

Agency CMBS6%

2%

Agency CMO12%

Agency MBS80%80%

Portfolio QualityPortfolio Quality

90.0%

100.0%

80.0%

90.0%

70.0%

80.0%

60.0%

50.0%

30.0%

40.0%

20.0%

30.0%

10.0%

20.0%

0.0%

AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB & NRAAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB &below

NR

S&P Moody's Fitch'sS&P Moody's Fitch's

2

Gwinnett County 457 Stable Value FundGwinnett County 457 Stable Value FundEstimated Cash Flow ScheduleEstimated Cash Flow ScheduleEstimated Cash Flow Schedule

35.00%35.00%

30.00%30.00%

25.00%25.00%

20.00%

15.00%

10.00%10.00%

5.00%5.00%

0.00%0.00%

Less than 1 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 7 to 8 8 to 9 9 to 10 10 Years +Less than 1year

1 to 2Years

2 to 3Years

3 to 4Years

4 to 5Years

5 to 6Years

6 to 7Years

7 to 8Years

8 to 9Years

9 to 10Years

10 Years +

3

Long Term Holdings Report

September 30, 2012Gwinnett County 457 Stable Value Fund

Cusip Par Value Purchase Price Book Value Market Value * Purchase Date S&P Moody's Fitch's

31391HV27 FNMA POOL #667633 LLB 7% Due 10/1/2032 Mo-1 123,710.64 130,224.79 129,247.22 146,527.15 20021204 AA+ Aaa AAA

31389MC47 FNMA POOL #629291 LLB 6 1/2% Due 2/1/2032 Mo-1 338,489.14 352,769.15 350,267.45 388,323.11 20021205 AA+ Aaa AAA

31391KAG2 FNMA POOL #668807 LLB 6% Due 11/1/2017 Mo-1 197,885.15 206,913.67 202,064.31 215,091.01 20021205 AA+ Aaa AAA

31287QGL9 FHLMC GOLD POOL #C64703 LLB 6 1/2% Due 3/1/2032 Mo-1 158,194.95 164,819.40 163,911.39 180,623.26 20021216 AA+ Aaa AAA

31371HPB8 FNMA POOL #252518 7% Due 5/1/2029 Mo-1 116,411.09 122,231.64 121,205.43 140,388.08 20021217 AA+ Aaa AAA

31294KN43 FHLMC GOLD POOL #E01311 5 1/2% Due 2/1/2018 Mo-1 69,130.69 71,010.17 70,185.81 74,737.82 20021218 AA+ Aaa AAA

36225BQ68 GNMA POOL #781377 6% Due 9/15/2029 Mo-1 106,214.75 110,330.59 109,801.66 120,512.96 20021220 AA+ Aaa AAA

31391NES6 FNMA POOL #671645 6% Due 11/1/2032 Mo-1 82,456.15 85,097.30 84,725.53 93,324.53 20021223 AA+ Aaa AAA

31288DMK2 FHLMC GOLD POOL #C74862 6% Due 11/1/2032 Mo-1 66,213.01 68,923.60 68,733.14 74,195.52 20030224 AA+ Aaa AAA

31294KP41 FHLMC GOLD POOL #E01343 5% Due 4/1/2018 Mo-1 154,808.91 153,300.12 153,606.06 166,339.35 20030227 AA+ Aaa AAA

3128H3JV4 FHLMC GOLD POOL #E95676 LLB 5% Due 4/1/2018 Mo-1 486,507.31 500,950.48 492,736.45 522,743.67 20030429 AA+ Aaa AAA

31371LCA5 FNMA POOL #254865 4 1/2% Due 9/1/2018 Mo-1 146,554.34 146,760.44 146,532.20 158,563.28 20030716 AA+ Aaa AAA

31401WAY5 FNMA POOL #720123 100% NY 6% Due 7/1/2033 Mo-1 67,278.81 69,549.44 69,257.27 76,146.70 20030722 AA+ Aaa AAA

31400UJ21 FNMA POOL #697881 LLB 5% Due 7/1/2018 Mo-1 161,516.85 162,198.24 161,608.13 178,490.54 20030826 AA+ Aaa AAA

31287RQW2 FHLMC GOLD POOL #C65869 LLB 6% Due 4/1/2032 Mo-1 63,903.74 65,810.84 65,659.63 71,617.83 20030923 AA+ Aaa AAA

31294KTB1 FHLMC GOLD POOL #E01446 4 1/2% Due 9/1/2018 Mo-1 68,731.63 68,538.33 68,563.32 72,236.68 20030923 AA+ Aaa AAA

31402YEY6 FNMA POOL #741851 MLB 6% Due 9/1/2033 Mo-1 617,922.19 638,632.26 636,481.83 699,369.30 20031002 AA+ Aaa AAA

31402WTX6 FNMA POOL #740466 MLB 5 1/2% Due 10/1/2018 Mo-1 77,636.63 79,771.63 79,034.72 84,909.86 20031017 AA+ Aaa AAA

31294KUE3 FHLMC GOLD POOL #E01481 4 1/2% Due 10/1/2018 Mo-1 77,578.41 77,384.45 77,404.07 82,042.31 20031031 AA+ Aaa AAA

31394LPQ9 FHLMC CMO SER.2698 CL.BE 4 1/2% Due 11/15/2032 Mo-1 18,239.26 18,273.45 18,226.22 19,038.71 20031119 AA+ Aaa AAA

36225CYE0 GNMA POOL #80708 Adj % Due 7/20/2033 Mo-1 25,081.81 25,207.20 25,187.14 25,951.20 20031216 AA+ Aaa AAA

31403VT66 FNMA POOL #759373 100% NY 5 1/2% Due 1/1/2034 Mo-1 262,531.74 268,582.31 267,714.20 291,342.84 20040226 AA+ Aaa AAA

312965KJ4 FHLMC GOLD POOL #B12997 4 1/2% Due 3/1/2019 Mo-1 70,159.30 69,402.89 69,583.37 75,402.45 20040421 AA+ Aaa AAA

31392ESX9 FNMA CMO SER.2002-59 CL.B 5 1/2% Due 9/25/2017 Mo-1 42,528.54 43,286.07 42,813.29 45,342.57 20040519 AA+ Aaa AAA

31297BKE1 FHLMC GOLD POOL #A23893 MLB 5 1/2% Due 7/1/2034 Mo-1 113,249.70 111,957.96 112,006.52 126,849.77 20040608 AA+ Aaa AAA

312964RN1 FHLMC GOLD POOL #B12293 MLB 5 1/2% Due 2/1/2019 Mo-1 109,744.90 111,751.17 110,717.70 119,208.56 20040618 AA+ Aaa AAA

31400X4X3 FNMA POOL #701138 5 1/2% Due 4/1/2033 Mo-1 148,056.97 149,005.45 148,906.15 164,305.23 20040805 AA+ Aaa AAA

31401XH83 FNMA POOL #721255 5 1/2% Due 7/1/2033 Mo-1 76,412.68 77,403.67 77,341.10 84,798.46 20040813 AA+ Aaa AAA

31394BSN5 FNMA CMO FLOATING SER.2004-90 CL.F Flt % Due 11/25/2034 Mo-25 408,019.52 408,019.52 408,019.52 408,600.94 20041222 AA+ Aaa AAA

31395HUJ7 FHLMC CMO SER.2894 CL.VA 5% Due 11/15/2015 Mo-1 252,209.52 256,918.74 251,872.28 252,756.81 20050105 AA+ Aaa AAA

31376J5B1 FNMA POOL #357342 5 1/2% Due 2/1/2033 Mo-1 162,227.34 165,091.67 164,917.75 180,030.70 20050211 AA+ Aaa AAA

Description

31371KXQ9 FNMA POOL #254587 5 1/2% Due 12/1/2022 Mo-1 68,969.22 70,068.41 69,845.82 76,236.39 20050301 AA+ Aaa AAA

312970N28 FHLMC GOLD POOL #B17609 LLB 5% Due 1/1/2020 Mo-1 232,908.64 234,473.51 233,896.18 255,591.25 20050426 AA+ Aaa AAA

31405TXC1 FNMA POOL #799075 100% NY 5 1/2% Due 3/1/2035 Mo-1 309,624.88 314,390.19 314,134.09 342,443.04 20050622 AA+ Aaa AAA

31394C6D9 FNMA CMO SER.2005-30 CL.VA 5% Due 2/25/2016 Mo-1 1,093,795.17 1,112,252.97 1,092,583.88 1,104,640.15 20050707 AA+ Aaa AAA

31297TY31 FHLMC GOLD POOL #A37930 100% NY 5 1/2% Due 10/1/2035 Mo-1 229,328.46 230,045.08 229,995.55 251,445.68 20050928 AA+ Aaa AAA

31394UCB6 FNMA CMO FLOAT SER.2005-86 CL.FC Flt % Due 10/25/2035 Mo-25 93,240.88 93,211.74 90,001.99 93,341.21 20051006 AA+ Aaa AAA

31393RN55 FHLMC CMO FLOAT SER.2637 CL.FA Flt % Due 6/15/2018 Mo-15 0.03 0.03 - - 20051027 AA+ Aaa AAA

3128LXF47 FHLMC GOLD POOL #G01987 HLB 6% Due 12/1/2035 Mo-1 267,582.47 271,554.39 271,352.13 297,333.10 20060105 AA+ Aaa AAA

31396AHP2 FHLMC CMO FLOAT SER.3032 CL.FP Flt % Due 8/15/2035 Mo-15 115,924.58 115,689.11 111,781.92 116,139.04 20060809 AA+ Aaa AAA

31408DLL6 FNMA POOL #848231 5/1 HARM Adj % Due 11/1/2035 Mo-1 728,948.68 726,727.65 726,802.08 776,306.18 20061215 AA+ Aaa AAA

31397BG70 FHLMC CMO SER.3219 CL.MC 5 3/4% Due 12/15/2018 Mo-1 4,876.30 4,906.78 4,943.69 4,876.69 20070205 AA+ Aaa AAA

31396JSK2 FHLMC CMO SER.R006 CL.AK 5 3/4% Due 12/15/2018 Mo-1 2,077.71 2,087.45 2,073.40 2,078.61 20070502 AA+ Aaa AAA

31411NCF2 FNMA POOL #911870 6% Due 12/1/2021 Mo-1 269,722.26 273,262.36 272,725.98 296,970.14 20070522 AA+ Aaa AAA

3128QHUM0 FHLMC POOL #1N1488 5/1 HYB 10YHYBRID Adj % Due 5/1/2037 Mo-1 293,696.31 293,466.84 293,445.84 312,139.87 20070531 AA+ Aaa AAA

3128QSD86 FHLMC POOL #1G1927 5X1 HYBRID Adj % Due 5/1/2037 Mo-1 95,667.77 95,611.72 95,605.72 102,762.78 20070702 AA+ Aaa AAA

31403DSP5 FNMA POOL # 745826 6% Due 7/1/2036 Mo-1 192,949.60 192,045.14 192,047.85 213,558.17 20070809 AA+ Aaa AAA

31413BWG2 FNMA POOL # 940847 6% Due 8/1/2037 Mo-1 330,792.62 329,655.52 329,650.81 366,123.93 20070820 AA+ Aaa AAA

3128MJDL1 FHLMC GOLD POOL #G08106 GIANT 6% Due 1/1/2036 Mo-1 195,009.49 196,441.60 196,376.42 215,228.67 20071022 AA+ Aaa AAA

31371MGG6 FNMA POOL #255899 SEASONED 5 1/2% Due 10/1/2035 Mo-1 295,470.62 291,869.55 291,945.54 325,865.18 20071114 AA+ Aaa AAA

36202EGR4 GNMA II POOL #003808 6% Due 1/20/2036 Mo-1 408,442.16 417,504.48 417,184.63 464,037.74 20071127 AA+ Aaa AAA

31403DBK4 FNMA POOL #745342 MEGA 6% Due 3/1/2036 Mo-1 146,368.68 149,124.53 148,999.89 163,031.19 20080103 AA+ Aaa AAA

3128LXMK3 FHLMC GOLD POOL #G02162 MEGA 5 1/2% Due 5/1/2036 Mo-1 244,667.48 247,859.63 247,732.35 267,321.06 20080115 AA+ Aaa AAA

3128M4FW8 FHLMC GOLD POOL #G02581 GIANT 5% Due 9/1/2035 Mo-1 317,155.12 320,078.91 319,950.02 350,909.49 20080123 AA+ Aaa AAA

31403DD97 FNMA POOL #745428 MEGA 5 1/2% Due 1/1/2036 Mo-1 170,207.60 170,593.24 170,556.29 187,716.57 20080214 AA+ Aaa AAA

31403DDX4 FNMA POOL #745418 MEGA 5 1/2% Due 4/1/2036 Mo-1 269,488.45 271,404.34 271,311.20 297,210.27 20080324 AA+ Aaa AAA

31403CXQ9 FNMA POOL #745087 MEGA 5 1/2% Due 12/1/2035 Mo-1 313,235.30 316,710.25 316,560.42 345,457.28 20080331 AA+ Aaa AAA

4 of 8



Cusip Par Value Purchase Price Book Value Market Value * Purchase Date S&P Moody's Fitch'sDescription

31407HJB3 FNMA POOL #831058 SEASONED 5% Due 10/1/2020 Mo-1 408,890.78 414,321.37 413,260.94 445,919.13 20080414 AA+ Aaa AAA

92261UAA2 VENDEE MORTGAGE TRUST CMO SER.2008-1 CL.GD 5 1/4% Due 1/15/2032 Mo-1 1,352,636.52 1,356,810.68 1,355,482.08 1,574,942.33 20080417 AA+ Aaa AAA

31402RDD8 FNMA POOL #735500 MEGA 5 1/2% Due 5/1/2035 Mo-1 170,561.63 171,867.49 171,799.07 188,107.01 20080521 AA+ Aaa AAA

31410KJ54 FNMA POOL #889584 5 1/2% Due 1/1/2037 Mo-1 157,993.69 159,277.39 159,217.03 174,246.23 20080521 AA+ Aaa AAA

3128M6DA3 FHLMC GOLD POOL #G04297 GIANT 6% Due 12/1/2037 Mo-1 163,467.70 166,251.78 166,154.04 180,365.44 20080530 AA+ Aaa AAA

3128MJJB7 FHLMC GOLD POOL #G08257 GIANT 6% Due 3/1/2038 Mo-1 192,539.85 195,698.71 195,590.14 211,660.61 20080530 AA+ Aaa AAA

31397TX31 FHLMC CMO SER.3461 CL.BV 5% Due 6/15/2019 Mo-1 338,226.84 332,519.28 336,743.57 347,013.57 20080613 AA+ Aaa AAA

3128MBX85 FHLMC POOL #G13203 GIANT 5 1/2% Due 7/1/2023 Mo-1 112,580.21 113,371.80 113,272.72 122,710.55 20080627 AA+ Aaa AAA

3128MJJJ0 FHLMC GOLD POOL #G08264 GIANT 6% Due 4/1/2038 Mo-1 127,202.80 128,643.77 128,595.36 139,835.06 20080630 AA+ Aaa AAA

31397EUZ6 FHLMC CMO REMIC SER.R010 CL. AB 5 1/2% Due 12/15/2019 Mo-1 80,894.43 80,685.88 80,715.59 81,606.14 20080805 AA+ Aaa AAA

31397W5M3 FHLMC CMO SER.3460 CL.VA 5% Due 5/15/2019 Mo-1 404,203.43 402,813.97 403,243.09 416,302.65 20081003 AA+ Aaa AAA

36202EV71 GNMA II POOL #004238 5 1/2% Due 9/20/2038 Mo-1 73,957.12 73,610.46 73,612.78 79,330.98 20081007 AA+ Aaa AAA

3128MB3F2 FHLMC GOLD POOL #G13298 GIANT 5% Due 10/1/2023 Mo-1 134,967.29 133,006.05 133,143.33 145,580.91 20081017 AA+ Aaa AAA

36202ETU3 GNMA II POOL #004163 5 1/2% Due 6/20/2038 Mo-1 54,807.29 56,160.34 56,133.16 58,789.69 20081218 AA+ Aaa AAA

31296YFU2 FHLMC GOLD POOL #A21979 5% Due 5/1/2034 Mo-1 383,956.00 396,554.55 396,091.60 424,819.89 20090107 AA+ Aaa AAA

31402DCV0 FNMA POOL #725584 MEGA 5% Due 7/1/2034 Mo-1 181,930.90 185,818.26 185,662.17 198,832.60 20090202 AA+ Aaa AAA

31283HZN8 FHLMC GOLD POOL #G01649 GIANT 5% Due 2/1/2034 Mo-1 141,186.36 144,716.01 144,630.18 154,491.91 20090218 AA+ Aaa AAA

3128MMKJ1 FHLMC GOLD POOL #G18296 GIANT 4 1/2% Due 2/1/2024 Mo-1 103,831.39 106,200.05 106,060.04 111,396.25 20090218 AA+ Aaa AAA

31414RQB4 FNMA POOL #973950 4 1/2% Due 4/1/2023 Mo-1 91,812.06 93,605.26 93,478.59 99,134.48 20090225 AA+ Aaa AAA

31416LTZ9 FNMA POOL #AA3267 5% Due 2/1/2039 Mo-1 303,407.44 311,134.83 310,869.09 337,340.30 20090306 AA+ Aaa AAA

3128MJLD0 FHLMC GOLD POOL #G08323 GIANT 5% Due 2/1/2039 Mo-1 161,662.59 165,249.48 165,138.39 175,281.22 20090309 AA+ Aaa AAA

31410GA78 FNMA POOL #888430 MEGA 5% Due 11/1/2033 Mo-1 192,612.88 197,729.16 197,526.02 211,680.69 20090309 AA+ Aaa AAA

31410GAR4 FNMA POOL #888416 MEGA 5% Due 9/1/2035 Mo-1 348,067.34 357,421.65 357,082.42 382,524.44 20090309 AA+ Aaa AAA

31402V4E7 FNMA POOL #739821 5% Due 9/1/2033 Mo-1 465,376.08 478,682.93 478,283.81 511,446.21 20090316 AA+ Aaa AAA

31402J4Y0 FNMA POOL #730839 5% Due 7/1/2033 Mo-1 445,094.06 460,672.36 460,045.52 489,156.36 20090331 AA+ Aaa AAA

3128MBYV3 FHLMC GOLD POOL #G13224 GIANT 4 1/2% Due 5/1/2023 Mo-1 90,560.80 93,065.37 92,889.75 97,187.10 20090417 AA+ Aaa AAA

3128MMKR3 FHLMC GOLD POOL #G18303 GIANT 4 1/2% Due 3/1/2024 Mo-1 274,948.68 283,605.27 283,159.08 294,980.65 20090428 AA+ Aaa AAA

31394YF33 FHLMC CMO SER.2796 CL.LB 4 1/2% Due 5/15/2024 Mo-1 301,303.61 306,764.72 304,045.27 326,542.31 20090518 AA+ Aaa AAA

3128MJLX6 FHLMC GOLD POOL #G08341 GIANT 5% Due 4/1/2039 Mo-1 194,057.23 199,454.44 199,286.44 210,404.82 20090521 AA+ Aaa AAA

31397P4Q0 FHLMC CMO FLOAT SER.3390 CL.FB Flt % Due 10/15/2017 Mo-15 72,497.56 71,693.30 72,050.19 72,560.27 20090619 AA+ Aaa AAA

31376KH41 FNMA POOL #357651 4 1/2% Due 11/1/2014 Mo-1 44,438.57 46,007.80 45,104.01 47,978.19 20090626 AA+ Aaa AAA

31376KJD9 FNMA POOL #357660 4 1/2% Due 12/1/2014 Mo-1 48,487.99 50,200.23 49,296.85 52,339.97 20090626 AA+ Aaa AAA

31385JM88 FNMA POOL #545883 SEASONED 5 1/2% Due 9/1/2017 Mo-1 85,027.63 89,358.74 88,146.48 92,488.42 20090626 AA+ Aaa AAA

31402DC24 FNMA POOL #725589 MEGA 5% Due 7/1/2034 Mo-1 264,907.48 271,033.47 270,808.85 289,517.85 20090629 AA+ Aaa AAA

36202E4J5 GNMA POOL #004425 5 1/2% Due 4/20/2039 Mo-1 316,772.36 327,661.41 327,386.43 353,294.84 20090629 AA+ Aaa AAA

3128M6AP3 FHLMC GOLD POOL #G04214 GIANT 5 1/2% Due 5/1/2038 Mo-1 326,964.15 337,794.85 337,491.91 356,317.93 20090727 AA+ Aaa AAA

31371LVC0 FNMA POOL #255411 5 1/2% Due 10/1/2034 Mo-1 333,185.36 345,419.51 345,004.14 367,876.05 20090728 AA+ Aaa AAA

3128MMLB7 FHLMC GOLD POOL #G18321 GIANT 4 1/2% Due 8/1/2024 Mo-1 645,614.96 664,781.33 663,563.27 692,652.62 20090903 AA+ Aaa AAA

31417YFM4 FNMA POOL #MA0171 4 1/2% Due 9/1/2029 Mo-1 517,837.03 528,760.15 528,207.86 561,801.19 20090903 AA+ Aaa AAA

3129343B6 FHLMC GOLD POOL #A87994 5% Due 8/1/2039 Mo-1 295,435.05 306,236.90 305,941.05 325,400.60 20091009 AA+ Aaa AAA

31412QGK9 FNMA POOL #931802 5% Due 8/1/2039 Mo-1 260,815.45 269,291.95 269,055.14 290,587.99 20091027 AA+ Aaa AAA

31417YDA2 FNMA POOL #MA0096 4 1/2% Due 6/1/2029 Mo-1 180,279.51 186,561.13 186,297.85 195,697.84 20091201 AA+ Aaa AAA

31417YGJ0 FNMA POOL #MA0200 4 1/2% Due 10/1/2029 Mo-1 259,142.84 268,091.37 267,687.44 281,143.96 20091201 AA+ Aaa AAA

31417YKF3 FNMA POOL #MA0293 4 1/2% Due 1/1/2030 Mo-1 529,832.57 545,189.42 544,489.78 574,815.14 20091211 AA+ Aaa AAA

31412QSY6 FNMA POOL #932135 5% Due 11/1/2039 Mo-1 561,213.84 579,190.23 578,721.58 625,277.38 20100111 AA+ Aaa AAA

31417VPB3 FNMA POOL #AC8517 5% Due 12/1/2039 Mo-1 343,126.70 355,779.47 355,413.63 383,689.16 20100120 AA+ Aaa AAA

31418MUR1 FNMA POOL #AD0591 MEGA 5% Due 12/1/2039 Mo-1 654,614.73 678,753.64 678,082.04 731,999.51 20100120 AA+ Aaa AAA

3128P7M67 FHLMC GOLD POOL #C91281 4 1/2% Due 12/1/2029 Mo-1 374,210.91 383,975.46 383,547.76 404,064.27 20100216 AA+ Aaa AAA

312939JH5 FHLMC GOLD POOL #A91164 5% Due 2/1/2040 Mo-1 886,797.51 922,200.15 921,214.36 981,178.10 20100216 AA+ Aaa AAA

31417YMB0 FNMA POOL #MA0353 4 1/2% Due 3/1/2030 Mo-1 281,046.32 288,072.48 287,736.98 305,665.87 20100216 AA+ Aaa AAA

31417YM95 FNMA POOL #MA0383 4 1/2% Due 4/1/2030 Mo-1 298,942.52 307,023.30 306,627.56 324,322.62 20100226 AA+ Aaa AAA

3128M7XB7 FHLMC GOLD POOL #G05774 GIANT 5% Due 1/1/2040 Mo-1 998,034.92 1,038,034.29 1,037,027.53 1,104,254.35 20100316 AA+ Aaa AAA

31394W2R8 FHLMC CMO SER.2770 CL.PM 4 1/2% Due 3/15/2034 Mo-1 413,458.44 417,593.01 416,528.32 454,080.98 20100326 AA+ Aaa AAA

92261XAA6 VENDEE MORTGAGE TRUST CMO SER.2010-1 CL.DA 4 1/4% Due 2/15/2035 Mo-1 430,705.61 438,545.77 437,497.37 477,237.75 20100415 AA+ Aaa AAA

31398PTG4 FNMA CMO SER.2010-42 CL.EP 4 1/2% Due 11/25/2039 Mo-1 220,340.22 228,740.70 225,690.89 232,688.09 20100427 AA+ Aaa AAA

31292K3K1 FHLMC GOLD POOL #C03502 5% Due 5/1/2040 Mo-1 317,559.41 332,643.48 332,265.81 351,356.80 20100519 AA+ Aaa AAA

31412PRQ6 FNMA POOL #931195 4 1/2% Due 5/1/2024 Mo-1 196,882.69 205,926.99 205,443.80 212,584.95 20100519 AA+ Aaa AAA

3128P7NT6 FHLMC GOLD POOL #C91302 4 1/2% Due 5/1/2030 Mo-1 425,678.06 441,374.93 440,761.72 459,637.31 20100525 AA+ Aaa AAA

5 of 8




312941B71 FHLMC GOLD POOL #A92762 4 1/2% Due 6/1/2040 Mo-1 508,628.32 520,509.56 520,201.61 548,569.29 20100525 AA+ Aaa AAA

31417YNY9 FNMA POOL #MA0406 4 1/2% Due 5/1/2030 Mo-1 426,249.17 443,632.14 442,965.71 462,437.55 20100621 AA+ Aaa AAA

31417YQP5 FNMA POOL #MA0461 4 1/2% Due 7/1/2030 Mo-1 455,327.32 473,824.97 473,101.39 495,976.48 20100621 AA+ Aaa AAA

3128PRAQ2 FHLMC GOLD POOL #J11815 4% Due 3/1/2025 Mo-1 331,430.38 344,338.03 343,693.54 352,840.19 20100715 AA+ Aaa AAA

31292K2X4 FHLMC GOLD POOL #C03490 4 1/2% Due 8/1/2040 Mo-1 529,973.39 549,909.49 549,412.93 571,590.53 20100720 AA+ Aaa AAA

3129413F2 FHLMC GOLD POOL #A93498 4 1/2% Due 8/1/2040 Mo-1 740,432.59 775,371.77 774,716.34 811,533.99 20100805 AA+ Aaa AAA

31418WKK5 FNMA POOL #AD8397 4 1/2% Due 8/1/2040 Mo-1 476,563.44 494,844.12 494,392.15 517,470.26 20100810 AA+ Aaa AAA

31418NFF2 FNMA POOL #AD1065 4% Due 3/1/2025 Mo-1 306,090.78 321,156.20 320,215.66 327,489.80 20100825 AA+ Aaa AAA

31416WUN0 FNMA POOL #AB1488 4% Due 9/1/2030 Mo-1 897,217.82 931,494.34 930,260.57 973,781.79 20100916 AA+ Aaa AAA

3620ANGZ7 GNMA POOL # 734716 4 1/2% Due 4/15/2040 Mo-1 407,046.14 428,924.87 428,574.41 450,013.11 20100927 AA+ Aaa AAA

31419BYQ2 FNMA POOL #AE1618 4% Due 10/1/2040 Mo-1 326,065.38 337,273.87 337,024.39 351,750.32 20101006 AA+ Aaa AAA

31292K7K7 FHLMC GOLD POOL #C03598 4% Due 11/1/2040 Mo-1 351,567.25 363,817.18 363,528.96 378,315.41 20101013 AA+ Aaa AAA

36202FEH5 GNMA II POOL #004636 4 1/2% Due 2/20/2040 Mo-1 370,910.23 392,701.19 392,278.93 411,817.24 20101028 AA+ Aaa AAA

36202FLP9 GNMA II POOL #004834 4 1/2% Due 10/20/2040 Mo-1 378,876.50 401,313.08 400,892.39 420,662.09 20101028 AA+ Aaa AAA

3137A2AZ4 FHLMC ABS SER.K009 CL.A1 2.757% Due 5/25/2020 Mo-1 466,390.91 471,035.22 469,592.07 497,787.41 20101115 AA+ Aaa AAA

31419AN52 FNMA POOL #AE0411 4 1/2% Due 9/1/2040 Mo-1 815,826.71 851,327.90 850,360.41 900,641.77 20101116 AA+ Aaa AAA

31416TL49 FNMA POOL #AA9346 4 1/2% Due 8/1/2039 Mo-1 356,337.49 369,199.05 368,895.53 396,389.68 20101202 AA+ Aaa AAA

31419EJ83 FNMA POOL #AE3886 4 1/2% Due 11/1/2040 Mo-1 386,353.23 399,271.91 398,985.29 419,516.67 20101202 AA+ Aaa AAA

31398S3L5 FNMA CMO SER.2010-153 CL.VA 4% Due 2/25/2022 Mo-1 434,934.70 449,341.93 444,856.15 461,482.24 20101213 AA+ Aaa AAA

31416WP71 FNMA POOL # AB1345 4 1/2% Due 8/1/2040 Mo-1 347,078.31 355,240.06 355,063.32 383,161.30 20101222 AA+ Aaa AAA

3128M73E4 FHLMC GOLD POOL #G05897 GIANT 4 1/2% Due 5/1/2040 Mo-1 373,864.91 380,524.40 380,370.08 414,088.79 20101229 AA+ Aaa AAA

312940EQ8 FHLMC GOLD POOL #A91943 4 1/2% Due 4/1/2040 Mo-1 306,250.05 310,891.67 310,783.10 330,298.90 20110111 AA+ Aaa AAA

31410LC67 FNMA POOL #890293 MEGA 4 1/2% Due 8/1/2040 Mo-1 316,447.84 321,590.13 321,466.69 343,610.80 20110113 AA+ Aaa AAA

3137A5LP7 FHLMC CMO SER.3791 CL.LV 4 1/2% Due 2/15/2022 Mo-1 439,572.52 471,510.22 464,323.83 479,162.62 20110131 AA+ Aaa AAA

31397QXC7 FNMA CMO SER. 2011-15 CL.VC 4% Due 5/25/2022 Mo-1 883,060.27 901,135.40 897,791.96 939,330.64 20110209 AA+ Aaa AAA

62888XAC8 NCUA GTD NOTES TRUST 2010-C1 ABS SER.2010-C1 CL.APT 2.65% Due 10/27/2020 Mo-27 470,276.13 452,199.90 457,615.53 497,537.47 20110216 AA+ Aaa AAA

3137A7JT8 FHLMC ABS SER. 2011 K-701 CL.A1 2.776% Due 6/25/2017 Mo-1 447,329.25 451,787.34 450,117.63 470,539.38 20110218 AA+ Aaa AAA

31398JZR7 FHLMC ABS SER.K004 CL.A1 3.413% Due 5/25/2019 Mo-1 401,894.54 411,753.52 409,603.04 438,135.38 20110225 AA+ Aaa AAA

3137A7NT3 FHLMC ABS SER.K011 CL.A1 2.917% Due 8/25/2020 Mo-1 689,537.18 689,532.77 689,321.37 742,894.26 20110318 AA+ Aaa AAA

3137A7YW4 FHLMC CMO SER.3827 CL.VA 4% Due 5/15/2022 Mo-1 667,325.09 699,231.57 689,898.31 693,263.35 20110318 AA+ Aaa AAA

31419DJX0 FNMA POOL #AE2977 4% Due 8/1/2025 Mo-1 171,045.00 175,748.73 175,575.17 183,002.88 20110330 AA+ Aaa AAA

3137A8PN2 FHLMC ABS SER.K012 CL.A1 3.427% Due 10/25/2020 Mo-1 685,226.46 692,071.87 690,618.19 752,852.83 20110407 AA+ Aaa AAA

92261WAB6 VENDEE MORTGAGE TRUST CMO SER.2011-1 CL.DV 3 3/4% Due 6/15/2022 Mo-1 447,501.95 463,374.29 461,318.67 490,641.59 20110414 AA+ Aaa AAA

31417Y2J5 FNMA POOL #MA0776 4 1/2% Due 6/1/2031 Mo-1 392,395.42 412,199.13 411,556.26 429,388.34 20110602 AA+ Aaa AAA

31418PS71 FNMA POOL #AD2341 4 1/2% Due 3/1/2040 Mo-1 363,822.04 379,341.33 379,044.20 395,051.47 20110603 AA+ Aaa AAA

31417UZZ1 FNMA POOL # AC7959 4% Due 1/1/2025 Mo-1 480,839.68 503,003.38 502,110.75 514,605.79 20110719 AA+ Aaa AAA

31417YX93 FNMA POOL #MA0703 3 1/2% Due 4/1/2021 Mo-1 531,708.07 554,721.06 552,794.02 566,150.41 20110719 AA+ Aaa AAA

31417Y3Z8 FNMA POOL #MA0815 3 1/2% Due 8/1/2021 Mo-1 784,466.99 821,361.45 818,029.33 835,282.24 20110801 AA+ Aaa AAA

31417YW86 FNMA POOL #MA0670 3 1/2% Due 3/1/2021 Mo-1 711,563.84 744,918.40 741,812.63 757,656.66 20110801 AA+ Aaa AAA

3128MC3E3 FHLMC POOL #G14197 3 1/2% Due 7/1/2026 Mo-1 854,897.24 894,703.39 893,335.60 905,332.32 20110811 AA+ Aaa AAA

31417Y3B1 FNMA POOL # MA0793 3 1/2% Due 7/1/2021 Mo-1 749,049.78 790,715.67 787,271.29 797,570.82 20110812 AA+ Aaa AAA

3128MC3Z6 FHLMC GOLD POOL #G14216 MEGA 3 1/2% Due 7/1/2021 Mo-1 370,010.76 389,436.32 388,089.57 391,839.73 20110816 AA+ Aaa AAA

3138A4F42 FNMA POOL #AH2886 3 1/2% Due 2/1/2026 Mo-1 353,544.38 369,895.80 369,257.54 376,556.33 20110816 AA+ Aaa AAA

31417Y4T1 FNMA POOL #MA0833 3% Due 8/1/2021 Mo-1 338,916.92 352,897.23 352,039.89 358,964.46 20110825 AA+ Aaa AAA

31398TNB3 FNMA CMO SER.2010-75 CL.NA 4% Due 9/25/2028 Mo-1 411,767.88 429,782.72 427,657.98 426,882.23 20110921 AA+ Aaa AAA

3138A7G28 FNMA POOL #AH5616 3 1/2% Due 2/1/2026 Mo-1 577,958.60 603,966.74 602,759.12 615,577.51 20110927 AA+ Aaa AAA

92262BAA3 VENDEE MORTGAGE TRUST CMO SER.2011-2 CL.DA 3 3/4% Due 12/15/2033 Mo-1 476,607.49 500,512.34 499,869.95 513,551.72 20111014 AA+ Aaa AAA

31294MJN2 FHLMC POOL #E02969 3 1/2% Due 8/1/2026 Mo-1 761,014.95 794,547.17 793,474.79 818,040.08 20111104 AA+ Aaa AAA

3138AVRN7 FNMA POOL #AJ4092 3 1/2% Due 10/1/2026 Mo-1 439,194.17 458,820.66 458,018.31 471,623.96 20111109 AA+ Aaa AAA

3138AVRM9 FNMA POOL #AJ4091 3 1/2% Due 10/1/2026 Mo-1 682,350.68 714,229.27 712,827.12 737,426.13 20111121 AA+ Aaa AAA

31417ARG6 FNMA POOL #AB4086 3% Due 12/1/2026 Mo-1 447,492.80 461,546.88 460,947.97 475,121.48 20111207 AA+ Aaa AAA

31417ARK7 FNMA POOL #AB4089 3% Due 12/1/2026 Mo-1 438,432.77 452,133.79 451,549.83 465,502.08 20111207 AA+ Aaa AAA

31419AX93 FNMA POOL #AE0703 3 1/2% Due 12/1/2025 Mo-1 409,993.10 431,517.74 430,560.30 443,085.40 20111208 AA+ Aaa AAA

3128PXKT2 FHLMC GOLD POOL #J17506 3% Due 12/1/2026 Mo-1 2,782,368.21 2,875,403.66 2,871,871.80 2,968,811.87 20111228 AA+ Aaa AAA

2012 Purchases3137AKKC4 FHLMC ABS SER.K705 CL.A2 2.303% Due 9/25/2018 Mo-1 500,000.00 504,986.00 504,457.67 529,680.50 20120119 AA+ Aaa AAA

38375CVV9 GNMA CMO SER.2012-43 CL.VA 3 1/2% Due 7/20/2023 Mo-1 727,087.87 784,573.27 782,456.25 803,432.10 20120327 AA+ Aaa AAA

6 of 8




3128P7S53 FHLMC GOLD POOL #C91440 3 1/2% Due 3/1/2032 Mo-1 473,989.06 498,206.93 497,817.70 510,241.82 20120416 AA+ Aaa AAA

31417BRG4 FNMA POOL #AB4986 3 1/2% Due 4/1/2032 Mo-1 481,290.35 505,655.67 505,259.82 518,311.03 20120416 AA+ Aaa AAA

3128E6B48 FHLMC GOLD POOL #D99059 3 1/2% Due 3/1/2032 Mo-1 476,565.20 499,574.36 499,204.68 513,014.99 20120427 AA+ Aaa AAA

3128E6ET0 FHLMC GOLD POOL #D99146 3 1/2% Due 4/1/2032 Mo-1 485,616.19 509,289.99 508,911.64 522,758.24 20120427 AA+ Aaa AAA

3128P7TJ2 FHLMC POOL #C91453 3 1/2% Due 5/1/2032 Mo-1 944,587.72 1,001,705.76 1,000,923.36 1,016,833.93 20120530 AA+ Aaa AAA

3137ANMN2 FHLMC ABS SER.K707 CL.A2 2.22% Due 12/25/2018 Mo-1 1,000,000.00 1,027,031.25 1,025,693.52 1,056,395.00 20120530 AA+ Aaa AAA

3132GUKK9 FHLMC POOL #Q08898 3 1/2% Due 6/1/2042 Mo-1 740,418.86 777,092.73 776,817.92 795,429.67 20120621 AA+ Aaa AAA

31418AF29 FNMA POOL #MA1084 3 1/2% Due 6/1/2032 Mo-1 490,326.06 518,060.13 517,724.55 528,041.76 20120621 AA+ Aaa AAA

3138EH7H9 FNMA POOL #AL1795 MEGA 3% Due 4/1/2027 Mo-1 1,452,330.72 1,537,882.08 1,536,719.33 1,551,076.24 20120713 AA+ Aaa AAA

3128MMP31 FHLMC GOLD POOL #G18441 GIANT 2 1/2% Due 8/1/2027 Mo-1 747,178.99 774,964.71 774,691.44 786,539.27 20120716 AA+ Aaa AAA

3128MMPZ0 FHLMC GOLD POOL #G18439 2 1/2% Due 7/1/2027 Mo-1 1,087,854.00 1,130,008.34 1,129,590.20 1,145,160.54 20120801 AA+ Aaa AAA

3138M0UC2 FNMA POOL #AO8678 3% Due 7/1/2027 Mo-1 593,975.21 628,778.44 628,374.10 631,111.92 20120802 AA+ Aaa AAA

3136A74V1 FNMA CMO SER.2012-96 CL.VA 3 1/2% Due 2/25/2022 Mo-1 992,509.47 1,087,108.03 1,086,303.23 1,087,418.19 20120823 AA+ Aaa AAA

31416YLG1 FNMA POOL #AB3026 4% Due 5/1/2041 Mo-1 1,278,247.09 1,379,308.50 1,378,292.66 1,379,337.09 20120824 AA+ Aaa AAA

31419E6N4 FNMA POOL #AE4476 4% Due 3/1/2041 Mo-1 895,428.34 969,441.09 968,772.41 965,963.35 20120828 AA+ Aaa AAA

3138AXYG0 FNMA POOL #AJ6110 4% Due 12/1/2041 Mo-1 959,110.61 1,031,943.07 1,031,173.53 1,034,961.75 20120910 AA+ Aaa AAA

3138AWNM1 FNMA POOL # AJ4895 4% Due 1/1/2042 Mo-1 974,647.96 1,056,579.30 1,056,579.30 1,064,900.84 20120911 AA+ Aaa AAA

3136A6TZ7 FNMA CMO SER.2012-63 CL.EB 2% Due 8/25/2040 Mo-1 493,120.55 500,035.80 500,035.80 500,679.10 20120926 AA+ Aaa AAA

74,361,654.81 76,966,559.10 76,800,629.10 80,476,608.78

Cash & Short Term 1,907,248.09 1,907,248.09 1,907,248.09 1,907,248.09

76,268,902.90 78,873,807.19 78,707,877.19 82,383,856.87

Net Purchases/RedemptionsJanuary (2,325,241.18)$February (1,642,564.97)$March (142,989.95)$April (265,044.11)$May 321,127.86$June 221,390.46$July (40,640.33)$August 438,064.89$September (156,296.87)$OctoberNovemberDecember

* Fixed income and other securities are valued by independent pricing services approved by Great-West Life & Annuity Insurance Company (“the Company”). In some instances,valuations from independent pricing services are not available or do not reflect significant events in the market therefore fair valuation procedures are implemented by the Company.

For fixed income securities, regardless of whether the price is sourced from our independent pricing services or the fair value procedures of the Company, fair value determinations are usedinvolving judgments that are inherently subjective. These determinations are made in good faith in accordance with procedures adopted by the independent pricing services or theCompany. Factors used in the determination of fair value may include but are not limited to market data incorporating available trade, bid and other market information includingbenchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Model processes such as the Option Adjusted Spread model are used to develop prepayment andinterest rate scenarios. Pricing evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluatedpricing applications and models. The policies in place are intended to assure the Portfolio’s valuation fairly reflects security values at the time of pricing.

