× Market Overview, U.S.

× Market Performance, International

× Economy

× Interest Rates and Inflation

About the Morningstar Markets Observer

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Table of Contents

Market Overview, U.S.

Market Dashboard

All fixed-income indexes posted especially strong returns considering the current low-yield environment, because of falling interest rates and narrowing credit spreads. After many years of underperformance, value stocks reasserted themselves in the first quarter, outperforming growth. A year ago, small stocks looked overvalued, but after a 9.8% drop (versus a 1.8% gain for large stocks), they are now closer to fairly valued territory.

As of 03/31/16. Source: Morningstar Direct. U.S. Aggregate—Barclays U.S. Aggregate Bond Total Return, U.S. Corporates—Barclays U.S. Corporate 5-10 Year Total Return, High Yield—Bank of America Merrill Lynch U.S. High Yield Master II Total Return, Municipals—Barclays Municipal Total Return, Fixed-Income Emerging Markets—J.P. Morgan EMBI Global Diversified Total Return, Gold—London Fix Gold PM Price Return.

U.S. Market Downturns, Recoveries, and Expansions

There have been eight market downturns since 1926, the most severe one being, without a doubt, the Great Depression. More recently,during the “lost decade,” two consecutive downturns with little to no expansion discouraged U.S. investors. However, the market returned59.3% since the expansion started in March 2012, and, as the chart illustrates, there is ample potential for future growth.

As of 03/31/2016. Stocks—Ibbotson Associates SBBI U.S. Large Stock Index.

Trailing 12-Month Performance of Major Asset ClassesU.S. stocks took investors on a roller coaster ride in the first quarter, with an 11% drop through Feb. 11 (the same day that oil price bottomed) and a complete recovery by March 31. U.S. stock-market volatility spread to all the other asset classes except bonds, which maintained a smooth, slow upward trajectory and ended up posting the best trailing 12-month return.

Source: U.S. stocks—Morningstar U.S. Market Index. Developed-markets stocks—Morningstar Developed Markets ex-U.S. Index. Emerging-markets stocks—Morningstar Emerging Markets Index. U.S. bonds—Morningstar Core Bond Index. Commodities—Morningstar Long-Only Commodity Index. As of 03/31/2016.

U.S. Sector PerformanceWhen higher interest rates didn’t materialize during the first quarter, investors turned to where they could find higher yields: to sectors such as utilities, communication services, and real estate. Utilities returned an unusually high 15.1%. Energy experienced a small recovery quarter from its massive one-year underperformance. Financial services struggled as large firms have to deal with higher capital requirements and new regulations, meaning lower profits.

As of 03/31/2016. Source: Morningstar Sector Indexes.

Current Valuations Hinder Return Environment in Intermediate TermOur research indicates international equities will outperform U.S. equities over the next 10 years. We believe multiple contractions will significantly dampen return potential among U.S. equities and less so among non-U.S. stocks. In fixed income, a first-quarter decrease in interest rates comes on the back of slower expected interest-rate increases by the Federal Reserve, further hindering prospective returns.

“The Supply of Stock Returns: Adding Back Buybacks” by Roger Ibbotson and Philip Straehl.

http://corporate1.morningstar.com/ResearchArticle.aspx?documentId=737061) © 2016 Morningstar Investment Management LLC. All Rights Reserved.

Morningstar Investment Management LLC is a registered investment advisor and subsidiary of Morningstar, Inc.

Asset-Class Winners and LosersInternational-developed stocks and commodities were the only two categories to post negative returns so far this year. If this trend continues for the rest of 2016, commodities will end up with a negative annual return for the fourth consecutive year, which is very unusual (and damaging) for any asset class. After a weak 2015, high-yield bonds bounced back in the first quarter, as investors shrugged off credit concerns in favor of the extra yield.

Source: Small stocks—Morningstar Small Cap Index. Large stocks—Morningstar Large Cap Index. Int’l stocks—Morningstar Developed Mkts ex-U.S. Index. Emerging stocks—Morningstar Emerging Mkts Index. Interm. govt bonds—Morningstar Interm. U.S. Govt Bond Index. Interm. corp. bonds—Morningstar Interm. Corp. Bond Index. High-yield bonds—Barclays U.S. High Yield Corp. Bond Index. Commodities—Morningstar Long-Only Commodity Index. Moderate portfolio—Morningstar Moderate Target Risk Index. As of 03/31/2016.

