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  1. Client Name Market Analysis / Third Quarter 2009

  2. Quarterly Review Summary of Key Points • The past year has been a huge challenge for investors, and we are pleased we were able to raise our game and perform well over the past 6 months • Markets continued to rally in the third quarter • Economic activity improved, and it is possible the economy is already growing again • Stocks around the globe continued to rally sharply and have strong year-to-date gains • Serious economic challenges remain • The economy depends on the heavily indebted and highly stressed consumer • Foreclosures and financial system losses will remain high and strain the economy • Valuations suggest much lower returns going forward • We don’t believe we are being paid well to take on risk • We have a conservative bias through an underweighting to equities Market Analysis 3Q2009

  3. Asset Class Returns Through 9/30/2009. Past performance may not be indicative of future returns. Market Analysis 3Q2009

  4. This Has Been the Worst Post-War Recession in Terms of Duration and GDP Decline Market Analysis 3Q2009

  5. The Consumer Has Been Battered Debt levels remain very high based on a variety of measures Access to credit is greatly restricted Unemployment is high and still climbing and income growth is minimal Net worth is down sharply Consumers are key to economic growth but are highly stressed Market Analysis 3Q2009

  6. Job Losses and the Length of Time Out of Work Are Both Very High Market Analysis 3Q2009

  7. Household Net Worth Has Plummeted • When people are less wealthy they are less inclined to spend • Debt becomes a bigger overhang and this creates incentive to pay down debt • As financial goals like retirement become threatened it increases the need to save rather than spend Market Analysis 3Q2009

  8. Our Bond Managers Took Advantage of Huge Disruptions in the Bond Markets Market Analysis 3Q2009

  9. The Environment Is Better But Challenges Remain • Evidence suggests the recession ended this summer • Sources of economic growth include • Slowdown of inventory contraction • Effects of huge government stimulus • However, growth is occurring off a depressed level and is still fragile, and some of the boost comes from temporary sources • We continue to monitor key factors: • Housing • Employment • Inflation Market Analysis 3Q2009

  10. Rebuilding of Inventories Will Contribute to Near-Term Economic Growth Market Analysis 3Q2009

  11. Both Trailing Valuation Data and Our Forward-Looking Analysis Suggest Unappealing Equity Valuations Market Analysis 3Q2009

  12. “Old Normal” vs. “New Normal” • We are considering the possibility of a return to prior “old normal” levels of growth • But we continue to weight more heavily the likelihood that we are seeing an economic reset to a lower level • This “new normal” would mean lower spending, lower growth, and lower investment returns in the years ahead • Our scenario analysis allows for both possibilities, but it is our judgment that we are more likely to see weak growth for years to come Market Analysis 3Q2009

  13. Our Scenario Analysis Allows Us to Weigh Risk and Return We combine fundamental and valuation analysis to estimate returns in a range of scenarios we consider possible We expect low equity returns in all but our most optimistic scenario Emerging-markets equities and bonds look reasonably attractive but can be volatile After a furious rally, high-yield bonds are no longer as compelling Some non-government sectors of the bond market still have appeal, but the big upside is largely gone We continue to evaluate funds that pursue alternative strategies Market Analysis 3Q2009

  14. Asset Class Return Estimates Market Analysis 3Q2009

  15. Our Current Portfolio Positioning • With unexciting return potential from stocks and a fragile economy, we don’t see incentive to take on a lot of risk • We expect to underperform if markets continue going up • This could happen longer-term if growth is stronger than we expect • Or shorter term until renewed weakness cools investors’ optimism • If we see another down leg in the markets we expect to outperform • However, in a major decline we’d still see material losses Market Analysis 3Q2009

  16. Final Thoughts The past year is a great illustration of the value of asset allocation Tactical moves mean we are invested differently than the benchmark This is the case currently, and we believe these moves will reward our clients in the years ahead The unprecedented stock opportunities that allowed a number of our active managers to outperform are mostly behind us now But we remain optimistic that both we (at the asset class level) and our managers (picking stocks) can continue to add value as markets experience periods of dysfunction in the years ahead Market Analysis 3Q2009