7 of 8

Agency Securities:Debt instruments issued by an agency of the Federal government. Though not generalobligations of the U.S. Treasury such securities are sponsored by the government and thereforehave high safety ratings.

Amortization ofRealizedGains/Losses:

The process of spreading out the impact of any gains or losses that occurred due to the sale ofassets or prepayment of securities that were faster or slower than expected. Amortization periodis typically the average duration of the portfolio.

Amortization of theDifference Betweenthe BV Assets andBV Liabilities:

The process of spreading out the impact of any differences between what the fund has earnedand the interest credited to participants from inception to the statement date. Amortizationperiod is the average life of the portfolio.

Asset BackedSecurities (ABS):

A debt security whose cash flows are backed by a pool of receivables or other financial assets.

Average Life: The average expected maturity date of the securities based on current pre-payment speeds anddetermined by an outside organization.

Average Maturity: The number of years until a bond pays back its principal.

Book Value: Original purchase price of the security +/- any amortization and reductions from principalpayments.

CollateralizedMortgageObligations

Mortgage backed bonds that separates mortgage pools into different maturity classes.

CommercialMortgage BackedSecurities (CMBS):

An asset backed security whose cash flows are backed by the principal and interest payments ofcommercial or multifamily property mortgage loans.

Corporates: A debt instrument issued by a private Corporation whose cash flows are backed by the issuingorganization.

Duration:A theoretical measurement developed by Professor Frederic Macauley that measures thesensitivity of a particular bond to changes in interest rates based on current prepayment speedsand scheduled interest payments. Determined by an outside organization.

FGLMC: Federal Home Loan Mortgage Corporation - Gold pool. Nicknamed Freddie Mac.FHLMC: Federal Home Loan Mortgage Corporation. Nicknamed Freddie Mac.FNMA: Federal National Mortgage Association. Nicknamed Fannie Mae.GNMA: Government National Mortgage Association. Nicknamed Ginnie Mae.GSE: Government Sponsored Entity

Investment Grade: A bond judged likely enough to meet payment obligations that banks are allowed to invest in it.

Liabilities: The total value of the participant account balances.Market Value: What the security could be sold for on the open market.Mortgage BackedSecurities (MBS):

An asset backed security whose cash flows are backed by the principal and interest payments ofa set of mortgage loans.

Par Value: Maturity value of the security.Purchase Price: Original purchase price of the security less any reductions from principal payments.Treasury Notes: Intermediate securities with maturities of 1 to 10 years.Vendee: Veterans Administration Mortgage.

Glossary

Economic and CapitalEconomic and Capital Markets ReviewThird Quarter 2012Third Quarter, 2012

Ad i d A t G LLCAdvised Assets Group, LLC

Current Economic Conditions

GDP6%

Super100

GDP– Real Gross Domestic Product increased at an annual

rate of 1.3% in the second quarter of 2012.1

• Among the largest contributors to GDP for the quarter were personal consumption, exports, nonresidential fixed -2%

0%

2%

4%

investment, and residential fixed investment.

• Private inventory investment and decreased state and local government spending were drags on GDP for the quarter.

-10%

-8%

-6%

-4%

5 Q

2

Q3

Q4

6 Q

1

Q2

Q3

Q4

7 Q

1

Q2

Q3

Q4

8 Q

1

Q2

Q3

Q4

9 Q

1

Q2

Q3

Q4

0 Q

1

Q2

Q3

Q4

1 Q

1

Q2

Q3

Q4

2 Q

1

Q2

2005

2006

2007

2008

2009

2010

2011

2012

Inflation

Source: Bureau of Economic Analysis, http://www.bea.gov/national/xls/gdpchg.xls, 9/27/12

5%6%

– The Consumer Price Index (CPI) increased 1.7% for the 12 months ending in August.2

• The 12 month change in Core CPI (CPI ex food & energy) was 1.9% over the previous 12 months.0%

1%2%3%4%5%

• The gasoline index rose 9.0% from July to August. Over the past 12 months, the gasoline index increased 1.8%. Despite this increase, the overall Energy sector decreased 0.6% for the 12 months ending in August.CPI Core CPI

-3%-2%-1%

2008

2009

2010

2011

2012

2

Source: Bureau of Labor Statistics, http://www.bls.gov/data/#prices, 9/14/12

Current Economic Conditions

Employment Statistics– The official unemployment rate (U-3) dropped to

7.8% at the end of September.3

• Non-farm payrolls increased by 114,000 in 8%

10%

12%

14%

16%

18%

September. For the third quarter, employment increased in healthcare, warehousing, and transportation, but changed little in most other major industries.

• The “U-6 Rate”, the most comprehensive measure of h i ’ l i i i d d

0%

2%

4%

6%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Unemployment Marginally Attached

Housing

the nation’s employment situation, remained steady for the second consecutive month at 14.7%.

Unemployment Rate (U-3)

Marginally Attached Rate (U-6)

Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/empsit.t15.htm, 10/5/12

g– August Housing Starts increased 2.3% from the

July measure.4

• This number represents a 29.1% increase from the August, 2011, measure.1,500

2,000

2,500

hous

ands

• Building permits decreased 1.0% from the revised July estimate. This represents a 24.5% increase over the previous 12 months.

Housing Starts

500

1,000

2006 2007 2008 2009 2010 2011 2012

Th

3

Source: U.S. Census Bureau, http://www.census.gov/const/www/newresconstindex.html, 9/19/12

Government and the Market

In the 50 years spanning 1961 – 2010, the S&P 500 Index saw the best annual performance on average under a Democratic president and a Republican-led Congress. (21.3%) This is nearly five times the average annual return achieved under a Republican president and a Democratic-led Congress. (4.5%)

When both the White House and Congress were controlled by the same political party the S&P 500 averaged 12 1%When both the White House and Congress were controlled by the same political party, the S&P 500 averaged 12.1%. When Congress was split, with one party controlling the House and the other party controlling the Senate, the S&P 500 averaged 7.1%, regardless of which party was in the White House.5

12 1%

21.3%

12.1%

7.1%

4.5%

White House/ Congress controlled by same party

Either party in White House/ Congress Split

Democratic President/ Republican Congress

Republican President/ Democratic Congress

Source: MFS Institutional Advisors, 9/2012

4

Market Update – Domestic Equity

Zephyr StyleADVISOR Zephyr StyleADVISOR: Advised Assets Group LLC

Domestic Equity Indices - Total Return as of September 2012

S&P 500 Russell 1000 Growth Russell 1000 Value Russell Midcap GrowthRussell Midcap Value Russell 2000 Growth Russell 2000 Value

urn 20

25

30

35

Ret

0

5

10

15

3 months YTD 1 year 3 years 5 years 10 years

Domestic equity markets rebounded solidly in the third quarter.• Most major categories gained at least 5% for the quarter.j g g q

• Value stocks outperformed growth stocks by a slight margin.

• Over the past twelve months, stocks have seen a tremendous rally with most major categories returning more than 25%.

5

Zephyr StyleADVISORZephyr StyleADVISOR: Advised Assets Group LLC

Market Update – International Equityp y y

Zephyr StyleADVISOR: Advised Assets Group LLC

International Equity Indices - Total Return as of September 2012

MSCI EAFE MSCI AC WORLD INDEX ex USA MSCI EUROPEMSCI JAPAN MSCI CHINA MSCI EM (EMERGING MARKETS)

Ret

urn

5

10

15

20

R

-5

0


International stocks saw solid gains for the third quarter.• European stocks led the way for the quarter, returning just under 9%.

• Japanese stocks continue to lag most other major countries.

• For 2012, emerging market stocks have slightly edged out European stocks as the best performing category.

6

Zephyr StyleADVISORZ h St l ADVISOR Ad i d A t G LLC

Market Update – Fixed Income

p y yZephyr StyleADVISOR: Advised Assets Group LLC

Fixed Income Returns as of September 2012

20

Barclays Capital U.S. Aggregate Barclays Capital U.S. Government: Intermediate Barclays Capital U.S. Treasury: U.S. TIPSBarclays Capital U.S. Intermediate Credit Barclays Capital Intermediate U.S. High Yield Citigroup WorldBIG Index

Ret

urn

8101214161820

0246


Source: U S Treasury Treasury Yield Curve6 Source: U.S. Treasury Fixed Income markets saw small gains for the quarter.

• Investors showed little interest in “safer” instruments, as government bonds lagged

Treasury Yield Curve6www.treasury.gov

3.0%

4.0%

instruments, as government bonds lagged other categories.

• High Yield bonds have shown the best returns across all time periods over the past 10 years on a rolling basis.

0.0%

1.0%

2.0%

1 month 90 days 1 year 2 year 3 year 5 year 7 year 10 year 20 year 30 year

y g9/30/2012 9/30/2011 9/30/2010

7

1 Bureau of Economic Analysis, U.S. Department of Commerce, News Release, September 27, 2012, www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm2 Bureau of Labor Statistics, U.S. Department of Labor, Economic News Release “Consumer Price Index – August 2012”, September 14, 2012, www.bls.gov/news.release/pdf/cpi.pdf3 Bureau of Labor Statistics U S Department of Labor Economic News Release “Employment Situation Summary” October 5 20123 Bureau of Labor Statistics, U.S. Department of Labor, Economic News Release Employment Situation Summary , October 5, 2012,www.bls.gov/news.release/empsit.nr0.htm4 U.S. Census Bureau, U.S Department of Housing and Urban Development, Economic News Release “New Residential Construction in August, 2012”, September 19, 2012. www.census.gov/const/www/newresconstindex.html5 MFS Institutional Advisors, Insightful Investor, “Primaries, Caucuses, and Elections…Oh My!”, September, 2012.6 U.S. Department of the Treasury, Data and Charts Center, October 8, 2012, http://www.treasury.gov/resource-center/data-chart-center/Pages/index.aspxg p

8

This Economic and Capital Markets Review is being offered as informational and educational material provided to a Plan Sponsor or a Representative, duly authorized and acting on behalf of a Plan Sponsor, to assist the Plan Sponsor in understanding the general investment environment.

This document is not intended as a recommendation, solicitation or offering of any particular securities by Great-West Life & Annuity Insurance Company , g y p y y p ynor any of its subsidiaries or affiliates.

The purpose of this document is to provide investment-related information only for the benefit of the Plan Sponsor in its role as a fiduciary to the plan, not as investment advice for plans or plan participants. Although we believe the data contained in this report is generally from reliable sources, Advised Assets Group, LLC cannot guarantee its completeness or accuracy. Economic data and information are derived from a variety of financial publications and economic reporting companies, including Moody’s, S&P, etc. The opinions expressed herein are those of AAG as of 10/08/2012 and are subject to change. No forecast is guaranteedNo forecast is guaranteed.

Prior to selecting investment options, Plan Sponsors should consider the investment objectives, risks, fees and expenses carefully before selecting investment options for their Plan. For this and other important information you may obtain prospectuses for mutual funds, any applicable annuity contract and the annuity's underlying funds and/or additional disclosure documents from your registered representative. Read them carefully before investing.

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Equity Style Consistency < User Value American Funds Invmt Co of America A

Equity Style Consistency < User Value Invesco Growth and Income Y

Equity Style Consistency < User Value Neuberger Berman Genesis Tr

Equity Style Consistency < User Value Perkins Mid Cap Value T

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Equity Style Consistency < User Value Fidelity Contrafund

Equity Style Consistency < User Value Baron Growth Retail

Equity Style Consistency < User Value Artisan Mid Cap Inv

Equity Style Consistency < User Value American Funds Growth Fund of Amer A

Equity Style Consistency < User Value American Century Mid Cap Value A

Equity Style Consistency < User Value Royce Low Priced Stock Svc

Equity Style Consistency < User Value Oppenheimer Global Y

Equity Style Consistency < User Value Columbia Small Cap Value II Z

Equity Style Consistency < User Value Artisan International Inv

Equity Style Consistency < User Value Oppenheimer Developing Markets Y

Fund Manager Change Vanguard Total Bond Market Index Signal

Fund Manager Change TIAA-CREF Equity Index Instl

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Fund Manager Change Great-West Moderately Agg Profile I Init

Fund Manager Change Great-West Aggressive Profile I Init

Fund Manager Change Great-West Moderate Profile I Init

Fund Manager Change Janus Balanced T

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Fund Manager Change Dreyfus Intl Stock Index

Fund Manager Change American Funds Invmt Co of America A

Fund Manager Change Invesco Growth and Income Y

Fund Manager Change Neuberger Berman Genesis Tr

Fund Manager Change Perkins Mid Cap Value T

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Fund Manager Change Baron Growth Retail

Fund Manager Change Artisan Mid Cap Inv

Fund Manager Change American Funds Growth Fund of Amer A

Fund Manager Change American Century Mid Cap Value A

Fund Manager Change Royce Low Priced Stock Svc

Fund Manager Change Oppenheimer Global Y

Fund Manager Change Columbia Small Cap Value II Z

Fund Manager Change Artisan International Inv

Fund Manager Change Oppenheimer Developing Markets Y

Morningstar Category Change Vanguard Total Bond Market Index Signal

Morningstar Category Change TIAA-CREF Equity Index Instl

Morningstar Category Change PIMCO Total Return Admin

Morningstar Category Change JPMorgan High Yield A Load Waived

Morningstar Category Change Nuveen Tradewinds Value Opportunities I

Morningstar Category Change Great-West Conservative Profile I Init

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Morningstar Category Change Great-West SecureFoundation® LT 2015 G

Morningstar Category Change Great-West Moderately Agg Profile I Init

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Morningstar Category Change Great-West Moderate Profile I Init

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Morningstar Category Change Fidelity Puritan

Morningstar Category Change Dreyfus Intl Stock Index

Morningstar Category Change American Funds Invmt Co of America A

Morningstar Category Change Invesco Growth and Income Y

Morningstar Category Change Neuberger Berman Genesis Tr

Morningstar Category Change Perkins Mid Cap Value T

Morningstar Category Change Janus Twenty T

Morningstar Category Change Fidelity Contrafund

Morningstar Category Change Baron Growth Retail

Morningstar Category Change Artisan Mid Cap Inv

Morningstar Category Change American Funds Growth Fund of Amer A

Morningstar Category Change American Century Mid Cap Value A

Morningstar Category Change Royce Low Priced Stock Svc

Morningstar Category Change Oppenheimer Global Y

Morningstar Category Change Columbia Small Cap Value II Z

Morningstar Category Change Artisan International Inv

Morningstar Category Change Oppenheimer Developing Markets Y

Stewardship Grade < User Input Value Vanguard Total Bond Market Index Signal

Stewardship Grade < User Input Value TIAA-CREF Equity Index Instl

Stewardship Grade < User Input Value PIMCO Total Return Admin

Stewardship Grade < User Input Value JPMorgan High Yield A Load Waived

Stewardship Grade < User Input Value Nuveen Tradewinds Value Opportunities I

Stewardship Grade < User Input Value Great-West Conservative Profile I Init

Stewardship Grade < User Input Value Great-West Moderately Cnsrv Prfl I Init

Stewardship Grade < User Input Value Great-West SecureFoundation® LT 2015 G

Stewardship Grade < User Input Value Great-West Moderately Agg Profile I Init

Stewardship Grade < User Input Value Great-West Aggressive Profile I Init

Stewardship Grade < User Input Value Great-West Moderate Profile I Init

Stewardship Grade < User Input Value Janus Balanced T

Stewardship Grade < User Input Value Fidelity Puritan

Stewardship Grade < User Input Value Dreyfus Intl Stock Index

Stewardship Grade < User Input Value American Funds Invmt Co of America A

Stewardship Grade < User Input Value Invesco Growth and Income Y

Stewardship Grade < User Input Value Neuberger Berman Genesis Tr

Stewardship Grade < User Input Value Perkins Mid Cap Value T

Stewardship Grade < User Input Value Janus Twenty T

Stewardship Grade < User Input Value Fidelity Contrafund

Stewardship Grade < User Input Value Baron Growth Retail

Stewardship Grade < User Input Value Artisan Mid Cap Inv

Stewardship Grade < User Input Value American Funds Growth Fund of Amer A

Stewardship Grade < User Input Value American Century Mid Cap Value A

Stewardship Grade < User Input Value Royce Low Priced Stock Svc

Stewardship Grade < User Input Value Oppenheimer Global Y

Stewardship Grade < User Input Value Columbia Small Cap Value II Z

Stewardship Grade < User Input Value Artisan International Inv

Stewardship Grade < User Input Value Oppenheimer Developing Markets Y

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The information contained in this report has been obtained from sources believed to be reliable, but its accuracy or completeness is notguaranteed. This report is not meant to supersede your custodial statements that should be read regularly. Any opinions expressedherein reflect our judgment at this date and are subject to change. Please report any discrepancies you may find to your UBSInstitutional Consultant.

Rule 204-3 under the Investment Advisers Act of 1940 requires that we make an annual offer to clients to send to them, withoutcharge, a written disclosure statement meeting the requirements of such rule. We will be glad to send you a copy of such statement toyou upon your written request.

Please contact your UBS Institutional Consultant if you have any questions regarding this report, if your financial situation, individualneeds or investment objectives have changed, or if you would like to impose or change any investment restrictions on this account.Please note that you are also required to inform your investment advisor, directly, of any changes in your financial condition, investmentobjectives or investment restrictions on your account.

Prepared For:Gwinnett County Employees Retirement SystemNovember 7, 2012

Prepared by:

Investment Performance

Period Ending September 30, 2012

Gwinnett County Composite

Allen Wright, Earle Dodd, Scott Olsen, Ray Vuicich

Annualized Performance Summary 1Net Annualized Performance Summary 3Executive Summary 5Investment Earnings Report 63 Year Capital Market Line 75 Year Capital Market Line Chart 8Capital Market Line Chart 9Universe Comparisons 10Benchmark Comparisons Used In This Report 11

Managed Account Performance

Rainier 12Barrow Hanley 16Fairpointe Capital 20William Blair 24Vaughan Nelson 28Atlanta Capital 32Invesco REIT 361607 Capital Partners 40ING 44Ryan Labs 48Templeton Global Bond 51Dreyfus International 55Cash 59Performance Report Disclosures 62

Inception 09/30/2012 Latest %tile Year to %tile 1 %tile 3 %tile 5 %tile %tileAccount Date Market Value QTR Ranking Date Ranking Year Ranking Year Ranking Year Ranking Inception RankingConsolidated Portfolio* 12/31/2006 $776,019,113 4.05% 81 10.33% 54 17.06% 45 10.61% 8 4.35% 3 5.28% 3

Policy Index 4.25% 81 10.25% 56 18.01% 36 9.90% 22 3.50% 12 4.31% 22Dynamic Index 4.03% 81 9.92% 68 17.06% 45 9.27% 50 1.63% 75Large Cap Growth

Rainier 10/22/2007 $94,410,369 5.56% 71 16.75% 43 26.11% 65 12.89% 52 0.70% 72Russell 1000 Growth 6.11% 48 16.80% 42 29.19% 32 14.73% 22 3.30% 33

Large Cap ValueBarrow Hanley 01/03/2007 $94,609,267 4.92% 90 13.67% 56 28.94% 45 12.85% 23 0.39% 52 1.72% 53Russell 1000 Value 6.51% 47 15.75% 25 30.92% 26 11.84% 43 -0.90% 84 0.27% 85

Mid Cap CoreFairpointe Capital 03/30/2012 $19,249,568 5.86% 45 2.21% 21Russell Midcap 5.59% 48 0.94% 48

Mid Cap GrowthWilliam Blair 03/30/2012 $18,712,001 4.19% 85 -0.91% 88Russell Midcap Grwth 5.35% 58 -0.56% 82

Mid Cap ValueVaughan Nelson 03/30/2012 $18,576,152 4.87% 70 -2.17% 92Russell Midcap Value 5.80% 47 2.35% 20

Small Cap BlendAtlanta Capital 01/31/2007 $60,557,056 4.16% 85 9.54% 92 27.55% 83 16.65% 20 8.57% 1 9.20% 1Russell 2000 5.25% 61 14.23% 46 31.91% 45 12.99% 73 2.21% 70 2.21% 72

REITSInvesco REIT 01/05/2007 $35,143,982 1.01% 8 15.16% 24 33.61% 32 19.77% 92 3.46% 45 2.51% 45NAREIT Equity 1.03% 8 16.10% 8 33.81% 24 20.72% 80 2.28% 79 79

Foreign Developed Blend1607 Capital Partners 06/30/2008 $100,579,899 7.76% 21 13.68% 19 16.80% 46 7.93% 2 1.41% 6MSCI ACWI ex US Net 7.40% 28 10.36% 61 14.47% 67 3.17% 42 -2.24% 42

Fixed Income Taxable IntermediateING 12/10/2007 $187,207,851 2.02% 40 4.83% 47 5.83% 56 7.01% 31 7.26% 18Barclays Aggregate 1.58% 70 3.99% 64 5.16% 67 6.18% 50 6.40% 59Ryan Labs 04/03/2012 $104,627,187 2.55% 21 5.19% 7Barclays Aggregate 1.58% 70 3.94% 53

Gross of FeesSummary StatementGwinnett County Employees Retirement System

Please be sure to read the DISCLOSURE SECTION at the end of this report which contains important disclosures and disclaimers on the information provided to you in this report.The inception date may or may not be coincident with the date that the UBS Institutional Consulting Group commenced providing performance reporting services to you.*Under $1 Billion Public Funds Universe

PAGE1

Inception 09/30/2012 Latest %tile Year to %tile 1 %tile 3 %tile 5 %tile %tileAccount Date Market Value QTR Ranking Date Ranking Year Ranking Year Ranking Year Ranking Inception Ranking

Emerging MarketsTempleton Global Bond 12/08/2011 $18,690,351 5.40% 10 11.85% 11 11.26% 11CG World Gov't 2.99% 70 3.41% 83 83Dreyfus International 12/08/2011 $18,574,476 5.54% 7 8.68% 27 9.16% 27CG World Gov't 2.99% 70 3.41% 83 83

Cash & EquivalentsCash 12/31/2006 $5,080,954 0.26% 0.93% 1.01% 0.50% 1.72% 2.18%Citigroup 3 Mo TBill 0.02% 0.05% 0.05% 0.10% 0.64% 1.20%

Gross of FeesSummary StatementGwinnett County Employees Retirement System


PAGE2

Inception 09/30/2012 Latest %tile Year to %tile 1 %tile 3 %tile 5 %tile %tileAccount Date Market Value QTR Ranking Date Ranking Year Ranking Year Ranking Year Ranking Inception RankingConsolidated Portfolio* 12/31/2006 $776,019,113 3.96% 81 10.05% 63 16.68% 52 10.17% 16 3.91% 3 4.82% 6

Policy Index 4.25% 81 10.25% 56 18.01% 36 9.90% 22 3.50% 12 4.31% 22Dynamic Index 4.03% 81 9.92% 68 17.06% 45 9.27% 50 1.63% 75Large Cap Growth

Rainier 10/22/2007 $94,410,369 5.42% 64 16.43% 37 25.77% 55 12.41% 50 0.27% 70Russell 1000 Growth 6.11% 41 16.80% 30 29.19% 25 14.73% 13 3.30% 24

Large Cap ValueBarrow Hanley 01/03/2007 $94,609,267 4.83% 85 13.37% 48 28.61% 41 12.43% 27 0.01% 53 1.33% 47Russell 1000 Value 6.51% 35 15.75% 17 30.92% 18 11.84% 36 -0.90% 71 0.27% 72

Mid Cap CoreFairpointe Capital 03/30/2012 $19,249,568 5.69% 45 1.87% 20Russell Midcap 5.59% 45 0.94% 36

Mid Cap GrowthWilliam Blair 03/30/2012 $18,712,001 3.96% 81 -1.13% 86Russell Midcap Grwth 5.35% 47 -0.56% 72

Mid Cap ValueVaughan Nelson 03/30/2012 $18,576,152 4.66% 65 -2.57% 93Russell Midcap Value 5.80% 45 2.35% 11

Small Cap BlendAtlanta Capital 01/31/2007 $60,557,056 3.96% 81 9.03% 90 26.74% 88 15.77% 17 7.75% 5 8.37% 1Russell 2000 5.25% 50 14.23% 29 31.91% 23 12.99% 56 2.21% 50 2.21% 56

REITSInvesco REIT 01/05/2007 $35,143,982 0.82% 20 14.52% 20 32.61% 33 18.88% 80 2.69% 60 1.74% 50NAREIT Equity 1.03% 13 16.10% 13 33.81% 13 20.72% 40 2.28% 80 64

Foreign Developed Blend1607 Capital Partners 06/30/2008 $100,579,899 7.56% 24 13.18% 26 15.86% 55 7.11% 6 0.65% 11MSCI ACWI ex US Net 7.40% 28 10.36% 61 14.47% 67 3.17% 42 -2.24% 42

Fixed Income Taxable IntermediateING 12/10/2007 $187,207,851 1.99% 46 4.68% 52 5.61% 59 6.77% 34 7.04% 18Barclays Aggregate 1.58% 69 3.99% 67 5.16% 67 6.18% 47 6.40% 49Ryan Labs 04/03/2012 $104,627,187 2.51% 24 5.14% 11Barclays Aggregate 1.58% 69 3.94% 52

Net of FeesSummary StatementGwinnett County Employees Retirement System


PAGE3

Inception 09/30/2012 Latest %tile Year to %tile 1 %tile 3 %tile 5 %tile %tileAccount Date Market Value QTR Ranking Date Ranking Year Ranking Year Ranking Year Ranking Inception Ranking

Emerging MarketsTempleton Global Bond 12/08/2011 $18,690,351 5.40% 9 11.85% 13 11.26% 13CG World Gov't 2.99% 70 3.41% 83 83Dreyfus International 12/08/2011 $18,574,476 5.54% 6 8.68% 30 9.16% 30CG World Gov't 2.99% 70 3.41% 83 83

Cash & EquivalentsCash 12/31/2006 $5,080,954 0.26% 0.93% 1.01% 0.48% 1.70% 2.17%Citigroup 3 Mo TBill 0.02% 0.05% 0.05% 0.10% 0.64% 1.20%

Net of FeesSummary StatementGwinnett County Employees Retirement System


PAGE4

Latest Year One Three Five SinceInvestment Returns (%) Quarter to Date Year Years Years Inception

Rainier 5.56 16.75 26.11 12.89 --- 1.12Barrow Hanley 4.92 13.67 28.94 12.85 0.39 1.56Fairpointe Capital 5.86 --- --- --- --- 2.01William Blair 4.19 --- --- --- --- -0.91Vaughan Nelson 4.87 --- --- --- --- -1.61Atlanta Capital 4.16 9.54 27.55 16.65 8.57 8.97Invesco REIT 1.01 15.16 33.61 19.77 3.46 1.021607 Capital Partners 7.76 13.68 16.80 7.93 --- 1.41ING 2.02 4.83 5.83 7.01 --- 7.35Ryan Labs 2.55 --- --- --- --- 4.00Templeton Global Bond 5.40 11.85 --- --- --- 11.85Dreyfus International 5.54 8.68 --- --- --- 8.68Cash 0.26 0.93 1.01 0.50 1.72 2.18Policy Index 4.25 10.25 18.01 9.90 3.50 4.31

Latest Quarter Year to Date

Beginning Mkt Value 747,184,120 666,635,874

Net Contributions (1,544,725) 39,220,864

Interest And Dividend Income 4,442,217 11,839,174

Net Capital Appreciation 25,998,801 58,499,127

Fees 810,881 2,311,800

Ending Mkt Value 776,019,113 776,019,113

Standard Deviation (Risk)18.0017.0016.0015.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00

An

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Return Std Dev Beta Alpha R-Squared Composite 4.35 13.30 0.88 1.08 98.09 Policy Index 3.50 15.01 1.00 0.00 100.00 3 Mth T-Bill 0.51 0.44 1.00 0.00 100.00

Policy Index

3 Mth T-Bill

Composite

Policy Index

3 Mth T-Bill

More ReturnLess Risk

More ReturnMore Risk

Less ReturnLess Risk

Less ReturnMore Risk

Total Market ValueAs of September 30, 2012

$ 776,019,113

Value Percent ING 187,207,851 24.12 Ryan Labs 104,627,187 13.48 1607 Capital Partners 100,579,899 12.96 Barrow Hanley 94,609,267 12.19 Rainier 94,410,369 12.17 Atlanta Capital 60,557,056 7.80 Invesco REIT 35,143,982 4.53 Fairpointe Capital 19,249,568 2.48 William Blair 18,712,001 2.41 Templeton Global Bond 18,690,351 2.41 Vaughan Nelson 18,576,152 2.39 Dreyfus International 18,574,476 2.39 Cash 5,080,954 0.67

Allocation - by Manager 5 Year Risk vs Reward

Executive Summary as of September 30, 2012Gwinnett County Composite

Please be sure to read the DISCLOSURE SECTION at the end of this report which contains important disclosures and disclaimers on the information provided to you in this report.The inception date may or may not be coincident with the date that the UBS Institutional Consulting Group commenced providing performance reporting services to you.

PAGE5

Manager Beginning Interest Net Ending TotalAnd Market New And Capital Market Investment Rate Of

Asset Class Value Money Dividends Appreciation Value Earnings Return

Rainier 89,441,412 0 240,048 4,728,909 94,410,369 4,968,957 5.56

Barrow Hanley 90,169,723 0 655,389 3,784,155 94,609,267 4,439,544 4.92

Fairpointe Capital 18,183,718 0 66,331 999,519 19,249,568 1,065,850 5.86

William Blair 17,957,178 0 35,796 719,027 18,712,001 754,823 4.19

Vaughan Nelson 17,713,752 0 137,803 724,597 18,576,152 862,400 4.87

Atlanta Capital 58,139,234 0 413,650 2,004,172 60,557,056 2,417,822 4.16

Invesco REIT 34,851,513 0 3 292,466 35,143,982 292,469 1.01

1607 Capital 93,335,117 0 581,130 6,663,652 100,579,899 7,244,782 7.76

ING 183,428,385 0 1,328,166 2,451,300 187,207,851 3,779,466 2.02

Ryan Labs 102,026,652 0 650,194 1,950,341 104,627,187 2,600,535 2.55

Templeton Global 17,733,019 0 205,934 751,398 18,690,351 957,332 5.40

Dreyfus Intl 17,599,084 0 107,427 867,965 18,574,476 975,392 5.54

Cash 6,605,333 -1,544,725 20,346 0 5,080,954 20,346 0.26

Gwinnett County 747,184,120 -1,544,725 4,442,217 25,937,501 776,019,113 30,379,718 4.05

Investment EarningsJune 30, 2012 Through September 30, 2012

Please be sure to read the DISCLOSURE section at the end of this report which contains important disclosures and disclaimers on the information provided to you in this report.

PAGE6

Standard Deviation (Risk)13.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00

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Policy Index

3 Mth T-Bill

Composite

Policy Index

3 Mth T-Bill





Risk versus Reward AnalysisSeptember 30, 2009 Through September 30, 2012

Please be sure to read the DISCLOSURE section at the end of this report which contains important disclosures and disclaimers on the information provided to you in this report.The comparative benchmark used in this analysis is the Policy Index.

PAGE7

Standard Deviation (Risk)18.0017.0016.0015.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00

Ann

ualiz

ed R

ate

of R

etur

n (%

)

4.00

3.00

2.00

1.00

0.00


Policy Index

3 Mth T-Bill

Composite

Policy Index

3 Mth T-Bill





Risk versus Reward AnalysisSeptember 30, 2007 Through September 30, 2012


PAGE8

Standard Deviation (Risk)15.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00

Ann

ualiz

ed R

ate

of R

etur

n (%

)

5.00

4.00

3.00

2.00

1.00


Policy Index

3 Mth T-Bill

Composite

Policy Index

3 Mth T-Bill





Risk versus Reward AnalysisDecember 31, 2006 Through September 30, 2012


PAGE9

Rate

of

Retu

rn (%

)

25

20

15

10

5

0

Quarter Fiscal YTD One Year Three Years Five Years 12/2006-9/2012 Highest Value 6.21 13.44 25.42 11.27 4.82 5.31 First Quartile 5.05 11.46 19.50 9.86 3.23 4.29 Median Value 4.82 10.52 16.81 9.24 2.49 3.51 Third Quartile 4.32 9.68 15.16 8.00 1.75 2.96 Lowest Value -0.05 0.02 -0.35 1.84 -0.96 0.28 Mean 4.38 9.89 15.97 8.53 2.34 3.44

Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Gwinnett County 4.05 81 10.33 54 17.06 45 10.61 8 4.35 3 5.28 3 Policy Index 4.25 81 10.25 56 18.01 36 9.90 22 3.50 12 4.31 22 Dynamic Index 4.03 81 9.92 68 17.06 45 9.27 50 1.63 75 N/A N/A

Rate

of

Retu

rn (%

)

30

20

10

0

-10

-20

-30

-402011 2010 2009 2008 2007

Highest Value 8.26 18.28 33.98 -5.13 12.17 First Quartile 2.59 14.38 21.28 -21.78 8.38 Median Value 1.42 12.63 18.70 -24.72 7.13 Third Quartile -0.31 11.66 16.54 -27.07 6.32 Lowest Value -3.21 2.46 5.79 -36.14 4.74 Mean 1.29 11.93 19.41 -24.16 7.37

Return Rank Return Rank Return Rank Return Rank Return Rank Gwinnett County 2.01 31 15.18 8 22.23 23 -21.51 21 8.08 32 Policy Index 1.71 47 14.38 25 23.40 20 -24.20 42 6.23 80 Dynamic Index 1.17 60 13.65 36 19.45 47 -24.15 42 N/A N/A

Annual Periods

Trailing Periods

Composite Peer Universe Comparison versus BNY Mellon Public Funds Less Than $1 Billion Managers


PAGE10

COMPOSITE BENCHMARK

11/30/2011 - Present 35.00% Barclays Aggregate 15.00% MSCI ACWI ex US Net 12.50% Russell 1000 Growth 12.50% Russell 1000 Value 7.50% Russell 2000 7.50% Russell Midcap 5.00% Citigroup World Gov't Bond 5.00% NAREIT Equity 06/30/2005 - 11/30/2011 35.00% Barclays Aggregate 15.00% MSCI ACWI ex US Net 12.50% Russell 1000 Growth 12.50% Russell 1000 Value 7.50% Russell 2000 7.50% Russell Midcap 5.00% JP Morgan Emerging Mkt Bnd + Index 5.00% NAREIT Equity

The primary index comparison for your portfolio and each of its asset classes is listed below.

Please be sure to read the DISCLOSURE SECTION at the beginning of this report which contains important disclosures and disclaimers on the information provided to you in this report.

Benchmark Comparisons Used In This Report

PAGE11



Net Contributions -- --

Interest And Dividend Income 240,048 608,098


Fees 117,407 358,155

Ending Mkt Value 94,410,369 94,410,369

Cash & Equivalents3.8%

Equity 96.2%

Quarter One Year Three Years Inception

Rate

of

Retu

rn (%

)

3028262422201816141210

86420

Total Portfolio Russell 1000 Growth

Standard Deviation (Risk)24.0023.0022.0021.0020.0019.0018.0017.0016.0015.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00-2.00-3.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

16.00

15.00

14.00

13.00

12.00

11.00

10.00

9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

-1.00

-2.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 12.89 20.20 1.08 -2.65 98.27 Russell 1000 Growth 14.73 18.50 1.00 0.00 100.00 Barclays Treas Bill 0.13 0.03 1.00 0.00 100.00

Russell 1000 Growth

Barclays Treas Bill

Total Portfolio

Russell 1000 Growth

Barclays Treas Bill





Asset Allocation

Portfolio Performance Risk vs Reward

Change in Financial Position

Executive Summary as of September 30, 2012Rainier


PAGE12

Rate

of

Retu

rn (%

)

35

30

25

20

15

10

5

0

Quarter Fiscal YTD One Year Three Years 10/2007-9/2012 Highest Value 8.73 21.55 33.06 17.20 5.12 First Quartile 6.93 17.89 30.14 14.67 2.88 Median Value 6.08 16.15 27.39 13.01 1.88 Third Quartile 5.41 14.11 25.11 11.59 0.91 Lowest Value 3.64 10.26 20.08 8.80 -2.16 Mean 6.13 16.01 27.44 13.11 1.87

Return Rank Return Rank Return Rank Return Rank Return Rank Rainier 5.56 71 16.75 43 26.11 65 12.89 52 1.12 72 Russell 1000 Growth 6.11 48 16.80 42 29.19 32 14.73 22 2.60 33

Rate

of

Retu

rn (%

)

50403020100

-10-20-30-40-50

2011 2010 2009 2008 Highest Value 7.08 25.20 50.89 -27.93 First Quartile 2.61 19.06 38.91 -34.89 Median Value -0.08 16.52 35.25 -37.81 Third Quartile -2.81 13.79 30.33 -40.38 Lowest Value -8.13 10.52 20.83 -48.82 Mean -0.12 16.64 35.12 -37.83

Return Rank Return Rank Return Rank Return Rank Rainier -2.69 73 18.22 31 32.04 69 -41.18 80 Russell 1000 Growth 2.64 24 16.71 47 37.21 35 -38.44 55

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus Large Cap Growth Managers


PAGE13

Up Market Performance

Rate

of

Ret

urn

(%)

42.040.038.036.034.032.030.028.026.024.022.020.018.016.014.012.010.0

8.06.04.02.00.0

Three Years Five Years Total Portfolio 37.15 N/A Russell 1000 Growth 37.66 40.19 Difference -0.51 N/A Ratio 0.99 N/A Up Periods 9 12

Down Market Performance

Rate

of

Ret

urn

(%)

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

-14.0

-16.0

-18.0

-20.0

-22.0

-24.0

-26.0

-28.0

-30.0

-32.0

-34.0

Three Years Five Years Total Portfolio -29.33 N/A Russell 1000 Growth -26.42 -34.76 Difference -2.91 N/A Ratio 1.11 N/A Down Periods 3 8

Performance in Rising and Declining MarketsSeptember 30, 2007 Through September 30, 2012

Please be sure to read the DISCLOSURE SECTION at the end of this report which contains important disclosures and disclaimers on the information provided to you in this report.

