Client Name

1. Client Name Market Analysis / Second Quarter 2009

2. Our Performance Was Strong in the Second Quarter • We had a strong tailwind from rising markets • Tactical position in bonds added a lot of value • Our active managers in aggregate have added a lot of value, especially since the market low reached late last year Market Analysis 2Q09

3. Asset Class Returns Past performance may not be indicative of future returns. Market Analysis 2Q09

4. A Better Environment, but Serious Challenges Remain • The global economy remains fragile • A huge amount of wealth has been destroyed • As a global debt bubble continues to unwind, businesses and consumers will spend less, possibly for many years to come • This means that when the economy finally bottoms, the recovery could be anemic Market Analysis 2Q09

5. As Wealth Declines, People Are Less Willing to Spend Market Analysis 2Q09

6. The Challenge of Reducing Debt also Reduces Spending Market Analysis 2Q09

7. A Few Key Questions Underlie How the Coming Years Will Unfold • When will the housing market stabilize? • What are the consequences of the growing federal deficit ? • Can policy makers walk the tightrope between deflation and inflation? • Will investors shun risk in the years ahead, which would lower investment returns? Market Analysis 2Q09

8. When Will the Housing Market Stabilize? • There are a few positive signs • Lower prices and interest rates have made homes more affordable • New construction is at a near standstill, which helps avoid worsening the supply glut • Bargain hunters have helped slow the rate of decline in the hardest-hit areas • But plenty of negatives as well • Inventory of unsold homes is at very high levels • Continued foreclosures are adding to supply, and waves of new foreclosures are likely • Unemployment is still getting worse • The low end market is speculators and first-time buyers • The middle and higher-end markets lack buyers and are at risk • Most experts believe we’ll see another 10-15% decline in home prices and almost all think a bottom will happen within 6-12 months Market Analysis 2Q09

9. Home Affordability Is at Record High Levels Market Analysis 2Q09

10. But New Waves of Foreclosures Are Likely Market Analysis 2Q09

11. What Are the Longer-Term Consequences of the Growing Federal Deficit? • Stimulus and bailout spending combined with collapsing tax revenues are bloating the current federal deficit and total national debt • The longer-term problem is worse, and is a function of demographics and rising health care costs • Unless action is taken to reduce the deficit and national debt we will be faced with the challenge of financing it • This can contribute to higher interest rates, a weaker dollar, and inflation Market Analysis 2Q09

12. National Debt as a Percentage of GDP Is Projected to Roughly Double in 10 Years Market Analysis 2Q09

13. We Are Highly Dependant on Foreign Investment to Fund our National Debt Market Analysis 2Q09

14. Should We Worry About Deflation or Inflation? • Deflation is the greater near-term risk and it matters because it can lead to a sustained (and difficult to break) period of: • Anemic spending • High unemployment • More wage cuts • Longer-term, inflation is a risk • The stimulus needed to avoid deflation can be too successful and cause inflation • The federal debt could ultimately be paid off with an inflationary run of the printing press Market Analysis 2Q09

15. We Expect Little Inflationary Pressure in the Near Term from Either the Cost or Demand Side Market Analysis 2Q09

16. Will Investors Shun Risk in the Years Ahead? Willingness to take risk grows during bull markets and erodes during bear markets A downturn this severe could have a lasting impact on risk aversion Risk-averse investors demand higher returns, and therefore pay lower prices for investments For stocks that would mean P/E multiples would be lower than average, which would reduce returns in the years ahead Market Analysis 2Q09

17. Investors Typically Become More Risk-Averse After Major Bear Markets Market Analysis 2Q09

18. The Big-Picture Bottom Line • Macro issues are unusually important in this environment, and will determine what environment we see in the years ahead • But it is very difficult to predict economic events with confidence • Therefore the range of outcomes is unusually wide • Our portfolio strategy is driven by this understanding Market Analysis 2Q09

19. We Probably Won’t Get Much of a Tailwind from the Markets in the Years Ahead • Few asset classes are priced at levels that suggest high returns are likely over our five-year time horizon • Equities are at the upper end of our fair value range* • The lowest hanging fruit money from the extreme market dysfunction may be gone • But the disconnect from fundamentals was so powerful that skilled active managers can still do well in the years ahead • Some asset class opportunities remain, and more are likely to be presented as we see further spells of vola Market Analysis 2Q09

20. We Have Several Current Tactical Positions • We own global bonds • We’ve seen an excellent return and continue to value their role in our portfolios, especially as a hedge against U.S. dollar devaluation • Emerging-markets equities reflect aprox. 50% of our foreign equities • This could be more volatile in the short term, but we expect higher returns from emerging markets in all of our five-year scenarios • We added TIPS as a long-term inflation hedge our portfolios • We’ve added some hard assets to all of our models Market Analysis 2Q09

21. Our Overall Portfolio Positioning Is Tilted Toward the Conservative • We are materially underweighted to U.S. equities, which lowers risk • But some of that is in high-yield, which has some equity like characteristics • Some is in emerging-markets, which can be more volatile than U.S. stocks • Our fixed-income managers have taken on some risk to pursue compelling opportunities • The net is that we have a conservative bias, but not as great as it may first appear Market Analysis 2Q09

22. In Summary • The very serious danger of a financial system collapse and possible depression is past • But the global economy faces serious challenges and risks remain • After a strong rally, stocks are not cheap and our return outlook is muted • Nevertheless, overall expected portfolio returns are well above cash returns and, in the more optimistic end of our scenario range, returns are strong • Moreover, we think we can do better than just what the markets give us • Continued opportunities are likely at the tactical level (for us) • And at the individual stock and bond level (for our managers) Market Analysis 2Q09