Quarterly Market Review

Market reviewA strong fourth quarter rally in equities finished off a tumultuous year for investors in 2011. Volatility took center stage last year as the markets dealt with natural disasters, uprisings in the Middle East, a U.S. credit rating downgrade, continued political gridlock and the ongoing European debt crisis. Through it all, strategies that emphasized safety and simplicity (think blue chip stocks and index strategies) won out over aggressive and complex. As you’ll note from the box scores at the end of this report, the Dow finished the year with a respectable 8.3% total return including dividends, while the S&P 500 eked out a gain of 2.11% as investors gravitated toward the safety of large-cap stocks. The year for the S&P 500 was incredible from a statistical standpoint as it finished 2011 at a price of 1257.60 compared to 1257.64 at the end of 2010. Since 1928, the S&P 500’s total return in a given year has been between -5% and +5% only nine prior times, first in 1934 and most recently in 2005. The average return in the years following those nine previous flat years was 26.3%, but three years (1935, 1940 and 1982) had either a bear market or a severe correction in store before things improved. Just some food for thought.

The NASDAQ composite and Russell 2000 small cap indexes finished with small declines for the year which masked the underlying volatility they displayed. Consider that as of 9/30/11, these indexes were sporting losses of 8.95% and 17.02% respectively while showing gains of 4.83% and 7.94% as of 3/31/11! Foreign markets displayed the greatest declines as the volatility in 2011 (and so far this year) was truly defined by events in Europe. Germany, considered the strongest economic player in Europe, showed a market decline of 15%, France declined by 17% and the London markets were the best of the worst with a decline of only 5.6%. Emerging markets fared no better with the average fund in the Morningstar category declining by 19.86% for the year. Funds focused solely on China were the worst performers with an average loss of 24.95%.

Fixed income, most notably U.S. Treasuries, posted another solid year. The incredible market volatility inspired by events in Europe drove investors toward the safety of U.S. debt, despite the low yields offered by these securities. Clearly this was an instance where investors were more concerned with return of their capital as opposed to return on their capital. The biggest winner of the year (and one of the most despised asset classes to start 2011) was the 30-year Treasury bond with a total return of approximately 35%. 10-year Treasury notes also shined with a return of 17% last year. It’s important to keep this performance in mind when evaluating the results of

Fourth Quarter 2011Quarterly Market Review

Matthew H. McPhail, CFAChief Investment Officer

Sentinel Benefits & Financial Group | 55 Walkers Brook Drive, Suite 100 Reading, MA 01867 | 1-800-436-6689 | sentinelgroup.com

In This ReportMarket review 1Equity markets rebounded in Q4 with blue chips leading the way while U.S. Treasuries posted impressive gains for 2011.

Un-Hedged 2 Despite their allure to investors, hedge funds are not immune to market volatility as their returns last year demonstrated.

stock dividends 2 keek growing Corporate America continues to increase their dividend payouts to investors and this trend may have room to run.

rotH 401(k) Update 3We briefly review some recent findings from a survey regarding how plan sponsors are using the Roth 401(k) option.

oUr portfolio 3strategy & allocation oUtlookNo major changes as we begin 2012, but there are three big picture factors that investors should keep an eye on.

Market 4scoreboard

Source: WSJ Market Data Group, Thomson Rueters Datastream

bond fund managers in 2011. Most are benchmarked against peers and the Barclays Aggregate Bond Index, an index with a high percentage weighting in U.S. Treasury debt. So we had a situation last year where most managers were underweight in terms of Treasury holdings and therefore likely trailed this key index. We continue to believe that an underweight stance is appropriate looking out over the intermediate term, but fully realize that Treasuries will likely remain attractive until there are tangible signs of progress toward resolution of the debt problems in Europe.

Gold recorded its 11th consecutive annual gain as investors looked for other avenues for safety and diversification aside from fixed-income, but the ride was anything but steady. After spiking to over $1,900 per ounce in the summer, prices tumbled 20% from their September highs to close the year. While the disappointing finish to the year has increased the chatter about the end of the bull market in gold, nothing has really changed from a fundamental standpoint to alter the yellow metal’s role as a diversifier in a portfolio or as a safe haven in times of economic uncertainty.