PAGE14

Fund's Average Investment Exposure and Market Index Returns

Quarter

Asset Class

Cash & Equivalents 3.20

Equity 96.80

International Equity 0.00

Asset Class Index Performance

Barclays Treas Bill 0.04

Russell 1000 Growth 6.11

Total Portfolio and Benchmark Performance

Dynamic Index 5.91

Policy Index 6.11

Portfolio Return 5.56

Value Added By Manager

Market Timing -0.20

Security Selection -0.35

Total Value Added -0.55

Market Timing And Security SelectionJune 30, 2012 Through September 30, 2012


PAGE15




Interest And Dividend Income 655,389 2,068,823


Fees 81,006 234,574

Ending Mkt Value 94,609,267 94,609,267


Equity 98.7%

Quarter One Year Three Years Five Years Inception

Rate

of

Retu

rn (%

)

30

25

20

15

10

5

0

Total Portfolio Russell 1000 Value

Standard Deviation (Risk)28.0026.0024.0022.0020.0018.0016.0014.0012.0010.008.006.004.002.000.00-2.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

1.00

0.00

-1.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 0.39 22.16 0.92 1.07 95.12 Russell 1000 Value -0.90 23.42 1.00 0.00 100.00 Barclays Treas Bill 0.78 0.65 1.00 0.00 100.00

Russell 1000 Value

Barclays Treas Bill

Total Portfolio

Russell 1000 Value

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 2012Barrow Hanley


PAGE16

Rate

of

Retu

rn (%

)

35

30

25

20

15

10

5

0

-5Quarter Fiscal YTD One Year Three Years Five Years 1/2007-9/2012

Highest Value 8.50 18.38 34.52 15.99 4.96 5.32 First Quartile 7.05 15.81 31.03 12.80 1.77 2.74 Median Value 6.33 14.11 28.27 11.55 0.55 1.66 Third Quartile 5.55 12.41 25.74 10.26 -0.51 0.59 Lowest Value 3.82 9.12 21.00 7.40 -2.91 -1.68 Mean 6.31 13.97 28.12 11.53 0.69 1.74

Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Barrow Hanley 4.92 90 13.67 56 28.94 45 12.85 23 0.39 52 1.56 53 Russell 1000 Value 6.51 47 15.75 25 30.92 26 11.84 43 -0.90 84 0.00 85

Rate

of

Retu

rn (%

)

50403020100

-10-20-30-40-50

2011 2010 2009 2008 Highest Value 10.48 19.63 44.48 -24.42 First Quartile 3.53 16.36 29.64 -32.25 Median Value 0.80 14.61 25.01 -34.92 Third Quartile -1.58 13.02 20.85 -37.19 Lowest Value -8.12 10.06 13.32 -44.11 Mean 0.97 14.75 25.73 -34.64

Return Rank Return Rank Return Rank Return Rank Barrow Hanley 4.43 18 11.16 94 23.22 60 -34.66 45 Russell 1000 Value 0.39 56 15.51 36 19.69 81 -36.85 71

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus Large Cap Value Managers


PAGE17


Rate

of

Ret

urn

(%)

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Three Years Five Years Total Portfolio 41.44 47.46 Russell 1000 Value 38.94 47.98 Difference 2.50 -0.52 Ratio 1.06 0.99 Up Periods 8 10


Rate

of

Ret

urn

(%)

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

-14.0

-16.0

-18.0

-20.0

-22.0

-24.0

-26.0

-28.0

-30.0

-32.0

Three Years Five Years Total Portfolio -28.15 -31.65 Russell 1000 Value -27.54 -33.64 Difference -0.61 1.99 Ratio 1.02 0.94 Down Periods 4 10



PAGE18


Quarter

Asset Class

Alt Equity 0.00


Equity 98.61



N/A


Russell 1000 Value 6.51


Dynamic Index N/A

Policy Index 6.51



Market Timing N/A

Security Selection N/A




PAGE19


Beginning Mkt Value 18,183,718 --

Net Contributions -- 18,832,656

Interest And Dividend Income 66,331 --

Net Capital Appreciation 999,519 --

Fees 31,280 91,335

Ending Mkt Value 19,249,568 19,249,568


Equity 99.5%

Quarter Inception

Rate

of

Retu

rn (

%)

7

6

5

4

3

2

1

0

Total Portfolio Russell Midcap

3/2012 6/2012 9/2012

Dol

lar

Val

ue

104

102

100

98

96

94

92

90

88

Quarter Inception Total Portfolio 5.86 2.01 Russell Midcap 5.59 0.94

Asset Allocation

Portfolio Performance Growth of a Dollar


Executive Summary as of September 30, 2012Fairpointe Capital


PAGE20

Rate

of

Retu

rn (%

)

8

6

4

2

0

-2

-4

Quarter 3/2012-9/2012 Highest Value 8.96 5.68 First Quartile 6.55 1.86 Median Value 5.54 0.85 Third Quartile 4.68 -0.22 Lowest Value 1.85 -4.49 Mean 5.54 0.83

Return Rank Return Rank Fairpointe Capital 5.86 45 2.01 21 Russell Midcap 5.59 48 0.94 48

Trailing Periods

Total Portfolio Peer Universe Comparison versus Small Cap Core Managers


PAGE21


Rate

of

Ret

urn

(%)

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap 40.08 47.26 Difference N/A N/A Ratio N/A N/A Up Periods 9 12


Rate

of

Ret

urn

(%)

2.00.0

-2.0-4.0-6.0-8.0

-10.0-12.0-14.0-16.0-18.0-20.0-22.0-24.0-26.0-28.0-30.0-32.0-34.0-36.0-38.0-40.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap -30.12 -40.86 Difference N/A N/A Ratio N/A N/A Down Periods 3 8



PAGE22


Quarter

Asset Class

Alt Equity 0.00


Equity 98.06



N/A


Russell 2000 5.25


Dynamic Index N/A

Policy Index 5.59



Market Timing N/A


Total Value Added 0.28



PAGE23






Fees 38,277 38,277

Ending Mkt Value 18,712,001 18,712,001


Equity 96.2%

Quarter Inception

Rate

of

Retu

rn (

%)

6

5

4

3

2

1

0

-1

-2

Total Portfolio Russell Midcap Grwth

3/2012 6/2012 9/2012

Dol

lar

Val

ue

102

101

100

99

98

97

96

95

94

93

92

Quarter Inception Total Portfolio 4.19 -0.91 Russell Midcap Grwth 5.35 -0.56

Asset Allocation



Executive Summary as of September 30, 2012William Blair


PAGE24

Rate

of

Retu

rn (%

)

8

6

4

2

0

-2

-4

Quarter 3/2012-9/2012 Highest Value 8.96 5.68First Quartile 6.55 1.86Median Value 5.54 0.85Third Quartile 4.68 -0.22 Lowest Value 1.85 -4.49 Mean 5.54 0.83

Return Rank Return Rank William Blair 4.19 85 -0.91 88 Russell Midcap Grwth 5.35 58 -0.56 82

Trailing Periods



PAGE25


Rate

of

Ret

urn

(%)

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap Grwth 42.21 48.57 Difference N/A N/A Ratio N/A N/A Up Periods 9 12


Rate

of

Ret

urn

(%)

2.00.0

-2.0-4.0-6.0-8.0

-10.0-12.0-14.0-16.0-18.0-20.0-22.0-24.0-26.0-28.0-30.0-32.0-34.0-36.0-38.0-40.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap Grwth -31.62 -41.21 Difference N/A N/A Ratio N/A N/A Down Periods 3 8



PAGE26


Quarter

Asset Class


Equity 95.74



Russell 2000 5.25


Dynamic Index 5.02

Policy Index 5.35



Market Timing -0.33





PAGE27






Fees 37,712 75,424

Ending Mkt Value 18,576,152 18,576,152


Equity 99.1%

Quarter Inception

Rate

of

Retu

rn (

%)

7

6

5

4

3

2

1

0

-1

-2

Total Portfolio Russell Midcap Value

3/2012 6/2012 9/2012

Dol

lar

Val

ue

103

102

101

100

99

98

97

96

95

94

93

92

91

Quarter Inception Total Portfolio 4.87 -1.61 Russell Midcap Value 5.80 2.35

Asset Allocation



Executive Summary as of September 30, 2012Vaughan Nelson


PAGE28

Rate

of

Retu

rn (%

)

8

6

4

2

0

-2

-4

Quarter 3/2012-9/2012 Highest Value 8.96 5.68First Quartile 6.55 1.86Median Value 5.54 0.85Third Quartile 4.68 -0.22 Lowest Value 1.85 -4.49 Mean 5.54 0.83

Return Rank Return Rank Vaughan Nelson 4.87 70 -1.61 92 Russell Midcap Value 5.80 47 2.35 20

Trailing Periods



PAGE29


Rate

of

Ret

urn

(%)

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap Value 44.34 51.20 Difference N/A N/A Ratio N/A N/A Up Periods 8 11


Rate

of

Ret

urn

(%)

0.0-2.0-4.0-6.0-8.0

-10.0-12.0-14.0-16.0-18.0-20.0-22.0-24.0-26.0-28.0-30.0

-32.0-34.0-36.0

Three Years Five Years Total Portfolio N/A N/A Russell Midcap Value -29.16 -37.32 Difference N/A N/A Ratio N/A N/A Down Periods 4 9



PAGE30


Quarter

Asset Class

Alt Equity 0.00


Equity 95.79



N/A


Russell 2000 5.25


Dynamic Index N/A

Policy Index 5.80



Market Timing N/A





PAGE31






Fees 110,176 216,725

Ending Mkt Value 60,557,056 60,557,056


Equity 93.8%


Rate

of

Retu

rn (%

)

323028262422201816141210

86420

Total Portfolio Russell 2000

Standard Deviation (Risk)32.0030.0028.0026.0024.0022.0020.0018.0016.0014.0012.0010.008.006.004.002.000.00-2.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 8.57 20.69 0.77 5.80 96.86 Russell 2000 2.21 26.54 1.00 0.00 100.00 Barclays Treas Bill 0.78 0.65 1.00 0.00 100.00

Russell 2000

Barclays Treas Bill

Total Portfolio

Russell 2000

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 2012Atlanta Capital


PAGE32

Rate

of

Retu

rn (%

)

40

35

30

25

20

15

10

5

0

Quarter Fiscal YTD One Year Three Years Five Years 3/2007-9/2012 Highest Value 8.96 18.70 38.71 18.45 8.42 8.82 First Quartile 6.55 15.70 34.15 16.41 5.34 5.50 Median Value 5.54 13.87 31.35 14.54 2.88 2.85 Third Quartile 4.68 11.99 28.68 12.73 1.44 1.94 Lowest Value 1.85 7.00 21.96 10.70 -1.48 -0.72 Mean 5.54 13.69 31.31 14.61 3.32 3.55

Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Atlanta Capital 4.16 85 9.54 92 27.55 83 16.65 20 8.57 1 9.15 1 Russell 2000 5.25 61 14.23 46 31.91 45 12.99 73 2.21 70 2.23 69

Rate

of

Retu

rn (%

)

60

50

40

30

20

10

0

-10

2011 2010 2009 Highest Value 6.97 36.09 55.02 First Quartile 1.89 30.04 39.12 Median Value -0.90 27.87 30.92 Third Quartile -3.83 24.79 25.50 Lowest Value -11.66 20.63 16.15 Mean -1.34 27.76 32.51

Return Rank Return Rank Return Rank Atlanta Capital 10.18 1 25.78 67 26.90 71 Russell 2000 -4.18 78 26.85 61 27.17 69

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus Small Cap Core Mutual Funds


PAGE33


Rate

of

Ret

urn

(%)

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Three Years Five Years Total Portfolio 43.05 44.05 Russell 2000 46.89 51.32 Difference -3.84 -7.27 Ratio 0.92 0.86 Up Periods 8 11


Rate

of

Ret

urn

(%)

0.0

-2.0-4.0

-6.0-8.0

-10.0-12.0-14.0

-16.0-18.0

-20.0-22.0

-24.0-26.0-28.0

-30.0-32.0

-34.0-36.0

Three Years Five Years Total Portfolio -22.44 -23.16 Russell 2000 -33.15 -36.72 Difference 10.71 13.57 Ratio 0.68 0.63 Down Periods 4 9



PAGE34


Quarter

Asset Class


Equity 94.12



Russell 2000 5.25


Dynamic Index 4.90

Policy Index 5.25



Market Timing -0.36





PAGE35




Interest And Dividend Income 3 5

Net Capital Appreciation 353,766 4,643,875

Fees 61,300 175,926

Ending Mkt Value 35,143,982 35,143,982Real Estate

100.0%


Rate

of

Retu

rn (%

)

35

30

25

20

15

10

5

0

Total Portfolio NAREIT Equity

Standard Deviation (Risk)42.0040.0038.0036.0034.0032.0030.0028.0026.0024.0022.0020.0018.0016.0014.0012.0010.008.006.004.002.000.00-2.00-4.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

3.00

2.00

1.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 3.46 32.15 0.93 0.73 99.58 Nareit Equity 2.28 34.54 1.00 0.00 100.00 Barclays Treas Bill 0.78 0.65 1.00 0.00 100.00

NAREIT Equity

Barclays Treas Bill

Total Portfolio

NAREIT Equity

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 2012Invesco REIT


PAGE36

Rate

of

Retu

rn (%

)

4540353025201510

50

-5Quarter Fiscal YTD One Year Three Years Five Years 1/2007-9/2012

Highest Value 5.51 25.83 42.52 22.90 7.20 4.28 First Quartile 0.74 15.19 33.84 22.16 5.46 2.70 Median Value -0.02 14.68 32.87 21.65 3.35 0.68 Third Quartile -0.23 14.46 32.28 21.07 2.68 0.27 Lowest Value -0.81 13.54 29.43 18.57 0.16 -1.96 Mean 0.45 15.45 33.35 21.39 3.56 1.09

Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Invesco REIT 1.01 8 15.16 24 33.61 32 19.77 92 3.46 45 1.02 45 NAREIT Equity 1.03 8 16.10 8 33.81 24 20.72 80 2.28 79 -0.06 79

Rate

of

Retu

rn (%

)

50403020100

-10-20-30-40-50

2011 2010 2009 2008 Highest Value 15.74 33.01 46.88 -18.75 First Quartile 11.60 30.14 34.17 -32.04 Median Value 10.18 29.02 31.19 -35.28 Third Quartile 8.99 26.36 26.77 -38.95 Lowest Value -0.75 17.27 -28.83 -45.15 Mean 9.80 28.07 29.93 -35.35

Return Rank Return Rank Return Rank Return Rank Invesco REIT 9.52 58 24.40 84 30.76 52 -33.61 29 NAREIT Equity 8.27 80 27.94 63 28.01 69 -37.73 65

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus REIT/Real Estate Managers


PAGE37


Rate

of

Ret

urn

(%)

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

Three Years Five Years Total Portfolio 34.84 46.14 NAREIT Equity 36.06 48.27 Difference -1.23 -2.13 Ratio 0.97 0.96 Up Periods 10 14


Rate

of

Ret

urn

(%)

0.0

-5.0

-10.0

-15.0

-20.0

-25.0

-30.0

-35.0

-40.0

-45.0

-50.0

-55.0

Three Years Five Years Total Portfolio -18.62 -53.78 NAREIT Equity -18.53 -56.99 Difference -0.10 3.21 Ratio 1.01 0.94 Down Periods 2 6



PAGE38


Quarter

Asset Class


Real Estate 99.94



NAREIT Equity 1.03


Dynamic Index 0.04

Policy Index 1.03



Market Timing -0.99

Security Selection 0.97




PAGE39




Interest And Dividend Income 581,130 1,533,554


Fees 174,987 538,058

Ending Mkt Value 100,579,899 100,579,899


Equity 96.2%


Rate

of

Retu

rn (%

)

18

16

14

12

10

8

6

4

2

0

-2

-4

Total Portfolio MSCI ACWI ex US Net

Standard Deviation (Risk)24.0023.0022.0021.0020.0019.0018.0017.0016.0015.0014.0013.0012.0011.0010.009.008.007.006.005.004.003.002.001.000.00-1.00-2.00-3.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

-1.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 7.93 20.05 0.98 4.58 98.57 Msci Acwi Ex Us Net 3.17 20.33 1.00 0.00 100.00 Barclays Treas Bill 0.13 0.03 1.00 0.00 100.00

MSCI ACWI ex US Net

Barclays Treas Bill

Total Portfolio

MSCI ACWI ex US Net

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 20121607 Capital Partners


PAGE40

Rate

of

Retu

rn (%

)

25

20

15

10

5

0

-5

Quarter Fiscal YTD One Year Three Years 6/2008-9/2012 Highest Value 9.55 17.54 22.95 8.67 2.69 First Quartile 7.54 13.26 18.69 4.55 -0.91 Median Value 6.69 11.12 16.58 2.79 -2.81 Third Quartile 6.13 9.42 13.80 1.58 -4.03 Lowest Value 4.32 4.83 8.39 -2.25 -7.37 Mean 6.82 11.30 16.06 3.11 -2.46

Return Rank Return Rank Return Rank Return Rank Return Rank 1607 Capital 7.76 21 13.68 19 16.80 46 7.93 2 1.41 6 MSCI ACWI ex US Net 7.40 28 10.36 61 14.47 67 3.17 42 -2.24 42

Rate

of

Retu

rn (%

)

50

0

2011 2010 2009 Highest Value -7.63 22.41 80.73 First Quartile -11.86 14.14 38.82 Median Value -13.68 10.54 32.82 Third Quartile -15.59 7.97 28.00 Lowest Value -22.23 3.89 20.64 Mean -13.86 11.48 34.35

Return Rank Return Rank Return Rank 1607 Capital -11.72 24 20.87 4 46.88 10 MSCI ACWI ex US Net -13.71 50 11.15 42 41.47 15

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus International Equity Managers


PAGE41


Rate

of

Ret

urn

(%)

42.040.038.036.034.032.030.028.026.024.022.020.018.016.014.012.010.0

8.06.04.02.00.0

Three Years Five Years Total Portfolio 30.80 N/A MSCI ACWI ex US Net 26.39 41.28 Difference 4.41 N/A Ratio 1.17 N/A Up Periods 9 11


Rate

of

Ret

urn

(%)

2.00.0

-2.0-4.0-6.0-8.0

-10.0-12.0-14.0-16.0-18.0-20.0-22.0-24.0-26.0-28.0-30.0-32.0-34.0-36.0-38.0-40.0

Three Years Five Years Total Portfolio -31.28 N/A MSCI ACWI ex US Net -35.17 -40.30 Difference 3.88 N/A Ratio 0.89 N/A Down Periods 3 9



PAGE42


Quarter

Asset Class

Alt Equity 0.00


Equity 63.97



N/A


MSCI ACWI ex US Net 7.40


Dynamic Index N/A

Policy Index 7.40



Market Timing N/A





PAGE43



Net Contributions -- (88,000,000)

Interest And Dividend Income 1,328,166 4,587,141


Fees 120,604 545,194

Ending Mkt Value 187,207,851 187,207,851


Rate

of

Retu

rn (%

)

8

7

6

5

4

3

2

1

0

Total Portfolio Barclays Aggregate

Standard Deviation (Risk)3.002.001.000.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 7.01 2.73 0.90 1.37 93.25 Barclays Aggregate 6.18 2.93 1.00 0.00 100.00 Barclays Treas Bill 0.13 0.03 1.00 0.00 100.00

Barclays Aggregate

Barclays Treas Bill

Total Portfolio

Barclays Aggregate

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 2012ING


PAGE44

Rate

of

Retu

rn (%

)

12

10

8

6

4

2

0

Quarter Fiscal YTD One Year Three Years 12/2007-9/2012 Highest Value 3.91 9.49 11.54 9.80 8.99 First Quartile 2.44 6.08 7.83 7.31 7.22 Median Value 1.86 4.72 6.13 6.21 6.45 Third Quartile 1.52 3.63 4.93 5.26 5.73 Lowest Value 0.83 2.13 2.95 3.49 4.15 Mean 2.02 5.01 6.51 6.34 6.45

Return Rank Return Rank Return Rank Return Rank Return Rank ING 2.02 40 4.83 47 5.83 56 7.01 31 7.35 18 Barclays Aggregate 1.58 70 3.99 64 5.16 67 6.18 50 6.22 59

Rate

of

Retu

rn (%

)

302520151050

-5-10-15

2011 2010 2009 2008 Highest Value 10.07 11.75 30.72 9.39 First Quartile 7.73 7.85 11.96 5.86 Median Value 6.39 6.48 8.38 4.11 Third Quartile 5.44 5.42 6.29 0.22 Lowest Value 2.70 2.63 2.74 -15.34 Mean 6.46 6.63 10.01 2.46

Return Rank Return Rank Return Rank Return Rank ING 7.40 32 7.88 24 8.84 46 5.98 24 Barclays Aggregate 7.84 22 6.54 47 5.93 80 5.24 31

Annual Periods

Trailing Periods

Total Portfolio Peer Universe Comparison versus Intermediate Bond Managers


PAGE45


Rate

of

Ret

urn

(%)

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Three Years Five Years Total Portfolio 8.17 N/A Barclays Aggregate 7.27 8.44 Difference 0.90 N/A Ratio 1.12 N/A Up Periods 11 17


Rate

of

Ret

urn

(%)

0.0

-1.0

-2.0

Three Years Five Years Total Portfolio -1.27 N/A Barclays Aggregate -1.30 -2.77 Difference 0.03 N/A Ratio 0.98 N/A Down Periods 1 3



PAGE46


Quarter

Asset Class

Alt Equity 0.00

Cash & Equivalents -3.22

US Treasury Bills 0.00

Fixed Income 103.22

Equity 0.00


N/A


Barclays Aggregate 1.58


Dynamic Index N/A

Policy Index 1.58



Market Timing N/A





PAGE47





Net Capital Appreciation 1,950,341 --

Fees 38,132 38,132

Ending Mkt Value 104,627,187 104,627,187

Distribution of AssetsMarket Value Market Value Latest Since

09/30/2012 Allocation 06/30/2012 Allocation Quarter InceptionRyan Labs

Total Portfolio $104,627,187 100.00% $102,026,652 100.00% 2.55% 4.00%Cash & Equivalents $11,775,839 11.26% $12,402,786 12.16% 0.00% 0.00%Fixed Income $92,851,348 88.74% $89,623,866 87.84% 2.90% 4.64%Equity


Fixed Income88.7%

Latest Month Latest Quarter Since Inception

Rate

of

Retu

rn (

%)

5

4

3

2

1

0

Total Portfolio Barclays Aggregate

6/2012 9/2012

Dol

lar

Val

ue

105

104

103

102

101

100

99

Latest Month Latest Quarter Since Inception Ryan Labs 0.36 2.55 4.00 Barclays Aggregate 0.14 1.58 2.54

Asset Allocation



Executive Summary as of September 30, 2012Ryan Labs


PAGE48


Rate

of

Ret

urn

(%)

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Three Years Five Years Total Portfolio N/A N/A Barclays Aggregate 7.27 8.44 Difference N/A N/A Ratio N/A N/A Up Periods 11 17


Rate

of

Ret

urn

(%)

0.0

-1.0

-2.0

Three Years Five Years Total Portfolio N/A N/A Barclays Aggregate -1.30 -2.77 Difference N/A N/A Ratio N/A N/A Down Periods 1 3



PAGE49


Quarter

Asset Class


Fixed Income 88.05

Equity 0.00



Barclays Aggregate 1.58


Dynamic Index 1.40

Policy Index 1.58



Market Timing -0.19





PAGE50





Net Capital Appreciation 751,398 636,286

Fees -- --

Ending Mkt Value 18,690,351 18,690,351Fixed Income

100.0%

Quarter Inception

Rate

of

Retu

rn (

%)

13

12

11

10

9

8

7

6

5

4

3

2

1

0

TOTAL FUND CG World Gov't

12/2011 3/2012 6/2012 9/2012

Dol

lar

Val

ue

114

112

110

108

106

104

102

100

98

Quarter Inception TOTAL FUND 5.40 11.85 CG World Gov't 2.99 3.41

Asset Allocation



Executive Summary as of September 30, 2012Templeton Global Bond


PAGE51

Rate

of

Retu

rn (%

)

16

14

12

10

8

6

4

2

0

Quarter 12/2011-9/2012 Highest Value 6.05 15.96 First Quartile 4.46 9.32 Median Value 3.62 6.46 Third Quartile 2.74 4.23 Lowest Value 0.24 0.03 Mean 3.39 6.92

Return Rank Return Rank Templeton Global 5.40 10 11.85 11 CG World Gov't 2.99 70 3.41 83

Annual Periods

Trailing Periods

TOTAL FUND Peer Universe Comparison versus Global Fixed Income Managers


PAGE52


Rate

of

Ret

urn

(%)

18.0

17.0

16.0

15.0

14.0

13.0

12.0

11.0

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Three Years Five Years TOTAL FUND N/A N/A CG World Gov't 11.02 17.82 Difference N/A N/A Ratio N/A N/A Up Periods 7 12


Rate

of

Ret

urn

(%)

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

-8.0

Three Years Five Years TOTAL FUND N/A N/A CG World Gov't -4.44 -8.58 Difference N/A N/A Ratio N/A N/A Down Periods 5 8



PAGE53


Quarter

Asset Class


Fixed Income 100.00



CG World Gov't 2.99


Dynamic Index N/A

Policy Index 2.99



Market Timing N/A





PAGE54





Net Capital Appreciation 867,965 888,915

Fees -- --

Ending Mkt Value 18,574,476 18,574,476Fixed Income

100.0%

Quarter Inception

Rate

of

Retu

rn (

%)

10

9

8

7

6

5

4

3

2

1

0

TOTAL FUND CG World Gov't

12/2011 3/2012 6/2012 9/2012

Dol

lar

Val

ue

110

109

108

107

106

105

104

103

102

101

100

99

Quarter Inception TOTAL FUND 5.54 8.68 CG World Gov't 2.99 3.41

Asset Allocation



Executive Summary as of September 30, 2012Dreyfus International


PAGE55

Rate

of

Retu

rn (%

)

16

14

12

10

8

6

4

2

0

Quarter 12/2011-9/2012 Highest Value 6.05 15.96 First Quartile 4.46 9.32 Median Value 3.62 6.46 Third Quartile 2.74 4.23 Lowest Value 0.24 0.03 Mean 3.39 6.92

Return Rank Return Rank Dreyfus Intl 5.54 7 8.68 27 CG World Gov't 2.99 70 3.41 83

Annual Periods

Trailing Periods

TOTAL FUND Peer Universe Comparison versus Global Fixed Income Managers


PAGE56


Rate

of

Ret

urn

(%)

18.0

17.0

16.0

15.0

14.0

13.0

12.0

11.0

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Three Years Five Years TOTAL FUND N/A N/A CG World Gov't 11.02 17.82 Difference N/A N/A Ratio N/A N/A Up Periods 7 12


Rate

of

Ret

urn

(%)

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

-8.0

Three Years Five Years TOTAL FUND N/A N/A CG World Gov't -4.44 -8.58 Difference N/A N/A Ratio N/A N/A Down Periods 5 8



PAGE57


Quarter

Asset Class


Fixed Income 100.00



CG World Gov't 2.99


Dynamic Index N/A

Policy Index 2.99



Market Timing N/A





PAGE58



Net Contributions (1,544,725) (3,255,475)


Net Capital Appreciation -- --

Fees -- --

Ending Mkt Value 5,080,954 5,080,954Cash & Equivalents

100.0%


Rate

of

Retu

rn (%

)

3

2

1

0

Total Portfolio Citigroup 3 Mo TBill

Standard Deviation (Risk)2.001.000.00

Ann

ualiz

ed R

ate

of R

etu

rn (%

)

2.00

1.00

0.00

Return Std Dev Beta Alpha R-Squared Total Portfolio 1.72 1.26 -1.83 0.69 8.89 Citigroup 3 Mo Tbill 0.64 0.54 1.00 0.00 100.00 Barclays Treas Bill 0.78 0.65 1.00 0.00 100.00

Citigroup 3 Mo TBill

Barclays Treas Bill

Total Portfolio

Citigroup 3 Mo TBill

Barclays Treas Bill





Asset Allocation



Executive Summary as of September 30, 2012Cash


PAGE59


Rate

of

Ret

urn

(%)

1.0

0.0

Three Years Five Years Total Portfolio 0.50 1.72 Citigroup 3 Mo TBill 0.10 0.64 Difference 0.41 1.08 Ratio 5.29 2.69 Up Periods 12 20


Rate

of

Ret

urn

(%)

0.0

Three Years Five Years Total Portfolio N/A N/A Citigroup 3 Mo TBill N/A N/A Difference N/A N/A Ratio N/A N/A Down Periods 0 0



PAGE60


Quarter

Asset Class





Dynamic Index 0.04

Policy Index 0.02



Market Timing 0.02





PAGE61

Performance Report Disclosures

General InformationThis performance report represents information about your accounts in the UBS Institutional ConsultingGroup at UBS Financial Services.

This report is intended as a general guide to review the performance of your holdings across a variety ofaccounts including those accounts held at different financial institutions. This report is for your use only.Information contained in the report should not be used for tax reporting or preparation purposes or used asthe basis of an investment or liquidation decision.

Please contact your Institutional Consultant if you have any questions regarding this performance report, ifyour financial situation, needs or investment objectives on any account have changed, or if you would like toimpose or change any investment restrictions on any account.

No Tax or Legal AdviceNeither UBS Financial Services nor any of its employees provide tax or legal advice. You must consult withyour legal or tax advisors regarding your personal circumstances.

Assets Held at Other Qualified CustodiansDepending on the accounts covered by your Institutional Consulting Services Agreement with us, this reportmay cover a number of your existing accounts, each with a potentially different investment objective and riskparameters. These accounts may be held at a variety of financial institutions and information reflected on thisreport is based on statements your custodians have provided to UBS Financial Services, at your request. Otherthan information included for accounts you hold at UBS Financial Services, we are not responsible for theaccuracy or completeness of any information included in this report. UBS Financial Services does not provideadvice with respect to your assets at other firms. This report includes information only as of the date of theaccount statements provided, which may differ by account or custodian. Your UBS Financial Services accountstatements are the only official record of your holdings with us and are not replaced, amended or supercededby any of the information presented in this Report.

This report does not constitute the solicitation to purchase or sell any specific security. This report may include a performance analysisof a variety of accounts, each with different investments, investment objectives and risk parameters. As a result, the overweighting orunderweighting of an account in a particular sector or asset class should not be viewed as an isolated factor in makinginvestment/liquidation decisions. Rather, such decisions should be assessed on an account by account basis and after an assessment ofthe overall impact of such decisions on a portfolio consisting of all your accounts.

Page 62

Important Information About This Report

Market ValuesMarket values used or presented in this report are obtained from sources believed to be reliable. UBS FinancialServices and its representatives make no representation or assurance that the market values presented in thereport are true and accurate.

EstimatesEstimates of annual interest or dividend income should not be relied upon. The estimates are based either onpast payout experience or scheduled interest payments. Past payouts are not an indication of future payoutsand there can be no assurance that any fixed income security will meet its scheduled interest payments.

Policy StatementsNeither UBS Financial Services nor your Institutional Consultant is responsible for ensuring that yourinvestment policy statement complies with all legal, actuarial or other requirements that may apply to you.That responsibility rests solely with you and you should consult your legal and tax advisors regarding thosematters.

Performance ResultsGross performanceThis report may illustrate net or gross of fee performance, but not both. While gross performance is valuablewhen reviewing a manager's performance relative to a particular index or peer group, note that suchinformation does not reflect management fees, wrap fees, transaction costs or your Institutional consultingfees.

The payment of fees and expenses will reduce the performance of the account and the reduction inperformance will have a cumulative effect over time. The net effect of the payment of fees on the annualizedperformance, and the compounded or cumulative effect over time, is dependent on the amount of the feeand the account's investment performance. For example, an account that experiences an annual grossperformance of 10% but incurs a 2.8% annual fee that is deducted quarterly on a prorated basis, willexperience net annual performance of 7.1%, a reduction of 2.9% per year.

Net of fees performanceIf your assets are custodied at UBS Financial Services and you have selected one or more of our advisoryprograms as an investment option and pay the program fee directly from those accounts, you will receiveseparate performance reports for those accounts which illustrate the performance of your portfolio on a netof fee basis.

Page 63

Index InformationThis report presents the current and historical performance of certain market indexes. These indexes mayrepresent a broad range of asset classes, market segments and investment styles. Depending upon thecomposition of your portfolio and your accounts and depending on your investment objectives, these indexesmay not be an appropriate measure or benchmark against which to compare the performance of a particularaccount or all of your accounts. Consequently, the performance of the indexes is presented for illustrationpurposes only.

Although the performance of an index is often used as a benchmark against which to compare theperformance of an actively managed separate account or actively managed mutual fund, actively managedaccounts and mutual funds are not generally restricted to investing only in the securities that are included inthe index. As a result, the securities held in your account will differ from the securities included in the indexand the performance of the account may likewise differ from the performance of the index. The performanceof an index reflects the passive performance of an unmanaged universe of securities. The performance of anindex does not reflect advisory or transaction fees, all of which would reduce the overall return. Indexes arenot available for direct investment. The past performance of an index is no guarantee of future results.

Benchmark RebalancingComparative benchmarks comprising more than one index are constructed each month based on the returnof the constituent indexes in the comparative benchmark and the respective weights assigned to eachconstituent index.

Target Asset AllocationThe target asset allocation is the percentage allocation of your total or composite investment fund among theasset classes in which you have decided to invest as set forth in your Investment Policy Statement.

Policy IndexFor each separate account, the Policy Index is the passive index that you have selected to serve as abenchmark against which to compare the performance of the separate account. If the account is balanced,indexes may be a blend of indexes.

For the total or composite investment fund, the Policy Index is a composite of one or more passive indexesthat you have selected and that are weighted according to the percentage weightings set forth in yourInvestment Policy Statement. The performance of your total or composite investment fund is comparedagainst the performance of the Policy Index that you have selected for the composite.

Page 64

For the purposes of calculating the performance of the Policy Index for the composite investment fund, thePolicy Index is recalculated using the percentage weightings set forth in your Investment Policy Statement ona monthly or quarterly basis depending on the convention that you selected.

The Policy Index that you selected for your total or composite investment fund is shown below:35.00% Barclays Aggregate, 15.00% MSCI ACWI ex US Net, 12.50% Russell 1000 Growth, 12.50% Russell1000 Value, 7.50% Russell 2000, 7.50% Russell Midcap, 5.00% Citigroup World Gov't Bond, 5.00%NAREIT Equity.

Account ValuationThis report uses a time-weighted rate of return, a method that calculates portfolio value using the beginningand ending portfolio values for the month and weighs each contribution/withdrawal by the amount of timeinvested.

Performance Start DateThe inception date shown in the report may or may not be the date that the UBS Institutional ConsultingGroup began providing services or performance information to you and may not be the date that an accountwas first invested in securities. Contact your Institutional Consultant for more information regarding theactual inception date.

Manager DataData concerning various managers' portfolio performance is obtained from sources believed to be reliable.This data is provided for comparative purposes only. UBS Financial Services does not guarantee the accuracyor veracity of this information. Different performance calculation methods may be used to calculate eachmanager's portfolio performance. Investment objectives of similar style portfolios of other managers may notmatch exactly your investment objectives.

BrochureRule 204-3 of the Investment Advisers Act of 1940 requires that we make an annual offer to clients to sendto them, without charge, a written disclosure statement. We will be glad to provide you with a copy of suchstatement upon your written request.

Page 65

©2012 UBS Financial Services Inc. All Rights Reserved. Member SIPC.All other trademarks, registered trademarks, service marks and registered service marks are of their respective companies.

UBS Financial Services Inc.www.ubs.com/financialservicesinc050707-1138

UBS Financial Services Inc. is a subsidiary of UBS AG.

Page 66

ab

Investment Strategy Guide

Risk and re� ation

Wealth Management ResearchFourth Quarter 2012

Central banks o� set structural risksIndiscriminate rally coming to an endOpportunities lie in corporate bonds rather than equities

Quarterly

Investment Strategy Guide Fourth Quarter 2012 1

Contents Editorial and Video Feature (electronic version only) . . . . . . . . . . . . . . . . . . . . . . 2

Summary & Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Focus: Risk and re� ation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Will…May…or Won’t: A Progress Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Washington Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Market Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Financial Market Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Foreign Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

International Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

US Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

US Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Alternative Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Investment Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Disclaimers/Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Publication details

Publisher UBS Financial Services Inc.

Wealth Management Research

1285 Avenue of the Americas, 13th Floor

New York, NY 10019

This report has been prepared by UBS Financial

Services Inc. (“UBS FS”) and UBS AG. Please see

important disclaimers and disclosures at the end

of the document.

This report was published

on 27 September 2012.

Editor in ChiefStephen Freedman

EditorMarcy Tolko�

Donna Brodsky

Authors (in alphabetical order)

Thomas Berner

Rebecca Clarke

Stephen Freedman

Katie Klingensmith

David Le� owitz

Barry McAlinden

Donald McLauchlan

Kathleen McNamara

Brian Rose

Mike Ryan

Dominic Schnider

David Wang

Henry Wong

Andrew Yongvanich (UBS Alternative Investments)

Jeremy Zirin

Project ManagementPaul Leeming

Greg Rosman

Research AssistantDaniel Kenny

Desktop PublishingGeorge Stilabower

Cognizant Group – Basavaraj Gudihal,

Srinivas Addugula, Pavan Mekala

and Virender Negi

2 Investment Strategy Guide Fourth Quarter 2012

Dear reader,

Standing on the brink of the fourth quarter of an eventful year, we are struck by the persistent in� uence of three market driving forces: The � rst is the e� ect of balance sheet deleveraging, which the world has watched playing out in recent weeks in the renewed anxiety around the eurozone debt crisis and the continuing uncertainty that thrives in the shadow of a potential US � scal cli� . The second is the scope of political transition, which has exerted its in� uence throughout the year across Europe, Asia, and the Middle East…not to mention in the US where the main event is still to come. The third is the power of monetary policy, which central bankers have demonstrated throughout the year, most recently in market-moving actions from the European Central Bank and the US Federal Reserve.

These three forces have shaped an investment landscape balanced between risk and re� ation. So far in 2012 the latter has been the more important driver of market outcomes, leading to a meaningful rally in risk assets which has also bene� ted from a notable absence of “bad news” relative to the past two years.

So what’s next? In short, we see an environment with fewer tail risks but chal-lenging macro conditions and a political outlook that remains uncertain. In our view, these are the ingredients for continued sluggish growth de� ned by periods of increased market volatility—but not by major economic contractions or sus-tained market corrections.

With this in mind, we retain a largely neutral allocation across major asset classes and suggest that investors assume a more selective posture as the indiscriminate nature of the current rally fades into more speci� c opportunities.

Editorial

Mike Ryan

Mike Ryan, CFAChief Investment StrategistHead, Wealth Management Research – Americas

Stephen Freedman

Stephen Freedman, PhD, CFAHead, Investment StrategyWealth Management Research – Americas

To watch Chief Investment Strategist Mike Ryan give a summary of this report, please click the play button.

http://www.ubs.com/us/en/wealth/misc/isgriskandreflation.html

Investment Strategy Guide December 2011 3

We believe the phase during which the current re� ationary e� ort led to indiscriminate rally-ing of risk assets is nearing an end. Consider the following:• Little has changed: While policymakers have reduced the tail risks associated with

potential eurozone debt defaults, a US debt ceiling stalemate and a Chinese hard landing, the macro environment is still challenging and the political outlook uncertain.

• Absence of malice: The rally across equity and credit markets appears to have had less to do with improvement in the macro outlook or a reacceleration in corporate pro� ts than a lack of bad news—an “absence of malice.”

• All together now: With the exception of the Bank of China, each of the major cen-tral banks has shi�ed to an openly expansionary policy stance. This will be an important source of support for the real economy and global � nancial markets.

Rather than extrapolating the encouraging market behavior witnessed since July, investors should be more selective. We suggest the following recommendations:

• Neutral tactical allocation to global equities: Investors should remain allocated in line with their long-term oriented benchmarks.

• Favor the US and emerging markets, less cautious on eurozone: We continue to prefer the US for its defensive character and EM for deep value and growth potential. We have turned less cautious on eurozone assets given the reduction in tail risks.

• Prefer growth, small- and mid-cap, and cyclical stocks: Within US equities, we continue to prefer growth to value stocks, small- and mid-cap stocks to large-caps, and pro cyclical over defensive sectors.

• Upgrade commodities, downgrade � xed income: The downside for some commodity sectors is now more limited. As an o� set, we downgrade � xed income.

• No longer prefer US dollar-denominated bonds vs. foreign bonds: Reduced risks in the eurozone remove a pillar of support for the dollar

• Favor US corporate credit, reduce preference for EM sovereign bonds: Fundamentals support investment-grade and high-yield corporate bonds. We deempha-size EM sovereign bonds denominated in US dollars a� er a strong performance.

Re� ation e� orts may still be curtailed by a variety of risk factors:• US � scal cli� : Neither party has shown much appetite for compromise, so there is still

some risk that negotiations could break down.• Eurozone escalation: With Germany balking at further aid to any bailout funds, a re� ar-

ing of the eurozone sovereign debt crisis remains a distinct possibility.• China hard landing: The failure of policymakers to respond to a further so�ening of

growth would pose a daunting challenge to the global expansion.• Iranian-Israeli con� ict: Israel may feel compelled to act if e� orts by western powers to

compel Iran to abandon its nuclear ambitions are unsuccessful.• Corporate earnings decline: With margins near historically high levels, EM growth sub-

dued and ef� ciency gains likely to be more modest, companies will have a tough time beating estimates.

Summary & Highlights

Outlook

Investment recommendations

Risks



Focus

Focus: Risk and re� ation

Little has changedAs we re� ected upon the factors that would likely have the biggest impact on the investment outlook for the fourth quarter, we were struck by just how little had changed since the beginning of the year. In our 2012 Outlook report, we identi� ed three key trends that would most profoundly a� ect both the real economy and � nan-cial markets over the course of this year: 1) the pace of global balance sheet deleveraging (see Fig. 1); 2) the scope of political leadership changes; and 3) the scale of mon-etary policy easing by major central banks. A subpar eco-nomic recovery process (see Fig. 2), ongoing sovereign debt crisis within the eurozone and festering tensions across much of the Middle East vividly illustrate the chal-lenges associated with debt deleveraging and political leadership transitions. But it has been the actions of cen-tral bankers around the globe that have ultimately played the more important role in determining the outcome for

markets this year. So in a contest that has pitted “risk ver-sus re� ation,” re� ation has thus far won out.

So what does the balance of this year hold for investors then? While policymakers and elected of� cials may have reduced the tail risks associated with potential eurozone debt defaults, a US debt ceiling stalemate and a Chinese hard landing, the macro environment is still challenging and the political outlook remains uncertain. The European Monetary Union’s structural limitations, the dysfunctional character of the American political system and the rigid nature of the Chinese economy remain unresolved. We therefore look for continued sluggish growth, episodic increases in market volatility and less uniform performance prospects across risk assets. However, the deepening com-mitment by central bankers toward re� ationary policies suggests that the risks of either a global economic con-traction or a sharp sell-o� within � nancial markets are

Note: Liabilties are represented by total credit market debt. Figures are annual and seasonally adjusted. Government is the total of federal, state, and local.Source: Federal Reserve Board, UBS WMR, as of 2Q 2012

GovernmentHouseholds and nonprofits

FinancialsNonfarm nonfinancial corporates

120

100

0

60

40

20

80

140

1952 1958 1964 19761970 19881982 20001994 2006 2012

Fig. 1: Broad-based deleveraging in US economy

US liabilities by subsector as a share of GDP, in %

The tension between structural risks and policy-induced re� ationary forces will likely continue to generate large swings in � nancial markets. We believe that the phase during which the current re� ationary e� ort led to indiscriminate rallying of risk assets is nearing an end. Going forward, the bene� ts of re� ation are likely to accrue to risk assets on a more selective basis. Currently, we believe the opportunities lie in corporate credit rather than in equities.

Source: Bloomberg, UBS WMR, as of 24 September 2012

EurozoneUSA UK China

Japan

–1

–2

–4

–3

2

1

0

3

1998 2000 2002 2004 2006 2008 2010 2012

Fig. 2: Manufacturing activity has weakened

Global real activity, standardized (mean=0, standard deviation=1)


limited. Against this backdrop, we opt to retain a largely neutral allocation across most of the main asset classes—but with a continued pro-risk bias toward the credit-sen-sitive sectors of the � xed income markets. We also favor the more attractively valued cyclical sectors of the US equity market.

