July 13, 2009

Quarterly Research Conference Call

Jeff MacLeanChief Executive Officer

Eric J Petroff CFA

LOS ANGELES

WURTS & ASSOCIATES

SEATTLE

Eric J. Petroff, CFADirector of Research

LOS ANGELES2321 Rosecrans AvenueSuite 2250El Segundo, California 90245310.297.1777 telephone310.297.0878 facsimile

SEATTLE999 Third AvenueSuite 4200Seattle, Washington 98104206.622.3700 telephone206.622.0548 facsimile

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July 13, 2009 Quarterly Research Conference Call – 10:00 am (Pacific)

Dial In

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1

Our Goal – Top Down & Holistic Portfolio DesignMosaic and Exhaustive Market Analysis

• Key macroeconomic factors

• Bureau of Economic Analysis, Bureau of Labor Statistics, US Treasury Department

• Fiscal & Monetary Policy

• Federal Reserve, Office of Management & Budget, Congressional Budget Office

• Major Asset Class Valuations

• S&P, Shiller, Russell, Barclays, MSCI, , , y ,

• We develop our own informed opinion…We look to capital markets for guidance, not the herd

Strategic Thinking vs. Benchmark Fixation

• Thought process and outlook aligned with goals and needs of our clientele

• Strategically oriented 10 year outlook on capital markets and economic environment

Simplicity & Clarity of Thought

• There is no correlation between investment complexity and investment return

Si l i b tt d th t’ th t!• Simpler is better…and that’s that!

Holistic Portfolio Design

• Assets deployed based on current market conditions, not past returns

• Diversification based on easily understood key risk factors…no reliance on statistical models

2

y y

• Dynamic and responsive to evolving conditions…when markets change, so should your advice!

3

A Reminder…We Look at 10 Year Periods for a Reason

144

180The Basic Relationship Between Time and Forecasting Accuracy

72

108

Fore

cast

ing

Err

or

0

36

0 20 40 60 80 100 120Time

0.74

0.840.91

0.8

1.0

Correlation Between the Barclay's Credit Index Starting Yield and Subsequent Returns (since 1973)

0 56

0.760.75

1.00

Correlation Between Shiller's Earnings & Dividend Yield and Subsequent Returns (since 1948)

0.50

0.3

0.5

0.22

0.37

0.56

0.25

0.50

1

0.0

1 Year 3 Year 5 Year 10 Year

Source: Ibbotson, Wurts & Associates

0.00

1 Year 3 Year 5 Year 10 Year

Source: Ibbotson, Yale/Shiller, Wurts & Associates

4

Can We Be Numerically Correct, No – Directionally Correct, Yes

15%

25%

35%Rolling 3 Year Market Efficiency - Implied vs. Actual Returns

-25%

-15%

-5%

5%

Source: Yale/Schiller, Ibbotson, Wurts & Associates

25%Rolling 10 Year Market Efficiency - Implied vs. Actual Returns

35%Rolling 5 Year Market Efficiency - Implied vs. Actual Returns

-35%

Implied Difference in Expected Equity & Treasury ReturnsActual Difference in Equity & Treasury Returns Over Rolling 10 Years

15%

25%

15%

25%

35%

-5%

5%

Implied Difference in Expected Equity & Treasury Returns

-15%

-5%

5%

Implied Difference in Expected Equity & Treasury Returns

2

Source: Yale/Shiller, Ibbotson, Wurts & Associates Source: Yale/Shiller, Ibbotson, Wurts & Associates

-15%

p p q y yActual Difference in Equity & Treasury Returns Over Rolling 10 Years-25%

Reaching the Lower Bounds of Economic Activity

2.8 2.5 2.6

6

12 Growth Rates of Key Macroeconomic Factors (Mar. '09)

-0.4

-3.2 -3.4

1.5

-6

0

Last 1 Year

Source: Federal Reserve, BLS, BEA, Ibbotson, Wurts & Associates

-8.9-12

CPI GDP Aggregate Demand Aggregate Supply

Last 1 Year

Last 20 Years

10Rolling 1 Year GDP Growth (Mar. ‘09)

12Seasonally Adjusted Unemployment Rate (June '09)

5

6

8

10

0

Rolling 1 Year Average GDP Growth Rate Average

2

4

6

Unemployment Rate Average

3

Source: BLS, Wurts & Associates

-50Unemployment Rate Average

Source: BLS, Wurts & Associates

6

Setting the Stage for a Rebound in Household Net Worth

25%27% 27%

40%Major Components of Household Assets/Net Worth (Mar. '09)

13%

6%

15%

11%

6%

15%

9%

5%

18%20%

Last 50 Years

Last 25 Years

Source: Federal Reserve, Wurts & Associates

0%

Real Estate Deposits Fixed Income Equities & Mutual Funds

Last 25 Years

Last 10 Years

5545Returns & Valuations for the S&P 500 Over Time (June '09)

