March 2012

for the period ended 2/29/12

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GLOBAL PERSPECTIVES

Table of Contents
Overview Strategic Overview News Headlines Global Capital Market Returns Equity U.S. U S Market Returns Valuation Fundamentals Volatility Fixed Income Bond and Loan Returns Yield Curves Global Yields U.S. Yields Municipal, Credit and Mortgage Spreads International Global Returns Major Currencies International Economics Global Stock Fundamentals World and Emerging Markets Euro Zone, China Hard Landing 28-31 32 33 34 35-36 37-38 20 21 22 23-24 25-27 6-10 11-12 13-18 19 3 4 5 Economy Consumer Trends, Confidence Leading & Current Business Indicators Employment and Unemployment GDP Inflation Housing Federal Budget, Debt, Deficits, Funding Corporate Tax Rates Commodities, Oil, U.S. Trade Asset Allocation Correlation Matrix Fund Flows Alternative Investment Returns Long-term Capital Market Results Diversification & Allocation Strategy Retirement Investment-Related Retirement Trends Index Definitions / Important Disclosures 65-74 75-77 57 58 59 60 61-64 39-40 41-43 44-45 46 47 48-49 50-52 53 54-56

All d t are th most recently available as of 2/29/12 unless data the t tl il bl f l indicated otherwise. Please refer to the Index Definitions.
GLOBAL PERSPECTIVES

Strategic Overview
Fundamentals
Global Capital Market Returns Advancing Corporate Profits Broadening Manufacturing Consumer Strength Developing Economies Global Risks U.S. Debt and Deficit Euro zone Debt China Hard Landing Commodities Bubble 51 37 38 54 Total federal debt exceeds 90% of GDP, and the deficit is about 9% of GDP (without Social Security or Medicare) Political posturing will likely continue Medicare). continue. The alarming debt levels of PIIGS countries may be containable by the “fence” being put in place, but potential obstacles and pitfalls remain. China’s soaring state investments, property bubble and declining exports raise questions about the probability of a soft landing landing. Gold prices exemplify the risk of a potential collapse in commodities prices.

Slide
5 14 42 39 35

Comment Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.
Consistent earnings growth is the cornerstone of an improving investment climate. U.S. ISM Manufacturing has expanded for 29 consecutive months and leads the way while global manufacturing also continues to expand. Personal consumption and income are at all-time highs; retail sales are rising fast.

World GDP grew steadily through the great recession supported by the largest emerging markets, which now out-produce the largest developed economies.

3

Overview

GLOBAL PERSPECTIVES

February News Headlines
February 1: Facebook files for an initial public offering that could value that company at as much as $100 billion February 3: Unemployment rate dips to 8.3%, as U.S. adds 243,000 jobs in January 8 3% US 243 000 February 5: New York defeats New England 21-17 to win Super Bowl XLVI February 7: Fed reports that household borrowing increased 9.3% in December after a 9.9% rise in November February 9: Greek leaders agree to new austerity measures as a prerequisite for bailout funds February 9: U.S. government reaches $25 billion settlement with banks over alleged foreclosure abuses February 9: Four-week moving average of initial jobless claims hits lowest level since April 2008 February 13: Moody s becomes first ratings agency to put the U K on watch for downgrade Moody’s U.K. February 14: Bank of Japan expands its asset-purchase program and sets an inflation target for the first time February 14: Congress reaches deal to extend the current payroll-tax cut through the end of the year February 15: Euro zone reports GDP contraction of 1 3% annualized for the fourth quarter 1.3% February 21: Euro zone finance ministers agree to new Greek bailout February 27: Pending home sales deliver highest January reading since 2007 February 28: Dow closes above 13,000 for first time since May 2008 13 000 February 29: ECB launches second installment of its Long-Term Refinancing Operation

4

Overview

GLOBAL PERSPECTIVES

Global Capital Market Returns
Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.
Index Equity S&P 500 S&P Midcap S&P Smallcap U.S. REITs EAFE Emerging Mkt E i Mkts Average Fixed Income Corporate U.S. Treasury 20+ Global Aggregate High Yield Average 60/40 Portfolio
10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Wgt Feb-12 3-mos YTD g

2011

2010

2009

2008

2007

1 year y

3 years 5 years 10 years y y y

4.3 4.5 2.1 (1.4) 5.8 6.4 64 3.6

10.1 11.0 10.2 9.2 10.4 18.8 18 8 11.6

9.0 11.4 8.8 4.9 11.4 21.5 21 5 11.2

2.1 (1.7) 1.0 4.7 (11.7) (22.7) (22 7) (4.7)

15.1 26.6 26.3 23.5 8.2 9.8 98 18.3

26.5 37.4 25.6 21.0 32.5 93.5 93 5 39.4

(37.0) (36.2) (31.1) (41.5) (43.1) (59.3) (59 3) (41.4)

5.5 8.0 (0.3) (20.2) 11.6 59.1 59 1 10.6

5.1 2.6 5.1 2.1 (7.0) (3.8) (3 8) 0.7

25.6 31.5 31.4 36.7 20.3 29.3 29 3 29.1

1.6 4.7 3.4 (6.2) (2.5) 6.4 64 1.2

4.2 8.2 8.1 7.1 6.8 18.8 18 8 8.9

0.8 (2.3) (0.1) 2.4 0.2 2.3

5.3 0.7 2.3 8.3 4.1 8.6

3.1 (2.6) 1.6 5.5 1.9 7.5

8.1 33.8 5.6 5.0 13.2 2.4

9.0 9.4 5.5 15.1 9.8 14.9

18.7 (21.4) 6.9 58.2 15.6 29.9

(4.9) 33.7 4.8 (26.2) 1.9 (24.1)

4.6 10.2 9.5 1.9 6.5 9.0

10.4 32.5 6.5 6.9 14.1 6.0

13.6 9.4 8.6 25.2 14.2 23.2

7.0 10.0 6.6 8.2 7.9 3.9

6.5 8.6 7.4 9.5 8.0 8.5

The Global Asset All Th Gl b l A t Allocation strategy i comprised of 10 asset classes, equally weighted: S&P500 S&P400 Mid ti t t is i d f t l ll i ht d S&P500, Midcap, S&P600 S ll Smallcap, MSCI U S REIT Index, U.S. I d MSCI EAFE Index, MSCI BRIC Index, Barclays Capital U.S. Corporate Bonds, Barclays Capital US Treasury Bonds, Barclays Capital Global Aggregate Bonds, Barclays Capital U.S. High Yield Bonds. Source: FactSet.

5

Overview

GLOBAL PERSPECTIVES

S&P 500
After two bull and two bear market cycles, the S&P 500 is about 13% below its 2007 peak.

1,800

S&P 500 (price only – 15 years) (13%)

S&P 500 (since 2007 peak)

1,600
(49%)

1,400

1,200
(51.9) (27.6) 24.2 101.9 (12.7)

1,000

800

600 400 1997 1999 2001 2003 2005 2007 2009 2011
10/09/07 11/20/08 11/20/08 01/06/09 1/06/09 3/09/09 3/09/09 2/29/12 10/09/07 2/29/12

Source: Standard & Poor’s, FactSet

6

Equity

GLOBAL PERSPECTIVES

Index Total Returns
Flat to negative 2011 returns gave way to a remarkable 2012 rally as perceptions of global risk subsided.

Index Broad Market Dow Industrial S&P 500 S&P 100 (OEX) Nasdaq Composite Large-Cap Russell 1000 Russell 1000 Value Russell 1000 Growth Mid-Cap Russell Mid-Cap Russell Mid-Cap Value Russell Mid-Cap Growth Mid Cap Small-Cap Russell 2000 Russell 2000 Value Russell 2000 Growth

Feb-12 2.7 4.3 4.6 46 5.6 4.4 4.0 4.8 4.1 3.8 4.5 45 2.4 1.5 3.3

YTD 6.5 9.0 9.0 90 14.1 9.5 7.9 11.0 10.5 8.9 12.0 12 0 9.6 8.2 11.0

2011 8.3 2.1 3.2 32 (0.8) 1.5 0.4 2.6 (1.5) (1.4) (1.7) (1 7) (4.2) (5.5) (2.9)

2010 14.0 15.1 12.5 12 5 18.0 16.1 15.5 16.7 25.5 24.8 26.4 26 4 26.9 24.5 29.1

2009 22.6 26.5 22.3 22 3 45.3 28.4 19.7 37.2 40.5 34.2 46.3 46 3 27.2 20.6 34.5

2008

2007

2006 19.0 15.8 18.5 18 5 10.4 15.5 22.2 9.1 15.3 20.2 10.7 10 7 18.4 23.5 13.3

2005 1.7 4.9 1.2 12 2.1 6.3 7.1 5.3 12.7 12.6 12.1 12 1 4.6 4.7 4.2

1 year 3 years 5 years 10 years 8.8 5.1 6.4 64 7.8 4.9 2.2 7.6 2.6 1.5 3.8 38 (0.2) (2.7) 2.4 25.8 25.6 24.0 24 0 30.4 26.2 25.0 27.5 32.0 31.9 32.2 32 2 29.5 27.7 31.2 3.9 1.6 1.6 16 5.2 1.8 ( ) (1.1) 4.5 2.7 1.0 4.1 41 1.8 (0.4) 3.9 5.1 4.2 3.2 32 6.4 4.6 4.8 4.3 8.2 8.3 7.5 75 7.0 7.0 6.7

(31.8) 8.8 (37.0) 5.5 (35.3) 6.1 (35 3) 6 1 (40.0) 10.5 (37.6) 5.8 ( (36.8) (0.2) ) ( ) (38.4) 11.8 (41.5) 5.6 (38.4) (1.4) (44.3) 11.4 (44 3) 11 4 (33.8) (28.9) (38.5) (1.6) (9.8) 7.0

Note: All returns are total returns including dividends expressed as percentages. Returns for 3-, 5-, and 10-year periods are annualized. Source: Dow Jones, Standard & Poor’s, NASDAQ, Russell Investments, FactSet

