INTRODUCTION TO ASSET ALLOCATION

Asset allocation is the process of dividing your investment dollars among a variety of complementary asset classes, such as stocks, bonds, real estate, and short-term, highly liquid vehiclesincluding money market fundsso that your portfolio is well-diversied.

The chart below illustrates the performance of each of these core asset class categories for the 20-year period ending June 30, 2003. During this time period, stocks outperformed bonds and bonds outdistanced money markets. In turn, the volatility declined from stocks to money markets. In any given 20-year time period, one can expect the various asset classes to perform differently and to assume varied levels of volatility in relation to each other.

The ultimate objective of an asset allocation program is to develop an investment portfolio that is properly aligned with your investment objectives and risk tolerance. A well-diversified portfolio will rarely outperform the top asset class in any given year, but, over time, it has often been one of the most effective ways to pursue your long-term financial goals. Key benefits of a sound asset allocation strategy include: Reduced risk: A properly allocated portfolio strives to lower volatility, or fluctuation in return, by simultaneously spreading market risk across several asset class categories. More consistent returns: By investing in a variety of asset classes, you can improve your chances of participating in market gains and lessen the impact of poor performing asset class categories on overall results. A greater focus on long-term goals: A properly allocated portfolio is designed to alleviate the need to constantly adjust investment positions to chase market trends. It can also help reduce the urge to buy or sell in response to short-term market swings.
Asset allocation in practice

Asset Class Performance

10 8 6 4 2 0 Stocks Bonds Real Estate Cash Return Volatility

While there are a broad range of asset classes in which you can invest, most investment professionals agree that a strong allocation strategy includes stocks, bonds, real estate, and cash equivalent instruments.

Source: FactSet. Stocks: S&P 500 Index. Bonds: Solomon Government/ Corporate Bond Index. Real Estate: Frank Russell Real Estate Composite. Cash: IBC/Donoghues Money Fund Average. Results are for the 20-year period ending June 30, 2003, and assume full reinvestment of dividends and capital gains. Volatility is measured by standard deviation and shows how past returns vary from the average rate of return for the period considered. The higher the standard deviation, the higher the price volatility and uctuation. The lower the standard deviation, the lower the level of investment risk. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Solomon Government/Corporate Bond Index consists of several thousand publicly traded issues of all non-convertible bonds of the U.S. government or agencies and non-convertible domestic debt of three major corporate classications: industrial, utility, and nancial. IBC/ Donoghue, Inc., calculates the average weekly performance of more than 700 top money market mutual funds.

Proponents of asset allocation argue that rather than investing in a single asset class, investors should consider allocating a portion of their portfolios to several asset class categories in an effort to achieve higher risk-adjusted returns over time. The theory behind this approach was developed in 1952 by Dr. Harry Markowitz, who discovered that overall portfolio risk can be reduced by combining various asset classes whose returns are not perfectly correlated, or whose returns do not move in unison.

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INTRODUCTION TO ASSET ALLOC ATION continued

Markowitzs Nobel Prize-wining theory, Modern Portfolio Theory, is illustrated by the chart below. The diversied portfolio, which held 35 percent in stocks, 45 percent in bonds, 10 percent in real estate, and 10 percent in cash, performed almost as well as the all-stock portfolio. It captured 80 percent of the return of the all-stock portfolio, with 55 percent less volatilitya tradeoff most investors would gladly accept and one that illustrates how effective asset allocation can be.
Asset Class Performance
12 10 8 6 4 2 0 Stocks Bonds Real Estate Money Markets Return Diversified Volatility

Factors of Portfolio Performance

Asset Allocation: 92% Security Selection: 5% Other: 3%

Source: Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. Determinants of Portfolio Performance II: An Update, Financial Analysts Journal, MayJune 1991.

This study supports the idea that in addition to the core asset categoriesstocks, bonds, real estate, and cashinvestors should consider including sub-asset class categories, particularly as their portfolios increase in value. Within the equity arena, these subcategories might include multiple styles (value, blend, growth), company sizes (small-, mid-, and large-cap), and geographic regions (foreign and domestic). In the xed income arena, one might consider government bonds, corporate bonds, mortgages, and municipalities, with a conscious effort to include bonds of varying maturity and credit quality. Diversication at this level can further dampen volatility, as various subcategories often react differently to changing economic and market conditions. The process of determining which asset classes to include and the appropriate weights to assign to each is, in part, dened by your time horizon, risk tolerance, and familiarity or comfort level with the nancial markets and various investment products.
The Efficient Frontier

Source: FactSet. Stocks: S&P 500 Index. Bonds: Solomon Government/Corporate Bond Index. Real Estate: Frank Russell Real Estate Composite.Cash: IBC/Donoghues Money Fund Average. Diversied Portfolio = 35% Stocks, 45% Bonds, 10% Real Estate, and 10% Cash. Results are for the 20-year period ending June 30, 2003, and assume full reinvestment of dividends and capital gains. Volatility is measured by standard deviation and shows how past returns vary from the average rate of return for the period considered. The higher the standard deviation, the higher the price volatility and uctuation. The lower the standard deviation, the lower the level of investment risk. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Solomon Government/Corporate Bond Index consists of several thousand publicly traded issues of all non-convertible bonds of the U.S. government or agencies and non-convertible domestic debt of three major corporate classications: industrial, utility, and nancial. IBC/Donoghue, Inc., calculates the average weekly performance of more than 700 top money market mutual funds.

Another study by Brinson, Singer, and Beebower further cemented the value and benets of asset allocation, concluding that the asset classes used, and the extent to which each is weighted in an investors portfolio, are the most important decisions an investor can make. They determined that asset allocation decisions account for approximately 92 percent of a portfolios long-term performance. Individual investment selection accounts for only 5 percent, while other factorsmarket timing includedaccount for a mere 3 percent of portfolio performance.

The outgrowth of Markowitzs work on Modern Portfolio Theory was the development of a plotted graph identifying portfolios that have the maximum expected return for any given level of risk, or the minimum level of risk for an innite number of asset class combinations. By plotting each portfolio or combination of asset classes on one axis, and the volatility measuresor standard deviationson another, a line graph representing the optimal combination of asset classes for various levels of risk is produced. This graph is known as the Efcient Frontier.

