Giving You The Best Opportunity For Success

Applying Scientific Research to the Real World of Investing

Agenda

Review of common investment challenges and approaches

– Randomness of returns

– Picking winning stocks

– Timing the market

– Picking active managers

– The Cost of Indexing

Our investment approach

– Strategic partnership with institutional investment managers

– Academically sound portfolio construction

– Keeping costs low

– Honorvise portfolios

2

The Randomness of Returns

US Large Cap is the S&P 500 Index. US Large Value is the Fama/French Large Value Index (ex utilities). US Small Cap is the CRSP 9-10 Index. US Small Cap Value is the Fama/French Small Value Index (ex utilities). US Real Estate is the

Dow Jones Wilshire REIT Index. International Large Value is the Fama/French International Value Index. International Small Cap and International Small Cap Value compiled by Dimensional from Style Research securities data; includes

securities of MSCI EAFE countries in the 10%-1% of ME range; market-capitalization weighted; each country capped at 50%; value defined as the top 30% of book-to-market; rebalanced semi-annually. Emerging Markets is the MSCI

Emerging Markets Index (gross dividends). One-Year Fixed is the Merrill Lynch One-Year US Treasury Note Index. Five-Year Government Fixed is the Lehman Brothers Treasury Bond Index 1-5 Years. Five-Year Global Fixed is the Citigroup

World Government Bond Index 1-5 Years.

The S&P data are provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of Russell data. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

Fama/French data provided by Fama/French. Dow Jones Wilshire data provided by Dow Jones Indexes. See MSCI disclosure page for additional information. Lehman Brothers data provided by Lehman Brothers, Inc. The Merrill Lynch

indices are used with permission; copyright 2007 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Cit igroup bond indices copyright 2007 by Citigroup.

Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

Picking Individual Securities

“Here’s a buy-and-forget portfolio to

capitalize on the

10 Stocks To Last The Decade.”

Return on whole portfolio through August 18, 2008?

(34.72)%

$1,000,000 to $652,800

1. Broadcom

2. Charles Schwab

3. Enron

4. Genentech

5. Morgan Stanley

6. Nokia

7. Nortel Network

8. Oracle

9. Univision

10.Viacom

Returns as of 8/18/2008

(81%)

(33%)

Oops!

152%

(40%)

(33%)

(99%)

(38%)

(26%)

Kind of hard to explain…

4

Source: Motley Fool Stock Advisor: “10 Stocks to Last the Decade, Revisited”, By Bill Barker, August 19, 2008

Selecting Mutual Funds

“All the time and effort that people devote

to picking the right fund, the hot hand, the

great manager, have in most cases led to

no advantage.”

- Peter Lynch, Beating the Street (New York, Simon

And Shuster, 1993) 60

The Difficulty With Fund

Selection

“Unless you are lucky, or extremely skillful in the selection of managers, you’re going to have a much better experience going with the index fund…”

Bill Miller, manager of the Legg Mason Value Trust Fund,

Money Magazine Interview, July 2007

Average Annual Total Returns

(%)

Quarter End as of June 30, 2008

3MO 1YR 3YR 5YR 10YR INCEP

Legg Mason Value Trust -11.07 -36.41 -8.62 -0.40 2.18 13.29

6

The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower

than the performance shown. Principal value and investment returns will fluctuate, and investors' shares, when redeemed, may be worth more or less than

the original cost. Source: http://www.leggmason.com/individualinvestors/products/mutual-funds/performance/LMVT.aspx

Trying to Time the Market

The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually

updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indices are not available for direct investment. Their performance does not reflect the expenses associated with the

management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that

an investor may lose money.

Performance of the S&P 500 Index

January 1970-December 2006

7

$51,299

$47,021

$38,105

$23,970

$16,232

$8,613

Growth of

$1,000

Total

Period

11.23%

Annualized

Compound Return

Missed 1

Best Day

10.97%

Missed 5

Best Days

10.34%

Missed 15

Best Days

Missed 25

Best Days

7.82%8.97%

One-Month

T-Bills

5.99%

Separately Managed Accounts

Advantages:

Tax Efficiency

Customization

Manager Selection

Disadvantages:

The fees are high

No advantage to choosing portfolio managers vs. mutual funds

No compelling tax management advantages vs. low cost highly tax efficient ETF’s or passively managed portfolios

Higher minimum account size making diversification difficult

Source: Seeking Alpha: Stock Opinion and Analysis, July 2006

8

Hedge Funds

Features:

May be aggressively managed

Can be riskier due to concentration of investments

Open to Accredited Investors only

Not required to register with the SEC

Hard to value

High fees

Since mid-2007, 67 distinct funds from 37 major hedge fund providers have

“imploded*”.