Absence of maliceRisk assets have rallied sharply o� their June lows with the S&P 500 and Euro Stoxx 600 indexes having posted gains of 10% and 16% respectively (see Fig. 3), while high-yield credit spreads have tightened by 120 basis points just since the beginning of June. This repricing across equity and credit markets appears to have had little to do with any meaningful improvement in the macro outlook. While the housing sector has shown signs of a rebound, labor mar-ket conditions have continued to languish, and third and fourth quarter US growth forecasts have been cut by 40 and 25 basis points respectively during the period. Nor has the impressive rally been attributable to a reacceleration in corporate pro� ts. While second quarter earnings came in slightly above consensus expectations, estimates had been reduced steadily since the end of the second quarter. The Street is now looking for S&P earnings of $103 for 2012 and $115 for 2013 compared to projected pro� ts of $106 and $119 as recently as May (see Fig. 4). Third quarter earnings are likely to post the � rst year-over-year decline since 2009 Q3.

Instead, the summer-long rally in stocks and corporate bonds appears to have been driven in large part by the lack of bad news—an “absence of malice.” A� er having su� ered through a series of geopolitical shocks, economic so� patches, natural disasters and political stalemates in each of the prior two summers, investors were under-standably cautious and sentiment depressed as the spring drew to a close. While there was still plenty of drama around the globe, the absence of any currency break-ups, political blowups or market meltdowns touched o� an impressive relief rally across risk assets. The European Central Bank (ECB) clearly played a role in this more benign backdrop by greatly reducing the tail risks associ-ated with a eurozone collapse. ECB President Mario Draghi has proven to be a much more pragmatic central banker than his predecessor, Jean-Claude Trichet.

Focus

Fig. 4: Earnings estimates have been steadily sliding

Source: FirstCall, UBS WMR, as of 24 September 2012

S&P 500 bottom-up consensus earnings-per-share estimates, in US dollars

110

108

106

104

102

100

112

114

124

122

120

118

116

114

112

126

2012 (le)2013 (right)

Jul-12May-12Mar-12Jan-12Nov-11Sep-11 Sep-12


1350

1300

1250

1200 220Jan-12 Mar-12 May-12 Jul-12 Sep-12

1450

1400

1500

260

250

240

230

270

280

Euro Stoxx 600 (right)S&P 500 (le)

Fig. 3: Equity markets have rallied sharply since June

S&P 500 Index and Euro Stoxx 600 Index

The question is how much of the

good re� ationary news has already

been incorporated into asset prices

and how much the risks can contain

any further repricing.

“

“


Focus

But for markets to extend the rally from here, more will be required than just a lack of bad things happening. Market participants will need to see some progress in one or all of the following areas: 1) an improvement, not simply further stabilization, in global macro conditions; 2) a continued easing of eurozone political risks; 3) some sort of agree-ment in the US on the “� scal cli� ”; 4) signs that Chinese policymakers are poised to step up e� orts to ease mon-etary and � scal conditions; and 5) evidence that corporate pro� ts are set to reaccelerate. So as we wait for some clar-ity on how each of these factors plays out over the bal-ance of the year, attention will likely continue to center upon the actions of the world’s central banks. E� ective re� ation e� orts will be crucial as elected of� cials seek to address mounting public sector de� cits and structural changes without jeopardizing the global expansion.

All together nowWhile monetary policy of� cials have played a prominent role within � nancial markets throughout the entire year, it was during the third quarter that they made their pres-ence most forcefully felt. With the notable exception of the People’s Bank of China (PBoC), each of the major cen-tral banks around the world has now shi� ed to aggres-sive monetary easing. This represents an important source of support for both the real economy and global � nancial markets. Consider the following:

• Under the leadership of President Mario Draghi, the ECB has adopted an increasingly aggressive approach toward monetary policy. In September, the ECB announced a new program designed to ease the pressure of esca-lating funding costs for critically vulnerable peripheral eurozone countries (e.g., Italy and Spain) by directly tar-geting the government bond risk premiums associated with a eurozone breakup. While the new purchase pro-gram entitled “Outright Market Transactions” (OMT) comes with plenty of conditions attached, it still repre-sents the ECB’s most important policy initiative to date. Keep in mind that the ECB speci� ed neither the timing and duration nor the magnitude of such a purchase pro-gram. So given the prospects for a more open-ended ECB commitment, peripheral yields are likely to remain within current tighter ranges and risk assets should be better supported.

The deepening commitment by

central bankers toward re� ationary

policies suggests that the risks of

either a global economic contraction

or a sharp sell-o� within � nancial

markets are limited.

“

“

Fig. 5: QE3 will further augment the Fed’s balance sheet


US Federal Reserve total assets, in USD bn

2500

3000

2000

1500

1000

500

0

3500

Fed’s total assets (historical)Fed’s total assets (projected)

2004200119981995 20132007 2010

Source: Bloomberg, UBS WMR, as of 31 August 2012

500

0

–500

–1000

–1500

–2000

–2500

1000

7

6

5

4

9

8

10

11

2012201120102008 2013

Fig. 6: US labor market continues to struggle

US nonfarm payrolls (3m rolling change, in 1000s) and unemployment rate (in %)

2009

US nonfarm payrolls (le)US unemployment rate (right)


• The US Federal Reserve (Fed) initiated a third phase of quantitative easing (QE3) in September amid continued disappointing labor market conditions (see Figs. 5 and 6). There is some concern that the latest e� ort by the Fed will have little impact upon the real economy, since each incremental policy step has tended to yield dimin-ishing returns.

• However, the most recent policy action by the Fed di� ers from prior moves in three important ways. First, since QE3 is open-ended, the magnitude of the Fed’s policy actions is theoretically unbounded. Not only has the Fed not speci� ed an aggregate total for purchases, but it also le� the timeline for such purchases unde� ned. Second, the conditions that the Fed set for determining policy success represent a radical departure from exist-ing policy protocols. While prior QE was based on the presumption that “if things get worse we will do more,” this time around it is based on the assurances that “if things don’t get materially better we will do more.” Speci� cally, the Fed has set a “substantial improvement in labor market conditions” as the standard by which policy e� orts will be measured. Finally, the Fed engaged in QE3 while in� ation expectations were rising and at the upper limit of the historical range rather than fall-ing. This suggests that the Fed has moved well beyond easing of credit channels, and is instead implicitly target-ing outright increases in the level of nominal economic activity as a policy objective.

Focus

• The Bank of England (BoE) and Bank of Japan (BoJ) have also done their part to support global re� ation e� orts (see Fig. 7). The BoE opted to increase its own quantita-tive easing (QE) program by another GBP 50 bn at the July gathering of its monetary policy committee (MPC). Although no additional expansion in the program was forthcoming at the August meeting, MPC members expressed a willingness to ease further—perhaps as early as the November meeting—if conditions don’t improve. Additionally, the BoE launched its Funding for Lending Scheme (FLS) in July. Under this program banks can get cheaper funding from the BoE which is tied to the banks’ pace of lending to UK households and busi-nesses. This directly incentivizes banks to lend more freely to the public. Meanwhile, the BoJ opted to ease policy on two fronts. Not only did it expand its own purchase program by an additional $126 bn, it also opted to eliminate the minimum required interest rate on the Japanese government bonds it purchases. The move came as something of a surprise, and essentially con� rms that central bankers in the developed world don’t want to be le� behind in the global re� ation sweepstakes.

• As we’ve already noted, the one exception here is the People’s Bank of China. Still smarting a bit from the backlash following the last major policy easing in 2009, the PBoC has moved far more cautiously in cutting rates compared to its counterparts around the world. Of� cial

Source: Bloomberg, UBS WMR as of 26 September 2012

ECBFed BOE

BOJ

400450

300350

50100150200250

500

2007 2008 2009 2010 2011 2012 2013

Fig. 7: Central banks have supported global reflation efforts

Size of central bank balance sheets, indexed to 100 at 1 January 2007


10

5

0 02006 2007 2008 2009 2010 2011 2012

20

15

25

30

20

10

40

50

China fixed assets investment - new construction, year-over-year (right)China required deposit reserve ratio for major banks (le)

Fig. 8: China has yet to ease aggressively

China reserve ratio and investment in new construction (year-over-year), in %

bellomjo

Text Box


borrowing rates have barely budged this year, despite evidence that the Chinese economy continues to so� en. Keep in mind however that while growth has deceler-ated, it remains within the ranges outlined by public of� -cials earlier this year. Unlike the developed world where growth prospects remain so fragile that a 50 basis point reduction in GDP threatens the expansion, China is still working through what we continue to see as a bot-toming out in a so� landing. It was therefore unreason-able for the PBoC to adopt the same sort of “shock and awe” approach that other central banks have taken. However, if economic conditions so� en further, China certainly has the means to ease policy more aggressively and contribute meaningfully to global re� ation e� orts.

Risks haven’t gone awayAs we noted from the outset, re� ation e� orts have become necessary amid a persistent set of risk factors. Many of these risks, such as the US � scal cli� , are broadly visible and have already been exhaustively explored. That’s not to suggest, however, that these risks are already fully re� ected in asset prices—or that they can’t still threaten the durability of the expansion or the stability of global � nancial markets. It’s therefore important to re� ect upon the other half of the risk/re� ation equation. Consider the following:

• US � scal cli� — So much has already been said and written about the approaching US � scal cli� , that it is dif� cult to o� er much in the way of fresh insight here. We explored the topic in some detail as part of our Risk Watch series, and continue to view some sort of tempo-rary agreement on at least some of the expiring tax and spending measures as the most likely outcome (please see Global Risk Watch: from � scal cli� to � scal reform, 27 September 2012). However, the lead-up to any sort of agreement would still be a rather bruising and con-tentious process—especially in the lame duck session a� er the elections. Neither party has shown much appe-tite for compromise, so there is still some risk that nego-tiations could break down. There is also the potential that a deal might come only a� er the beginning of the new year—meaning there could still be a temporary � s-cal shock in early 2013. But keep in mind that while we don’t expect the US economy to bear the full potential

impact of the entire � scal cli� (~4% of GDP), some level of � scal contraction is all but certain, which could fur-ther undermine already sluggish growth prospects and weigh upon risk assets.

• Eurozone escalation — While the ECB has provided relief to beleaguered peripheral eurozone debt mar-kets, the respite could turn out to be an uncomfortably short one. Mario Draghi has continued to insist on cer-tain conditions in exchange for ECB action, including the need for vulnerable countries to formally request the support of the European Stability Mechanism (ESM). Spain and Italy might be unwilling to accept the required reform measures that would have to be implemented in exchange for such support and the ECB’s new program does not apply to Greece. With Germany balking at fur-ther aid to any bailout funds, a re� aring of the eurozone sovereign debt crisis remains a distinct possibility.

• China hard landing — It remains our view that the Chinese economy is bottoming out following an extended so� patch. However, the ongoing impact from the European crisis, coupled with both a leadership tran-sition and lagged impact from policy tightening, suggest the risks of a hard landing are not negligible. The failure of policymakers to respond in a timely manner to evi-dence of a further so� ening of growth would not only threaten the Chinese economy, but would also pose a daunting challenge to the global expansion.

• Iranian–Israeli con� ict — In his recent speech before the United Nations, Iranian President Mahmoud Ahmadinejad did little to ease concerns over the poten-tial for an escalation of tension between Iran and Israel.

Focus

The summer-long rally in stocks

and corporate bonds appears to

have been driven in large part by

the lack of bad news — an absence

of malice.

“

“


Keep in mind that Israel is unlikely to preemptively attack Iran in the period leading up to the US presiden-tial election. Israel would still need the logistical support of the US to successfully circumvent Iranian defenses and neutralize a counterstrike. However, once the elec-tion is over, Israel may feel compelled to act if e� orts by western powers to compel Iran to abandon its program to weaponize nuclear capabilities are unsuccessful.

• Corporate earnings collapse — Despite a subpar recovery and limited pricing power, US corporations have managed to post impressive earnings gains over the past three years. While the bar was admittedly set pretty low in the a� ermath of the � nancial crisis, com-panies have still demonstrated an uncanny ability to deliver solid earnings, even as revenue growth remained rather moderate. However, with corporate pro� t mar-gins near historically high levels, emerging market growth prospects increasingly subdued and further ef� ciency gains likely to be more modest, companies will have a tougher time beating consensus estimates. Were the economy to stumble—either because of the spillover from the eurozone crisis or a policy misstep in Washington—earnings could fall fairly sharply from cur-rent levels.

Re� ation news largely priced inIn view of the tug of war between investors’ fear of the risks highlighted above and their propensity to take

comfort in the re� ationary e� ort by policymakers, the question is how much of the good re� ationary news has already been incorporated into asset prices and how much the risks will contain any further upside. We believe that as far as equities are concerned, the repricing has largely hap-pened. As we wrote in our January 2012 report Decade Ahead: The Great Deleveraging, we think the current low-growth, high-risk environment suggests that histori-cal equity valuation levels need to be adjusted downward to gauge the attractiveness of equities. For the S&P 500’s price/earnings (PE) ratio on forward earnings, a range of 12 to 14 times would appear fair compared to its long-run historical average of 15 times (see Fig. 9). Based on our expectations for earnings over the next year, the PE for US stocks is close to the top of that range at 13.5, suggesting limited upside. Moreover, with market participants having shi� ed from being overly cautious to somewhat compla-cent about the risks, we believe the risks of a pullback into year-end are signi� cant.

Asset class implications:Against this backdrop, we are recommending the fol-lowing tactical asset allocation tilts in portfolios. While some of this month’s adjustments may be viewed as an increase in pro-risk orientation, others are more defensive in nature. Consider the following:

• Based on the comments above, we continue to recom-mend a neutral tactical allocation to global equities,

Focus


8x

12x

10x

14x

16x

18x

20x

1Q121Q11

Fair value P/E: 12–14x

1Q101Q091Q081Q071Q061Q05 1Q13

Fig. 9: US equities remain with our fair value range

S&P 500 P/E calculated using normalized earnings

Note: Arrows indicate changes adopted as of this report. Scale explained in Appendix.Source: WMA Asset Allocation Committee, as of 27 September 2012

Non-US Developed Eq.

Emerging Market Eq.

US Fixed Income

Cash (USD)

Non-US Fixed Income

US Equity

Commodities

n– –– – – – + ++ +++

underweight overweight

Fig. 10: Asset classes and regional preferences

Tactical deviations from benchmark, including view on currency


i.e., investors should remain allocated in line with their long-term oriented benchmarks, but not beyond. From a regional perspective, we continue to prefer the US market for its defensive character and more stable growth prospects, and emerging markets for deep value and long-term growth potential (see Fig. 10). We have turned less cautious on eurozone assets given the reduc-tion in tail risks on the back of the ECB’s commitment to provide a backstop (see page 25). Within US equities, we continue to prefer growth stocks over value stocks, and small- and mid-cap stocks over large-caps (see page 33). And while we also continue to recommend that investors focus on attactively valued procyclical sec-tors over the more expensive defensive sectors, in this report we tactically upgraded the defensive Utilities sec-tor to neutral following its recent underperformance. Overall, we like Information Technology, Industrials and Consumer Staples, while deemphasizing Telecom, Materials and Healthcare—which we downgraded from neutral. We have also downgraded Consumer Discretionary to neutral (see page 30).

• We incrementally add some cyclical risk to the portfolio by upgrading commodities from a moderate under-weight to a neutral stance. Broadly diversi� ed commod-ity indexes have appreciated by almost 5% over the last four weeks, with base and precious metals leading the pack. In an environment where key central banks pledge

their commitment to support economic growth, reduce unemployment or � nance government spending needs, the downside we were concerned about for some com-modity sectors is more limited and others may bene� t further. Note that while QE3 is positive for gold, we also believe that a lot of the solid performance leading up to and following the announcement already re� ects a good portion of the news.

• As an o� set, we downgrade � xed income from a moderate overweight to neutral. We also re� ect our belief that following the recent dollar sell-o� , curren-cies have readjusted to levels that we broadly consider fair. We are therefore no longer recommending a prefer-ence for US dollar-denominated bonds vs. foreign bonds


0

60

40

80

100

120

140

20

Jan-12Jul-11Jan-11Jul-10Jan-10 Jul-12

Fig. 11: Agency MBS spreads plummeted following QE3

30-year Fannie Mae current coupon spread over 10-year Treasuries, in bps

Note: AAII = American Association of Individual InvestorsSource: Bloomberg, UBS WMR, as of 26 September 2012

3-month averageNet bullish sentiment Long-term average

Last data point

40

60

20

0

–60

–40

–20

80

2000 2002 2004 2006 2008 2010 2012

Fig. 12: Investor sentiment has bounced back

AAII net bullish sentiment, in %

From a regional perspective, we

continue to prefer the US market

for its defensive character and more

stable growth prospects, and

emerging markets for deep value

and long-term growth potential.

“

“

Focus


(see pages 28). Within US dollar bonds, we maintain a preference for higher-yield, credit-sensitive paper in the corporate sector (both investment-grade and high-yield). However, we have reduced our recom-mended position in emerging market sovereign bonds denominated in dollars following their strong performance. As a result, our recommended � xed income portfolio, while still signi� cantly procyclical, has a reduced sensitivity to credit risk relative to last month (see page 35).

• Since it represents the most signi� cant tactical position in our model allocations, the case for high-yield and investment-grade corporate bonds is worth expanding on a bit more. Valuations still appear reasonably attrac-tive to us. The incremental yield on high-yield bonds (credit spread) is still over 5.5 percentage points. We believe that the Fed’s buying of mortgage-backed secu-rities (MBS) is likely to provide further support for the credit universe by encouraging investors to reach for yield (see Fig. 11). This should allow spreads on cor-porate bonds to narrow further, thereby providing an additional source of outperformance over government bonds beyond the yield pickup. From a fundamental perspective, the slow but persistent recovery of the US economy, healthy company balance sheets and still-robust earnings create a supportive environment for cor-porate bonds. Despite the recent uptick in defaults, in the absence of a renewed US recession, we expect the default rate to remain stable at 3.5% until the end of the year. A heavy load of new issuance so far this year means that high-yield companies will be faced with a lower risk of failed re� nancing going forward (i.e., in case of an unexpected economic slump).

ConclusionThe “Great Deleveraging” environment in which we believe we remain entangled is one in which bouts of optimism and pessimism are likely to remain the norm – much as we have witnessed over the last 3 years. While the current re� ationary e� orts of central banks may drive markets up from here, positive momentum can only be sustained if the recent absence of bad news persists. Unfortunately, the catalog of risks that could material-ize and derail the rally is long, ranging from the US � scal cli� , to a re-escalation of the euro crisis, to a � are-up in geopolitical tensions in the Middle East or East Asia – all this against a weak macroeconomic backdrop. Therefore, we believe that, rather than extrapolating the encourag-ing market behavior witnessed since July, investors should be more selective. From this perspective, we believe it is more advisable to position portfolios to reach for the yield advantage and possible capital gains in corporate bonds rather than to reach aggressively into equities.

Mike Ryan, CFA, Chief Investment Strategist; Stephen Freedman, CFA, PhD, Strategist

Focus


Will, may or won’t: a progress report

Will

European sovereign credit quality will deteriorate

TO DATE: Fundamentals in the periphery continue to worsen. A� er Greece, Ireland and Portugal, Spain now appears likely to eventually have to apply for a full-blown country program in order to obtain support from the European Central Bank. A� er a brief reprieve, Spanish debt yields are back at 6%.

�

Global earnings growth will stall

TO DATE: A� er a solid � rst half of 2012, which included a surprisingly strong Q2, con-sensus earnings estimates for both 2012 and 2013 have been trending steadily down-ward. Further, Wall Street analysts are expecting third quarter results to indicate a 0.5% contraction versus 3Q11 and a � at pro� le vs. the prior quarter.

�

Risk premiums will remain elevated

TO DATE: A� er widening out in the midst of a volatile summer, spreads on risk assets have since tightened as credit and equities continue their 2012 rally. Despite the run-up in equity markets, risk premiums have not declined signi� cantly and the asset class is still cheap relative to long-run averages. Credit spreads, on the other hand (high yield in par-ticular), have tightened more signi� cantly and are now somewhat below long-term aver-age levels.

?

Central banks will ease further

TO DATE: Global monetary easing moved into full swing in the third quarter, with the ECB, Fed, and Bank of Japan (BoJ) all instituting expansionary monetary policy. The ECB’s “Outright Monetary Transactions” (OMT) program allows it to buy an unlimited amount of short-term sovereign bonds in the secondary market. The Fed, meanwhile, embarked on a third round of quantitative easing, and the BoJ boosted bond purchases, while expressing a readiness to do more.

�

Economic growth prospects will decouple

TO DATE: Economic weakness has been fairly universal, though the US has seen less of a deceleration than other regions. Global manufacturing activity has trended downwards, and US labor markets remain weak. However, the US has seen a substantial pickup in the housing sector and recent upticks in consumer sentiment, two developments that sug-gest it may be the � rst main region to accelerate in the fourth quarter.

?

May

Bank deleveraging may create a global credit crunch

TO DATE: Despite stress in the global � nancial sector, a global credit crunch has not yet emerged, largely due to central banks’ willingness to expand their balance sheets in response to dif� culties in funding markets. However, in Europe a credit crunch is under-way in at least some countries and is one of the factors responsible for the ongoing recession throughout large parts of the continent.

?

Geopolitical tensions may lead to another energy shock

TO DATE: A� er some temporary appeasement, Middle East tensions have once again placed upward pressure on energy prices. Though this has certainly not reached “oil shock” proportions, US gasoline prices are now once again near the $4 per gallon price that has tended to weigh on the US consumer.

?

In keeping with our quarterly tradition, we check in on the forecasts we made in our 2012 Outlook on the � ve things that will, may, or won’t happen this year.


?

The eurozone may make decisive steps toward a � scal union

In mid-September, the EU Commission made an of� cial proposal for a single banking supervisor, which the Commission president described as a stepping stone to a pan-Euro-pean banking union and, in turn, to a “genuine, credible Community � scal capacity.” A German constitutional court decision in September paved the way for German rati� cation of the ESM (European Stability Mechanism). Finally, eurozone leaders opened talks over a centralized budget. These are all steps toward a � scal union.

�

US capital expenditure may accelerate

TO DATE: A� er a noticeable slowdown in the pace of growth of US capital expenditures (capex) from almost 10% in 4Q 2011 to about 4% in 2Q 2012, we only expect a moder-ate acceleration in 2H 2012. The unresolved eurozone debt crisis, pending US � scal cli� and a generally lukewarm consumer most likely have made businesses more cautious.

�

Crises may erupt in individual emerging market economies

TO DATE: As the violence in Syria continues, much of the Arab world is now roiled in anti-US demonstrations. Meanwhile, as China attempts to navigate an economic contrac-tion, it is caught up in an escalating con� ict with Japan over disputed islands. On the other side of the globe, Latin American countries have seen exports plummet this year due to the pullback in demand from Europe and China.

�

Won’t

The US will not achieve meaningful � scal consolidation

TO DATE: We think some sort of “grand bargain” (de� cit cuts of $4 trillion or more over the next 10 years) is likely, regardless of who wins in November, but we see minimal likeli-hood for this getting done in 2012. A short-term compromise may be reached to extend certain measures (such as the Bush tax cuts), but issues such as spending cuts from sequestration and comprehensive tax reform will likely be pushed back into 2013.

�

China will not experience a hard landing

TO DATE: While the Chinese economy is clearly disappointing, it is hard to argue that it is experiencing a hard landing. Consensus growth estimates are now between 7 and 8%, whereas they had started the year above 8%. The government has been stimulating the economy since last spring, but we have yet to see clear signs of a turnaround, with con-tinued so� ness in industrial activity and trade indicators.

?

Eurozone will not break up in 2012

TO DATE: ECB president Mario Draghi made good on his July pledge to do “whatever it takes” to maintain the eurozone as a going concern, instituting the OMT bond purchase program in September. While a so� Greek exit remains a distinct possibility next year, 2012 is unlikely to be the year the eurozone breaks up.

�

Social unrest will not subside

TO DATE: The year of geopolitical uncertainty continued, as tensions reached the tipping point in three major regions of the world in September – the Middle East, East Asia, and Europe. Mass anti-US protests � ared across much of the Arab world (targeting US embas-sies in various countries), an increasingly rancorous dispute over islands in the East China Sea spurred waves of anti-Japanese protests in China, and Spaniards and Greeks took to the streets en masse to protest against austerity.

�

The US dollar will not lose its safe haven status

TO DATE: As has been the trend throughout the year, the US dollar continues to be buoyed by the global demand for liquidity when risk aversion rises. A� er a slide that lasted through August and into September, the dollar has started bouncing back thanks to renewed worries over global economic data. Long term, the US will need to address structural � scal issues if it is to remain the world’s reserve currency.

�

Will, may or won’t: a progress report


With November 6 just six short weeks away, the outcome of the election is anything but certain, similar to the out-look for many policies. Indeterminate tax rates, stubbornly elevated unemployment and high government de� cits are some of the many issues that befuddle legislators. This ele-vated policy uncertainty is likely already holding down con-sumer con� dence and hindering the ability of business to make investment and hiring decisions. On the campaign trail, the presidential candidates are promising to address these challenges with radically di� erent approaches—so di� erent that the fundamental role of government in soci-ety appears to be in play.

We think many of the economic issues at stake are sig-ni� cant indeed, yet the next president and the 113th Congress will be constrained by the same economic and political factors, resulting in a similar outcome regard-less of who wins. Keep in mind that whoever occupies the White House will have to deal with a closely divided Senate, even if that chamber is held by his party. While major policy change may be dif� cult, the challenges are many, including those facing the last “lame duck” session of the 112th Congress. Against this backdrop, Washington Watch walks through likely outcomes of the election, the “� scal cli� ” and the potential for � scal and other policy reforms next year.

Washington Watch

Countdown to November 6

The election countdownCampaigns can change quickly, and the 2012 presidential race has already seen some signi� cant volatility. We expect an Obama victory, a narrowly Democratic Senate and a solidly Republican House. Despite a lackluster US economy and subdued approval ratings, the president has run an e� ective campaign and continues to enjoy the commit-ted support of many Americans. Although the tides have recently turned against him, we think Mitt Romney stands a plausible chance of unseating the president, and we expect the race to remain close. We think that a Romney victory would likely be accompanied by a very slight Republican majority in the Senate. However, recent polls have indicated that Romney has fallen behind in most swing states, including several that he must win to gain the 270 votes in the electoral college (see Fig. 1).

The � scal cli� and the debt ceilingBefore the victors descend on Washington, DC, on January 3, 2013, the agenda during the last remaining weeks of the 112th Congress will be ambitious to say the least. Congress was wise enough to pass a continuing resolu-tion in September, approving current spending on gov-ernment programs through March. While a government shutdown is therefore one less thing that Congress will have to address when it resumes in November, the � scal cli� still looms.

The � scal cli� refers to a series of measures that come into play in 2013 which reduce government spending and sharply increase taxes. Jointly, this � scal cli� amounts to $607bn of tightening in the 2013 government bud-get. If Congress allowed all of these measures to kick in, we think this could subtract as much as 4% from GDP growth, resulting in a 2013 GDP contraction of nearly 2% (see Fig. 2).

We think the chances of going o� the cli� and staying where we land are low. However, these measures could all kick in for a short period of time (temporary cli� ). Alternatively, it is quite possible that at least some of the provisions will go into e� ect permanently (mini cli� ). The most likely scenario, in our view, is a � scal pothole where Congress pushes out the deadline, extending many pieces of current legislation, namely the sequester and the

Fig. 1: Currently swinging Obama

The swing states’ current polls, unemployment rate, electoral votes

RCP Poll Average (in %)Obama Romney

Unemploy-ment rate (%)

Electoral votes

Colorado 48.3 46.0 8.2 9

Florida 48.3 46.4 8.8 29

Iowa 49.0 44.3 5.5 6

Michigan 49.0 41.0 9.4 16

Nevada 48.3 45.8 12.1 6

New Hampshire 46.0 45.0 5.7 4

North Carolina 46.6 48.4 9.7 15

Ohio 48.8 44.7 7.2 18

Virginia 49.6 45.1 5.9 13

Wisconsin 51.5 43.7 7.5 10

National 48.6 44.9 8.1 538

Source: Politico, US Bureau of Labor Statistics, UBS WMR as of 24 September 2012


majority of the “Bush tax cuts,” but probably phases out or lets lapse extended unemployment bene� ts and the payroll tax holiday. If all current policy were to lapse and a full-blown � scal cli� were to materialize, � nancial markets could react sharply.

The debt ceiling will add pressure to address � scal uncer-tainties quickly. The current ceiling is $16.4tn dollars, and Treasury currently estimates that the debt counted under this ceiling will reach the limit at the end of 2012 (see Fig. 3). Based on recent precedent, Treasury will likely � nd a way to adjust accounts such that the risk of hitting this ceiling is only realized several months later. We doubt the government will actually breach this limit and default on its Treasury obligations, but we could easily see another clif� anger, much as we did in summer 2011.

A grand bargain?Regardless of who wins the White House and controls the Senate, bipartisan support will be necessary to achieve most major reforms. Ironically, while we expect rancor-ous debate between the parties, we actually think there is good chance that under either Obama or Romney, we will see a bipartisan � scal deal that would trim $4tn from projected de� cits over the next 10 years. The very dis-cord between Republicans and Democrats may end up being bene� cial. Their di� erences could keep them at the negotiating table, and may incentivize them to agree to a bigger deal, such that each party can highlight what the

other sacri� ced. While current campaign rhetoric may sug-gest otherwise, there are quite a few areas of agreement, including the need for corporate tax reform, an overhaul of the personal tax code and the undesirability of the bud-get sequester. We expect that under Democratic leader-ship revenue increases might be higher, but that spending cuts would still constitute the bulk of � scal reform.

The tax code will be at the center of debates on � scal policy. Few in Washington want to see the Bush tax cuts expire fully, which would not only increase taxes on the highest earners, but also on low- and middle-income households. However, to lower marginal rates from the levels to which they will revert in 2013 without bring-ing down the overall revenue collected, some deductions would have to be reduced or eliminated. We expect that fundamental reform of the tax code is more likely under Republican leadership than Democratic. However, we believe that many previously sacrosanct deductions are now up for serious review under either administration. Speci� cally, we think the mortgage interest deduction on second homes, deductions for charitable donations and the tax-exempt status of municipal bonds could be vulnerable.

Washington Watch

For recent UBS election commentary, ask your � nancial advisor for a copy of…

• Election Watch 2012 Volume 1 – The Issues (February 2012)

• Election Watch 2012 Volume 2 – Global Elections (April 2012)

• Election Watch 2012 Volume 3 – The Implications (September 2012)

• Exchange: Election 2012 (September 2012)

• Washington Weekly (September 2012)

Stay current with UBS’s views on the election by visiting ubs.com/election.

Source: CBO, UBS WMR, as of 27 June 2012

1.0

0.0

2.0

3.0

4.0

Fig. 2: Fiscal cliff impact would be devastating for growth

Cumulative impact of “fiscal cliff” components, in % of UBS estimate of 2013GDP per category

Med

icare

“doc

fix”

Unem

ploy

men

tbe

nefit

s

Sequ

este

rsp

endi

ng c

uts

ACA

tax

Oth

er ta

xpr

ovisi

ons

Payr

oll t

ax

Bush

tax

cuts

and

AMT

fix

Oth

er c

hang

es


The pressure to maintain a top sovereign credit rating may also keep lawmakers up at night. S&P’s much pub-licized downgrade in August 2011 initially triggered sub-stantial consternation among market participants. Since then, Moody’s, S&P and Fitch have maintained a negative outlook on their Aaa/AA+/AAA ratings, respectively. We believe that only a credible $4tn de� cit reduction pack-age is likely to placate the rating agencies, but there could still be warnings about the long-term outlook and the commitment to control de� cits. In terms of timing, the debt ceiling limit presents a greater US credit rating risk than overall � scal reform because inaction and/or delays in raising the limit would lead to more immediate rat-ings actions. Moody’s, S&P and Fitch have intimated they would downgrade the US if Treasury were to miss an inter-est or principal payment, and even another debt ceiling stando� may result in a credit rating review.

Some sectors, overall economy a� ected by electionsThe next president and Congress will have many other issues to address beyond � scal policy, and while there are a few topics where di� erent electoral outcomes will result in sharp di� erences, in many other cases we do not expect major divergences. A Romney administration would likely repeal or change some important parts of the A� ordable Care Act, with mixed results for the Healthcare sector. In Financial Services, we would also experience some changes to Dodd-Frank, in our view, but most of this

Washington Watch

legislation has already been implemented and would be very dif� cult to reverse.

Some sectors of the economy would see very similar pol-icy outlooks, regardless of the results on November 6. We think prospects for energy policy would be similar. Equity sectors such as Technology and Consumer Staples sectors should remain attractive regardless of the elec-tions. Overall, we anticipate that a Romney administra-tion would be slightly more likely to pursue � scal reform and reduce policy uncertainty and regulations, which would be marginally positive for economic growth over the course of several years and for equity market perfor-mance. However, given the challenging � scal situation and the slow-growth economy either president would face, and given that we expect Congress to be closely divided between the two parties, we do not expect sweeping leg-islative changes or radically di� erent economic or � nancial market results.

Katie Klingensmith, analyst


Debt limitPublic debt

1210

86

0

141618

42

2010200520001995

Fig. 3: Debt ceiling debate to heat up in early 2013

US public debt and statutory debt limit, in trillions of US dollarsFig. 4: US credit rating in jeopardy

US sovereign rating agency guidance

Moody’s Investors Service

“Without further de� cit reduction measures, the rating could be placed on review for downgrade sometime in the coming year…the outlook change will most likely not occur until sometime in 2013.”

Standard & Poor’s “The negative outlook re� ects our opinion that U.S. sovereign credit risks, primarily political and � scal, could build to the point of leading us to lower our ‘AA+‘ long-term rating by 2014.”

Fitch Ratings “Fitch does not expect to resolve the Negative Outlook until late 2013. Fitch will take into account any de� cit reduction strategy that may emerge a� er Congressional and Presidential elections in addition to an updated assessment of the medium-term economic and � scal outlook.”

Source: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, as of 21 September 2012


Market Scenarios (next 12 months)Economic data have yet to show a decisive growth rebound and remain compatible with our sluggish expansion base case. Headwinds from tighter � scal policy and deleveraging in developed markets will continue in 2013, making a strong recovery dif� cult to achieve. On the positive side, monetary policy is extremely loose and some developing countries are implementing stimulus measures. For the next 12 months we distinguish the following four scenarios for global growth and in� ation.

High Growth

Low Growth

Negative Growth

High Negative Inflation

Low Inflation Inflation

High Growth

Low Growth

Negative Growth



• The global economy remains on a very fragile expan-sion course with government policies achieving low but positive growth, with the exception of the eurozone.

• Deleveraging pressures keep growth below historical trends in most developed countries, with unemploy-ment rates remaining far above their pre� nancial crisis levels.

• Growth in emerging markets continues to outpace developed markets, though their growth has slowed as well.

• A less likely but possible negative scenario is that the public loses faith in monetary policymakers or energy and/or food prices rise abruptly, leading to a pickup in in� ation expectations. This, in turn, would lead to a combination of weak growth and in� ation (stag� ation).

65%

5%Stag� ation

Source: UBS WMR

SluggishExpansion

High Growth

Low Growth

Negative Growth



• The global economy slides back into recession due to a signi� cant escalation of the eurozone sovereign debt crisis, a sharp US � scal contraction (� scal cli� ) or a hard landing in China. This leads to a reemergence of de� a-tionary pressures. 20%

Renewed Recession

High Growth

Low Growth

Negative Growth



• Loose monetary policy, as well as greater � scal policy clarity in the US and Europe, encourages a surge in hir-ing and investment spending and mitigates the � scal austerity drag.

• Improvement in both the labor and housing markets sets the stage for a more dynamic consumer recovery.

10%StrongExpansion


Against the backdrop of an ongoing slide in eco-nomic growth momentum, the European Central Bank (ECB) and the Fed decided to act with more resolve. The ECB’s conditional but unlimited bond purchase program and the Fed’s open-ended QE3 program mitigate downside growth risks, e� ec-tively behaving like an “at the money” put option on � nancial market activity. However, we doubt that they will strongly boost growth in the near term. It is more likely they will simply help the global economy to operate closer to its potential.

Tentative but fragile growth reboundKey global growth indicators have yet to con� rm a deci-sive growth rebound. In the US, the ISM manufactur-ing PMI, a guage of business climate remained slightly below the expansion-critical 50 level in August. Moreover, nonfarm payroll gains lost luster again in August, a� er brie� y jumping above 100,000 in July. The unemployment rate remains stuck above 8%. Our UBS Current Activity Indicator, which uses 25 indicators to estimate monthly real GDP growth, rose to an annualized 1.3% in August a� er 1% in July. This improvement is only tentative as not all August indicators that enter the calculation have been released. The moderate improvement suggests that we are on track for real GDP growth of annualized 1.5% in the third quarter a� er 1.7% in 2Q12.

The picture is similar in the eurozone, where in September the composite PMI fell slightly to 45.9, remaining below 50. The manufacturing climate improved a bit, led by Germany, but the service sector climate deteriorated. The ongoing growth malaise prompted us to lower our 2013 real GDP growth forecast from 0.4% to 0.2%. However, we kept our 2012 fore-cast at -0.4% and still see the second quarter as the trough with near-zero growth going forward.

More decisive signs of a growth rebound are also absent in China. While the second quarter brought about sequential growth improvement, the yearly growth rate is still slipping and will probably not � nd a bottom until the fourth quar-ter. And a� er having been stable for a few months, the Chinese PMI has taken a turn for the worse. We remain of the view that China will avoid a hard landing and growth will rebound, albeit only marginally.

More forceful monetary policy responsesThe pervasive loss in growth momentum has � nally prompted key central banks to take more decisive action to stem the weakness. The ECB and the Fed have announced policies that should signi� cantly miti-gate downside growth risks. The Fed rolled out an open-ended quantitative easing program (QE3) with monthly $40bn purchases of agency mortgage-backed securities

Economic Outlook

“At the money” policies

Fig. 1: Growth and in� ation forecasts

GDP Growth In� ationin % ’11 ’12F ’13F ’11 ’12F ’13FWorld 3.2 2.7 3.1 3.9 2.9 2.9

US 1.8 2.2 2.3 3.1 2.1 1.7

Canada 2.4 2.0 2.3 2.9 2.0 2.3

Japan -0.8 2.3 2.0 -0.3 0.0 0.3

Eurozone 1.5 -0.4 0.2 2.7 2.4 1.9

UK 0.8 -0.5 0.8 4.5 2.7 2.1

China 9.3 7.5 7.8 5.4 2.8 3.6

India 6.5 5.5 6.5 8.0 7.5 7.0

Russia 4.3 3.8 3.7 8.5 5.0 6.6

Brazil 2.7 1.6 4.8 6.5 5.3 6.5

Note: For full explanation of this table, please see appendix. F: forecast Source: UBS WMR, as of 25 September 2012

Fig. 2: US growth to stay moderate into 2013

Source: Thomson Datastream, UBS WMR as of 24 September 2012

US real GDP growth, quarter-over-quarter annualized in %

UBS WMRforecasts

5

0

–5

–10

10

Investment in equipment & sowareResidential investment

ConsumptionInvestment in nonresidential structures

GovernmentReal GDP (% q/q annualized)

InventoriesNet exports

Q3 2012Q3 2011Q3 2010Q3 2009Q3 2008Q3 2007Q3 2006 Q3 2013


(MBS). The Fed telegraphed that it would increase the dol-lar amount of the purchases unless there is a substantial improvement in the labor market outlook. This e� ectively makes the Fed more reactive to incoming data, curtail-ing the risk of a loss in growth momentum turning into a recession. Based on our unemployment rate forecasts, we estimate that QE3 could last until at least late 2013 with around $1.16tn in purchases of agency MBS and Treasuries. This � gure takes into account the inclusion in the QE3 program of purchases of $45bn per month of longer-dated Treasuries starting next January to substitute for Operation Twist purchases of an equal amount that are scheduled to expire at year-end.

The ECB has also curtailed the downside risks to growth by signaling unlimited sovereign bond purchases in the secondary market for countries that apply for a bailout. This has boosted the market’s perception of the ECB’s resolve to do whatever it takes to save the euro. Insofar as the ECB’s and Fed’s new policies mitigate downside growth risks by allowing them to react quickly to eco-nomic and � nancial weakness, they e� ectively behave like an at-the-money put option on � nancial market activity.

The economic outlook remains lacklusterWhile we think that the new policies mitigate down-side growth risks, we are skeptical whether they can

signi� cantly boost growth at this stage. The Fed’s QE3 program will at present simply help to o� set the recent growth weakness and li� growth back to a potential 2%-2.5% over the next few quarters assuming of course that the � scal cli� will be avoided. In the eurozone, the growth outlook continues to be muddied by a possible Greek exit and Spanish bailout.

Can in� ation become a problem?In such a weak growth environment, we continue to expect a rather benign development of in� ation across the globe. In� ation expectations crept higher a� er the ECB’s and Fed’s announcements, but they are still within a healthy historical range. As long as that is the case, central banks will likely continue to inject supportive liquidity. Eventually, these new policies could gain more traction and more meaningfully reignite the global econ-omy. If so, in� ation will become a bigger concern. But for the next few quarters, we doubt that growth can acceler-ate to the point where it would be a serious problem for the in� ation outlook.