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INTRODUCTION TO ASSET ALLOC ATION continued

Efcient Frontier

programs are available to help nancial planners and investment advisors construct and manage client portfolios for investors at any level.
Things to remember
Efficient

Mean Return

Inefficient Risk Standard Deviation of Return

Source: Markowitz, Harry. Portfolio Selection. Journal of Finance, 1952. Standard deviation is an indicator of a funds total return volatility. The larger the funds standard deviation, the greater its volatility.

Asset allocation is a critical element to any sound investment plan. By building a portfolio that encompasses a wide selection of securities and a broad range of asset classes and investment styles, you can help protect your portfolio from sudden changes in the nancial markets. A diversied solution can potentially help you attain your long-term goals more readily and with additional peace of mind. There can be no guarantee that any particular yield or return will be achieved from any investment. Investors should note that diversication does not assure against market loss and that there is no guarantee that a diversied portfolio will outperform a nondiversied portfolio. A change in your goals, time horizon, risk tolerance, or personal nancial situation may require a change in your strategic asset allocation, which is why its important to periodically review your asset allocation strategy. For example, as your time horizon shortens, you may have less time to recoup losses from sudden market downturns. Therefore, you might consider a more conservative asset mix. In contrast, investors whose nancial situation has improved signicantly or who have become more comfortable and experienced with more volatile assets, such as stocks, might shift to a more aggressive allocation strategy. Fluctuations in the nancial markets may also necessitate a reassessment of your portfolio. For example, if you begin an investment program with 75 percent of your money in stocks, 20 percent in bonds, and 5 percent in money market funds, several years of strong bond market performance (as was the case from 2000 to 2003) could quickly shift your allocations. The resulting, unplanned overexposureor in negative conditions, underexposureto an asset class may not be in keeping with your risk tolerance, investment goals, and time horizon. Thats why it is important to maintain an ongoing dialogue with your nancial professional to establish and periodically rebalance your portfolio, so you can help ensure that your investment plan remains consistent with your long-term goals.

Points on or under the curve (in the darker area) represent the possible combinations of investments. Points above the curve (in the lighter area) are unobtainable combinations given the particular set of available asset class categories. The curve itself represents where you could not obtain higher average returns without generating higher volatility, or where you could not obtain lower volatility without generating lower average returns. The portfolios that lie directly on the curve are viewed as efcient, which is why the curve itself is called the Efcient Frontier. Portfolios that lie below the curve are deemed inefcient, as alternate portfolios exist with higher returns, lower volatility, or both. Utilizing Efcient Frontier analysis, advisors can select which asset classes to include in a given portfolio and then view all possible combinations of those asset classes to help determine the most appropriate mix for each client. Until recently, the benets of the revolutionary efforts of Markowitz and others in the nancial arena have been largely reserved for institutional and high-net-worth investors who were able to access the high-level mathematicians and computer systems needed to capture, calculate, and report risk and return data on a multitude of asset class categories. Now, with advances in computer technology and additional studies done to quantify the true value of the asset allocation decision, sophisticated software

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Reward

PORTFOLIO REACTIONS FOLLOWING PAST FINANCIAL CRISES

History has shown that portfolios invested during market downturns have experienced recoveries along with the market as a whole.

The following illustration depicting two notable, historical market events demonstrates the resilience of the market and shows how a sample portfolio would have recovered over the ensuing months and years.
2001: Terrorist Attacks Worst Market Day: 9/17/01

1989: U.S. Savings & Loan Crisis Worst Market Day: 10/13/89
50 42.92% 40

30

28.50%

26.64%

20 12.87% 10 7.68% 3.58% 1.50% 2.25% 3.72% 2.70% 2.69% 6.10%

10 Cumulative Percentage of Return Worst Day: After 1 year: After 1 month: After 3 years: After 6 months: After 5 years:

This sample portfolio return shows the loss the portfolio endured during the worst market day of each event, as well as how that portfolio fared over time as it remained invested in the market. Investors who attempt to time market conditions by pulling their assets out when things get rocky run the risk of missing the potentially dramatic gains that can help them in their pursuit of their long-term goals. In order to evaluate how your portfolio should be invested during the good timesand the challenging timeswe take both your risk tolerance and current market conditions into account.
Past performance is no guarantee of future results. Returns are based on a sample balanced portfolio comprised of 60% equities (reected by the S&P 500 Index) and 40% xed income (reected by the Barclays Capital Aggregate Bond Index). This is for illustrative purposes only. No specic investments were used in this example. All indices are unmanaged and investors cannot invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Actual results will vary. Source of returns: MPI Stylus.

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PERIODIC TABLE OF ASSET CLASSES

2003
Highest Return
Emerging Markets 56.28% Small-Cap Blend 47.30% Mid-Cap Blend 40.10% World Stock 39.16% Real Estate 37.08% Large-Cap Blend 29.90% High-Yield 27.93% Commodities 22.66% Long/Short 17.27% Market Neutral 8.83%

2004
Real Estate 31.56% Emerging Markets 25.95% World Stock 20.70% Mid-Cap Blend 20.20% Small-Cap Blend 18.30% High-Yield 11.96% Long/Short 11.56% Large-Cap Blend 11.40% Commodities 7.64% Market Neutral 4.97%

2005
Emerging Markets 30.31% Commodities 17.54% World Stock 13.54% Mid-Cap Blend 12.70% Real Estate 12.16% Long/Short 9.68% Market Neutral 7.11% Large-Cap Blend 6.30% Small-Cap Blend 4.60% Managed Futures 3.75%

2006
Real Estate 36.14% Emerging Markets 32.59% World Stock 26.34% Small-Cap Blend 18.40% Large-Cap Blend 15.50% Mid-Cap Blend 15.30% Long/Short 14.38% High-Yield 11.85% Market Neutral 7.64 Money Market 5.08%

2007
Emerging Markets 39.39% Long/Short 13.66% World Stock 11.17% Commodities 11.08%

2008
Managed Futures 13.60% IntermediateTerm Bond 5.24% Money Market 1.51% Market Neutral 0.61%

2009
Emerging Markets 79.02% High-Yield 58.21% Mid-Cap Blend 40.48% World Stock 32.46% Large-Cap Blend 28.43% Small-Cap Blend 27.17% Long/Short 22.13% Real Estate 20.15%

2010
Real Estate 28.48% Small-Cap Blend 26.85% Mid-Cap Blend 25.48% Emerging Markets 18.88% Commodities 16.83% Large-Cap Blend 16.10% High-Yield 15.19% World Stock 7.75%