Performance of Risk-Based PortfoliosAs expected, an aggressive portfolio with a larger allocation to stocks was able to deliver returns superior to its moderate and conservativecounterparts over longer periods, such as five and 10 years. However, because it also assumes a greater risk level, it suffers more-severelosses in down markets. In the last 12 months, for example, the aggressive portfolio lost 3.5%.

As of 03/31/2016. Source: Conservative portfolio—Morningstar Conservative Target Risk Index. Moderate portfolio—Morningstar Moderate Target Risk Index. Aggressive portfolio—Morningstar Aggressive Target Risk Index. Returns for periods longer than one year are annualized.

Morningstar Price to Fair Value Distribution, U.S. EquityThe distribution of price to fair value shows how the range of over- and undervaluation can vary significantly over time. U.S. equities have been trading below fair value since mid-2014. The market fell in January but recovered by the end of the quarter, pushing valuations a little higher (although it is still in undervalued territory).

As of 03/31/2016. Morningstar quantitative and analyst fair value data

Morningstar Price to Fair Value, U.S. Equity Style BoxesThe current market is slightly undervalued at negative 1.5% (compared with the previous quarter’s negative 4.1%). The most undervalued opportunities appear to be across all value and small categories in the size/style box and in high-uncertainty stocks in the moat/uncertainty box. Growth (driven by the technology and healthcare sectors) has outperformed value for the past several years, which makes beaten-down value stocks more attractive going forward.

As of 03/31/2016. Morningstar quantitative and analyst fair value data. Morningstar Style Boxes based on market-cap-weighted data.

Morningstar Price to Fair Value Distribution by U.S. SectorIn the first quarter, on a market-cap-weighted basis, financial services was the most undervalued and basic materials the most overvalued among U.S. equity sectors. Financial services is the only sector where the market-cap average is lower than the median. This happens because the market is undervaluing large banks like Citigroup and J.P. Morgan in light of newer regulations that require them to hold more capital, which limits their ability to take on risk.

As of 03/31/2016. Source: Morningstar quantitative and analyst fair value data.

Market Performance, International

International Stock Market PerformanceEmerging markets enjoyed a strong quarter in all regions except China. These economies are export-driven and highly dependent on oil and other commodities, as well as very sensitive to movements in developed-markets currencies. Oil prices stabilized and the U.S. dollar stopped appreciating, boosting emerging markets performance. Developed markets, on the other hand, didn’t fare quite as well, still hampered by sluggish economies and weak growth prospects.

As of 03/31/2016. Source: Morningstar Sector Indexes.

Global Market Barometer

In the past 12 months, there was a wide divergence in individual country performance across the world. Greece was the worst performer in light of its continuing economic troubles, while Russia managed to post double-digit gains despite experiencing problems of its own. Since the U.S. dollar rose over the past year, all these local-currency returns would be even lower when translated into U.S. dollars.

As of 03/31/2016. Source: Morningstar Country and Region Indexes.

Other Developed Country Central Banks Loosen, the U.S. Continues to TightenThe U.S. implemented quantitative easing earlier than most central banks coming out of the financial crisis, lowering the dollar and successfully boosting economic activity. Other countries were slower to move. Those later moves were more extensive (including negative rates) than in the U.S., but ultimately less successful in boosting economic activity. Those extensive programs have helped to limit more aggressive Fed actions.

As of 03/31/2016. Source: Federal Reserve, European Central Bank, and Bank of Japan.

G7 Unemployment Rates Continue to Decline, With the Exception of CanadaDriven by central banking easing around the world, combined with increasing baby boomer retirements, unemployment rates have continued to fall in many nations, with the exception of those dependent on commodities. Job quality and full utilization of employee talents remain issues in many regions. However, slowing population growth means that labor shortages and not unemployment is likely to be the key issue in the decade ahead.

As of 03/31/2016. Source: Eurostat, Japan Statistics Bureau, Statistics Canada, Bureau of Labor Statistics. © 2015 Morningstar. All Rights Reserved.

Morningstar Price to Fair Value by CountryEven though valuation is an important metric to consider, risk levels are also a crucial factor when investing internationally. For example, the United States and Brazil are similarly undervalued, but persistent problems in Brazil make it a much riskier investment when compared with the U.S. Egypt may appear as an attractive investment (undervalued by almost 10%), but risks in such an unstable economy may not be worth the trouble for some investors.