Thomas Berner, CFA, Analyst

Economic Outlook

Fig. 3: US core CPI inflation to dri slightly higher


US inflation, year-over-year in %

4

2

0

–2

–4

6

Consumer Price IndexCore Consumer Price Index

201020082006200420022000 2012

UBSWMR

forecasts

Fig. 4: Inflation pressure is absent


Global CPI inflation rates, year-over-year in %

6

0

–2

–4

8

10

4

USAEurozone

UK ChinaJapan

2010200620021998

2


Economic Outlook: Chartbook

Fig. 7: US net wealth and the savings rate have stabilized

Note: Right scale is invertedSource: Thomson Datastream, UBS WMR as of 24 September 2012

US household net wealth and savings rate, in % of disposable income

12

10

8

6

4

2

0

–2

14

4.0

4.5

5.0

5.5

6.0

6.5

3.5

Savings rate (le)Net wealth to disposable income ratio (right)

200019901980197019601950 2010

Note: PMI = Purchasing Managers’ IndexSource: Thomson Datastream, UBS WMR, as of 24 September 2012

GermanyEurozone

ItalyFrance

50

45

40

35

30

55

60

65

Jan-11Jan-10Jan-09Jan-08Jan-07 Jan-12

Fig. 9: Eurozone growth picture marginally improving

Manufacturing PMIs for the eurozone, in levels

Fig. 6: US commercial bank lending growth is firmly positive


US commercial bank loans and leases, 3month-over-3month annualized in %

5

–10

–15

–20

15

10

20

0

US commercial bank loans and leases

Feb-12Feb-11Feb-10Feb-09Feb-08Feb-07Feb-06

–5

Note: PMI = Purchasing Managers’ IndexSource: Bloomberg, UBS WMR as of 24 September 2012

Manufacturing PMI (right)Real GDP (le)

8

7

6

9

10

12

11

13

444240

4648

56545250

58

Mar-11Mar-10Mar-09Mar-08Mar-07 Mar-12

Fig. 10: Chinese PMI deteriorates again

Chinese manufacturing PMI and real GDP growth (year-over-year in %)


Conference Board (le)University of Michigan (le) Bloomberg (right)

20

0

40

60

100

80

120

–60

–50

–10

–20

–30

–40

0

Jan-11Jan-10Jan-09Jan-08Jan-07 Jan-12

Fig. 8: US consumer sentiment has improved moderately

Three US consumer sentiment indexes

Fig. 5: Improvement in US labor market has yet to resume


Composite measure of nine key labor market indicators, in levels

–2

–5

–6

–7

1

0

–1

2

improvement

–3

Composite measure of key labor market indicators

Jan-12Jan-11Jan-10Jan-09Jan-08Jan-07

–4deterioration


Financial Market Performance

Fig. 1: Asset Classes


Total return in USD and %

US Fixed Income

Non-US Fixed Income

Commodities

Cash (USD)

Non-US Dev. Equities

EM Equities

US Equities

year-to-datequarter-to-date

1412108640 2 16

Fig. 3: International Fixed Income



UK

Japan

Non-US Fixed Income

EMU

US Fixed Income


2 64 8 100

Fig. 5: US Fixed Income

Source: BoAML, UBS WMR, as of 26 September 2012


IG CorporatesHY Corporates

MortgagesPreferreds

EM SovereignsMunicipal bonds

TIPSAgencies

Treasuries


8 10 126420 14

Fig. 2: International Equity



UK

Japan

Emerging Markets

Non-US Developed

EMU

US Equity


10 12 148642–2 0 16

Fig. 4: US Equity



Mid Cap

Small Cap

REITs

Large Cap Growth

Large Cap

Large Cap Value


1614121084 620 18

Fig. 6: Currencies


Appreciation vs. USD in %

CAD

CHF

BRL

AUD

GBP

JPY

EUR


–6 –2–4–8–10 6420


With the major currencies all undergoing debase-ment due to ultra-loose monetary policies, we continue to advocate that investors consider diversi-fying into minor currencies of commodity producers and emerging economies, adding them on dips.

Currencies tend to lose value when central banks increase their supply. So why has the US dollar remained fairly stable on both a trade-weighted basis and relative to the other big currencies? Keep in mind that not just the Federal Reserve has o� ered extra liquidity to the markets in di� erent forms; several other central banks, including the European Central Bank (ECB) and the Bank of Japan (BoJ) have also done so, with the Bank of England (BoE) suggesting it could provide even more.

While many of the major central banks have simultane-ously increased their balance sheets, thereby boosting their supply of liquidity, this may be o� set by the fact that their economies currently have a high demand for such liquid-ity. When interest rates are close to zero and investors are paid little to save or invest their funds, the opportunity cost of holding cash is very low. Additionally, demand for liquidity has remained high due to global economic head-winds and investors’ preference for high cash balances.

The “big four” currencies are all facing major challenges. It should therefore be of little surprise that the major curren-cies are trading close to their long-term fair values relative

Foreign Exchange

Easy monetary policy across the big currencies

to one another. Europe is still confronting political concerns about the integrity of the common currency, Japan still struggles with near de� ation, the US is experiencing high unemployment and � scal policy uncertainty—and all are facing lackluster economic activity. We encourage inves-tors to be well diversi� ed among the major currencies and beyond. Ultimately we would expect the currencies of countries with higher levels of in� ation to depreciate, especially when not compensated by an attractive inter-est rate. Only time will tell which central banks will be the most successful in reversing quantitative easing and other extraordinary monetary policies. However, we do not expect any of the four major currencies’ central banks to hike rates through the end of 2013.

Given the extraordinary commitment of many central banks to provide liquidity, some countries may ultimately experi-ence higher in� ation and pressure on their currencies. We suggest investors look to countries with more solid mon-etary and � scal policies in the developed and emerging spaces. Among the former, such currencies as the Australian and Canadian dollar have attractive economic and policy pro� les. Many emerging markets continue to o� er higher interest rates and healthier monetary and � scal pro� les. However, from a near-term perspective, commodity and emerging market currencies are already expensive; we rec-ommend adding them to portfolios on dips.

Katie Klingensmith, Analyst


CAD/USDAUD/USD

1

1.1

0.8

0.9

0.4

0.5

0.6

0.7

1.2

2002 2003 2004 2005 20072006 2008 2009 2010 2011 2012

Fig. 2: Australian and Canadian dollars near record high

Exchange rates, higher figures reflect weaker US dollar

1.0

Fig. 1: UBS WMR exchange rate forecasts

26-Sept in 3 months

in 6 months

in 12 months

PPP*

EURUSD 1.29 1.30 1.32 1.34 1.30

USDJPY 77.71 80 82 86 79

GBPUSD 1.62 1.65 1.68 1.70 1.69

USDCHF 0.94 0.93 0.92 0.92 1.03

USDCAD 0.98 0.94 0.94 0.92 0.98

AUDUSD 1.04 0.97 1.00 1.05 0.74

NZDUSD 0.82 0.78 0.80 0.83 0.60

USDSEK 6.59 6.31 6.06 5.97 6.83

USDNOK 5.75 5.62 5.45 5.37 6.58

*Relative Purchasing Power Parity; UBS WMR calculationsSource: Bloomberg, UBS WMR, as of 26 September 2012


International Equities

ECB sparks rally

The US underperformed international equity markets in the third quarter but we continue to prefer the US to other developed markets as earnings prospects appear more robust. More aggressive policy action in the eurozone sparked a rally, and we have removed our long-standing underweight recommendation. We favor the UK as it looks relatively inexpensive, especially for dollar-based investors. We remain overweight emerging markets. While China has con-tinued to disappoint, we still expect policy easing to deliver better growth in the quarters ahead.

Upgrading eurozone to neutral, downside risk remainsEurozone equities rebounded strongly in the third quar-ter, helped by the European Central Bank’s (ECB) decision to open up the possibility of buying sovereign bonds in unlimited amounts to bring yields down, at least at the short end of the curve. In addition, it now appears likely that the European Stability Mechanism (ESM) will be up and running by early October. Spain could apply for assis-tance from the ESM/ECB as soon as mid-October. These steps should greatly reduce the risk of a liquidity crisis hitting a eurozone government that loses access to the bond market.

Further, they should help to prevent a vicious circle of high interest rates pushing up budget de� cits leading to fur-ther increases in rates. It remains our view that Spain will

eventually be able to stabilize its public � nances, as long as the interest rates it needs to pay on its bonds remain at reasonable levels.

Even a� er their rally, eurozone equities trade on relatively attractive valuations, and given the reduction of tail risks, we decided to upgrade the market to neutral. However, it is important to keep in mind that the eurozone debt cri-sis is far from over. The situation in Greece remains highly uncertain, and a Greek exit from the eurozone could trig-ger contagion in other countries. We also see downside risks to earnings as analysts have recently raised some of their forecasts, despite the fact that many eurozone coun-tries remain mired in recession.

We favor the UK among the non-US developed marketsThe UK economy has fallen into a technical recession, with GDP contracting three quarters in a row. Domestic demand has been weak as � scal austerity measures cre-ate headwinds, and the downturn in the eurozone is weighing on exports. However, the labor market has con-sistently been stronger than the GDP � gures would sug-gest, and we expect growth to return to positive territory. Valuations are similar to eurozone equities, but consen-sus earnings forecasts appear less stretched, given that 70% of UK earnings are generated outside of the country, including considerable exposure to the emerging markets. Furthermore, the pound looks cheap against the dollar,


–2.0

2.0

1.00.5

1.5

0–0.5

2.5

–1.0–1.5

Switz

erla

nd

Aust

ralia

Cana

da

Japa

n

UK

Euro

zoneUS EM

Fig. 4: Eurozone, UK, EM look cheap

Sector-adjusted valuation premium, in P/E points

Expensive relative to world

Cheap relative to world

Note: arrows indicate changes adopted as of this reportSource: UBS CIO/WMR, as of 27 September 2012. Scale explained in Appendix.

n– –– – – – + ++ +++

UK

Emerging Markets

Eurozone

Other Developed

Canada

US

Japan

Australia

Switzerland

underweight overweight

Fig. 3: Equity Regions

Tactical deviation from benchmark, including view on currency


o� ering hope for exchange rate movements to add to returns in dollar terms. We therefore have a preference for the UK over the eurozone, and recommend a small over-weight position within global equities.

Japanese markets continue to languishJapan has been one of the worst-performing markets so far this year and largely missed the global rally in the third quarter. The economic data have been disappoint-ing recently, especially in the manufacturing sector, with industrial production falling to its lowest level of the year in July. The positive boost from reconstruction spend-ing has peaked, and political � ghts are causing some delays. A territorial dispute with China has caused prob-lems for Japanese � rms operating in China and is having a big impact on the tourism industry. Even more concern-ing than the negative short-term outlook is the prospect of weak growth in the long run. A rapidly aging popula-tion and shrinking labor force leave Japan with virtually no growth potential, and Japanese companies continue to lose market share in many of their core products. Public � nances are in a ruinous state, and the consumption tax will be doubled in 2014 and 2015 as a � rst step to cut the de� cit. Valuations are much cheaper than they have been in the past, but in our view are still not attractive given the lack of growth potential. The stock market may continue to languish unless the yen weakens, but that would hurt returns for dollar-based investors. We therefore remain underweight Japan within global equities.

International Equities


1000

500

0

2000

1500

3000

2500

2011

3500

2001 20061996199119861981

Fig. 5: Japanese equities near post-bubble low

TOPIX index

Canada solid but expensiveCanada is among the most expensive international mar-kets, especially on a sector-adjusted basis, a� er fairly heavy downgrades to analysts’ forecasts during the summer. Some valuation premium can be justi� ed by Canada’s relatively strong economic fundamentals and the positive outlook for its currency. With the eurozone in recession, the close link to the US economy is a posi-tive, as is the rebound in commodity prices during the third quarter. One positive is that the Bank of Canada is one of the few central banks in the world with a tighten-ing bias, and this could push the Canadian dollar toward its record-high against the US dollar. We downgrade Canada to underweight.

Australia: close links to China hurting recentlyGrowth has been sluggish since the tail end of 2011, but overall economic conditions are still strong relative to most other developed countries, as evidenced by Australia’s 5.1% unemployment rate. Investment spending to expand mining production should continue to boost the economy going forward, but lower commodity prices and the pros-pect of slower growth in demand from China have put some projects on hold. The return on Australian equities in dollar terms is heavily impacted by the Australian dol-lar/US dollar exchange rate, which is not too far from its all-time high. While we expect the relatively high level of interest rates to support the currency, there are downside risks. Valuations are somewhat more expensive than the

Source: Bloomberg, UBS WMR, as of July 2012

10

0

–10

30

20

60

70

40

50

2012

80

2009 2010 20112008200720062005

Fig. 6: Sluggish China a negative for Australia

Australian exports to China, year-over-year % change, 3-month moving average


outperformed developed markets over the last couple of weeks. EM equities trade at around a 20% discount to developed markets, and a� er the global rally in the third quarter, investors may be looking for assets that still appear cheap compared to historic norms. We therefore continue to recommend an overweight position on EM. Within this space, our favored markets are China, Brazil and Korea. Chinese economic data have continued to dis-appoint, but with the market trading at just 9-times for-ward earnings, we have decided to remain overweight. In Brazil, looser monetary policy should spur better growth in the quarters ahead. Valuations are in line with EM aver-ages and long-term growth prospects remain good. This month, we have upgraded Korea to overweight, and we also upgrade Taiwan from underweight to neutral. Both markets are similar in that they are relatively exposed to the global business cycle and have done well during peri-ods of QE. Please see the most recent Emerging Market Equities monthly for further details.

Brian Rose, PhD, Strategist

average for developed markets on a sector-adjusted basis. We maintain an underweight on Australia.

Switzerland: performance linked to euroSwiss companies o� er strong balance sheets and the market is heavily weighted toward defensive sectors like Healthcare and Consumer Staples. Equity valuations are in line with developed market averages. The Swiss cen-tral bank remains committed to preventing the EUR/CHF exchange rate from moving below 1.20, so if the euro has a renewed bout of weakness against the dollar, the peg would result in an equal decline in the franc, hurting equity returns in dollar terms. We downgrade Switzerland to underweight.

Emerging markets continue to disappoint Emerging markets (EM) got o� to a strong start in 2012, but have underperformed since then. The main problem has been the disappointing economic performance of the larger countries, including China, India and Brazil. In line with our expectations, in� ation has slowed, giving central banks the leeway to cut interest rates. However, policy eas-ing has not been enough to overcome headwinds such as the slowdown in exports caused by the recession in Europe. At this point, it seems unlikely that EM economic growth will improve dramatically before the end of the year.

One positive sign for EM equities is that money has started to � ow into EM equity funds, and EM has slightly

Fig. 7: Emerging market underperformance may be over


Market performance in USD, end-2011 indexed to 100

115

110

105

100

95

120

EM EM relative to DMDeveloped markets

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12


Taiwan

Russia

Korea

China

India

Brazil

EM total

Year-to-dateQuarter-to-date

5 10 15 20 250

Fig. 8: Varied performance in emerging markets

Emerging market returns in US dollars, %


Riskier sovereign bonds, especially those in periph-eral Europe, rallied in the third quarter, while the safer bonds lost some of their premium. Exchange rate movements are likely to be the main driver of relative performance among the “safer” markets. We have moved to a neutral stance on US vs. non-US � xed income as downward pressure on the euro has been greatly reduced.

Weak growth to help rates stay lower for longerGlobal economic growth has generally been weaker than expected, making it likely that central banks will keep interest rates lower for longer. Amid overcapacity and high unemployment rates in many countries, core in� a-tion is generally low.

Upgrade eurozone bonds to neutral, focus on coreThe European Central Bank’s new program for bond pur-chases in the secondary markets has helped yields move lower in most of the weaker eurozone countries. Even Greece has seen a strong rally, bringing yields close to their post-restructuring lows. In the current low-yield environ-ment, the relatively high yields o� ered on government bonds in countries such as Greece, Portugal and Spain appear attractive. However, we continue to recommend that investors avoid these bonds. It is widely expected that Spain will seek assistance in the near future, but if political problems or other circumstances prevent this, yields may rise suddenly. We still think that Greece may be forced out

International Fixed Income

Yields contained by sluggish growth

of the eurozone, and another debt restructuring appears likely. We no longer expect the euro to weaken against the dollar, and this has led us to upgrade eurozone bonds, but investors should avoid taking on excessive risks in the peripheral countries.

No value in JapanJapanese government bonds o� er the worst of all worlds. The government’s debt-to-GDP ratio is above 200%, yet 10-year bond yields are below 1%. While we do not expect a major deterioration in 2012, at some point we expect a sell-o� in Japanese government bonds and the yen to weaken sharply. Although considered a safe haven by some, we recommend avoiding Japanese debt.

UK relatively attractiveThe UK has embarked on a multi-year plan to narrow its budget de� cit, which should give the country a chance to hold on to its AAA rating. The pound rallied against the dollar in the third quarter and is trading near its high for the year. We still see the potential for further appreciation against the dollar, although the prospect of another round of monetary easing by the Bank of England could be a short-term negative. If economic growth can return to posi-tive territory, this could signal the end of the easing cycle, allowing the pound to appreciate. We recommend an over-weight on the UK within non-US � xed income.

Brian Rose, PhD, Strategist

Source: UBS WMR, as of 26 September 2012

GermanyUS UK

Japan

5

4

0

2

1

3

6

2002 2003 2004 2005 2006 2007 2008 2009 2010 20122011

Fig. 10: Bond yields comparison

10-year government bond yields, in %

Note: arrows indicate changes adopted as of this reportSource: UBS CIO/WMR, as of 27 September 2012. Scale explained in Appendix.

n– –– – – – + ++ +++

US

Other

UK

Japan

Eurozone

Underweight Overweight

Fig. 9: Fixed Income Regions

Tactical deviation from benchmark, including view on currency


International markets: Chartbook

Fig. 13: Profit growth weak outside of US

Source: Datastream, UBS WMR, as of 25 September 2012

12-month trailing earnings per share, January 2011 indexed to 100

70

60

120

110

100

90

80

130

UK Emerging markets EurozoneUS Japan

Jun-12Apr-12Feb-12Dec-11Oct-11Aug-11Jun-11Apr-11Feb-11 Aug-12


EurozoneUS UK

Japan

64

–202

1412108

16

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Fig. 12: Equity risk premiums higher than usual

Earnings yield minus 10-year bond yield, in %

Fig. 14: Market perceives reduced eurozone tail risks


5-year government CDS spreads, in %

1.0

0.0

6.0

5.0

4.0

3.0

2.0

7.0

SpainItaly

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Fig. 15: Dollar and pound look cheap, Aussie expensive


JP Morgan Real Effective Exchange Rate, CY2000 = 100

60

140

120

100

80

160

US dollar Swiss Franc EuroBritish pound Australian dollar

201020082006200420022000 2012

Fig. 16: Dollar has rallied against many EM currencies


Exchange rate versus US dollar, indexed end-2010 = 100

100959085

125120115110105

130

Brazil IndiaKorea Russia

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12


EurozoneUS (le)

Emerging marketsJapan

0

–20–10

2010

60504030

70

–6–3

630

9

181512

21

Jul-12Jan-12Jul-11Jan-11Jul-10Jan-10

Fig. 11: Economic data so in Japan and eurozone

Change in UBS Economic Surprise Indexes since January 1, 2010


US Equities: Sectors

Still cautiously procyclical

Cyclical sectors still trade at a substantial discount to defensives, even a� er their more recent liquidity-fueled outperformance. But while central bankers are doing their part to promote economic growth, there are a number of near-term hurdles for cyclicals, such as uncertainty over � scal policy, less depressed relative valuations and sluggish pro� t trends.

As of 27 September 2012, the S&P 500 has gained nearly 7% during 3Q and is 14% above its June 2012 low. Not surprisingly, cyclical sectors have performed well during this period, recouping roughly half of their March through July underperformance versus defensives (Fig. 2). While we continue to favor cyclicals as we head into 4Q, in this report we trim our tactical tilt toward cyclicals by upgrad-ing Utilities from underweight to neutral and downgrad-ing Consumer Discretionary from moderate overweight to neutral. We also downgrade Healthcare from neutral to moderate underweight.

Cyclical sectors remain inexpensive relative to defensives and trade at a 14% valuation discount (see Fig. 3). But keep in mind that this valuation gap has narrowed over the past two months. In late July, cyclicals traded at a 21% discount to defensives—an 18-year low. The combination of cheap relative valuations, aggressive monetary accom-modation by the Fed, a reduction in European “tail risks” and signs of stabilization in the domestic economy helped

cyclical sectors to recover. Financials, Technology and Consumer Discretionary stocks have been the strongest performers over the past two months.

Over a 12-18 month period, we continue to believe that a moderate acceleration of economic growth, the avoidance of policy “shocks” and attractive relative valuations should drive cyclical sector outperformance. But over the remain-der of 2012, we are less convinced. We doubt that strong catalysts will be present to signi� cantly narrow the valua-tion gap as investors fret over the US “� scal cli� ” and slowing corporate earnings growth. Our allocation to the 10 S&P 500 sectors is as follows:

Information Technology (overweight)—outperformance to continueThe Technology sector has outperformed the S&P 500 both year-to-date and in 3Q. We expect this to continue given the sector’s low valuation, solid earnings growth and strong product cycles from the largest “tech titans.” Trading at just 12.5x forward earnings estimates, valuation is 4% lower than the market. Since 1995, Tech has traded at a discount to the market just 9% of the time. Tech earnings grew an impressive 9% during 2Q despite macro headwinds, disappointing PC sales and the sector’s rela-tively high exposure to Europe. Mobility and data centers have been strong end-markets. The introduction of Windows 8 in October should also provide some boost to


n– –– – – – + ++ +++

Consumer StaplesIndustrials

Cons DiscretionaryEnergy

Technology

FinancialsUtilities

MaterialsTelecom

Healthcare


Fig. 1: Slightly reduce cyclical overweight

Tactical deviations from benchmark

New Old

Fig. 2: Cyclicals have regained ground on defensives

Source: Thomson Datastream, UBS WMR, as of 25 September 2012

Relative performance of cyclicals versus defensives, indexed

1.10

1.05

1.00

0.95

1.15

Performance of cyclicals vs defensives

Jul-12May-12Mar-12Jan-12 Sep-12


2US Equities: Sectors

PC manufacturers and the computing supply chain. Within the sector, we prefer tech hardware and semiconductor.

Consumer Staples (moderate overweight)—sustainable divi-dend growthConsumer Staples has lagged the S&P 500 in 2012. Sector fundamentals have been challenging as weak unit volume growth in developed markets, higher commodity input costs and a strong dollar all weighed on earnings. These headwinds appear to be easing as the trade-weighted dol-lar has weakened by 4% over the past eight weeks and many commodity prices have declined. Valuation is some-what high at a 22% premium to the market (compared with its 10-year average of 12%), but given the sector’s superior earnings and dividend growth relative to other defensives, a premium is warranted.

Industrials (moderate overweight)—weak momentum appears priced in Despite the recent cyclical rally, Industrials have lagged the S&P 500 in 3Q. We upgraded the sector to moderate overweight on 23 August 2012. Current sector fundamen-tals appear mixed. Earnings grew 14% in 2Q but are expected to slow to mid-single digits in the second half of the year. Global purchasing managers indexes (PMI) indi-cate sluggish end-market demand, but much of this already appears priced in with the sector trading at a 2% discount to the market—below the average 6% valuation premium of the past 10 years. Earnings revisions have

been negative but should stabilize or improve given our expectation for a near-term bottoming of manufacturing PMIs and incremental increases in infrastructure invest-ment in China.

Utilities (upgrade to neutral)—risk/reward getting more attractiveA� er underperformance of 11 percentage points since the market bottomed in early June, we upgrade Utilities from underweight to neutral. Our prior underweight stance was based on the sector’s extreme relative valuation premium and our outlook for higher interest rates (which compete with income-producing Utilities), as well as low power prices. The liquidity-driven rally on the heels of QE3 has prompted a rotation out of safe haven assets pressuring “bond substitutes” within equities such as the Utilities sector. While we believe rates will slowly dri� higher, the recent underperformance has driven Utilities sector valua-tions to less demanding levels. In addition, power prices have hit new lows and further downside will likely be more limited based on coal plant retirements and a bot-toming process in natural gas prices.

Consumer Discretionary (downgrade to neutral)—expectations getting lo� yWe downgrade Consumer Discretionary from moderate overweight to neutral, based on a more cautious outlook for the Retailing industry. Our change in view is based on elevated valuation and aggressive earnings growth

Fig. 3: Cyclicals near lowest valuations in two decades


Relative forward P/E ratio of cyclicals versus defensives, in %

160

140

120

100

80

60

180

Relative P/E - Cyclicals vs Defensives

2011

14% discount

20092007200520032001199919971995 2013


0.4

0.8

0.6

1.0

1.2

1.4

20112009200720052003 2013

Fig. 4: Valuation on utilities now less extreme

Relative forward P/E - Utilities vs. S&P 500


expectations. The Retailing group’s P/E multiple is near a 10-year high relative to the market and consensus earn-ings estimates call for growth to accelerate from 9% this year to 16% in 2013. We believe this is a high hurdle, especially with gasoline prices once again approaching $4 per gallon. We retain our positive view on the Media industry due to its solid pricing power and strong earn-ings trends.

Energy (neutral)—oil prices near fair valueOil supply is running ahead of demand as new US shale oil output has hit the market. Therefore, the market should be reasonably well supplied in the near term and Saudi Arabia will likely manage its output in order to target Brent crude prices of roughly $100, about 10% below current levels. Prices are likely higher than the Saudi target due to some risk premium based on possible military action in the Middle East. As a result, our commodity team is somewhat cautious on oil prices in the near term but believes prices will stabilize near current levels looking out 12 months. Financials (neutral)—very low valuation, but risks remainFinancials have rallied a� er actions by the European Central Bank which reduce the likelihood of a disruptive breakup of the eurozone. The sector has also been buoyed by an improving US housing market and a pickup in capi-tal markets activity. However, � nancial services companies still have to contend with a dif� cult regulatory environ-ment and limited aggregate loan demand as the house-hold sector continues to delever. While valuations remain low, industry pro� tability is likely to remain below average as well. The sector is also vulnerable if tensions in Europe � are again—an outcome that cannot be ruled out as European policymakers negotiate a banking union, Greece faces the prospect of needing additional support and the recession lingers across the continent.

Materials (moderate underweight)—earnings reductions likelyThe Materials sector has lagged over the last 18 months as the global economy has decelerated, notably in com-modity-intensive sectors. As a result, valuation has become more attractive but is not yet at levels that we � nd compelling. Relative to the market, the sector’s price-to-book value is still nearly 10% above its 10-year average. In addition, consensus earnings expectations

look lo� y at 21% growth in 2013. Aggressive central bank easing could buoy commodity prices in dollar terms in the near term, but signs of an actual acceleration in global economic activity—particularly in Asia—will need to surface in order to sustain higher commodities prices and Materials sector stocks.

Healthcare (downgrade to moderate underweight)—poor earnings momentum We downgrade Healthcare from neutral to moderate underweight based on a reduction in our outlook for Healthcare’s equipment & services industry. Relative earn-ings revisions for this subsector have deteriorated based on a worsening outlook for medical insurance companies and still-challenging environment for medical devices. Pro� tability in the medical insurance industry has declined as medical costs rise on the back of higher- than-expected utilization. Cycles in this industry tend to last several quar-ters as it takes time for the insurance carriers to adjust pricing. Pharmaceutical company valuations have risen to multi-year highs, but are still lower than other more expensive defensives such as Telecom and Utilities.

Telecom (underweight)—still expensiveTelecom remains the most expensive S&P 500 sector at a 40% premium to the market. In this low interest rate envi-ronment, investors have found the sector’s market-leading 4.4% dividend yield appealing. However we caution that interest rates are already at generational lows and our � xed income team believes rates will likely dri� higher over the next 12 months. Fundamentally, while wireless pro� t-ability has improved for the largest carriers, this could prove to be temporary as smaller players upgrade their networks to faster speeds, narrowing their competitive disadvantages.

Jeremy Zirin, CFA; David Le� owitz, CFA, Strategists

US Equities: Sectors


A� er lagging for most of 2012, small-caps have ral-lied since we moved to an overweight late last month. We believe further outperformance is likely. We maintain our long-standing preference for growth over value and continue to expect crosscur-rents for neutral-rated REITs.

Small- and mid-caps should continue to “close the gap”In last month’s Investment Strategy Guide (Back to work, 23 August 2012), we wrote that small- and mid-cap stocks were lagging large-caps despite the presence of several factors that typically coincide with smaller com-pany outperformance, such as broad equity market gains, declining market volatility and narrowing credit spreads. At that time, we upgraded our tactical allocation to small- and mid-caps to overweight. Over the course of the last few weeks, small-caps have outperformed, narrowing the “disconnect” from the fundamental drivers cited above. We believe further relative gains are likely for small- and mid-cap stocks.

First, though we are moderately scaling back our prefer-ence for cyclicals over defensives, we retain a clear pref-erence for the former given attractive relative valuations, stabilizing to improving economic data and additional measures by the Fed to spur risk-taking. As small-caps are more cyclical (and are exposed to more domestic cycli-cals) than large-caps, a rotation into economically sensitive

sectors should provide a tailwind for small-caps. Second, relative valuation is largely neutral and shouldn’t be a hur-dle for small-caps. Third, small-caps performed poorly on a relative basis versus large-caps as interest rates declined. Despite the Fed’s latest installment of QE, our US � xed income team is projecting moderately rising interest rates over the next 12 months as the economy gains traction and in� ation expectations rise. This will reduce the appeal of large-caps’ higher dividend yield.

Remain overweight growth and neutral real estateWe are not making any changes to style (maintaining our preference for growth over value) or to our neutral view of REITs. Growth performed in line with value in the third quarter and has outperformed by 110 basis points in 2012. In our view, the drivers for further outperformance for growth indexes remain in place: attractive relative valuation (growth is trading at a 30% premium to value, below its long-run average of 46%); positive sector in� u-ences (Technology over Financials); and the tendency for growth to outperform value as aggregate corporate earn-ings growth moderates. REITs continue to face the dual headwinds of interest rate risk in case of rising rates and stretched valuations, but fundamentals should remain solid in a moderate growth and still low interest rate envi-ronment. We remain neutral.

David Le� owitz, CFA; Jeremy Zirin, CFA, Strategists

US Equities: Size & Style, REITs

Small-caps perking up


n– –– – – – + ++ +++

Mid-Cap

Large-Cap Growth

REITs

Small-Cap

Large-Cap Value


Fig. 5: Favor growth over value; small over large

Size, style, and REITs recommended allocation, deviation from benchmark

New Old

Fig. 6: Rebounding cyclicals should boost small-caps

Source: FactSet, Bloomberg, UBS WMR, as of 20 August 2012

Relative performance of cyclical vs.defensive sectors

Relative performance ofRussell 2000 vs. Russell 1000

106

102

98

94

90

86

110

114

100

98

96

94

92

90

88

102

Cyclicals versus defensives (le)Small-caps relative to large-caps (right)

Jul-12Apr-12Jan-12Oct-11Jul-11Apr-11Jan-11 Oct-12


US Equities: Chartbook

Source: Datastream, UBS WMR, as of 25 September 2012

0.9

1.1

1.0

1.2

1.3

1.4

1.5

Sep-10Sep-08Sep-06Sep-04Sep-02 Sep-12

Fig. 9: Retailing valuations are stretched

Retailing forward P/E relative to S&P 500

Fig. 12: Small-caps have lagged despite low volatility


Relative performance of large-capsvs. small-caps (indexed)

VIX 13-week m.a.

100

95

90

85

105

110

50

40

30

20

10

60

correlation: 56%

Large-caps vs small-caps (le)VIX 13-week moving average (right)

Jul-12Jan-12Jul-11Jan-11Jul-10Jan-10Jul-09Jan-09 Jan-13

Fig. 10: High gasoline prices could crimp Retailing


US gasoline prices, in USD per gallon

4.0

3.5

3.0

2.5

4.5

US gasoline price national average

Jun-12Feb-12Oct-11Jun-11Feb-11Oct-10Jun-10 Oct-12

Fig. 11: Rising interest rates a risk for Utilities

Source: FactSet, UBS WMR, as of 14 September 2012

Regulated Utilities relative to S&P 500 10-year US Treasury yield, in %

1.4

1.3

1.2

1.1

1.0

0.9

0.8

1.5

1.6

1.5

2.0

2.5

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Regulated utilities relative to S&P 500 (le)UBS WMR year-end Treasuries forecast (right)10 year Treasury yield inverted (right)

Jul-12Jan-12Jul-11Jan-11Jul-10Jan-10 Jan-13

Fig. 7: Tech is trading at a wide discount to average valuations


Relative forward P/E ratio by sector

1.4x

1.2x

1.0x

0.8x

0.6x

1.6x

Current relative P/E10 year average relative P/E

Ener

gy

Tech

nolo

gy

Heal

thca

re

Indu

stria

ls

Mat

eria

ls

Utili

ties

Cons

Disc

Cons

Stp

ls

Tele

com

Fina

ncia

ls

Fig. 8: Weak earnings momentum for Healthcare

Source: FactSet, UBS WMR, as of 24 September 2012

Positive earnings revisions minus negative revisions / total estimates,Healthcare Equipment and Services relative to S&P 500, in %

30

20

10

0

–10

–20

40

Relative earnings revisions Relative earnings revisions - 3 mo avg

2012201120102009200820072006 2013


Despite the signi� cant spread tightening that has taken place, credit-sensitive parts of the � xed income market should continue to bene� t from recent policy actions that limit � nancial market downside and push investors toward higher-yield-ing assets. We look for Treasury yields to return to slightly higher but stable ranges, and credit spreads to grind only moderately tighter into year-end. Despite very tight spreads, agency mortgage-backed securities (MBS) will likely continue to remain well bid with the Fed absorbing substantial gross supply. We lowered our emerging markets sovereign allocation to neutral as valuations are no longer compelling.

New Treasury yield forecast rangeWe recently increased our interest rate forecasts as we now expect rates to remain in a slightly higher range over the next three to six months. There are two main take-aways from the new Fed and ECB measures: First, the short end of the yield curve remains anchored at excep-tionally low levels, while longer-dated maturities are more likely to rise slightly. Second, the ECB measures represent a cap on Spanish and Italian sovereign yields that should reduce worries about the euro crisis and cause benchmark

US Fixed Income

Go with the policy � ows

Fig. 2: US interest rate forecastsIn %

27-Sept in3 months

in6 months

in12 months

3-month Libor 0.4 0.5 0.5 0.5

2-year Treasury 0.2 0.4 0.4 0.5

5-year Treasury 0.6 0.9 0.9 1.2

10-year Treasury 1.6 2.0 2.0 2.3

30-Year Treasury 2.8 3.0 3.0 3.5

Source: Bloomberg, UBS WMR, as of 27 September 2012Note: Bold numbers indicate the new rate forecasts published in Interest rates and bond markets, 14 September 2012.

Preferred Securities

Emerging Market

Most PreferredLeast preferred

Inv. Grade Corporates

High Yield Corporates

TIPS

Agencies

Mortgages

Treasuries

– – – – – – n + ++ +++

Note: Our TFI preferences are presented in a different format than in prior months. The focus is on the relative preference order rather than on deviations from a benchmark. See the appendix for a detailed asset allocation illustration in the context of a moderate-risk taxable US dollar fixed income portfolio and explanations regarding the interpretation of the suggested tactical deviations from benchmark. Source: UBS WMR, as of 27 September 2012

Fig. 1: USD taxable fixed income (TFI) strategy

Tactical deviations from benchmark

yields to be less impacted by safe haven � ows. While we are revising our expectations for interest rates slightly higher, we are not of the view that we have reached the beginning of a long-term bear market for bonds. However, the measures open the door for benchmark yields to return to their previously stable and slightly higher ranges. We have kept our 12-month forecasts in place, which are only moderately higher than our 6-month forecasts. Factors such as the ongoing structurally weak growth environment, the potential for political risks to � are up again, and the likelihood that the Fed will initiate outright Treasury purchases when its Operation Twist program ends next year should serve to put downward pressure on rates.

Real yields to remain low in the near termBreakeven rates increased due to the in� ationary implica-tions of expanding the Fed’s balance sheet and the Fed’s focus on bringing down unemployment. Most of this move in in� ation expectations has played out through real yields, which have been pushed lower. In contrast, the 10-year nominal Treasury stands close to its level prior to when the bond market began to expect QE3. The poten-tial for breakeven rates to remain elevated, albeit anchored near current levels, will likely keep real yields depressed in the near term. However, over the long term, both real and


nominal yields should respond to the growth e� ects of QE and rise if we get back on track to reach potential growth.

Agency debentures and MBS—high-quality alternativesPrices of agency MBS rose as the Fed stated it would make new MBS purchases at a pace of $40bn per month, while maintaining the policy of reinvesting principal payments of agency debt and MBS. Since the Fed announcement, the 30-year FNMA current coupon rate has fallen 58bps to a record low of 1.78%, while the spread to the Treasury 5yr/10yr blend has tightened to just 60bps. These pur-chases should add to an already favorable supply/demand backdrop that exists as the Fed is scheduled to accumu-late a substantial share of MBS gross issuance. In addi-tion, steps taken by the Federal Housing Finance Agency in mid-August helped raise the credit quality of agency debentures and MBS by strengthening the operational ties that Fannie Mae and Freddie Mac have with the govern-ment. We believe agency MBS will likely retain their lo� y valuations while the Fed remains an aggressive buyer. In the agency debenture space, we prefer callable bonds over bullets. In a period of lower volatility and range-bound yields, callable agency bonds allow investors to pick up incremental yield and may o� er higher total returns over non-callable bonds.

Credit to be a bene� ciary, yet againRecent policy actions in support of economic growth and

market liquidity are likely to maintain a positive tone for credit, while fundamentals remain robust. With invest-ment grade (IG) spreads having tightened by 18bps in September and 80bps year-to-date (YTD), overall yields remain near historically low levels with the IG index cur-rently exhibiting an average YTM slightly below 3%. This serves to increase the duration risk that is inherent in the IG market. The e� ective duration of the IG index currently stands close to 7 years, compared to a 10-year average of 6 years. Although we believe the average credit spread of this index, currently at 167bps, could decline to 150bps, this is only likely to occur in tandem with 10-year Treasury rates rising up to our 2.0% forecast level. While we see some further potential for spread tightening, this will likely be mixed with higher levels of volatility, as macro and political events weigh on the markets and risk tolerance. Continued solid new issuance volumes and strong investor demand are likely to follow in the fourth quarter, as long as market conditions remain supportive.

Financial bonds may compress further Our view on Financials heading into 4Q12 remains con-servative, as YTD returns for the sector are substantial, and spreads are now approaching the tights of 2011 but at a much lower overall yield. In the quarter to date, IG Financials have rallied substantially, with a total return of 4.7%, versus 2.8% for Industrials and leaving Financials within 30bps of their post-crisis low spread level of 171bps (11 April 2011). Although we have moved through our

US Fixed Income

Fig. 4: Breakevens have risen on QE3 expectations


10-year real, nominal, and breakeven rates, in %

2.5

1.5

0.5

–0.5

–1.5

3.5

0.0

4.5

10 year nominal yields 10 year breakeven10 year real yields

Jul-12Jan-12Jul-11Jan-11Jul-10Jan-10 Jan-13

August 2012 Fed minutes

Fig. 3: Duration and yield curve positioning

Duration Neutral

Corporate bond maturity range 3 to 7 years

TIPS maturity range 5 to 10 years

Municipal maturity range 6 to 9 years



US Fixed Income

previous year-end spread target of 200bps, we see sup-port for further tightening and compression relative to Industrials. During upcoming 3Q12 earnings, banks and insurers will face similar challenges posed by the low inter-est rate environment and tepid growth. Banks are likely to continue to report improvement in credit quality of loan portfolios while insurers are likely to bene� t from improved pricing. Among IG Financial issuers, we continue to favor well-capitalized money center banks and regional Financials, as well as diversi� ed insurance companies. Further down the capital structure, we remain neutral on preferred securities. While we believe preferred prices are currently at rich levels, we expect preferreds to remain well bid in the near term. We caution that current � xed-for-life coupon levels below 6% expose investors to long duration risk should rates move higher than we forecast.

Price ‘melt-up’... how much longer?Preferred securities exhibited another strong month of total return performance during August. The index for � xed-rate investment-grade preferreds returned 1.0% for the month and 12.7% YTD. A signi� cant portion of this solid YTD performance was attributed to price appre-ciation, contributing 7.2% out of the 12.7% during the period. Subsequently, we now see less room for fur-ther price appreciation from the current lo� y prices and believe the dividend or interest component will count more toward the total rate of return for the rest of 2012. We hold this view in spite of the recent monetary stimulus

announced by the Federal Open Market Committee (FOMC) on September 13. We do not see as much perfor-mance potential as � nancial market stress is muted, pre-ferred securities yields are lower and recent economic data has been coming in better than expected.

Prices of non-US preferred securities have increased another 1.4% since Mario Draghi’s “whatever it takes” comment on July 26. However, we believe the situation in the eurozone has not improved enough to support higher price levels without some risk of a credit-related pullback. The combination of the lingering eurozone problems, global growth concerns, uncertainty over US � scal policy and the still-recovering banking sector present multiple potential risk factors. That said, in the absence of a mar-ket shock, we look for the prices of non-US preferreds to remain at these well-bid levels, especially as the universe of high-yielding investment alternatives is scarce. With these varying forces at play, we believe income will similarly play a larger part of non-US preferreds total rate of return for the remainder of the year.

