SEATTLE

999 Third Avenue Suite 4200

Seattle, Washington 98104

206.622.3700 tel 206.622.0548 fax

LOS ANGELES

2321 Rosecrans Avenue Suite 2250

El Segundo, California 90245

310.297.1777 tel 310.297.0878 fax

www.wurts.com

Eric J. Petroff, CFA, FRM, CAIAChief Strategistepetroff@wurts.com

Quarterly Research ReportJune 2011

MARCH 2011Report Overview

6Macroeconomics & Portfolio Implications

19Capital Markets

26Appendix

2

T A B L E O F C O N T E N T S

3

R E P O R T O V E R V I E W

3

Growth is There, But Nothing Robust in Sight for a While

It’s good to see the US economy hasn’t fallen into a double-dip recession, a legitimateconcern a year ago. However, the pace of growth in GDP appears to be declining andthere’s not a strong case for it to rise substantially higher soon. The Institute ofSupply Management’s ISM index continues to indicate economic expansion, but itseems unlikely to continue at current rates which haven’t lasted too long historically.Retail sales are up in most industries, but we should recognize certain areas of theeconomy may remain depressed for a while; autos and construction for example.

Most of the time we hear people quoting official and “unofficial” unemploymentrates, but rarely if ever do we hear that around 10% of the workforce has beendislocated since 2007, that is if we account for those not participating. This is a largedislocation in labor markets even during normal times, let alone during one with suchslow economic growth. We’ve been discussing unemployment for years now and thenumbers really haven’t changed much since 2009. There just aren’t enough jobs beingcreated to meet the growing need for them, let alone reducing the huge number ofunemployed appreciably.

Bureau of Labor Statistics data tells us the economy continues to bleed jobs and theduration of unemployment is at historic highs. There is an ever greater reliance ontemporary workers, which are definitely not the type of jobs we’d prefer to create.And we’re also grappling with an historic number of people that have beenunemployed for four months or longer.

On the brighter side, real estate is putting fourth some good news, which should bewelcomed given how big housing is to GDP and the jobs market. If prices would juststabilize and turn around, we could easily see a wealth effect as access to home equitycredit lines free up. Mortgage delinquencies are trending lower and foreclosure ratesappear stable for now. Real estate as a percent of GDP is near some of its lowestlevels in decades. However, don’t get overly optimistic. With the exception of asecular increase during the end of the 1970’s, the ratio of real estate to GDP haspretty much remained constant. Of course this ratio could dip lower, but there isundeniably less downside in real estate today than in quite some time.

As much as we’d like to see housing prices run, we should be careful what we wishfor. We wouldn’t want price appreciation contributing to an inflationary cycle ifpeople get spooked about storing wealth if CPI picks up and start accumulatinghousing as a result.

Developed Economies are Not in The Best Shape

When examining a spectrum of US economic data, we see reason to believe GDP willcontinue growing. Industrial production is still skirting around all time lows eventhough it made an upswing jump from a few years ago, and could still go higher. Howmuch stronger can it get though, especially given we’ve seen a decline in growth ratesover that last decade? Personal consumption continues to grow and is beyond 2007levels, as are many industry sales figures. So growth is there for sure, albeit modest.

Let’s just not forget there are serious risks facing the economy. Interest paymentscould put a drag on GDP if rates go higher before our economic mess is resolved ordebt levels decline. And don’t forget that with higher GDP usually comes higherinflation. We’re already running around 3% CPI annualized alongside modest realGDP growth. If GDP growth rallies, CPI is likely to as well.

To be fair, the US has plenty of company amongst its developed neighbors in termsof having sub-optimal macroeconomic conditions. In fact, looking at global economicdata could lead you to believe we have two competing economic models in the world.

The first are developed markets with their high debt and deficit levels, lower GDPgrowth rates, and higher levels of implied volatility and potential downside. Thenthere’s the emerging world which is basically the exact opposite; better cash flows,societal balance sheets, and growth. Chances are emerging markets are likely to bemore stable, better returning economies than the developed world going forward.

Such divergent economic paths remind us we could be within an era of regime changein financial relationships globally. Trillions in Federal Reserve bond purchases is agreat example of artificial influences that will certainly disrupt normal financialrelationships. In such a time, it will be harder for investors to successfully identifyopportunities due to an increasing government influence which is inherently randomand unpredictable; wise political decisions rarely make sense economically.

Another example is the US dollar’s status as the world’s reserve currency. We knowmany nations are calling for another reserve currency or a plurality thereof, and it maybe happening already. The US dollar’s portion of global currency reserves is steadilyfailing and the euro’s is rising. Losing our reserve currency status would throw allsorts of financial relationships out of whack for some time. Such a change isn’t goingto occur overnight, but that doesn’t mean we shouldn’t be wary of it.

4

R E P O R T O V E R V I E W

We’re Surrounded by Reminders of our Predicament

The European debt crisis is a reminder of how easily debt can become a problem.Societal leverage in itself can quickly become a serious burden on GDP, butderivatives make the situation all that much more fun! The Greek economy is a tinyfraction of European Union GDP, yet is somehow attracting a lot of attention.Financial derivatives based on Greek assets are likely the cause of such seriousconcern for a relatively insignificant portion of the EU economy.

This situation is a great testament to the types of risks investors will be facing in whatappears to be an age of leverage for the developed world. Debt and leverage begetvolatility, especially given the size of global central bank intervention. Having a seriesof central banks manipulating rates and money supply is not necessarily a recipe forsuccess or global financial stability.

We have been, and continue to warn of the risk inflation poses in this environment.Sure we haven’t seen inflation get materially beyond normal bounds, but that doesn’tmean it won’t going forward. As we learned back in 2008, CPI can rise quickly.

The reason we continue to discuss inflation is expectations could easily get out ofhand with as much monetary and fiscal stimulus there is floating around. Removingmonetary stimulus without inflationary consequences is possible, but it’s more likelyunintended consequences will arise, and on a big scale.

The fact of the matter is inflation can very easily become influenced by the monetaryenvironment; GDP isn’t the only thing that affects CPI. Don’t try to argue printing$10 trillion wouldn’t have an effect on the value of the dollar. And also don’t takesolace in the “output gap” as an indicator of low inflation. If you actually look at thedata, the expected relationship doesn’t hold. And the reason is likely due to monetaryforces that come into play only when an output gap occurs.

Such concerns should give global investors pause in this environment, becausenominal global yields are not all that high, let alone if you take into account recentlevels of inflation. Perhaps this is why we’ve seen a steady decline for real TIPS yieldsin spite of generally improving GDP?

Is the TIPS market telling us investors are becoming increasingly concerned aboutinflation? Well they should be with the economy at a crossroads as QE II ends withno fiscal stimulus in sight. Because until GDP is self-sustaining, the use of moremonetary stimulus or debt is the government’s only option.

