Download - Annual Economic Update By Bny Mellon 5 3 12
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Portfolio Strategies for Today’s Economy and Financial Markets
Leo Grohowski Chief Investment Officer, BNY Mellon Wealth Management
May 2012
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1As of 3/31/12
BNY Mellon LEADERSHIP
BNY Mellon: A Global Leader
• Leading global provider of securities services
− $26.6 trillion in assets under custody and administration1
• 11th largest global asset manager
− $1.3 trillion under management1
• 8th largest U.S. asset manager
BNY Mellon Wealth Management: A National Leader
• Top 10 U.S. wealth manager
− $176 billion in private client assets1
− Approximately $11 billion in deposits and $7 billion in loans outstanding1
• Third largest U.S. private bank
• Two centuries of experience and perspective
− Oldest private bank in U.S. history
− Among first to create dedicated family office business
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BNY Mellon Asset Management Investment Firms DEPTH AND BREADTH IN VIRTUALLY EVERY ASSET CLASS AND STYLE
1Do not offer services in the U.S.; 2A division of The Bank of New York Mellon; 3A division of The Dreyfus Corporation; 4Minority Interest; 550/50 Joint Venture. Please see the disclosures in the appendix.
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Historical Market Returns
Returns as of 4/30/12, unless noted otherwise. Standard deviations are calculated based on monthly data for the trailing 10 years. 1Standard deviation is for 5 years; 2Returns are for periods through 9/30/11.
Source: Morningstar.
Asset Class Index 1Q YTD 1 Year 3 Year 5 Year 10 Year
Treasury Bills Treasury Bills (90 Day) 0.0 0.0 0.0 0.1 1.0 1.8 0.5
Tax-Exempt Bonds S&P Intermed. Munis 1.1 2.3 9.9 7.1 6.2 5.5 4.3
Taxable Bonds Barclays Aggregate 0.3 1.4 7.5 7.1 6.4 5.7 3.6
High Yield ML US HY Master II 5.2 6.2 5.1 19.7 8.0 9.0 10.9
International Bonds BarCap Global Agg. Ex U.S. 1.2 2.4 0.6 8.0 6.4 8.3 8.9
EMD - Local Currency JPM GBI EM Global Divers1
8.3 9.3 (0.3) 14.1 9.7 14.5
Large Cap Stocks S&P 500 12.6 11.9 4.8 19.5 1.0 4.7 15.9
Mid Cap Stocks S&P MidCap 400 13.5 13.2 (0.9) 22.7 4.1 7.7 18.5
Small Cap Stocks Russell 2000 12.4 10.7 (4.3) 20.3 1.5 6.2 21.0
International Stocks MSCI EAFE (Net) 10.9 8.7 (12.8) 11.8 (4.7) 5.4 18.7
Emerging Mkts Stks MSCI EMF 14.1 12.7 (12.6) 18.3 3.5 13.9 24.5
Hedge Funds HFRX Global Hedge Index 3.1 3.3 (6.7) 3.1 (2.9) 1.8 6.1
Real Estate FTSE EPRA/NAREIT 12.9 15.6 0.6 24.4 (3.8) 10.3 21.5
Commodities S&P GSCI 5.9 5.3 (10.6) 13.3 (2.7) 4.6 24.9
Private Equity Cambridge Assoc. PE Index2
13.4 6.5 8.6 12.0
10 Yr.
Std. Dev.
Annualized Returns
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U.S. Unemployment Rate, Seasonally Adjusted
As of 3/31/12. Source: Bureau of Labor Statistics, Haver Analytics.
*Includes officially unemployed, those who want a job but stopped looking, and those who need full-time jobs but can only find
part-time work, measured as a percentage of the civilian labor force plus all the marginally attached workers.
3
6
9
12
15
18
79 82 85 88 91 94 97 00 03 06 09 12
PE
RC
EN
T
8.2%
14.5%
Civilian Unemployment Rate Broader Unemployment Rate*
Employment Showing Signs of Improvement
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As of 3/31/12. Sources: National Federation of Independent Businesses and Ned Davis Research.
NFIB Index of Small Business Optimism
Business Confidence Up from Fourth Quarter Lows FISCAL CONCERNS WEIGHED ON SENTIMENT
75
80
85
90
95
100
105
110
76 79 82 85 88 91 94 97 00 03 06 09 12
IND
EX
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20
40
60
80
100
120
140
160
71 78 85 92 99 06
As of 3/31/12. Sources: The Conference Board and Haver Analytics.