2011
Muni National Intermediate 10.70% Real Estate 8.69%

2012
Emerging Markets 18.22% Real Estate 17.77%

Intermediate- World Stock Term Bond 17.32% 7.84% High-Yield 4.38% Large-Cap Blend 1.50% Money Market 0.07% Mid-Cap Blend 1.55% Small-Cap Blend 4.18% Managed Futures 4.19% Market Neutral 4.23% Long/Short 7.31% Mid-Cap Blend 17.28% Large-Cap Blend 16.42% Small-Cap Blend 16.35% High-Yield 15.59% Market Neutral 12.38% Long/Short 8.21% Muni National Intermediate 6.78% IntermediateTerm Bond 4.21% Money Market 0.07%

Intermediate- Muni National Term Bond Intermediate 6.97% 2.47% Market Neutral 6.48% Large-Cap Blend 5.80% Mid-Cap Blend 5.60% Money Market 4.71% Long/Short 19.76% High-Yield 26.17 Small-Cap Blend 33.80% Large-Cap Blend 37.60%

Commodities IntermediateTerm Bond 18.91% 6.54% Long/Short 3.70% Market Neutral 2.70%

Muni National Commodities Muni National Intermediate Intermediate 37.61% 3.36% 12.91% Managed Futures 2.87% High-Yield 2.66% Small-Cap Blend 1.60% Real Estate 15.69% Real Estate 37.73% Mid-Cap Blend 41.50% World Stock 45.09% Emerging Markets 53.33% Market Neutral 6.24%

Muni National Muni National Muni National Muni National Intermediate Intermediate Intermediate Intermeidate 4.32% 4.47% 3.51% 4.84 Intermediate- IntermediateTerm Bond Term Bond 4.11% 4.34% Managed Futures 3.92% Managed Futures 3.52% Money Market 1.24% Money Market 3.34% IntermediateTerm Bond 2.43% High-Yield 2.26% IntermediateTerm Bond 3.84% Managed Futures 0.40% Commodities 2.71%

Intermediate- Muni National World Stock Term Bond Intermediate 12.14% 5.93% 2.38% Managed Futures 2.23% Money Market 0.14% Managed Futures 2.01% Money Market 0.13%

Commodities Commodities 13.32% 1.06% Emerging Markets 18.42% Managed Futures 2.93%

Lowest Return

Money Market 1.07%

Source: MPI Stylus and FactSet. This example is for illustrative purposes only. Performance data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversication does not assure against market loss and that there is no guarantee that a diversied portfolio will outperform a nondiversied portfolio. The return and value of investment products will uctuate with market conditions. Indices are unmanaged and investors cannot invest directly in an index. The above asset classes are represented by the following indices: Large-Cap Russell 1000; Mid-Cap Russell Midcap; Small-Cap Russell 2000; World Stock MSCI EAFE; Emerging Markets MSCI EM; Intermediate-Term Bonds Barclays Capital U.S. Aggregate Bond Index; Muni National Intermediate Barclays Capital U.S. Municipal Bond; Real Estate MSCI US REIT; High-Yield Bond BofA US HY Master II; Money Market BofA US 3Month T-Bill; Long/Short DJ Credit Suisse Long/Short; Managed Futures DJ Credit Suisse Managed Futures; Market Neutral CISDM Equity Market Neutral Index; Commodities Dow Jones USB Commodity Index.

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CORRELATION OF VARIOUS ASSET CLASSES

What is correlation within the portfolio management context? Correlation describes the degree to which assets tend to move together over time. And from a practical standpoint, it can provide important insight into the level of portfolio diversication. Portfolio correlations range between 1.0 and 1.0. If two hypothetical investments have a correlation of 1.0, they are said to be perfectly correlated, meaning that they generally move in exact linear unison. When two investments have a correlation of 0, they are said to
Moderate High Moderate None Negative Negative 0.70 to 1.00 0.11 to 0.69 0. 10 to 0. 10 0. 11to 0.69 0.70 to 1 .00

World Bond Muni National Intermediate Intermediate-Term Bond Short-Term Bond Multisector Bond High-Yield Bond Long/Short Managed Futures Commodities Money Market Market Neutral World Stock Emerging Markets Real Estate Large-Cap Growth Large-Cap Value Small-Cap Growth Small-Cap Value

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1.0 0.34 0.54 0.60 0.66 0.44 0.33 0.50 0.53 0.25 0.32 0.52 0.48 0.36 0.35 0.34 0.18 0.17

2
1.0 0.62 0.33 0.54 0.04 -0.16 0.30 -0.21 -0.04 -0.04 -0.13 -0.05 0.09 -0.16 -0.16 -0.15 -0.14

3
1.0 0.82 0.77 -0.08 -0.40 0.30 -0.19 0.01 -0.16 -0.28 -0.22 -0.20 -0.39 -0.39 -0.50 -0.48

4
1.0 0.56 -0.05 -0.24 0.19 -0.02 0.14 0.00 -0.15 -0.11 -0.14 -0.21 -0.22 -0.33 -0.33