Fair Value is in The Eye of The Beholder

Determining fair value for an asset is a function of your liabilities. If you’re trying tomeet floating or low absolute return goals, then equities would look like a goodmarginal investment with an implied return of 6%-7% vs. 3% on 10 year Treasuries.Alternatively, if your portfolio needs 7%-8%, then equities aren’t all that attractive;nothing much actually is nowadays, except in the riskiest or most illiquid spaces.

Besides looking at equities through the prism of a return goal, we can consider themvis-à-vis prevailing GDP. Such analysis indicates equities are priced for strong GDP,not the growth rates we’re actually experiencing. What this implies is equities likelyhave more downside than upside given the economic environment, that is unless yousee a catalyst for an expanding pace of GDP growth going forward.

TIPS markets are pricing modest inflation. So if you think we’re in store for 2.0%-3.0% CPI, then TIPS aren’t attractive. But if you think inflation will be at least 3.5%,then TIPS are poised to beat nominal Treasuries and the BC Aggregate & Creditindices. Commodities, in spite of recent gains, don’t look all that expensive. Pricelevels are not much higher than a few years ago in spite of dollar depreciation, andtrailing returns versus other asset classes indicate upside is still there.

Because theory and reality eventually meet up over time, we believe it best to viewopportunities through a theoretical prism, our favorite of which is an estimate of thecapital markets line. We’re adding some color this quarter to our capital markets lineresearch and are also previewing some material on implied risk adjusted returns thatshould prove to be very interesting. We know such analysis is rarely seen in theindustry. But just because a lot of people aren’t doing these sort of analyses, doesn’tmean they aren’t incredibly useful tools for analyzing asset classes.

What you will see later in this report is both sets of research show capital markets areoffering the best implied premiums and risk adjusted returns in some time. However,prospective absolute returns are pretty poor, a testament to the powers of low tonegative cash rates and return goals that aren’t being met.

Our advice to clientele in this environment is to not get caught up chasingincreasingly lower returns on risky assets like everyone did in the mid 2000’s,especially in the face of almost certainly rising rates or inflationary expectations thatwill shift valuations lower across the board.

5

R E P O R T O V E R V I E W

M A C R O E C O N O M I C S & P O R T F O L I O I M P L I C A T I O N S

6

74.4

42.0

49.5

25.9

85.4

54.8

41.949.1

23.1

85.0

65.2

45.752.4

25.0

91.6

0

50

100

150

Motor Vehicles &Parts Dealers

Grocery Stores General MerchandiseStores

Building Materials,Garden Equipment,

Supply Dealers

Food and BeverageStores & Services

Selected Census Bureau Sales Data - $'s, BB's (May '11)

Dec. '07

Dec. '08

May '11

Source: BEA, PMI, Wurts

As a whole, the US economy is progressing, albeit not at thepace many would have hoped for a few years ago.

In spite of GDP gains, the economy still doesn’t feel as if it’sback on track again.

This is likely because growth rates have been less thannormal, and some areas within the economy remain seriouslyimpacted such as the automotive and construction industries.

We can see slowing growth the last few quarters, mostnotably in government spending and private investment.

This is not to mean we are necessarily headed towards arecession, but it is also unlikely GDP gains will continue at anexpanding rate.

We’re growing, just not all that quickly.

Source: Census BureauSource: BEA

T H E R E ’ S B E E N G R O W T H , B U T A T A R E C E N T L Y D E C L I N I N G P A C E

7

Many industries’ sales figures are above 2007 levels, but not where they wouldhave been if the last few years had seen normal growth. Some industries remainin recession and seem unlikely to reach peak levels again near term.

-5%

-3%

-1%

1%

3%

5%

7%

9%

30

40

50

60

70

80Institute of Supply Mgmt's PMI Index (June '11)

ISM PMI

1 Year GDP Growth (Real)

1.7% 2.3%

-5.7%

3.3%4.0% 4.3%

8.2%

2.4%1.9%2.9%

-1.3%

0.2%

-10%

0%

10%

20%

GDP Personal Consumption Gross Private DomesticInvst.

GovernmentConsumption & Gross

Investment

Components Growth Rates of Real GDP (Mar. 11)

Annualized Since Dec. 2007Last YearLast Two Quarters

These ranges of PMI activity are generally accompanied by higher rates of GDPgrowth, and don’t usually last that long. Sustaining recent PMI readings may notbe a high likelihood event, let alone exceeding them to pull GDP even higheragainst what appears to be drags on growth.

GDP growth as a whole slowed in the last two quarters of the year, with adecline in the growth rate of government spending being most notableamongst all major components of GDP.

8

On the last page we noted the impairment of certainindustries, a problem we may be dealing with for some time.

An impairment in the market for skilled, but specializedworkers can alter the composition of our unemploymentproblem as transitioning to other industries may not be easy.

We can see the duration of unemployment and weeks out ofwork are up, likely due to systematically dislocated workers.

Another concerning factor is the amount of jobs either beinglost or completed. This indicates labor markets are stillbleeding jobs and are relying more on temporary workers,which is a sign of perceived poor business prospects.

We’ve had a large labor dislocation recently on both anabsolute and percentage basis. This hit to labor marketswould take a while to absorb even with normal growth.

Source: BLS

6.3 6.4

12.7

4.5% 4.6%

9.1%

0%

5%

10%

15%

0

5

10

15

20

Unemployed Not in LaborForce

Total Unemployed Not in LaborForce

Total

Change in Unemployment From Dec. '07 - May '11

Millions As % of Total Employment

0

15

30

45

60

0

10

20

30Duration of Unemployment Over Time (May '11)

Median Weeks Unemployed Average Weeks Unemployed

-2

-1

0

1

2

3

4

5

6

7

8

-2

0

2

4

6

8

10Job Losses as % of Labor Force (May '11)

Job Losers & Persons Who Completed Temporary Jobs as % of Labor Force

Unemployed for More than 15 Weeks as % of Labor Force

Source: BLS

Source: BLS

This metric may be illustrative of huge dislocations in the auto andconstruction industries, areas where activity is still well below pre-recessionlevels and swaths of skilled, but specialized workers cannot find jobs. Or itcould just mean the economy isn’t producing enough jobs in general.

Sadly, these numbers have not changed appreciably in the last fewyears. Nearly ten percent of the labor market has been displacedand remains that way.

The unprecedented rate of people being unemployed for more than 15weeks may have something to do with workers not being able to shiftover to other industries; i.e., too specialized of skills.

W E A R E S I M P L Y N O T P R O D U C I N G E N O U G H J O B S , A N D N O T E N O U G H O F T H E R I G H T T Y P E O F T H E M

9

Source: BEA, Case-Shiller

Residential real estate is by no means poised for a roaringupswing, but fundamentals appear to be tilting in its favor.