Source: Hedge Fund Implode-O-Meter, http:// hf-implode.com

* The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.

Are Index Funds the Answer?

“Most investors, both institutional and

individual, will find that the best way to own

common stocks is through an index fund that

charges minimal fees.”

Warren Buffet, Berkshire Hathaway, Inc. 1996 Annual

Report chairman’s letter in www.berkshirehathaway.com

The Effect of Index Reconstitution on Stock Prices

S&P 500 data source: Anthony Lynch and Richard Mendenhall, “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,” Journal of Business 70, no. 3 (July 1997): 351-83. MSCI

EAFE Index data source: Rajesh Chakrabarti, Wei Huang, Narayanan Jayaraman, and Jinsoo Lee, “Price and Volume Effects of Changes in MSCI Indices: Nature and Causes,” Journal of Banking and Finance

29, no. 5 (May 2005): 1237-64.

For illustrative purposes only. Past performance is not a guarantee of future results.

S1740.2

S&P 500 Index

MSCI EAFE

Index

One-Day Return after

Announcement (%)

3.2 3.4

Run-Up to Effective Date (%) 3.8 4.5

Decay after Effective Date (%) -2.1 -2.6

Announcement Effective

Price

Time

• Stocks rise on

announcement of inclusion.

• Index funds are forced to buy

high on effective date.

• Buying and selling to track

index changes reduces

tracking error but generates

transaction costs.

Volume of Additions Around Effective Date

Source: Dimensional Fund Advisors

12

Market Cap Weighted Relative to S&P 500 Index

1996-2003

Agenda

Review of common investment challenges and approaches

– Randomness of returns

– Picking winning stocks

– Timing the market

– Picking active managers

– The Cost of Indexing

Our Investment approach

– Strategic partnership with institutional investment managers

– Academically sound portfolio construction

– Keeping costs low

– HonorVise™ portfolios 13

Investor Needs

Diversify Portfolio

Reduce expenses

Minimize Taxes (and turnover).

Stay Disciplined (long term horizon)

Risk and return are related

14

Strategic Partnership

Dimensional Fund Advisors (DFA)

The mission of Dimensional Fund Advisors is to deliver the performance of capital markets

and increase returns through state-of-the-art portfolio design and trading.

– Founded in 1981

– $152 Billion in AUM (as of December, 2007)

– Investment Pioneers

• Rex Sinquefield – Co-founder of DFA, credited with inventing index investing

• David G. Booth – Co-founder of DFA, pioneer of indexing and small cap investing

• Eugene F. Fama – Efficient Markets Hypothesis, Multifactor Asset Pricing Model and Value

Effect

• Kenneth R. French – Capital Markets Research, Multifactor Asset Pricing Model and Value

Effect

15

Structured Management

Active Management Index Management

Attempts to beat the market through

security selection and market timing

Undermines asset class exposure to only

buy “underpriced” securities

Generates higher fees, trading costs, and

tax consequences due to increased turnover

Targets index returns

Delivers asset class returns minus indexing

costs

Accepts high transaction costs and turnover

in favor of tracking

Structured Asset Class Investing

Combines qualities of active and passive investing

Grounded in the theory of the efficiency of capital markets

Captures specific dimensions of risk identified by academic research

Seeks to minimize transaction costs and enhance returns through trading

and engineering

16

A Partial List of DFA’s Institutional Clients

17

Progress through Scientific Principles

The Maturity Risk/Return Tradeoff

Source: One-Month US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provided by Ibbotson Associates. Six-Month US Treasury Bills provided by CRSP

(1964-1977) and Merrill Lynch (1978-present). One-Year US Treasury Notes provided by CRSP (1964-May 1991) and Merrill Lynch (June 1991-present). Ibbotson data © Stocks, Bonds, Bills, and Inflation

Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). CRSP data provided by the Center for Research in Security Prices, University of Chicago. The

Merrill Lynch Indices are used with permission; copyright 2008 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved.

Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio.

Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income

securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns.

S1270.4

• Not all investors define risk as

standard deviation. Some

investors may seek to hedge

long-term liabilities using long-

term bonds.

• Historically, longer-maturity

instruments have higher

standard deviations and have

not provided consistently

greater returns.

10.846.182.331.711.32Annualized Standard Deviation (%)

7.497.386.716.535.78Annualized Compound Return (%)

Twenty-Year US

Govt. Bonds

Five-Year US

Treasury Notes

One-Year US

Treasury Notes

Six-Month US

Treasury Bills

One-Month US

Treasury BillsMaturity

0

2

4

6

8

10

12

Annualized

Compound Returns

Annualized

Standard Deviation

Quarterly: 1964-2007

• Equity Market

(Complete Value-weighted universe of stocks)

Stocks have higher expected returns than

fixed income.

