Fourth Quarter Investment Review – January 2012

 Market and Portfolio Review  Outlook and Current Positioning  Research Q&A Agenda

Euro Fears Stoked Huge Volatility in the Second Half of 2011 Daily S&P 500 price swings during the first half of 2011 were in line with historical averages… But fear and hope about Europe drove volatility through the roof in the second half. S&P 500 Daily Price Swings – First half of 2011 S&P 500 Daily Price Swings – Second half of 2011

2011 Performance of S&P 500 Stocks Based on Yield Stocks in the three highest-yielding deciles gained… …while the rest of the index fell Highest- Yielding Tenth Lowest- Yielding Tenth The Highest Yielding Stocks Drove S&P 500 Returns

Not currently in portfolios Currently in portfolios How Investors Fared in 2011 Depended Largely on How Much They Invested in High-Quality Bonds and High-Dividend Stocks

A Look Inside the Bond Index Shows What Happened in 2011 and What to Expect Going Forward 2011 Return and Current Yields on Barclays Bond Indexes Treasuries drove returns of the broader index But yields are very low

The Developed World Is Struggling under a Mountain of Debt

□Pessimistic o Another financial crisis with deflation and possible global depression o Big downside for stocks and other risky assets □Optimistic o Policymakers hit the bulls eye o Emerging markets lift all boats o Growth is higher than we expect o Stocks and risky assets see strong gains □Base Case o No major financial crisis but growth remains slow o Returns for balanced portfolios in the mid-single-digit range o Volatility remains high There Are Several Ways Things Could Play Out from Here

□2011 was characterized by a risk-on/risk-off investor mentality that resulted in extreme volatility for global stock markets. □During sharp flight-to-safety rallies, high-quality bonds (Treasuries) became a safe haven for capital spooked by Europe’s debt crisis and fears of China’s slowing growth. □Our portfolios trailed their benchmarks for the year mostly as a result of our positioning away from core bonds in favor of flexible bond strategies. □The huge amount of debt in the developed world continues to drive our expectations about the years ahead. □Our portfolios are positioned somewhat defensively as a result. Key Takeaways

Research Team Q&A