The volume of home owners becoming delinquent on theirloans has markedly turned for the better. There are still a lotof foreclosures in process, but the number of them is notgrowing rapidly.

Household real estate as a percent of GDP is close to some ofthe lowest levels in decades. There is a noticeabledivergence in growth between rental income and housingprices, a trend that should not persist and will likely revert.

With as much government influence as there is in housingmarkets through manipulating rates and offering unlimitedcredit lines to lenders, anything could happen. But the kinksmay finally be working their way through the system.

Source: OCCSource: BEA, Fed, Wurts

0%

50%

100%

150%

200%

250%Household Real Estate as % of GDP (Mar. '11)

Households & Nonprofit Real Estate as % of GDP (Mar. '11)

Linear (Households & Nonprofit Real Estate as % of GDP (Mar. '11))

0

100

200

300

400

0

50

100

150

200

250

300Rental Income vs. Housing Prices (Mar. '11)

Case-Shiller Price Index

Rental Income of Persons ($'s, BB's)

0.70.9

1.01.1 1.1

1.2 1.2 1.2 1.3 1.3

1.6 1.61.8

2.1

2.42.2

2.01.9

1.71.6

0

1

2

3

4

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11

Foreclosures & Delinquent Loans - Millions (Mar. 11)

Foreclosures in Process

Seriously Delinquent Loans

If you consider the relationship between housing prices and rentalincome over time, there is no reason to believe their mutual pathscan diverge into perpetuity; they’re linked.

What’s really fascinating here is that with the exception of a onetime upwards shift in real estate as a % of GDP, its portion of theeconomy has actually remained quite stable. And we’re not too faraway from the lowest levels in decades.

This is far from great news, but to see such a significant decline inseriously delinquent loans is a big positive for price stability. And itdoesn’t hurt to see foreclosures in process potentially peaking.

R E S I D E N T I A L R E A L E S T A T E M A Y B E N E A R I N G A T U R N I N G P O I N T

-2

0

2

4

6

8

10

12

14%

16%

18%

20%

22%

24%Composition of Labor Force vs. GDP Growth (Mar. '11)

Part Time Workers as % of Total Employed (May '11)

Subsequent 3 Year Real GDP Growth

10

Source: BLS, Fed

As noted earlier, GDP is growing and there’s reason to expectthis to continue for the time being. Beyond such statistics asretail sales and ISM PMI data, we can see a few other macroindicators of rising growth rates.

The ratio of part- to full-time workers appears to have acorrelation with future GDP, and is indicating growth ratesshould trend higher. Industrial production is still at some ofits lowest levels in decades in spite of having rebounded.

Let’s not forget about societal debt loads and theirassociated interest payments though.

Debt levels have never been higher, but interest payments asa percent of GDP have never been proportionally lower. Wecould very well be spring loaded for a big drag on growthshould interest rates rise before we pay down debt.

Source: Fed, BEA, WurtsSource: BLS, BEA, Wurts

100%

125%

150%

175%

200%

225%

250%

275%

0%

2%

4%

6%

8%Societal Debt & Interest Payments (Mar. '11)

Societal Debt as % of GDPGov't Interest as % of GDPPersonal Interest as % of GDP

0%

1%

2%

3%

4%

5%

6%

-6%

-3%

0%

3%

6%

9%

12%Industrial Production Growth Rates & CPI (May '11)

Rolling 3 Year Real Industrial ProductionSubsequent 3 Year CPILinear (Rolling 3 Year Real Industrial Production)

Long term growth rate trends are concerning, but so is the likely direction inwhich CPI will move from here given its correlation to industrial production;we’re already seeing CPI around 3% the last twelve months.

This chart seems to indicate GDP growth rates will expand from here, butalso implies companies are not highly optimistic about business prospectswith a greater reliance on more temporary workers.

A real threat facing our economy is the additional interest cost thatcould be brought about by rising rates. We’re lucky for now ratesare low, but this may not be the case for much longer.

B E O P T I M I S T I C I F Y O U L I K E , B U T D O N ’ T K I D Y O U R S E L F A B O U T T H E R I S K S F A C I N G O U R E C O N O M Y

11

Source: IMF

Developed and emerging economies appear to be pursuingtwo distinctly different economic paths.

Developed economies have high levels of debt to GDP, largebudget deficits, slow rates of economic growth, and highlevels of implied volatility due to societal leverage.

The developing world has low budget deficits, small amountsof outstanding debt, dramatically higher growth rates, andtherefore lower potential volatility and downside.

If you’re looking for an opportunity to diversify your equityholdings meaningfully (i.e., outside an optimizer), thisdifference in economic models would be a good way to do so.

Emerging markets are commonly perceived as being riskierthan developed markets, but from a fundamental economicstandpoint, that is arguably not the case going forward.

81.899.5

83.0

229.1

17.133.6 30.2

0

100

200

300

400

EU United States UnitedKingdom

Japan China Emerging &Developing

DevelopingAsia

Gross Government Debt as % of GDP 2011 est.

-4.8

-10.8

-8.6-10.0

-1.6 -1.5-2.9

-15

-10

-5

0

5

10

EU United States UnitedKingdom

Japan China Emerging &Developing

DevelopingAsia

Government Net Lending/Borrowing as % of GDP 2011 est.

1.82.8

1.3

3.9

10.3

7.3

9.5

3.84.5 4.6

3.2

13.6 13.5

15.5

0

5

10

15

20

25

EU United States UnitedKingdom

Japan China Emerging &Developing

DevelopingAsia

Global Real & Nominal GDP Growth Rates in 2010

Real GDP

Nominal

How does Japan pull off such high levels of debt to GDP? It’s actually prettystraightforward. They can supply all of their lending needs from domesticsavings and their cost of borrowing is next to nothing. This is not something theUnited States enjoys.

The developed world is just bleeding more capital from a budgetarystandpoint, meaning taxes will go up, spending will come down, or acombination of the two will occur; any is bad for GDP.

Whether you’re looking at real or nominal rates, developedeconomies are trailing far behind their developing neighbors.

Source: IMFSource: IMF, Wurts

T W O E C O N O M I C M O D E L S , W H I C H I S M O R E L I K E L Y T O G R O W F A S T E R O V E R T I M E ?

-378

297

-23

12948

327

-470

306

12133 153

378

-494

372

4135

357

647

-1000

-500

0

500

1000

1500

United States China Euro area NewlyIndustrialized

AsianEconomies

Middle East andNorth Africa

Emerging &DevelopingCountries

Global Current Account Balances ($'s, Billions)

2009

2010

2011

-6.4%

7.0%

-2.6%-0.2%

2.3%

-17.1%

9.8%

0.1%3.1% 4.3%

-10.4%

8.3%

-2.3%

1.4%3.2%

-40%

-20%

0%

20%

40%

US Euro Yen Pound Other Currencies

Change in Composition of Currency Reserves Last 10 Years (Mar. '11)

Advanced Economies

Developing & Emerging Economies

Global

12

Questions regarding the US dollar’s permanency as theworld’s reserve currency are heard often enough nowadays.And for good reason!