7

Equity

GLOBAL PERSPECTIVES

Sector Total Returns
Wide variations in sector returns have characterized markets buoyed by strong fundamentals and buffeted by global risks.
Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Information Technology Telecommunication Utilities S&P 500 Feb-12 4.7 3.6 5.9 5.0 1.3 2.8 (0.4) 7.4 3.7 0.7 4.3 YTD 10.9 2.1 7.5 13.5 4.4 10.0 10.8 15.6 0.9 (2.9) 9.0 2011 6.1 14.0 4.7 2010 27.7 14.1 20.5 2009 41.3 14.9 13.8 17.2 19.7 20.9 48.6 61.7 8.9 11.9 26.5 2008 2007 2006 2005 (6.4) 3.6 31.4 6.4 6.5 2.3 4.4 1.0 (5.6) 16.8 4.9 1 year 3 years 5 years 10 years 11.8 15.3 (2.2) (11.0) 13.6 2.3 (2.6) 11.4 7.6 13.6 5.1 37.4 21.1 21.9 27.0 18.8 32.3 28.8 31.4 16.6 16.5 25.6 4.2 8.0 7.0 (14.4) 3.5 2.4 2.5 7.2 0.9 2.1 1.6 1.8 6.4 7.9 (4.5) 0.5 1.4 9.0 (5.9) (3.1) 1.1 4.2

(33.5) (13.2) 18.6 (15.4) 14.2 (34.9) 34.4 14.4 24.2

(17.1) 12.1 12.7 (0.6) (9.8) 2.4 6.3 20.0 2.1 2.9 26.7 22.2 10.2 19.0 5.5 15.1

(55.3) (18.6) 19.2 (22.8) 7.1 7.5 13.3 18.6 8.4 36.8 21.0 15.8

(39.9) 12.0 (45.7) 22.5 (43.1) 16.3 (30.5) 11.9 (29.0) 19.4 (37.0) 5.5

Note: N t All returns are t t l returns including dividends expressed as percentages. Returns f 3- and 5 t total t i l di di id d d t R t for 3 d 5-year periods are annualized. All other returns are i d li d th t cumulative. Total returns are based on S&P GICS sectors. Source: Standard & Poor’s, FactSet

8

Equity

GLOBAL PERSPECTIVES

Style Total Returns
Small- and mid-cap styles have led the market every calendar year except 2007 and 2011.
2001 Sm Val 14.0% Mid Value 2.3% Lg Val -5.6% 5 6% Sm Gr -9.2% Mid Gr -20.2% Lg Gr -20.4% 20 4% 2002 Mid Val -9.6% Sm Val S V l -11.4% Lg Val -15.5% 15 5% Mid Gr -27.4% Lg Gr -27.9% Sm Gr -30.3% 30 3% 2003 Sm Gr 48.5% Sm Val S V l 46.0% Mid Gr 42.7% 42 7% Mid Val 38.1% Lg Val 30.0% Lg Gr 29.8% 29 8% 2004 Mid Val 23.7% Sm Val S V l 22.3% Lg Val 16.5% 16 5% Mid Gr 15.5% Sm Gr 14.3% Lg Gr 6.3% 6 3% 2005 Mid Val 12.7% Mid Gr G 12.1% Lg Val 7.1% 7 1% Lg Gr 5.3% Sm Val 4.7% Sm Gr 4.2% 4 2% 2006 Sm Val 23.5% Lg V l L Val 22.2% Mid Val 20.2% 20 2% Sm Gr 13.3% Mid Gr 10.7% Lg Gr 9.1% 9 1% 2007 Lg Gr 11.8% Mid Gr G 11.4% Sm Gr 7.0% 7 0% Lg Val -0.2% Mid Val -1.4% Sm Val -9.8% 9 8% 2008 Sm Val -28.9% Lg V l L Val -36.8% Lg Gr -38.4% 38 4% Mid Val -38.4% Sm Gr -38.5% Mid Gr -44.3% 44 3% 2009 Mid Gr 46.3% Lg G L Gr 37.2% Sm Gr 34.5% 34 5% Mid Val 34.2% Sm val 20.6% Lg Val 19.7% 19 7% 2010 Sm Gr 29.1% Mid Gr G 26.4% Mid Val 24.8% 24 8% Sm Val 24.5% Lg Gr 16.7% Lg Val 15.5% 15 5% 2011 Lg Gr 2.6% Lg V l L Val 0.4% Mid Val -1.4% 1 4% Mid Gr -1.7% Sm Gr -2.9% Sm Val -5.5% 5 5% 2012 Mid Gr 12.0% Lg G L Gr 11.0% Sm Gr 11.0% 11 0% Mid Val 8.9% Sm Val 8.2% Lg Val 7.9% 7 9%

Indexes: Lg Val = Russell 1000 Value Mid Gr = Russell Mid Cap Growth

Lg Gr = Russell 1000 Growth Sm Val = Russell 2000 Value

Mid Val = Russell Mid Cap Value Sm Gr = Russell 2000 Growth

Note: Data based on Russell U.S. equity indices as indicated above and are total returns including dividends for each calendar year or partial year. Source: Russell Investments, FactSet

9

Equity

GLOBAL PERSPECTIVES

Dow Jones Industrials (price only – 100 years)
It is not unusual for stocks to have prolonged periods of flat returns.

Log

10,000 6,000 5,000 , 4,000 3,000 2,000 1,000 ,000 600 500 400 300 200 100 60 50 40 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Period of falling inflation and interest rates

Period of rising inflation and flat a interest rates

Source: Dow Jones, FactSet

10

Equity

GLOBAL PERSPECTIVES

Performance by Market Capitalization
Mid-cap stocks have had the best U.S. equity 10-year return record.

2.4 2.2 2.0 20 1.8

January 1, 1999 – February 29, 2012

Mid-Cap

Annualized 10-Year Returns Large-Cap: 4.2% Mid-Cap: 8.2% Small-Cap: 8.1%
Small-Cap

Growth of $1

1.6 1.4 1.2 1.0 0.8 0.6 0.4 1999

Large-Cap

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: FactSet, Russell Investments

11

Equity

GLOBAL PERSPECTIVES

Stock vs. Bond Valuation
Stocks look historically attractive based on their earnings yield (E/P) vs. the yield-to-maturity of 10-year Treasuries.

%

16 14 12 10 8 6 4 2 1963 1966 1969 1972 1975 1978 1981

Earnings Yield (solid = forward, dotted = trailing)

U.S. U S Treasury Yield (10 year)

Equivalent to P/E of 13

7.86

Equivalent to P/E of 51
1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

1.97

Note: Earnings Yi ld i th i N t E i Yield is the inverse of th P/E ratio and i calculated as th sum of th reported next t l months’ earnings estimates divided b market f the ti d is l l t d the f the t d t twelve th ’ i ti t di id d by k t capitalization. The 10-year U.S. Treasury yield is used for bonds. Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet

12

Equity

GLOBAL PERSPECTIVES

Dividend Yields
Except for the 2008 spike, stock dividend yields are above levels seen since 1996 and remain historically attractive relative to bond yields.
4
%

Dividend Yields

2

%

Dividend Yield Minus Bond Yield Stocks Attractive

0 3 (2)
average

(4) 2 (6)
Bonds Attractive

1 1987 1990 1993 1996 1999 2002 2005 2008 2011

(8) 1987 1990 1993 1996 1999 2002 2005 2008 2011

Note: Bond yield is represented by the 10-year U.S. Treasury note. Source: Standard & Poor’s, Reuters, FactSet

13

Equity

GLOBAL PERSPECTIVES

Fundamentals Drive the Stock Market
Advancing earnings drive markets up, and negative earnings drive markets down, albeit with a reporting lag.

150%

2012 S&P 500 Earnings Forecast: $105 2012 S&P 500 Price Forecast: 1425

2,200

100%

1,900

S&P 500 EPS Growth

50% 1,300 1 300 0% 1,000
S&P 500 EPS growth (left scale)

-50% %

700

-100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

400

Source: Standard & Poor’s, First Call, FactSet, ING Investment Management

Equity

GLOBAL PERSPECTIVES

S&P 500 Price
14

S&P 500 Index (right scale)

1,600

Corporate Earnings vs. S&P 500 Prices
The S&P 500 sold for 1,469 in 1999 based on less than $40 of annual earnings per share; today the index is about 1,300, a good value with earnings around $100.
1,600 1,400 1,200 1,000 800 800 600
Corporate Earnings S&P500 $ billions Recessions
S&P price level

1,800 1,600 1,400 1,200 1,000 1 000

600 400 200 0

400 200 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Earnings data through 9/30/11. Source: FactSet

15

Equity

GLOBAL PERSPECTIVES

S&P 500 Historical and Projected Earnings
Fourth quarter 2011 earnings reports are underway with positive earnings surprises for two thirds of those reporting.
Sector Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Telecommunication T l i ti Utilities S&P 500 Reported Actual / Total 42 29 60 74 40 52 80 29 8 32 488 / / / / / / / / / / / 42 31 61 80 42 52 80 71 8 33 500 Earnings Growth Percent Positive Negative 7% -11% 13% 6% 2% 5% 64% 14% -23% 23% 4% 13% 28 15 49 46 25 37 43 39 4 19 305 13 11 9 24 15 15 31 32 3 12 165 Earnings Surprise Percent Positive Negative 0% 3% 8% 5% 1% 2% 2% 10% -11% 11% 1% 4% 24 16 43 53 22 33 42 47 2 15 287 18 10 13 18 10 11 30 15 5 14 144

75% 50% 25% 0% -25% 25% -50%

%

1Q 06

1Q 07

1Q 08

1Q 09

1Q 10

1Q 11

Historical

Projected

Note: E i N t Earnings G Growth is th percentage change in the cumulative share weighted EPS earnings f th i the t h i th l ti h i ht d i from th t of a year ago. S that f Surprise P i Percent is th share t i the h weighted average of the ratio of actual company earnings vs. the consensus estimate. Source: Bloomberg, Standard & Poor’s, Factset

16

Equity

GLOBAL PERSPECTIVES

Fundamental Characteristics by Market Capitalization
Size matters in terms of growth and valuation. Smaller stocks have higher growth rates, and in terms of the P/E ratio, higher valuation.
Characteristics Market Capitalization # of Securities Dividend Yield S&P 500 12,360,815 500 1.99 Russell Midcap 4,136,354 782 1.68 Russell 2000 1,190,648 1944 1.38

Growth Historical 3 Year Sales Growth % Long-term Estimated Growth % Estimated 2011 EPS Growth %

