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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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Larry MannixChief Investment Officer
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Kurt WoetzelBNY Mellon
Head of Global Operations, Technology and Collateral Services
William KellyDeputy Business Head
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Nancy SullivanGlobal Head of
Fixed Income Lending
Robert ChiuchGlobal Head of Equity Trading
Jeannine LehmanSecurities Lending Business Executive
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Michael McAuleyGlobal Head of Product Strategy
David DiNardoChief Operating Officer
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Robert PiersonStrategic Investments
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Steve Russo
Charles FelixManager
Term Strategy
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James McGovernBrian Wiese
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Simon Toon1
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James Douglas1
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BNY Mellon Securities Lending
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Thomas GamelloSenior Credit Manager
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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
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George MalangaEnterprise-wide
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Mark Rogers Global Financial Services (Borrower Underwriting)
Mark MusiBNY Mellon
Chief Compliance & Ethics Officer
Scott ShawBroker Dealers,
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TBDInvestment Management
Global Head of Risk & Compliance
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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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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
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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
Number of investments ranked
Peer Group Median -5.18
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
Number of investments ranked
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
Number of investments ranked
Peer Group Median 6.45
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
Number of investments ranked
Peer Group Median 1.19
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
Number of investments ranked
Peer Group Median 2.04
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
Number of investments ranked
Peer Group Median 1.11
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
Number of investments ranked
Peer Group Median 0.21
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
Number of investments ranked
Peer Group Median 1.07
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
Number of investments ranked
Peer Group Median 2.05
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
Number of investments ranked
Peer Group Median -0.87
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
Number of investments ranked
Peer Group Median 7.22
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
Number of investments ranked
Peer Group Median -2.51
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
Number of investments ranked
Peer Group Median 3.55
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
Number of investments ranked
Peer Group Median 0.41
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
Quarterly Statement as of
September 30, 2012
Quarterly Statement as of
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
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'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
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'sDescription
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
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'sDescription
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
3 months YTD 1 year 3 years 5 years 10 years
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
3 months YTD 1 year 3 years 5 years 10 years
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.
Plan fiduciaries should review the educational material provided and consult with their investment advisers if necessary to make investment decisions. N ith AAG t it t ti t ffili t itt d t i l l ERISA t d i A di i f th tt i l d dNeither AAG, not its representatives, agents, or affiliates are permitted to give legal, ERISA, or tax advice. Any discussion of these matters included or related to this document or other educational information is provided for informational purposes only. Such discussion does not purport to be complete or to cover every situation. Current tax and ERISA law are subject to interpretation and legislative change. The appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. You should consult with and rely on your own legal and tax advisers.
MSCI EAFE® Index is a trademark of Morgan Stanley Capital International. Inc. and is an unmanaged index considered indicative of the International equity market. S&P 500® Index is a trademark of the Standard & Poor’s Financial Services, LLC and is an unmanaged index considered indicative of the domestic gLarge-Cap equity market. Russell 2000® Index is a trademark of the Frank Russell Company and is an unmanaged index considered indicative of the domestic Small-Cap equity market. Russell 1000® Index is a trademark of the Frank Russell Company and is an unmanaged index considered indicative of the domestic Large-Cap equity market. Russell Midcap® Index is a trademark of the Frank Russell Company and is an unmanaged index considered indicative of the domestic mid-cap equity market. Barclays Capital is a trademark of Barclays Capital, the investment banking division of Barclays Bank PLC.
Advised Assets Group, LLC is a federally registered investment adviser and wholly owned subsidiary of Great-West Life & Annuity Insurance Company and ffili t f G t W t Lif & A it I C f N Y k Whit Pl i N Y k M i f ti b f d tan affiliate of Great-West Life & Annuity Insurance Company of New York, White Plains, New York More information can be found at
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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
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Date Set Email Recurring
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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
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
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
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
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
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
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
nual
ized
Rat
e o
f Re
turn
(%)
4.00
3.00
2.00
1.00
0.00
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
Ann
ualiz
ed R
ate
of R
etur
n (%
)
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
Return Std Dev Beta Alpha R-Squared Composite 10.61 10.78 0.98 0.86 99.24 Policy Index 9.90 10.98 1.00 0.00 100.00 3 Mth T-Bill 0.09 0.02 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
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
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
Risk versus Reward AnalysisSeptember 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.The comparative benchmark used in this analysis is the Policy Index.