• Company Size

(Measured by market capitalization)

Small company stocks have higher expected

returns than large company stocks.

• Company Price

(Measured by ratio of company book value to market equity)

Lower-priced “Value” stocks have higher expected returns than

higher-priced “growth” stocks

Multifactor Analysis

The Dimensions of Stock Returns

Three Dimensions Around the World

Growth(Low BtM)

Value(High BtM)

Large

Small

Total

Stock

Market

The Risks Worth Taking - Equities

20

S1220.2

Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of

future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Small company risk: Securities of small firms are often

less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Emerging markets risk: Numerous emerging countries have experienced serious,

and potentially continuing, economic and political problems. Stock markets in many emerging countries are relatively small, expensive, and risky. Foreigners are often limited in their ability to invest

in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Foreign securities and currencies risk: Foreign securities prices may decline or fluctuate

because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk

(the possibility that foreign currency will fluctuate in value against the US dollar).

In US dollars. Developed markets value and growth index data provided by Fama/French, ex utilities. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by

the Center for Research in Security Prices, University of Chicago. International Small Index data: 1970-June 1981, 50% UK small cap stocks provided by the London Business School and 50%

Japan small cap stocks provided by Nomura Securities; July 1981-present, compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE Index countries, market-

capitalization weighted, each country capped at 50%; rebalanced semiannually. MSCI data copyright MSCI 2008, all rights reserved; see MSCI disclosure page for additional information. Emerging

markets index data compiled by Fama/French from countries in the IFC Investable Universe; indices are free-float weighted both within each country and across all countries. Standard deviation is a

statistical measure of risk. Generally speaking, the higher the standard deviation, the greater the risk.

Annual Index Data

Size and Value Effects Around the World

Risk Factors Have Periods of

Under- and Over- Performance

• From year to year, stocks with

high book-to-market ratios and

smaller market caps do not

always produce higher returns.

• Over longer time periods, the

size and value premiums are

more prevalent.

S1240.3

Multifactor data provided by Fama/French. SmB and HmL research factors.

Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are

often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and

issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

US Value Premium

US Size Premium

Annual: 1927-2007

A Structured Approach to

Asset Allocation

Portfolio 1 Portfolio 2 Portfolio 3

Lehman Government / Credit Bond Index 40%

S&P 500 Index 60% 30% 7.50%

One-Year US Treasury Note Index 40% 40%

CRSP 9-10 Index 30% 7.50%

Fama/French US Small Value Index 7.50%

Fama/French US Large Value Index 7.50%

Fama/French International Value Index 15%

Dimensional International Small Cap Index 15%

Total 100% 100% 100%

Annualized Portfolio Return 10.31 11.00 12.24

Annualized Standard Deviation 10.94 12.51 10.87

23

Quarterly Data: 1973 – 2006

For illustrative purposes only. Lehman data provided by Lehman Brothers, Inc. The S&P Data are provided by Standard & Poors Index Services Group. One-Year Treasury Note index provided by Merrill

Lynch. CRSP 9-10 Index data provided for the Center for Research in Security Prices, University of Chicago. Fama/French data provided by Fama/French. International Value data provided by

Fama/French (January 1975 – January 2004) and MSCI EAFE index (net dividends) (January 1973 – December 1974), data copyrighted MSCI, 2006. All rights reserved. International Small Cap Index,

June 1970 – June 1981. 50% UK Small Cap stocks and 50% Japan Small Cap stocks (1981 – present). Simulated by Dimensional from StyleResearch securities data, includes securities of MSCI EAFE

countries, market capitalization weighted, each country capped at 50%. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of

an actual portfolio.

Dimensional Has Relatively Low Expenses

24

The Value of Low Fees

$4,983,951

$3,745,318

$2,806,794

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

1 Year 3 Years 5 Years 10 Years 20 Years 30 Years

Time

1% Fee

2% Fee

3% FeeD

oll

ars

Assumed 6.5% Annualized Return over 30 Years

• Fees Matter.

• Over long time periods, high

management fees and related expenses

can be a significant drag on wealth

creation.

• Passive investments generally

maintain lower fees than the average

actively managed investment by

minimizing trading costs and

eliminating the costs of researching

stocks.

25

The Results – Positive Alpha

Source: Which Fund Families Have the Best Managers? Ranked by Their 3 Year Alpha. Reprinted with permission from the January/February issue

Broker/Dealer Journal TM

The Results – Positive Alpha

The Impact of Volatility

Year 1

Return

Year 2

Return

Average

Return

Compound

Return

Value at End

of Year 2

Portfolio #1 50% -50% 0%

Portfolio #2 10% -10% 0%

Impact on a Hypothetical $100,000 Portfolio

For illustrative purposes only.

S1010.2

-13.4%

-0.5%

$75,000

$99,000