0 LPL Financial Member FINRA/SIPC LPL Research Trends and Opportunities in Active Management February 3, 2011

1 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Three Themes 1.LPL Financial Services and The Research Team 2.MSG – And Due-Diligence 3. Manager Trends 4. Research Services

2 LPL Financial Member FINRA/SIPC LPL Financial Services LPL Research: Expand Your Office By 28 Research Professionals

3 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Research ASK Research Due Diligence Data Analytics Market Strategists Portfolio Strategy Each team works together as one comprehensive unit

4 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Research Tenets PerformanceServiceTransparency Research Outperform Frequently No surprises Proactive: Media, blogs, commentaries, client letters Reactive: ASK Research-Accurate, Swift, Knowledgeable Sources of real-time research Serves the “do-it-yourselfer” and delegator

5 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH The Process: Multiple Inputs to Control Risk

6 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH PiecesPuzzle How do we do it?

7 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Our Process: What you Should Know Goal 1: Know our Managers / Universe Goal 2: Understand the environment Goal 3: Buy Great Funds at the Right Time Goal 4: Implement the TAA Team’s Macro Outlook Goal 5: Limit Mistakes Through Our Sell Discipline Goal 6: Be Vigilant (today’s winner = tomorrow’s losers)

8 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH The MSG Calendar Monday: MSG Team Meeting (Implementation Prep) Tuesday: AM – New Ideas, PM - Implementation Wednesday: Managers in Models Thursday: Sell Discipline Thursday Friday: AI DD Focus Meet with 50 to 60 managers a month

9 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goal 1: Know our Managers The 4 Ps People Process Performance Philosophy Red flags, if you looked Split-strike conversion? Does not align with the process Lack of transparency Example: Madoff This is where we start… For many teams, this is the entire process!

10 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goal #2 - Understand the Conditions The correlation of returns in the S&P 500 was well above average for the last couple of years, making it difficult for active managers to out-perform. The trend is lower.

11 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Trailing 2-Year Asset Class Performance Performance in 2010  < 20% of large cap mutual funds out-performing the Russell 1000  27% of mid cap mutual funds out-performed the Russell MidCap  40% of small cap mutual funds out-performed the Russell 2000 Performance YTD (as of 1/24/2011)  38% of large cap mutual funds are out-performing the Russell 1000  38% of mid cap mutual funds are out-performing the Russell MidCap  70% of small cap mutual funds are out-performing the Russell 2000

12 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Proliferation of Alternative Strategy Mutual Funds Types of Alternative Strategy Mutual Funds  Multi-Manager Funds  Event-Driven or Arbitrage Strategies  Equity, Fixed Income Long/Short  Equity Market Neutral  Global Macro  Hedge Fund Replication Hedge FundMutual Fund Fees Standard Fee: 2% management fee, 20% incentive fee Management Fee only. Typically less than 2% Liquidity Typically no better than quarterlyDaily TransparencyLimitedFull transparency Minimum InvestmentTypically > $1,000,000Typically < $5,000 Regulatory Oversight Typically unregistered, exemptSEC registered

13 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goal 3: Buy Great Funds at the Right Time

14 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Rolling Data Tells A Different Story At the end of 2008, NWQ was on a different path NWQ LCV MFS is in the top quartile, but is not always there Manager vs Lipper Large-Cap Value Funds: Return Rank January December 2008 (6-Quarter Moving Windows, Computed Quarterly) Return Rank 100% 75% Median 25% 0% Q2 1999Q4 1999Q4 2001Q4 2003Q4 2005Q4 2007Q MFS Value A 5th to 25th Percentile 25th Percentile to Median Median to 75th Percentile 75th to 95th Percentile Source: Zephyr Please see slide 15 for additional disclosures

15 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Two Good Funds Whose Paths Crossed TRADE DATE Manager vs Lipper Large-Cap Value Funds: Return Rank January March 2010 (6-Quarter Moving Windows, Computed Quarterly) Return Rank 100% 75% Median 25% 0% Q2 2006Q4 2006Q4 2007Q4 2008Q4 2009Q th to 25th Percentile 25th Percentile to Median Median to 75th Percentile 75th to 95th Percentile NWQ LCV MFS Value A Source: Zephyr Please see slide 15 for additional disclosures

16 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goals #4 Be Ready to implement the TAA View Adjusting Portfolio Risk Over Time

17 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goals #4 Be Ready to implement the TAA View “Lets Lower Beta” – LPL TAA team “Lets Lower Beta” – LPL TAA team - There are endless pieces that can be used here! Long/Shor t Absolute Return Managed Futures Global Macro High Quality Bonds Balanced Funds

18 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH “Lets Lower Beta” – LPL TAA team Each Category has sub-categories! Multi-Strat Funds Absolute Return Long/Short Merger- Arb Convertible Arb Strat - Arb

19 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH AQR Diversified Arbitrage Fund (ADAIX) 2010 Down Month Returns (Russell 3000) Multi-Statistic: January December Beta vs. MarketCorrelation vs. Market AQR Diversified Arbitrage Fund Russell 3000 Multi-Statistic: January December R-Squared vs. Market AQR Diversified Arbitrage Fund Russell 3000

20 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Goal 5 - Limit Mistakes Through Our Sell Discipline Hypothetical Illustration: For Informational Purposes Only

21 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Thornburg Value: Sell Discipline Process Review Sell Discipline Issue  Flagged for underperformance versus its benchmark and its peers. Decision  Maintain Recommendation During a Period of Underperformance: Key Sell Discipline Questions  What was driving underperformance?  Had anything changed within the strategy or the firm?  Will the strategy rebound?  What key factors would drive outperformance?

22 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Performance Profile Has Continued to Improve Manager vs. Morningstar Large Blend: Return December December 2010 (not annualized if less than 1 year) Return months6 months1 year Thornburg Value Fund; Institutional S&P 500 5th to 25th Percentile 25th Percentile to Median Median to 75th Percentile 75th to 95th Percentile

23 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Driving Results Through a Disciplined, Rigorous Process Traditional Due Diligence Timing the Buy and the Sell Implementing the Spirit of the Trade Implementing a Sell Discipline Be Vigilant

24 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Implementation – Mutual Fund Profiles

25 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Implementation – Mutual Fund Factsheets

26 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH Performance Review – Daily Performance Report

27 LPL Financial Member FINRA/SIPC LPL FINANCIAL RESEARCH = A ccurate S wift K nowledgeable Still Have Questions?