The US dollar’s position within global reserves has fallennoticeably over the decade. Unresolved Federal budgetaryand monetary issues aren’t helping the situation.

We must keep in mind the US tends to run a significant tradedeficit with the rest of the world, and that our reservecurrency status allows us to do so indefinitely becausecountries store most of their surpluses in dollars.

If we lose our reserve status, the dollar’s value would likelyfall due to myriad economic forces. In the short term thiswould import a great deal of inflation, but over the long termwould skyrocket exports and grow the real economy.

Source: IMF, Wurts

60

70

80

90

100

110

120

130

140

150

55%

60%

65%

70%

75%

80%

85%US Dollar Portion of Global Currency Reserves (Mar. '11)

US Dollar as % of Global Allocated Currency Reserves

U.S. Dollar: Major Currencies Index - Real

Source: IMF

Source: IMF, Wurts

The US dollar clearly gave ground over the last decade. What’s surprising is theeuro’s strength in spite of poor underlying economic growth. However, in allfairness their GDP growth might be low, but their inflation is also low which ismore important for holding a currency’s value.

Clearly there is some positive feedback between the US dollar losingvalue and its position in currency reserves. But don’t forget new reservesare being added all the time and we’re still seeing a decline in thedollar’s proportion of reserves.

The United States is sending huge amounts of cash abroad, much of which isthankfully being reinvested into domestic debt by the same people we’rebuying all our stuff from; funny cycle.

T H E U N I T E D S T A T E S H A D B E T T E R B E M I N D F U L O F I T S S T A T U S A S T H E G L O B A L R E S E R V E C U R R E N C Y

105.1 110.3126.8

142.0152.3

59.4 63.773.9 79.5 81.8

0

100

200

300

2007 2008 2009 2010 2011

Recent Debt to GDP Levels for Greece & EU (2011 est.)

Greek Debt/GDP

EU Debt/GDP

Source: IMF, Wurts

The Greek debt crisis is yet another testament to the pitfallsof societal leverage, not only as it relates to absolute debtlevels, but asset based leverage and derivatives.

The fact of the matter is Greece is but a small fraction of theEU or world economy. It’s total GDP is less than a fraction ofthe US’ annual budget deficit!

So from an economic point of view, Greece’s economy canlinger without really causing any serious drag to EU growth.

Then why is this tiny country’s meager few hundred billion indebt worrying some of the world’s more powerful nations?

The debt is likely the basis for financial derivatives andleverage, and EU financial institutions holding them would beharmed by the debt’s rapid depreciation.

Source: Tradingeconomics.comSource: IMF

13

1.35%

0.34%

310.4

0

200

400

600

0%

1%

2%

3%

Greece GDP

Greek GDP in Relation to EU & World

As % of EU

As % of World

Nominal GDP ($'s, BB's)

-5

0

5

10

15

20Greek Government 10 Year Bond Yields (June '11)

Nominal

Real

Budgetary issues can get out of hand really quick, which is somethingUS investors should remain aware of for a while.

Greece just isn’t a significant player in the global economy. In a worldfree of financial derivatives, it would be very hard for the EU to care sosignificantly about such a small piece of the pie.

Have we got a deal for you…sovereign debt with double digit yields! Andto think they were investment grade debt just a few years ago.

W H O D O E S N ’ T L O V E A G R E A T G R E E K T R A G E D Y

5.5

3.6

5.0

2.9

0

3

6

9

Real Cash <0 Real Cash > 0

Real Cash Rates & 3 Yr. CPI Since 1954 (May '11)

Average Subsequent 3 Year CPI

Median Subsequent 3 Year CPI

14

Source: IMF, Wurts

Our primary goal of warning clientele about inflation is notcentered on the concept that it will be any specific numberor some extreme value, but to manage one of the morepronounced risks facing institutional investors today andmake money along the way.

Our views are based on the concept that normal levels ofinflation are an economic phenomenon, and that higher thandesired bouts of inflation are a monetary phenomenon.

And from a monetary point of view, trillions of dollars havebeen “printed” through Fed bond purchases, real cash ratesare now around -3%, and Federal deficits abound.

And don’t bring up the “output gap” as a low inflationargument. It doesn’t hold water empirically; possibly theresult of social spending buoying demand during recessions.

Source: Fed, BEA, WurtsSource: BLS, Fed, Wurts

0%

4%

8%

12%

16%

20%Fed Assets & Monetary Base as % of GDP (Mar. '11)

Fed Balance Sheet as % of GDPMonetary Base as % of GDP

3.9

3.4

2.5

0

4

8

<-1.5% -1.5% - 0% 0%+

Range of Output GAP as % of GDP

Inflation vs. GDP Output Gap - G7 Since 1980 (2011 est.)

Annual Inflation

Both theory and observation tell us negative real cash rates are inflationary,and cash rates have been decidedly negative in the US for several years.

The theory behind the output gap is that when an economy grows faster or slowerthan its natural pace, inflation goes up or down correspondingly. This theorywould more likely apply to real life assuming no one was dinking around withmoney supply and interest rates, which is generally what happens when theeconomy isn’t growing fast enough (or an output gap occurs).

The Fed’s plans to remove unprecedented monetary stimulus maysound great on the drawing board, but in reality we think itsomehow may be a little too complicated to manage without somesort of unintended consequences.

J U S T B E C A U S E I N F L A T I O N I S N ’ T R U N N I N G A L I T T L E H I G H N O W , D O E S N ’ T M E A N I T N E V E R W I L L

-5

0

5

10

15

20

25Nominal 1 Year GDP Growth & 10 Year Treasury Yields

1 Year Nominal GDP 10 Year Treasury Yield

15

Source: Fed, BEA, Wurts

Interest rates are looking low across the board in nominal andreal terms for developed markets. The question oneveryone’s mind is when will rates rise and by how much?

It’s hard to ever predict rates with any numerical accuracy,but not so hard to predict directional movements.

We can see the US 10 year Treasury yield tends to tracknominal GDP; or GDP tends to pull rates up or down.

This indicator alongside monetary and fiscal policy issuespoint in the direction of rising rates, but there is no strongsign of imminent upward pressure.

The likes of QE II and global central bank intervention will allbut assure real rates will stay low; any peak in nominal ratesis anyone’s guess at this point.

