Dfa all slides 2013
Upcoming SlideShare
Loading in...5
×
 

Dfa all slides 2013

on

  • 310 views

DFA

DFA

Statistics

Views

Total Views
310
Views on SlideShare
310
Embed Views
0

Actions

Likes
0
Downloads
6
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment
  • Talking Points:While emerging market stock markets around the world often outperform the US market, this performance is unpredictable and at times extreme.This table ranks annual stock market performance in US dollar terms for twenty-two different emerging markets (from highest to lowest) over the last fifteen years. The colors correspond to the countries featured on the next slide, and the patchwork dispersion of colors shows no predictable pattern. Investors who follow a structured, diversified strategy are more likely to capture the returns wherever they happen to occur.
  • Talking Points:Investing in securities markets outside the US helps build more extensive diversification into a portfolio.This chart shows annual performance in US dollar terms of twenty-two emerging market stock markets for the last fifteen years, highlighting the top performer in each calendar year. Although many investors prefer to keep their capital close to home, they may pay a high price in terms of lower diversification and missed opportunity.
  • Talking Points:This cartogram depicts the world not according to land mass, but by the size of each country’s stock market relative to the world’s total market value (free-float adjusted).  Population, gross domestic product, exports, and other economic measures may influence where people invest. But the map offers a different way to view the universe of equity investment opportunities. If markets are efficient, global capital will migrate to destinations that offer the most attractive risk-adjusted expected returns. Therefore, the relative size and growth of markets may help in assessing the political, economic, and financial forces at work in countries. The cartogram brings into sharp relief the investible opportunity of each country relative to the world. It avoids distortions that may be created or implied by attention to economic or fundamental statistics, such as population, consumption, trade balances, or GDP. By focusing on an investment metric rather than on economic reports, the chart further reinforces the need for a disciplined, strategic approach to global asset allocation. Of course, the investment world is in motion, and these proportions will change over time as capital flows to markets that offer the most attractive returns.  The countries we used this year are the same countries represented in the MSCI All Country World IMI Index and the MSCI Frontier Markets Index, with the exception of Saudi Arabia, which was added this year. While we used the same countries as in the MSCI Indices, we did not use the same list of stocks. This year’s map includes a greater representation of small cap stocks, particularly in the emerging and frontier countries, which explains the market capitalization fluctuations in countries such as Chile and Turkey as compared to last year. New this year, Israel has moved from being an emerging to a developed market; and Colombia, Egypt, and Peru have been added to the emerging markets where Dimensional invests. Some Dimensional emerging market strategies may not invest in all of the designated emerging markets.
  • The efficient markets hypothesis implies that no active investor will consistently beat the market over long periods of time, except by chance. Yet active managers test the hypothesis every day through their efforts to pick stocks and time markets. The evidence shows that their efforts are not worth the high cost borne by investors. This slide displays the percentage of actively managed public equity funds that failed to outperform their respective market benchmarks for each major fund category for the five-year period ending December 2012. Most of the fund categories failed to beat their respective benchmark as a group. This is consistent with research, which shows that, as a group, active managers underperform the market by an amount equivalent to their average fees and expenses. The lone exception is the international small fund manager category during the period. As indicated in the graph, 21% of this group failed to beat the respective benchmark, which is the S&P Developed ex-US Small Cap index. More detailed analysis reveals that many managers in the international small category had significant holdings in emerging market stocks, which is a different asset class that had stronger performance during the period. The large percentage of outperformance among international small managers may result from a large portion of them holding a different asset class and being compared to the wrong benchmark.If the manager group’s average return is benchmarked to an international small cap index that includes emerging markets, the rate of underperformance rises to over 60%, which is in line with the other equity fund categories. (Benchmark is the MSCI All Country World ex USA Small Cap Index.)
  • Research by Eugene Fama and other financial academics has offered evidence that the bond markets are efficient and that interest rates and bond prices do not move predictably. This appears to be the case with all types of issues, from short-term government instruments to long-term corporate bonds. This slide illustrates the formidable challenge that active bond managers face. The graph shows the percentage of active fixed income funds in each category that failed to beat their respective market benchmark for the five-year period ending December 2012. All categories had at least a 40% failure rate, with failure defined as underperforming their benchmark. This is consistent with financial theory and research, which propose that active managers cannot outperform the market as a group, particularly after accounting for management fees, trading costs, and other expenses.
  • This histogram quantifies the distribution of the size premium in the US equity market. Each bar represents a range of return premiums (horizontal axis) and the number of years the premium was in that range (vertical axis). For example, there were six years in which small cap outperformed large cap by at least 15% but less than 20%. Those six years are listed below the bar as 2001, 1999, 1991,1975,1944, and 1936. The green and orange years indicate the 1990s and 2000s, respectively.This histogram suggests that the size effect has been positive slightly more than half the time since 1927—and most of the annual premiums have occurred in the 0% to 10% range. When small cap stocks have underperformed large cap stocks, most negative premiums have occurred in the range of -10% or less.
  • This histogram quantifies the distribution of the value premium in the US equity market. Each bar represents a range of returns (horizontal axis) and the number of years the return was in that range (vertical axis). For example, there were 14 years in which value outperformed growth by at least 5% but less than 10%. The individual years are listed below the bar, starting with 2012. The green and orange years indicate the 1990s and 2000s, respectively.This histogram suggests that the value effect has been positive more than 60% of the time since 1927—and most of this annual outperformance has occurred in the 0% to 20% premium range. When value stocks have underperformed growth stocks, most negative premiums have occurred in the range of -15% or less.
  • This histogram quantifies the distribution of the annual US market premium since 1927. Each bar represents a range of return premiums (horizontal axis) and the number of years the premium was in that range (vertical axis). For example, there were five years in which the US market outperformed T-bills by at least 5% but less than 10%. Those years are listed below the bar in descending order (1993, 1992, 1968, etc.). The green and orange years indicate the 1990s and 2000s, respectively. This histogram suggests that the market premium has been positive about two-thirds of the time since 1927—and most of the annual premiums have occurred in the 0% to 25% range. When the market has delivered lower returns than T-bills, most of these negative premiums have occurred in the range of -15% or less.
  • Exposure to three equity risk factors and two fixed income risk factors accounts for most of a diversified portfolio's expected return. The three equity risk factors are: Market—stocks have higher expected returns than fixed income securities.Size—small cap stocks have higher expected returns than large cap stocks.Book-to-Market (BtM)—lower-priced “value” (high BtM) stocks have higher expected returns than higher-priced “growth” stocks (low BtM). Two additional risk factors reflect compensated risk in the fixed income markets. These are: Maturity—longer-term bonds are riskier than shorter-term instruments.Credit—instruments of lower credit quality are riskier than instruments of higher credit quality. The credit premium only covers 1973-2012.The historical return premiums for these risk factors are documented in the graph. Equities have offered a higher expected return than fixed income, but these stronger premiums come with higher risk. Structuring a portfolio around compensated risk factors can change many aspects of the investment process. Rather than focusing on individual stock or bond selection, investors work to achieve diversified, controlled exposure to the risk factors that drive expected returns. An investor first determines his portfolio’s stock/bond mix, and then decides how much additional small cap and value to hold in pursuit of higher expected returns. The level of risk assumed in the fixed income component may depend on why an investor is holding fixed income. For example, an equity-driven investor who wants to reduce portfolio volatility may hold less risky debt instruments, while an investor pursuing higher yield or income may take more maturity and default risk.