5
1.0 0.50 0.14 0.32 0.18 -0.08 0.21 0.23 0.30 0.27 0.07 0.09 -0.03 0.00

6
1.0 0.82 0.14 0.60 -0.02 0.48 0.81 0.84 0.77 0.73 0.75 0.70 0.72

7
1.0 0.25 0.72 -0.05 0.61 0.91 0.89 0.79 0.92 0.90 0.89 0.88

8
1.0 0.31 0.06 -0.01 0.22 0.19 0.19 0.17 0.17 0.03 0.06

9
1.0 0.20 0.43 0.77 0.78 0.63 0.74 0.70 0.66 0.64

10
1.0 0.06 0.00 0.04 -0.08 -0.08 -0.06 -0.06 -0.11

11
1.0 0.61 0.60 0.46 0.62 0.54 0.55 0.51

12
1.0 0.89 0.78 0.90 0.90 0.82 0.80

13
1.0 0.78 0.86 0.84 0.84 0.81

14
1.0 0.84 0.87 0.83 0.87

15
1.0 0.96 0.93 0.93

16
1.0 0.92 0.95

17
1.0 0.98

18
1.0

This example is for illustrative purposes only. Correlation data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversication does not assure against market loss and that there is no guarantee that a diversied portfolio will outperform a nondiversied portfolio. The return and value of investment products will uctuate with market conditions. Data provided by MPI Stylus. Indices are unmanaged and investors cannot invest directly in an index. Data reects the 10-year time period of 1/1/200212/31/2012. The above asset classes are represented by the following indices: Large-Cap Growth Russell 1000 Growth; Large-Cap Value Russell 1000 Value; Small-Cap Growth Russell 2000 Growth; Small-Cap Value Russell 2000 Value; World Stock MSCI EAFE; Emerging Markets MSCI EM; Real Estate MSCI REIT; Intermediate-Term Bonds Barclays Capital U.S. Aggregate Bond Index; Multisector Bond BofA ML US Corporate Master; Muni National Intermediate Barclays Capital U.S. Municipal Bond; High-Yield Bond BofA ML High Yield Master II Index; Short-Term Bonds Barclays Capital Government 13 Yr; World Bond Barclays Capital Global Aggregate Bond; Market Neutral Morningstar Market Neutral; Managed Futures DJ Credit Suisse Managed Futures; Long/Short CISDM Equity Long/Short; Commodities Dow Jones-AIG U.S. Commodity Index; Money Market ML 3-Month T-Bill.

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CO R R EL ATIO N OF VARIOUS ASSE T CL ASSES continued

have no linear relationship; thus, they typically move independently of each other. Its also possible to have two investments that have a perfectly negative linear relationship with a correlation of 1.0, meaning that when one investment is up a specic percentage, the other investment will be down a multiple of the same amount. Most investments have correlations that range between 0.1 and 1.0. Historically, real estate, international, and xed income investments typically have had low

positive or even negative correlations in relation to U.S. equity investments. Past performance does not guarantee future results, however, and there is not necessarily one particular set of asset classes that will perform most contrary to the overall market. When interpreting correlation values, historically, higher incidences of lower correlations within a portfolio have denoted a higher degree of portfolio diversication, and volatility has been lowered.

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PERIODIC TABLE OF SECTORS

2003
Highest Return
Technology 51.98%

2004
Energy 33.52%

2005
Energy 39.70%

2006
Telecom. 34.81%

2007
Energy 37.90%

2008

2009

2010

2011
Utilities 19.91%

2012
Financial 28.82%

Consumer Health Care Technology Discretionary 22.97% 64.48% 27.66% Consumer Consumer Industrials Staples Discretionary 26.73% 28.60% 33.68%

Financial 34.07%

Utilities 23.73%

Utilities 17.67%

Utilities 21.95%

Utilities 18.61%

Consumer Consumer Staples Discretionary 13.99% 23.92%

Industrial 33.79%

Telecom. 20.50%

Financial 8.90%

Energy 20.82%

Technology 16.97%

Utilities 30.33%

S&P 26.46%

Energy 20.46%

Health Care 12.73%

Telecom. 18.31%

Consumer Discretionary Industrial 17.44% 33.38%

Health Care 8.26%

Financial 20.02%

Telecom. 16.40%

Consumer Discretionary Industrial 26.07% 31.41% Consumer Staples 23.86%

Telecom. 18.97%

Telecom. 6.27%

Health Care 17.89%

Utilities 31.46%

Financial 15.03%

Industrial 5.85%

S&P 15.80%

Industrial 13.79%

Telecom. 34.53%

S&P 500 15.06%

Consumer Discretionary 6.13%

S&P 16.00%

Energy 30.05%

Consumer Staples 13.49%

S&P 4.91%

Consumer Staples 15.55%

Consumer Staples 10.25%

S&P 37.00%

Health Care 21.71%

Consumer Staples 14.11%

Energy 4.72%

Industrial 15.35%

S&P 28.68%

Consumer Consumer Care Discretionary Technology Discretionary Health 2.93% 8.18% 11.02% 15.25% Consumer Staples 2.60%

Energy 39.20%

Energy 17.26%

Financials 12.13%

Technology Technology 2.41% 14.82%

Consumer Staples 24.94%

S&P 10.88%

Industrial 14.33%

S&P 5.49%

Industrial 40.02%

Financial 17.11%

Technology 10.19%

S&P 2.11%

Consumer Staples 10.76%

Health Care Health Care 19.41% 4.45%

Telecom. 2.04%

Consumer Technology Technology Discretionary 10.43% 43.58% 5.96%

Utilities 12.58%

Utilities 5.46%

Industrial 0.59%

Energy 4.61%

Lowest Return

Telecom. 12.69%

Consumer Health Care Technology Discretionary 2.01% 6.85% 0.92%

Financial 12.54%

Financial 50.18%

Telecom. 9.85%

Health Care 2.90%

Financial 17.06%

Utilities 1.29%

Source: S&P 500. This example is for illustrative purposes only. Performance data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversication does not assure against market loss and that there is no guarantee that a diversied portfolio will outperform a nondiversied portfolio. Indices are unmanaged and investors cannot invest directly in an index. The above asset categories are represented by the following indices: Technology S&P 500 Technology; Financials S&P 500 Financials; Utilities S&P 500 Utilities; Telecom. Services S&P 500 Telcom Services; Consumer Discretionary S&P 500 Consumer Discretionary; Health Care S&P 500 Health Care; Consumer Staples S&P 500 S&P Consumer Staples; Industrials S&P 500 Industrials; Energy S&P 500 Energy; S&P S&P 500 Index. The return and value of investment products will uctuate with market conditions.

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STRATEGIC VS. TACTICAL ASSET ALLOCATION

Strategic allocation refers to the development of a portfolio that reects a clients long-term investment risk and return prole. With the clients risk tolerance and nancial needs and goalsas determined in the Investment Policy Statementin mind, the advisor will develop an asset allocation strategy that is not expected to vary as years pass. In reality, changes in the clients nancial circumstances often require the advisor to shift the allocation; however, the initial intent of this approach is for the allocation to remain stable for at least ve years, and the advisor will rebalance the portfolio periodically to maintain the determined distribution. Tactical allocation involves the active management of a portfolio, where the advisor changes the asset allocation at frequent intervals in the hopes of enhancing returns. Many believe tactical asset allocation bears a resemblance to market timing, as this methodology usually involves making assumptions based on current or immediate future projections regarding factors such as interest rates, political events, commodity markets, and demographic trends. While this type of anticipatory strategy is used often, most studies have shown that advisors have not consistently been able to achieve better results than if they had used strategic policies. Keep in mind that strategic and tactical asset allocation are not opposing mechanisms; rather, they are tools that can operate in tandem. Our rst step is to establish a rm foundation for your nances through determining the appropriate level of equity, xed income, and cash exposure within your portfolio. Later, we will work with you to choose an appropriate asset allocation approach that may be achieved through active tradingdesigned to take advantage of changing factors in the markets and economyor through a less active approach. Consider the analogy of a ship at sea. Upon departure, a clear course is charted. But if the course could be modied so as to encounter favorable winds or to avoid a storm, the ship would follow a slightly different path. In this way, we establish a xed allocation with a destination in mind, but we may build into this plan enough exibility to seize opportunities along the way.