Source: Tradingeconomics.com, WurtsSource: BEA

3.93.4 3.1 3.2 3.0

1.2

3.4

4.9

-1.6-1.1

-0.6 -0.4

0.7 0.91.4

2.2

-5

0

5

10

China UnitedKingdom

Canada United States Germany Japan France Italy

10 Year Government Nominal & Real* Yields (June '11)

Nominal

Real* Nominal yields less current annualized inflation

-2

0

2

4

6Real TIPS Yields (June '11)

5 Year

10 Year

20 Year

If no one was worried about inflation, then why are real TIPS yields headinglower in the midst of normal levels of CPI?

The relationship is imperfect, but you get the point. Rates gettugged around by nominal GDP and even sometimes match.

The inflation number used to calculate real yields may be influenced bystale energy cost data, but regardless, implied real rates are still low.

T H E R E ’ S N O T A L O T T O B E F O U N D I N T E R M S O F Y I E L D S , E V E N G L O B A L L Y

11.3

7.5 7.7 7.46.4

17.6

21.9 21.4

25.4

22.4

0

10

20

30

40

0%-2% 2%-3% 3%-4% 4%-5% June '11

Trailing 1 Year GDP Growth (Since 1948)

Equity Valuations & Implied Returns vs. Real GDP Growth

Implied 10 Yr. Return (Shiller EPS & Div. Yield)

Shiller PE

16

Source: BEA, Shiller, Wurts

We’ve addressed using short term valuations (4Q ‘10) and arenot going to get into that again. But we would remindeveryone longer term metrics are generally more effective.

Using implied equity and fixed income returns over the nextdecade, we get two contrasting valuation messages, eachwith distinct implications depending on your plan’s liabilities.

If your portfolio is linked to fixed and/or high single digitreturn goals, then equities look expensive with an impliedreturn of 6%-7%. Or if liabilities are relative to risk free ratesor something floating, that’s potentially a whole other story.

Let’s not forget determining fair value is a function of yourending assumption for PE ratios, and history tells us they arematerially affected by the pace of change in GDP growth. Sohaving an opinion on GDP matters too.

Source: Fed, Shiller, WurtsSource: BEA, Shiller, Wurts

-10

-5

0

5

10

15

20Implied Equity Risk Premium to 10 Year Treas. (June '11)

Implied Equity Risk Premium to 10 Year Treas. Yield+0.5 Sigma-0.5 Sigma

0.16%

-0.24%-0.05%

0.98%

-1%

0%

1%

2%

GDP Growth Rate Expanding GDP Growth Rate Falling

Quarterly Change in PE's & Implied Returns vs. GDP Since 1948

PE Ratios

Shiller EPS & Dividend Yield

This isn’t rocket science. The pace of change in GDP growthrates has a material impact on asset values. So having an ideaof where GDP is heading might be kind of useful.

If your liabilities are floating in nature, or are linked to interest rates, thenequities are looking like a fair deal. You might not get high nominalreturns, but they’ll be a lot better than cash or Treasuries.

Valuations are implicitly reflective of strong GDP growth, which isn’t thecase today or likely to be anytime soon. In other words, there is a reason tobelieve volatility may be leaning towards the downside variety if valuationsdecide to catch up with prevailing economic growth.

F A I R V A L U E F O R E Q U I T I E S I S A F U N C T I O N O F Y O U R P O I N T O F V I E W & M A C R O O U T L O O K

17

Source: Bloomberg, Wurts

Forecasting returns for inflation protecting assets such as TIPSand commodities is no more an exact science than doing so inother asset classes, but at least there is some science to it.

Commodities had a great run recently, but trailing periodreturns are really not impressive in relation to other assetclasses, including low returning ones like fixed income.

Price levels for some major commodities, though recentlyhigher, are basically where they were years ago, even in theface of a weaker US dollar since then.

So it’s hard to say commodities are expensive from a longerterm point of view. This doesn’t even take into account thepotential effects of global GDP growth or a weakening dollar.

And if you think inflation will break 2.5% over the next decade,then TIPS still look like a good deal for risk free rates.

Source: IbbotsonSource: Fed, Wurts

0.1 0.3 1.9 2.03.9 6.5 6.5 5.7

25.9

-11.9

0.0

6.6

30.7

3.3 2.9 2.7

-40

0

40

80

1 Year 3 Year 5 Year 10 Year

Trailing Returns for Major Asset Classes (June '11)

CashBC AggregateDJ-UBS Commodity IndexS&P 500

0

100

200

300

400

500Price Levels for Major Commodities (Dec 2006 = 100)

Corn wheat Gold Oil Silver

-2

-1

0

1

2

3

4

5

6Implied Inflation - Nominal vs. Real Rates (June '11)

5 Year TIPS - Nominal Treasury Yield

10 Year TIPS - Nominal Treasury Yield

People have gotten a little heady about gold and silver, but otherwise we’repretty much back to where we were years ago. And considering dollardepreciation since then, real price increases would look even lower.

Commodities just don’t look rich when you compare them to other asset classes’returns. Although their outperformance to equities over a decade is large, theywere competing against ridiculously overvalued equities; hard to lose. Also, keepin mind commodities have barely beaten bonds over ten years.

Treasury yields reflect a bond market without significant worry about inflationbeyond normal levels in spite of all the monetary and fiscal stimulus, while atthe same time 5 year real TIPS yields are negative. This is perhaps a testamentto rate manipulation by the Fed in nominal markets.

A R E I N F L A T I O N P R O T E C T I N G A S S E T S S T I L L P O I S E D T O F U L F I L L T H E I R R O L E I N T H E P O R T F O L I O ?

18

Source: Ibbotson, Barclays, Shiller, Wurts

Capital markets remain poised to provide good risk adjustedreturns for embracing credit and equity risk. But with cash atzero and 10 year Treasuries at 3%, these risk premiums aren’tamounting to much in absolute terms.

We haven’t seen this sort of steepness in well over a decadefor the slope of the capital markets line, meaning thedifference in returns for accepting risk has widened.

We’re also seeing a similar set of data for implied Sharperatios, meaning equities are providing some of the bestprospective risk adjusted returns over cash in decades.

So markets are basically compensating investors for takingrisk, but at low absolute levels. And as we’ve cautioned inmany reports, be wary of what could happen when cash ratesrise to head off inflation before the economy is sorted out.

Source: Fed, BEA, WurtsSource: BEA

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2Slopes of Implied Sharpe Ratios/ Capital Markets Line

Capital Markets Line

Implied Sharpe Ratio

Cash

IA IT Treasury

BC Credit

IA LT Treasury

Shiller EPS & DIv. Yield

-2

0

2

4

6

8

10

0 2 4 6 8 10 12 14 16 18 20

Yiel

d/Im

plie

d Re

turn

s (%

)

Standard Deviation

Wurts Estimate of the Capital Markets Line (June ‘11)

CML (Trailing 10 Yr Std Dev.)