  • This slide documents the frequency with which the value and size premiums have been positive over various time periods in the US stock market from 1926 to 2012.  As the results illustrate, US value stocks have outperformed US growth stocks—and US small cap stocks have outperformed US large cap stocks—in a majority of all the rolling return periods measured. The US value premium has been positive more often than the size premium. The time periods, which range from five to twenty-five years, are based on annualized returns for rolling 12-month periods (e.g., January-December, February-January, March-February, etc.). The total number of 12-month periods for each time frame is indicated in the footnotes.
  • This slide documents the frequency with which the value premium, from 1975-2012, and the size premium, from 1970-2012, have been positive over various time periods in the international (non-US) developed stock markets.  In the international markets, value stocks have outperformed growth stocks—and small cap stocks have outperformed large cap stocks—in a majority of all rolling return periods measured. The value premium has been strongly positive more often than the size premium. The time periods, which range from five to twenty-five years, are based on annualized returns for rolling 12-month periods (e.g., January-December, February-January, March-February, etc.). The total number of 12-month periods for each time frame is indicated in the footnotes. The set of available data for non-US developed markets is considerably shorter than US markets. As a result, the smaller set of observations can amplify the effect of sustained periods of negative or positive premiums. This may explain part of the frequency difference between the 20-year and 15-year periods for the international small cap premium.
  • The harsh reality of market efficiency has not stopped speculators and other traders from attempting to read the future. On paper, market timing offers a seductive prospect: By predicting market direction ahead of time, a trader might capture only the best-performing days and avoid the worst. This slide tells the other side of that story. Large gains may come in quick, unpredictable surges. A trader who misinterprets events may leave the market at the wrong time. Missing only a small fraction of days—especially the best days—can defeat a timer’s strategy.For example, since 1970, missing the best 25 trading days would have significantly cut S&P 500 Index annualized compound return.Trying to forecast which days or weeks will yield good or bad returns is a guessing game that can prove costly for investors.
  • This analysis offers further insight into the potential consequences of both successful and failed market timing. The graph plots the S&P 500’s annualized compound return since 1970. The orange bar (far left) shows what a buy-and-hold investor would have earned in annualized return for the entire period. The bars to the right show the incremental return impact if an investor had missed the best or worst day, month, quarter, or longer sequence during the period. For example, the worst market day since 1970 occurred on October 19, 1987. An investor who avoided the worst day would have earned a 10.49% annualized return, but missing the best day would have reduced the return to 9.66%.If daily market returns are random, market timing is a flip of the coin. Investors who attempt to predict market drops are just as likely to avoid them as to miss out on strong return periods.
  • Talking Points:This graph documents bull and bear market periods in the S&P 500 Index from January 1, 1926 through December 31, 2011. The market cycles are identified in hindsight using historical cumulative daily returns. All observations are performed after the fact. A bear market is identified in hindsight when the market experiences a negative daily return followed by a cumulative loss of at least 10%. The bear market ends at its low point, which is defined as the most negative cumulative return prior to achieving a positive cumulative return. A bull market is defined by data points not considered part of a bear market.The rising trend lines in blue designate the bull markets occurring since 1926, and the falling trend lines in red document the bear markets. The bars that frame the trend lines help to describe the length and intensity of the gains and losses. The numbers above or below the bars indicate the cumulative return percentage of the bull or bear market. Keep in mind that this graph does not show total compounded returns or growth of wealth since 1926. Once the cycle is established in retrospect, the first day of that cycle resets the performance baseline to zero. Investors may draw a number of lessons from this graph. First, since 1926, bull markets in the S&P 500 Index have lasted longer than bear markets and delivered price gains that are disproportionately greater than the bear market losses. Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles: bull markets may have short-term dips, and bear markets may have short-term advances. The immediate trend is not readily apparent to market observers, and in fact, may become clear only in hindsight. This illustrates the difficulty of accurately predicting and timing market cycles. Finally, the graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long-term perspective. Investors who react emotionally to short-term movements are at risk of making ill-timed decisions that compromise long-term performance.
  • Talking Points:This graph documents bull and bear market periods in the S&P 500 Index from January 1926 through December 2011. The market cycles are identified in hindsight, applying the same methodology as the other slides in the “Bull and Bear Markets” series. The numbers above or below the bars indicate the duration (in months) and cumulative return percentage of the bull or bear market. Monthly index returns are total returns, which include reinvestment of dividends.
  • Talking Points:This graph documents bull and bear market periods in the Russell 2000 Index from January 1979 through December 2011.  The market cycles are identified in hindsight, applying the same methodology as the other slides in the “Bull and Bear Markets” series. The numbers above or below the bars indicate the duration (in months) and cumulative return percentage of the bull or bear market. Monthly index returns are total returns, which include reinvestment of dividends.
  • Talking Points:This graph documents bull and bear market periods in the MSCI EAFE Index from January 1970 through December 2011. The market cycles are identified in hindsight using historical cumulative monthly returns. These returns consider the reinvestment of dividends, net of foreign government withholding taxes. All monthly observations are performed after the fact. A bear market is identified in hindsight when the market experiences a negative monthly return followed by a cumulative loss of at least 10%. The bear market ends at its low point, which is defined as the most negative cumulative return prior to achieving a positive cumulative return. A bull market is defined by data points not considered part of a bear market.The rising trend lines in blue designate the bull markets occurring since 1970, and the falling trend lines in red document the bear markets. The bars that frame the trend lines help to describe the length and intensity of the gains and losses. The numbers above or below the bars indicate the duration (in months) and cumulative return percentage of the bull or bear market. Keep in mind that this graph does not show total compounded returns or growth of wealth since 1970. Once the cycle is established in retrospect, the first month of that cycle resets the performance baseline to zero. Investors may draw a number of lessons from this graph. First, since 1970, bull markets in the MSCI EAFE Index have lasted longer than bear markets and delivered gains that are disproportionately greater than the bear market losses. Keep in mind, however, that this time series is relatively short.Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles: bull markets may have short-term dips, and bear markets may have short-term advances. The immediate trend is not readily apparent to market observers, and in fact, may become clear only in hindsight. This illustrates the difficulty of accurately predicting and timing market cycles. Finally, the graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long-term perspective. Investors who react emotionally to short-term movements are at risk of making ill-timed decisions that compromise long-term performance.
  • Talking Points:This graph documents bull and bear market periods in the MSCI Emerging Markets Index from January 1988 through December 2011. The market cycles are identified in hindsight, applying the same methodology as the other slides in the “Bull and Bear Markets” series. The numbers above or below the bars indicate the duration (in months) and cumulative return percentage of the bull or bear market. Monthly index returns include the reinvestment of gross dividends. The graph demonstrates the same principles as the previous data:In the data since 1988, which is a relatively short time series, bull markets in the MSCI Emerging Markets Index have lasted longer than bear markets and delivered gains that are disproportionately greater than the bear market losses. Index performance fluctuates, even within established market cycles.Investors who maintain a disciplined investment approach may avoid making ill-timed decisions amidst the market volatility.
  • Talking Points:This graph shows that a few outperforming stocks may account for a disproportionately large share of the US market’s return in a given year. From 1926 to 2012, the US stock market, as measured by the CRSP 1-10 Index, provided a 9.6% compound average annual return. If the top-performing decile of stocks were excluded each year, the market’s return would drop to 6.3% annualized. Excluding the top quartile of performers each year would reduce the market’s average annual return to a negative 0.6%. Since it is impossible to reliably identify winners before the fact, the most prudent approach is to maintain broad diversification and consistent exposure within a particular asset class. This improves the likelihood that a portfolio will capture outperformance—wherever it may occur.