High yield, high coupons High yield (HY) credit has bene� ted tremendously from investors’ insatiable quest for income, which has resulted in strong fund � ow demand. Dissecting the 12.5% YTD total returns that the HY index has generated, roughly half of this stems from coupon income and half from price appreciation, as spreads have compressed 175bps


20

0

140

40

120

100

80

60

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Fig. 5: Agency MBS spreads plummeted following QE3

30-year Fannie Mae current coupon spread over 10-year Treasuries, in basis pointsFig. 6: Projected six-month returns

Index Incomereturn (%)

Price return (%)

Total return (%)

Investment grade 2.2 -0.7 1.5

High yield 3.7 0.2 3.9

Source: BofAML, Yield Book, UBS WMR, as of 25 September 2012Note: Utilizes our 6-month interest rate forecasts and spread target assumptions of 150 basis points for IG and 500 basis points for HY


US Fixed Income

YTD. Average spreads currently stand at 535bps and have potential to decline below 500bps, in our view. However, given the strong correlation with equities, we think this will occur only in the context of a supportive environment for risk assets and in the absence of any negative market shocks. Further price gains will be limited by the fact that roughly 40% of the HY index trades above its call price, which constrains further upside. Nonetheless, given the relative income advantage and still reasonable spread valu-ations, we believe HY corporate bonds o� er an attractive return outlook and should be overweighted.

EM sovereign debt: move to neutralEmerging markets (EM) US dollar-denominated sovereign debt has been the top YTD performer among the seg-ments tracked in our US � xed income asset allocation. EM sovereign debt’s YTD total return stands at 14.1%, about 150bps and 160bps ahead of preferreds at 12.6% and US high-yield at 12.5%, respectively. The asset class continues to exhibit stronger fundamentals and better growth pros-pects than the developed world, in our view. Furthermore, in an environment of historically low benchmark rates, EM has remained a sought-a� er investment destination, which in turn has translated into strong investor in� ows and sup-portive technicals.

However, EM sovereign debt valuations look roughly in line with fundamentals, which should mean that further upside is likely to be rather limited. Therefore, we reduce our

tactical weighting for US dollar-denominated EM sovereign debt to neutral from overweight. That said, we continue to favor Latin America and Asia over Eastern Europe. We also favor investment vehicles (e.g., mutual funds and/or ETFs) that include EM corporate debt in their respective man-dates. We continue to expect a pickup in global economic activity in coming quarters, and EM corporate bonds tend to outperform their respective underlying sovereign when growth accelerates. Downside risks to our neutral allo-cation include the strong correlation between crude oil prices, which appear rather shaky nowadays, and Russian sovereign debt (about 10% of our benchmark index). On the upside, we have the October 7 presidential election in Venezuela (almost 7% of our benchmark index). Market participants seemed positioned for the incumbent’s reelec-tion, but recent news � ow out of Venezuela suggests there’s a possibility for a market-friendly surprise. Municipal securitiesFavorable technical factors related to manageable new issue supply and healthy investor demand helped munici-pals outperform Treasury securities throughout most of the summer. As a result of this strong performance, municipal-to-Treasury (M/T) yield ratios at the 10-year and 30-year maturity points have fallen to 101.7% and 103.4%, respectively, from 119.8% and 120.1% on June 1. In September, new issuance is estimated at $22.5bn through 28 September 2012, following $31.9bn in primary mar-ket supply occurring last month, according to The Bond

Fig. 8: Spreads are at YTD tights but above 2011 lows

Source: BofAML, UBS WMR, as of 25 September 2012

Option-adjusted spread, in basis points

240

200

160

120

280

800

700

600

500

400

900

Investment grade (le)High yield (right)

Apr-12Jan-12Oct-11Jul-11Apr-11Jan-11Oct-10Jul-10Apr-10Jan-10 Jul-12

Fig. 7: Duration risk increases as yields decline


Duration, in years

7.0

6.0

5.0

4.0

3.0

8.0

IG Corporates TreasuriesHY Corporates USD EM Sovereigns

2002 2004 2006 2008 2010 2012


Fig. 12: AAA muni-to-Treasury yield ratios

Source: MMD, UBS WMR as of 25 September 2012

in basis points

110

95

80

125

140

10 year30 year

Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12

Note: September flows are month-to-date, as of 12 September 2012Source: Investment Company Institute, UBS WMR, as of 25 September 2012

10000

5000

0

–5000

–10000

–15000

15000

May-09Sep-08 Sep-10 Jan-02May-11 Sep-12Jan-10

Fig. 11: Municipal mutual fund flows

In USD (millions)

“60 minutes”

Lehman Brother’sbankruptcy

Historically low yields

Monthly Net Inflows/Outflows

Fig. 10: HY spreads and equities have moved in tandem

Source: BofAML, Bloomberg, UBS WMR, as of 25 September 2012

S&P 500 Index, le, and HY option-adjusted spread, right, in basis points

1,350

1,300

1,250

1,200

1,500

1,450

1,400

1,550

500

550

600

650

700

750

450

S&P 500 Index (le)High yield spread (right)

Oct-12Sep-12Aug-12Jul-12Jun-12May-12Apr-12Mar-12Feb-12Jan-12

Fig. 9: Financials and Industrials spreads have compressed


Option adjusted spreads, in basis points

300

200

100

400

Industrials Financials

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Buyer. On the demand side, investors continue to direct � ows to municipal mutual funds in pursuit of income. Net cash in� ows to muni mutual funds have now taken place for 25 consecutive weeks according to data reported by the Investment Company Institute, accumulating a total of $45.8bn YTD through 12 September 2012. On a monthly basis, the sector has not experienced out� ows since August 2011.

The broad muni market has posted a 6.2% YTD total return, outpacing the 1.9% return for the Treasury bond market over the same time frame. By contrast, tax-exempt munis have lagged investment-grade corporate bond per-formance of 8.6%. Some supply pressures are likely to build in the October/November time period. Presently, the 30-day Visible Supply stands at $9.3bn. By compari-son, the indicator has averaged $8.6bn in 2012 and re-cently attained its lowest reading YTD on 30 August 2012 ($2.6bn). We expect price volatility to increase a� er the presidential election as tax reform takes center stage and municipal tax exemption is closely scrutinized. In our view, the municipal tax exemption is likely to be among the tax expenditures targeted by Congress for a variety of reasons, as discussed in WMR’s Municipal Market Guide: Taxing times, 14 September 2012.

Rebecca Clarke; Barry McAlinden, CFA; Donald McLauchlan; Kathleen McNamara, CFA, CFP; Henry Wong, Strategists

US Fixed Income


US Fixed Income: Chartbook

Fig. 5: Municipal visible supply and yields


Le hand axis yield, in %, right hand axis in USD millions

3

2.5

2

1.5

1

3.5

Yiel

d 11,500

14,500

5500

8500

2500

17,500

30-Day Visible Supply (right)Treasury 10 year (le)

AAA GO 10 year (le)

May-12Mar-12Jan-12Nov-11Sep-11Jul-11 Jul-12 Sep-12

Fig. 3: Emerging Market sovereign bond spread


Option-adjusted spreads, in basis points

800

600

400

200

0

1000

EM spreadAvg (2000-present)

2009200620032000 2012

Fig. 4: TIPS breakeven inflation rates remain elevated


Breakeven inflation rate, in %

3

2

1

0

–1

4

5-year breakeven 30-year breakeven10-year breakeven

Sep-11Sep-10Sep-09Sep-08Sep-07 Sep-12

Fig. 1: Treasury yields to rise gradually


Rate development and UBS WMR forecast, in %

5

4

3

2

1

0

6

2-year Treasury note10-year Treasury note

Sep-11Sep-09Sep-07Sep-05Sep-03Sep-01 Sep-13

Fig. 2: The yield curve should remain steep


10-year Treasury yield minus 2-year Treasury yield, and WMR forecast, in basis points

250

200

150

100

50

0

–50

300

10s/2s Curve

Sep-11Sep-09Sep-07Sep-05Sep-03Sep-01 Sep-13

Fig. 6: US � xed-income yieldsYields, in %

Maturity Treasury TIPS Agencies IG Corp. Single-A

HY Corp. Double B

Muni AAA Muni TEY 35%

2-year 0.3 -1.5 0.3 0.7 2.6 0.3 0.5

5-year 0.6 -1.5 0.9 1.6 3.7 0.8 1.2

10-year 1.7 -0.8 1.9 3.0 5.1 2.0 3.1

20-year 2.4 -0.1 3.0 4.2 6.5 3.2 4.9

30-year 2.8 0.4 2.9 4.2 7.9 3.3 5.1

Note: TEY = tax equivalent yieldSource: Bloomberg, UBS WMR, as of 25 September 2012


The announcement by key central banks that they would further ease monetary policy in the com-ing quarters has had a mixed impact on commodity prices so far. Precious and industrial metals per-formed well, whereas energy and agricultural com-modities saw prices coming under pressure. We think this diverging behavior could continue in 4Q12.

Strong sector-specifi c price drivers are in a position to over-power the supportive impact of extremely loose monetary policy on real assets. Overall, this leaves us with an asset class return payoff that is only mildly positive for 4Q12.

Energy continues to weakenOn a sector level, we continue to forecast negative expected returns for Energy. Global crude oil supply should expand by 0.8-1 million barrels per day (mbpd) versus the prior quarter and therefore overcompensate incremen-tal demand. Lackluster crude oil demand growth (0.2 mbpd) has several sources of weakness, which range from structural factors in Europe and the US to cyclical issues in China. We think that will bring Brent crude oil prices toward $95/bbl while WTI slides toward $78/bbl in 4Q12. Ample supply should also keep US natural gas inventories fi rmly above longer-term averages and lead to high single-digit investment losses.

Better news for metalsA more favorable situation can be found on the metal

Commodities

Caught between QE and sector-specifi c price drivers

side. With China’s growth deceleration coming to an end, metals should hold their ground. That said, the strong price increase witnessed a er the QE3 announcement has yet to be followed by a real demand pickup. We think this will limit the sector’s performance. On an individual level, copper is our top pick. Stronger investment demand can quickly widen the metal’s supply defi cit.

A quite opposite return payoff can be found for gold. The Fed’s aggressive easing is likely to weigh on the US dollar and motivate a constant infl ow into gold-backed invest-ments over the next 3-6 months. Gold is likely to be the key benefi ciary of investors’ search for real assets. We think this should leave room for the gold price to rise fur-ther in the coming three months.

Grains under pressureA 15%-20% price increase for grains remains a highly probable outcome. Demand rationing for corn and soy-beans is still needed. With ethanol production and feed demand holding up, US grain inventories run the risk of declining more than envisaged by the USDA. Additional grain support comes from elevated planting expectations for South America’s crop, leaving room for disappoint-ments when planting becomes very weather-sensitive in late 4Q12. Risk to this view relates to ongoing US export weakness in the grains.

Dominic Schnider, Strategist

Fig. 1: Performance of different commodity sectors


UBS Bloomberg CMCI spot indices, standardized to 100

140

120

100

80

60

160

180

EnergyAgriculture

Industrial MetalsPrecious Metals

Livestock

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12


150

100

50

0

–50

–100

200

2

0

–2

–4

6

4

8

20011995198919831971 2007

Fig. 2: Negative real interest rates should continue to supportgold price

US real interest rates and annual returns on Gold (in %)

1977

US real interest rates (right)Gold price year-over-year change (le)

Most hedge fund strategies have been posting gains this year. However, performance across the industry, while improving, continues to disappoint and is trailing the overall equity markets by a sizeable margin. We have wit-nessed a truncated volatility pro� le across funds as manag-ers try to navigate a globally weak economy and indecision among policymakers. Funds of funds and equity long/short funds, the largest hedge fund strategy, are reevaluating their value proposition as they lag their passively managed long-only peers. As of August, the S&P 500 had returned 13.5% compared to just 3.5% according to the HFRI Equity Hedge Index. However, � xed income managers, particularly in the asset-backed area, have delivered strong, steady performance through aggressive asset purchases and bene� ting from low interest rates and limited defaults.

Leverage increased slightly amidst a slower trading envi-ronment. Correlations within asset classes came down and dispersion across securities increased, thereby creating a more favorable environment for security selection. As a result, equity managers with a fundamental approach and a net-long bias performed relatively well in August.

Equity hedge funds were up +3.5% year-to-date by August, rebounding slightly a� er a weak second quarter. Managers underperformed relative to market indexes. They entered 3Q defensively positioned, but eventu-ally ramped up exposure o� the back of the equity rally. As a result, a markedly greater upside capture emerged. Managers with short positions saw those rallying harder than their longs, which hurt performance. In terms of geography, managers with more US-centric positions seemed to outperform those invested in international markets, particularly Asia. Strong performance from equity-oriented managers is expected to continue if mar-kets remain � rm.

Event-driven funds were up +4.0% year-to-date. Event-driven managers have performed similarly to equity hedge managers as they su� ered from the same dif� cul-ties, including lower net exposure and lack of conviction. Managers rerisked their portfolios a� er the ECB’s commit-ment to save the euro. This resulted in gains across merger arbitrage and European � nancials, but these were o� set by European sovereign credits. Merger activity picked up

toward the end of summer as new deals were announced. Gains were also driven by equity and credit positions, par-ticularly in auto, mining, consumer and energy segments. Event plays are expected to materialize toward year-end with the US election and changes in tax policy.

Macro funds had risen a mere +0.95% by the end of August. A� er a dif� cult June, commodity trading advisors (CTAs) were the best-performing strategy in July, up over 3% for the month with most of the gains coming from currency and � xed income markets. The EUR declined against major currencies, which made money for many managers who were short EUR and long USD and AUD. Commodities also experienced signi� cant price movement as droughts in certain parts of the US created shortages in corn and wheat. CTAs gave back some performance in August as trends failed to materialize. Returns from dis-cretionary macro managers remained muted and are rela-tively � at for the year. A dif� cult trading environment for discretionary managers continues to persist as investors begin to lose interest.

Relative-value funds, in contrast, were up 6.6%. Fixed income and structured credit funds are the best-perform-ing hedge fund strategies in 2012. Spreads tightened across corporate and high-yield markets, aiding long- biased managers. Managers that posted positive perfor-mance pro� ted from yield curve positioning in the US and Europe. Credit-distressed managers had modestly positive results as core restructurings and post re-org equities con-tributed to performance. Capital has continued to � ow into this area including RMBS, CMBS and CLO paper as investors avoid equities in favor of yield.

Andrew Yongvanich, UBS Alternative Investments

Alternative Investments

Hedge fund review and outlook


Andrew Yongvanich is an employee of the UBS Alternative Investments team within UBS Wealth Management Solutions and is not a part of Wealth Management Research (WMR). WMR may have views that di� er or are contrary to the views expressed herein.

Fundraising environmentAs of mid-year, global fundraising across the private equity (PE) industry remained slightly below its three-year average. Since 2009, the PE industry has managed to raise on aver-age $73.2bn per quarter while 2012 netted $66.7bn per quarter. This remained signi� cantly below the 2005-08 bull market level. However, certain investors continue to allocate capital to PE with a preference for yield and capital appre-ciation, rather than liquidity. Larger funds, those greater than $1bn, are grabbing a bigger share of the overall pie. Fourteen funds held a � nal close with at least $1bn in com-mitted capital with the largest fund closing with $7.1bn in aggregate commitments. However, funds are delaying their closing in hopes of reaching their fundraising targets.

North America continued to be the primary market fund-raising, accounting for 51% of funds closed and 58% of committed capital. Europe accounted for 22% of fund closings and 27% of committed capital, while Asia along with the rest of the world closed 22% of funds and raised 14% of committed capital.

Buyout funds were the most in demand with $24.9bn in capital commitments, followed by natural resources. Six dedicated natural resources funds raised $8.8bn with four out of six raising more than $1bn. Real estate � ows appeared to slow, while appetite for venture capital remained constant.

Dry powder/� nancingPE funds have a lot of capital on hand from a lackluster deal environment driven by uncertain growth prospects. Overall, they are sitting on approximately $900bn dollars and the $51bn invested last quarter was the lowest total since 2009. Transactions dropped 29% from the previous quarter and PE � rms are on pace to execute the fewest deals since 2003.

Credit markets weakened around the world especially in Europe during the second quarter with both new high-yield issuance and new issue leverage loans down quarter over quarter. However, � nancing conditions for US lever-aged buyouts remain broadly favorable. Firms with big pools of capital have been able to opportunistically re� -nance and extend existing debt.

Subdued deal-making environment Deal-making remained muted in the � rst half, while sec-ond quarter deal � ow was the lowest level for any individ-ual quarter since 2008. Consistent deal-making that was present in 2011 fell in the � rst half of 2012. Secondary buyouts are returning to the market as PE � rms have bought more assets from other PE � rms this year, more than double 2011 volumes and the highest since 2007.

Energy infrastructure deals are experiencing a boom from changing supply/demand balances, technology advance-ments, new infrastructure, growth in low-cost supply of certain commodities (natural gas), higher levels of volatil-ity and new policy changes. Energy infrastructure funds are attracting interest by delivering attractive yield, sup-ported by real asset exposure and strong cash-� ow-based businesses. Investments include undeveloped oil and gas assets, mineral rights and royalties, and producing oil and gas properties.

Investments in Financial Services lagged as a result of the European crisis and economic slowdown. Deal-making in consumer products (retail, media, consumer durables/non-durables, services) remained weak, but speci� c sec-tors found activity. Retail represented 15% of consumer products deal � ow and accounted for 36% of capital invested. Consumer durables experienced the largest drop in invested capital, declining almost $10bn year over year. Exit activity was relatively strong, despite a drop from the � rst quarter. Corporate acquisitions with strategic partners appeared favored over IPO exits.

Exit volumes appear strong going into the second half of the year in hopes of tax avoidance, due to policy changes at year-end. Additionally, mega-cap deals came back at the end of the third quarter, pushing LBO volume up notably in Asia. While the market is coming back, deals are smaller and less visible as compared to the boom years.

Andrew Yongvanich, UBS Alternative Investments

Alternative Investments

Private equity landscape

Andrew Yongvanich is an employee of the UBS Alternative Investments team within UBS Wealth Management Solutions and is not a part of Wealth Management Research (WMR). WMR may have views that di� er or are contrary to the views expressed herein.



Global Investment Process and Committee DescriptionThe UBS investment process is designed to achieve replicable, high quality results through applying intellectual rigor, strong process governance, clear responsibility and a culture of challenge. Leading the process, the Chief Investment Of� cer formulates the UBS Wealth Management Investment House View at the Global Investment Committee (GIC) based on the analyses and assessments conducted and vetted throughout the investment process. Senior investment profession-als from across UBS, complemented by selected external experts, debate and rigorously challenge the investment strategy to ensure consistency and risk control.

Global Investment Committee CompositionThe Global Investment Committee is comprised of fourteen members, representing top market and investment expertise from across all divisions of UBS:

• Alex Friedman (Chair)• Mark Andersen• Mark Haefele• Andreas Höfert• Jorge Mariscal• Mads Pedersen• Mike Ryan• Simon Smiles• Larry Hathaway (*)• Bruno Marxer (*)• Curt Custard (*)• Andreas Koester (*)• Tom Daula (*)• Andrew Williamson (*)(*) Business areas distinct from CIO/WMR

WMA Asset Allocation Committee DescriptionWe recognize that a globally derived house view is most e� ective when complemented by local perspective and applica-tion. As such, UBS has formed a US Asset Allocation Committee responsible for translating the Global Investment Committee’s house views on asset classes into US speci� c asset allocation models. Any charts and tables that feature the guidance of the WMA Asset Allocation Committee are indicated with a lavender-tinted color block.

WMA Asset Allocation Committee CompositionThe WMA Asset Allocation Committee is comprised of seven members:

• Tony Roth (Chair)• Mike Ryan • Michael Crook • Stephen Freedman • Richard Hollmann • Brian Nick • Jeremy Zirin

Appendix

Investment Committee


Nontraditional AssetsNontraditional assets include commodities and alternative investments. Alternative

investments, in turn, include hedge funds, private equity, real estate, and managed

futures. Interests of alternative investment funds are sold only to quali� ed investors,

and only by means of o� ering documents that include information about the risks,

performance and expenses of alternative investment funds, and which clients are

urged to read carefully before subscribing and retain. An investment in an alterna-

tive investment fund is speculative and involves signi� cant risks. Alternative invest-

ment funds are not mutual funds and are not subject to the same regulatory

requirements as mutual funds. Alternative investment funds’ performance may be

volatile, and investors may lose all or a substantial amount of their investment in an

alternative investment fund. Alternative investment funds may engage in leveraging

and other speculative investment practices that may increase the risk of investment

loss. Interests of alternative investment funds typically will be illiquid and subject to

restrictions on transfer. Alternative investment funds may not be required to provide

periodic pricing or valuation information to investors. Alternative investment fund

investment programs generally involve complex tax strategies and there may be

delays in distributing tax information to investors. Alternative investment funds are

subject to high fees, including management fees and other fees and expenses, all of

which will reduce pro� ts. Alternative investment funds may � uctuate in value. An

investment in an alternative investment fund is long-term, there is generally no

secondary market for the interests of a fund, and none is expected to develop.

Interests in alternative investment funds are not deposits or obligations of, or guar-

anteed or endorsed by, any bank or other insured depository institution, and are not

federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve

Board, or any other governmental agency. Prospective investors should understand

these risks and have the � nancial ability and willingness to accept them for an

extended period of time before making an investment in an alternative investment

fund and should consider an alternative investment fund as a supplement to an

overall investment program.

In addition to the risks that apply to alternative investments generally, the following

are additional risks related to an investment in these strategies:

• Hedge Fund Risk: There are risks speci� cally associated with investing in hedge

funds, which may include risks associated with investing in short sales, options,

small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities

and illiquid investments.

• Hedge Fund of Funds: In addition to the risks associated with hedge funds gener-

ally, an investor should recognize that the overall performance of a fund of funds

is dependent not only on the investment performance of the manager of the

fund, but also on the performance of the underlying managers. The investor will

bear the management fees and expenses of both the fund of funds and the

underlying hedge funds or accounts in which the fund of funds invests, which

could be signi� cant.

• Managed Futures: There are risks speci� cally associated with investing in managed

futures programs. For example, not all managers focus on all strategies at all

times, and managed futures strategies may have material directional elements.

• Real Estate: There are risks speci� cally associated with investing in real estate

products and real estate investment trusts. They involve risks associated with debt,

adverse changes in general economic or local market conditions, changes in

governmental, tax, real estate and zoning laws or regulations, risks associated

with capital calls and, for some real estate products, the risks associated with the

ability to qualify for favorable treatment under the federal tax laws.

• Private Equity: There are risks speci� cally associated with investing in private

equity. Capital calls can be made on short notice, and the failure to meet capital

calls can result in signi� cant adverse consequences including, but not limited to, a

total loss of investment.

• Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of

the United States should be aware that even for securities denominated in US

dollars, changes in the exchange rate between the US dollar and the issuer’s

Appendix

End notes for table labeled detailed asset allocations with non-traditional assets (NTAs)1 See “Sources of benchmark allocations and investor risk pro� les”on next page

regarding the source of investor risk pro� les.2 See “Sources of benchmark allocations and investor risk pro� les” on next page

regarding the source of benchmark allocations and their suitability.3 See “Deviations from benchmark allocations” in the appendix regarding the inter-

pretation of the suggested tactical deviations from benchmark. 4 The current allocation row is the sum of the benchmark allocation and the tactical

deviation rows.5 UBS WMR considers that maintaining the benchmark allocation is appropriate for

alternative investments. The recommended tactical deviation is therefore structurally

set at 0. See “Sources of benchmark allocations and investor risk pro� les” on next

page regarding the types of alternative investments and their suitability.

End notes for table labeled detailed asset allocations without non-tradi-tional assets (NTAs)1 See “Sources of benchmark allocations and investor risk pro� les”on next page

regarding the source of investor risk pro� les.2 See “Sources of benchmark allocations and investor risk pro� les” on next page

regarding the source of benchmark allocations and their suitability.3 See “Deviations from benchmark allocations” in the Appendix regarding the

interpretation of the suggested tactical deviations from benchmark. 4 The current allocation row is the sum of the benchmark allocation and the tactical

deviation rows.

Emerging Market InvestmentsInvestors should be aware that Emerging Market assets are subject to, amongst

others, potential risks linked to currency volatility, abrupt changes in the cost of

capital and the economic growth outlook, as well as regulatory and socio-political

risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid

and liquidity conditions can abruptly worsen. WMR generally recommends only

those securities it believes have been registered under Federal US registration rules

(Section 12 of the Securities Exchange Act of 1934) and individual State registration

rules (commonly known as “Blue Sky” laws). Prospective investors should be aware

that to the extent permitted under US law, WMR may from time to time recom-

mend bonds that are not registered under US or State securities laws. These bonds

may be issued in jurisdictions where the level of required disclosures to be made by

issuers is not as frequent or complete as that required by US laws.

For more background on emerging markets generally, see the WMR Education

Notes “Investing in Emerging Markets (Part 1): Equities,” 30 July 2007, “Emerging

Market Bonds: Understanding Emerging Market Bonds,” 12 August 2009 and

“Emerging Market Bonds: Understanding Sovereign Risk,” 17 December 2009.

Investors interested in holding bonds for a longer period are advised to select the

bonds of those sovereigns with the highest credit ratings (in the investment grade

band). Such an approach should decrease the risk that an investor could end up

holding bonds on which the sovereign has defaulted. Sub-investment grade bonds

are recommended only for clients with a higher risk tolerance and who seek to hold

higher-yielding bonds for shorter periods only.

bellomjo

Text Box


Appendix

“home” currency can have unexpected e� ects on the market value and liquidity

of those securities. Those securities may also be a� ected by other risks (such as

political, economic or regulatory changes) that may not be readily known to a US

investor.

• Options: Options are not suitable for all investors. Please read the Options Clearing

Corporation Publication titled “Characteristics and Risks of Standardized Options

Trading” and consult your tax advisor prior to investing. The Publication can be

obtained from your Financial Services Inc., Financial Advisor, or can be accessed

under the Publications Section of the Option Clearing Corporation’s website:

www.theocc.com.

Description of Certain Alternative Investment Strategies• Equity Hedge: Investment managers who maintain positions both long and short

in primarily equity and equity-derivative securities. A wide variety of investment

processes can be employed to arrive at an investment decision, including both

quantitative and fundamental techniques; strategies can be broadly diversi� ed or

narrowly focused on speci� c sectors and can range broadly in terms of levels of

net exposure, leverage employed, holding period, concentrations of market capi-

talizations and valuation ranges of typical portfolios. Equity hedge managers

would typically maintain at least 50% and may, in some cases, be substantially

entirely invested in equities, both long and short.

• Event Driven: Investment managers who maintain positions in companies currently

or prospectively involved in corporate transactions of a wide variety including, but

not limited to, mergers, restructurings, � nancial distress, tender o� ers, share-

holder buybacks, debt exchanges, security issuance or other capital structure

adjustments. Security types can range from most senior in the capital structure to

most junior or subordinated, and frequently involve additional derivative securities.

Event-driven exposure includes a combination of sensitivities to equity markets,

credit markets and idiosyncratic, company-speci� c developments. Investment

theses are typically predicated on fundamental characteristics (as opposed to

quantitative), with the realization of the thesis predicated on a speci� c develop-

ment exogenous to the existing capital structure.

• Credit Arbitrage Strategies: Employ an investment process designed to isolate

attractive opportunities in corporate � xed income securities. These include both

senior and subordinated claims as well as bank debt and other outstanding obli-

gations, structuring positions with little or no broad credit market exposure. These

may also contain a limited exposure to government, sovereign, equity, convertible

or other obligations, but the focus of the strategy is primarily on � xed corporate

obligations and other securities held as component positions within these struc-

tures. Managers typically employ fundamental credit analysis to evaluate the

likelihood of an improvement in the issuer’s creditworthiness. In most cases,

securities trade in liquid markets, and managers are only infrequently or indirectly

involved with company management. Fixed income: corporate strategies di� er

from event driven; credit arbitrage in the former more typically involves more

general market hedges, which may vary in the degree to which they limit � xed

income market exposure, while the latter typically involves arbitrage positions with

little or no net credit market exposure, but are predicated on speci� c, anticipated

idiosyncratic developments.

• Macro: Investment managers who 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, � xed income, hard currency and commodity

markets. Managers employ a variety of techniques, both discretionary and system-

atic analysis, combinations of top-down and bottom-up theses, quantitative and

fundamental approaches and long- and short-term holding periods. Although

some strategies employ relative value techniques, macro strategies are distinct

from relative value strategies in that the primary investment thesis is predicated on

predicted or future movements in the underlying instruments, rather than realiza-

tion of a valuation discrepancy between securities. In a similar way, while both

macro and equity hedge managers may hold equity securities, the overriding

investment thesis is predicated on the impact movements in underlying macroeco-

nomic variables may have on security prices, as opposed to equity hedge, in which

the fundamental characteristics of the company are the most signi� cant and

integral to investment thesis.

• Distressed Restructuring Strategies: Employ an investment process focused on

corporate � xed income instruments, primarily on corporate credit instruments of

companies trading at signi� cant discounts to their value at issuance, or obliged

(par value) at maturity, as a result of either a formal bankruptcy proceeding or

� nancial market perception of near-term proceedings. Managers are typically

actively involved with the management of these companies, frequently involved on

creditors’ committees in negotiating the exchange of securities for alternative

obligations, either swaps of debt, equity or hybrid securities. Managers employ

fundamental credit processes focused on valuation and asset coverage of securities

of distressed � rms. In most cases, portfolio exposures are concentrated in instru-

ments which are publicly traded, in some cases actively and in others under

reduced liquidity but, in general, for which a reasonable public market exists. In

contrast to special situations, distressed strategies primarily employ debt (greater

than 60%) but also may maintain related equity exposure.

• Relative Value: Investment managers who maintain positions in which the invest-

ment thesis is predicated on realization of a valuation discrepancy in the relation-

ship between multiple securities. Managers employ a variety of fundamental and

quantitative techniques to establish investment theses, and security types range

broadly across equity, � xed income, derivative or other security types. Fixed income

strategies are typically quantitatively driven to measure the existing relationship

between instruments and, in some cases, identify attractive positions in which the

risk-adjusted spread between these instruments represents an attractive opportu-

nity for the investment manager. Relative value position may be involved in corpo-

rate transactions also, but as opposed to event-driven exposures, the investment

thesis is predicated on realization of a pricing discrepancy between related securi-

ties, as opposed to the outcome of the corporate transaction.

About WMR economic forecastsIn developing the WMR economic forecasts, WMR economists worked in collabora-

tion with economists employed by UBS Investment Research (INV). INV is published

by UBS Investment Bank. Forecasts (F) are current only as of the dates of the publi-

cation and may change without notice.


Sources of benchmark allocations and investor risk pro� les• Benchmark allocations represent the longer-term allocation of assets that is

deemed suitable for a particular investor. Except as described below, the bench-

mark allocations expressed in this publication have been developed by UBS

Investment Solutions (IS), a business sector within UBS Wealth Management

Americas that develops research-based traditional investments (e.g., managed

accounts and mutual fund options) and alternative strategies (e.g., hedge funds,

private equity, and real estate) o� ered to UBS clients. The benchmark allocations

are provided for illustrative purposes only and were designed by IS for hypotheti-

cal US investors with a total return objective under seven di� erent Investor Risk

Pro� les ranging from very conservative to very aggressive. In general, benchmark

allocations will di� er among investors according to their individual circumstances,

risk tolerance, return objectives and time horizon. Therefore, the benchmark allo-

cations in this publication may not be suitable for all investors or investment goals

and should not be used as the sole basis of any investment decision. As always,

please consult your UBS Financial Advisor to see how these weightings should be

applied or modi� ed according to your individual pro� le and investment goals.

• The process by which UBS Investment Solutions has derived the benchmark allo-

cations can be described as follows. First, an allocation is made to broad asset

classes based on an investor’s risk tolerance and characteristics (such as prefer-

ence for international investing). This is accomplished using optimization methods

within a mean-variance framework. Based on a proprietary set of capital market

assumptions, including expected returns, risk, and correlation of di� erent asset

classes, combinations of the broad asset classes are computed that provide the

highest level of expected return for each level of expected risk. A qualitative judg-

mental overlay is then applied to the output of the optimization process to arrive

at the benchmark allocation. The capital market assumptions used for the bench-

mark allocations are developed by UBS Global Asset Management. UBS Global

Asset Management is a subsidiary of UBS AG and an af� liate of UBS Financial

Services Inc.

• In addition to the benchmark allocations IS derived using the aforementioned

process, WMR determined the benchmark allocation by country of Non-US

Developed Equity and Non-US Fixed Income in proportion to each country’s

market capitalization, and determined the benchmark allocation by Sector and

Industry Group of US Equity in proportion to each sector’s market capitalization.

WMR, in consultation with IS, also determined the benchmark allocation for US

dollar taxable � xed income. It was derived from an existing moderate risk taxable

� xed income allocation developed by IS, which includes fewer � xed income seg-

ments than the benchmark allocation presented here. The additional � xed income

segments were taken by WMR from related segments. For example, TIPS were

taken from Treasuries and Preferred Securities from Corporate Bonds. A level of

overall risk similar to that of the original IS allocation was retained.

Appendix

Explanations about Asset Classes

• Alternative investments (AI) include hedge funds, private equity, real estate, and

managed futures. The total benchmark allocation was determined by IS using

the process described above. The Global Investment Committee (GIC) derived

the AI subsector benchmark allocations by adopting IS’ determination as to the

appropriate subsector benchmark allocations with AI for the following risk pro-

� les: conservative, moderately conservative, moderate, moderate aggressive and

aggressive. The GIC then developed subsector allocations for very conservative

and very aggressive risk pro� les by taking the IS subsector weightings for conser-

vative and aggressive risk pro� le investors and applying them pro rata to the IS AI

total benchmark allocations for very conservative and very aggressive, respectively.

Allocations to AI as illustrated in this report may not be suitable for all investors. In

particular, minimum net worth requirements may apply.

• The background for the benchmark allocation attributed to commodities can be

found in the WMR Education Note “A pragmatic approach to commodities,”

2 May 2007.

Deviations from benchmark allocation• The recommended tactical deviations from the benchmark are provided by the US

Asset Allocation Committtee. They re� ect the short- to medium-term assessment

of market opportunities and risks in the respective asset classes and market seg-

ments. Positive / zero / negative tactical deviations correspond to an overweight /

neutral / underweight stance for each respective asset class and market segment

relative to their benchmark allocation. The current allocation is the sum of the

benchmark allocation and the tactical deviation.

• Note that the regional allocations on the International Equities page are provided

on an unhedged basis (i.e., it is assumed that investors carry the underlying cur-

rency risk of such investments). Thus, the deviations from the benchmark re� ect

the views of the underlying equity and bond markets in combination with the

assessment of the associated currencies. The two bar charts (“Equity Regions”

and “Fixed Income Regions”) represent the relative attractiveness of countries

(including the currency outlook) within a pure equity and pure � xed income port-

folio, respectively. In contrast, the detailed asset allocation tables integrate the

country preferences within each asset class with the asset class preferences stated

earlier in the report.

Scale for tactical deviation charts

Symbol Description/De� nition Symbol Description/De� nition Symbol Description/De� nition

+ moderate overweight vs. benchmark – moderate underweight vs. benchmark n neutral, i.e., on benchmark

++ overweight vs. benchmark – – underweight vs. benchmark n/a not applicable

+++ strong overweight vs. benchmark – – – strong underweight vs. benchmark

Source: UBS WMR


Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affi liate

thereof. Wealth Management & Swiss Bank brands its publications as Chief Investment Offi cer (CIO), Wealth Management Research outside the US. In certain countries UBS

AG is referred to as UBS SA. This publication is for your information only and is not intended as an off er, or a solicitation of an off er, to buy or sell any investment or other

specifi c product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies,

fi nancial situation and needs of any specifi c recipient. It is based on numerous assumptions. Diff erent assumptions could result in materially diff erent results. We recommend

that you obtain fi nancial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain ser-

vices and products are subject to legal restrictions and cannot be off ered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information

and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made

as to its accuracy or completeness (other than disclosures relating to UBS and its affi liates). All information and opinions as well as any prices indicated are current only as of

the date of this report, and are subject to change without notice. Opinions expressed herein may diff er or be contrary to those expressed by other business areas or divisions

of UBS as a result of using diff erent assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short

position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer.

Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are

exposed may be diffi cult to quantify. UBS relies on information barriers to control the fl ow of information contained in one or more areas within UBS, into other areas, units,

divisions or affi liates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments

may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may

have an adverse eff ect on the price, value or income of an investment. This document may not be reproduced or copies circulated without prior authority of UBS or a subsid-

iary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third

parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law.

Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affi liate of UBS Financial Services Inc. UBS

Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affi liate when it distributes reports to US persons. All transactions by a US person

in the securities mentioned in this report should be eff ected through a US-registered broker dealer affi liated with UBS, and not through a non-US affi liate. The contents of this

report have not been and will not be approved by any securities or investment authority in the United States or elsewhere.

Version as per October 2011.

© 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Disclaimer


ab

©2012 UBS Financial Services Inc. All rights reserved. Member SIPC. All other trademarks, registered

trademarks, service marks and registered service marks are of their respective companies.

UBS Financial Services Inc.

www.ubs.com/� nancialservicesinc

UBS Financial Services Inc. is a subsidiary of UBS AG.

ab

Gwinnett County Public Employees Retirement System

Downgraded Bonds 3Q12

Position Description

Coupo

n

Stated

Maturity CUSIP

Moody's

Rating

S&P

Rating

Fitch

Rating

Effective

Rating

Current

Face (m)

Market

Price

Market Value

(m)

% Market

NAV

SASC 2005-6 2A1 5.5 5/25/1935 863576BF0 Ba2 BBB- NR $810,249 $99.08 $802,754

Country Wide

Mortgage Backed

Securities 4.5 1/25/2019 12669FMP5 Baa3 Ba3 29,352 $101.608 $29,824

Watch List Commentary

Q2 -Commentary from Paul Irvine: We have been informed that Moody’s has downgraded a Country Wide MBS security cusip 12669FMP5 from Baa3 to Ba3. Fitch is currently rating

this security as AAA. The par value held as of 03/31/2012 was $24,669, market value is approx $25,000 which represent 0.01% of the portfolio. We recommend holding this bond until we

can find the appropriate price for its small lot size, as well as we like the structure and characteristics of this bond.

Q3 -Commentary from Paul Irvine: Hello Bill, we have been informed that yesterday Moody’s has downgraded SASC 2005-6 2A1 cusip 863576BF0 (PAR 1,095,000) from Baa1 to Ba2.

S&P is currently rating this security as AA+. We recommend holding this bond as we like the structure and characteristics of this bond.

Manager

YES NO YES NO YES NO YES NO

U.S. Equity

Rainier √ √ √ √

Barrow Hanley √ √ √ √

Atlanta Capital √ √ √ √

Invesco REIT √ √ √ √

Fairpointe Capital NA NA NA NA

Vaughan Nelson NA NA NA NA

William Blair NA NA NA NA

International Equity

1607 Capital Partners √ √ √ √

Fixed Income

ING √ √ √ √

Ryan Labs NA NA NA NA

Templeton Global Bond NA NA NA NA

Dreyfus International NA NA NA NA

Criteria Criteria Criteria List

Manager Status and Watch List 3rdQ12

Compliance with Criteria

1 Year 3/5 Year Cummulative Watch

ab

Gwinnett County Public Employees Retirement System - Q3 2012 As of September 30, 2012

Investment Management Fee Analysis

Account Fee Schedule

Market Value as

of 09/30/2012

% of

Portfolio

Estimated

Annual Fee ($)

Estimated

Annual Fee

(%)

Ranier 0.75% of First $10.0 Mil, $94,410,369 12.166% $497,052 0.53%

0.50% Remainder

Barrow Hanley 0.75% of First $10.0 Mil, $94,609,267 12.192% $324,023 0.34%

0.50% of Next $15.0 Mil,

0.25% of Next $175.0 Mil,

Atlanta Capital 0.80% of First $50.0 Mil, $60,557,056 7.804% $452,785 0.75%

0.50% of Next $50.0 Mil,

Invesco Real Estate 0.75% of First $10.0 Mil, $35,143,982 4.529% $243,436 0.69%

0.70% of Next $10.0 Mil,

0.65% Remainder

1607 Capital Partners 0.75% of First $100.0 Mil, $100,579,899 12.961% $753,769 0.75%

0.65% of Next $150.0 Mil,

0.50% on 250.0 Mil or <

Fairpointe Capital 0.65 Flat $19,249,568 2.481% $125,122 0.65%

Vaughan Nelson 0.85% of First $10.0 Mil, $18,576,152 2.394% $149,321 0.80%

0.75% of Next $15.0 Mil,

0.65%on 25.0 Mil or <

ab

Institutional Consulting Group

ab

Gwinnett County Public Employees Retirement System As of September 30, 2012

Investment Management Fee Analysis

Account Fee Schedule

Market Value as

of 09/30/2012

% of

Portfolio

Estimated

Annual Fee ($)

Estimated

Annual Fee

(%)

William Blair 0.90 of First $10.0 Mil, $18,712,001 2.411% $155,340 0.83%

0.75% of Next $20.0 Mil,

0.65% of Next $20.0 Mil,

0.60% of Next $50.0 Mil,

ING Asset Management 0.30% of First $50.0 Mil, $187,207,851 24.124% $431,974 0.23%

0.25% of Next $50.0 Mil,

0.18% of Next $400.0 Mil,

Templeton Global Bond 0.82% Expense Ratio $18,690,351 2.408% $153,261 0.82%

Not Billed

Dreyfus International 0.65% Expense Ratio $18,574,476 2.394% $120,734 0.65%

Not Billed

Ryan Labs 0.30% of First $10.0 Mil $104,627,187 13.483% $202,627 0.19%

0.28% of Next $10,0 Mil

0.25% of Next $15.0 Mil,

0.20% of Next $15.0 Mil,

0.145% of Next $50.0 Mil,

0.10% of Next $200.0 Mil,

Cash Account No Fee $5,080,954 0.655% N/A N/A

Total Plan $776,019,113 100.00%

Prepared For: Gwinnett County Public Employees Retirement System

ab

Institutional Consulting Group

Gwinnett County Public Employees' Retirement System

Large Cap Growth Search

October 18, 2012

UBS Institutional Consulting Group

PERFORMANCE ANALYSIS

TRAILING PERIODS ENDING SEPTEMBER 30, 2012

GROSS RETURNS

0

4

8

12

16

20

24

28

32

RA

TE

OF

RE

TU

RN

Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth

Latest Quarter 1 Year 3 Years 5 Years 7 Years 10 Years5.75 26.77 12.80 0.51 5.38 9.649.81 24.32 15.47 4.27 7.94 N/A7.07 25.98 15.95 5.50 6.17 11.326.11 29.19 14.73 3.24 5.80 8.41

* MANAGER STYLE OR INVESTMENT STRATEGY REVIEWED BY UBS FS. PLEASE READ “IMPORTANT INFORMATION” SECTION. + THIS INVESTMENT OR STRATEGY IS NOT AVAILABLE THROUGHUBS. SEE "IMPORTANT INFORMATION" SECTION FOR ADDITIONAL INFORMATION.