S&P 500

Russell Midcap

Russell 2000

-7.65% 11.05% 12.51%

17.39% 12.38% 16.66%

16.94% 14.16% 26.24% High growth th
Russell 2000

Valuation Price/Earnings g Price/Cash Flow Price/Book

S&P 500

Russell Midcap

14.29 6.66 2.22

17.94 8.56 2.08

24.00 8.33 1.88

Rich valuation

Source: Russell Investments, Standard & Poor’s

17

Equity

GLOBAL PERSPECTIVES

Operating Profits and Operating Margins
Corporate profits (excluding financials) have improved steadily along with operating margins, which collapse in recessions and surge in recoveries.
Operating Profits (S&P 500 ex-financial) 1,200 1,100
1,000 900 800 700 600 11 500 400 1997 1999 2001 2003 2005 2007 2009 2011 10 1997 12 13
$ billions

15

Operating Margins (S&P 500 ex-financial)
%

1,085
14

14.0

1999

2001

2003

2005

2007

2009

2011

Note: Values are calculated based on a market value-weighted sum of th quarterly hi t i l results of th S&P 500 constituents excluding Fi N t V l l l t db d k t l i ht d f the t l historical lt f the tit t l di Financials. i l Values reflect results for trailing four quarters at each quarter end. Data as of 12/30/11. Source: Standard & Poor’s, Compustat, FactSet

18

Equity

GLOBAL PERSPECTIVES

Equity Volatility (VIX)
Projected market volatility spikes in times of crisis then drops into the normal range as fear, uncertainty and doubt subside — apparently the prevailing sentiment today.
90
Lehman Crisis

80 70 60 50

12/31/07 = 22.5 11/20/08 = 80.9 12/31/08 = 40.0 02/28/12 = 18.4
U.S. Credit Downgrade Euro Crisis

40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Standard & Poor’s, Chicago Board Option Exchange, FactSet

19

Equity

GLOBAL PERSPECTIVES

Bond and Loan Returns
Although long-term U.S. Treasuries were winners in crisis periods, over time, risk relates to return in a rational way, and riskier bonds have been the leaders.
Index Spread Feb-12 YTD 2011 2010 2009 2008 2007 2006 1 year 3 years 5 years 10 years

U.S. Investment Grade Treasury y( ) Treasury (1-3YR) Treasury (20+YR) Government Related Corporate Fixed rate MBS ABS CMBS Hybrid ARM Barclays Aggregate High Yield and Global High Yield gg g Global Aggregate Emerging Markets Senior Loans

0 0 0 69 181 63 67 207 7 69

(0.7) ( ) (0.1) (2.3) 0.1 0.8 0.1 (0.1) 1.0 0.1 (0.0) (0 0)

(0.3) ( ) (0.0) (2.6) 1.1 3.1 0.5 1.0 2.9 0.6 0.9 09

9.8 1.6 33.8 6.7 8.1 6.3 5.1 6.2 3.6 7.8 78

5.9 2.4 9.4 5.0 9.0 5.5 5.9 18.5 2.5 6.5 65

(3.6) 0.8 2.5 18.7 5.8 24.7 28.3 7.8 5.9 59

13.7 6.7 8.5 (4.9) 8.5 (12.7) (20.5) 6.1 5.2 52

9.0 7.3 10.2 8.0 4.6 7.0 2.2 5.6 6.3 7.0 70

3.1 3.9 0.9 4.3 4.3 5.2 4.7 4.7 4.8 4.3 43

9.6 1.5 32.5 7.5 10.4 6.5 5.6 7.0 4.0 8.4 84

5.0 1.7 9.4 5.6 13.6 5.8 10.0 21.6 4.3 7.5 75

6.4 3.5 10.0 6.1 7.0 6.4 4.3 6.6 5.1 6.4 64

5.5 3.2 8.6 5.5 6.5 5.6 4.4 N/A N/A 5.7 57

(21.4) 33.7

577 82 369 635

2.4 ( ) (0.1) 2.7 0.0

5.5 1.6 5.1 2.1

5.0 5.6 7.0 1.3

15.1 5.5 12.8 10.8

58.2 6.9 34.2 51.6

(26.2) 4.8 (14.7) (29.1)

1.9 9.5 5.2 2.0

11.8 6.6 10.0 6.8

6.9 6.5 12.2 1.2

25.2 8.6 19.2 17.1

8.2 6.6 8.5 4.6

9.5 7.4 11.0 5.9

Note: All spreads are option-adjusted spreads except for Emerging Markets and Senior Loans. Emerging Markets spread is the spread over the U.S. Treasury curve. S i L Senior Loans spread i th average th d is the three-year call secondary spread. All returns are t t l returns including di id d expressed as percentages. ll d d t total t i l di dividends d t Returns for 3- and 5-year periods are annualized. All other returns are cumulative. Source: Barclays Capital, JPMorgan, Standard & Poor’s

20

Fixed Income

GLOBAL PERSPECTIVES

Yield Curves
The steep U.S. yield curve is indicative of economic growth. Higher yield opportunities can be found outside the U.S.

6 5 4

%

U.S. Yield Curve
12/31/06 12/31/09 12/31/07

14 12 10 8
02/29/12 12/31/08

%

Global Yield Curves
Brazil India South Africa Mexico UK Euro Zone US Japan

3 2 1 0

6 4 2

3 mo 2 yrs

5 yrs

10 yrs
2 yrs 0.30 1.13 0.73 3.10 4.79 5 yrs 0.86 2.69 1.44 3.50 4.69

30 yrs
10 yrs 1.97 3.83 2.06 4.08 4.69 30 yrs 3.09 4.63 2.56 4.50 4.81

0

3 mo 2 yrs

5 yrs
3 mo 0.08 0.46 0.06 0.11 4.44 5.60 9.06 8.85 8 85

10 yrs
2 yrs 0.30 0.41 0.17 0.11 4.73 5.93 8.16 10.02 10 02 5 yrs 0.86 0.98 0.82 0.30 5.28 7.75 8.31 11.07 11 07

30 yrs
10 yrs 1.97 2.06 1.82 0.97 6.22 7.82 8.19 11.29 11 29 30 yrs 3.09 3.23 2.43 1.94 7.64 8.77 8.55 11.40 11 40
21

Date 02/29/12 12/31/09 12/31/08 12/31/07 12/31/06

3 mo 0.08 0.06 0.09 3.16 5.01

02/29/12 US UK Euro Zone Japan Mexico South Africa India Brazil

Source: Reuters, Bloomberg, FactSet

Fixed Income

GLOBAL PERSPECTIVES

Global Yields
Investors seeking income may benefit from the rich opportunities for higher yield available from global bonds.

10-Year Sovereign Bond Yields
Euro Region U.S. Canada United Kingdom Australia New Zealand Philippines Poland Indonesia I d i India South Africa Brazil 1.8% 2.0% 2.0% 2.1% 4.0% 4.1% 5.2% 5.5% 5.6% 5 6% 8.2% 8.7% 11.3% 11 3%

Source: Bloomberg

22

Fixed Income

GLOBAL PERSPECTIVES

Fed Funds Target Rates and 3 Month T-Bill Yield
Both the Fed funds rate and 3-month U.S. Treasury bill yields are at their lowest levels ever, and the Fed has indicated it intends to keep rates low into 2014.
16 14
12 10 5 8 6 4
Average
%

Fed Funds Target Rates

9 % 8 7 6

3 Month T-Bill Yield

4 3 2 1 0
1 basis point

2 0 1979 1983 1987 1991 1995 1999 2003 2007 2011

(1) 1987 1990 1993 1996 1999 2002 2005 2008 2011

Note: 3-Month T-Bill Yield is annualized based on purchase at a discount and holding to maturity. Source: Reuters, Bloomberg, FactSet

23

Fixed Income

GLOBAL PERSPECTIVES

U.S. Treasury Yield
Nominal and real yields on 10-year U.S. Treasuries are far below long-term averages, and the Fed’s open market operations have been designed to keep them low.
10 9 8
4
%

10-Year Treasury Yield

6

%

Real 10-Year Treasury Yield

5

7 6 5 4
1 3

2

3 2
1.96%

0
0%

1 1990 1993 1996 1999 2002 2005 2008 2011

(1) 1990 1993 1996 1999 2002 2005 2008 2011

Note: Real 10-Year Treasury Yield is equal to the 10-Year Treasury yield minus core CPI (ex food and energy) Source: Federal Reserve, Bloomberg, FactSet

24

Fixed Income

GLOBAL PERSPECTIVES

Municipal Bond Yields ÷ Treasury Yields
Municipal yields are well above Treasury yields; defaults have been minimal, but pressures to cut spending and balance budgets have been intense.
200 180 160 140 120 100 80 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
%

116

Note: Municipal yields represent the yield-to-worst for the Merrill Lynch AA municipal index. 10-year U.S. Treasury yields are used. Source: Merrill Lynch, Reuters, Bloomberg, FactSet

25

Fixed Income

GLOBAL PERSPECTIVES

Corporate Spreads and Ted Spread
Credit spreads have declined since the 2008 crisis and still offer good opportunity; TED spreads are in the normal range despite debt and deficit fears.
7
%

Corporate Spreads Baa

4

%

Ted Spread (Libor – 3 month Treasury)

6

Lehman crisis

3
5

4
3.4

2

3

1
0.40

2

0
1 0 1990 1993 1996 1999 2002 2005 2008 2011
Euro crisis II

(1) 1990 1993 1996 1999 2002 2005 2008 2011

Note: C N t Corporate Baa Spreads are b t B S d benchmark average rates i excess of 10 h k t in f 10-year U S T U.S. Treasury yields. “Lib ” i th L d I t b k Off Rate, the i ld “Libor” is the London Inter-bank Offer R t th interest rate banks charge each other for loans. Source: Moody’s, Reuters, Federal Reserve, Bloomberg, FactSet

26

Fixed Income

GLOBAL PERSPECTIVES

Mortgage Spreads and Loan Delinquency
Mortgage-backed bond spreads are healthy. Home loan delinquencies far exceed commercial and industrial loans; both have declined since their peaks.
3.5
%

Mortgage Spreads

12

%

Loan Delinquency

Most recent data: 12/30

3.0

10
Residential

9.9

2.5
2.1

8

2.0

6

Commercial and Industrial

1.5

4

1.0

2

1.6

0.5 05 1990 1993 1996 1999 2002 2005 2008 2011

0 1990 1993 1996 1999 2002 2005 2008 2011

Note: Mortgage spread equals the Freddie Mac 30-year fixed rate mortgage yield minus the 10-year U.S. Treasury yield. Source: Federal Reserve (Federal Financial Institutions Examination Council Report), Freddie Mac, FactSet