Dfa all slides 2013 Dfa all slides 2013 Presentation Transcript

  • DV1000.2 Diversification I. The Impact of Volatility II. The Randomness of Returns III. The Randomness of Returns: Bonds IV. The Randomness of Returns: Sectors V. Model Portfolio: Allocations VI. Model Portfolio: Historical Returns VII. Equity Returns of Emerging Markets VIII. Equity Returns of Developed Markets IX. World Market Capitalization
  • DV1010.2 The Impact of Volatility Impact on a Hypothetical $100,000 Portfolio Year 1 Return Year 2 Return Average Return Compound Return Value at End of Year 2 Portfolio #1 50% -50% 0% -13.4% $75,000 Portfolio #2 10% -10% 0% -0.5% $99,000 For illustrative purposes only. 2
  • DV1030.10 The Randomness of Returns Annual Return (%) 1998 Lowest Return US Large Cap US Large Cap Value US Small Cap US Small Cap Value US Real Estate Intl Large Cap Value Intl Small Cap Intl Small Cap Value Emerging Markets One-Year US Fixed Five-Year US Government Fixed Five-Year Global Fixed 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 28.6 23.1 15.6 10.2 9.7 8.4 7.8 5.9 -2.6 -6.4 -17.0 -25.3 66.4 33.0 30.2 21.5 21.3 21.0 7.4 4.0 3.6 1.9 -1.5 -2.6 31.0 22.8 9.0 8.3 7.3 7.0 4.0 -2.0 -3.0 -9.1 -12.3 -30.6 14.0 12.3 8.4 7.3 6.4 2.5 -2.4 -5.6 -6.5 -11.9 -15.4 -16.7 7.6 5.1 3.8 3.6 3.4 -2.9 -6.0 -11.4 -13.8 -15.5 -20.5 -22.1 69.2 66.8 60.2 56.3 47.3 46.0 36.2 30.0 28.7 2.0 1.9 1.5 35.1 33.2 32.1 30.6 26.0 22.3 18.3 16.5 10.9 2.7 1.3 0.8 34.5 24.1 22.6 15.1 13.8 7.0 4.9 4.7 4.6 3.1 2.4 1.3 36.0 33.0 32.6 27.5 26.3 23.5 22.2 18.4 15.8 4.3 4.1 3.8 39.8 8.2 8.0 6.3 6.3 6.2 5.9 5.5 -0.2 -1.6 -9.8 -17.6 8.8 6.6 4.7 -28.9 -33.8 -36.8 -37.0 -39.2 -42.5 -45.1 -47.1 -53.2 79.0 48.6 47.8 44.8 28.5 27.2 26.5 20.6 19.7 2.3 0.8 0.2 28.1 26.9 24.5 20.7 19.2 19.2 15.5 15.1 13.3 3.7 2.0 0.8 9.4 3.4 2.3 2.1 0.6 0.4 -4.2 -5.5 -15.1 -15.6 -17.1 -18.2 21.2 18.6 18.2 18.1 17.5 17.1 16.8 16.4 16.0 2.1 0.9 0.2 1998 Highest Return 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 28.6 15.6 -2.6 -6.4 -17.0 23.1 10.2 9.7 -25.3 5.9 7.8 8.4 21.0 7.4 21.3 -1.5 -2.6 33.0 30.2 21.5 66.4 4.0 1.9 3.6 -9.1 7.0 -3.0 22.8 31.0 4.0 -12.3 -2.0 -30.6 7.3 9.0 8.3 -11.9 -5.6 2.5 14.0 12.3 -15.4 -16.7 -6.5 -2.4 7.3 8.4 6.4 -22.1 -15.5 -20.5 -11.4 3.6 -13.8 -2.9 3.8 -6.0 3.4 7.6 5.1 28.7 30.0 47.3 46.0 36.2 69.2 60.2 66.8 56.3 1.5 2.0 1.9 10.9 16.5 18.3 22.3 33.2 30.6 32.1 35.1 26.0 0.8 1.3 2.7 4.9 7.0 4.6 4.7 13.8 15.1 22.6 24.1 34.5 2.4 1.3 3.1 15.8 22.2 18.4 23.5 36.0 33.0 26.3 27.5 32.6 4.3 3.8 4.1 5.5 -0.2 -1.6 -9.8 -17.6 6.3 8.0 6.2 39.8 5.9 8.2 6.3 -37.0 -36.8 -33.8 -28.9 -39.2 -45.1 -47.1 -42.5 -53.2 4.7 8.8 6.6 26.5 19.7 27.2 20.6 28.5 48.6 44.8 47.8 79.0 0.8 0.2 2.3 15.1 15.5 26.9 24.5 28.1 13.3 20.7 19.2 19.2 0.8 3.7 2.0 2.1 0.4 -4.2 -5.5 9.4 -17.1 -15.6 -15.1 -18.2 0.6 3.4 2.3 16.0 17.5 16.4 18.1 17.1 21.2 16.8 18.2 18.6 0.2 0.9 2.1 In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. Russell data copyright © Russell Investment Group 1997-2013, all rights reserved. US Real Estate is the Dow Jones US Select REIT Index, provided by Dow Jones Indexes. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. One-Year US Fixed is the BofA Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged), copyright 2013 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 3
  • DV1030.9 Model Portfolio: Allocations Model Portfolio 1 Model Portfolio 4 Model Portfolio 5 60% 60% 60% 60% 60% US STOCKS Model Portfolio 3 60% EQUITY Model Portfolio 2 60% 60% 60% 30% 60.0% 60.0% 30.0% 15.0% 7.5% US Large Cap S&P 500 Index US Large Cap Value Fama/French US Large Cap Value Research Index — — — 15.0% 7.5% US Small Cap Fama/French US Small Cap Index — — 30.0% 15.0% 7.5% US Small Cap Value Fama/French US Small Cap Value Research Index — — — 15.0% 7.5% 0% 0% 0% 0% 30% NON-US STOCKS International Large Cap Value Fama/French International Value Index — — — — 15.0% International Small Cap International Small Cap Index — — — — 15.0% 40% 40% 40% 40% 40% — 40.0% 40.0% 40.0% 40.0% 40.0% — — — — FIXED INCOME One-Year US Fixed BofA Merrill Lynch One-Year US Treasury Note Index US Fixed (all maturities) Barclays Capital US Government/Credit Bond Index International Small Cap Index data compiled by Dimensional. The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. For illustrative purposes only. The balanced strategies are not recommendations for an actual allocation. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. 4
  • DV1030.9 Model Portfolio: Historical Returns Annual Return (%) 1998 2001 2002 2003 2004 2005 2006 21.63 16.76 5.82 8.12 -6.61 31.75 14.80 8.93 15.27 3.19 5.81 -9.18 26.31 11.04 11.69 14.32 -1.02 0.48 -9.87 25.46 10.82 Lowest Return 2000 19.89 Highest Return 1999 11.64 -2.70 -3.30 -11.19 9.92 10.35 -3.50 -3.91 -12.01 2008 2009 2010 2011 2012 16.42 6.29 -21.22 24.75 13.75 5.37 11.96 5.74 13.70 5.74 -21.40 22.27 12.94 1.96 11.83 9.31 4.15 11.69 4.18 -21.90 20.75 12.24 0.00 11.64 18.89 8.31 3.92 11.14 3.29 -22.27 17.77 11.96 -1.58 10.09 17.49 6.85 3.90 10.91 1.60 -24.72 16.29 9.66 -5.48 9.66 1998 1999 2000 2001 2002 2003 2004 2005 2006 Model Portfolio 1 21.63 11.64 -1.02 -3.30 -9.18 18.89 8.31 3.92 Model Portfolio 2 19.89 14.32 -2.70 -3.91 -12.01 17.49 6.85 Model Portfolio 3 10.82 16.76 -3.50 5.81 -11.19 25.46 Model Portfolio 4 9.92 10.35 5.82 8.12 -9.87 Model Portfolio 5 11.69 15.27 3.19 0.48 -6.61 2007 2007 Annual Annualized Standard 2012 Return Deviation 2008 2009 2010 2011 10.91 6.29 -21.40 17.77 12.24 5.37 11.64 5.64 11.34 3.90 11.14 5.74 -21.90 16.29 9.66 1.96 9.66 4.46 11.46 9.31 4.15 11.69 3.29 -22.27 22.27 13.75 0.00 10.09 5.71 12.34 26.31 11.04 5.74 13.70 1.60 -21.22 20.75 12.94 -1.58 11.96 6.40 11.62 31.75 14.80 8.93 16.42 4.18 -24.72 24.75 11.96 -5.48 11.83 7.02 13.68 Assumes all strategies have been rebalanced quarterly. The S&P data are provided by Standard & Poor’s Index Services Group. Fama/French data provided by Fama/French. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. The Merrill Lynch indices are used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. 5