2

PERFORMANCE ANALYSIS

CALENDAR PERIODS ENDING DECEMBER 31, 2011

GROSS RETURNS

-60

-40

-20

0

20

40

60

RA

TE

OF

RE

TU

RN


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011N/A -25.94 -25.28 35.02 13.24 12.86 9.14 22.70 -42.96 33.28 17.98 -3.16N/A N/A N/A N/A 15.97 13.45 9.20 22.69 -43.53 47.34 25.52 -2.01

-4.22 -18.81 -28.81 51.47 13.54 4.91 -4.28 14.91 -36.46 43.81 17.75 5.02-22.42 -20.42 -27.88 29.75 6.30 5.26 9.07 11.81 -38.44 37.21 16.71 2.64


3

QUARTILE RANKING ANALYSIS

PSN LARGE CAP GROWTH

TRAILING PERIODS ENDING SEPTEMBER 30, 2012

-10

0

10

20

30

40

50

60

70

80

90

100

110

RA

TE

OF

RE

TU

RN

RA

NK

ING

Latest Quarter 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years HIGH (0.05) 8.62 33.58 18.54 17.20 5.83 8.43 12.07 FIRST QUARTILE 7.01 30.50 15.90 14.81 3.65 6.37 9.54 MEDIAN 6.16 27.69 13.88 13.25 2.67 5.60 8.79 THIRD QUARTILE 5.53 25.35 12.26 11.79 1.57 4.81 8.01 LOW (0.95) 3.64 19.69 8.53 8.83 -1.22 2.86 6.39 MEAN 6.20 27.73 13.94 13.31 2.57 5.60 8.79 VALID COUNT 263 263 258 255 245 221 180


Latest Quarter 1 Year 2 Years 3 Years 5 Years 7 Years 10 YearsVALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK

5.75 68 26.77 61 12.74 69 12.80 58 0.51 88 5.38 57 9.64 219.81 1 24.32 82 13.57 55 15.47 15 4.27 11 7.94 3 N/A N/A7.07 23 25.98 71 16.32 18 15.95 10 5.50 2 6.17 29 11.32 26.11 52 29.19 37 15.79 25 14.73 26 3.24 35 5.80 43 8.41 58


4

QUARTILE RANKING ANALYSIS


CALENDAR PERIODS ENDING DECEMBER 31, 2011

-10

0

10

20

30

40

50

60

70

80

90

100

110

RA

TE

OF

RE

TU

RN

RA

NK

ING

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 HIGH (0.05) 14.09 0.65 -11.85 49.21 18.94 16.65 17.08 27.54 -28.04 51.32 25.20 7.07 FIRST QUARTILE 0.31 -11.04 -20.02 34.26 12.98 10.93 11.89 19.67 -34.89 39.24 19.08 2.58 MEDIAN -6.64 -15.38 -23.96 30.01 10.25 8.15 9.20 14.93 -37.84 35.32 16.52 -0.09 THIRD QUARTILE -13.29 -20.66 -27.41 26.56 7.43 5.29 6.85 10.91 -40.38 30.66 13.79 -2.81 LOW (0.95) -22.38 -29.87 -33.34 20.31 4.15 1.52 1.97 4.93 -48.82 20.83 10.52 -8.13 MEAN -6.06 -15.84 -23.48 30.76 10.52 8.43 9.37 15.28 -37.85 35.24 16.64 -0.13 VALID COUNT 175 194 205 218 229 245 258 265 281 289 288 293


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK VALUE RANK

N/A N/A -25.94 92 -25.28 60 35.02 21 13.24 22 12.86 13 9.14 50 22.70 13 -42.96 88 33.28 61 17.98 33 -3.16 77N/A N/A N/A N/A N/A N/A N/A N/A 15.97 10 13.45 10 9.20 50 22.69 13 -43.53 90 47.34 5 25.52 1 -2.01 68

-4.22 42 -18.81 65 -28.81 85 51.47 1 13.54 20 4.91 79 -4.28 99 14.91 50 -36.46 35 43.81 12 17.75 35 5.02 7-22.42 99 -20.42 74 -27.88 80 29.75 54 6.30 84 5.26 75 9.07 53 11.81 69 -38.44 55 37.21 35 16.71 47 2.64 23


5

TOTAL RISK REWARD ANALYSIS

3 YEAR PERIOD ENDING SEPTEMBER 30, 2012

GROSS RETURNS

17 18 19 20 21 22 23 24STANDARD DEVIATION

11

12

13

14

15

16

17

RA

TE

OF

RE

TU

RN

Russell 1000 Growth






ROR Std Dev Pop Alpha Beta R-Squared12.80 19.74 -2.97 1.11 0.9815.47 23.00 -1.94 1.24 0.9115.95 17.94 1.16 1.00 0.9714.73 17.71 0.00 1.00 1.00

RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH


6



GROSS RETURNS

21 22 23 24 25 26STANDARD DEVIATION

1

2

3

4

5

6

RA

TE

OF

RE

TU

RN

Russell 1000 Growth






ROR Std Dev Pop Alpha Beta R-Squared0.51 23.11 -2.58 1.06 0.984.27 25.87 1.30 1.15 0.935.50 21.11 2.28 0.96 0.963.24 21.63 0.00 1.00 1.00



7



17 18 19 20 21 22 23STANDARD DEVIATION

3

4

5

6

7

8

9

RA

TE

OF

RE

TU

RN

Russell 1000 Growth






ROR Std Dev Pop Alpha Beta R-Squared5.38 20.21 -0.42 1.06 0.977.94 22.44 2.00 1.15 0.926.17 18.52 0.51 0.96 0.935.80 18.64 0.00 1.00 1.00



8

UPSIDE VS. DOWNSIDE MARKET CAPTURE ANALYSIS


-25 0 25 50 75 100 125 150DOWNSIDE CAPTURE RATIO

0

25

50

75

100

125

150

UP

SID

E C

AP

TU

RE

RA

TIO

90 Day U.S. Treasury Bill

Russell 1000 Growth

Outperforms inPos. & Neg. Qtrs.

Underperforms in Pos. Qtrs.Outperforms in Neg. Qtrs.

Underperforms in Neg. Qtrs.Outperforms in Pos. Qtrs.

Underperforms inPos. & Neg. Qtrs.


Up Mkt Capt Retrn Up Cap Ratio Dnside Cap Return Dnside Cap Ratio R-Squared37.66 100.01 -30.08 113.84 0.9847.07 124.99 -35.36 133.83 0.9139.44 104.72 -26.21 99.20 0.9737.66 100.00 -26.42 100.00 1.00



9



-3 22 47 72 97 122DOWNSIDE CAPTURE RATIO

-24

1

26

51

76

101

126

UP

SID

E C

AP

TU

RE

RA

TIO


Russell 1000 Growth









10



-29 -4 21 46 71 96 121DOWNSIDE CAPTURE RATIO

-19

6

31

56

81

106

131

UP

SID

E C

AP

TU

RE

RA

TIO


Russell 1000 Growth









11

MULTI-STATISTIC QUARTILE RANKING BAR


SEPTEMBER 30, 2009 TO SEPTEMBER 30, 2012

7

8

9

10

11

12

13

14

15

16

17

18

19

0.8

0.9

1.0

1.1

0.8

0.9

1.0

1.1

1.2

1.3

1.4 -15

-10

-5

0

5

10 13

14

15

16

17

18

19

20

21

22

23

24

25

-2

-1

0

1

2

3

4

5

6

7

8

9

10 -2.0

-1.0

0.0

1.0

HIGH (0.95)1st QUARTILEMEDIAN3rd QUARTILELOW (0.05)MEANVALID COUNT

ROR17.2014.8113.2511.798.83

13.31255

R-Squared0.990.980.970.950.900.97255

Beta0.800.981.041.101.241.03255

Alpha3.670.13-1.61-3.18-6.48-1.54255

Std Dev Pop14.6717.6818.7619.8122.4918.66255

Tracking Error Pop1.712.843.584.667.653.86255

Info Ratio Pop0.790.04-0.36-0.80-1.66-0.39255

VALUE RANK

Rainier Invstmnt Growth+ 12.80 58

Columbia Mgmt Focused LgC 15.47 15

TCW Group ConcentratedCor 15.95 10

Russell 1000 Growth 14.73 26

VALUE RANK

0.98 18

0.91 97

0.97 55

1.00 1

VALUE RANK

1.11 78

1.24 99

1.00 31

1.00 33

VALUE RANK

-2.97 71

-1.94 54

1.16 13

0.00 27

VALUE RANK

19.74 73

23.00 99

17.94 34

17.71 27

VALUE RANK

3.12 34

8.05 99

3.15 35

0.00 1

VALUE RANK

-0.62 63

0.09 21

0.39 9

0.00 26


12

MULTI-STATISTIC QUARTILE RANKING BAR


SEPTEMBER 30, 2007 TO SEPTEMBER 30, 2012

-3

-2

-1

0

1

2

3

4

5

6

7

0.8

0.9

1.0

1.1

0.8

0.9

1.0

1.1

1.2

1.3 -6

-5

-4

-3

-2

-1

0

1

2

3

4 17

18

19

20

21

22

23

24

25

26

27

28

29

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11 -1.0

0.0

1.0

HIGH (0.95)1st QUARTILEMEDIAN3rd QUARTILELOW (0.05)MEANVALID COUNT

ROR5.833.652.671.57-1.222.57245

R-Squared0.990.970.960.940.840.95245

Beta0.810.951.011.061.191.00245

Alpha2.800.62-0.41-1.43-4.07-0.48245

Std Dev Pop18.2220.9322.2723.4027.1422.31245

Tracking Error Pop2.303.774.716.419.975.14245

Info Ratio Pop0.500.11-0.15-0.33-0.83-0.13245

VALUE RANK

Rainier Invstmnt Growth+ 0.51 88

Columbia Mgmt Focused LgC 4.27 11

TCW Group ConcentratedCor 5.50 2

Russell 1000 Growth 3.24 35

VALUE RANK

0.98 13

0.93 77

0.96 50

1.00 1

VALUE RANK

1.06 74

1.15 97

0.96 29

1.00 46

VALUE RANK

-2.58 89

1.30 10

2.28 3

0.00 39

VALUE RANK

23.11 69

25.87 98

21.11 30

21.63 40

VALUE RANK

3.41 18

7.48 88

4.25 37

0.00 1

VALUE RANK

-0.80 99

0.14 22

0.53 1

0.00 35


13

RAINIER INVESTMENT MANAGEMENT, INC.LARGE CAP GROWTH EQUITY

601 Union Street #2801 TEL: 206-518-6600Seattle, WA, 98101 FAX: 206-518-6601CONTACT: Mr. Kurt A. Polk, CFA PRODUCT ASSETS: $ 4,419.85 MILLION

© 2012 Informa Investment Solutions, Inc., www.informais.com

between 150-200 stocks are under evaluation ascandidates for purchase, and between 40 and 80companies may be held as current investments.Sectors, industry and individual security decisions aremade within the context of a bottom-up process andbased on several factors: * We emphasize investing incompanies that are likely to demonstrate superiorearnings momentum relative to their peers. * Positiveearnings surprises and estimate revisions areemphasized. We anticipate the future direction ofchanges. * Our preference is to invest in stocks that areselling at attractive valuations. We use three proprietaryvalue screens. * Strong management with a significantownership in the company is desired. * Companies thatexhibit advantageous competitive strategies or operatein favorable competitive environments are stressed. *We favor companies with balance sheet integrity andfinancial strength. * Securities must have a minimumof $5 million in average daily trading volume to ensuresufficient trading liquidity.

PORTFOLIO CONSTRUCTION - Individual stockweights depend upon our assessment of the riskcharacteristics of the particular stock. As a generalguideline, no single issue will account for more than7% of the total portfolio. The portfolios are diversifiedby economic sector and are limited to the index sectorweighting +/- 10% in absolute terms. We will invest amaximum of 35% in any single sector. We do notattempt to time the market. Cash equivalents normallymake up less than 5% of the portfolio and are a residualof the investment process.

KEY INVESTMENT OFFICER:

TEAM APPROACH

Mr. Mark Hamilton DawsonCurrent Position: Principal, PM, 1996 - PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio Manager; BalancedPortfolio Manager; Research AnalystProfessional Accreditation: CFAEducation Undergraduate: University of Washington,BA, HistoryEducation Graduate: Tufts University, MA,International RelationsYear of Birth: 1956Phone:email:Previous Position: 1991-1996

EQUITY INVESTMENT PHILOSOPHY - Weidentify attractive securities using a bottom-up stockselection discipline. This is based on our belief that atany given time, the overall US equity market isefficiently priced, but that pricing inefficiencies existbetween various stocks that comprise the overallmarket. We believe, and our results have shown, that aconsistent process focused on identifying andexploiting mispriced securities can lead to consistentoutperformance versus the average market return andour peers. Performance attribution confirms thatsecurity selection decisions are accountable for 80-90%of historical excess returns, with sector allocationdecisions, which are a residual of our process, beingattributed to the remainder. Rainier employs afundamental research based investment approach,augmented by proprietary quantitative tools. Thequantitative tools provide a common framework foreach stock analyzed, and enable all portfolio managersto evaluate every stock held in client portfolios, andthose under consideration by each team member. Thetools also assist in the process of narrowing down theinvestable universe of stocks to a subset of companiesthat exhibit the growth and valuation measures that theteam believes offers the most compelling investmentideas given our investment discipline.

INVESTMENT DECISION-MAKING PROCESS - Inchoosing investments for its portfolios, Rainier seeks toidentify companies with above averageearnings-per-share growth rates selling at reasonablevaluations relative to their industry peers. The universeis comprised of the aggregate list of all portfoliomanagers' working lists of stock ideas of companieswith market capitalizations and characteristics similarto those contained within the Russell 1000 Growthindex. Only stocks with market capitalizations above$2 billion are considered, with an emphasis on stockswith capitalizations greater than $5 billion. Theportfolio managers regularly screen a broad universe ofstocks, scanning BaseLine and other data sources, andeliminating stocks of companies that do not meetearnings, quality or liquidity requirements; onlycommon stock is considered. A working universe ofcompanies is analyzed for important fundamentals suchas revenue and earnings growth, as well as thevaluation of a company relative to the market, industrypeers, and its own price history. The working universetypically distils to 800-1,000 securities. Data on thefundamentals of selected stocks are evaluated in ourproprietary tracking and valuation system, where



Phone:email:Previous Position: -Company:Title:

Mr. Mark W. BroughtonCurrent Position: Senior Portfolio Manager, 2002 -PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio Manager; BalancedPortfolio Manager; Research AnalystProfessional Accreditation: CFAEducation Graduate: University of Southern California,MBA - FinanceYear of Birth: 1966Phone:email:Previous Position: -Company:Title:

Stacie L. CowellCurrent Position: Senior Equity Manager, 2006 -PRESENTCurrent Firm: Rainier Investment ManagementResponsibility: Equity Portfolio Manager; BalancedPortfolio Manager; Research AnalystProfessional Accreditation: CFAEducation Undergraduate: Colgate University,Bachelor of Science, EconomicsEducation Graduate: University of Colorado, Master ofScience, FinancePhone: 206-464-0400email:Previous Position: -2006Company: Invesco Funds GroupTitle: Senior VP, Lead PM

Mr. Andrea L. DurbinCurrent Position: Sr. Equity PM, 2007 - PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio ManagerProfessional Accreditation: CFAEducation Undergraduate: University of Minnesota, BSYear of Birth: 1969Year Entered Industry: 1986Phone:

Company: Badgley, Phelps and BellTitle: PM, Director of Research

Mr. James Richard MargardCurrent Position: Principal, Portfolio Man, 1985 -PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Chief Investment officer; EquityPortfolio Manager; Balanced Portfolio Manager;Director of ResearchProfessional Accreditation: CFAEducation Undergraduate: University of New Mexico,BA - SpanishEducation Graduate: NYU, MA; MBA - FinanceYear of Birth: 1952Phone:email:Previous Position: 1980-1985Company: ValueLine, Inc.Title: Inv. Research, Portfolio

Mr. Peter Morgan MusserCurrent Position: Principal, Portfolio Man, 1994 -PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio Manager; BalancedPortfolio Manager; Research AnalystProfessional Accreditation: CFAEducation Undergraduate: Lawrence University, BA -EconomicsYear of Birth: 1956Phone:email:Previous Position: 1984-1994Company: Ragen MacKenzie, Inc./Cable, Howse &RagTitle: Sr. VP - Res.

Mr. Daniel M. BrewerCurrent Position: Senior Portfolio Manager, 2000 -PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio Manager; BalancedPortfolio Manager; Research AnalystProfessional Accreditation: CFAEducation Undergraduate: California State University,Fullerton, BAYear of Birth: 1965



Class I: RLGIX

COMMINGLED FUND: Rainier Large Cap GrowthEquity Collective Trust Fund.Rainier acts as subadvisor. SEI Investments Company,as trustee, has ultimate responsibility for all investmentdecisions for the CIT.; Min Acct Size: $5 million; MinFee: N/A

LAST MODIFIED ON: 2/16/2012

email:Previous Position: -Company: Blackrock Financial ManagementTitle:

Ms. Carlee J PriceCurrent Position: Sr. Equity PM, 2008 - PRESENTCurrent Firm: Rainier Investment Management, Inc.Responsibility: Equity Portfolio ManagerProfessional Accreditation: CFAEducation Undergraduate: University of BritishColumbia, BAYear Entered Industry: 1994Phone:email:Previous Position: 2000-2008Company: Franklin TempletonTitle: VP and Equities Analyst

Mr. Michael EmeryCurrent Position: Sr. Equity PM, 2008 - PRESENTCurrent Firm: Rainier Investment ManagementResponsibility: Equity Portfolio ManagerProfessional Accreditation: CFAEducation Undergraduate: University of Washington,BAEducation Graduate: Cornell University, MBAYear Entered Industry: 1995Phone:email:Previous Position: -Company:Title:

FEES AND MINIMUM ACCOUNT:

SEPARATE ACCT: 0.75% on the first $10 million ofassets0.50% on the balance

Fees may be negotiable, depending on the size of theaccount.; Min Acct Size: $25 million

MUTUAL FUND: The John Hancock Rainier GrowthFund is available through John Hancock Funds. Rainieris the subadvisor to the fund.

Class A: RGROX

COLUMBIA MANAGEMENTCOLUMBIA FOCUSED LARGE CAP GROWTH

225 Franklin Street TEL: 617-747-0441Boston, MA, 02111 FAX:CONTACT: Ms. Kathleen A. Kennedy PRODUCT ASSETS: $ 8,252.34 MILLION


sheets, excellent management, accelerating earningsgrowth, and a strong commitment to shareholder value.The Team screens the universe of publicly tradedcompanies (over 10,000) for the most attractive growthstocks by using these criteria: -Market capitalization >US$3 billion -Earnings growth rate >12% or double thegrowth rate of the S&P 500 Index -Return on equity>15% This results in a focused universe ofapproximately 250 qualified growth companies. TheTeam makes investment decisions based on bottom-upanalysis, and allow for significant position weights forindividual holdings based on their level of conviction inthe underlying company. The Team relies onfundamental research to build portfolios, company bycompany. They limit the portfolio market value of anyone holding to 5% of the total portfolio, diversifyingacross growth industries, usually initiating a newposition at 2-3%. Security weights are the result of theTeam's level of conviction in the strength of thecompany's fundamentals and the appreciation potentialof the security. Portfolios are always fully invested.Annual turnover will average approximately 25-35%.The ultimate objective is to offer investors potentialparticipation in the bright future of growth companies.In the Team's view, such companies usually have thefollowing fundamental characteristics: -A dominantposition in a rapidly growing industry -Earnings growthrate of at least 12% per year, or roughly double that ofthe S&P 500 -Financial strength as measured by suchfactors as: low debt, high return on equity, reinvestedearnings and substantive free cash flow generation-Highly regarded, shareholder-focused managementSecurities are sold for the following reasons:Fundamentals Change: If the investment teamconcludes that the earnings growth opportunity for thecompany over the next three years no longer meetstheir projected earnings growth criteria, the stock willbe sold. Harvest Success: If a stock trades within 10%of established price objectives, it is reviewed.Diversification: No company is more than 5% ofportfolio and no industry more than 10%. Portfoliocross correlation average less than the benchmark.Market Message: If a stock experiences a 20% relativeprice decline in the prior three months, it will beimmediately reviewed.

PORTFOLIO CONSTRUCTION - The Team makesinvestment decisions based on bottom-up analysis, andallow for significant position weights for individualholdings based on their level of conviction in theunderlying company. The Team relies on fundamental

EQUITY INVESTMENT PHILOSOPHY - TheColumbia Focused Large Cap Growth Team believesthat earnings growth is the critical driver of stock pricesover the long term. They believe that throughfundamental research, they can identify outstandingcompanies having dominant industry positions, strongfinancials, and consistently high earnings growth rates.In the portfolio construction process, they select whatthey feel are the best growth companies in the bestgrowth industries. They look to exploit marketanomalies and inefficiencies by unearthing companiescapable of sustaining faster growth longer thanconsensus expects. Since the team manages aconcentrated portfolio of 25-35 holdings, they payclose attention to the risk involved in each of theirholdings. Their long-term focus allows the strategy toparticipate in the success of a well-executed businessplan, providing their clients with strong returns that areattractive to both taxable and tax-exempt investors.The Focused Large Cap Growth strategy was launchedby portfolio manager Thomas Galvin in 2003, when hejoined U.S. Trust and created the Focused Large CapGrowth team.

INVESTMENT DECISION-MAKING PROCESS -The Team employs a team-oriented decision makingprocess which is followed in research, portfolioconstruction, security selection, and strategydevelopment. Each team member is involved in thegenesis and analysis of idea generation, bringing adiverse background and unique contribution toportfolio construction. Ideas are discussed among theteam as part of its daily research process. Sponsorsfollow companies of interest and continually update therest of the team on their ideas. This process allows forsubstantial in-depth, bottom-up research and review byThe Group on each investment idea before any finaldecision is made. As a result, each team member isintimately familiar with all holdings. The lead portfoliomanager has the ultimate decision making authorityand accountability. Research plays a key role in astock selection process that aims to find where growthis sustainable. Our portfolio management team screenspotential candidates with an eye to both individualcompany fundamentals as well as the macroeconomicoutlook. Our aim is to stay ahead of the curve bypinpointing sectors that will benefit from the economicchange we foresee, and within those sectors to targetgrowth leaders with expanding and dominant marketshare, strong cash flow, rapid product development,and high profit margins. We look for strong balance



Responsibility: Equity Portfolio ManagerProfessional Accreditation:Education Undergraduate: Brigham Young University,BSEducation Graduate: University of Notre Dame, MBAYear Entered Industry: 1998Phone: 203-352-4466email: [email protected] Position: -Company: George E. Reed Heart CenterTitle: Research Assistant

Mr. Richard A. CarterCurrent Position: SVP, Analyst, 2003 - PRESENTCurrent Firm: Columbia ManagementResponsibility: Research AnalystProfessional Accreditation:Education Undergraduate: Connecticut College, BAYear Entered Industry: 1993Phone: 1-203-352-4470email: [email protected] Position: 2000-2003Company: Credit Suisse First BostonTitle: Equity Market Strategist

Mr. Michael W. GnadingerCurrent Position: Vice President, Analyst, 2003 -PRESENTCurrent Firm: Columbia ManagementResponsibility: Research AnalystProfessional Accreditation: CFAEducation Undergraduate: University of Delaware, BAYear Entered Industry: 2001Phone: 212-893-7100email: [email protected] Position: -Company: U.S. TrustTitle: Portfolio Assistant


SEPARATE ACCT: 0.65% on the first $25MM; 0.50%on the next $50MM;0.40% on the next $75MM; 0.35% on the next$150MM;0.325% on the next $200MM; 0.275% on all assetsover $500MM; Min Acct Size: $10MM; Min Fee:$45,000

research to build portfolios, company by company.They limit the portfolio market value of any oneholding to 5% of the total portfolio, diversifying acrossgrowth industries, usually initiating a new position at2-3%. Security weights are the result of the Group'slevel of conviction in the strength of the company'sfundamentals and the growth potential of the security.Portfolios are always fully invested. Annual turnoverwill average approximately 25-35%. Thecharacteristics of this strategy's risk managementphilosophy are: • Invest only in high-qualitycompanies, three- to five-year time horizon • Maintaina diversified growth portfolio with limited industryoverlap oSector limited to 2x that of the Russell 1000Growth Index oIndustries limited to 10% of theportfolio •Limit portfolio market value basis of eachholding to 5% •Established price targets for everyholding •Continuous review of the bottom and topperformers relative to fundamental changes in eachcompany's outlook •Cross-correlation of each holdingis reviewed. Using one year trailing daily price actionof each position, they monitor the correlation of eachposition with the goal of averaging 0.25 or less acrossthe portfolio. This is also used prior to purchasing anew position to help understand the risk impact of thenew position in the portfolio.


TEAM APPROACH

Mr. Thomas M. GalvinCurrent Position: President, CIO - LCG, 2003 -PRESENTCurrent Firm: Columbia ManagementResponsibility: Chief Investment officerProfessional Accreditation: CFAEducation Undergraduate: Georgetown University, BSEducation Graduate: New York University, MBAYear Entered Industry: 1983Phone: 203-352-4437email: [email protected] Position: -Company: Credit Suisse First BostonTitle: CIO, Equity Strategist

Mr. Todd D. HergetCurrent Position: SVP, Portfolio Manager, 1998 -PRESENTCurrent Firm: Columbia Management



MUTUAL FUND: Columbia Select Large Cap GrowthFund - Z sharesUMLGXexpense ratio net - 0.94%

COMMINGLED FUND: Columbia Trust FocusedLarge Cap Growth Fund


TCW GROUPTCW CONCENTRATED CORE EQUITIES

865 South Figueroa Street TEL: 213-244-0655Los Angeles, CA, 90017 FAX: 213-244-0741CONTACT: Ms. Leah Kirste PRODUCT ASSETS: $ 5,736.39 MILLION


corporate strategies are discussed in these interviews. 4.Independent sources may also be interviewed to verifyfacts and assumptions derived from conversations withmanagement. These sources may include a company’scustomers, suppliers, competitors and relevant industryassociations. 5. The portfolio manager evaluatesavailable research inputs and company stock marketvaluations to develop an investment decision. 6. If abuy decision is made, a plan is developed for eachholding that outlines our expectations for the financialfundamentals of the company and for the pricemovement of the stock. 7. All companies held in theportfolio are monitored and reevaluated to determine ifthey are fulfilling expectations. A holding may be soldwhen its price rises to a level that reflects fully thecompany’s growth opportunities, if it fails to meet ouroperational expectations, or to take advantage of abetter opportunity.

PORTFOLIO CONSTRUCTION - The ConcentratedCore Equities portfolios are generally fully invested inequities. Our investments typically average higherrates of growth, profitability, and quality, though tradedin a higher valuation than the broader market. In orderto not dilute the performance of those stocks in whichwe have the greatest confidence, we do notoverdiversify. Holdings are weighted to reflect eachissue’s attractiveness relative to others. Portfolioholdings will generally fall in the large cap category.Investment decisions are made with a long-timehorizon which can result in relatively low turnover.


TEAM APPROACH

Mr. Craig C. BlumCurrent Position: Group Managing Director, 1999 -PRESENTCurrent Firm: TCWResponsibility: Equity Portfolio ManagerProfessional Accreditation:Education Undergraduate: University of California, LosAngeles, BSEducation Graduate: University of California, LosAngeles, MBAYear of Birth: 1970Year Entered Industry: 1994Phone: 213-244-0434email: [email protected] Position: -

EQUITY INVESTMENT PHILOSOPHY - Superiorlong-term performance can be achieved byparticipating in the long-term success of selectedextraordinary businesses purchased at attractivevaluations. The portfolios in TCW Concentrated CoreEquities seek to maximize total return, with anemphasis on capital appreciation. Performance shouldbe measured over a full market cycle.

INVESTMENT DECISION-MAKING PROCESS -TCW utilizes a multi-factor investment strategydesigned to identify opportunities not fully reflected instock market valuations. These are: superior businesspractices, long-term trend analysis and valuation.Companies targeted for investment typically are thosebelieved to have strong and enduring business modelsand defendable advantages over their competitors.They must also be companies positioned to benefitfrom secular trends. Additionally, each investment issubjected to cash flow based valuation analysis. Theportfolio is constructed one stock at a time and eachstock must satisfy our research criteria. Thoroughanalysis of a company’s valuation, business modeladvantage and resulting financial superiority is critical.Companies targeted for investment typically exhibitone or more of the following characteristics: -Superior management teams with long-term businessperspectives and an ownership position in theirbusinesses. - Specific plans to capitalize on positivefundamental changes. - Dominant industry or marketniche position. - Superior growth and profitability. -Proprietary products or low-cost production and/ordistribution capability. - Substantial and sustainablefree cash flow to finance future growth. - Shareholderorientation – deployment of cash flow to generatehighest long-term return to shareholders. Ourinvestment process is designed to identify attractivecandidates for investment where changes in businessfundamentals are not fully reflected in stock marketvaluations. The steps in this process can include: 1.Through original and secondary research, we developan initial investment idea, concept or thesis based onchanges in technology, industry dynamics,demographics, regulations, etc. 2. Comprehensive,proprietary fundamental research is conducted on thecompanies and industries of interest. This researchprocess is focused on the changes in businessfundamentals occurring within a company and itsindustry. 3. A dialogue is typically established with thesenior level managers of a company considered forinvestment. Business conditions, business plans and

TCW GROUPTCW CONCENTRATED CORE EQUITIES


Company: FMAC Captial MarketsTitle: Analyst


SEPARATE ACCT: Institutional: Negotiatedperformance-based fee OR .70% on all assets; MinAcct Size: $25MM (US clients), $50MM (Int'l clients);Min Fee: $175,000

MUTUAL FUND: The net expense ratio for the TCWSelect Equities Fund (I Class) is 0.90%.; Min AcctSize: $2,000; Min Fee: $18.00

WRAP ACCT: Please contact TCW for details.; MinAcct Size: $100,000

Other: Separate Accounts - High Net WorthIndividuals: 1.00% on all assets; Min Acct Size:$3MM; Min Fee: $30,000


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e pr

ofile

que

stio

ns a

nd a

re c

urre

nt o

nly

as o

f th

e da

te p

rint

ed o

n th

e fr

ont c

over

. Unl

ess

you

mak

e a

spec

ific

req

uest

for

an

upda

te,

this

rep

ort w

ill n

ot b

e up

date

d to

ref

lect

any

cha

nges

in a

ny o

f th

e ac

coun

ts c

over

ed,

your

inve

stm

ent o

bjec

tives

, ris

k to

lera

nces

or

mar

ket c

ondi

tions

.

You

sho

uld

note

that

UB

S Fi

nanc

ial S

ervi

ces

(“th

e Fi

rm”)

has

a v

arie

ty o

f pr

oduc

ts

and

serv

ices

that

pro

vide

por

tfol

io r

evie

w a

nd a

naly

sis.

The

rec

omm

enda

tion

s an

d ty

pes

of a

naly

ses

prov

ided

(in

clud

ing

reco

mm

ende

d as

set a

lloca

tion

stra

tegi

es)

may

va

ry d

epen

ding

on

the

asse

t allo

catio

n m

odel

and

pro

gram

use

d.

Thi

s re

port

may

cov

er a

num

ber

of y

our

exis

ting

por

tfol

io, e

ach

wit

h po

tent

ially

di

ffer

ent i

nves

tmen

t obj

ectiv

es a

nd r

isk

para

met

ers.

As

you

inst

ruct

ed, t

he a

sset

s in

th

ese

acco

unts

hav

e be

en c

onsi

dere

d as

a w

hole

in d

evel

opin

g an

ove

rall

asse

t al

loca

tion

stra

tegy

that

add

ress

es y

our

spec

ific

inve

stm

ent g

oal.

Inve

stm

ent

Man

ager

Per

form

ance

Perf

orm

ance

res

ults

for

inve

stm

ent m

anag

ers

that

are

incl

uded

in o

ur A

CC

ESS

pr

ogra

m, w

hich

are

indi

cate

d th

roug

hout

the

repo

rt, a

re b

ased

upo

n th

e A

CC

ESS

m

anag

er’s

tim

e w

eigh

ted

rate

s of

ret

urn

of f

ully

dis

cret

iona

ry A

CC

ESS

acc

ount

s m

anag

ed f

or a

t lea

st o

ne f

ull c

alen

dar

quar

ter.

Per

form

ance

res

ults

for

non

-AC

CE

SS

part

icip

atin

g in

vest

men

t man

ager

s ar

e ob

tain

ed f

rom

Inf

orm

a In

vest

men

t Sol

utio

ns’

Plan

Spo

nsor

Net

wor

k (P

SN)

as r

epor

ted

by e

ach

inve

stm

ent m

anag

er a

nd d

o no

t re

flec

t act

ual U

BS

Fina

ncia

l Ser

vice

s ac

coun

t per

form

ance

. You

r re

turn

s m

ay v

ary

from

thes

e re

sults

sho

wn

due

to ti

min

g an

d ot

her

indi

vidu

al a

ccou

nt f

acto

rs. T

hese

resu

lts a

re g

ener

ally

net

of

com

mis

sion

s on

sec

uriti

es tr

ansa

ctio

ns b

ut d

o no

t ref

lect

th

e de

duct

ion

of th

e in

vest

men

t man

ager

’s f

ee o

r U

BS

Fina

ncia

l Ser

vice

s’ f

ee. T

he

paym

ent o

f th

ese

fees

and

exp

ense

s w

ill r

educ

e yo

ur r

etur

n. T

he n

et e

ffec

t of

the

dedu

ctio

n of

fee

s on

ann

ualiz

ed p

erfo

rman

ce, i

nclu

ding

the

com

poun

ded

effe

ct o

ver

tim

e, is

det

erm

ined

by

the

rela

tive

size

of

the

fee

and

the

acco

unt’

s in

vest

men

t pe

rfor

man

ce. F

or e

xam

ple,

for

an

acco

unt w

ith a

2.8

% a

nnua

l fee

ded

ucte

d qu

arte

rly,

if th

e gr

oss

perf

orm

ance

is 1

0% o

n an

ann

ual b

asis

, the

qua

rter

ly

com

poun

ding

eff

ect o

f th

e fe

es w

ill r

esul

t in

a fi

nal p

erfo

rman

ce o

f ap

prox

imat

ely

7.1%

per

yea

r, a

red

uctio

n of

2.9

% p

er y

ear.

Com

poun

ding

will

sim

ilarl

y af

fect

the

acco

unt’

s pe

rfor

man

ce o

n a

cum

ulat

ive

basi

s. I

t sho

uld

also

be

note

d th

at w

here

yo

ur g

ross

ret

urns

are

com

pare

d to

an

inde

x, th

e in

dex

perf

orm

ance

als

o do

es n

ot

refl

ect a

ny tr

ansa

ctio

n co

sts

or m

anag

emen

t fee

s.

Som

e in

vest

men

t man

ager

s pr

esen

ted

in th

e st

rate

gies

may

hav

e in

divi

dual

pe

rfor

man

ce tr

ack

reco

rds

that

are

long

er th

an th

e pe

riod

sho

wn

in th

e re

port

. In

divi

dual

inve

stm

ent m

anag

ers’

per

form

ance

rec

ords

for

long

er ti

me

peri

ods,

if

appl

icab

le, a

re a

vaila

ble

thro

ugh

your

Fin

anci

al A

dvis

or. F

or c

ompl

ete

info

rmat

ion

rega

rdin

g th

ese

inve

stm

ent m

anag

ers,

thei

r fe

es a

nd p

erfo

rman

ce, c

onta

ct y

our

UB

SIC

Con

sulta

nt a

nd s

ee th

e m

anag

er’s

For

m A

DV

, Par

t II.

Impo

rtan

t In

form

atio

n R

egar

ding

Sim

ulat

ed P

erfo

rman

ce

The

str

ateg

y is

a n

ew s

trat

egy

and

does

not

hav

e a

trac

k re

cord

. The

per

form

ance

in

form

atio

n pr

esen

ted

is s

imul

ated

, bac

ktes

ted

and

was

cre

ated

by

appl

ying

the

sam

e in

vest

men

t per

spec

tives

and

qua

ntit

ativ

e an

alys

is o

f va

luat

ion,

qua

lity

and

sen

tim

ent

that

are

em

ploy

ed in

exi

stin

g st

rate

gies

man

aged

by

the

inve

stm

ent m

anag

er, t

houg

h di

ffer

ence

s ex

ist i

n po

rtfo

lio

cons

truc

tion

. Any

impr

ovem

ents

that

wer

e in

corp

orat

ed

into

the

curr

ent i

nves

tmen

t pro

cess

and

qua

ntita

tive

mod

els

wer

e as

sum

ed to

exi

st

for

the

enti

re s

imul

atio

n pe

riod

. Im

plem

enta

tion

of th

e li

ve s

trat

egy

vers

us th

e si

mul

ated

str

ateg

y w

ill b

e vi

rtua

lly id

enti

cal w

ith

the

exce

ptio

n of

intr

amon

th

trad

ing.

The

hyp

othe

tical

per

form

ance

res

ults

for

the

mod

el s

how

n re

flec

t the

in

vest

men

t ret

urns

that

an

inve

stor

mig

ht h

ave

achi

eved

by

inve

stin

g in

the

stra

tegy

fo

r th

e en

tire

peri

od in

dica

ted.

It a

ssum

es th

at, s

ince

ince

ptio

n, n

o ca

sh w

as a

dded

to

or a

sset

s w

ithdr

awn

from

the

acco

unt a

nd th

at a

ll di

vide

nds,

gai

ns a

nd o

ther

ea

rnin

gs in

the

acco

unt w

ere

rein

vest

ed. T

he s

imul

atio

n as

sum

ed o

nce

a m

onth

tr

adin

g bu

t tra

ding

for

the

live

str

ateg

y w

ill l

ikel

y oc

cur

mor

e fr

eque

ntly

. Ret

urns

ar

e si

mul

ated

for

the

enti

re p

erio

d an

d as

sum

e 1.

0% tr

ansa

ctio

n co

sts.

The

test

ing

met

hodo

logy

use

d bo

th in

tern

ally

and

Fac

tset

pro

vide

d da

ta a

nd a

pplic

atio

ns to

ge

nera

te s

imul

ated

his

tori

cal p

ortf

olio

s. T

he r

esul

ts s

how

n do

not

rep

rese

nt th

e re

sult

s of

act

ual t

radi

ng u

sing

clie

nt a

sset

s, b

ut w

ere

achi

eved

by

mea

ns o

f th

e

retr

oact

ive

appl

icat

ion

of a

mod

el th

at w

as d

esig

ned

with

the

bene

fit o

f hi

ndsi

ght.

The

sim

ulat

ed p

erfo

rman

ce w

as c

ompi

led

afte

r th

e en

d of

the

peri

od d

epic

ted

and

does

not

rep

rese

nt th

e ac

tual

inve

stm

ent d

ecis

ions

of

the

advi

sor.

The

se r

esul

ts d

o no

t ref

lect

the

effe

ct o

f m

ater

ial e

cono

mic

and

mar

ket f

acto

rs o

n de

cisi

on-m

akin

g.

As

a re

sult,

ther

e is

no

reas

on to

bel

ieve

that

you

r po

rtfo

lio

wil

l per

form

in a

sim

ilar

m

anne

r or

that

the

inve

stm

ent m

anag

er w

ould

hav

e m

ade

the

sam

e in

vest

men

t re

com

men

datio

ns o

r ac

hiev

ed th

e sa

me

leve

l of

perf

orm

ance

if it

had

bee

n m

anag

ing

the

stra

tegy

for

the

entir

e pe

riod

for

act

ual c

lient

s an

d ch

argi

ng f

ees

for

the

advi

ce, w

ith th

e kn

owle

dge

that

clie

nts

wou

ld r

ely

on th

e ad

vice

and

in li

ght o

f th

en-c

urre

nt m

arke

t con

ditio

ns. T

he s

trat

egy

did

not e

xist

dur

ing

the

peri

od

pres

ente

d. I

n ad

diti

on, i

f in

vest

ors

had

actu

ally

inve

sted

bas

ed o

n th

e st

rate

gy, t

heir

re

sults

wou

ld h

ave

diff

ered

fro

m th

ose

show

n be

caus

e of

dif

fere

nces

in th

e tim

ing

and

amou

nts

of th

eir

inve

stm

ents

. Pas

t per

form

ance

is n

ever

an

indi

cato

r of

fut

ure

resu

lts.