Linear Fit

0.00

0.25

0.50

0.75

1.00

1.25

IA IT Govt BarCap US Credit IA LT Govt Shiller Earnings and Div.Yld

Shar

pe R

atio

Wurts Estimated Implied Sharpe Ratios (June ‘11)

Implied Sharpe Ratio (Trailing 10 - Year Std Dev.)

Linear Fit

To understand how this chart works, recall 1999 when stocks were poisedto return around 4% while 10 year Treasuries were yielding over 5%. If youcompute a capital markets line or implied Sharpe ratios, equities wouldcome up on bottom in both measures; hence a low/negative slope.

This kind of kink in the line at credit tells you one very simple thing – holdcredit over risk free assets if you believe future volatility will be similarto the last decade. And this is about as good as equities get for thismetric if you look back historically.

On the surface making 6% over cash and 2%-3% over Treasuries would normallybe a fair deal for equities. The problem is equity returns aren’t likely to meetmost institution’s return goals. So are they really a good deal?

I F C A S H R A T E S W E R E J U S T A B I T H I G H E R , C A P I T A L M A R K E T S W O U L D B E A D I F F E R E N T P L A C E

C A P I T A L M A R K E T S

19

1.1%

3.0% 3.2% 3.1%3.4% 3.4%

4.9%

3.7%4.2%

6.0%

0%

2%

4%

6%

8%

Japan Germany UnitedStates

Canada France UK Italy Barclays USCredit

BarclaysGlobalCredit

EMBI-Global

Global Sovereign 10 Year Index Yields (June '11)

G L O B A L M A R K E T S

20

Source: Freelunch.com; Wurts & Associates

Source: JPMorgan, Western Asset Management

Source: MSCI; Wurts & Associates

-6%

-4%

-2%

0%

2%

4%

6%

8%

60

80

100

120

140

160US Dollar Major Currency Index (June '11)

US Major Currency Index (real)Average Currency Index ValueSubsequent 10 Year Return

1.4

13.9

7.8

3.2

10.3

2.3

15.8

10.1

1.9

10.3

2.0

13.3

8.4

2.3

11.4

0

5

10

15

20

25

Price/Book Value Price/Earnings Price/Cash Earnings Dividend Yield Earnings Yield +Dividend

Rolling 3 Month MSCI Valuation Ratios (June '11)

MSCI EAFE

United States

Emerging Markets

Dispersion amongst global rates is likely to become more andmore of an opportunity for fixed income investors.

Nominal rates will likely lead in volatility, but real rates shoulddiffer quite a bit as various nations work through globalmonetary excesses and a potential regime shift in currencies.

The US dollar is basically around historic lows and, short ofanother global monetary crisis, it’s hard to envision a nearterm scenario for strong dollar appreciation.

One could make a pretty good case for a secular decline in thevalue of the US dollar. It could happen, but don’t expect it toovernight or be surprised if we do have another flight or twoto safety in the meantime.

With global equity markets being priced to provide similarreturns, one must concede currency returns will make a bigdifference in returns globally to US investors going forward.

U S L A R G E C A P E Q U I T I E S

21

Source: Yale/Shiller, Wurts

Source: Yale/Shiller, Wurts Source: S&P, Wurts(Assumes 2.5% Real Earnings Growth, 2% Dividend, and 3% Inflation)

19.7

2.0

7.1

22.4

1.8

6.3

22.4

1.9

6.4

19.5

3.1

9.2

0

10

20

30

40

Shiller P/E Ratio Dividend Yield (%) Earnings & Dividend Yield (%)

US Large Cap (S&P 500) Valuations Snapshot (June '11)

Jun-10Dec-10Jun-1150 Year Average

15.4

13.4

1.8 2.0

8.39.4

0

5

10

15

20

25

Trailing 1 YearP/E

1 Year ForwardP/E Ratio

Current DividendYield (%)

Implied DividendYield(%)

Trailing Earnings& Dividend

Yield(%)

Implied Earnings& Dividend Yield

(%)

S&P 500 Valuation Snapshot (June '11)

-51%

-16%

2%

30%

-45%

-5%

15%

47%

-80%

-40%

0%

40%

80%

4th Quartile Avg. Since1926: PE=10

Avg. Since 1926: PE=17 30 Year Avg. PE=21 1st Quartile Avg. Since1926: PE=27

1 Ye

ar R

etur

n: P

E Ra

tio

Real

ized

Ending PE's

Effects of Changes in Shiller PE Ratio on S&P 500 Returns

1 Year Return as of June '11 (Starting PE: 22.4)1 Year Return as of June '10 (Starting PE: 19.7)

What you need to know about US equities is they have moredownside than upside from a year ago, regardless of how youvalue them. Earnings haven’t moved that much.

The Shiller PE ratio is up about 10% for the last year. So anyvaluation based forecast just went lower if you’re being honestabout the numbers.

Short term valuation metrics paint a rosier picture ofprospective equity returns with an implied 8%-9% returndepending on the assumption of trailing or forward earnings.

Keep in mind these shorter term valuations are based on nearrecord levels of profit as a percent of our economy.

Profits could continue to grow at historically high levels forsome time, there could be a new regime in margin expansion,or not. Profits could revert to normal levels from here.

The latter is more likely. Don’t be surprised if it happens.

-25

0

25Technical Indicator for US Lg Value & Growth (June '11)

Technical IndicatorSubsequent 7 Year Excess Returns (Value vs. Growth)

-15

-10

-5

0

5

10

15

20

0.0

0.3

0.6

0.9

1.2

1.5Relative PE Ratio of US Large Value vs. Growth (June '11)

Rolling 3 Month Avg PE (Value/Growth)Relative Average ValuationSubsequent 5 Year Rolling Excess Returns (value vs. growth)

2.1

-1.6

3.0

0.8

-4

-2

0

2

4

Relative PE<Average Relative PE>Average Wurts Technical ValueIndicator < 0

Wurts Technical ValueIndicator > 0

Subs

eque

nt R

ollin

g 5

Yr E

xces

s Re

turn

(Va

lue

Vs.

Gro

wth

)

Fundamental vs. Technical Indicators

S T Y L E T I L T S : U S L A R G E V A L U E V S . G R O W T H

22

Source: Ibbotson, Wurts & Associates

Source: Russell, Wurts & Associates Source: Ibbotson, Wurts & Associates

Fundamental Technical

Value more expensive

Growth more expensive

Sell Signal for Value

Buy Signal for Value

The trick to dimensioning style tilt opportunities is to wait forlarge deviations from norms to occur before acting.

We may have just lived through one such opportunity, but thismay be one of those instances where the lines don’t act theway you’d like them to on the charts.

The spike in valuations for value stocks during the 2008 bearmarket was not due to a bubble in stock prices.

But instead was due to a huge cyclical drop in earnings thatmade the relative price levels to growth stocks look huge.