  • DV1032.1 The Randomness of Returns: Sectors Annual Return (%) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 61.93 82.58 54.05 3.63 -6.31 50.32 38.05 40.83 39.41 32.88 -16.09 61.85 30.53 18.46 32.39 49.92 25.07 45.67 1.41 -6.63 41.04 23.25 14.75 21.76 27.51 -23.35 53.60 24.87 13.39 29.05 38.70 23.95 38.42 1.31 -9.09 37.62 19.24 8.11 19.74 17.18 -28.11 50.17 24.16 11.90 24.56 31.22 23.46 26.76 0.86 -13.09 34.83 17.94 6.03 17.57 16.56 -38.17 35.63 23.38 5.05 19.32 17.79 17.65 7.24 -7.11 -21.08 32.09 15.39 5.96 15.44 12.58 -38.39 33.97 23.16 4.06 16.46 13.86 12.79 0.29 -12.77 -23.84 26.07 14.39 5.17 15.12 11.95 -39.41 24.05 14.46 0.64 15.28 10.28 1.81 -14.16 -14.86 -23.78 24.71 12.53 3.69 14.98 8.05 -41.22 20.97 13.39 -0.38 13.30 8.54 Highest Return -2.89 -25.78 -16.67 -23.58 19.84 10.10 3.01 11.90 0.20 -41.99 15.62 11.81 -0.71 10.08 -7.05 -6.66 -35.38 -17.44 -37.31 18.87 3.51 -1.40 10.87 -8.69 -48.14 14.55 7.31 -14.12 4.32 -15.90 -14.64 -40.14 -28.40 -38.33 17.43 0.79 -6.04 6.65 -17.88 -51.35 11.76 5.11 -16.51 2.19 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Morningstar SEC/Basic Materials -7.05 23.95 -14.16 0.86 -9.09 37.62 17.94 5.96 14.98 27.51 -48.14 53.60 24.87 -14.12 16.46 Morningstar SEC/Consumer Cyclical 49.92 23.46 -40.14 -17.44 -37.31 19.84 14.39 -6.04 39.41 0.20 -38.17 35.63 23.16 0.64 32.39 Morningstar SEC/Consumer Dfnsve 31.22 17.65 -25.78 3.63 -23.78 41.04 15.39 -1.40 11.90 -8.69 -41.22 50.17 30.53 4.06 24.56 Morningstar SEC/Energy 17.79 -2.89 7.24 1.41 -6.31 17.43 10.10 3.01 15.12 12.58 -16.09 15.62 14.46 13.39 10.08 -15.90 25.07 45.67 -14.86 -6.63 26.07 38.05 40.83 19.74 32.88 -38.39 33.97 23.38 5.05 4.32 Morningstar SEC/Healthcare 10.28 1.81 26.76 -7.11 -13.09 32.09 12.53 6.03 17.57 -17.88 -51.35 14.55 11.81 -16.51 29.05 Morningstar SEC/Industrials 38.70 -6.66 38.42 -12.77 -21.08 18.87 3.51 8.11 6.65 8.05 -23.35 20.97 5.11 11.90 19.32 Morningstar SEC/Technology 8.54 12.79 0.29 1.31 -23.58 34.83 19.24 5.17 15.44 11.95 -39.41 24.05 24.16 -0.71 15.28 61.93 82.58 -35.38 -28.40 -38.33 50.32 0.79 3.69 10.87 16.56 -41.99 61.85 13.39 -0.38 13.30 13.86 -14.64 54.05 -16.67 -23.84 24.71 23.25 14.75 21.76 17.18 -28.11 11.76 7.31 18.46 2.19 Lowest Return Morningstar SEC/Financial Svc Morningstar SEC/Communication Svc Morningstar SEC/Utilities Mutual fund universe statistical data and non-Dimensional money managers' fund data provided by Morningstar, Inc. Morningstar’s Sector Index family consists of 11 sector indices that track the US equity market using a consumption-based analysis of economic sectors in a comprehensive, non-overlapping structure. Index constituents are drawn from the available pool of US-domiciled stocks that trade on one of the three major US exchanges. Real Estate Sector Index is not included in the above illustration. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
  • DV1037.3 Equity Returns of Emerging Markets Annual Return (%) 1998 Highest Return Lowest Return 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Korea Turkey Czech Rep. Russia Czech Rep. Thailand Colombia Egypt China Peru Morocco Brazil Thailand Indonesia Turkey 141.15 252.41 1.62 55.85 44.16 144.56 132.95 161.59 82.87 94.74 -10.87 128.62 56.27 6.50 64.87 Morocco Russia Poland Korea Indonesia Turkey Egypt Colombia Indonesia Brazil Colombia Indonesia Peru Malaysia Philippines 24.57 247.06 -4.04 48.71 42.83 125.88 126.23 107.52 74.83 79.99 -25.10 127.63 53.35 0.12 47.56 Philippines Malaysia Brazil Colombia Hungary Brazil Hungary Russia Morocco Turkey Chile Russia Chile Philippines Egypt 13.45 114.33 -11.37 45.77 30.69 115.01 92.49 73.77 68.58 74.81 -35.37 104.91 44.81 0.10 47.10 Thailand Indonesia Chile Peru Peru Peru Czech Rep. Korea Peru India South Africa India Colombia Thailand Poland 11.56 93.46 -15.14 19.92 30.50 94.32 87.25 58.00 62.55 73.11 -37.89 102.81 43.41 -2.40 40.97 Czech Rep. Korea Malaysia Mexico South Africa Egypt Poland Brazil Philippines China Peru Turkey Malaysia Czech Rep. Colombia 0.54 92.42 -15.95 18.55 27.99 91.84 61.52 57.05 59.65 66.24 -40.11 98.49 37.01 -5.02 35.89 Poland Egypt South Africa Taiwan Thailand China Indonesia Turkey Russia Egypt Malaysia Chile Philippines Colombia Thailand -6.69 88.40 -17.19 10.47 27.59 87.57 52.21 56.94 55.93 58.43 -41.21 86.73 35.49 -5.02 34.94 Hungary India Mexico Thailand Colombia Chile Mexico Mexico India Czech Rep. Czech Rep. Colombia Indonesia Korea Mexico -8.16 87.35 -20.49 5.25 25.36 84.41 48.32 49.11 51.00 55.93 -42.75 84.35 34.62 -11.76 29.06 Taiwan Mexico Morocco Malaysia Russia India South Africa Czech Rep. Brazil Indonesia Mexico Taiwan South Africa Mexico India -20.64 80.07 -21.55 4.56 15.71 78.36 44.91 46.20 45.80 55.03 -42.94 80.25 34.21 -12.11 25.97 India Brazil India Czech Rep. Korea Indonesia Turkey India Poland Morocco Taiwan Hungary Mexico South Africa China -21.24 67.23 -21.74 -2.01 8.62 78.20 42.03 37.57 41.93 48.15 -45.88 77.61 27.61 -14.36 23.10 Egypt South Africa Peru Chile India Russia Brazil Peru Mexico Thailand Thailand Thailand Korea Morocco Hungary -27.00 57.20 -23.82 -2.83 8.38 75.94 36.47 35.00 41.44 46.63 -48.27 77.31 27.15 -14.76 22.79 South Africa Taiwan Hungary Indonesia Egypt Colombia Chile South Africa Malaysia Malaysia China Korea Taiwan China Korea -27.56 52.71 -26.80 -8.49 1.59 66.93 29.01 