Conference Board's Consumer Confidence Index
Consumer Confidence Recovering PACE OF RECOVERY WEIGHING ON SENTIMENT
IND
EX
12
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Households Reducing Debt FORCED DELEVERAGING A PARTIAL CONTRIBUTOR
As of 12/31/11. Household debt includes home mortgage and consumer credit. Source: Ned Davis Research.
Household Debt as Percentage of Disposable Personal Income
112.8%
60
70
80
90
100
110
120
130
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
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-2
0
2
4
6
8
10
12
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Quarterly Data 3/31/1947 – 12/31/2011. Source: Ned Davis Research, Department of Commerce, Department of Labor, Haver Analytics.
Net National Savings (as a % of GDP)
Savings Rate Improved from Low of Financial Crisis
PE
RC
EN
T
14
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Housing Starts HINT OF RECOVERY FROM LOW LEVEL
Seasonally Adjusted Annual Rate
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
500
1,000
1,500
2,000
2,500
TH
OU
SA
ND
UN
ITS
As of 3/30/12. Source: U.S. Census Bureau.
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-20
-10
0
10
20
84 88 92 96 00 04 08 12
PE
RC
EN
T
14
As of 3/31/12. Source: Ned Davis Research, Haver Analytics, National Association of Realtors.
Median Price of Existing Homes – Percent Change from Year Ago
Month’s Supply of Existing Homes
Housing Market Still Challenged
3
6
9
12
84 88 92 96 00 04 08 12
6.3
1.9%
MO
NT
HS
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1.9
-0.3
-3.5
3.0
1.7
2.5 2.5
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012E 2013E
PE
RC
EN
T
U.S. GDP Forecast MODERATE GROWTH EXPECTATIONS
BNY Mellon Wealth Management GDP Estimates
Sources: 2007-2011: Bureau of Economic Analysis; 2012-2013: BNY Mellon Wealth Management.
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European Manufacturing Contracting
Euro-Zone Market Manufacturing Purchasing Managers' Index
As of 4/30/12. Seasonally adjusted. Source: Haver Analytics, RBS/Markit
IND
EX
LE
VE
L
38
42
46
50
54
58
2007 2008 2009 2010 2011 2012 2006
62
34
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Source: Associated Press
ECB Behind the Curve in 2011
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-2
0
2
4
6
8
10
United States
United Kingdom
Japan Euro Area Brazil Russia India China
PE
RC
EN
T
2011 2012E 2013E
Real Gross Domestic Product (GDP)
As of April 2012. Sources: International Monetary Fund and BNY Mellon Wealth Management.
Euro Region Uncertainty Restraining Global Growth GROWTH RATES LIKELY TO COME DOWN AS GLOBAL DEMAND SLOWS
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Central Banks Maintaining Accommodative Policies
Central Bank Rates
As of 3/31/12. Source: Bloomberg LP
0
2
4
6
8
10
12
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Bank of England U.S. Federal Funds Rate
Bank of Japan European Central Bank
PE
RC
EN
T
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Source: Associated Press
Leadership Change at ECB…
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Europe Aiding Bank Liquidity
Source: European Central Bank
€ 489 € 530
0
200
400
600
LTRO 1 (Dec 2011) LTRO 2 (Feb 2012)
ECB 3-Year Long-Term Refinancing Operations
€ B
ILL
ION
S
523 Bidders 800 Bidders
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As of 4/30/12. Source: Bloomberg L.P.
Increasing Pressure on Italian Bonds
10-Year Government Bond Yields and Credit Default Swaps
0
100
200
300
400
500
600
3
4
5
6
7
8
06 07 08 09 10 11 12
10-Year Yield (Left Axis) 10-Year CDS (Right Axis)
PE
RC
EN
T
BA
SIS
PO
INT
S
22
YEAR
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LIBOR Rates Have Subsided
3-Month LIBOR
23
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-120.2
0.3
0.4
0.5
0.6
PE
RC
EN
T Y
IEL
D
As of 4/30/12. Source: British Bankers Association.
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M2 Money Supply as of 3/30/12; Commercial and Industrial Loans Outstanding as of 3/30/12.
Sources: Federal Reserve System and The Conference Board.
Back in the U.S... MONEY AND CREDIT ARE ACCELERATING
Year-over-Year Percent Changes
94 96 98 00 02 04 06 08 10 12-40
-30
-20
-10
0
10
20
30
M2 Money Supply Commercial and Industrial Loans Outstanding
24
PE
RC
EN
T
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25
70
80
90
100
110
IND
EX
Trade-Weighted Dollar
As of 4/30/12. Source: Bloomberg L.P.