Inde

x In

form

atio

n

An

actu

al in

vest

men

t in

the

secu

riti

es in

clud

ed in

the

inde

x w

ould

req

uire

an

inve

stor

to in

cur

tran

sact

ion

cost

s, w

hich

wou

ld lo

wer

the

perf

orm

ance

res

ults

. Pl

ease

kee

p in

min

d th

at in

dex

info

rmat

ion

is f

or il

lust

rativ

e pu

rpos

es a

nd r

elat

es to

hi

stor

ical

per

form

ance

of

mar

ket i

ndex

es a

nd n

ot th

e pe

rfor

man

ce o

f ac

tual

st

rate

gies

or

man

ager

s pr

esen

ted.

The

pas

t per

form

ance

of

the

inde

xes

is n

ot a

gu

aran

tee

of f

utur

e re

sults

bec

ause

eac

h in

dex

refl

ects

an

unm

anag

ed u

nive

rse

of

secu

ritie

s an

d do

es n

ot in

clud

e an

y de

duct

ion

for

advi

sory

fee

s or

oth

er e

xpen

ses

that

wou

ld r

educ

e ac

tual

ret

urns

. The

per

form

ance

sho

wn

shou

ld n

ot b

e co

nsid

ered

in

dica

tive

of th

e pe

rfor

man

ce o

f an

act

ivel

y m

anag

ed p

ortf

olio

for

the

sam

e tim

e pe

riod

. Mos

t man

ager

s ar

e no

t res

tric

ted

to in

vest

men

t in

the

sam

e se

curi

ties

or

secu

rity

wei

ghtin

gs a

s th

e co

rres

pond

ing

inde

xes,

so

perf

orm

ance

will

var

y. F

inal

ly,

the

perf

orm

ance

of

the

inde

xes

refl

ects

the

rein

vest

men

t of

all i

ncom

e an

d di

vide

nds.

A d

escr

iptio

n of

eac

h in

dex

can

be f

ound

in th

e D

efin

ition

s se

ctio

n at

the

end

of th

is r

epor

t.

Rec

omm

ende

d St

rate

gies

The

Man

ager

Rec

omm

enda

tion

s in

clud

ed in

this

Rep

ort a

re li

mite

d to

thos

e m

anag

ers

and

stra

tegi

es in

our

AC

CE

SS, M

AC

Res

earc

hed,

and

UB

SIC

Rev

iew

ed

prog

ram

s. W

hile

the

due

dilig

ence

pro

cess

enc

ompa

sses

man

ager

s in

eac

h pr

ogra

m,

the

freq

uenc

y an

d de

pth

of o

ur d

ue d

ilig

ence

rev

iew

s va

ries

dep

endi

ng o

n w

hich

pr

ogra

m th

e m

anag

er p

artic

ipat

es in

. The

leve

l of

due

dili

genc

e en

com

pass

es a

qu

anti

tati

ve r

evie

w o

f co

mpo

site

and

act

ual p

erfo

rman

ce d

ata

and

port

foli

o an

alyt

ics

(inc

ludi

ng r

espo

nses

to a

det

aile

d qu

estio

nnai

re)

and

may

als

o in

clud

e on

-site

vis

its

by o

ne o

r m

ore

of o

ur I

nves

tmen

t Man

ager

Res

earc

h A

naly

sts

to e

ach

man

ager

. For

A

CC

ESS

man

ager

s, o

n-si

te v

isits

occ

ur o

n av

erag

e at

leas

t onc

e ev

ery

12 m

onth

s.

On-

site

vis

its to

MA

C R

esea

rche

d m

anag

ers

occu

r on

ave

rage

at l

east

eve

ry 2

yea

rs.

UB

SIC

Rev

iew

ed m

anag

ers

are

subj

ect t

o in

-dep

th r

evie

w o

n av

erag

e at

leas

t eve

ry

2 ye

ars,

but

no

on-s

ite v

isits

are

con

duct

ed.

The

eva

luat

ion

crite

ria

cove

red

in o

n-

site

vis

its

are

the

sam

e fo

r m

anag

ers

in b

oth

prog

ram

s. I

n ad

ditio

n, f

or A

CC

ESS

m

anag

ers,

a d

etai

led

revi

ew o

f po

rtfo

lio p

erfo

rman

ce a

nd a

ttrib

utio

n is

per

form

ed o

n a

quar

terl

y ba

sis

to e

nsur

e th

at p

ortf

olio

s co

ntin

ue to

be

inve

sted

con

sist

ent w

ith th

e m

anag

er’s

sta

ted

inve

stm

ent s

tyle

. Por

tfol

io a

ttri

buti

on a

naly

sis

is p

erfo

rmed

pri

or

to o

n-si

te v

isits

and

may

be

done

dur

ing

peri

ods

of p

oor

rela

tive

perf

orm

ance

, but

is

not s

yste

mat

ical

ly p

erfo

rmed

on

a qu

arte

rly

basi

s. T

he s

trat

egie

s pr

esen

ted

are

hypo

thet

ical

por

tfol

ios,

and

hav

e no

t bee

n tr

acke

d by

U

BS

Fina

ncia

l Ser

vice

s. T

hey

wer

e cr

eate

d as

of

the

date

of

this

rep

ort w

ith

the

bene

fit o

f hi

ndsi

ght.

The

pas

t per

form

ance

of

each

rec

omm

ende

d in

vest

men

t m

anag

er w

as k

now

n to

UB

S Fi

nanc

ial S

ervi

ces

whe

n it

deve

lope

d th

e st

rate

gies

and

w

as a

key

fac

tor

in th

e Fi

rm’s

dec

isio

n to

incl

ude

each

inve

stm

ent m

anag

er in

a

reco

mm

ende

d st

rate

gy. T

here

is n

o re

ason

to b

elie

ve th

at U

BS

Fina

ncia

l Ser

vice

s w

ould

hav

e be

en a

ble

to d

evel

op th

is s

ame

stra

tegy

with

out k

now

ing

in a

dvan

ce

how

the

reco

mm

ende

d in

vest

men

t man

ager

s an

d th

e m

arke

ts w

ould

per

form

, and

th

ese

resu

lts

are

not a

n in

dica

tor

that

UB

S Fi

nanc

ial S

ervi

ces

wil

l be

able

to d

o so

in

the

futu

re.

The

pas

t per

form

ance

res

ults

for

the

reco

mm

ende

d st

rate

gy a

re h

ypot

hetic

al. T

hey

refl

ect t

he th

eore

tica

l inv

estm

ent r

etur

ns th

at a

n in

vest

or m

ight

hav

e ac

hiev

ed b

y in

vest

ing

the

amou

nt a

nd o

n th

e da

tes

indi

cate

d on

the

inve

stm

ent p

rofi

le s

ectio

n of

th

is r

epor

t, an

d by

fol

low

ing

the

reco

mm

enda

tion

for

initi

ally

allo

cati

ng, a

nd th

en

real

loca

ting

from

tim

e to

tim

e, th

e ac

coun

t’s

asse

ts a

mon

g th

e di

ffer

ent

reco

mm

ende

d in

vest

men

t man

ager

s. I

t ass

umes

that

, aft

er e

stab

lish

ing

the

acco

unt,

the

inve

stor

wou

ld n

ot h

ave

adde

d an

y ca

sh to

or

wit

hdra

wn

asse

ts f

rom

the

acco

unt

and

that

all

divi

dend

s, g

ains

and

oth

er e

arni

ngs

in th

e ac

coun

t wou

ld h

ave

been

re

inve

sted

in a

ccor

danc

e w

ith

the

Firm

’s r

ecom

men

datio

ns. T

he r

ecom

men

ded

stra

tegy

in th

is f

orm

at m

ay n

ot h

ave

exis

ted

as o

f th

e da

tes

for

whi

ch p

erfo

rman

ce is

sh

own.

In

addi

tion,

som

e of

the

inve

stm

ent m

anag

ers

reco

mm

ende

d m

ay n

ot h

ave

been

par

t of

any

UB

S Fi

nanc

ial S

ervi

ces

spon

sore

d pr

ogra

m a

t tha

t tim

e. A

ctua

l as

sets

of

actu

al c

lien

ts m

ay n

ot h

ave

been

inve

sted

in a

ccor

danc

e w

ith

thes

e st

rate

gies

dur

ing

the

time

peri

ods

show

n.

Past

per

form

ance

can

nev

er g

uara

ntee

fut

ure

resu

lts.

Ass

ets

Hel

d at

Oth

er F

inan

cial

Ins

titu

tion

s

At y

our

dire

ctio

n, w

e m

ay a

lso

have

con

side

red

asse

ts th

at y

ou h

old

at o

ther

fi

nanc

ial i

nstit

utio

ns. I

nfor

mat

ion

abou

t the

se a

sset

s is

bas

ed s

olel

y on

the

info

rmat

ion

you

have

pro

vide

d to

us.

We

have

not

ver

ifie

d, a

nd a

re n

ot r

espo

nsib

le

for,

the

accu

racy

or

com

plet

enes

s of

this

info

rmat

ion.

You

hav

e pr

ovid

ed th

e na

mes

of

inve

stm

ent m

anag

ers

man

agin

g yo

ur a

sset

s at

oth

er

fina

ncia

l ins

titut

ions

. Thi

s re

port

pro

vide

s pe

rfor

man

ce in

form

atio

n de

rive

d fr

om a

th

ird

part

y da

taba

se, w

hich

is b

elie

ved

to b

e re

liabl

e, b

ut w

hich

UB

S Fi

nanc

ial

Serv

ices

has

not

ver

ifie

d. T

he m

anag

ers

liste

d ar

e in

com

para

tive

por

tfol

ios

and

are

for

illus

trat

ive

purp

oses

. You

may

not

hav

e re

ceiv

ed th

e pe

rfor

man

ce r

etur

ns

pres

ente

d he

re b

ecau

se th

ey a

re g

ross

of

any

man

agem

ent f

ees

and

othe

r ch

arge

s th

at h

ave

been

ass

esse

d to

you

r ac

coun

t. T

here

fore

, any

eva

luat

ion

or a

naly

sis

prov

ided

in th

is r

epor

t reg

ardi

ng s

epar

ate

acco

unt m

anag

ers,

whi

ch in

clud

es a

sset

s

Plea

se n

ote

that

any

dis

crep

anci

es b

etw

een

the

info

rmat

ion

you

prov

ided

and

the

actu

al v

alue

of

thos

e as

sets

at t

he ti

me

you

choo

se to

impl

emen

t the

str

ateg

y m

ay

also

aff

ect t

he o

utco

me

of th

e as

set a

lloc

atio

n st

rate

gy w

e di

scus

s w

ith

you.

As

such

, th

e re

sult

s m

ay d

iffe

r fr

om a

ny il

lust

ratio

ns s

how

n on

this

rep

ort.

Tax

es I

mpl

emen

ting

any

str

ateg

y pr

esen

ted,

incl

udin

g ch

angi

ng a

ny s

trat

egy

may

re

sult

in in

curr

ing

gain

s or

loss

es f

or in

com

e ta

x pu

rpos

es. U

BS

Fina

ncia

l Ser

vice

s do

es n

ot p

rovi

de ta

x ad

vice

. We

reco

mm

end

that

you

eva

luat

e th

is r

epor

t with

you

r le

gal a

nd/o

r ta

x ad

viso

r be

fore

taki

ng a

ny a

ctio

n be

caus

e of

the

sign

ific

ance

and

co

mpl

exity

of

tax

cons

ider

atio

ns.

Per

iodi

c R

evie

ws

Sinc

e th

is r

epor

t is

base

d on

info

rmat

ion

prov

ided

as

of th

e da

te

indi

cate

d on

the

cove

r, a

ssum

ptio

ns a

nd e

stim

ates

may

cha

nge.

For

this

rea

son,

with

yo

ur F

inan

cial

Adv

isor

, you

sho

uld

peri

odic

ally

rev

isit

your

cur

rent

fin

anci

al

situ

atio

n, y

our

curr

ent s

trat

egy,

and

the

assu

mpt

ions

it c

onta

ins.

Def

init

ions

G

ener

al D

efin

itio

ns

Alp

ha –

A m

easu

re o

f th

e di

ffer

ence

bet

wee

n a

fund

’s a

ctua

l ret

urns

and

its

expe

cted

per

form

ance

, giv

en it

s le

vel o

f ri

sk a

s m

easu

red

by b

eta.

A p

osit

ive

alph

a fi

gure

indi

cate

s th

e fu

nd h

as p

erfo

rmed

bet

ter

than

its

beta

wou

ld p

redi

ct. I

n co

ntra

st, a

neg

ativ

e al

pha

indi

cate

s th

e fu

nd’s

und

erpe

rfor

man

ce, g

iven

the

expe

ctat

ions

est

ablis

hed

by th

e fu

nd’s

bet

a. A

ll M

PT s

tati

stic

s (a

lpha

, bet

a, a

nd R

-sq

uare

d) a

re b

ased

on

a le

ast-

squa

red

regr

essi

on o

f th

e fu

nd’s

ret

urn

over

Tre

asur

y bi

lls.

Bet

a –

A m

easu

re o

f a

fund

’s s

ensi

tivi

ty to

mar

ket m

ovem

ents

. The

bet

a of

the

mar

ket i

s 1.

00 b

y de

fini

tion.

Mor

ning

star

cal

cula

tes

beta

by

com

pari

ng a

fun

d’s

exce

ss r

etur

n ov

er T

-bil

ls to

the

mar

ket’

s ex

cess

ret

urn

over

T-b

ills,

so

a be

ta o

f 1.

10

show

s th

at th

e fu

nd h

as p

erfo

rmed

10%

bet

ter

than

its

benc

hmar

k in

dex

in u

p m

arke

ts a

nd 1

0% w

orse

in d

own

mar

kets

, ass

umin

g al

l oth

er f

acto

rs r

emai

n co

nsta

nt. C

onve

rsel

y, a

bet

a of

0.8

5 in

dica

tes

that

the

fund

’s e

xces

s re

turn

is

expe

cted

to p

erfo

rm 1

5% w

orse

than

the

mar

ket’

s ex

cess

ret

urn

duri

ng u

p m

arke

ts

and

15%

bet

ter

duri

ng d

own

mar

kets

.

Ble

nd –

A B

lend

is s

ever

al m

anag

ers

allo

cate

d to

per

cent

ages

of

a w

hole

. The

pe

rfor

man

ce o

f th

e m

anag

ers

is w

eigh

ted

to c

reat

e th

e bl

ende

d pe

rfor

man

ce.

Dow

nsid

e R

isk

– D

owns

ide

Ris

k, o

r Se

mi-

vari

ance

is th

e st

anda

rd d

evia

tion

(se

e St

anda

rd D

evia

tion)

of

the

port

folio

’s n

egat

ive

retu

rns.

Man

y co

nsul

tant

s fi

nd th

e st

atis

tic e

xtre

mel

y us

eful

sin

ce it

mea

sure

s vo

latil

ity in

und

esir

able

situ

atio

ns. T

he

high

er th

e va

lue,

the

grea

ter

the

hist

oric

al D

owns

ide

Ris

k.

Dow

n M

arke

t Cap

ture

Rat

io –

A m

easu

re o

f m

anag

ers’

per

form

ance

in d

own

mar

kets

rel

ativ

e to

the

mar

ket i

tsel

f. A

dow

n m

arke

t is

one

in w

hich

the

mar

ket’

s qu

arte

rly

retu

rn is

less

than

zer

o. T

he lo

wer

the

man

ager

’s d

own-

mar

ket c

aptu

re

rati

o, th

e be

tter

the

man

ager

pro

tect

ed c

apita

l dur

ing

a m

arke

t dec

line

. A v

alue

of

90

sugg

ests

that

a m

anag

er’s

loss

es w

ere

90%

of

the

mar

ket l

oss

whe

n th

e m

arke

t was

do

wn.

Info

rmat

ion

Rat

io –

The

rat

io o

f an

nual

ized

exp

ecte

d re

sidu

al r

etur

n to

res

idua

l ri

sk. T

o ca

lcul

ate

the

IR th

e ac

tive

retu

rn a

nd tr

acki

ng e

rror

mus

t be

annu

aliz

ed.

R-S

quar

ed –

Ref

lect

s th

e pe

rcen

tage

of

a st

rate

gy’s

mov

emen

ts th

at c

an b

e ex

plai

ned

by m

ovem

ents

in it

s be

nchm

ark

inde

x. A

n R

-squ

ared

of

100

indi

cate

s th

at

all m

ovem

ents

of

a fu

nd c

an b

e ex

plai

ned

by m

ovem

ents

in th

e in

dex.

Thu

s,

port

folio

s in

vest

ed in

S&

P 50

0 st

ocks

will

typi

cally

hav

e an

R-s

quar

ed c

lose

to 1

00.

Con

vers

ely,

a lo

w R

-squ

ared

indi

cate

s th

at v

ery

few

of

the

fund

’s m

ovem

ents

can

be

expl

aine

d by

mov

emen

ts in

its

benc

hmar

k in

dex.

An

R-s

quar

ed m

easu

re o

f 35

, for

ex

ampl

e, m

eans

that

mov

emen

ts in

the

benc

hmar

k in

dex

can

expl

ain

only

35%

of

the

port

folio

’s m

ovem

ents

.

Shar

pe-R

atio

– A

ris

k-ad

just

ed m

easu

re d

evel

oped

by

Nob

el L

aure

ate

Will

iam

Sh

arpe

. It i

s ca

lcul

ated

by

usin

g st

anda

rd d

evia

tion

and

exce

ss r

etur

n to

det

erm

ine

rew

ard

per

unit

of r

isk.

The

hig

her

the

Shar

pe R

atio

, the

bet

ter

the

port

folio

’s

hist

oric

al r

isk-

adju

sted

per

form

ance

is. T

he S

harp

e R

atio

is c

alcu

late

d fo

r th

e pa

st

36-m

onth

per

iod

by d

ivid

ing

a po

rtfo

lio’s

ann

ualiz

ed e

xces

s re

turn

s by

its

annu

aliz

ed s

tand

ard

devi

atio

n. S

ince

this

rat

io u

ses

stan

dard

dev

iatio

n as

its

risk

m

easu

re, i

t is

mos

t app

ropr

iate

ly a

pplie

d w

hen

anal

yzin

g a

port

folio

that

is a

n in

vest

or’s

sol

e ho

ldin

g. T

he S

harp

e R

atio

can

be

used

to c

ompa

re tw

o po

rtfo

lios

dire

ctly

on

how

muc

h ri

sk a

fun

d ha

s to

bea

r to

ear

n ex

cess

ret

urn

over

the

risk

-fre

e ra

te.

Stan

dard

Dev

iati

on –

A m

easu

re o

f ri

sk. A

sta

tisti

cal m

easu

rem

ent o

f di

sper

sion

ab

out a

n av

erag

e, w

hich

, for

a p

ortf

olio

, dep

icts

how

wid

ely

the

retu

rns

vari

ed o

ver

a ce

rtai

n pe

riod

of

time.

Inv

esto

rs u

se th

e st

anda

rd d

evia

tion

of h

isto

rica

l pe

rfor

man

ce to

try

to p

redi

ct th

e ra

nge

of r

etur

ns th

at a

re m

ost l

ikel

y fo

r a

give

n po

rtfo

lio. W

hen

a po

rtfo

lio h

as a

hig

h st

anda

rd d

evia

tion,

the

pred

icte

d ra

nge

of

perf

orm

ance

is w

ide,

impl

ying

gre

ater

ris

k an

d vo

latil

ity.

Tra

ckin

g E

rror

– M

easu

res

the

dive

rgen

ce b

etw

een

the

pric

e be

havi

or o

f a

port

folio

to th

e pr

ice

beha

vior

of

a be

nchm

ark.

Up

Mar

ket

Cap

ture

Rat

io –

Up-

mar

ket c

aptu

re r

atio

is a

mea

sure

of

man

ager

s’

perf

orm

ance

in u

p m

arke

ts r

elat

ive

to th

e m

arke

t its

elf.

An

up m

arke

t is

one

in

whi

ch th

e m

arke

t’s

quar

terl

y re

turn

is g

reat

er th

an o

r eq

ual t

o ze

ro. T

he h

ighe

r th

e m

anag

er’s

up-

mar

ket c

aptu

re r

atio

, the

bet

ter

the

man

ager

cap

italiz

ed o

n a

risi

ng

mar

ket.

For

exam

ple,

a v

alue

of

110

sugg

ests

that

the

man

ager

cap

ture

d 11

0% o

f th

e up

mar

ket (

perf

orm

ed te

n pe

rcen

t bet

ter

than

the

mar

ket)

whe

n th

e m

arke

t was

up.

Inde

x D

efin

itio

ns

Fir

st B

osto

n C

onve

rtib

le S

ecur

itie

s (F

BC

B) T

his

is a

per

form

ance

ben

chm

ark

for

conv

ertib

le a

ccou

nts.

Thi

s in

dex

gene

rally

incl

udes

250

to 3

00 is

sues

. To

be

incl

uded

, con

vert

ible

bon

ds a

nd p

refe

rred

s m

ust b

e ra

ted

B-

or b

ette

r by

Sta

ndar

d &

Po

or’s

(qu

ality

-rel

ated

adj

ustm

ents

are

mad

e at

the

end

of e

ach

cale

ndar

yea

r),

conv

ertib

les

mus

t hav

e a

min

imum

issu

e si

ze o

f $5

0 m

illio

n (n

ew is

sues

are

add

ed

in th

e m

onth

fol

low

ing

thei

r is

suan

ce),

and

pre

ferr

eds

mus

t hav

e a

min

imum

of

500,

000

shar

es o

utst

andi

ng. E

urob

onds

are

als

o in

clud

ed if

they

are

issu

ed b

y U

S-do

mic

iled

com

pani

es, r

ated

B-

or h

ighe

r by

Sta

ndar

d &

Poo

r’s,

and

hav

e an

issu

e si

ze g

reat

er th

an $

100

mill

ion.

Bar

clay

s C

apit

al A

ggre

gate

Bon

d In

dex

(BC

AG

) C

ompo

sed

of s

ecur

ities

fro

m

Bar

clay

s C

apita

l Bro

ther

s go

vern

men

t/cor

pora

te b

ond

inde

x, m

ortg

age-

back

ed

secu

ritie

s in

dex,

and

the

asse

t-ba

cked

sec

uriti

es in

dex.

Tot

al r

etur

n co

mpr

ises

pri

ce

appr

ecia

tion/

depr

ecia

tion

and

inco

me

as a

per

cent

age

of th

e or

igin

al in

vest

men

t. In

dexe

s ar

e re

bala

nced

mon

thly

by

mar

ket c

apita

liza

tion

.

Bar

clay

s C

apit

al C

orpo

rate

Int

(B

CIC

) A

sub

set o

f th

e B

arcl

ays

Cap

ital

Cor

pora

te B

ond

Inde

x co

veri

ng a

ll co

rpor

ate,

pub

licly

issu

ed, f

ixed

-rat

e,

nonc

onve

rtib

le U

S de

bt is

sues

rat

ed a

t lea

st B

aa w

ith a

t lea

st $

50 m

illio

n pr

inci

pal

outs

tand

ing

and

mat

urity

less

than

10

year

s.

Bar

clay

s C

apit

al C

orpo

rate

Lon

g T

erm

(B

CL

TC

) A

sub

set o

f th

e B

arcl

ays

Cap

ital C

orpo

rate

Bon

d In

dex

cove

ring

all

corp

orat

e, p

ublic

ly is

sued

, fix

ed-r

ate,

no

ncon

vert

ible

US

debt

issu

es r

ated

at l

east

Baa

with

at l

east

$50

mill

ion

prin

cipa

l ou

tsta

ndin

g an

d m

atur

ity g

reat

er th

an 1

0 ye

ars.

Bar

clay

s C

apit

al G

over

nmen

t C

orpo

rate

Bon

d In

dex

(BC

GC

) C

ompo

sed

of a

ll bo

nds

that

are

inve

stm

ent g

rade

(ra

ted

Baa

or

high

er b

y M

oody

’s o

r B

BB

or

high

est

by S

&P,

if u

nrat

ed b

y M

oody

’s).

Iss

ues

mus

t hav

e at

leas

t one

yea

r to

mat

urity

. T

otal

ret

urn

com

pris

es p

rice

app

reci

atio

n/de

prec

iati

on a

nd in

com

e as

a p

erce

ntag

e of

the

orig

inal

inve

stm

ent.

Inde

xes

are

reba

lanc

ed m

onth

ly b

y m

arke

t cap

itali

zati

on.

Bar

clay

s C

apit

al G

over

nmen

t/C

orpo

rate

Int

(B

CIG

C)

Com

pose

d of

all

bond

s co

vere

d by

the

Bar

clay

s C

apita

l Gov

ernm

ent/C

orpo

rate

Bon

d In

dex

with

mat

uriti

es

betw

een

one

and

9.99

yea

rs. T

otal

ret

urn

com

pris

es p

rice

app

reci

atio

n/de

prec

iatio

n an

d in

com

e as

a p

erce

ntag

e of

the

orig

inal

inve

stm

ent.

Inde

xes

are

reba

lanc

ed

mon

thly

by

mar

ket c

apita

lizat

ion.

Bar

clay

s C

apit

al G

over

nmen

t/C

orpo

rate

Lon

g T

erm

(B

CL

TG

C)

Com

pose

d of

al

l bon

ds c

over

ed b

y th

e B

arcl

ays

Cap

ital G

over

nmen

t/Cor

pora

te B

ond

Inde

x w

ith

mat

urit

ies

of 1

0 ye

ars

or g

reat

er. T

otal

ret

urn

com

pris

es p

rice

ap

prec

iatio

n/de

prec

iati

on a

nd in

com

e as

a p

erce

ntag

e of

the

orig

inal

inve

stm

ent.

Inde

xes

are

reba

lanc

ed m

onth

ly b

y m

arke

t cap

itali

zati

on.

Bar

clay

s C

apit

al M

ortg

age

Bac

ked

(BC

MB

S) C

ompo

sed

of a

ll fi

xed-

rate

, se

curi

tized

mor

tgag

e po

ols

by G

NM

A, F

NM

A, a

nd F

HL

MC

, inc

ludi

ng G

NM

A

grad

uate

d pa

ymen

t mor

tgag

es. T

he m

inim

um p

rinc

ipal

am

ount

req

uire

d fo

r in

clus

ion

is $

50 m

illi

on. T

otal

ret

urn

com

pris

es p

rice

app

reci

atio

n/de

prec

iatio

n an

d in

com

e as

a p

erce

ntag

e of

the

orig

inal

inve

stm

ent.

Inde

xes

are

reba

lanc

ed m

onth

ly

by m

arke

t cap

itali

zati

on.

Bar

clay

s C

apit

al M

unic

ipal

Bon

d (B

CM

) C

ompu

ted

twic

e m

onth

ly f

rom

pri

ces

on a

ppro

xim

atel

y 1,

100

bond

s. P

rice

s ar

e su

pplie

d by

Ken

ny I

nfor

mat

ion

Syst

ems,

In

c. T

he in

dex

is c

ompo

sed

of a

ppro

xim

atel

y 60

% r

even

ue b

onds

and

40%

sta

te

gove

rnm

ent o

blig

atio

ns.

Bar

clay

s C

apit

al M

unic

ipal

5 Y

ear

(BC

MB

) A

sub

set o

f th

e B

arcl

ays

Cap

ital

Mun

icip

al B

ond

Inde

x w

here

the

aver

age

mat

urit

y of

the

bond

s ar

e fi

ve y

ears

.

MSC

I (E

AF

E)

An

arit

hmet

ic, m

arke

t val

ue-w

eigh

ted

aver

age

of th

e pe

rfor

man

ce o

f ov

er 9

00 s

ecur

ities

list

ed o

n th

e st

ock

exch

ange

s of

the

follo

win

g co

untr

ies

in

Eur

ope,

Aus

tral

ia a

nd th

e Fa

r E

ast:

Aus

tral

ia, H

ong

Kon

g, N

orw

ay, A

ustr

ia, I

rela

nd,

Sing

apor

e, B

elgi

um, I

taly

, Spa

in, D

enm

ark,

Jap

an, S

wed

en, F

inla

nd, M

alay

sia,

Sw

itzer

land

, Fra

nce,

Net

herl

ands

, Uni

ted

Kin

gdom

, Ger

man

y, N

ew Z

eala

nd.

MSC

I E

mer

ging

Mar

kets

(E

MF

) T

he M

SCI

Em

ergi

ng M

arke

ts (

EM

F) is

a f

ree

floa

t-ad

just

ed m

arke

t cap

italiz

atio

n in

dex

that

is d

esig

ned

to m

easu

re e

quity

mar

ket

perf

orm

ance

in th

e gl

obal

em

ergi

ng m

arke

ts. A

s of

Apr

il 20

02 th

e M

SCI

EM

F In

dex

cons

iste

d of

the

follo

win

g 26

em

ergi

ng m

arke

t cou

ntry

inde

xes:

Arg

entin

a,

Bra

zil,

Chi

le, C

hina

, Col

ombi

a, C

zech

Rep

ublic

, Egy

pt, H

unga

ry, I

ndia

, Ind

ones

ia,

Isra

el, J

orda

n, K

orea

, Mal

aysi

a, M

exic

o, M

oroc

co, P

akis

tan,

Per

u, P

hilip

pine

s,

Pola

nd, R

ussi

a, S

outh

Afr

ica,

Tai

wan

, Tha

iland

, Tur

key

and

Ven

ezue

la.

MSC

I W

orld

S/B

Net

(M

SCIW

) T

he M

SCI

Wor

ld I

ndex

is a

fre

e fl

oat-

adju

sted

m

arke

t cap

italiz

atio

n in

dex

that

is d

esig

ned

to m

easu

re g

loba

l dev

elop

ed m

arke

t eq

uity

per

form

ance

. As

of A

pril

2002

the

MSC

I W

orld

Ind

ex c

onsi

sted

of

the

follo

win

g 23

dev

elop

ed m

arke

t cou

ntry

inde

xes:

Aus

tral

ia, A

ustr

ia, B

elgi

um,

Can

ada,

Den

mar

k, F

inla

nd, F

ranc

e, G

erm

any,

Gre

ece,

Hon

g K

ong,

Ire

land

, Ita

ly,

Japa

n, N

ethe

rlan

ds, N

ew Z

eala

nd, N

orw

ay, P

ortu

gal,

Sing

apor

e, S

pain

, Sw

eden

, Sw

itzer

land

, the

Uni

ted

Kin

gdom

and

the

Uni

ted

Stat

es.

S&P

500

(SW

PI)

Cov

ers

500

indu

stri

al, u

tility

, tra

nspo

rtat

ion,

and

fin

anci

al

com

pani

es o

f th

e U

S m

arke

ts (

mos

tly N

YSE

issu

es).

The

inde

x re

pres

ents

abo

ut

75%

of

NY

SE m

arke

t cap

italiz

atio

n an

d 30

% o

f N

YSE

issu

es. I

t is

a ca

pita

liza

tion

-w

eigh

ted

inde

x ca

lcul

ated

on

a to

tal r

etur

n ba

sis

with

div

iden

ds r

einv

este

d.

Rus

sell

1000

(R

1000

) C

onsi

sts

of th

e 1,

000

larg

est s

ecur

ities

in th

e R

usse

ll 30

00

inde

x. T

his

larg

e ca

p (m

arke

t-or

ient

ed)

inde

x re

pres

ents

the

univ

erse

of

stoc

ks f

rom

w

hich

mos

t act

ive

mon

ey m

anag

ers

typi

cally

sel

ect.

The

Rus

sell

1000

is h

ighl

y co

rrel

ated

with

the

S&P

500

inde

x.

Rus

sell

1000

Gro

wth

(R

1000

G) C

onta

ins

thos

e R

usse

ll 10

00 s

ecur

ities

with

a

grea

ter-

than

-ave

rage

gro

wth

ori

enta

tion.

Sec

uriti

es in

this

inde

x te

nd to

exh

ibit

high

er p

rice

-to-

book

and

pri

ce-e

arni

ngs

ratio

s, lo

wer

div

iden

d yi

elds

and

hig

her

fore

cast

ed g

row

th v

alue

s th

an th

e va

lue

univ

erse

.

Rus

sell

1000

Val

ue (

R10

00V

) C

onta

ins

thos

e R

usse

ll 10

00 s

ecur

ities

with

a le

ss-

than

-ave

rage

gro

wth

ori

enta

tion.

It r

epre

sent

s th

e un

iver

se o

f st

ocks

fro

m w

hich

va

lue

man

ager

s ty

pica

lly s

elec

t. Se

curi

ties

in th

is in

dex

tend

to e

xhib

it lo

w p

rice

-to-

book

and

pri

ce-e

arni

ngs

ratio

s, h

ighe

r di

vide

nd y

ield

s an

d lo

wer

for

ecas

ted

grow

th

valu

es th

an th

e gr

owth

uni

vers

e.

Rus

sell

2000

(R

2000

) C

onsi

sts

of th

e sm

alle

st 2

,000

sec

uriti

es in

the

Rus

sell

3000

in

dex,

rep

rese

ntin

g ap

prox

imat

ely

11%

of

the

Rus

sell

3000

tota

l mar

ket

capi

taliz

atio

n. T

his

inde

x is

wid

ely

rega

rded

in th

e in

dust

ry a

s th

e pr

emie

r m

easu

re

of s

mal

l cap

sto

cks.

Rus

sell

2000

Gro

wth

(R

2000

G) C

onta

ins

thos

e R

usse

ll 20

00 s

ecur

ities

with

a

grea

ter-

than

-ave

rage

gro

wth

ori

enta

tion.

Sec

uriti

es in

this

inde

x te

nd to

exh

ibit

high

er p

rice

-to-

book

and

pri

ce-e

arni

ngs

ratio

s, lo

wer

div

iden

d yi

elds

and

hig

her

fore

cast

ed g

row

th v

alue

s th

an th

e va

lue

univ

erse

.

Rus

sell

2000

Val

ue (

R20

00V

) C

onta

ins

thos

e R

usse

ll 20

00 s

ecur

ities

with

a le

ss-

than

-ave

rage

gro

wth

ori

enta

tion.

Sec

urit

ies

in th

is in

dex

tend

to e

xhib

it lo

wer

pri

ce-

to-b

ook

and

pric

e-ea

rnin

gs r

atio

s, h

ighe

r di

vide

nd y

ield

s an

d lo

wer

for

ecas

ted

grow

th v

alue

s th

an th

e gr

owth

uni

vers

e.

Rus

sell

2500

(R

2500

) C

onsi

sts

of th

e bo

ttom

500

sec

uriti

es in

the

Rus

sell

1000

in

dex

and

all 2

,000

sec

uriti

es in

the

Rus

sell

2000

inde

x, r

epre

sent

ing

appr

oxim

atel

y 23

% o

f th

e R

usse

ll 30

00 to

tal m

arke

t cap

italiz

atio

n. T

his

inde

x is

a g

ood

mea

sure

of

smal

l to

med

ium

-sm

all s

tock

per

form

ance

.

Rus

sell

2500

Gro

wth

(R

2500

G) M

easu

res

the

perf

orm

ance

of

thos

e R

usse

ll 25

00

com

pani

es w

ith h

ighe

r pr

ice-

to-b

ook

ratio

s an

d hi

gher

for

ecas

ted

grow

th v

alue

s.

Rus

sell

2500

Val

ue (

R25

00V

) M

easu

res

the

perf

orm

ance

of

thos

e R

usse

ll 25

00

com

pani

es w

ith lo

wer

pri

ce-t

o-bo

ok r

atio

s an

d lo

wer

for

ecas

ted

grow

th v

alue

s.

Rus

sell

3000

(R

3000

) M

easu

res

the

perf

orm

ance

of

the

3,00

0 la

rges

t US

com

pani

es

base

d on

tota

l mar

ket c

apita

lizat

ion,

whi

ch r

epre

sent

s ap

prox

imat

ely

98%

of

the

inve

stab

le U

S eq

uity

mar

ket.

Rus

sell

3000

Gro

wth

(R

3000

G) M

easu

res

the

perf

orm

ance

of

thos

e R

usse

ll 30

00®

In

dex

com

pani

es w

ith h

ighe

r pr

ice-

to-b

ook

ratio

s an

d hi

gher

for

ecas

ted

grow

th

valu

es. T

he s

tock

s in

this

inde

x ar

e al

so m

embe

rs o

f ei

ther

the

Rus

sell

1000

®

Gro

wth

or

the

Rus

sell

2000

® G

row

th in

dexe

s.

Rus

sell

3000

Val

ue (

R30

00V

) M

easu

res

the

perf

orm

ance

of

thos

e R

usse

ll 30

00®

In

dex

com

pani

es w

ith lo

wer

pri

ce-t

o-bo

ok r

atio

s an

d lo

wer

for

ecas

ted

grow

th

valu

es. T

he s

tock

s in

this

inde

x ar

e al

so m

embe

rs o

f ei

ther

the

Rus

sell

1000

® V

alue

or

the

Rus

sell

2000

® V

alue

inde

xes.

Rus

sell

Mid

cap

(RM

ID)

Con

sist

s of

the

smal

lest

800

sec

uriti

es in

the

Rus

sell

1000

in

dex,

as

rank

ed b

y to

tal m

arke

t cap

italiz

atio

n. T

his

inde

x ac

cura

tely

cap

ture

s th

e m

ediu

m-s

ized

uni

vers

e of

sec

uriti

es a

nd r

epre

sent

s ap

prox

imat

ely

35%

of

the

Rus

sell

1000

tota

l mar

ket c

apita

lizat

ion.

Rus

sell

Mid

cap

Gro

wth

(R

MID

G)

Con

tain

s th

ose

Rus

sell

Mid

cap

secu

ritie

s w

ith

a gr

eate

r-th

an-a

vera

ge g

row

th o

rien

tatio

n. S

ecur

ities

in th

is in

dex

tend

to e

xhib

it hi

gher

pri

ce-t

o-bo

ok a

nd p

rice

-ear

ning

s ra

tios,

low

er d

ivid

end

yiel

ds a

nd h

ighe

r fo

reca

sted

gro

wth

val

ues

than

the

valu

e un

iver

se. T

he s

tock

s ar

e al

so m

embe

rs o

f th

e R

usse

ll 10

00 G

row

th I

ndex

.

Rus

sell

Mid

cap

Val

ue (

RM

IDV

) C

onta

ins

thos

e R

usse

ll M

idca

p se

curi

ties

wit

h a

less

-tha

n-av

erag

e gr

owth

ori

enta

tion.

Sec

uriti

es in

this

inde

x te

nd to

exh

ibit

low

pr

ice-

to-b

ook

and

pric

e-ea

rnin

gs r

atio

s, h

ighe

r di

vide

nd y

ield

s an

d lo

wer

for

ecas

ted

grow

th v

alue

s th

an th

e gr

owth

uni

vers

e. T

he s

tock

s ar

e al

so m

embe

rs o

f th

e R

usse

ll 10

00 V

alue

Ind

ex.

Salo

mon

Bro

ther

s W

orld

Gov

ernm

ent

Bon

d (S

WG

B)

A m

arke

t cap

itali

zati

on-

wei

ghte

d in

dex

cons

istin

g of

gov

ernm

ent b

ond

mar

kets

of

the

follo

win

g co

untr

ies:

A

ustr

alia

, Aus

tria

, Bel

gium

, Can

ada,

Den

mar

k, F

ranc

e, G

erm

any,

Ita

ly, J

apan

, N

ethe

rlan

ds, S

pain

, Sw

eden

, Uni

ted

Kin

gdom

, Uni

ted

Stat

es.

U.S

. Tre

asur

y B

ill (

UST

B):

Rep

rese

nts

90-d

ay r

etur

n fo

r T

reas

ury

Bil

ls is

sued

by

the

Uni

ted

Stat

es g

over

nmen

t.

Wils

hire

RE

Sec

urit

ies

Inde

x (W

RE

SI)

A b

road

mea

sure

of

the

perf

orm

ance

of

publ

icly

trad

ed r

eal e

stat

e se

curi

ties,

suc

h as

Rea

l Est

ate

Inve

stm

ent T

rust

s (R

EIT

s)

and

Rea

l Est

ate

Ope

ratin

g C

ompa

nies

(R

EO

Cs)

. The

inde

x is

cap

italiz

atio

n-w

eigh

ted.

The

beg

inni

ng d

ate,

Jan

uary

1, 1

978,

was

sel

ecte

d be

caus

e it

coin

cide

s w

ith th

e R

usse

ll/N

CR

EIF

Pro

pert

y In

dex

star

t dat

e. T

he I

ndex

is r

ebal

ance

d m

onth

ly, a

nd r

etur

ns a

re c

alcu

late

d on

a b

uy a

nd h

old

basi

s.

October 12, 2012 Second Floor, Financial Services ...€¦ · 09/11/2012 · Joseph Ciacciarelli...

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Transcript of October 12, 2012 Second Floor, Financial Services ...€¦ · 09/11/2012 · Joseph Ciacciarelli...