28.34 37.14 46.07 -50.83 72.06 22.73 -18.24 21.48 Chile Thailand Russia Hungary Poland Czech Rep. Philippines Poland Czech Rep. Philippines Philippines Peru Turkey Russia Peru -28.50 47.16 -30.03 -9.16 1.26 66.20 26.58 24.96 34.69 41.68 -51.87 72.06 21.24 -19.30 20.24 Malaysia Chile China Morocco Malaysia Morocco Korea Philippines Hungary Korea Egypt Philippines India Chile South Africa -30.81 39.01 -30.54 -13.70 -0.66 49.03 22.86 23.92 33.70 32.58 -52.35 67.98 20.95 -20.00 19.01 Indonesia Poland Colombia Brazil Morocco South Africa Morocco Chile Chile Poland Poland China Russia Taiwan Taiwan -31.53 31.50 -38.85 -16.99 -8.42 45.86 22.56 21.62 29.33 25.79 -54.49 62.63 19.40 -20.15 17.66 Mexico Peru Egypt South Africa Mexico Philippines India China Taiwan Russia Korea South Africa Poland Peru Russia -33.53 18.86 -43.71 -17.21 -13.31 42.76 19.11 19.77 20.90 24.79 -55.07 57.82 15.86 -21.37 14.39 Brazil China Taiwan Philippines China Taiwan Malaysia Hungary South Africa Chile Brazil Mexico Morocco Brazil Malaysia -39.62 13.33 -44.90 -19.29 -14.05 42.55 15.17 18.50 20.53 23.68 -56.06 56.63 15.33 -21.59 14.27 Peru Hungary Philippines India Chile Korea Taiwan Indonesia Egypt South Africa Indonesia Malaysia Egypt Poland Chile -40.22 11.66 -45.01 -19.45 -19.81 35.94 9.83 15.76 17.08 18.14 -56.20 52.06 12.42 -29.52 8.34 Colombia Czech Rep. Turkey China Taiwan Poland Russia Morocco Colombia Hungary Hungary Poland Brazil Hungary Indonesia -41.71 5.35 -45.65 -24.70 -24.45 35.48 5.69 13.97 13.76 16.80 -61.53 42.51 6.81 -33.65 5.22 China Philippines Korea Poland Philippines Mexico Peru Thailand Korea Colombia Turkey Egypt China Turkey Czech Rep. -42.37 3.32 -49.62 -27.44 -28.98 32.81 3.16 9.16 13.19 15.00 -62.10 39.74 4.83 -35.16 3.48 Turkey Morocco Thailand Turkey Brazil Hungary China Taiwan Thailand Mexico India Czech Rep. Czech Rep. India Brazil -52.51 -11.92 -56.27 -32.66 -30.65 32.31 1.89 7.25 11.61 12.15 -64.63 27.77 -1.66 -37.17 0.34 Russia Colombia Indonesia Egypt Turkey Malaysia Thailand Malaysia Turkey Taiwan Russia Morocco Hungary Egypt Morocco -82.99 -14.38 -61.90 -41.30 -35.70 26.61 -0.92 2.29 -6.97 9.13 -73.83 -4.98 -9.58 -46.86 -11.48 Source: MSCI emerging markets country indices (gross dividends) with at least fifteen years of data. MSCI data copyright MSCI 2013, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 7
  • DV1037.3 Equity Returns of Emerging Markets Annual Return (%) Boxed Return is highest return for the year. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Brazil -39.62 67.23 -11.37 -16.99 -30.65 115.01 36.47 57.05 45.80 79.99 -56.06 128.62 6.81 -21.59 0.34 Chile -28.50 39.01 -15.14 -2.83 -19.81 84.41 29.01 21.62 29.33 23.68 -35.37 86.73 44.81 -20.00 8.34 China -42.37 13.33 -30.54 -24.70 -14.05 87.57 1.89 19.77 82.87 66.24 -50.83 62.63 4.83 -18.24 23.10 Colombia -41.71 -14.38 -38.85 45.77 25.36 66.93 132.95 107.52 13.76 15.00 -25.10 84.35 43.41 -5.02 35.89 0.54 5.35 1.62 -2.01 44.16 66.20 87.25 46.20 34.68 55.93 -42.75 27.77 -1.66 -5.02 3.48 -27.00 88.40 -43.71 -41.30 1.59 91.84 126.23 161.59 17.08 58.43 -52.35 39.74 12.42 -46.86 47.10 -8.16 11.66 -26.80 -9.16 30.69 32.31 92.49 18.50 33.70 16.80 -61.53 77.61 -9.58 -33.65 22.79 India -21.24 87.35 -21.74 -19.45 8.37 78.36 19.11 37.57 51.00 73.11 -64.63 102.81 20.95 -37.17 25.97 Indonesia -31.53 93.46 -61.90 -8.49 42.83 78.20 52.21 15.76 74.83 55.03 -56.20 127.63 34.62 6.50 5.22 Korea 141.15 92.42 -49.62 48.71 8.62 35.94 22.86 58.00 13.19 32.58 -55.07 72.06 27.15 -11.76 21.48 Malaysia -30.81 114.33 -15.95 4.56 -0.66 26.61 15.17 2.29 37.14 46.07 -41.21 52.06 37.01 0.12 14.27 Mexico -33.53 80.07 -20.49 18.55 -13.31 32.81 48.32 49.11 41.44 12.15 -42.94 56.63 27.61 -12.11 29.06 24.57 -11.92 -21.55 -13.70 -8.42 49.03 22.56 13.97 68.58 48.15 -10.87 -4.98 15.33 -14.76 -11.48 -40.22 18.86 -23.82 19.92 30.50 94.32 3.16 35.00 62.55 94.74 -40.11 72.06 53.35 -21.37 20.24 Philippines 13.45 3.32 -45.01 -19.29 -28.98 42.76 26.58 23.92 59.65 41.68 -51.87 67.98 35.49 0.10 47.56 Poland -6.69 31.50 -4.04 -27.44 1.26 35.48 61.52 24.96 41.93 25.79 -54.49 42.51 15.86 -29.52 40.97 Russia -82.99 247.06 -30.03 55.85 15.71 75.94 5.69 73.77 55.93 24.79 -73.83 104.91 19.40 -19.30 14.39 South Africa -27.56 57.20 -17.19 -17.21 27.99 45.86 44.91 28.34 20.53 18.14 -37.89 57.82 34.21 -14.36 19.01 Taiwan -20.64 52.71 -44.90 10.47 -24.45 42.55 9.83 7.25 20.90 9.13 -45.88 80.25 22.73 -20.15 17.66 11.56 47.16 -56.27 5.25 27.59 144.56 -0.92 9.16 11.61 46.63 -48.27 77.31 56.27 -2.40 34.94 -52.51 252.41 -45.65 -32.66 -35.70 125.88 42.03 56.94 -6.97 74.81 -62.10 98.49 21.24 -35.16 64.87 Czech Republic Egypt Hungary Morocco Peru Thailand Turkey Source: MSCI emerging markets country indices (gross dividends) with at least fifteen years of data. MSCI data copyright MSCI 2013, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 8