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UNDERSTANDING ST YLE BOXES

Perhaps youve seen the Morningstar style boxes. But what do they actually mean? Style boxes are essentially the building blocks of asset allocation. Each box represents an asset class, and each security you own will t somewhere within the nine equity or nine xed income style boxes.

Curr e nt Equity Inv e stm e nt Styl e %

Styl e Valu e 32 Bl e nd Growth 19 19 Larg e -Cap

Mid-Cap

Depending on your goals, risk tolerance, and time horizon, your style boxes are populated by the percentage of your overall portfolio that matches that asset class. The style box breakdown of an aggressive investor with a 25-year time horizon should look signicantly different from a conservative investor with a 5-year time horizon. But, remember, as good a tool as style boxes are, it is also important to be diversied at the security level. You should own multiple securities in each of the applicable asset classes. For the average investor, mutual funds and exchange-traded funds can be the easiest way to accomplish this diversication. And remember, diversication doesnt assure prot or protect against a loss.
Equity style box

Small-Cap

Fixed income style box

Extensive maturity funds holdings have an average effective maturity of more than 10 years. Moderate maturity funds holdings have an average effective maturity of between 4 and 10 years. Limited maturity funds holdings have an average effective maturity of less than 4 years. High-quality funds holdings have an average credit rating of AA or AAA. Medium-quality funds holdings have an average credit rating of BBB or A. Low-quality funds holdings have an average credit rating of BB or below.
Fixed Income Investment Style %
Maturity Limited 40 Mod. Extensive 30 High-Quality

Growth funds invest in stocks that management believes have the potential to increase earnings faster than the general market. Value funds invest in stocks that management believes are currently undervalued and could appreciate in price. Blend funds invest in both value and growth stocks. Domestic large-capitalization (large-cap) funds average weighted market capitalization ranks in the highest 5 percent of the 5,000 largest domestic stocks. International large-cap funds have a median market capitalization greater than $5 billion. Domestic medium-capitalization (mid-cap) funds average weighted market capitalization ranks in the highest 5 percent to 20 percent of the 5,000 largest domestic stocks. Domestic small-capitalization (small-cap) funds average weighted market capitalization ranks in the lowest 80 percent of the 5,000 largest domestic stocks.

Medium-Quality

30

Low-Quality

Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. The prospectus contains this and other information about the fund and should be read carefully before investing. You can obtain a prospectus from your nancial advisor.

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INTRODUCTION TO IBBOTSON ASSOCIATES

U.S. economy. His ndings documented the relationship between risk and return and quantied the ability to reduce risk through diversication. Ibbotson has taken that research and knowledge of asset allocation beyond the classroom and created practical, real-world solutions.
Methodology

Ibbotson Associates, Inc., (Ibbotson) is recognized as a leader of asset allocation research in the nancial services industry. Its business lines include investment consulting and research, planning and analysis software, wealth forecasting, and educational services. It lls an important need in the nance and investment industry for an independent, single-source provider of investment knowledge, practical application expertise, and leading-edge technology. For more than 30 years, Ibbotson has successfully worked to incorporate academic theory into practical, useful investment products and services.

The methodology used to determine the investment portfolios for Ibbotsons asset allocation models is created by mean-variance analysis (MVA). Developed by Harry Markowitz in the 1950s, MVA provides a mathematical framework for generating portfolios that have maximum expected returns for a level of risk (i.e., efcient portfolios). The analysis uses information from asset classes, rather than individual securities. The model allocation for each objective requires three assumptions about asset class information: Expected return: Based on both historical asset class performance and subjective forecasting Expected standard deviation: Forecast based entirely on historical data Correlation coefficients: Degree to which asset classes behave similarly

Through a consulting arrangement with our , broker/dealer, Commonwealth Financial Network Ibbotson has developed ve model portfolios with various investment objectives to cover the spectrum of client needs. These portfolios are a product of the work of rm founder and namesake Roger Ibbotson. A former professor at the University of Chicago, Mr. Ibbotson published a seminal study analyzing the long-term returns of the principal asset classes in the

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REBALANCING

Shifts that occur in the market may have a dramatic impact on an investment portfolios risk/ return characteristics. The example to the right illustrates this point.

Example

Small-Cap Value 20% Mid-Cap 20% Large-Cap Growth 20% Large-Cap Value 20% International Equity 20% Small-Cap Value 15% Mid-Cap 15% Large-Cap Value 15% Large-Cap Growth 40% International Equity 15% Small-Cap Value 20% Mid-Cap 20% Large-Cap Growth 20% Large-Cap Value 20% International Equity 20%
This hypothetical example is not indicative of any real change or actual portfolio.

The portfolio at the top is a well-diversied portfolio with 20% allocated to each asset class. Over time, the growth of the large-cap stocks has impacted the portfolio; the large-cap growth segment now accounts for 40% of the total portfolio. This, in turn, has changed the risk/return characteristics of the overall portfolio to higher risk and potentially higher return, which may not be in line with your investment objectives and goals. By continuously monitoring the portfolio, we can help manage the market changes by buying and selling over- and underweighted asset classes to help ensure that your portfolios risk/return characteristics are always held intact.