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
Return Std Dev Beta Alpha R-Squared Composite 5.28 11.32 0.86 1.27 98.18 Policy Index 4.31 13.02 1.00 0.00 100.00 3 Mth T-Bill 1.05 0.47 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
Risk versus Reward AnalysisDecember 31, 2006 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.
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
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.
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
Latest Quarter Year to Date
Beginning Mkt Value 89,441,412 80,868,846
Net Contributions -- --
Interest And Dividend Income 240,048 608,098
Net Capital Appreciation 4,728,909 12,933,425
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012Rainier
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.
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
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.
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
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.
PAGE15
Latest Quarter Year to Date
Beginning Mkt Value 90,169,723 83,231,476
Net Contributions -- --
Interest And Dividend Income 655,389 2,068,823
Net Capital Appreciation 3,784,155 9,308,968
Fees 81,006 234,574
Ending Mkt Value 94,609,267 94,609,267
Cash & Equivalents1.3%
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012Barrow Hanley
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.
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
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.
PAGE17
Up Market Performance
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
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
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
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.
PAGE18
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Alt Equity 0.00
Cash & Equivalents 1.37
Equity 98.61
International Equity 0.00
Asset Class Index Performance
N/A
Barclays Treas Bill 0.04
Russell 1000 Value 6.51
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 6.51
Portfolio Return 4.92
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added -1.58
Market Timing And Security SelectionJune 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.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.
PAGE19
Latest Quarter Year to Date
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
Cash & Equivalents0.5%
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
Change in Financial Position
Executive Summary as of September 30, 2012Fairpointe Capital
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.
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
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.
PAGE21
Up Market Performance
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
Down Market Performance
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
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.
PAGE22
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Alt Equity 0.00
Cash & Equivalents 1.94
Equity 98.06
International Equity 0.00
Asset Class Index Performance
N/A
Barclays Treas Bill 0.04
Russell 2000 5.25
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 5.59
Portfolio Return 5.86
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added 0.28
Market Timing And Security SelectionJune 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.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.
PAGE23
Latest Quarter Year to Date
Beginning Mkt Value 17,957,178 --
Net Contributions -- 18,832,685
Interest And Dividend Income 35,796 --
Net Capital Appreciation 719,027 --
Fees 38,277 38,277
Ending Mkt Value 18,712,001 18,712,001
Cash & Equivalents3.8%
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
Portfolio Performance Growth of a Dollar
Change in Financial Position
Executive Summary as of September 30, 2012William Blair
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.
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
Total Portfolio Peer Universe Comparison versus Small Cap Core Managers
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.
PAGE25
Up Market Performance
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
Down Market Performance
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
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.
PAGE26
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 4.26
Equity 95.74
Asset Class Index Performance
Barclays Treas Bill 0.04
Russell 2000 5.25
Total Portfolio and Benchmark Performance
Dynamic Index 5.02
Policy Index 5.35
Portfolio Return 4.19
Value Added By Manager
Market Timing -0.33
Security Selection -0.83
Total Value Added -1.15
Market Timing And Security SelectionJune 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.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.
PAGE27
Latest Quarter Year to Date
Beginning Mkt Value 17,713,752 --
Net Contributions -- 18,832,685
Interest And Dividend Income 137,803 --
Net Capital Appreciation 724,597 --
Fees 37,712 75,424
Ending Mkt Value 18,576,152 18,576,152
Cash & Equivalents0.9%
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
Portfolio Performance Growth of a Dollar
Change in Financial Position
Executive Summary as of September 30, 2012Vaughan Nelson
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.
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
Total Portfolio Peer Universe Comparison versus Small Cap Core Managers
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.
PAGE29
Up Market Performance
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
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
-32.0-34.0-36.0
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
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.
PAGE30
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Alt Equity 0.00
Cash & Equivalents 4.21
Equity 95.79
International Equity 0.00
Asset Class Index Performance
N/A
Barclays Treas Bill 0.04
Russell 2000 5.25
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 5.80
Portfolio Return 4.87
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added -0.93
Market Timing And Security SelectionJune 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.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.
PAGE31
Latest Quarter Year to Date
Beginning Mkt Value 58,139,234 55,248,200
Net Contributions -- --
Interest And Dividend Income 413,650 673,020
Net Capital Appreciation 2,004,172 4,635,836
Fees 110,176 216,725
Ending Mkt Value 60,557,056 60,557,056
Cash & Equivalents6.2%
Equity 93.8%
Quarter One Year Three Years Five Years Inception
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012Atlanta Capital
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.
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
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.