It would probably be best to wait and see how relativevaluations pan out. It appears as if value stocks may betrending towards the expensive side now that we’re throughworst of the recession.

Valuations don’t seem compelling enough to act just yet.

-25

0

25Technical Indicator for US Small vs. Large (June '11)

Technical IndicatorSubsequent 7 Year Excess Returns (Small vs. Large)

-15

-10

-5

0

5

10

15

0.5

0.8

1.0

1.3

1.5

1.8

2.0Relative PE Ratio of US Small vs. US Large (June '11)

Rolling 3 Month Avg PE (Small/Large)Relative Valuation AverageSubsequent 5 Year Rolling Excess Returns (Small - Large)

-0.3

-1.4

0.3

-1.5

-3

-2

-1

0

1

Relative PE<Average Relative PE>Average Wurts TechnicalIndicator < 0

Wurts TechnicalIndicator > 0

Subs

eque

nt R

ollin

g 5

YrEx

cess

Ret

urn

(Sm

all v

s. L

arge

)

Fundamental vs. Technical Indicators

S T Y L E T I L T S : U S L A R G E V S . S M A L L

23

Source: Russell, Wurts & Associates

Source: Ibbotson, and Wurts & AssociatesSource: Russell, Wurts & Associates

Fundamental Technical

Small more expensive

Large more expensive

Sell signal for small

Buy signal for small

Unlike the relative valuation analysis on the previous page,there appears to be good reason to believe small stocks are notlikely poised to outperform large stocks.

On an absolute valuation basis we see small stocks to bestabilizing at very high relative valuations. Technical indicatorsare slightly bearish on relative returns.

Given these indicators, it seems likely risk adjusted returns forsmall stocks should be well below large stocks.

There is little reason to believe small stocks will provide higherreturns going forward given valuations.

There is also little reason to believe the volatility of smallstocks is going to be lower than in large stocks.

If you believe in either an optimizer or fundamental valuations,underweighting small stocks seems appropriate at this time.

F I X E D I N C O M E

24Source: Federal Reserve, WurtsSource: Barclays, JP Morgan.

Source: Federal Reserve

*EMBI-Global Yield Data since Dec 1997.

0%

1%

2%

3%

4%

5%US Treasury Yield Curves

Jun-10

Dec-10

Jun-11

1.8%

2.8%

4.0%

9.2%

6.5%

1.7%

2.8%

3.7%

7.3%

6.0%

4.7%5.6%

6.2%

10.3%

9.2%

0%

5%

10%

15%

Barclays US TreasuryIndex

Barclays USAggregate Index

Barclays US CreditIndex

Barclays US CorpHigh Yield Index

EMBI-Global Index*

Nominal Fixed Income Yield to Maturities

Jun-10

Jun-11

20 Year Average

1.5%

1.8%2.0%

1.8%

2.3% 2.4%

0%

1%

2%

3%

4%

Jun-10 Dec-10 Jun-11

Inflation Expectations (Nominal less Real Treasury Yields)

5 Year Implied Inflation

10 Year Implied Inflation

Across the board yields are well below their averages overthe last twenty years; high yield bonds for example areyielding 3% less than average.

Credit spreads are still decent relative to Treasuries, withinvestment grade credit and high yield offering 2% to morethan 5% higher yields, respectively.

On the other hand, high yield is only paying 3.6% overinvestment grade, which is well underneath the additionalhistoric default rate for this asset class.

Active managers can definitely add value through creditresearch, but high yield debt is starting to look expensive.

The yield curve remains steep and inflationary expectationsappear tame. It’s likely there will be more interesting thingsto talk about next quarter if the Fed stays out of themonetary easing game for a while.

25

Source: NCREIF

Source: NCREIF

You only need to look at capitalization to vacancy rates tosee the effects of cash yielding zero.

Capitalization rates appear to have peaked in 2009 and areheading lower. This is in spite of vacancy rates having onlyfallen for the apartment sector since 2007.

This is one of the reasons why apartments are so soughtafter nowadays, more and more people are renting, causingvacancy rates to fall and pricing power to rise.

No other sector has these dynamics, which is whyapartments are trading at the lowest cap rates amongsectors at about a 2.5% premium over the 10 year Treasury.

With the way things are valued, you can likely bank on 5%-6%in income going forward, plus maybe seeing your propertyappreciate at inflation on top.

4.8%

6.0%5.3%

6.0%5.4%

6.3%5.7%

6.5%6.0%

7.2% 7.3% 7.0%

5.6%6.1% 6.3% 6.6%

0%

3%

6%

9%

12%

Apartment Industrial Office Retail

Commercial Real Estate Capitalization Rates (Mar. '11)

Dec. 07 Dec. '08 Dec. '09 Mar. 11

3%

5%

7%

9%

11%

13%Cap Rates & Sub. Returns from Income (Mar. ‘11)

Transaction Capitalization Rates

Subsequent 5 Year Return From Income

Source: NCREIF, Wurts

8%7%

11%

6%

9% 8%

12%

8%8%

11%

15%

10%

6%

12%

15%

11%

0%

5%

10%

15%

20%

25%

Apartment Industrial Office Retail

Commercial Real Estate Vacancy Rates (Mar. '11)

Dec. 07 Dec. '08 Dec. '09 Mar. 11

C O M M E R C I A L R E A L E S T A T E

A P P E N D I X

26

P E R I O D I C T A B L E O F R E T U R N S – J U N E 2 0 1 1

27

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011YTD

Bes

t

17.5 59.9 29.1 74.8 16.6 38.3 23.1 35.2 38.7 66.4 31.8 14.0 25.9 56.3 26.0 34.5 32.6 39.8 5.2 79.0 29.1 8.6

8.9 51.2 13.8 32.9 8.1 37.2 23.1 31.8 20.3 43.1 22.8 8.4 10.3 48.5 22.3 21.4 26.9 16.2 1.8 37.2 24.5 7.4

7.9 41.7 12.3 26.3 6.4 31.0 21.6 30.5 16.2 33.2 12.3 7.3 6.7 46.0 20.7 18.9 23.5 15.8 -6.5 34.5 19.2 6.8

2.6 41.2 11.4 23.8 4.2 25.8 21.4 18.6 15.6 27.3 11.6 4.1 1.7 38.6 16.5 14.0 22.2 11.8 -20.7 32.5 16.8 5.9

2.3 24.6 8.0 18.1 2.7 24.6 14.4 16.2 13.6 26.5 7.0 2.8 1.0 30.0 14.3 7.5 16.1 11.6 -24.0 20.6 16.7 5.3

-0.3 21.7 7.8 13.4 -0.8 18.5 14.1 13.9 8.7 24.3 6.0 -2.4 -6.0 29.7 13.1 7.1 13.4 10.3 -28.9 19.7 15.5 4.7