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UNDERSTANDING RISK
Country risk: The potential volatility of foreign stock, or the potential default of foreign government bonds, due to political/financial events. Reinvestment rate risk: The possibility that interest or dividends earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. Principal risk: The likelihood that the value of the amount invested will decline due to bankruptcy or default. Currency (exchange rate) risk: The risk that an investments value will be affected by changes in exchange rates. If money must be converted into a foreign currency in order to make a particular investment, changes in the value of the currency in relation to the U.S. dollar will affect the total loss or gain on the investment when currency is converted back. This source of risk applies only if the investor acquires foreign assets denominated in foreign currency. But, because investors may acquire shares in domestic firms with foreign operations or shares in mutual funds that make foreign investments, the investors may still indirectly bear currency risk. Credit risk: The risk that a company or an individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds within their portfolios. Government bonds, especially those issued by the federal government, have had the least amount of default risk and least amount of returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with lower chances of default are considered to be investment-grade, and bonds with higher chances are considered to be junk bonds.

All investments involve some type of risk. Financial risk is the measurable uncertainty that the anticipated return will be achieved. In many instances, investment returns are directly proportional to investment risks; as risk increases, so does potential rewardand potential loss. Although investors must be willing to bear risk in order to achieve an expected return, our main goal is to help our clients manage nancial risk through sound planning and nancial control. We believe that familiarizing yourself with the different types of risk is the rst step in learning how to manage it within your portfolio.

Below is a partial list of the more commonly encountered types of nancial risk: Inflation risk (sometimes referred to as purchasing power risk): Refers to the risk that inflation will diminish the buying power of an investors assets and income. Interest rate risk: The possibility of the reduction of the value of a security, especially a bond, because of a rise in interest rates. Economic risk: The possibility that the revenue generated from a particular project will be insufficient to cover operating expenses and to repay debt obligations. Timing risk: The likelihood that an investor will buy or sell a security at an inopportune time. Typically, this means buying a stock at its high or selling it at its low, or buying a bond just before interest rates rise or selling a bond just before interest rates fall. Market risk: The tendency of an entire class of assets to move together. The value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market. Liquidity risk: The possibility that an investor will be unable to quickly convert a commodity or a security to cash without loss of principal.

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MODEL PORTFOLIOS (AS OF 2/8/2012)

The amount of risk you are comfortable with will help determine the asset allocation of your portfolio. For our purposes, there are 9 investment objectives: Primarily Fixed Income, Balanced Fixed Income-Oriented, Balanced Equity-Oriented, Primarily Equity, Equity, Income, Balanced Fixed Income-Oriented with Alternatives, Balanced Equity-Oriented with Alternatives, and Primarily Equity with Alernatives. Target allocations are subject to change. Primarily Fixed Income

Large-Cap Growth 9% Large-Cap Value 9% Foreign Large-Cap

Blend 4%

Target Allocations: 22% Equity; 71% Fixed Income; 7% Cash or Money Market Majority of assets invested in interest- and/or dividend-bearing securities. Goal is to keep principal steady while earning interest and/or dividends. Portfolio is not expected to keep pace with stock markets.

Short-Term Bond 33% Intermediate-Term

Bond 30%

High-Yield Bond4% World Bond 4% Cash or Money Market 7%

Balanced Fixed Income-Oriented

Large-Cap Growth 12% Large-Cap Value 12% Mid-Cap Growth 4% Small-Cap Value 3% Real Estate 4% Foreign Large-Cap
Blend 6%

Target Allocations: 41% Equity; 54% Fixed Income; 5% Cash or Money Market Focus on reducing short-term losses. Willing to accept some fluctuation of principal, but should be kept to a minimum. Portfolio is expected to underperform the stock market during positive markets and to overperform during negative markets.

Short-Term Bond 24% Intermediate-Term Bond 22% High-Yield Bond 4% World Bond 4% Cash or Money Market 5%

Investments in xed income and equity securities are subject to the following principal investment risks: the risk that the price of securities may decline in response to general market and economic conditions or events, as well as investment rate risk, or the risk that the issuers earnings prospects and overall nancial position will deteriorate, causing a decline in the securitys value over short or extended periods of time. Mid- and small-cap investments may be subject to additional risk due to reduced market share. International investments are subject to certain risks, such as currency uctuations, economic instability, and political developments not present with domestic investments. Emerging market investments can offer higher potential returns to long-term investors but also carry higher risk. Emerging market investments entail higher political and liquidity risks than domestic investments and, as such, may be more volatile. Currency risks also affect emerging market investments. REITs, which own real estate, are subject to a number of risks, including possible declines in the value of real estate; risks related to economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; and dependency upon skills of the management of REITs. The return and principal value of any investments in securities may uctuate so that shares, when redeemed, may be worth more or less than their original cost. Fixed income investments are subject to interest rate risk and prepayment risk. Bond values may change due to current interest rate changes and are subject to the risk that the issuer may default. An investment in the money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency; although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

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MO D EL PO RTFOLIOS (AS OF 2/8/2012) continued

Balanced Equity-Oriented Target Allocations: 59% Equity; 37% Fixed Income; 4% Cash or Money Market

Large-Cap Growth 16% Large-Cap Value 16% Mid-Cap Growth 6% Small-Cap Value 4% Real Estate 5% Foreign Large-Cap
Blend 8%

Should expect more risk than conservative investor. Portfolio should experience more fluctuation than a more conservative model because of reduced fixed income exposure and higher stock exposure. Portfolio is expected to underperform the stock market slightly on the upside and to lose less on the downside.

E merging Markets 4% Short-Term Bond 18% Intermediate-Term Bond 11% High-Yield Bond 4% World Bond 4% Cash or Money Market 4% Large-Cap Growth 20% Large-Cap Value 20% Mid-Cap Growth 5% Mid-Cap Value 4% Small-Cap Growth 4% Small-Cap Value 4% Real Estate 5% Foreign Large-Cap
Blend 11%

Primarily Equity

Target Allocations: 77% Equity; 20% Fixed Income; 3% Cash or Money Market Should expect more risk than moderate growth investor. Portfolio is expected to fluctuate; however, the investor accepts this in the pursuit of higher returns. Portfolio is expected to keep pace with the broad stock market on the upside and to lose less on the downside.

E merging Markets 4% Short-Term Bond 7% Intermediate-Term Bond 5% High-Yield Bond 4% World Bond 4% Cash or Money Market 3%
Large-Cap Growth 25% Large-Cap Value 25% Mid-Cap Growth 7% Mid-Cap Value 6% Small-Cap Growth 5% Small-Cap Value 4%

Equity

Target Allocations: 97% Equity; 3% Cash or Money Market Seeks to achieve highest rates of return with little or no concern for portfolio fluctuation. Portfolio is expected to outperform the broad stock market during positive markets and to underperform in negative markets.