15Rolling 10 Year Change in Household Real Estate Equity (Mar. '09)

3525 10

15

155

Rolling 10 Year Return for S&P 500 Schiller PE Ratio

5

4

Source: Ibbotson, Yale/Schiller Source: Federal Reserve, Wurts & Associates

-5-15oll g 0 ea etu o S& 500 Sc lle at o

0

7

Don’t Misinterpret an Increase in the Savings Rate

8

10

12Household Savings Rate vs. Household Net Worth (Mar. '09)

2

4

6

Rolling 10 Year Average Savings Rate

Source: Federal Reserve, BEA, Wurts & Associates

0

g g g

Rolling 10 Year Change in Household Net Worth

1212Growth in Household Net Worth vs. Personal Consumption (Mar. '09)

12Growth in Consumer Spending vs. Growth in GDP (Mar. '09)

8

10

12

8

10

12

8

10

12

2

4

6

2

4

6

Rolling 10 Year Change in Household Net Worth

4

6

Rolling 10 Year Growth in Personal ConsumptionR lli 10 Y G th i GDP

1

Source: Federal Reserve, BEA, Wurts & Associates Source: Federal Reserve, BEA, Wurts & Associates

00Rolling 10 Year Growth in Personal Consumption

2Rolling 10 Year Growth in GDP

8

Gov’t Spending Should Overcome an Increase in Savings Rate

4.85.1

5.0

6.0CBO's Estimate of Federal Spending ($'s, Trillions)

3.73.6 3.6

3.84.0

4.24.4

4.6

4.0

$2.0

Growth in Savings vs. Gov't Spending Per Capita in Thousands (Assumes 5% Growth in Disp. Income and 7% Savings Rate by 2019)

3.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

$20

CBO Estimated Federal Spending Per Capita in Thousands (300 million pop. assumed)

Source: CBO, BEA, Wurts & Associates

$0.6$0.7 $0.6

$0.8 $0.7 $0.7

$1.0$1.0

$2.0

$$15.4

$16.1

$17.1 $18

$20

$0.2 $0.2 $0.2 $0.2 $0.2 $0.3 $0.3 $0.3 $0.3 $0.3

-$0.5-$0.4

$0.0$0.0

Estimated Additional Dollars Saved Per CapitaE ti t d Additi l G t S di P C it

$12.3 $11.9 $11.9 $12.5

$13.2 $13.9

$14.7

$13

$15

2

Source: CBO, BEA, Wurts & Associates

$0.5

-$1.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Estimated Additional Government Spending Per Capita

$10

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: CBO, BEA, Wurts & Associates

9

Monetary Policy is Inflationary & Our Creditors are Figuring it Out

90%

95%

100%

15

20

25Market Timing of Foreign Official Holders of US Treasury Debt (Mar. '09)

75%

80%

85%

5

0

5

10

2,500,000 Composition of Federal Reserve Balance Sheet1 500 000

Federal Reserve Asset Purchases: Actual vs. Approved

70%-10

-5

Subsequent 1 Year Return of Barclays US Treasury 7-10 Yr. Index% of Foreign Holdings in T Notes

Source: US Treasury, Ibbotson, Wurts & Associates

1,500,000

2,000,000

Other Federal Reserve AssetsMaiden Lane LLC I, II, III (Bear Stearns and AIG)Commercial Paper Money Market Funding FacilityOther loansRepos and Term auction credit

1,250,000

800,000

1,000,000

1,500,000

500,000

1,000,000

s

Repos and Term auction creditSecurities held outright (Gov't Securities, Agency Debt, and MBS)Gold stock, treasury currency, and special drawing right acct

158,441 87,824

455,337

25 000

300,000200,000

500,000

llion

sActual Total Purchases as of June '09

Total Approved Purchases

3

Source: Federal Reserve

-

$ M

illio

ns

,25,000

-

US Treasury Securities

Federal Agency Debt Securities

MBS TALF

$ M

il

Source: Federal Reserve

10

Are We Really De-Levering at the Societal Level?