Un-HedgedMutual fund investors weren’t alone in their struggles last year. Many of the largest and best known hedge fund managers posted double-digit losses as well. While the term “hedge fund” can have varying definitions, this type of investment vehicle is best known for its flexibility to invest in a variety of markets and to go long or short (betting on a rise or fall in a security) on their ideas. Considering this type of mandate, one would assume that these strategies were ideally suited for the volatility we witnessed in 2011. Unfortunately, this wasn’t the case. While there were exceptions, the average hedge fund fell 4.8%, according to research compiled by Hedge Fund Research (HFR) and Merrill Lynch analysts. Quite a humbling result for the $1.7 trillion hedge fund industry. To be fair though, this was only the third year the industry finished in the red since 1990, when HFR began computing industry-wide performance. Perhaps 2011 was just one of those years when the markets won and even the most talented investors lost. But industry criticism has been mounting in recent years. Hedge funds have historically marketed themselves as vehicles that could produce returns that wouldn’t mirror or be highly correlated with the stock markets. But research from Merrill Lynch shows that correlation between hedge fund performance and the S&P 500 hit historic highs last year, thus weakening the diversification argument for many hedge fund managers. Another criticism of the industry (and the same could be said for traditional mutual funds) is that there are simply too many players chasing too few opportunities. This can lead to a lack of differentiation among managers and watered down returns.

Finally, more and more investors are realizing that they’re paying hefty fees to hedge funds when they may have done better with less costly mutual funds. When you consider the higher fees, potential leverage, illiquidity and general lack of transparency from the manager, it’s easy to see why this industry is under the microscope from investors more today than ever before.

stock dividends keep growingOne strategy that we continue to promote for our clients is the inclusion of dividend paying stocks within their equity allocations. Fortunately for investors, dividend growth continued strongly in 2011 and we expect more good news in the coming year. According to a recent report in Barron’s, investors are clearly benefitting from the current strength in corporate profits and cash flow. Standard & Poors recently announced that dividend enrichments reached $50.2 billion last year; an 89% increase over the $26.5 billion figure in 2010. S&P also counted 1,953 positive payout actions – increases, extras or resumptions – in 2011, up 13% from the prior year. Only 101 of the approximately 7,000 publicly owned companies that report their payout activity to S&P cut or cancelled dividend payouts, down 30% from the prior year. Analysts at S&P predict another strong year of dividend growth in 2012 with payouts across the board rising by double-digits. For the long-term investor who wants the combination of stable growth with income, large-cap dividend paying stocks may make sense in this environment.

Adding to the attractiveness of stocks that can offer a growing stream of dividends is the demographics of the U.S. population. As the baby boomer generation is now just starting to hit their retirement years, a real thirst for current investment income is apparent. This is especially true in light of the record low yields currently available from fixed-income investments. Combining the current attractiveness of corporate balance sheets (and ability to pay increasing dividends) along with the growing demand from investors looking for income alternatives leads us to believe that this trend may just be getting started. According to a recent report from KKR, a back tested strategy that substantially outperformed the S&P 500 from 2004 – 2011 involved buying a basket of stocks with the following criteria (1) Current dividend yield between 2-5%, (2) year over year earnings growth between 5-15%, (3) rising trailing 12 month returns on equity over the past year, (4) forward P/E ratio below industry sector average and (5) rising dividends paid or rising share buybacks. While this approach may be difficult for most investors to replicate and manage on their own, there are mutual fund strategies that encompass these techniques. As an additional bonus, a portfolio of dividend-paying stocks has generally displayed less volatility

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than the overall market as well. With the current overall yield on the S&P 500 index only around 2%, there seems to be plenty of room for yields to increase going forward.

rotH 401(k) UpdatePLANSPONSOR Magazine recently announced the results of their 2011 Defined Contribution (DC) survey which included some updated thoughts from the marketplace related to the Roth 401(k) option. Overall, 37.4% of plans (from the micro market under $5 million in plan assets to the mega market plans with greater than $1 billion in assets) have adopted the Roth feature in their plans. While company adoption of the Roth feature continues to grow at a solid pace, the same cannot be said for adoption at the participant level. In fact, only 9% of employees who have this option available are utilizing it, according to research from Vanguard. Both plan sponsors and advisors in the survey agreed that when it comes to Roth, it’s clearly a lower priority. The overwhelming concern among all parties is how to get participants to increase their savings. All other issues, including Roth, are secondary. Any endeavor that may distract participants from the primary goal, such as additional education related to the differences between a Roth and traditional 401(k), is pushed to the back burner.