As of 03/31/2016. Source: Morningstar quantitative and analyst fair value data

Economy

Dollar Declines Again, Fed Slows Tightening, U.S. Inflation RisesA combination of potentially slower Fed rate actions in 2016, higher relative inflation, and a widening trade deficit have all put pressure on the U.S. dollar. That is in contrast to 2015 when the Fed was talking aggressively about more tightening, the ECB talked about easing, and the dollar soared. Showing the diminished effectiveness of new easing programs, the dollar has weakened against the yen in 2016, even as the Bank of Japan implemented negative rates.

As of 03/31/2016. Source: The Federal Reserve

U.S. Economy a One-Trick Pony, Only Consumer Sector Grew in Q4The consumer’s 68.7% share of the U.S. economy means consumption growth often dominates GDP growth rates, despite very low volatility. However, it is highly unusual to see the consumption segment be the only sector to grow, as was the case in Q4. Government, business investment, and net exports were all down. The prognosis is for a typically soft first quarter growth rate, though growth for the full year is likely to fall in the 2.0%-2.5% range of the last two years.

As of 03/31/2016. Source: Bureau of Economic Analysis, Morningstar Calculations. Percentage breakdowns might not add up to their totals due to rounding differences.

Employment Growth Likely to Remain Steady, but Unspectacular at 2%Despite its undeserved reputation as a lagging indicator, year-over-year employment growth has done a better job of projecting the trajectory of the U.S. economy than most other indicators. At the moment it appears that employment growth is being limited more by a lack of workers than a desire for businesses to hire more workers. Nevertheless, pockets of weakness in mining, manufacturing, and government are slowing overall employment growth rates.

As of 03/31/2016. Source: Bureau of Labor Statistics, Morningstar Calculations.

Higher Education Stills Pays in Terms of Unemployment RisksUnemployment rates have fallen drastically across all educational levels since the recession ended. Still, the near 8% unemployment level for those with less than a high school education remains about three times higher than those with a college degree. Unemployment rates for those with lower educational attainment have popped back up recently as more discouraged workers have re-entered the job market as prospects improve.

As of 03/31/2016. Source: Bureau of Labor Statistics, Morningstar Calculations.

Small Business Wage Pressures Continue

Source: National Federation of Independent Business

About 45% of small businesses report difficulty finding qualified applicants as the labor pool shrinks and the unemployment rate drifts lower. The inability to raise prices continues to pressure profits and keeps planned wage increases in check, compounding the labor shortage issue. Smaller businesses are seeing labor and cost issues now that could eventually spread to larger corporations as labor shortages worsen.

Consumption Growth, the Key Economic Driver, Slows ModestlyHigher inflation and weakness in the high-paying manufacturing and mining sectors are depressing wage and income growth in early 2016. Lower wage growth combined with a warm winter and a faulty seasonal factor have caused consumption to dip from year-ago levels when weather aided in year-over-year comparisons. However, rising wages and past consumer savings could limit further consumption growth deterioration.

Source: Bureau of Economic Analysis.

Key Categories, like Healthcare and Housing, Limit Consumption GrowthKey necessities (including the massive housing sector, clothing, and groceries) face large demographic headwinds, suppressing headline consumption data. Surprisingly, discretionary items like travel, recreational goods and services, and restaurant meals show healthy gains. Still, expansion of the large healthcare category continues to eat away at consumers’ ability to spend new earnings elsewhere, even in the face of falling gas prices.

Source: Bureau of Economic Analysis.

Housing Focus Shifts to Single-Family Market, Residential InvestmentsAs shortages of existing homes continue to build and new apartment units started in previous years are completed, builder and investor focus is likely to turn to the single-family market. Demographics and the slowly aging millennial cohort are likely to provide further impetus to this building trend. Given single-family home construction provides more employment and economic activity than apartments or existing homes, the shift should boost residential investment.

As of 03/31/2016. Source: Census Bureau, Morningstar Calculations. © 2015 Morningstar. All Rights Reserved.