-8.1 16.0 7.4 11.5 -1.5 15.2 11.3 12.9 5.1 13.0 4.1 -2.7 -8.6 23.9 11.1 7.1 12.8 7.9 -35.6 19.4 13.1 3.8

-10.6 14.5 5.0 9.8 -2.0 11.6 10.3 9.7 1.2 11.4 1.9 -5.6 -11.4 21.6 9.1 5.3 10.4 7.1 -36.9 18.9 12.4 2.7

-17.4 12.5 3.7 3.1 -2.4 11.1 6.4 5.3 -5.1 7.3 -14.0 -9.2 -15.5 11.6 6.9 4.7 9.1 7.0 -38.4 11.5 8.2 1.0

-21.8 5.8 3.6 2.9 -2.9 7.5 6.0 2.1 -6.5 4.7 -22.4 -19.5 -15.7 9.0 6.3 4.1 4.8 4.7 -38.5 5.9 6.5 0.1

-23.2 -5.6 -4.3 1.4 -3.5 5.8 5.3 -3.4 -25.3 -0.8 -22.4 -20.4 -27.9 4.1 4.3 3.0 4.3 -0.2 -43.1 0.2 5.5 -0.5

N/A N/A -11.9 -1.1 -7.3 -5.2 3.6 -11.6 -27.0 -1.5 -30.6 -21.2 -30.3 1.1 1.2 2.4 2.1 -9.8 -53.2 -16.9 0.1 -2.6

Large Cap Growth US Stocks (Russell 1000 Growth Index) Hedge Fund of Funds (HFRI Fund of Funds Composite Index)

Large Cap Value US Stocks (Russell 1000 Value Index) Domestic Fixed Income (Barclays Capital Aggregate Bond Index)

Small Cap Growth US Stocks (Russell 2000 Growth Index) Real Estate (NCREIF Property Index)

Small Cap Value US Stocks (Russell 2000 Value Index) Cash (Citigroup 3-Mo Treasury)

International Stocks - Developed Markets (MSCI EAFE Index) ICC Universe Median (Total Funds)

International Stocks - Emerging Markets (MSCI EM Index) Commodities (DJ UBS Commodity Index)

Data: Morningstar, Inc., Hedge Fund Research, Inc. (HFR), National Council of Real Estate Investment Fiduciaries (NCREIF) and Independent Consultants Cooperative (ICC).

Wor

st

S & P 5 0 0 S E C T O R R E T U R N S

28

Source: ICC

-2.8

-2.6

-2.5

-1.7

-1.3

-1.2

-0.6

-0.3

-0.3

-0.2

(5) 0

FINANCIALS

INFORMATION TECHNOLOGY

CONSUMER STAPLES

ENERGY

TELECOMMUNICATION SERVICES

HEALTH CARE

INDUSTRIALS

CONSUMER DISCRETIONARY

MATERIALS

UTILITIES

Month Ending June 2011

-3.0

2.3

3.6

7.0

7.6

8.0

8.2

9.3

11.6

13.7

(5) 0 5 10 15

FINANCIALS

INFORMATION TECHNOLOGY

MATERIALS

TELECOMMUNICATION SERVICES

CONSUMER STAPLES

INDUSTRIALS

CONSUMER DISCRETIONARY

UTILITIES

ENERGY

HEALTH CARE

YTD Ending June 2011

D E T A I L E D E Q U I T Y & F I X E D I N C O M E R E T U R N S

29

Domestic Equity June YTD 1-Year 3-Year 5-Year 10-Year Fixed Income June YTD 1-Year 3-Year 5-Year 10-Year

Core Index Performance Index Performance

S&P 500 (1.7) 6.0 30.7 3.3 2.9 2.7 BC US Aggregate Bond (0.3) 2.7 3.9 6.5 6.5 5.7

S&P 500 Equal Weighted (1.8) 8.1 36.5 9.2 5.6 6.8 BC US Treasury US TIPS 0.8 5.8 7.7 5.3 6.9 7.0

DJ Industrial Average (1.1) 8.6 30.4 6.1 5.0 4.2 BC US Treasury Bills 0.0 0.1 0.2 0.6 2.1 2.2

Russell Top 200 (1.6) 5.6 29.2 2.6 2.5 1.7 Maturity Evaluation

Russell 1000 (2.1) 5.9 28.9 2.3 1.2 4.0 BC US Treasury 1-3 Yr 0.0 0.9 1.3 2.8 4.2 3.6

Russell 2000 (2.3) 6.2 37.4 7.8 4.1 6.3 BC US Treasury Interm. (0.1) 2.2 2.7 4.9 5.9 4.9

Russell 3000 (1.8) 6.4 32.4 4.0 3.4 3.4 BC US Treasury Long (1.9) 2.3 (1.1) 5.9 7.3 6.9

Russell Mid Cap (2.1) 8.1 38.5 6.5 5.3 7.6 Issuer Performance

Style Index Performance BC US Agency Intermediate 0.0 1.6 2.4 4.9 5.7 5.1

Russell 1000 Growth (1.4) 6.8 35.0 5.0 5.3 2.2 BC US Credit (0.7) 3.4 6.2 8.2 7.0 6.3

Russell 1000 Value (2.1) 5.9 28.9 2.3 1.2 4.0 BC US MBS 0.1 2.9 3.8 6.9 7.0 5.8

Russell 2000 Growth (2.1) 8.6 43.5 8.4 5.8 4.6 BC US Corporate High Yield (1.0) 5.0 15.6 12.7 9.3 9.0

Russell 2000 Value (2.5) 3.8 31.4 7.1 2.2 7.5 BC Emerging Markets 0.7 5.0 12.1 10.8 9.5 10.3

International Equity June YTD 1-Year 3-Year 5-Year 10-Year

Broad Index Performance

MSCI EAFE (1.2) 5.3 30.9 (1.3) 2.0 6.1

MSCI AC World ex US (1.7) 2.1 26.3 (3.0) 1.0 5.0

MSCI Emerging Mkts (1.5) 1.0 28.2 4.5 11.8 16.5

MSCI EAFE Small Cap (1.9) 2.4 33.3 0.9 0.1 7.8Style Index Performance

MSCI EAFE Growth (1.6) 2.9 28.5 (4.1) 0.3 3.2

MSCI EAFE Value (1.2) 3.1 24.8 (5.2) (3.0) 2.9

Regional Index Performance

MSCI United Kingdom (2.9) 5.6 34.1 (1.4) 1.2 5.5

MSCI Japan 1.5 (4.7) 13.2 (4.2) (3.6) 1.5

MSCI EM Asia (2.6) 0.4 23.1 5.8 9.1 12.8

MSCI EM Latin America (0.5) (3.3) 22.6 (2.1) 13.5 16.8

Source: Morningstar, Inc.