  • DV1040.9 Equity Returns of Developed Markets Annual Return (%) 19 8 8 19 8 9 19 9 0 19 9 1 19 9 2 19 9 3 B elg. A ustria UK H.K. H.K. H.K. 53.63 1 03.91 1 0.29 49.52 32.29 1 6.70 1 23.57 44.1 2 40.05 Den. Ger. H.K. Sing. Japan US 46.26 9.1 8 A ustral . 33.64 Switz. 52.67 Highest Return 1 7.23 67.97 21 .44 37.1 4 Swede n 37.21 US US Switz. 30.07 6.39 45.79 Swede 1n 8.34 Swede n 33.36 Swede No rway A ustria n 48.33 45.53 6.33 No rway Den. No rway Sing. Sing. 42.40 43.94 0.65 24.96 6.28 France Sing. Den. 37.87 42.26 -0.91 A ustral France . 36.40 36.1 5 Japan Neth. 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2000 No rway Switz. 19 9 4 Spain Switz. 44.25 44.25 B elg. 67.76 67.75 Sing. Switz. A ustral A ustria Swede A ustria n 5.85 1. .68 1 6.55 64.53 71 .52 Italy Italy Can. 35.48 52.52 Swede n 79.74 H.K. Den. Spain Japan Den. B elg. 33.08 34.52 49.90 61 .53 3.44 -1 0.89 No rway Neth. 42.04 France France Swede n 1 7.83 2.81 36.99 Spain No rway US France H.K. 33.38 41 .54 59.52 Neth. Can. Spain US Can. Italy 27.71 28.54 25.41 30.1 4 53.74 -1 .33 29.83 Italy 1 .56 1 US Neth. Neth. Ger. B elg. B elg. Neth. Ger. Ger. 1 7.80 2.30 35.64 8.24 25.88 27.51 24.57 29.43 Neth. Den. B elg. Neth. Sing. H.K. UK Neth. Switz. 35.28 6.68 22.57 27.42 23.77 23.53 29.27 UK US UK Neth. US 35.79 -3.1 9 1 6.56 -1 .47 Sing. Switz. UK UK 33.32 Swede n 31 .79 -6.23 1 6.02 -3.65 H.K. US Ger. Switz. Ger. 28.1 2 30.01 -9.36 1 5.77 -1 0.27 Ger. Switz. B elg. Spain A ustria 20.60 Can. 26.21 Can. -1 0.98 Sing. 1 7.07 24.30 -1 .66 1 1 5.63 -1 0.65 Swede A ustral 1n 4.42 -1 . 0.82 US UK Can. B elg. -30.49 76.43 30.73 -2.56 31 .27 US Sing. H.K. Switz. Sing. -37.57 73.96 23.23 -6.77 30.96 58.46 -4.31 -1 4.05 -1 .05 1 Den. Can. 38.39 A ustria Swede n 56.96 36.28 24.64 45.1 2 31 .43 Den. Swede n 43.39 Can. Spain Sweden Sing. No rway Ger. 29.57 -40.60 22.1 4 -1 0.01 30.90 Den. 38.77 38.77 Sing. France H.K. Can. B elg. H.K. 28.35 -43.27 60.1 5 20.45 -1 0.62 28.27 A ustral . 28.34 Can. B elg. Japan A ustral. A ustria -45.51 57.49 1 5.44 Den. Ger. Can. US 1 4.77 24.50 Can. Italy No rway 54.60 32.49 24.26 Den. Switz. B elg. 30.82 1 6.33 36.66 Den. 49.25 A ustral A ustral A ustria . 36.54 30.34 1 . 6.02 36.54 25.90 Neth. A ustral. 25.59 -45.87 56.1 8 Ger. Spain Sing. Spain A ustral. Spain Sweden -1 2 2.1 22.07 1 4.37 35.99 23.95 -47.35 43.48 1 4.52 -1 2.28 21 .97 H.K. Neth. Neth. Den. UK Switz. Can. France 32.81 4.66 1 8.78 21 .79 1 3.55 1 7.80 20.04 -1 .53 1 -1 8.61 -1 4.97 40.22 24.98 1 3.85 France 34.48 20.59 -47.56 43.30 1 .79 1 -1 2.71 Spain Den. Can. UK H.K. Sing. Neth. 3.77 Switz. 1 8.31 Ger. -1 5.23 Spain 38.1 0 Italy 22.27 Can. Italy 32.49 France 29.78 Italy Swede 1n 0.31 Ger. 28.53 3.54 1 6.41 -1 5.29 37.83 22.20 Neth. 31 .38 31 .38 A ustria US France Ger. Neth. Den. Sing. UK 37.60 1 9.57 Italy No rway Japan 1 9.42 -1 3.83 1 .08 1 25.48 -1 .63 1 2.59 Spain B elg. Spain Japan Japan UK Can. Sing. B elg. 1 3.53 1 7.29 -1 3.85 8.92 -21 .45 24.44 -3.04 6.45 1 2.03 Italy Spain Spain B elg. Spain 9.76 A ustral -1 . 7.54 Ger. 1 .46 1 8.1 6 -21 .87 23.51 -4.80 France France 6.24 5.05 A ustria A ustria 1 .57 No rway A ustria A ustral 6.02 4.51 -1 . 0.44 0.35 Den. H.K. 1 2.06 -1 4.74 -22.1 0 -1 6.03 Neth. Ger. France H.K. 6.88 -1 5.59 -22.36 -1 7.79 Spain Spain Ger. Neth. 4.83 -1 5.86 -22.39 -20.83 8.40 Switz. Japan UK 34.08 1 5.86 7.35 Italy US UK Switz. US -26.59 -23.09 32.06 1 4.96 5.1 4 Spain Switz. -7.02 Swede n -21 .29 Can. A ustria Japan Sing. Japan Sing. A ustria Sing. 0.69 -6.86 -23.67 -1 2.88 -9.1 1 Sing. No rway B elg. -30.05 -30.06 -1 4.26 -1 5.50 H.K. -21 8 .1 -6.1 4 -4.72 Ger. 1 7 6.1 France Can. -28.90 B elg. 35.33 Sing. H.K. 9.1 5 9.05 -23.42 -23.29 -28.25 1 8.48 B elg. 2.28 A ustria Japan 35.91 -1 6.85 Switz. H.K. B elg. Italy 1 .05 -6.28 Japan France -0.26 Italy US France A ustral .30.86 30.86 9.88 H.K. -5.1 8 1 7.58 9.92 -2.90 20.90 Den. Sing. -1 0.95 28.93 France Swede Swede A ustral A ustria Can. 21 .20 1n 2.92 1n 3.96 1 . 7.62 -1 .96 -20.44 1 A ustral Can. Den. UK US Switz. 1 . 6.49 1 2.80 8.99 1 2.45 -1 2.84 -21 .38 No rway Spain 64.1 6 48.1 1 1 3.58 -1 5.50 35.21 France 1 2 4.1 -36.1 0 46.71 B elg. A ustral 1 .1 1. 9 1 .71 Den. 25.52 -1 9 3.1 UK 0.57 UK 43.53 H.K. 1 9 4.1 Lowest Return Ger. 63.80 41 .20 -1 4.81 13 .1 Japan No rway Sing. UK 28.09 8.39 Japan B elg. 39.55 Ger. Japan Japan 28.31 B elg. US 1 .36 21 .92 -1 5 2.1 5.95 Sing. 2 0 12 Ger. Switz. A ustral . -1 0.31 49.46 UK 2 0 11 UK Swede -1n 4.41 A ustria -1 0.28 2 0 10 23.23 Can. Swede A ustria No rway n -20.99 -1 2.23 -22.29 Italy -7.33 2009 B elg. 1 3.77 H.K. -7.26 2008 Japan No rway Sweden -29.21 87.07 33.75 Switz. A ustral. Den. 22.62 -1 3.00 Italy H.K. Den. France -22.22 2007 Spain 49.36 49.36 23.24 Italy Italy 2006 Can. Den. 21 .87 -1 .82 France France US -1 2.39 2005 No rway Spain No rway A ustria No rway No rway No rway Japan -1 2.22 2004 21 .27 1 4.61 Italy -4.09 -1 .36 1 2003 Ger. Den. Neth. -1 9 9.1 No rway Neth. 31 .70 A ustria A ustral -5.65 -1. .34 No rway Spain -0.89 2002 A ustral . -9.95 France A ustral . 1 .94 1 6.07 UK Can. A ustral A ustral .7 . 35.1 5.40 5.34 28.63 1 .70 1 -3.1 5 35.39 Switz. A ustral . 6.1 8 9.30 99.40 2001 US Neth. -27.72 Swede Swede n 8 -30.49 n -27.1 28.41 1 2.24 4.41 Japan Japan Ger. Neth. US Italy -28.1 6 -29.40 -33.1 8 28.09 1 4 0.1 1 .90 UK 30.61 30.61 H.K. 30.35 30.35 1 3.24 UK 8.36 Italy US 1 4.67 1 4.67 Japan 6.24 6.24 21 .29 Neth. 20.59 Switz. 20.35 Den. UK Den. No rway 6.06 Swede n -49.86 36.57 8.76 -1 6.02 1 8.65 US Italy France Ger. H.K. US 5.44 -49.98 31 .83 8.44 -1 6.02 1 5.33 Switz. A ustral . 5.29 -50.67 Italy Neth. France UK 26.57 1 .74 -1 6.87 1 5.25 H.K. US B elg. Sing. Italy -51 .21 26.25 -0.42 -1 7.92 1 2.48 Ger. Can. Switz. A ustria 27.40 27.40 2.1 7 Can. 1 7.80 1 7.80 A ustria No rway Japan -48.22 43.20 1 0.95 -1 4.33 UK Neth. A ustria Sweden -48.34 42.25 9.88 -1 5.98 Swede No rway Switz. France n 0.62 -64.24 25.31 -4.1 1 B elg. B elg. Ger. Italy -2.73 -66.48 25.1 5 -1 5.01 Japan A ustria -4.23 -68.41 -1 8.08 9.09 Italy Japan -23.1 8 8.1 8 Japan Spain A ustria Spain 6.25 -21 .95 -36.43 In US dollars. Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 3.00 9