Home Price Growth Continues to Accelerate Despite Forecasts of a SlowingA combination of falling mortgage rates, limited supply, and sustained employment growth have continued to propel home prices upward in 2016. Hope remains strong that price growth will remain elevated enough to encourage homebuilders and potential sellers without discouraging potential buyers. Price gains remain concentrated in areas with superior job growth. Among those areas, western states, which face geological growth limits, continue to do the best.

As of 03/31/2016. Source: Federal Housing Finance Agency

Consumer Debt Growing at Fraction of Pre-Recession Highs

Pre-recession consumer debt growth of more than 10% was dangerous and unsustainable. Furthermore, it disguised underlying weakness in consumer income and wage growth. Now, the pendulum appears to have swung in the other direction with total debt growth of 2.4% in fourth-quarter 2015 exactly matching GDP growth. Mortgages, which are larger than all other debt categories combined, are having a particularly depressive effect on loan growth.

As of 03/31/2016. Source: Federal Reserve Bank of New York.

Improving Manufacturing Sector Outlook Reduces World Recession FearsManufacturing activity, as measured by Markit, is improving after a rough 2015 for the Chinese and U.S indexes. A coordinated drop in the reports in early 2016 spooked investors into believing another recession was at hand. While other economic indicators are still a little soft, investors seem impressed that this forward-looking indicator is stronger. PMI data, combined with stabilizing oil prices and better employment data, halted the recent market slide.

As of 03/31/16. Source: Institute for Supply Management, The National Bureau of Economic Research. © 2014 Morningstar. All Rights Reserved.

Population Growth Rates Slow WorldwideWorld population growth has slowed from 1.7% in the 1950s to 1.2% currently with broad implications for economic growth and commodity usage. The trend will intensify over the next 30 years as falling fertility rates and rising baby boomer deaths further pressure the growth rate. U.S. population growth will likely remain near the top of the pack for the developed market at about 0.4%.

As of 03/31/2016. Source: United Nations

After a Disastrous 2015, Commodities StabilizeMost commodities, outside of oil, moved higher in the first quarter as oil prices stabilized mid-quarter and worries of another recession diminished throughout the quarter. News that China’s economy wasn’t in a free fall aided many commodities during the quarter. However, as China attempts to shift to a more consumer-oriented economy, demand for basic commodities, especially coal and metal ores, will continue to be depressed.

As of 03/31/2016. Source: Morningstar Direct. Data represented by Bloomberg Commodity Indexes.

U.S. Productivity May Rebound With Increased R&D SpendingRecent poor productivity performance has many economists and even the Federal Reserve worried. Higher wages without improved productivity can lead to inflation. While many factors underlie the recent productivity slump, the lagging effects of massive R&D cuts during the Great Recession didn’t help matters. Now with R&D spending on the mend and corporations focusing on innovation, the odds of increased productivity are improving.

Source: Bureau of Labor Statistics, Bureau of Economic Analysis.

World Growth Rates Remain Stalled, as Commodity Plunge Slows GrowthEven after a strong rebound in growth following the recession, current world growth rates of around 3% remain more than 60% below the 2004 peak of over 5%. Growth has slowed in both developed and developing markets, with commodity-related economies such as Brazil, Russia, Canada, and Australia being particularly hard hit. However, population juggernauts China and India, as well as other developing markets, still offer higher relative growth potential.

Source: International Monetary Fund

Private-Sector Debt Soars in China and JapanTotal Chinese debt, excluding financials, has accelerated since the Great Recession even as Chinese GDP growth has slowed from double digits to the 6%–7% range. Chinese debt levels as a percentage of GDP no longer look contained, and are approaching U.S. and European levels and showing no signs of slowing. Given long-term demographic issues, Japanese debt levels also appear to be problematic.

Source: The Bank for International Settlements.

China’s Per-Capita GDP Significantly Trails Developed MarketsChina’s economic growth over the past two decades and the absolute levels of GDP are now well over halfway toward levels of the U.S. and the Eurozone. Per-capita GDP growth has also been healthy. However, when accounting for a much larger population growth, Chinese per-capita GDP remains a small fraction of the levels prevalent in the U.S. and Europe.

Source: Conference Board Total Economy Database

Interest Rates And Inflation

As More Economies Search for Growth, Negative Rates More CommonYield curves can provide an insight into what the market is thinking about the future direction of yields. For example, in the United Kingdom and Japan, the one-month rate is higher than the one-year rate, which is unusual—a signal that the market thinks rates are going to decline even further in those countries. Japan and Germany are currently in negative-interest-rate territory because of their extensive quantitative easing programs designed to stimulate growth.