27

Fixed Income

GLOBAL PERSPECTIVES

World Market Returns by Region – USD
Emerging market equity (EME) has often been a top performer, lagged in 2011, but began 2012 with a strong rally.
2001 EME -2.4% Pac Ex-Japan -9.4% S&P 500 -11.9% 11 9% UK -14.1% Europe Ex-UK -22.0% Japan -29.3% 29 3% 2002 Pac Ex-Japan -5.8% EME -6.0% Japan -10.1% 10 1% UK -15.2% Europe Ex-UK -19.9% S&P 500 -22.1% 22 1% 2003 EME 56.3% Pac Ex-Japan 47.0% Europe Ex-UK 43.6% 43 6% Japan 36.2% UK 32.1% S&P 500 28.7% 28 7% 2004 Pac Ex-Japan 29.6% EME 26.0% Europe Ex-UK 22.4% 22 4% UK 19.6% Japan 16.0% S&P 500 10.9% 10 9% 2005 EME 34.5% Japan J 25.6% Pac Ex-Japan 14.8% 14 8% Europe Ex-UK 11.3% UK 7.4% S&P 500 4.9% 4 9% 2006 Europe Ex-UK 36.4% 2007 EME 39.8% 2008 Japan -29.1% 2009 EME 79.0% 2010 EME 19.2% 2011 S&P 500 2.1% UK -2.5% Pac Ex-Japan -12.7% 12 7% Japan -14.2% Europe Ex-UK -14.5% EME -18.2% 18 2% 2012 EME 18.1% Pac Ex-Japan 14.5% Europe Ex-UK 12.8% 12 8% Japan 9.8% S&P 500 9.0% UK 8.9% 8 9%

Pac Pac Pac Pac S&P 500 Ex-Japan Ex-Japan Ex-Japan Ex-Japan -37.0% 17.1% 33.2% 31.7% 73.0% EME 32.6% 32 6% UK 30.7% S&P 500 15.8% Japan 6.3% 6 3% Europe Ex-UK 17.5% 17 5% UK 8.4% S&P 500 5.5% Japan -4.1% 4 1% Europe Ex-UK -45.0% 45 0% UK -48.3% EME -47.1% Pac Ex-Japan -50.0% UK 43.4% 43 4% Europe Ex-UK 33.9% S&P 500 26.5% Japan 6.4% 6 4% Japan 15.6% 15 6% S&P 500 15.1% UK 8.8% Europe Ex-UK 2.4% 2 4%

Note: All data are based on equity indices for each regional or country index and are total returns including dividends for each calendar year or partial year. Source: MSCI, Standard & Poor’s, FactSet

28

International

GLOBAL PERSPECTIVES

Global Returns – Local and USD
Given geopolitical, economic and financial fears, 2011 equity returns were down, but 2012 had a strong start; emerging markets remain the long-term leader.
Index Global Markets International USD local Emerging Mkt USD local 5.8 5.6 56 6.0 4.5 11.4 9.8 98 18.1 12.3 (11.7) (11.7) (11 7) 8.2 5.3 53 32.5 25.4 25 4 79.0 62.8 (43.1) 11.6 (39.9) (39 9) 4.0 40 26.9 16.9 16 9 32.6 28.9 14.0 29.5 29 5 34.5 35.8 (7.0) (6.8) (6 8) 0.2 1.8 20.3 13.8 13 8 32.6 24.7 (2.5) (4.7) (4 7) 6.5 6.0 6.8 2.3 23 15.5 13.3 Currency Feb-12 YTD 2011 2010 2009 2008 2007 2006 2005 1 year 3 years 5 years 10 years

(18.2) 19.2 (12.5) 14.4

(53.2) 39.8 (45.7) 33.5

Regions Euro x-UK USD local UK USD local Pac x-Japan USD local Japan USD local S&P 500 7.0 4.6 5.2 3.9 4.5 3.2 5.0 50 11.5 4.3 12.8 9.1 8.9 6.0 14.5 10.1 9.8 98 15.5 9.0 (14.5) (12.1) (2.5) (1.8) 2.4 5.1 8.8 12.2 33.9 29.0 43.4 27.7 73.0 45.8 6.4 64 9.3 26.5 (45.0) 17.5 (42.7) (48.3) (28.5) 6.6 8.4 6.6 36.4 22.5 30.7 14.6 33.2 25.9 6.3 63 7.3 15.8 11.3 28.6 7.4 20.1 14.8 20.3 25.6 25 6 44.7 4.9 (10.6) (8.7) (0.2) 1.6 (0.4) (4.8) (10.0) (10 0) (11.1) 5.1 19.6 15.4 24.4 19.7 32.9 17.2 12.4 12 4 5.5 25.6 (3.2) (4.6) (1.4) 2.7 5.4 0.5 (5.6) (5 6) (12.5) 1.6 6.8 1.8 6.2 4.9 13.9 7.9 4.5 45 (0.6) 4.2

(12.7) 17.1 (12.8) 6.1

(50.0) 31.7 (41.6) 21.6 (29.1) (4.1) (29 1) (4 1) (42.5) (10.1) (37.0) 5.5

(14.2) 15.6 (14 2) 15 6 (18.6) 2.1 0.7 15.1

Note: Returns for periods greater than one year are annualized. All returns reflect total return including dividends expressed as a percentage. Source: MSCI, Standard & Poor’s, FactSet

29

International

GLOBAL PERSPECTIVES

Country Returns – USD (YTD)
Sovereign debt and deficit fears remained the dominant global headline risks, yet stock markets around the world were mostly positive at the start of 2012.
20 20 20

Developed Markets (USD)
19 19 19 17 16 15 13 13 12 12 11 11 10 10 9 9 8 8 5 3 2

Finland

Hong Kong

Belgium

Canada

Netherlands

Australia

Switzerland

Denmark

Singapore

Germany

France

Austria

N Zealand

Sweden

Norway

Ireland

EAFE

USA

48

Emerging Markets (USD)
30 27 27 26 22 21 20 18 18 18 18 17 16 16 15 11 11 9 7 7

2

-6

-7

Hu ungary

China

Philip ppines

South Africa

South Africa

ch Czec Rep

Indo onesia

Note: All returns reflect total return including dividends expressed as a percentage. Source: MSCI, Standard & Poor’s, FactSet

Arge entina
30

R Russia

Th ailand

Eme erging Ma arkets

Colombia

Egypt

P Poland

Korea

India

Brazil

alaysia Ma

Pa akistan

Mo orocco

T Taiwan

T Turkey

Israel

International

GLOBAL PERSPECTIVES

J Jordan

Portugal

Greece

UK

Japan

Spain

Italy

U.S. and International Stocks vs. Bonds
Both global bonds and international stocks have outperformed their U.S. counterparts over the last ten years but with higher volatility.

2.6 2.4 2.2 22 2.0
Barclays Capital Global Aggregate Index MSCI EAFE Index Barclays Capital U.S. Aggregate Index S&P 500 Index

Growth of $1

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

break even

2012

Source: FactSet, Russell Investments

31

International

GLOBAL PERSPECTIVES

Major Currencies
Although the U.S. dollar dropped only about 1% in 2011, the dollar is 38% below its 1985 peak compared to a tradeweighted basket of world currencies.
$/€

€ rising vs. $

1.6 1.4 1.2 1.0 0.8
12/31/11: 1.30 2/29/12: 1.34 Change: 3.0%

160 ¥ / $ 140 120 100 80

¥ falling vs. $

12/31/11: 76.94 2/29/12: 80.94 Change: -5.2%

1995 1997 1999 2001 2003 2005 2007 2009 2011

60 1990 1993 1996 1999 2002 2005 2008 2011

2.2 $ / £ 2.0 1.8 1.6 1.4 1.2 12 1990 1993

£ rising vs. $
12/31/11: 1.55 2/29/12: 1.60 Change: 3.2%

140 120 100 80

$ falling vs. major currencies

12/31/11: 82.18 1/31/12: 82.37 Change: -0%

1996

1999

2002

2005

2008

2011

60 1982

1986

1990

1994

1999

2003

2007

2011

Source: FactSet

32

International

GLOBAL PERSPECTIVES

International Economics
China, India and Brazil are growing rapidly, and China is now second only to the U.S., while Germany’s exportdriven economy is the runaway euro zone leader.
Countries Developed Markets US Germany Canada UK Eurozone E Japan Ireland Emerging Markets Brazil Russia India China Mexico 2,557 1,540 1,749 7,197 1,176 12.6 13.9 1.5 5.4 10.3 6.7% 4.5% 6.8% 8.9% 5.4% 3.9% 8.9% 9.4% 10.4% 5.2% 11.2 % 33.9 % 17.9 % 28.8 % 30.0 % 203 139 1,189 1,337 114 5.5 6.6 7.2 4.1 4.79 29 39 26 36 27 USD (Billions) 15,176 3,643 1,760 2,445 13,310 13 310 6,065 221 GDP Per Capita 48.8 42.8 51.6 39.0 25.5 25 5 47.5 45.8 1-Yr Change 1.7% 3.6% 2.5% 0.8% 1.6% 1 6% (0.9%) (0.4%) 5-Yr Change 2.7% 3.9% 2.8% 2.6% 3.3% 3 3% 1.7% 5.3% Trade (% of GDP) Exports 10.0 % 41.2 % 26.6 % 18.2 % 18.5 18 5 % 14.5 % 56.7 % Demographics Population Unemployment Median (Millions) % Age 311 82 34 63 329 127 5 8.3 6.8 7.6 7.8 10.7 10 7 4.6 14.2 45 35 37 45 41 40

Source: FactSet. Data is most recent available.