  • DV1040.9 Equity Returns of Developed Markets Annual Return (%) Boxed Return is highest return for the year. 1988 Australia Austria 36.40 1989 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 33.64 -10.82 35.17 5.40 11.19 16.49 -10.44 6.07 17.62 -9.95 1.68 -1.34 49.46 30.34 16.02 30.86 28.34 -50.67 76.43 14.52 -10.95 22.07 6.33 -12.23 -10.65 28.09 -6.28 -4.72 4.51 1.57 0.35 -9.11 -11.96 -5.65 16.55 56.96 71.52 24.64 36.54 2.17 -68.41 43.20 9.88 -36.43 25.90 1990 9.30 -17.54 0.57 103.91 1991 Belgium 53.63 17.29 -10.98 13.77 -1.47 23.51 8.24 25.88 12.03 13.55 67.75 -14.26 -16.85 -10.89 -14.97 35.33 43.53 9.05 36.66 -2.73 -66.48 57.49 -0.42 -10.62 39.55 Canada 17.07 24.30 -13.00 11.08 -12.15 17.58 -3.04 18.31 28.54 12.80 -6.14 53.74 5.34 -20.43 -13.19 54.60 22.20 28.31 17.80 29.57 -45.51 56.18 20.45 -12.71 9.09 Denmark 52.67 43.94 16.56 -28.25 32.81 3.77 18.78 21.79 34.52 8.99 12.06 3.44 -14.81 -16.03 49.25 30.82 24.50 38.77 25.59 -47.56 36.57 30.73 -16.02 31.27 France 37.87 36.15 -13.83 17.83 2.81 20.91 -5.18 14.12 21.20 11.94 41.54 29.27 -4.31 -22.36 -21.18 40.22 18.48 9.88 34.48 13.24 -43.27 31.83 -4.11 -16.87 21.29 Germany 20.60 46.26 -9.36 8.16 -10.27 35.64 4.66 16.41 13.58 24.57 29.43 20.04 -15.59 -22.39 -33.18 63.80 16.17 9.92 35.99 35.21 -45.87 25.15 8.44 -18.08 30.90 Hong Kong 28.12 8.39 9.17 32.29 116.70 -28.90 22.57 33.08 -23.29 -2.92 59.52 -14.74 -18.61 -17.79 38.10 24.98 8.40 30.35 41.20 -51.21 60.15 23.23 -16.02 28.27 Italy 11.46 19.42 -19.19 -1.82 -22.22 28.53 11.56 1.05 12.59 35.48 52.52 -0.26 -7.33 37.83 32.49 1.90 32.49 6.06 -49.98 26.57 -15.01 -23.18 12.48 Japan 35.39 1.71 -36.10 8.92 -21.45 25.48 21.44 0.69 -15.50 -23.67 5.05 61.53 -28.16 -29.40 -10.28 35.91 15.86 25.52 6.24 -4.23 -29.21 6.25 15.44 -14.33 8.18 Netherlands 14.19 35.79 2.30 35.28 11.70 27.71 27.51 -4.09 -22.10 -20.83 28.09 12.24 13.85 31.38 20.59 -48.22 42.25 1.74 -12.12 20.59 Norway 42.40 45.53 0.65 -15.50 -22.29 42.04 23.57 6.02 28.63 -0.89 -12.22 -7.26 48.11 38.39 24.26 45.12 31.43 -64.24 87.07 10.95 -10.01 18.65 Singapore 33.32 42.26 -11.66 6.28 67.97 6.68 6.45 -6.86 -30.05 -12.88 99.40 -27.72 -23.42 -11.05 37.60 22.27 14.37 46.71 28.35 -47.35 73.96 22.14 -17.92 30.96 Spain 13.53 9.76 -13.85 15.63 -21.87 29.78 -4.80 29.83 40.05 25.41 49.90 4.83 -15.86 -11.36 -15.29 58.46 28.93 4.41 49.36 23.95 -40.60 43.48 -21.95 -12.28 3.00 Sweden 48.33 31.79 -20.99 14.42 -14.41 36.99 18.34 33.36 37.21 12.92 13.96 79.74 -21.29 -27.18 -30.49 64.53 36.28 10.31 43.39 0.62 -49.86 64.16 33.75 -15.98 21.97 -0.91 -3.19 49.52 17.80 24.96 23.77 23.23 6.88 6.24 -30.06 31.70 -1.33 -26.59 Switzerland 6.18 26.21 -6.23 15.77 17.23 45.79 3.54 44.12 2.28 44.25 23.53 -7.02 5.85 -21.38 -10.31 34.08 14.96 16.33 27.40 5.29 -30.49 25.31 11.79 -6.77 20.35 UK 5.95 21.87 10.29 16.02 -3.65 24.44 -1.63 21.27 27.42 22.62 17.80 12.45 -11.53 -14.05 -15.23 32.06 19.57 7.35 30.61 8.36 -48.34 43.30 8.76 -2.56 15.25 US 14.61 30.01 -3.15 30.07 6.39 9.15 1.13 37.14 23.24 33.38 30.14 21.92 -12.84 -12.39 -23.09 28.41 10.14 5.14 14.67 5.44 -37.57 26.25 14.77 1.36 15.33 In US dollars. Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 10
  • DV1060.7 World Market Capitalization $37.5 Trillion as of December 31, 2012  Developed Markets  Emerging Markets  Frontier Markets Capitalization over time ($ trillions): In US dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison. 11
  • ME1100.4 Market Efficiency I. Peter Lynch II. Warren E. Buffett III. Efficient Markets Hypothesis IV. US Large Cap Returns V. The Failure of Active Management VI. The Mutual Fund Landscape VII. Morningstar Predictive Power
  • ME1120.4 Peter Lynch ―All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.‖ Peter Lynch, Beating the Street (New York: Simon & Schuster, 1993), 60. 13
  • ME1130.2 Warren E. Buffett Chairman and CEO, Berkshire Hathaway, Inc. ―Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.‖ Berkshire Hathaway Inc., 1996 Annual Report, chairman’s letter, in www.berkshirehathaway.com. 14
  • ME1140.2 Efficient Markets Hypothesis Eugene F. Fama, University of Chicago The Hypothesis States: • Current prices incorporate all available information and expectations. • Current prices are the best approximation of intrinsic value. • Price changes are due to unforeseen events. • ―Mispricings‖ do occur but not in predictable patterns that can lead to consistent outperformance. Implications • Active management strategies cannot consistently add value through security selection and market timing. • Passive investment strategies reward investors with capital market returns. Eugene F. Fama, ―Efficient Capital Markets: A Review of Theory and Empirical Work,‖ Journal of Finance 25, no. 2 (May 1970): 383-417. Eugene F. Fama, ―Foundations of Finance,‖ Journal of Finance 32, no. 3 (June 1977): 961-64. 15
  • ME1150.7 US Large Cap Returns 1997-2012 16 Annualized Compound Return (%) S&P 500 Index CRSP 1-10 Index Annualized Compound Returns (%) 5.34 Morningstar Fund Average 14 4.75 4.71 12 10 8 CRSP 1-10 Index S&P 500 Index Morningstar Fund Average 6 4 2 0 0 25 50 75 100 125 150 175 200 225 250 275 300 Number of Funds 325 350 375 400 425 450 475 Source: Morningstar data provided by Morningstar Inc. Includes all Morningstar US large cap funds with fifteen-year returns, distinct portfolios only, as of December 31, 2012. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. 16
  • ME1160.8 The Failure of Active Management Percentage of active public equity funds that failed to beat the index Five Years as of December 2012 100% 90% 90% % of Active Funds That Failed to Outperform Benchmark 83% 80% 75% 76% 74% 70% 62% 60% 50% 40% 30% 21% 20% 10% 0% US Large Cap US Mid Cap US Small Cap Global International International Small Emerging Markets Equity Fund Category Source: Standard & Poor’s Indices Versus Active Funds Scorecard, year-end 2012. Index used for comparison: US Large Cap—S&P 500 Index; US Mid Cap—S&P MidCap 400 Index; US Small Cap—S&P SmallCap 600 Index; Global Funds—S&P Global 1200 Index; International—S&P 700 Index; International Small—S&P World ex. US SmallCap Index; Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database. 17