Source: Federal Reserve, Macrobond Financial AB, data current as of 4/6/2016.

World 10-Year Government-Bond YieldsThe United States currently has one of the highest 10-year yields among developed countries. The Federal Reserve recently raised U.S. rates, while Europe and Japan continue their quantitative-easing programs. Rates all over the world still remain very low, and the general consensus is that they won’t go up dramatically anytime soon. Such low (and even negative) rates hurt fixed-income investors and discourage saving.

Source: OECD, investing.com, Morningstar calculations.

Corporate Credit SpreadsHigh-yield spreads had a wild ride in the first quarter, rising all the way up to 8.9% in mid-February and then falling back down to 7.1%. This coincided exactly with the movement in oil prices, which rose from $26 on Feb. 11 to $37 on March 31. Many high-yield issuers are energy firms, hence the oil price link. Still, high-yield spreads are at the highest level since 2011. Unlike the volatile high-yield, the investment-grade categories have been relatively stable.

Source: Bank of America Merrill Lynch Corporate Spread Indexes from the Federal Reserve, Morningstar calculations.

Fed to Proceed ‘Cautiously’ With Rising Rates; Taylor Rule Says OtherwiseThe Taylor rule has never been followed exactly, but, as a guideline, it was pretty accurate directionally before the 2008 crisis. During the financial crisis, the Taylor rule suggested strongly negative rates, which was not feasible. Instead, the Fed employed quantitative easing as an alternative, and kept rates as low as possible. The Taylor rule suggested a 2% or higher rate starting in 2014, a trajectory highly divergent from what the Fed followed in the crisis’ aftermath.

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve, Congressional Budget Office, Macrobond Financial

Municipal Bonds’ Tax Advantages Outshine TreasuriesA tax-equivalent yield is the pretax yield a Treasury bond would need to offer in order to equal the yield on a similar municipal bond. This calculation depends on an investor’s tax rate and is more advantageous for people in higher tax brackets. However, even an investor with a $100,000 income would get a yield that’s 30% higher. There is a slightly higher risk with municipal bonds, but diversification should be able to minimize the damages of any one bankruptcy.

Source: 10-Year Municipal Bond Yield--Barclays Municipal 10 Yr 8-12 Yld USD. 10-Year Treasury Bond Yield--Federal Reserve

Core Inflation Increases, Total Inflation to Rise as Gas Price Declines Slow

Low energy prices will continue to depress headline inflation through early summer. Meanwhile, core inflation, especially services inflation, continues to move higher. Rent increases of close to 4% annually have been particularly problematic. As annual energy price declines diminish by year-end, headline inflation could easily exceed 2% by December.

As of 03/31/2016. Source: Bureau of Labor Statistics, The National Bureau of Economic Research, Morningstar Calculations

Fixed-Income Winners and LosersFalling rates in Europe and Japan have driven top performance for international developed bonds so far in 2016. However, considering that many of these bonds now have negative yields, further superior returns will prove difficult. Overall, returns for all fixed-income categories were positive in the first quarter, as rates fell and credit spreads narrowed.

As of 03/31/2016.. Source: Long-term govt—Morningstar LT U.S. Govt Bond Index. Intermediate-term govt—Morningstar IT U.S. Govt Bond Index. Long-term corporate—Morningstar LT Corporate Bond Index. Short-term—Morningstar Short-Term Core Bond Index. Municipal—Barclays Municipal Bond Index. International—Citigroup WGBI Non-USD 5+ Year Bond Index. Emerging-markets—JPM EMBI Global Bond Index. High-yield—Barclays U.S. Corp High Yield Bond Index. Bank loans—S&P/LSTA Leveraged Loan Index. Aggregate—Morningstar Core Bond Index.

Disclosure

All investments involve risk including loss of principal. Small-/mid-cap investments are more volatile. Alternative investment/strategies are speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. The risk is magnified in emerging markets. Fixed income investments are subject to interest rate and credit risks. Additionally, municipal securities may be subject to Alternative Minimum Tax (AMT).

Terms and Definitions: Bank of America Merrill Lynch U.S. High Yield Master II Total Return: Benchmark index for high-yield corporate bonds.

