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Stable Value Funds

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  • 1. Stable Value Funds 100 Bank Street, Suite 800 Burlington, Vermont 05401 (802) 383-4000 www.dwight.com DWIGHT asset management company www.dwight.com
  • 2. Stable Value Fund Objectives Stable Value Funds Seek to Provide: Principal preservation Higher returns than a money market fund Lower risk than a bond fund High credit quality and issuer diversification DWIGHT asset management company 1
  • 3. What Is Stable Value? Stable value funds seek to provide relatively stable returns across market cycles One-Year Returns Rolled Quarterly Stable value is a conservative fixed 10 Years Ending 12/31/08 income investment vehicle that seeks 12 to provide capital preservation and a relatively stable rate of return. 10 Stable value investments are intended 8 Stable Value Performance to earn interest income comparable Rate of Return (%) 6 to that of intermediate-term, high- quality fixed income securities, with 4 lower risk for loss of principal. 2 The primary objectives are: • capital preservation; 0 • issuer and reinvestment diversification; -2 • real return that remains relatively DEC-98 DEC-99 DEC-00 DEC-01 DEC-02 DEC-03 DEC-04 DEC-05 DEC-06 DEC-07 DEC-08 stable; highest yield consistent Stable Value (Ryan 5-Year GIC Index) with risk tolerance. Money Markets (MFR Money Market Index*) Short-Term Bonds (Merrill Lynch 1-3 Year U.S. Treasury) Past performance is no indication of future results. Investment returns will fluctuate. Indices are unmanaged and not available for direct investment. Index returns do not reflect deduction of investment advisory fees. See last page for definitions of indices. * The MFR Money Market Index is the all-taxable money fund report average, a product of iMoneyNet, Inc., and is presented net of certain fees and expenses. DWIGHT asset management company 2
  • 4. Why Invest in Stable Value? In a conservative asset mix, replacing short-term bonds or cash with stable value may result in achieving a comparable return with less risk, or a higher return with comparable risk. Risk-Return Analysis of Hypothetical Asset Mixes 10 Years Ending 12/31/08 5.0 Stocks Return: 3.70% 20% Standard Deviation: 4.53% 72 basis points additional return sis retu Stable Value 80% 4.0 Stocks Return: n: 4.35% 4.3 30% Standard Deviation: d d D i ti 3.02% 30 Stable Value Rate of Return (%) 1.20% less volatility 70% Cash h 10% % 3.0 Short-Term Stocks 30% Bonds 60% Return: rn: 2.98% 2.9 Standard Deviation: d d D i ti 4.22% 42 Portfolio with no Stable Value 2.0 1.0 2 3 4 5 6 Standard Deviation (%) Past performance is no indication of future results. Asset mixes are purely hypothetical. Stocks, bonds, cash, and stable value are represented by the S&P 500 Index, Merrill Lynch 1-3 Year U.S. Treasury Index, MFR Money Market Index, and Ryan 5-Year GIC Index respectively. Indices are unmanaged and not available for direct investment. Index returns do not reflect deduction of investment advisory fees. Standard Deviation measures the degree to which an individual observation in a probability distribution tends to vary from the mean (average, expected value) of the distribution. In terms of performance, it indicates the volatility of a portfolio’s total return as measured against its average return. The MFR Money Market Index is the all-taxable money fund report average, a product of iMoneyNet, Inc., and is presented net of certain fees and expenses. DWIGHT asset management company 3
  • 5. Stable Value Versus Other Asset Classes Stable value offers attractive risk/return characteristics Risk-Return Analysis 10 Years Ending 12/31/08 10 Stable value can be an important asset allocation tool. 8 6 Stable Value As you can see in the risk return Rate of Return (%) analysis to the right, stable value’s high average annual return 4 Money Markets combined with stable value’s low risk (standard deviation) has created 2 higher risk-adjusted performance versus certain asset classes. 0 Stock Markets Stable value has historically -2 produced high risk-adjusted returns -2 0 2 4 6 8 10 12 14 16 18 and has helped to diversify equity Risk (Standard Deviation in %)1 risk exposure. Standard Sharpe Index Return Deviation/Risk Ratio2 Stable Value (Ryan 5-Year GIC Index) 5.58% 0.24% 8.55% Money Markets (MFR Money Market Index3) 3.30% 0.52% -0.29% Stock Markets (S&P 500 Index) -1.38% 15.10% -0.31% 1. Standard Deviation measures the degree to which individual observations in a probability distribution tend to vary from the mean (average, expected value) of the distribution. Approximately 2/3 of the observations in a series fall within one standard deviation of the mean. In terms of performance, it indicates the volatility of a portfolio's total return as measured against its average return. 2. Sharpe Ratio is the risk-adjusted return calculated by dividing the return premium by the standard deviation. This indicates the historical reward for taking on the additional risk associated with an investment. The risk-free rate used in calculation of these Sharpe Ratios is the Merrill Lynch 90-Day U.S. Treasury Bill Index. Past performance is no indication of future results. Indices are unmanaged and not available for direct investment. See last page for definitions of indices. 3. The MFR Money Market Index is the all-taxable money fund report average, a product of iMoneyNet, Inc., and is presented net of certain fees and expenses. DWIGHT asset management company 4