PAGE33
Up Market Performance
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
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
-34.0-36.0
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
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.
PAGE34
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 5.94
Equity 94.12
Asset Class Index Performance
Barclays Treas Bill 0.04
Russell 2000 5.25
Total Portfolio and Benchmark Performance
Dynamic Index 4.90
Policy Index 5.25
Portfolio Return 4.16
Value Added By Manager
Market Timing -0.36
Security Selection -0.74
Total Value Added -1.09
Market Timing And Security SelectionJune 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.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.
PAGE35
Latest Quarter Year to Date
Beginning Mkt Value 34,851,513 30,676,028
Net Contributions -- --
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%
Quarter One Year Three Years Five Years Inception
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012Invesco REIT
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.
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
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.
PAGE37
Up Market Performance
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
Down Market Performance
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
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.
PAGE38
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 0.04
Real Estate 99.94
Asset Class Index Performance
Barclays Treas Bill 0.04
NAREIT Equity 1.03
Total Portfolio and Benchmark Performance
Dynamic Index 0.04
Policy Index 1.03
Portfolio Return 1.01
Value Added By Manager
Market Timing -0.99
Security Selection 0.97
Total Value Added -0.02
Market Timing And Security SelectionJune 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.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.
PAGE39
Latest Quarter Year to Date
Beginning Mkt Value 93,335,117 88,576,725
Net Contributions -- --
Interest And Dividend Income 581,130 1,533,554
Net Capital Appreciation 6,663,652 10,469,620
Fees 174,987 538,058
Ending Mkt Value 100,579,899 100,579,899
Cash & Equivalents3.8%
Equity 96.2%
Quarter One Year Three Years Inception
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 20121607 Capital Partners
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.
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
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.
PAGE41
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 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
Down Market Performance
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
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.
PAGE42
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Alt Equity 0.00
Cash & Equivalents 3.90
Equity 63.97
International Equity 32.12
Asset Class Index Performance
N/A
Barclays Treas Bill 0.04
MSCI ACWI ex US Net 7.40
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 7.40
Portfolio Return 7.76
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added 0.36
Market Timing And Security SelectionJune 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.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.
PAGE43
Latest Quarter Year to Date
Beginning Mkt Value 183,428,385 264,529,888
Net Contributions -- (88,000,000)
Interest And Dividend Income 1,328,166 4,587,141
Net Capital Appreciation 2,451,300 6,090,822
Fees 120,604 545,194
Ending Mkt Value 187,207,851 187,207,851
Quarter One Year Three Years Inception
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012ING
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.
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
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.
PAGE45
Up Market Performance
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
Down Market Performance
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
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.
PAGE46
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Alt Equity 0.00
Cash & Equivalents -3.22
US Treasury Bills 0.00
Fixed Income 103.22
Equity 0.00
Asset Class Index Performance
N/A
Barclays Treas Bill 0.04
Barclays Aggregate 1.58
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 1.58
Portfolio Return 2.02
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added 0.43
Market Timing And Security SelectionJune 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.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.
PAGE47
Latest Quarter Year to Date
Beginning Mkt Value 102,026,652 --
Net Contributions -- 100,481,973
Interest And Dividend Income 650,194 --
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
Cash & Equivalents11.3%
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
Portfolio Performance Growth of a Dollar
Change in Financial Position
Executive Summary as of September 30, 2012Ryan Labs
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.
PAGE48
Up Market Performance
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
Down Market Performance
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
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.
PAGE49
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 11.95
Fixed Income 88.05
Equity 0.00
Asset Class Index Performance
Barclays Treas Bill 0.04
Barclays Aggregate 1.58
Total Portfolio and Benchmark Performance
Dynamic Index 1.40
Policy Index 1.58
Portfolio Return 2.55
Value Added By Manager
Market Timing -0.19
Security Selection 1.15
Total Value Added 0.96
Market Timing And Security SelectionJune 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.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.
PAGE50
Latest Quarter Year to Date
Beginning Mkt Value 17,733,019 2,486,658
Net Contributions -- 15,000,000
Interest And Dividend Income 205,934 567,407
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
Portfolio Performance Growth of a Dollar
Change in Financial Position
Executive Summary as of September 30, 2012Templeton Global Bond
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.
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
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.
PAGE52
Up Market Performance
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
Down Market Performance
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
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.
PAGE53
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 0.00
Fixed Income 100.00
Asset Class Index Performance
Barclays Treas Bill 0.04
CG World Gov't 2.99
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 2.99
Portfolio Return 5.40
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added 2.41
Market Timing And Security SelectionJune 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.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.