Real Estate 5% Foreign Large-Cap

Blend 15%

E merging Markets 5% Cash or Money Market 3%

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MO D EL PO RTFOLIOS (AS OF 2/8/2012) continued

Income

Short-Term Bond 10% I ntermediate-Term

Bond 32%

Target Allocations: 23% Equity; 72% Fixed Income; 5% Cash or Money Market Seeks income generation and preservation of capital; growth is a secondary objective. Portfolio will typically be invested in a broad mix of stocks and bonds.

M ultisector Bond 8% High-Yield Bond 5% World Bond 6% Emerging Markets Bond 6% World Stock 7% World Allocation 8% Financials 8% Bank Loan 5% Cash or Money Market 5%

Balanced Fixed Income-Oriented with Alternatives

Large-Cap Growth 10% Large-Cap Value 10% Foreign Large-Cap

Blend 5%

Target Allocations: 25% Equity; 53% Fixed Income; 15% Alternatives; 7% Cash or Money Market Should expect more risk than a portfolio invested entirely in fixed income. Portfolio should experience more fluctuation than a capital preservation model because of reduced fixed income exposure and higher equity exposure. Portfolio is expected to underperform the stock market during positive markets but should lose less on the downside due to the addition of alternative asset classes that traditionally have had a lower correlation to equity markets.

Managed Futures 4% Market Neutral 5% World Allocation 6% Short-Term Bond 24% Intermediate-Term Bond 22% High-Yield Bond 3% World Bond 4% Cash or Money Market 7%

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MO D EL PO RTFOLIOS (AS OF 2/8/2012) continued

Balanced Equity-Oriented with Alternatives

Target Allocations: 40% Equity; 35% Fixed Income; 20% Alternatives; 5% Cash or Money Market Should expect more risk than a conservative investor. Portfolio should experience more fluctuation than a more conservative model because of reduced fixed income exposure and higher equity exposure. Portfolio is expected to underperform the stock market during positive markets but should lose less on the downside due to the addition of alternative asset classes that traditionally have had a lower correlation to equity markets.

Large-Cap Growth 11% Large-Cap Value 11% Mid-Cap Growth 4% Small-Cap Value 3% Real Estate 3% F oreign Large-Cap
Blend 5%

Emerging Markets 3% Managed Futures 5% Market Neutral 5% Long/Short 5% World Allocation 5% Short-Term Bond 15% I ntermediate-Term Bond 13% High-Yield Bond 3% World Bond 4% Cash or Money Market 5%

Primarily Equity with Alternatives

Target Allocation: 54% Equity; 19% Fixed Income; 23% Alternatives; 4% Cash or Money Market Should expect more risk than a moderate growth investor. Portfolio is expected to fluctuate, however, as the investor accepts increased risk in the pursuit of higher returns. Portfolio is expected to underperform the stock market during positive markets but should lose less on the downside due to the addition of alternative asset classes that traditionally have had a lower correlation to equity markets.

Large-Cap Growth 12% Large-Cap Value 12% Mid-Cap Growth 5% Mid-Cap Value 4% Small-Cap Growth 3% Small-Cap Value 3% Real Estate 4% F oreign Large-Cap Blend 7% Emerging Markets 4% Managed Futures 7% Market Neutral 5% Long/Short 6% World Allocation 5% Short-Term Bond 7% I ntermediate-Term Bond 5% High-Yield Bond 3% World Bond 4% Cash or Money Market 4%

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EMOTIONS OF INVESTING
however, because it may foster a cant lose attitude that strays from a disciplined investment approach. During these times, its important to review and rebalance as appropriate and stay focused on long-term investment goals. When the market is low, investors often feel defeated. Although the market may be down, buying at this time can offer investors a great opportunity to make money. We all know the old adage that investors should buy low and sell high, yet few investors take advantage of down markets in this way. If it makes sense for your risk tolerance and goals, we may take advantage of market downturns.

Logic and emotion have never been a perfect pairing. It is logical for investors to stay focused on their long-term goals during volatile markets, but emotionally it is very difcult to follow this reasoning.

Emotional instincts, which may be valuable in certain aspects of our lives, may contradict sound investment decisions. The image below depicts the emotional cycle relative to market changes. When the market is doing well, investors are excited, even blissful. This can be the riskiest time to invest,

Positive

Bliss Opportunity to Make Money

Nervous Bold

Market Performance Riskiest Time

Desperate Hopeful

Defeated

Negative

This hypothetical scenario is for illustrative purposes only and does not reect actual market performance, nor is it a prediction of future market conditions.

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INVESTMENT SELECTION METHODOLOGY

that such funds are more than likely to underperform the market in the following year. With that said, for the recommended list to be effective, turnover must be kept to a minimum. What makes Commonwealths recommended list different from lists offered by other firms? 1. Unbiased advice: It is never the analysts intent to pressure advisors to offer certain funds to their clients. Analysts advise or recommend funds on the basis of merit and client situation. They have no interest in steering advisors to sell any fund, especially if a particular fund does not meet the stringent requirements that make up the selection process. This is also consistent with the analyst teams position on being independent in all decision making. 2. Platform for additional research: Because the list is geared for the average investor, it should not be regarded as the end of an advisors research needs. Granted, the recommended list is designed to be a timesaver, but this does not eliminate the need for your advisor to conduct independent research. Furthermore, because the list makes no mention of optimal asset mixes/asset allocations, your advisor must conduct additional research or seek out additional counsel from analysts to decide whether particular recommended funds will be optimal within your asset allocation framework. 3. The art of the analysis: Though the recommended list is constructed in a rigorous fashion, using a combination of quantitative and qualitative research, it can still be construed as an artistic creation because, ultimately, the analysts make decisions on which variables to analyze, weigh, consider, or include in a particular analysis. This does not imply that a process does not existbecause a process is denitely in placebut that the selection of inputs that is integral to the overall process and subsequent selection of mutual funds can be somewhat subjective in nature.

Commonwealths Mutual Fund Recommended List is one of many tools at your advisors disposal. But, like any tool, to be effective it requires a consistent, well-thought-out methodology that is rigorous in analytical nature but receptive to the specic needs of the community using it.