15

20

25

15

25 Growth in Federal Debt vs. Volatility in Treasuries (Mar. '09)

5

10

15

5

Mar. '08 - Mar. '09 Change in Annual Rates ($'s, Trillions) $20Year Over Year Debt Outstanding by Sector ($'s, Trillions)

0-5Rolling 10 Year Nominal Growth in Federal DebtRolling 10 Year Annualized Std Dev IA SBBI US IT Govt

Source: Federal Reserve, Ibbotson, Wurts & Associates

1.0

0.0

2.0g ($ , )

10.6 10.8

16.4

10.511.2

17.0

$15

$20g y ( )

-0.6

-2.7

-0.8

-2.0

2.6

5.2

2.6

6.7

$5

$10

Mar. '08

Mar. '09

1

-4.0

Total Household Borrowing

Total Domestic Financial Borrowing

Total Business Borrowing (non-

financial)

Total Federal Borrowing

$0

Household Mortgage Household Consumer Credit

Total Business Debt Total Federal Debt Domestic Financial Sector Debt

Source: Federal ReserveSource: Federal Reserve

11

Inflationary Expectations Higher, but Still Somewhat Low

12

16

8

10

12Growth in Monetary Base vs. Inflation (June ‘09)

4

8

2

4

6

R lli 10 Y I fl ti R lli 10 Y G th i M t B

Source: Federal Reserve, BEA, Wurts & Associates

00 Rolling 10 Year Inflation Rolling 10 Year Growth in Monetary Base

2.5Inflation Expectations (Nominal less Real Treasury Yields)

126Societal Arbitrage-Cost of Borrowing vs. Growth in GDP & Household Net Worth

1.31.3

1.7

1.58

10

-2

2

0.7

0.30.5

5 Year Implied Inflation

4

6

-6

-2

10 Year Nominal GDP less 10 Year Nominal Treasury YTM

2

Source: Federal Reserve, Wurts & Associates Source: Federal Reserve; Ibbotson, Wurts & Associates

-0.2-0.5

Dec-08 Mar-09 Jun-09

5 Year Implied Inflation

10 Year Implied Inflation 2-10 10 Year Nominal Growth in Household Net Worth

12

How Does Inflation Affect Key Portfolio Risk Factors?

10

12

14

16

lati

on

The Relationship Between Inflation & Shiller PE Ratio (Since 1960)

0

2

4

6

8

Rolli

ng 1

Yea

r In

fl

Source: Yale/Shiller, Ibbotson, Wurts & Associates

-4

-2

0 5 10 15 20 25 30 35 40 45 50

Shiller PE Ratio

16The Relationship Between Inflation & Risk Free Interest Rates (Since 1960)

16The Relationship Between Inflation & Credit Spreads (Since 1973)

8

10

12

14

ar In

flat

ion

8

10

12

14

16

r In

flat

ion

2

0

2

4

6

Rolli

ng 1

Yea

2

0

2

4

6

Rolli

ng 1

Yea

r

3

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

-4

-2

0 2 4 6 8 10 12 14 16

Ibbotson US LT Yield

-4

-2

-1 0 1 2 3 4 5 6 7Barclays Credit - Treasury Yield

13

Macroeconomic Factors Provide the Bulk of Diversification

170%

100%

150%

200%One Year Change in Major Risk Factors - Dec. '08

-41% -50% -40%-50%

0%

50%

50Major Risk Factors During a Flight to Safety - 2008

40Major Risk Factors During a Flight to Risk - Recent Returns (2nd QTR ‘09)

Source: Yale, Dept. of Energy, Barclays, Federal Reserve

-100%

Shiller PE Ratio Price of Oil ($'s/barrell)

Credit Spread (OAS) Corp. Credit

10 Year Treasury Rate

-3

34

8

0

25

16

21

12

19

129

20

Equity RiskCommodity Risk

Equity RiskCommodity Risk

Interest Rate/Credit Risk

Interest Rate/Riskless

-37 -40 -36

-46

-10-3

-50

-25

9

-9

10

Interest Rate/Credit Risk

Interest Rate/Riskless

1

-75

S&P 500 MSCI World DJ UBS S&P GSCI Barclays Global Credit

Barclays US Credit

Barclays US Treasury 20+

Barclays US MBS

-20

S&P 500 MSCI World DJ UBS S&P GSCI Barclays Global Credit

Barclays US Credit

Barclays US Treasury 20+

Barclays US MBS

Source: Ibbotson Source: Ibbotson

14

Risk in US Large Caps is Far More Balanced Than a Year Ago

15

20

25

30

40

50History of Normalized PE Ratio & Returns (June '09)

5

0

5

10

15

10

20

30

Effects of Changes in Shiller PE Ratio on S&P 500 Returns (Assumes 5% Growth in Earnings & 3% Dividend) (June '08)

Effects of Changes in Shiller PE Ratio on S&P 500 Returns (Assumes 5% Growth in Earnings & 3% Dividend) (June '09)

-10

-5

010 Yr. Real PE RatioSubsequent Rolling 10 Year Return (S&P 500)

Source: Ibbotson, Yale/Shiller

-3-5-2

47

2 3 6 7

5

30 (Assumes 5% Growth in Earnings & 3% Dividend) (June 08)

12

34

210

14

3 5 9 11

0

30

60(Assumes 5% Growth in Earnings & 3% Dividend) (June 09)