Barclays Corporate High-Yield Index: Measures the USD-denominated, high yield, fixed-rate corporate bond market.

Barclays EM Local Currency Broad Bond Index: The index measures the performance of the sovereign, local currency bond markets of emerging market countries.

Barclays Municipal Bond Index: A broad-based benchmark that measures the investment grade, US dollar-denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured, and pre-refunded bonds.

Barclays US Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS and CMBS.

Barclays US Corporate 5-10 Year Total Return: This Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 5 and 10 years.

Barclays US Corporate High Yield Bond Index: Measures returns of the high yield bond market. The Index includes issues rated BB and below by S&P/ Moody's.

Barclays U.S. Treasury 20+ Year Bond Index: Measures the performance of government bonds issued by the US Treasury, with maturities of more than 20 years.

Barclays U.S. Treasury 7-10 Year Bond Index: Measures the performance of government bonds issued by the US Treasury, with maturities between 7 and 10 years.

Bloomberg Commodity Index: Calculated on an excess return basis and reflects commodity futures price movements. It is made up of 22 exchange-traded futures on physical commodities in seven sectors and represents 20 commodities, weighted to account for economic significance and market liquidity.

Citigroup WGBI Non-USD 5+ Year Bond Index: Measures the performance of government bonds issued by governments outside the US, with maturities of over 5 yearsIbbotson Associates SBBI U.S. Large Stock: Stocks, bonds, bills, and inflation index for large-cap stocks.

Disclosure

J.P. Morgan EMBI Global Diversified Total Return: Limits the weights of those index countries with larger debt stocks by only including a specified portion of these countries eligible current face amounts of debt outstanding

J.P. Morgan EMBI Global Bond Index: Tracks total returns for traded external debt instruments in emerging markets, including USD Brady bonds, loans, Eurobonds

London Fix Gold PM Price Return: Benchmark index used for pricing gold products and derivatives Morningstar Core Bond Index: A broad investment-grade index that includes the largest, most important sectors of the investment-grade U.S. bond market.

Morningstar Corporate Bond Index: Includes US corporate bonds with maturities of more than one year and at least $500 million outstanding.

Morningstar Developed Markets ex-U.S. Index: Captures the performance of the stocks located in the developed countries across the world.

Morningstar EM Composite Bond Index: Includes the most liquid sovereign and corporate bonds issued in US Dollars (USD) by the governments and corporations of the most prominent emerging markets.

Morningstar Emerging Markets Index: Captures the performance of the stocks located in the emerging countries across the world.

Morningstar Global Markets Ex-U.S.: Captures the performance of the stocks located in the developed and emerging countries across the world.

Morningstar Interm. Corporate Bond Index: Includes US Treasury and US Government Agency bonds with maturities between four and seven years.

Morningstar Interm. U.S. Govt Bond Index: Tracks the performance of U.S. large-cap stocks that represent the largest 70 percent capitalization of the investable universe.

Morningstar Large Cap Index: Tracks the performance of U.S. large-cap stocks that represent the largest 70 percent capitalization of the investable universe.

Morningstar Long-Only Commodity Index: A fully collateralized commodity futures index that is long all eligible commodities.

Morningstar LT Corporate Bond Index: Includes US corporate bonds with maturities of seven years or longer.

Morningstar LT U.S. Govt Bond Index: Includes US Treasury and US Government Agency bonds with maturities of seven years or longer.

Morningstar Target Risk Index: Consists of a family of 5 indexes covering the following equity risk preferences: Aggressive, Moderately Aggressive, Moderate, Moderately Conservative, Conservative. These indexes can serve as benchmarks to help with target-risk mutual fund selection and evaluation by offering an objective yardstick for performance comparison.

Disclosure

Morningstar Mortgage Bond Index: Tracks approximately 98% of the fixed-rate mortgages issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Morningstar Short-Term Core Bond Index: Includes all bonds in the Morningstar Core Bond Index that have maturities between one and four years.

Morningstar Small Cap Index: Tracks the performance of U.S. small-cap stocks that fall between 90th and 97th percentile in market capitalization of the investable universe.

Morningstar U.S. Market Index: A diversified broad market index that targets 97% market capitalization coverage of the investable universe.

S&P/LSTA Leveraged Loan Index: Designed to reflect the performance of the largest facilities in the leveraged loan market.