Avg = 97.5
Avg = 92.7
Avg = 90.3
Avg = 89.3
Avg = 85.9 Avg = 83.0
2003 2004 2005 2006 2007 2008
Avg = 87.3
2009 2010
Avg = 83.8
2011
Avg = 79.5
U.S. Currency Bounces off Mid-2011 Lows DOLLAR GIVING UP GROUND AS SOVEREIGN DEBT FEARS SUBSIDE
2012
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Strong Rebound in Capital Spending COMPANIES SHRUG OFF UNCERTAINTY
Manufacturers’ New Orders, Nondefense Capital Goods, Seasonally-adjusted
94 96 98 00 02 04 06 08 10 1230
40
50
60
70
80
90
$ B
ILL
ION
S
As of 02/29/12. Sources: Conference Board and FactSet.
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0
500
1000
1500
2000
2500
66 75 84 93 02 11
Before Tax After Tax Undistributed
As of 12/31/11. Source: Bureau of Economic Analysis.
Corporate Earnings Very Strong
$ B
ILL
ON
S
27
Corporate Profits with Inventory Valuation and Capital Consumption Adjustments
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Inflation Remains Contained
Year-over-Year Percent Change in Consumer Price Index
96 98 00 02 04 06 08 10 12-3
-2
-1
0
1
2
3
4
5
6
PE
RC
EN
T
As of 03/30/12. Source: U.S. Bureau of Labor Statistics.
Core CPI Headline CPI
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China Inflation Moderating
China CPI vs Food Prices (Year-to-Year Changes)
As of 3/31/12. Sources: Ned Davis Research and Haver Analytics
IND
EX
LE
VE
L
-5
0
5
10
15
20
1998 2000 2002 2004 2006 2008 2010 2012
25
CPI CPI for Food CPI excluding Food
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Yield on 5-Year Treasury Note minus yield on 5-Year TIPS. As of 4/27/12. Source: Federal Reserve System.
Inflation Expectations Remain Subdued
5-Year Breakeven Inflation
04 06 08 10 12-3
-2
-1
0
1
2
3
PE
RC
EN
T
2.06%
30
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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 120
2
4
6
8
10
12
14
16
PE
RC
EN
T
1.95%
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Treasury Yields near Historic Lows
As of 4/30/12. Source: FactSet.
10-Year Constant Maturity Treasury Note Yields
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Continued Strong Appetite for Bond Funds
Net Fund Flows By Asset Class, 12-Month Moving Average
As of 3/31/12. Sources: Investment Company Institute and Ned Davis Research.
82 88 94 00 06 12 -16
-4
0
4
16
36
$ B
ILL
ION
S
Equity Funds Bond Funds
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0
2
4
6
8
10
90 92 94 96 98 00 02 04 06 08 10 12
S&P 500 Operating Earnings Yield 10-Year Treasury Note
Stocks Attractive Relative to Bonds
Earnings yield is inverse of P/E for 4-quarter trailing operating earnings.
As of 3/31/12. Sources: Standard & Poor’s Corp. and Bloomberg L.P.
Internet bubble:
Earnings yield of 3.4 = P/E of 29
S&P 500 Earnings Yield vs. 10-Year Treasury Note
PE
RC
EN
T
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Treasuries
Year P/EDividend
Yield10-Year YTM
1962 14.0 4.1 3.91
1966 13.0 4.0 5.01
1970 13.4 4.6 7.91
1974 6.9 5.9 7.90
1982 8.1 6.7 13.06
1987 12.4 4.1 9.52
1990 13.0 4.1 8.72
2002 16.7 2.1 3.94
2009 11.7 3.4 2.82
Current* 14.3 2.0 1.95
S&P 500
34
Valuation of Stocks at Major Market Bottoms
*Estimates as of 4/30/12. Dividends are for the year. Treasuries YTM are averages rates for the appropriate month,
except for the current value. Source: Bhirud Associates, Inc.
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S&P 500 Operating Earnings Estimates CONSISTENT WITH SLOW GROWTH SCENARIO
82.54
49.51
56.86
83.77
96.44 100-105
0
25
50
75
100
2007 2008 2009 2010 2011 2012 Estimate
As of 3/31/12. Earnings represent trailing four-quarter earnings per share.
Source: Standard & Poor’s and BNY Mellon Wealth Management.