-46

-19

-45

-20

-47

-25

-2

-60

-30

0

1 Year Sensitivity 5 Year Sensitivity 10 Year Sensitivity

2

-61-70

Early '80's: PE =8 3rd Quartile Since 1926: PE =11.5

Average Since 1926: PE=17.5

30 Year Average: PE =21

1 Year Sensitivity 5 Year Sensitivity 10 Year Sensitivity

Source: Yale/Shiller; Wurts & AssociatesSource: Yale/Shiller; Wurts & Associates

-60

Early '80's: PE =8 3rd Quartile Since 1926: PE =11.5

Average Since 1926: PE=17.5

30 Year Average: PE =21

y y y

15

A Practical Examination of Downside Risk (Fixed Income)

19.418.1

15

20

25Nominal Fixed Income Rates (YTM)

1.6

3.6 4.0

6.9

1.8

3.7 4.1

7.1

2.44.3 4.1

5.6

12.8

5

10

15

Dec-08Mar-09Jun-09

25

One Year Sensitivity of Barclays Credit Index to Changes in Interest Rates (Assumes 1% default, 5% coupon, and duration of 5)

One Year Sensitivity of Barclays High Yield to Changes in Interest Rates (Assumes 15% default, 8% coupon, and duration of 5)

0

Barclays Treasury Index

Barclays Agency MBS Index

Barclays Aggregate Index

Barclays Credit Index

Barclays High Yield Index

Source: Barclays

20.9

10.9

5.3

0.7

13.7

3.8

25( )

47.036.5

25.517.123.0

12.51.5

25

75

-12.4

-1.9

-6.5

0

As of March '09

-25.4

-6.9

-49.4

-25

As of March '09

3

Source: Ibbotson, Barclays, Wurts & Associates Source: Ibbotson, Barclays, Wurts & Associates

-19.6-25

20 Year Low = 3.9 20 Year 3rd Quartile = 5.8

20 Year Average = 7.0

20 Year 1st Quartile = 7.9

20 Year High = 10.0

As of June '09-75

20 Year Low = 6.8 20 Year 3rd Quartile = 8.9

20 Year Average = 11.2

20 Year 1st Quartile = 13.0

20 Year High = 21.8

As of June '09

16

The Cycle of Capital Markets – Thinking Ahead

8

10The Potential Effects of Inflation on Allocation Decisions

Effects of High Inflationary Expectations• TIPS & commodities rise sharply

Base Assumptions

• Economy recovers in the face of significantmonetary and fiscal stimulus

Implied Shifts in Allocation• More TIPS & commodities

6

CPI

• PE ratios fall• Interest rates rise

• Inflation likely moves past historic averageas a result…a decision point is reached

• Will inflation remain controlled, buthigher than average temporarily, or will itget out of control (i.e., ’70’s)?

• Reduce equities• Sell long bonds/buy floating rates

2

4 Effects of Normal Inflationary Expectations• TIPS & commodities decline slightly• PE ratios are relatively unaffected• Interest rates decline/stabilize

Implied Shifts in Allocation• Scale back TIPS & commodities• Maintain equities• Maintain fixed income

Flight to SafetyStimulus Enacted

Investors Tip Toe Into

A Flight to Risk Ensues

R l i &

Overvaluations & Overconfidence

The Cycle of Capital Markets

0

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Fiscal & Monetary Stimulus

Risk Free Asset Bubble

Investors Tip-Toe IntoRisky Assets

High Grade investments Recover First

Real Estate, Equity & Credit Markets Rise

Household Balance Sheets are Repaired

Liquidity Triumphs Over Reason

Downside Risks Abound and are Ignored

4th Qtr 2008 – 1st Qtr 2009 20xx?Beginning to Happen

4

Repeat

17

Concluding ThoughtsKey Top Down Considerations

• Clearly the US economy remains in the throes of a recession, but we are nearing the lower bounds of economic activity.

• Conditions won’t get worse forever.

• Yes, the savings rate is increasing. However, this is very good for the long term health of the US economy.

• We could very well be setting the stage for the next significant period of economic expansion.

Potential Risks & Opportunities

• We continue to be concerned about inflation over the next decade.

• We could be wrong about inflation, though we doubt it, but the risk to real portfolio value is undeniable.

• Credit remains an attractive opportunity, but not as attractive as just a few quarters ago.

• Equities appear fairly valued relative to long term valuation metrics.

Overall Strategic Portfolio Implications

• Don’t let short term pessimism drive long term allocation decisions. Now is the time to embrace risk, not run away from it.

• Markets tend to be short sighted in nature, which only works to the advantage of long term focused investors.

• Simple concepts such as discipline and patience are far more valuable in achieving portfolio goals than market timing acumen.

• And they are much, much easier!

1

Read our full Quarterly Research Report…We just can’t cover everything during this conference call.

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