33

International

GLOBAL PERSPECTIVES

Global Stock Fundamentals
Emerging market equities appear to offer comparable profitability and better balance sheet strength with valuations at or below those of S&P 500 and EAFE stocks.
Valuation P/E (next fiscal year estimated earnings) Price to Book Ratio Price to Cash Flow Ratio Price to Sales Ratio S&P 500 13.0 2.0 20 8.9 1.2 MSCI EAFE 11.8 1.3 13 6.8 0.7 MSCI Emerging Markets 10.8 1.6 16 6.9 0.7

Profitability Return on Equity (ROE) 15.6 11.1 14.4

Balance Sheet Strength B l Sh t St th Long-term Debt to Capital Ratio 37.6 41.0 24.0

Note: Valuation and Profitability figures are weighted harmonic averages, a statistical technique that reduces the effects of extreme outlying data on the f f ff f average. Long Term Debt to Capital figures are weighted averages. Source: FactSet

34

International

GLOBAL PERSPECTIVES

World GDP and Emerging Market Importance
World GDP grew steadily through the great recession, supported by the largest emerging markets, which now outproduce the largest developed economies.
80,000
$ trillions

World GDP

80 70 60 50

%

Emerging Market Importance Percent Contribution to Global Growth, PPP Basis
U.S. + European Union + Japan

60,000

40,000

40 30

20,000

20 10
Global Emerging Markets Top 8*

0 1990 1993 1996 1999 2002 2005 2008 2011

0 1991

1995

1999

2003

2007

2011

Source: The World Bank Group * China, India, Russia, Brazil, Mexico, Korea, Indonesia and Taiwan

35

International

GLOBAL PERSPECTIVES

Developed and Emerging Market Contrasts
Aging populations in mature economies strain public resources and produce heavier government debt burdens that hinder economic growth.
Population % over age 60 2010 40 2030 2050

50

Gross Government Debt to GDP 140
% of GDP

120

G7* All Advanced Economies

30

100

80 20 60 10 40 0
Least Dev. Most Dev China U.S. US Brazil Japan

Emerging and Developing Economies

20 2008 2009 2010 2011 2012 2013 2014 2015

*G7= France, Italy, Germany, Japan, U.K., U.S and Canada Source: IMF, CIA World Factbook

36

International

GLOBAL PERSPECTIVES

Euro Zone
Even with total debt at 152% of GDP, Greece accounts for less then 3% of the euro zone, but Italy and Spain are major economies with much higher total debt at 120% of GDP.
Euro Area 2010 GDP by Country Austria Slovak 3% Belgium Republic Slovenia Cyprus yp 1% 4% 0% 0% Finland Portugal Spain 2% 2% 12% Netherlands 6% Malta France 0% 21% Luxembourg 0% Italy 17% Ireland 2% Greece 3% Germany 27%
0 2000 Euro Zone Debt
Gross Debt in Euros (billions) Debt as % of GDP

160 140 120

1500 100 80 1000 60 500 40 20 0

Source: International Monetary Fund (IMF) as of 2011

37

International

GLOBAL PERSPECTIVES

China Hard Landing
China’s soaring state investments, property bubble and declining exports raise questions about the likelihood of a “soft landing” from its enviable recent growth.
3,000
$ billions State Investment Consumer Spending Government Spending Net Exports

2,000

1,000

0

2002

2003

2004

2005

2006

2007

2008

2009

2010

China’s reported Debt % to GDP
35 30 25 20 15 10 2002 2003 2004 2005 2006 2007 2008 2009 2010
30% may be understated based on contingent liabilities

Source: International Monetary Fund (IMF) as of 2011, China Bureau of Statistics

38

International

GLOBAL PERSPECTIVES

Consumer Trends
At about 70% of GDP, the U.S. consumer is the game changer in the economic recovery. Consumption, income and retail sales are at new highs, and retail sales are rising consistently.
14000
$ billions

8,000

450

7,000
Personal Income

Highest level High t l l ever
6,000 400

12000 5,000 350 4,000 10000 3,000 300
Personal Consumption Expenditures

Retail Sales

2,000

8000 2007 2008 2009 2010 2011

1,000 1 000

250 2004 2006 2008 2010 2012

Source: FactSet

39

Economy

GLOBAL PERSPECTIVES

Consumer Confidence
U.S. consumer confidence seems low, but consumer confidence is backward-looking and has often been a contrary indicator for subsequent stock market returns.
160 140 120 100 80
Total Index Index Level Market returned 16.3% in subsequent 12 months

60 40 20 0 2002 2003 2004 2005 2006
Market returned 49.8% in subsequent 12 months Market returned 13.9% in subsequent 12 months Present

2007

2008

2009

2010

2011

Source: The Conference Board, Factset

40

Economy

GLOBAL PERSPECTIVES

U.S. Leading Indicators
U.S. Leading Indicators have been consistently positive — in fact, for 21 of the last 24 months.

2.0 % 1.0 0.0 (1.0) (1 0) (2.0) (3.0) (4.0) 1987 1989 1991 1993 1995 1997 1999 2001

Recessions

2003

2005

2007

2009

2011

2.0 1.0 0.0 (1.0) (1 0)

2010

2011

Source: Bloomberg, Factset The Conference Board U.S. Leading Index consists of the weighted average of the following indices: 1. 1 Average weekly hours manufacturing hours, 2. 2 Average weekly initial jobless claims 3. Manufacturers 3 Manufacturers’ new orders consumer orders, 4. Vendor performance, slower deliveries 5. Manufacturers’ new orders, capital 6. Building permits, new private housing units 7. Stock prices, 500 common stocks 8. Money Supply, M2 9. Interest Rate Spreads10. Index of consumer expectations

41

Economy

GLOBAL PERSPECTIVES

Broadening Manufacturing
U.S. factory activity remains in expansionary territory as does the global index, but the euro zone is hovering at the precipice of economic contraction.
65 60 55 50 45 40 35 30 2001 2003 2005 2007 2009 2011
30 1997 1999 2001 2003 2005 2007 2009 2011
Manufacturing

U.S. Institute for Supply Management Expansionary (>50)
Non Manufacturing

65 60

Global Manufacturing
Euro zone PMI

56.8 56 8
55

51.1 52.4
50

49.0
45 Global PMI 40

Contractionary (<50)
35

Source: Institute of Supply Management, Federal Reserve, FactSet

42

Economy

GLOBAL PERSPECTIVES

Business Fixed Investment
A strong recovery in corporate profits and cash flows is spurring a revival in business spending on equipment and software.
1,800
$ billions

1,600
Business Fixed Investment

1,400
Highest g level ever

1,200

1,000

Equipment and Software

800

600 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Factset

43

Economy

GLOBAL PERSPECTIVES

Employment Payrolls
Total payrolls, including all non-farm employment, have been positive, but not enough to bring unemployment rates down significantly.
000’s +257 most recent private

400 200 0 (200)

Total Payrolls

+243 most recent total Total Private Payrolls

(400) (600) (800) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: FactSet

44

Economy

GLOBAL PERSPECTIVES

Unemployment Rate
High unemployment may reluctantly recover as growth resumes; recent reports are encouraging, and news of job growth and payrolls has been positive.
800,000
000’s Recessions

12% 11%
Unemployment Rate

10% 9% 8% 7%

600,000

400,000

6% 5%
Initial U I i i l Unemployment Claims l Cl i

4% 200,000 3% 2% 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Source: Bureau of Labor Statistics, FactSet

45

Economy

GLOBAL PERSPECTIVES

Real GDP (Q/Q)
The U.S. has recovered the output level it lost in the recession and has now reached new highs. Expansions historically last about five years.
20

15 Real annualized GDP % change 10

Breakdown Consumption: 71% Government: 20% Investment: 12% Exports: 12% E t Imports: (15%)
4Q11 3.0%

$12 $11 $10 $9 $8

Grow of $1 wth

Percent (%)

$7 5 $6 0 $5 $4 (5) Real GDP Cumulative Value starting at $1 (10) 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 $3 $2 $1

Source: Bloomberg

46

Economy

GLOBAL PERSPECTIVES

Inflation — CPI
Core and headline inflation remain under control; while commodities prices spiked dramatically in 2009-2010, recent figures show a marked softening.
700
Index Level %

15 600 10 500
Core Inflation (right axis) Headline Inflation (right axis) CRB Index (left)

400

5

300 0 200

100 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

(5)

Note: Core CPI reflects consumer price inflation excluding food and energy. Source: Factset.

47

Economy

GLOBAL PERSPECTIVES

S&P Case-Shiller Home Price Index
Home values have fallen about 32% since 2006; the 20 City Composite Index has steadily declined, though recent data have seen upticks in some areas.
220
Index Level % change

20 15 10

207
200

180

5 0

160 (5)

137
140 (10) (15) 120 (20) 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (25)

Source: Factset, S&P Case-Shiller, Bloomberg

48

Economy

GLOBAL PERSPECTIVES

Home Sales and Housing Starts
Housing is still lagging the U.S. economic recovery; existing homes and new household formation suggest that outstanding supply will remain a hurdle for some time.
7,500 7,000 6,500
Existing Homes (left axis) 000’s Housing Starts including multi family (right axis) 000’s

2,500

2,000 2 000

6,000 1,500 5,500 5,000 1,000 4,500 4,000 3,500 3,000 3 000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 500

New Homes (right axis)

Source: U.S. Census Bureau, FactSet

49

Economy

GLOBAL PERSPECTIVES

Federal Budget Deficit
Troubling projected budget deficits are driven by large mandatory programs, defense and interest payments, making it difficult to reduce government spending.
Federal Budget Deficit
$ trillions
Historical Current Projected

Federal Budget Breakdown

1.4 1.3

1.4

14.3% 14 3% 20% Defense Other Mandatory

1.2

0.9 0.8 0.8

0.8

6% Interest Other Discretionary 40.7% Social Security, Medicare, , Medicaid

0.5 0.3 0.2 0.2

19%

05

06

07

08

09

10

11

12

13

14

15

16

Source: Congressional Budget Office, Office of Management and Budget, Data as of 10/31/11.

50

Economy

GLOBAL PERSPECTIVES

U.S. Government Debt and Deficit Perspective
Total federal public debt outstanding exceeds 90% of GDP, and the current U.S. deficit is more than 9% of GDP (excluding Social Security and Medicare).
16,000,000
$

U.S. Government Debt

120

% of GDP

Deficit Levels
> 90% of GDP

100
12,000,000 12 000 000

80
8,000,000
Debt

60

40
4,000,000
Debt > 9.4% of GDP

20
Deficit

0
Deficit

0 1955 1962 1969 1976 1983 1990 1997 2004 2011

1962 1969 1976 1983 1990 1997 2004 2011

Source: Factset

51

Economy

GLOBAL PERSPECTIVES

Foreign Ownership of U.S. Treasuries
Foreign ownership of U.S. debt has more than tripled since 2000, in effect, financing U.S. consumption and facilitating unsustainable deficit spending.
5,000
Foreign Ownership of Treasuries
$ billions
$4.5 trillion

Breakdown of Foreign Ownership
Europe 11% Other 17% Commodity Exporters 8% Offshore 16%

4,000 4 000

3,000

2,000
Japan 21%

1,000
China 27%

0 2002

2004

2006

2008

2010

2012

Source: U.S. Treasury. Data as of 6/30/11, Factset

52

Economy

GLOBAL PERSPECTIVES

Ireland Cana - 2012 ada Cana - 2011 ada H Hong Kong S Singapore Canada Russia Turkey O OECD AVG 20.0% 20.0% 24.3% 25.0% % 28. .0% 28. .0% Australia Japan India Germany France Brazil U.S.A. 3 30.0% 3 30.0% 3 30.0% 33.0% 33.3% 34.0% 35.0% 18.0% 17.0% 16.5% 16.5% 15.0%

Source: Bloomberg, CIA World Factbook

Corporate Tax Rates

12.5 5%

The average marginal corporate tax rate for all OECD countries is 24.3%. The U.S. is highest at 35%.