Further comments from advisors who meet with plan participants in a group setting often point to the confusion factor as a main impediment to expanded Roth adoption. Most cite the myriad of issues facing investors today including savings rates, diversification, retirement income planning and so on that tend to overwhelm participants before a tax planning discussion related to the Roth 401(k) can even begin. Overall, most advisors feel that the Roth 401(k) does offer value and that plan sponsors should have the option available, but understand that it will likely only be utilized by a select few participants. Over time this may change, but for the moment the Roth is relegated to the bottom of the plan sponsor priority list.

oUr portfolio strategy & oUtlookWe anticipate no major shifts within our portfolios to start the year. Our positions continue to emphasize high quality large-cap stocks within the U.S. and Foreign equity segments. Within the fixed-income segment, we continue to feel that diversity across broad sectors makes sense for the long-term, while realizing this strategy lagged in 2011. With U.S. Treasuries stealing the spotlight in 2011 as global havoc sent investors in search of maximum safety, other sectors of the bond market suffered. We continue to believe that non-Treasury debt offers a better risk reward over the next three to five years. Finally, we think every investor needs a segment of their long-term portfolio devoted to alternative strategies that offer diversification and lower overall volatility. Our favorite manager in this category not only beat the broad equity indexes in 2011, but did so with significantly less volatility. This included generating positive returns in the months of August and September, which witnessed major declines for equities.

Here are 3 big picture items we’re watching as the year gets underway:

1. The Europe Situation. 2011 was all about Europe and the debt crisis that captured the attention of markets around the world. To recap, many of the European countries own too much debt, have very little chance of achieving enough economic growth to stem the tide and they do not have their own currencies to inflate their way out of trouble (as the U.S. did following the 2008 meltdown). At this point, nothing has been solved in terms of long-term solutions, but our sense is that events are moving (ever so slowly) in the right direction due to two factors. First, the various leaders of these countries seem to finally have a sense of urgency in regard to the consequences of letting this situation get any further out of control. This is in contrast to last summer when the general feeling was that the debt problem was contained to Greece. It reminds us of how the mortgage crisis in the U.S. was supposed to be contained to just those sub-prime borrowers. We know how that turned out. Second, the European Central Bank (ECB), or the European equivalent of the Federal Reserve Bank, is now on board with the American model of bailouts and debt financing for the weaker European nations. The ECB is now printing money and injecting capital into the banking system to shore up the weakest players in order to avoid a “Lehman Brothers” type event from happening to a major financial institution. Continued marginal improvements out of Europe would certainly help investor sentiment.

2. The U.S. Economy. The situation at home remains uneasy. Expectations for GDP growth in 2012 are in the 2% range.

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2011

33.0%

41.1%

39.2%

38.4%

50.5%

37.4%

2010

15.7%

23.2%

21.8%

26.7%

34.7%

20.2%

Micro

Small

Mid

large

Mega

overall

2009

12.3%

18.0%

17.7%

21.2%

N/A

16.3%

2008

8.7%

11.7%

13.4%

15.7%

N/A

11.4%

Sponsors Reporting Offering a Roth Option in the DC Plan

Source: PLANSPONSOR’s 2011 DC Survey

Sentinel Benefi ts & Financial Group | 55 Walkers Brook Drive, Suite 100 Reading, MA 01867 | 1-800-436-6689 | sentinelgroup.com

S&P 500 TR: A market capitalization-weighted index of 500 widely held stocks often used as a proxy for the large-cap segment of stock market.

Russell 2000 TR: Consists of the smallest 2000 companies in the Russell 3000 Index, representing approximately 7% of the Russell 3000 total market capitalization often used as a proxy for the small-cap segment of the stock market.

Barcap Aggregate Bond TR: The Barclays Capital Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S.

MSCI EAFE NR USD: Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes that collectively represent many of the major markets of the world.