PAGE54
Latest Quarter Year to Date
Beginning Mkt Value 17,599,084 2,510,984
Net Contributions -- 15,000,000
Interest And Dividend Income 107,427 174,577
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
Portfolio Performance Growth of a Dollar
Change in Financial Position
Executive Summary as of September 30, 2012Dreyfus International
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.
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
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.
PAGE56
Up Market Performance
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
Down Market Performance
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
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.
PAGE57
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 0.00
Fixed Income 100.00
Asset Class Index Performance
Barclays Treas Bill 0.04
CG World Gov't 2.99
Total Portfolio and Benchmark Performance
Dynamic Index N/A
Policy Index 2.99
Portfolio Return 5.54
Value Added By Manager
Market Timing N/A
Security Selection N/A
Total Value Added 2.55
Market Timing And Security SelectionJune 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.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.
PAGE58
Latest Quarter Year to Date
Beginning Mkt Value 6,605,333 8,287,613
Net Contributions (1,544,725) (3,255,475)
Interest And Dividend Income 20,346 48,816
Net Capital Appreciation -- --
Fees -- --
Ending Mkt Value 5,080,954 5,080,954Cash & Equivalents
100.0%
Quarter One Year Three Years Five Years Inception
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
More ReturnLess Risk
More ReturnMore Risk
Less ReturnLess Risk
Less ReturnMore Risk
Asset Allocation
Portfolio Performance Risk vs Reward
Change in Financial Position
Executive Summary as of September 30, 2012Cash
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.
PAGE59
Up Market Performance
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
Down Market Performance
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
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.
PAGE60
Fund's Average Investment Exposure and Market Index Returns
Quarter
Asset Class
Cash & Equivalents 92.55
Asset Class Index Performance
Barclays Treas Bill 0.04
Total Portfolio and Benchmark Performance
Dynamic Index 0.04
Policy Index 0.02
Portfolio Return 0.26
Value Added By Manager
Market Timing 0.02
Security Selection 0.22
Total Value Added 0.23
Market Timing And Security SelectionJune 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.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.
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.
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
Investment Strategy Guide Fourth Quarter 2012 3
4 Investment Strategy Guide Fourth Quarter 2012
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)
Investment Strategy Guide Fourth Quarter 2012 5
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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.
“
“
6 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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)
Investment Strategy Guide Fourth Quarter 2012 7
• 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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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 %
8 Investment Strategy Guide Fourth Quarter 2012
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.
“
“
Investment Strategy Guide Fourth Quarter 2012 9
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
10 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 11
(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
12 Investment Strategy Guide Fourth Quarter 2012
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.
Investment Strategy Guide Fourth Quarter 2012 13
?
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
14 Investment Strategy Guide Fourth Quarter 2012
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
Investment Strategy Guide Fourth Quarter 2012 15
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
16 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 21 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 17
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
High Negative Inflation
Low Inflation Inflation
• 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
High Negative Inflation
Low Inflation Inflation
• 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
High Negative Inflation
Low Inflation Inflation
• 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
18 Investment Strategy Guide Fourth Quarter 2012
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
Investment Strategy Guide Fourth Quarter 2012 19
(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
Source: Thomson Datastream, UBS WMR as of 24 September 2012
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
Source: Bloomberg, UBS WMR as of 24 September 2012
Global CPI inflation rates, year-over-year in %
6
0
–2
–4
8
10
4
USAEurozone
UK ChinaJapan
2010200620021998
2
20 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR as of 24 September 2012
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 %)
Source: Bloomberg, UBS WMR as of 24 September 2012
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
Source: Thomson Datastream, UBS WMR as of 24 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 21
Financial Market Performance
Fig. 1: Asset Classes
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
Total return in USD and %
UK
Japan
Non-US Fixed Income
EMU
US Fixed Income
year-to-datequarter-to-date
2 64 8 100
Fig. 5: US Fixed Income
Source: BoAML, UBS WMR, as of 26 September 2012
Total return in USD and %
IG CorporatesHY Corporates
MortgagesPreferreds
EM SovereignsMunicipal bonds
TIPSAgencies
Treasuries
year-to-datequarter-to-date
8 10 126420 14
Fig. 2: International Equity
Source: Bloomberg, UBS WMR, as of 26 September 2012
Total return in USD and %
UK
Japan
Emerging Markets
Non-US Developed
EMU
US Equity
year-to-datequarter-to-date
10 12 148642–2 0 16
Fig. 4: US Equity
Source: Bloomberg, UBS WMR, as of 26 September 2012
Total return in USD and %
Mid Cap
Small Cap
REITs
Large Cap Growth
Large Cap
Large Cap Value
year-to-datequarter-to-date
1614121084 620 18
Fig. 6: Currencies
Source: Bloomberg, UBS WMR, as of 26 September 2012