Corporate Tax Rates

Economy
China U.K. Indonesia
53

GLOBAL PERSPECTIVES

Gold and Copper Prices
Gold, regarded as a safe haven and inflation hedge, actually sells for less today in real terms than in 1980. Copper’s many industrial uses make it a strong proxy for economic growth.
$2,000
Gold 1,709
$/metric ton

Copper

10,000

$1,600 $1 600
8,000

$1,200
6,000 6 000
8,585

$800
4,000
503
Nominal Price/o Price/oz.

439

$400
2,000
Real Price/oz.

$0 1976 1981 1986 1991 1996 2001 2006 2011

1990 1993 1996 1999 2002 2005 2008 2011

54
Source: FactSet, (gold divided by CPI U.S. city average with 9/30/1976 = 100)

Economy

GLOBAL PERSPECTIVES

Oil Price and Intensity
Energy prices rise and fall based on political turmoil, and gasoline prices follow suit, but the required amount of oil per GDP output in the U.S. (oil intensity) has steadily declined.
Barrels per $1 million of GDP Price $ per Barrel

160 140 120
Crude Oil (N NYM $/billion)

1,000

Oil Int tensity

800

107

100 80 600 60 40 20 200 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 0

400

Note: Oil Prices are West Texas Intermediate light crude spot price (NYMEX). Source: US Dept of Energy, FactSet

55

Economy

GLOBAL PERSPECTIVES

U.S. Trade
A growing economy fuels demand for imports; the trade deficit hit a 10-year low in the great recession as demand dwindled. Exports recently reached their highest level ever at $180 billion.
0 (10) (20) (30) (40) (50) (60) (70) (80) 1992
Exports (right axis) Imports (right axis) Trade Deficit (left axis) $USD billions Recessions $USD billions

250

200
Highest Export Level – SEP ‘11 $180

150

100

50 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: FactSet

56

Economy

GLOBAL PERSPECTIVES

Long-Run Correlation (since 1990)
Return correlations below 1.0 indicate ways to combine investments and reduce overall risk; negative or near zero correlations offer the best diversification benefits.
Std Dev Cash 0.61 Bonds 3.75 Int Bnds 8.64 Lg Cap 15.20 15 20 Sm Cap 19.81 Intl Eq 17.78 Emg Eq 24.29 REITS 20.57 Hdge Fds 7.08
Indices:
Cash – 3 Month T-Bill Bonds – Barclays Aggregate Intl FI – Barclays Global Agg ex-US Lg Cap – S&P 500 Sm Cap – Russell 2000 Intl Eq – MSCI EAFE Emg Eq – MSCI Emerging Equity REITS – FTSE NAREIT US Hdge Fds – HFRI Composite

Cash 1.00

Bonds 0.04 1.00

Int Bnds (0.10) 0.48 1.00

Lg Cap 0.03 0.14 0.16 1.00 1 00

Sm Cap (0.03) 0.02 0.09 0.81 0 81 1.00

Intl Eq (0.00) 0.10 0.42 0.75 0 75 0.66 1.00

Emg Eq (0.06) (0.00) 0.15 0.70 0 70 0.70 0.73 1.00

REITS (0.05) 0.17 0.24 0.59 0 59 0.66 0.51 0.47 1.00

Hdge Fds 0.10 0.02 0.12 0.74 0 74 0.82 0.74 0.82 0.45 1.00

Note: Correlation coefficients describe the degree to which two variables are related, ranging from -1 to +1. Larger values (positive or negative) indicate stronger correlation, with +1 indicating the variables tend to move together and -1 indicating the variables move opposite one another. Zero correlation indicates independent movement. All Long Run Correlation coefficients are calculated based on monthly total return data for 20 years, except for Cash movement Long-Run years which goes back 12 years. Standard deviations are calculated based on monthly data that is annualized. Source: Barclays Capital, MSCI, Russell Investments, Standard & Poor’s, Citigroup, FTSE, NAREIT, HFR, FactSet

57

Allocation

GLOBAL PERSPECTIVES

Mutual Fund Flows
Early 2012 bond flows were the strongest in 18 months while net outflows from domestic equity funds show that investors remain spooked by market volatility.
millions USD
Asset Class Flows Total Equity Domestic Foreign Hybrid Total Bond Taxable Municipal Total T t l AUM Money Market Change YTD 2,652,301 (42,524) 2,694,825 (119,176) 2,814,001 3,302,793 3,840,054 3,122,000 (3,134) (6,303) 3,168 15,236 56,174 43,794 12,380 68,275 68 275 (164,174) (168,746) 4,572 44,969 174,747 177,903 (3,159) 55,541 55 541 (28,765) (87,739) 58,975 23,522 246,000 234,817 11,183 240,756 240 756 (9,056) (39,666) 30,613 22,764 376,137 307,052 69,086 389,847 389 847 (234,387) (151,749) (82,635) (18,414) 27,593 19,773 7,820 (225,209) (225 209) 90,816 (47,791) 138,609 24,162 108,768 97,895 10,874 223,749 223 749 2012 2011 2010 2009 2008 2007

Source: Investment Company Institute (ICI)

58

Allocation

GLOBAL PERSPECTIVES

Alternative Investment Returns
Alternative Asset Class Hedge Funds (as of 1/31/12) g ( ) CSFB/Tremont HF Index Distressed Convertible Arbitrage qu y a e eu a Equity Market Neutral Global Macro Long/Short Equity Real Estate (as of 12/31/11) NCREIF Property Index Apartment Industrial Office Retail Equity (as of 2/29/12) S&P 500 U.S. REIT Global REIT 9.0 90 4.9 6.5 2.1 21 4.7 1.7 15.1 15 1 23.5 23.4 26.5 26 5 21.0 33.7 (37.0) (37 0) (41.5) (45.0) 5.5 55 (20.2) (11.1) 15.8 15 8 30.2 38.8 5.1 51 2.1 30.3 25.5 25 5 36.7 0.5 1.6 16 (6.2) 2.6 4.2 42 7.1 10.4 14.3 15.5 14.6 13.8 13 8 13.8 13.1 18.2 9.4 11.7 11 7 10.8 (16.9) (17.5) (17.9) (19.1) (19 1) (10.9) (6.5) (7.3) (5.8) (7.3) (7 3) (4.1) 15.8 11.4 14.9 20.5 20 5 13.5 16.6 14.6 17.0 19.1 19 1 13.3 13.1 18.2 9.4 11.7 11 7 10.8 (4.2) (3.3) (5.4) (5.7) (5 7) (1.8) 3.5 2.9 2.6 3.8 38 4.0 7.4 7.4 6.8 6.4 64 9.8 2.3 2.4 (2.4) 0 0.2 1.2 3.9 (2.5) (4.2) 1.1 4.5 5 6.4 (7.3) 10.9 10.3 11.0 (0 8) (0.8) 13.5 9.3 18.6 20.9 47.3 4.1 11.6 19.5 (19.1) (20.5) (31.6) ( 0 3) (40.3) (4.6) (19.8) 12.6 8.4 5.2 93 9.3 17.4 13.7 13.9 15.6 14.3 11.2 13.5 14.4 (0.9) (3.8) 1.3 2.8 8 8.6 (3.9) 9.1 9.4 17.0 2.2 10.0 8.0 3.4 2.1 3.8 (6 9) (6.9) 8.5 2.5 6.6 7.5 4.9 0 0.2 10.5 6.4 YTD 2011 2010 2009 2008 2007 2006 1 Year 3 Year 5 Year 10 Year

Note: All returns are annual returns except year-to-date (YTD) returns above. When considering alternative investments, investors should consider various risks i l di th use of l i i k including the f leverage and other speculative i d th l ti investment practices, illiquid i t t t ti illi id instruments, and complex t structures. These t d l tax t t Th investments are intended for sophisticated investors only, as defined by law. All investing involves substantial risk of loss. Source: CSFB/Tremont, NCREIF, Standard & Poor’s, Bloomberg

59

Allocation

GLOBAL PERSPECTIVES

Long-term Capital Market Results
Consistent with capital market theory, stocks have outdistanced bonds, and small-cap stocks have substantially outperformed large-cap stocks for many years.
U.S. Stock and Bond Returns and Economic Shocks 1000
Log
Recessions

Small-Cap Stocks p

100
Large-Cap Stocks Corporate Bonds

Growth of $1

10

1

0.1 01 1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: FactSet

60

Allocation

GLOBAL PERSPECTIVES

Global Asset Allocation – Effective Diversification
A diversified global strategy produced better performance with lower risk than U.S. large-cap and EAFE equities plus corporate bonds.
High Yield Bonds 10%

Barclays Aggregate Corp 20%

Global Aggregate Bonds 10% US Treasury Bonds 20+ 10%
SP500 70%

SP500 10% Mid Cap 10%

MSCI EAFE 10%

Small Cap 10%

Barclays Aggregate Corp p 10%

REIT 10% MSCI BRIC 10% MSCI EAFE 10%

Annual Return Standard Deviation

7.08% 14.60%

Annual Return Standard Deviation

8.31% 11.92%

Index returns for the period 1995-2011 (YTD): S&P 500, S&P400 Midcap, S&P600 Smallcap, MSCI EAFE, MSCI BRIC, Barclays Capital U.S. Corporate Bonds, Bonds Barclays Capital US Treasury Bonds Barclays Capital Global Aggregate Bonds, Barclays Capital U S High Yield Bonds NAREIT REIT. For Bonds, Bonds U.S. Bonds., REIT illustration only. Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Source: FactSet. Returns data from 9/30/1995-12/30/2011.