S&P 500 Earnings and BNY Mellon Wealth Management Estimates
$ D
OL
LA
RS
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S&P 500 Sector Current 2005 2000 1995
Information Technology 26.5% 26.5% 18.0% 14.2%
Health Care 18.6% 20.6% 14.8% 10.6%
Financials 14.6% 12.7% 11.2% 14.0%
S&P 500 13.2% 11.5% 8.8% 9.0%
Consumer Discretionary 10.1% 8.0% 4.0% 5.0%
Industrials 9.9% 4.1% 3.9% 3.4%
Materials 8.6% 7.3% 2.1% 4.0%
Consumer Staples 6.9% 6.7% 3.5% 4.0%
Energy 5.6% 9.1% 4.6% 4.2%
Utilities 2.0% 2.3% 2.4% 1.2%
Telecommunications 3.9% 3.4% 1.6% 1.6%
Cash as Percentage of Assets
As of 12/31/11. Source: StrategasRP.
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Equity Dividend Yields Currently Competitive with Bond Yields
As of 4/30/12. Source: Baseline.
S&P 500 Dividend Yield vs. 10-Year U.S. Treasury Yield
0
2
4
6
8
10
88 91 94 97 00 03 06 09
S&P 500 Dividend Yield 10-Year U.S. Treasury Yield
PE
RC
EN
T
12
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Dividend Payout Ratios at Historic Lows
As of 3/31/12. Source: StrategasRP. Ned Davis Research, January 1930 – December 2009.
90.1
59.4 54.6 56.0
45.5 48.6 47.6
35.3 30.0
0
25
50
75
100
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s Current*
PE
RC
EN
T
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Steep Tax Increases in 2013
*Excludes qualified dividends.
Note: The 2013 rates reflect the expiration of the Bush tax cuts and the 3.8% medicare tax on net investment income for certain
high income taxpayers as well as the additional medicare payroll tax on employees. The rates summarized above do not take into
consideration the increase in the marginal tax rates for higher income taxpayers due to the loss of the personal exemption, the loss
of some itemized deduction and the deduction for self-employment tax.
PE
RC
EN
T
Maximum Tax Rates 2012 vs. 2013 Reduced Exemptions
$5.12M
$1M
Estate and Gift Tax
$5.12M
$1.36M
Gen. Skipping Tax
35 35
15 15
35 39.6
43.4 43.4
23.8
55
0
10
20
30
40
50
60
Ordinary Income: Wages
Ordinary Income:
Investments*
Qualified Dividends
Capital Gains
Estate, Gift GST Tax
2012 2013
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40
30
40
50
60
70
80
00 01 02 03 04 05 06 07 08 09 10 11 12
Drop in Investor Sentiment
*12/1/95 – 4/24/12.
As of 4/24/12. Source: Ned Davis Research.
Ned Davis Crowd Sentiment Poll
Extreme Pessimism
Extreme Optimism
CR
OW
D S
EN
TIM
EN
T IN
DIC
AT
OR
S&P 500 Gain*
When Indicator Is:
% Gain/
Annum
% of
Time
Above 61.5 0.8 38.0
Between 55.5 and 61.5 5.2 20.7
55.5 and Below 9.2 41.3
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Sell in May and Go Away?
-10
-5
0
5
10
15
20
25
30
35
1926-1929
1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010-2011
1926 To Date
November-April May-October
Source: The Leuthold Group
S&P 500 Annual Total Returns
PE
RC
EN
T
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$16,575
$455,289
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
May 1-Oct 31 Nov 1-Apr 30
42
Sell in May and Go Away?
Source: Ned Davis Research.
S&P 500, Growth of $10,000 Investment, 1950-2010
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4.9
7.9
9.3
15.1 15.1
0
5
10
15
PE
RC
EN
T
Market Performance and Political Parties
S&P 500 Performance by Partisan Control, 1933-2010
Source: StrategasRP
D Congress
R President
R Senate
D House
R President
D Congress
D President
R Congress
R President
R Congress
D President
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CBOE Volatility Index (VIX)
2008 2010 201210
20
30
40
50
60
70
80
90
IND
EX
LE
VE
L
As of 04/30/12. Source: FactSet.
Lower Volatility in 2012 vs. 2011 LIKELY TO PICK UP AS YEAR PROGRESSES
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0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
73 76 79 82 85 88 91 94 97 00 03 06 09 12
Correlations Moving Lower MARKET RESPONDING TO FUNDAMENTALS
Daily data 1/1/1973 – 4/30/2012. Source: Ned Davis Research.
CO
RR
EL
AT
ION
Median 63-Day Correlation of S&P 500 Stocks to the S&P 500 Index
Mean
+1
+2
+3
-1
-2
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More
Attractive
Asset Class
Less
Attractive
Asset Class Outlook
U.S. Large Cap Equities
International Developed Equities
Emerging Markets Equities
High Yield Bonds
Treasuries
Commodities
U.S. Small/Mid Cap Equities
Real Estate (REITs)
Emerging Markets Debt
Private Equity
Hedge Funds (Long/Short)
Municipal Bonds
Corporate Bonds
Managed Futures
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Recommended Balanced Portfolio Structure
The allocation represents BNY Mellon Wealth Management’s Growth and Income (60/40) Non-Traditional Strategic Asset Allocation.