DJ US Industrials TR USD: Computed by summing the prices of the stocks of 30 U.S. companies and then dividing that total by an adjusted value--one which has been adjusted over the years to account for the eff ects of stock splits on the prices of the 30 companies.

NASDAQ: Measures the performance of all issues listed in the Nasdaq Stock Market and is often used as a proxy for the large-cap technology segment of the U.S. stock market.

DJ/UBS Commodity: The DJ-UBSCI is composed of futures contracts on physical commodities and is often used as a proxy for broad-based exposure to the commodity markets.

Disclosure: This information is intended solely to report on investment results, strategies and opportunities identifi ed by Sentinel Pension Advisors, Inc. Opinions and estimates off ered constitute our judgment and are subject to change without notice, as are statements of fi nancial market trends, which are based on current market conditions. This material is not intended as an off er or solicitation for the purchase or sale of any fi nancial instrument. References to specifi c securities are for illustrative purposes only and are not intended, and should not be, interpreted as recommendations to purchase or sell such securities. Past performance is not indicative of future results. Index information has been obtained from sources that we believe to be reliable; however, we do not guarantee the accuracy of such information. Investors cannot invest directly in an index.

Investment advisory services provided by Sentinel Pension Advisors, Inc., an SEC-registered investment adviser. Securities off ered through Sentinel Securities, Inc. Member FINRA & SIPC. Sentinel Pension Advisors, Inc. and Sentinel Securities, Inc. are affi liated companies. Sentinel Benefi ts & Financial Group is the brand name for the Sentinel family of companies, which includes Sentinel Pension Advisors, Inc. and Sentinel Securities, Inc.

Date of First Use: 1.17.12 | QMR-101-01162012

Q4 2011

11.82

12.78

8.19

15.47

3.38

1.12

0.35

ytd

2.11

8.38

-0.83

-4.18

-11.73

7.84

-13.32

1 year

2.11

8.38

-0.83

-4.18

-11.73

7.84

-13.32

3 year

14.11

14.89

19.37

15.63

8.16

6.77

6.39

5 year

-0.25

2.37

2.43

0.15

-4.26

6.50

-2.07

index returns 12/31/11

s&p 500

dJia

nasdaQ

russell 2000

Msci eafe int’l index

barclays aggregate bond

dJ-Ubs commodity

Source: Morningstar

This isn’t terribly exciting, but the bar is certainly lower in comparison to expectations one year ago. Fears of a near-term fall back into recession have receded. Employment has shown recent signs of improvement, but while job gains are a positive factor, continued improvement is needed. As we’ve mentioned before, corporate earnings and profi ts are in excellent shape, but the growth rate in earnings is slowing. Based on analysts earnings estimates for the recently completed quarter, earnings are expected to rise year over year by 7.1%, which is well below the expectations of 15% growth when the fourth quarter began. In addition, the ratio comparing companies that have lowered their earnings guidance vs. those that have increased guidance is up to 3.5 times. This is the highest reading for this ratio since Q4 of 2008. So despite the seemingly low valuations for stocks, a contraction in earnings growth will not likely be received well by the market. We’ll be observing the earnings results and outlooks closely to start the year.

3. China. One of the main factors that got the global recovery underway in 2009 was China’s massive fi scal stimulus program. Global growth ignited and risk assets staged a major turnaround. Unfortunately, the bill for this stimulus has recently been coming due in the form of higher infl ation. As a result, the Chinese authorities have had to raise interest rates and the economy which was once growing at a double-digit pace has slowed to where expectations for GDP growth for this year are in the 7% range. In addition to slowing growth, worries have intensifi ed over the housing market and the quality of many bank loans issued in the past few years. The Chinese market was one of the worst performing in the world last year. Due to its incredible appetite for commodities and other world goods, a prolonged slowdown in Chinese growth

will have major ripple effects on world growth. The good news is that the rate of infl ation in China seems to have peaked a few months back and the pressure on the government to keep raising interest rates has lessened considerably. But should the banking or housing markets in China continue to display poor results, we’d expect world markets to react negatively.

Please let us know if you’d like do discuss your personal investing goals.

Matthew H. McPhail, CFA Chief Investment Offi cer

Market scoreboard

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