61

Allocation

GLOBAL PERSPECTIVES

Broad Multiple Market Downturns
On average since 1980, portfolios that remained fully invested through the most severe multiple-market losses would have recovered within one year.
Average Portfolio Returns (%) 1980 – 2011 Market 17.2 13.6 U.S. Large U.S. Small InterEmerging Cap Cap national Markets

Average Returns Entire Period Annual (%) Average Down Months (%) 11.5 11.6 10.1 14.6

(9.9)

(11.4)

(10.4)

(11.1)

Subsequent Returns (% ) 1-year 3-years 14.8 11.0 20.8 15.8 12.7 7.8 20.5 19.7

(10.7) 1 Month 1 Year 3 Years

Note: Assets include U.S. Large-Cap Equities (S&P 500), U.S. Small-Cap Equities (Russell 2000), International Equities (MSCI EAFE) for the period January 1980 – S t b 2011 and E September d Emerging M k t E iti (MSCI E i Markets Equities Emerging M k t I d ) J i Markets Index), January 2001 – S t b 2011. Th minimum monthly decline September 2011 The i i thl d li threshold defined as -7%. For illustration only. Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Source: FactSet, ING Investment Management.

62

Allocation

GLOBAL PERSPECTIVES

Effect of Combining Risky Assets
A portfolio of risky assets may have less risk than might be expected at first glance. Assets should be evaluated on their contribution to the overall portfolio, not in isolation.
Diversification Benefits Portfolio Return/Risk Ratio 18 16
U.S. Small-cap 8.4 6.6 12.2 16.5 16 5 24.7 17.0 20.7 30.1 30 1 Annualized Returns and Risks (%) Risky Asset Return Risk

Averag Return % ge

14 12

International Equities Global REITS

10 8 6 4 16 18 1-Asset 20 2-Assets 22 24 26 Annualized Risk % 3-Assets 4-Assets 28 30 32

Emerging Market Equities

Other asset classes not included in the analysis: U.S. Large-cap U.S. Bonds 4.5 6.0 17.0 4.0

Log. (1-Asset)

Note: The analysis includes returns for the Russell 2000 Small-cap Index, MSCI EAFE International Index, NAREIT REIT Index and MSCI Emerging Markets Equity index for the period January 1995 – June 2011. Hypothetical 2-, 3- and 4- asset portfolios were created based on equal weighting of the included assets. The return for each portfolio (vertical axis) is the average annualized return over the measurement period. The risk (horizontal axis) equals the annualized standard deviation for the period. Standard deviation measures dispersion around the average return, indicating whether the returns tend to be close to the average or spread over a wide range. The dotted line ellipses represent theoretical “attainable sets” of other portfolios of those assets with different asset weightings. As more assets are added to the hypothetical portfolios, historically risk tends to decline. For illustration purposes only. Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Diversification does not guarantee against a loss and th t ff t lt I t ti t di tl i i d Di ifi ti d t t i t l d there i no guarantee th t a is t that diversified portfolio will consistently outperform a non-diversified portfolio. 63 Source: ING Investment Management, FactSet.

Allocation

GLOBAL PERSPECTIVES

Benefits of Portfolio Rebalancing
Over 35 years, regular rebalancing increased returns and reduced risk compared to a buy and hold approach, which allows allocations to drift away from the intended targets.
Buy and Hold 72/28 Average Allocation Value: $2.7 million Rebalanced 60/40 Average Allocation Value: $2.9 million

Initial Portfolio 60/40 Allocation Value: $100,000

Barclays Capital Aggregate Bonds

72/28
S&P 500 Stocks Return Risk 9.67% 11.70%

60/40
Return Risk 9.88% 9.90%

Note: Based on index return data for the period 1/31/1976-9/30/2011, compounded annually. Initial hypothetical portfolios comprised of 60% S&P 500, 40% Barclays Capital US Aggregate Bonds with rebalancing for the rebalanced portfolio on a quarterly basis. Risk equals historical annualized standard deviation. For illustration only. P t performance i not a guarantee of future results. Investors cannot invest directly in an i d d i ti F ill t ti l Past f is t t ff t lt I t ti t di tl i index. P tf li rebalancing may Portfolio b l i include trading costs and fees. Source: FactSet, ING Investment Management.

64

Allocation

GLOBAL PERSPECTIVES

Life Expectancy
Improving life expectancy for those of all ages means the probability of living many years in retirement is higher than most people realize.
Life Expectancy Before Retirement 65% 49.0 40.0 31.0 22.5 18.6 26% 46% Probability of Long Life at Age 65

30

40

50 Age

60

65

80

85 Age

90

Source: Table B. Expectation of life by age, sex, Hispanic origin and race for non-Hispanic population, United States, 2007, National Vital Statistics Reports, Vol. 59, No. 9, September 28, 2011.

65

Retirement

GLOBAL PERSPECTIVES

Retirement Plan Funding, Sponsorship, Participation
Declining funding and sponsorship of pension plans is shifting the burden of retirement savings to participants in defined contribution plans.
Funded Status of DB Plans for S&P 500 Companies, 2011 Forecast Underfunded, 92.4% 92 4% Funded, 7.6%

DB Plan Sponsors in Fortune 1000 700 600 500 400 300 200 100 0 2004 2005 Number of Sponsors S
No Frozen Plans

Frozen Plans

2006

2007

2008

2009

2010

2011

Retirement Plan Participation, Medium and Large Companies 90 80 70 60 50 40 30 20

% Participating P

Defined Benefit

Defined Contribution

1985

1989

1995

2000

2005

2010
66

Source: Top: Towers Watson. Bottom: Employee Benefit Research Institute, U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2004 – March 2010, Bureau of Labor Statistics, 2004-2010.

Retirement

GLOBAL PERSPECTIVES

Major Sources of Retirement Income
Today’s workers expect to rely more on personal sources of retirement income, such as their savings plan and IRA, than is presently the case for those over 65.
Expected Sources Percent (% )

Actual Sources of Retirement Income – 2009, Age 65 and Over Earnings g 28% Social Security 42%

Employer-sponsored saving plan Social Security Employer traditional pension Individual Retirement Account Other Oth savings and i i d investments t t Continued Employment Personally-owned guaranteed income products

44 33 29 29 26 24 14

Income from Assets 11% Pensions and Annuities 19%

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993-2011 Retirement Confidence Surveys, ebri.org Issue Brief, March 2011, No. 355. EBRI Databook on Employee Benefits, estimates from Current Population Survey, U.S. Census Bureau, March 2010 Supplement.

67

Retirement

GLOBAL PERSPECTIVES

Savings Rates and Household Net Worth
Lower personal savings rates and household net worth increase the burden that future savings must bear to achieve retirement security.
10
3 month average, % of disposable income
Most recent data: 1/31/12

70

$ trillions

Most recent data: 9/30/11

8

60
57.4

6

50
4.5% 4 5%

4

40

2

30

0

20

(2) 1990 1993 1996 1999 2002 2005 2008 2011

10 1990 1993 1996 1999 2002 2005 2008 2011

Source: Bureau of Economic Analysis, Federal Reserve, FactSet.

68

Retirement

GLOBAL PERSPECTIVES

Savings Needed for Retirement
Among workers who reported, total savings and investments — not including their personal residence or defined benefit plans — are far less than what they will need to retire.
Amount Needed at Retirement: Estimated Weighted Average: $567,000
31

35 30 25 Percent (%) t

50 45 40 Perce (%) ent

Reported Total Savings and Investments: 75% have saved < $100,000
46

22

35 30 25 20 15 10 5 0
10 14 11 9 11

20 15 10

19

10 7

5 0
< $250 $250-500 $5001,000 $1,000$1 0001,500 $1,500+ $1 500+

< $10k $10-25k $25-50k

$50100k

$100250k

250k+

Source: E l S Employee B Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2011 R ti fit R h I tit t d M th G ld A i t I Retirement C fid t Confidence S Survey, ebri.org I bi Issue Brief, March Bi f M h 2011, No. 355, Figure 26, “Amount of Savings Workers Think They Need for Retirement”, including data only for those who responded (88%), Figure 3, “Reported Total Savings and Investments, Among Those Providing a Response”.

69

Retirement

GLOBAL PERSPECTIVES

Confidence in the Future
The percentage of workers who are very confident about the financial aspects of retirement has slipped substantially in the past ten years.
Percentage of Workers Very Confident in Financial Aspects of Retirement 2001 2011 28.0 22 29.0 27 22.0 37

34

13.0

Live comfortably

Enough for basic expenses

Doing a good job of preparing Confidence that social security p q for retirement will provide benefits of equal value

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2011 Retirement Confidence Survey, ebri.org Issue Brief, March 2011, No. 355, Figure 7, “Percentage of Workers Very Confident in Financial Aspects of Retirement”, selected retirement responses.

70

Retirement

GLOBAL PERSPECTIVES

Capital Market Returns
Capital market returns vary widely over time, making asset allocation decisions difficult and successful market timing virtually impossible.
2002
BC Agg. 10.3% NAREIT/REIT 3.8% T-Bill 1.7% MSCI EM -6.2% Balanced -9.8% MSCI EAFE -15.7% MidCap -16.2% 16 2% R2000 -20.5% SP500 -22.1%

2003
MSCI EM 55.8% R2000 47.3% MidCap 40.1% MSCI EAFE 39.2% NAREIT/REIT 37.1% SP500 28.7% Balanced 18.5% 18 5% BC U.S. 4.1% T-Bill 1.0%

2004
NAREIT/REIT 31.6% MSCI EM 25.6% MSCI EAFE 20.7% MidCap 20.2% R2000 18.3% SP500 10.9% Balanced 8.3% 8 3% BC U.S. 4.3% T-Bill 1.2%

2005
MSCI EM 34.0% MSCI EAFE 14.0% MidCap 12.7% NAREIT/REIT 12.2% SP500 4.9% R2000 4.6% Balanced 4.0% 4 0% T-Bill 3.0% BC U.S. 2.4%

2006
NAREIT/REIT 35.1% MSCI EM 32.2% MSCI EAFE 26.9% R2000 18.4% SP500 15.8% MidCap 15.3% Balanced 11.1% 11 1% T-Bill 4.8% BC U.S. 4.3%

2007
MSCI EAFE 11.6% BC U.S. 7.0% Balanced 6.2% MidCap 5.6% SP500 5.5% T-Bill 4.7% R2000 -1.6% 1 6% NAREIT/REIT -15.7% MSCI EM -39.4%

2008
BC U.S. 5.2% T-Bill 1.6% Balanced -22.1% R2000 -33.8% SP500 -37.0% NAREIT/REIT -37.7% MidCap -41.5% 41 5% MSCI EAFE -43.1% MSCI EM -53.3%

2009
MSCI EM 78.5% MidCap 40.5% MSCI EAFE 32.5% NAREIT/REIT 28.0% R2000 27.2% SP500 26.5% Balanced 18.4% 18 4% BC U.S. 5.9% T-Bill 0.1%

2010
NAREIT/REIT 28.0% R2000 26.9% MidCap 25.5% MSCI EM 18.9% SP500 15.1% Balanced 12.1% MSCI EAFE 8.2% 8 2% BC U.S. 6.5% T-Bill 0.1%

2011
BC U.S. 7.8% NAREIT/REIT 4.7% Balanced 4.4% SP500 2.1% T-Bill 0.0% MidCap -1.5% R2000 -4.2% 4 2% MSCI EAFE -11.7% MSCI EM -18.2%

NAREIT/REIT = NAREIT Equity REIT MSCI EM = MSCI Emerging Markets - Net Midcap = Russell Midcap Index

T-Bill = U.S. 30-day T-Bill R2000 = Russell 2000 Index SP500 = S&P 500

BC Agg. = Barclays Capital U.S. Aggregate Bond Index Balanced = 60% S&P 500, 40% BC Aggregate MSCI EAFE = MSCI EAFE USD

Note: For illustration only. Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Source: FactSet, ING Investment Management.