  • 6. Stable Value Performance Stable value has provided higher returns over longer time periods than money market and short-term bond indices. Historical Investment Performance Comparison as of 12/31/08 8 6.61 5.95 6 5.58 4.78 Rate of Return (%) 4.64 4.71 4.54 4.06 4 3.74 2.93 3.06 2.04 2 0 1 Year 3 Year 5 Year 10 Year Stable Value (Ryan 5-Year GIC Index) Money Markets (MFR Money Market Index*) Short-Term Bonds (Merrill Lynch 1-3 Year U.S. Treasury) Index returns are presented for informational purposes. Investors may not invest directly in these indices. Index returns do not reflect deduction of investment advisory fees. Past performance is no guarantee of future results. *The MFR Money Market Index is the all-taxable money fund report average, a product of iMoneyNet, Inc., and is presented net of certain fees and expenses. DWIGHT asset management company 5
  • 7. How Stable Value Works Stable value portfolios consist of GICs and high-quality bonds combined with wrapper agreements designed to maintain a stable net asset value (NAV). Portfolio Construction Fixed Income Book Value Securities Wrapper Agreements • Diversified portfolio of • Contracts with high high-quality intermediate- quality banks and term bonds insurance companies • Portfolio quality: typically • Smooths price AAA to AA average credit STABLE VALUE fluctuations in bond quality PORTFOLIO portfolio • Duration/average maturity: HIG S • Payment obligations 2.0 to 4.0 years HQ P ER of issuer help maintain UALITY WRAP a stable NAV DWIGHT asset management company 6
  • 8. How Stable Value Works Wrapper contracts smooth out market fluctuations Falling Wrapper agreements are designed to Interest help preserve principal and provide a Rates stable crediting rate as identified by the solid, bold line. Book Value The wrap agreement's crediting rate Contract formula is designed to provide a stable Asset Value return during rising or falling interest Market Value rates. The agreements smooth the of underlying impact of fluctuating interest rates portfolio and bond prices by amortizing the gains or losses over the duration of the portfolio. The smoothing function allows the Rising stable value portfolio yield to track Interest the general direction of interest rate Rates changes without the day-to-day price Time volatility of traditional bond portfolios. Wrap Value: Book Value - Market Value DWIGHT asset management company 7
  • 9. Risks in Stable Value Inflation risk is the possibility that a person's investment dollars will not maintain the same purchasing power in the future. Credit risk includes the possibility that a GIC issuer may be unable to make interest payments or to pay back the original investment on time, that a wrap provider will not be able to make payments required under a wrap agreement or that default within fixed income portfolios will have a detrimental effect on a stable value fund. DWIGHT asset management company 8
  • 10. Stable Value Investment Vehicles Commingled Fund A fund that combines unaffiliated plans into one large group to purchase GICs and other stable value products. These funds may also be referred to as pooled funds, bank pooled funds, or collective funds. Separate Account A separately managed account is specifically designed for plan participants within a particular plan. The investment contracts are negotiated to accommodate the deposit and withdrawal needs of plan participants investing in the fund. DWIGHT asset management company 9
  • 11. Conclusion Historically, under the majority of interest rate scenarios, stable value funds have outperformed money market funds and short-term bond funds. Stable value has provided higher returns than money market funds without the return volatility of bond funds. DWIGHT asset management company 10
  • 12. Appendix—Definitions of Indices The Merrill 1-3 Year Treasury Index is composed of U.S. Treasury securities with maturities between 1 and 3 years. This index typically has a duration of between 1.5 and 2.0 years. The Merrill Lynch 90-Day U.S. Treasury Bill Index is composed of a single 90-Day Treasury bill issue that is replaced on a monthly basis. The MFR Money Market Index, the all-taxable money fund report average, a product of iMoneyNet, Inc., is constructed from historical yield data for over 900 taxable money market funds. Monthly returns are calculated based upon the average 30-day compound yield of the funds in the universe. The Ryan 5-Year GIC Index is a stable value benchmark calculated from the rolling yields on a hypothetical portfolio of high quality guaranteed investment contracts. The index is constructed by Ryan Labs, Inc., from market data provided by contract issuers. This index has a duration of 2.5 years. The returns of the index are provided as a proxy for stable value returns. At present, there are no widely accepted benchmark indices representing the returns of wrapped fixed income investments. DWIGHT asset management company 11

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