Appreciation vs. USD in %
CAD
CHF
BRL
AUD
GBP
JPY
EUR
year-to-datequarter-to-date
–6 –2–4–8–10 6420
22 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 23
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,
Source: Bloomberg, UBS WMR, as of 24 September 2012
–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
24 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 25
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
Source: Bloomberg, UBS WMR, as of 24 September 2012
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
Source: Bloomberg, UBS WMR, as of 24 September 2012
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, %
26 Investment Strategy Guide Fourth Quarter 2012
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
Investment Strategy Guide Fourth Quarter 2012 27
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
Source: Bloomberg, UBS WMR, as of 26 September 2012
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
28 Investment Strategy Guide Fourth Quarter 2012
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
Source: UBS WMR, as of 25 September 2012
n– –– – – – + ++ +++
Consumer StaplesIndustrials
Cons DiscretionaryEnergy
Technology
FinancialsUtilities
MaterialsTelecom
Healthcare
Underweight Overweight
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
Investment Strategy Guide Fourth Quarter 2012 29
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
Source: Thomson Datastream, UBS WMR, as of 24 September 2012
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
Source: Thomson Datastream, UBS WMR, as of 24 September 2012
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
30 Investment Strategy Guide Fourth Quarter 2012
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
Investment Strategy Guide Fourth Quarter 2012 31
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
Source: UBS WMR, as of 25 September 2012
n– –– – – – + ++ +++
Mid-Cap
Large-Cap Growth
REITs
Small-Cap
Large-Cap Value
Underweight Overweight
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
32 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 21 September 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
3.0
3.5
4.0
4.5
1.0
0.5
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
Source: Thomson Datastream, UBS WMR, as of 25 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 33
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
34 Investment Strategy Guide Fourth Quarter 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Source: UBS WMR, as of 27 September 2012
Investment Strategy Guide Fourth Quarter 2012 35
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
36 Investment Strategy Guide Fourth Quarter 2012
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
Source: BofAML, UBS WMR, as of 25 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 37
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
Source: BofAML, UBS WMR, as of 25 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 38
US Fixed Income: Chartbook
Fig. 5: Municipal visible supply and yields
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Source: BofAML, UBS WMR, as of 25 September 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
Source: Bloomberg, UBS WMR, as of 25 September 2012
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
39 Investment Strategy Guide Fourth Quarter 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
Source: Bloomberg, UBS WMR, as of 24 September 2012
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
Source: Bloomberg, UBS WMR, as of 24 September 2012
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
Investment Strategy Guide Fourth Quarter 2012 40
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.
41 Investment Strategy Guide Fourth Quarter 2012
Investment Strategy Guide Fourth Quarter 2012 42
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
43 Investment Strategy Guide Fourth Quarter 2012
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.
Investment Strategy Guide Fourth Quarter 2012 44
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.
45 Investment Strategy Guide Fourth Quarter 2012
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
Investment Strategy Guide Fourth Quarter 2012 57
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
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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,
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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
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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
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Version as per October 2011.
© 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
Disclaimer
58 Investment Strategy Guide Fourth Quarter 2012
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
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
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
* 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.
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
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
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
* 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.
4
QUARTILE RANKING ANALYSIS
PSN LARGE CAP GROWTH
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
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
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
* 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.
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
More ReturnLess Risk
Less ReturnLess Risk
More ReturnMore Risk
Less ReturnMore Risk
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*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
* 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.
6
TOTAL RISK REWARD ANALYSIS
5 YEAR PERIOD ENDING SEPTEMBER 30, 2012
GROSS RETURNS
21 22 23 24 25 26STANDARD DEVIATION
1
2
3
4
5
6
RA
TE
OF
RE
TU
RN
Russell 1000 Growth
More ReturnLess Risk
Less ReturnLess Risk
More ReturnMore Risk
Less ReturnMore Risk
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*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
RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH
* 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.