To this end, the investment analysts at Commonwealth produce the recommended list as an indispensable service for advisors seeking to receive high-quality investment research that will ultimately increase the time they spend with clients and lessen the time they spend doing intensive research, which, to a certain extent, is already provided by Commonwealths in-house research staff. Three principles drive the creation of the Mutual Fund Recommended List: 1. Independence and objectivity: In creating the recommended list, we make all decisions on an independent and objective basis. We strive to free ourselves from all outside inuences to add or delete mutual funds. Additionally, our unbiased advice is never intended to pressure investors to buy/sell certain funds within their portfolio. Our advice is centered around the basis of merit within each clients nancial situation. 2. Investor needs: No list can serve or anticipate the needs of every investor. A list that is carefully created and meticulously crafted can serve the needs of many, however. The recommended list is built on this premise by making the assumption that there is a benecial tradeoff in creating a list for many, as opposed to one. In general, the list is designed to offer something for every investor, or better yet, to meet the needs of the average investor. 3. Longevity: Fund additions are made because there is a deep-seated belief that the fund will stay on the list until it closes. Funds of the Month or even Funds of the Year do not receive considerable attention due to empirical research, which asserts

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INVESTMENT SELECTION METHODOLOGY continued

Manager selection process

The mutual fund manager selection process describes the many considerations that Commonwealth makes when deciding which funds deserve to be included or removed from the recommended list. The process has four distinct parts: (1) screening, (2) evaluation, (3) analysis, and (4) nal consideration.
Step 1: Screening

attention to candidates more likely to be selected for the analysis stage. It also serves as a monitoring tool for mutual funds already on the list. Other tools used for evaluation include rolling three-year and ve-year excess returns. These measures supplement the risk-adjusted scoring system with additional objective measures.
Step 3: Analysis

Before any serious analysis can be conducted, an initial screening takes place. The purpose of this screening is to concentrate on the stronger relative performers within a given category or asset class. To do this, managers performing below category median returns over a three-year to ve-year period are eliminated. Also of note, all current recommended list funds are included for benchmarking purposes. Following this, more screens are conducted to help ensure that a fund is available for purchase, has a sufcient long-term track record, and is not a hybrid product or a product that invests a signicant portion of its assets in bonds or categories that are different from its Morningstar denition. This step is taken to help ensure that funds within a particular category meet investors expectations.
Key screening influences

The next step is to cherry-pick funds worthy of nal consideration. This is done by considering the quantitative data collected, as well as any fundamental information acquired from fund fact sheets, analysts, conferences, portfolio manager/fund company visits, and/or conference calls. The objective is to build a solid understanding of how a mutual fund operates. In general, this step requires careful attention to the ve Ps of manager or fund analysis: philosophy, process, people, performance, and price. Ideally, the recommended list includes mutual funds that are strong in all areas, as such funds will have the greatest chance of performing to expectations and a smaller likelihood of being eliminated.
Step 4: Final consideration

Rate of return vs. beta (volatility) Manager track record Top 1/3 ranking among the peer group (asset class) Performance reaction in both up and down quarters Investment style consistency Investment sector diversification
Step 2: Evaluation

Only a few funds will make it to this stage. But making it to this stage does not necessarily mean that a mutual fund will be added to our recommended list. In fact, the state of the current list is what inuences whether a mutual fund addition is needed. Once again, for the list to be useful, turnover must be kept to a minimum or the list will resemble a high-octane stock portfolio. At any rate, the intent of this stage is (1) to produce high-quality fund names that can be added to the list; (2) to serve as a short list for advisors requiring one-off recommendations that meet a specic client need; (3) to act as a monitoring system for high-quality funds that are likely to be added in the future (contingent

After screening, funds are evaluated by applying a risk-adjusted returns scoring system to the remaining mutual funds. The intention of this step is to draw

Recommended List

People

Philosophy

Process

Price

Performance

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INVESTMENT SELECTION METHODOLOGY continued

upon certain conditions being met); and (4) to further justify why current recommended list funds deserve to stay on the list. It is also worth mentioning that, at this stage, fund nalists are compared with current recommended list funds on a quantitative and qualitative basis. Fundamental mutual fund factors are discussed in greater detail and more quantitative data is examined, including upside/downside capture, benchmark tracking, style analysis, and rolling three-year universe ranks.
Manager monitoring

To communicate information garnered from the regular monitoring of funds, the Recommended List Quarterly Review, as well as Fund Fact summaries, are enlisted. The quarterly review provides summaries and quarterly performance information for every Morningstar category and fund on the recommended list. Its objective is to provide advisors with historical information on funds that can be conveyed to clients. Fund Facts provides fund-specic proles, as well as up-to-date quantitative graphs and charts, which are not readily available to the investment community.
Efficacy of the list

Mutual funds already on our list are continuously monitored to ensure that they have the potential to continue to deliver strong relative and absolute performance. But monitoring is more than just performance. It involves the framework already set forth in the ve Ps. Careful attention to the ve Ps, and to whether a particular variable has changed, are paramount to the manager monitoring process because performance is directly related to the strength of these variables. Specic issues falling under the ve-P framework and receiving special attention include manager turnover, style inconsistency, signicant outperformance or underperformance, process changes, and fund mergers.

On a quarterly basis, the efcacy of our Mutual Fund Recommended List is evaluated. Questions concerning how well the list performed since mutual funds were added or deleted, in addition to how well the list performed on a risk-adjusted basis, are answered. Overall, our recommended lists performance is treated like a stock portfolio. When a mutual fund is added, its performance contributes to or detracts from the performance of the list. Lastly, the benchmark for performance is the median for each respective category.

Investing in funds listed in Commonwealths Mutual Fund Recommended List (the list) is not guaranteed to yield any particular return. The list is subject to change. Overall uctuation in markets may affect performance. Past performance is no guarantee of future results.

Investors should consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your nancial advisor. Read the prospectus carefully before investing.

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INVESTMENT SELECTION METHODOLOGY continued

Mutual Fund Universe 14,000 Funds

Ibbotson Asset Allocation 17 Asset Classes/Investment Styles

Simultaneous Quantitative and Qualitative Filtering Process

Quantitative
Peer Group Analysis 3-Year to 5-Year Risk/Reward Analysis Style Consistency Excess Return Consistency Portfolio Correlation Analysis Cost AnalysisRelative

Qualitative
Proven Process

Investment Philosophy

Portfolio Manager Experience Organization (Tradition) Research Support (Analysts) People

Mutual Fund Recommended List

Efcacy of List and Ongoing Monitoring

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