71

Retirement

GLOBAL PERSPECTIVES

Asset Allocation by Participant Age
As participants age, declining equity and increasing fixed income allocations make reported allocations appear to be rational – if not optimal.
Average Asset Allocation of 401(k) Accounts by Participant Age — 2009 50.0 39.2 33.7 30 20.9 20 10.8 10 0 Equity Target Date Other Balanced
20s 40s

60 50 40

31.8

19.6 15.9 7.8 10.3 9.4 10.1 7.1 7.7 9.8 2.0 20 Stable Value
60s

2.8 28

4.3

Bonds

Money Market

Note: Dollar weighted averages, omits minor investment options, may not sum to 100 due to rounding. Source: EBRI/ICI Participant-Directed Plan Data Collection Project.

72

Retirement

GLOBAL PERSPECTIVES

Maintaining Purchasing Power
Retirees face the risk of shrinking real purchasing power; on average, small-cap stocks have been a good inflation hedge; cash is a poor choice.
Real Rates of Return Over Average Life Expectancy at Age 65 1982 – 2011 16
Ann nualized Rates of Return (%) s
Recessions

14 12 10 8 6 4 2 0 (2)

New graph N h

Small-Cap Stocks S ll C St k Large-Cap Stocks Corporate Bonds

Cash Rate of Inflation

(4) 1982

1986

1990

1994

1999

2003

2007

2011

Note: Return data for the S&P 500 Index, Russell 2000 Small-cap Index, Barclays Capital U.S. Corporate Bond Index and the 30-day U.S. T-Bill index for rolling 18.5-year periods f lli 18 5 i d from 1963 2011 C l l t d as th compound annualized return i excess of th rate of i fl ti f each asset class. Th rate of 1963-2011. Calculated the d li d t in f the t f inflation for h t l The t f inflation is based on the monthly reported change in the Consumer Price Index (CPI). Source: FactSet, ING Investment Management.

73

Retirement

GLOBAL PERSPECTIVES

Fund Flows in DC Plans
Fund flows show the tendency of investors to remain risk averse long after market downturns in ways that may undermine their long-term wealth accumulation goals.
Estimated Net New Cash Flows to DC Retirement Plans ($billions) $ Year Equities Hybrid (Balanced) Bonds Money Market Total
S&P 500 Return

2001 63 19 36 31 150 -11.9%

2002 20 16 54 20 110 -22.1%

2003 74 37 8 -30 88 28.7%

2004 92 57 3 -31 120 10.9%

2005 52 75 13 1 139 4.9%

2006 68 59 15 32 174 15.8%

2007 16 95 28 59 198 5.5%

2008 -124 32 31 82 21 -37.0%

2009 -22 41 90 -70 40 26.5%

2010 -25 51 52 -50 28 15.1%

10-Year Total 214 482 330 44 1068

% of Total 20% 45% 31% 4% 100%

Note: Includes both 401(k) and IRA plans. Components may not add to the illustrated total due to rounding. Source: Investment Company Institute, ING Investment Management.

74

Retirement

GLOBAL PERSPECTIVES

Index Definitions
Barclays Capital U.S. Aggregate Bond Index is composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $250 million. Barclays Capital U.S. Corporate Bond Index is a component of the Barclays Capital U.S. Aggregate Index. Barclays Capital U.S. Corporate High-Yield Bond Index tracks y p p g the performance of non-investment grade U.S. dollar-denominated, fixed rate, taxable corporate bonds including those for which the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, and excluding Emerging Markets debt. Barclays Capital U.S. Treasury Bond Index is a component of the Barclays C it l U S A B l Capital U.S. Aggregate I d t Index. Barclays Capital Global Aggregate Bond Index measures a wide spectrum of global government, government-related, agencies, corporate and securitized fixed-income investments, all with maturities greater than one year. Barclays Emerging Market Bond Index includes fixed and floating-rate USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. The Credit Suisse/Tremont Hedge Fund Index is an assetweighted hedge fund index covering over 5000 funds with at least US$50 million under management a 12 month track record, and management, 12-month record audited financial statements calculated net of performance fees and expenses. CS/Tremont sub-indexes track hedge fund strategies by methodology, asset class and/or use of leverage. Dow Jones Industrial Average is a price-weighted average computed from the stock prices of 30 large, widely held public companies in the U.S., adjusted to reflect stock splits and dividends. FTSE NAREIT US Real Estate Index presents comprehensive REIT performance across the U.S. economy, including all commercial investment and property sectors. FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible real estate equities worldwide. The Chicago Board Options Exchange Volatility Index (CBOE VIX) is a measure of the implied volatility of S&P 500 index options. It is one measure of the market's expectation of volatility over the next 30 day period. JPMorgan Emerging Markets Bond Index Plus (EMBI+) tracks total returns for actively traded emerging markets debt instruments including U.S.-dollar denominated Brady bonds, Eurobonds, and traded loans issued by sovereign entities. y g Merrill Lynch Municipal Bond Index is an unmanaged index that includes tax-exempt fixed rate bonds across a broad range of quality and maturity segments. MSCI BRIC Equity Index is a market capitalization weighted index of about 320 companies located in Brazil, Russia, India and China. MSCI EAFE Index is a free float-adjusted market capitalization j p weighted index designed to measure the developed markets’ equity performance, excluding the U.S. & Canada, for 21 countries. MSCI Europe Index is a free float-adjusted market capitalization weighted index designed to measure equity performance of the developed markets in Europe consisting of 16 country indices. MSCI Pacific Index is a free float-adjusted market capitalization weighted index designed to measure developed markets’ equity performance of the in the Pacific region consisting of 5 countries. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that measures emerging market equity performance of 22 countries. 75

GLOBAL PERSPECTIVES

Index Definitions
MSCI U.S. REIT Index is a free float-adjusted market capitalization weighted index comprised of equity REITs that generate a majority of g their revenue and income from real estate rental and leasing operations. NASDAQ Composite Index is a market capitalization weighted index of the performance of domestic and international common stocks listed on The NASDAQ Stock Market including over 2,800 securities. The NCREIF (National Council of Real Estate Investment Fiduciaries) Property Index (NPI) is a market value-weighted index of total rates of return for a large pool of commercial real estate properties acquired in the private market for investment purposes. Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investible U.S. equity market. Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity market and includes approximately 1000 of the largest securities based on market capitalization and representing approximately 92% of the U.S. market. Russell 1000 Growth Index measures the large-cap growth segment of the U.S. equity market including Russell 1000 companies with higher price-to-book ratios and forecasted growth. Russell 1000 Value Index measures the large-cap value segment of the U.S. equity market including Russell 1000 companies with lower price-to-book ratios and l i t b k ti d lower expected growth. t d th Russell Midcap Index measures the performance of mid-cap stocks in the U.S. equity market including 800 of the smallest securities in the Russell 1000® Index, based on market capitalization. Russell Midcap Growth Index measures the performance of the midcap growth segment of the U.S. equity market including Russell Midcap Index companies with higher price-to-book ratios and forecasted growth. Russell Midcap Value Index measures the performance of the midcap value segment of the U.S. equity market including Russell Midcap Index companies with lower p p p price-to-book ratios and forecasted growth. Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity market including approximately 2000 of the smallest securities based on market capitalization. Russell 2000 Growth Index measures the performance of smallsmall cap growth stocks in the U.S. equity market including Russell 2000 companies with higher price-to-value ratios and forecasted growth. Russell 2000 Value Index measures the performance of small-cap growth stocks in the U.S. equity market including Russell 2000 companies with lower price-to-value ratios and forecasted growth. S&P MidCap 400 Index is a benchmark for mid-sized companies, which covers over 7% of the U.S. equity market and reflects the risk and return characteristics of the broad mid-cap universe. S&P SmallCap 600 Index covers approximately 3% of the domestic q g p portfolio of small equities market and is designed to represent a p companies that are investable and financially viable. S&P 500 Index is a gauge of the U.S. stock market which includes 500 leading companies in major industries of the U.S. economy. S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index (LLI) is a total return market value index that tracks fully ( ) y funded, senior secured, first lien term loans syndicated in the U.S., as well as dollar-denominated overseas loans, including 90-95% of the institutional universe. The S&P GICS (Global Industry Classification Standard) sectors provide standardized industry definitions consisting (in the U.S.) of 10 sectors, 24 industry groups, and 68 industries. 76

GLOBAL PERSPECTIVES

Important Disclosures
This information has been prepared by ING Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties th t could cause actual d k i k d t i ti that ld t l results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels and (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Past performance is no guarantee of future results. The views and judgments expressed are those of ING Investment Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm firm. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss. You should consult your tax, legal, accounting or other advisors b t th tt di d herein. about the matters discussed h i As indicated on each page, some information was obtained from outside sources and is believed to be reliable, but ING does not guarantee its completeness or accuracy.

Not FDIC Insured; no bank guarantee; may lose value

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CID –3012

GLOBAL PERSPECTIVES

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