7
TOTAL RISK REWARD ANALYSIS
7 YEAR PERIOD ENDING SEPTEMBER 30, 2012
17 18 19 20 21 22 23STANDARD DEVIATION
3
4
5
6
7
8
9
RA
TE
OF
RE
TU
RN
Russell 1000 Growth
More ReturnLess Risk
Less ReturnLess Risk
More ReturnMore Risk
Less ReturnMore Risk
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*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
RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH
* 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.
8
UPSIDE VS. DOWNSIDE MARKET CAPTURE ANALYSIS
3 YEAR PERIOD ENDING SEPTEMBER 30, 2012
-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.
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
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
RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH
* 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.
9
UPSIDE VS. DOWNSIDE MARKET CAPTURE ANALYSIS
5 YEAR PERIOD ENDING SEPTEMBER 30, 2012
-3 22 47 72 97 122DOWNSIDE CAPTURE RATIO
-24
1
26
51
76
101
126
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.
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
Up Mkt Capt Retrn Up Cap Ratio Dnside Cap Return Dnside Cap Ratio R-Squared39.00 97.03 -38.20 109.89 0.9847.91 119.20 -38.28 110.13 0.9342.05 104.62 -32.48 93.43 0.9640.19 100.00 -34.76 100.00 1.00
RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH
* 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.
10
UPSIDE VS. DOWNSIDE MARKET CAPTURE ANALYSIS
7 YEAR PERIOD ENDING SEPTEMBER 30, 2012
-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
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.
Rainier Invstmnt Growth+Columbia Mgmt Focused LgCapGr*TCW Group ConcentratedCore*Russell 1000 Growth
Up Mkt Capt Retrn Up Cap Ratio Dnside Cap Return Dnside Cap Ratio R-Squared33.58 107.73 -36.12 110.17 0.9738.82 124.53 -36.55 111.47 0.9230.33 97.30 -31.12 94.93 0.9331.17 100.00 -32.79 100.00 1.00
RISK BENCHMARK USED FOR THIS ANALYSIS: RUSSELL 1000 GROWTH
* 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.
11
MULTI-STATISTIC QUARTILE RANKING BAR
PSN LARGE CAP GROWTH
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
* 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.
12
MULTI-STATISTIC QUARTILE RANKING BAR
PSN LARGE CAP GROWTH
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
* 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.
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
RAINIER INVESTMENT MANAGEMENT, INC.LARGE CAP GROWTH EQUITY
© 2012 Informa Investment Solutions, Inc., www.informais.com
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
RAINIER INVESTMENT MANAGEMENT, INC.LARGE CAP GROWTH EQUITY
© 2012 Informa Investment Solutions, Inc., www.informais.com
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
© 2012 Informa Investment Solutions, Inc., www.informais.com
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
COLUMBIA MANAGEMENTCOLUMBIA FOCUSED LARGE CAP GROWTH
© 2012 Informa Investment Solutions, Inc., www.informais.com
Responsibility: Equity Portfolio ManagerProfessional Accreditation:Education Undergraduate: Brigham Young University,BSEducation Graduate: University of Notre Dame, MBAYear Entered Industry: 1998Phone: 203-352-4466email: todd.herget@columbiamanagement.comPrevious 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: rich.carter@columbiamanagement.comPrevious 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: michael.gnadinger@columbiamanagement.comPrevious Position: -Company: U.S. TrustTitle: Portfolio Assistant
FEES AND MINIMUM ACCOUNT:
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.
KEY INVESTMENT OFFICER:
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: tom.galvin@columbiamanagement.comPrevious Position: -Company: Credit Suisse First BostonTitle: CIO, Equity Strategist
Mr. Todd D. HergetCurrent Position: SVP, Portfolio Manager, 1998 -PRESENTCurrent Firm: Columbia Management
COLUMBIA MANAGEMENTCOLUMBIA FOCUSED LARGE CAP GROWTH
© 2012 Informa Investment Solutions, Inc., www.informais.com
MUTUAL FUND: Columbia Select Large Cap GrowthFund - Z sharesUMLGXexpense ratio net - 0.94%
COMMINGLED FUND: Columbia Trust FocusedLarge Cap Growth Fund
LAST MODIFIED ON: 6/15/2012
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
© 2012 Informa Investment Solutions, Inc., www.informais.com
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.
KEY INVESTMENT OFFICER:
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: craig.blum@tcw.comPrevious 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
© 2012 Informa Investment Solutions, Inc., www.informais.com
Company: FMAC Captial MarketsTitle: Analyst
FEES AND MINIMUM ACCOUNT:
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
LAST MODIFIED ON: 9/12/2012
Impo
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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.