Implementation of allocations may vary based on our asset class outlook at the time of investment and any client specific circumstances.
*Limited to qualified investors only and where appropriate. As of 4/30/12.
Fixed Income 26.5%
High Yield 2.8% Real Estate 2.0%
Commodities 1.2%
Absolute Return Hedge* 3.1%
Long/Short Hedge* 7.3%
International Equities 7.0%
Emerging Markets Equities 10.0%
Emerging Markets Debt 2.5%
Private Equity* 7.5%
Managed Futures 3.0%
U.S. Small/Mid Cap 5.0%
U.S. Large Cap 22.1%
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Fixed Income Sector Returns
9.8
4.8
8.2
13.6
6.2
5.0
7.0
10.7
-1.3
0.0
2.1
0.9 0.6
5.3 5.5
1.8
-4
0
4
8
12
16
Treasury Agency Corporate TIPS MBS High Yield Emerging Markets
Municipal Bond Index
2011 2012 YTD
Selected Sector Returns
As of 3/31/12. Source: Barclays Capital.
PE
RC
EN
T
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Municipal Upgrades and Downgrades
Sources: 2005 – 2011 Moody's Investors Service; 2012 BNY Mellon Wealth Management
-6
-4
-2
0
2
4
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
Upgrades per Downgrade Downgrades per Upgrade
49
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8.8
10.3
12.5 11.8
0.7 1.4
2.2
4.2
0
2
4
6
8
10
12
14
AAA AA A BAA
2011 2012 YTD
50
Credit Quality Returns
As of 3/31/12. Source: Barclays Capital.
Municipal Credit Quality Returns OPPORTUNITIES FOR WELL RESEARCHED ISSUE SELECTION
PE
RC
EN
T
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Corporate Spreads Receding RISK ON – RISK OFF
Baa Corporate Spread
51
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12160
180
200
220
240
260
280
300
320
PE
RC
EN
T
As of 4/30/12. Sources: Barclays Capital and FactSet.
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Strategic Architecture NEW INVESTMENT SOLUTIONS INTRODUCED IN THE LAST FEW YEARS
Date Introduced Solution
October 08 Municipal Opportunities
December 08 Diversified International
January 09 Inflation Adjusted Securities
March 09 Commodities
March 09 Small Cap Value Multi-Strategy
April 09 Focused Equity
September 09 Small/Mid Cap Strategy
December 09 Opportunistic Small Cap
January 10 Mezzanine Finance
January 10 Distressed Opportunities
March 10 Managed Futures
September 10 Tax-Sensitive Large Cap Multi-Strategy
September 10 Large Cap Market Opportunities
November 10 Large Cap Dividend Equity
March 11 Venture Capital/Buyout Private Equity Strategy
March 11 Dynamic Commodities Strategy
July 11 Emerging Markets Debt Local Currency Strategy
July 11 Emerging Markets Income Strategy
December 11 International Equity Dividend Strategy
March 12 Corporate Bond Strategy
Municipal Opportunities
Focused Equity
Mezzanine Finance
Distressed Opportunities
Large Cap Dividend Equity
Emerging Markets Debt Local Currency Strategy
Emerging Markets Income Strategy
International Equity Dividend Strategy
Corporate Bond Strategy
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Preservation and Income
Inflation Protection
Capital Appreciation
Incremental Diversification
Enhanced Return
Objective-Driven Investing
MANAGING WEALTH TO SERVE BOTH LIFESTYLE AND WEALTH TRANSFER NEEDS
Wealth
Preservation
Income
Generation
Wealth
Accumulation
Generational
Transfer
Legacy
Funding
Lifestyle Wealth Transfer
Total Portfolio
Lifestyle
Portfolio
Wealth Transfer
Portfolio
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SLOW, SPORADIC
GROWTH
POLICY HEADWINDS
CHANGED BELIEFS Multi-dimensional Recovery Challenges
A Challenging, Dynamic Landscape
Extreme Investing Environment
2010-2020:
WHY THE MOST CRITICAL DECADE
FUNDAMENTAL
CHANGES
The Most Critical Decade
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Investment Innovation and Rigorous Discipline
Dynamic, Seamless Planning
A Different Quality of Client-Advisor Engagement
2010 to 2020: The Most Critical Decade
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THANK YOU!