  • ME1160.8 The Failure of Active Management Percentage of active public fixed income funds that failed to beat the index Five Years as of December 2012 100% 95% 94% 90% % of Active Funds That Failed to Outperform Benchmark 90% 80% 76% 70% 60% 59% 60% 50% 50% 40% 40% 30% 20% 10% 0% Government Long Government Intermediate Government Short InvestmentGrade Long InvestmentGrade Intermediate InvestmentGrade Short National Muni CA Muni Fixed Income Category Source: Standard & Poor’s Indices Versus Active Funds Scorecard, year-end 2012. Index used for comparison: Government Long—Barclays Capital US Long Government Index; Government Intermediate—Barclays Capital US Intermediate Government Index; Government Short—Barclays Capital US 1-3 Year Government Index; Investment Grade Long—Barclays Capital US Long Government/Credit; Investment Grade Intermediate—Barclays Capital US Intermediate Government/Credit; Investment Grade Short—Barclays Capital US 1-3 Year Government/Credit; National Muni—S&P National AMT-Free Municipal Bond Index; CA Muni—S&P California AMT-Free Municipal Bond Index. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. 18
  • ME1161.1 The Mutual Fund Landscape 2013 report 19
  • ME1161.1 The US Mutual Fund Industry Number of equity and fixed income funds, 2012 Number of funds as of December 2012. International equities include all non-US developed funds. Global fixed includes all non-US funds, both developed and emerging markets. See Data Appendix for more information. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 20
  • ME1161.1 The US Mutual Fund Industry Assets under management (in USD billions) 2003 2012 Assets under management as of the end of each December from 2003 to 2012. International equities include all non-US developed funds. Global fixed includes all non-US funds, both developed and emerging markets. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 21
  • ME1161.1 Survivorship and Outperformance Performance periods ending December 31, 2012—equity funds Beginning sample includes funds as of the beginning of the one-, five-, and 10-year periods ending in 2012. The number of funds as of the beginning of each sample time period is indicated below the period label. Survivors are funds that are still in existence as of December 2012. Winners are funds that survive and beat their respective benchmarks over the period. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 22
  • ME1161.1 Survivorship and Outperformance Performance periods ending December 31, 2012—fixed income funds Beginning sample includes funds as of the beginning of the one-, five-, and 10-year periods ending in 2012. The number of funds as of the beginning of each sample time period is indicated below the period label. Survivors are funds that are still in existence as of December 2012. Winners are funds that survive and beat their respective benchmarks over the period. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 23
  • ME1161.1 Do Winners Keep Winning? Past performance vs. subsequent performance—equity funds The sample includes funds at the beginning of the three-, five-, and seven-year periods, ending in December 2009. The graph shows the proportion of funds that outperform and underperform their respective benchmarks. Winner funds are reevaluated in the subsequent period from 2010 to 2012, with the graph showing the proportion of outperformance and underperformance among past winners. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 24
  • ME1161.1 Do Winners Keep Winning? Past performance vs. subsequent performance—fixed income funds The sample includes funds at the beginning of the three-, five-, and seven-year periods, ending in December 2009. The graph shows the proportion of funds that outperform and underperform their respective benchmarks. Winner funds are reevaluated in the subsequent period from 2010 to 2012, with the graph showing the proportion of outperformance and underperformance among past winners. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 25
  • ME1161.1 High Costs Make Outperformance Difficult Winners and losers based on expense ratios (%)—equity funds The sample includes funds at the beginning of the one-, five-, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average expense ratio over the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each expense ratio quartile. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 26
  • ME1161.1 High Costs Make Outperformance Difficult Winners and losers based on expense ratios (%)—fixed income funds The sample includes funds at the beginning of the one-, five-, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average expense ratio over the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each expense ratio quartile. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 27
  • ME1161.1 High Trading Costs Make Outperformance Difficult Winners and losers based on turnover (%)—equity funds The sample includes equity funds at the beginning of the one-, five, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average turnover during the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each turnover quartile. Fixed income funds are excluded from the analysis because turnover is not a good proxy for fixed income trading costs. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results. 28
  • ME1161.1 Report Summary The mutual fund landscape Findings • Most funds underperformed. • Strong track records failed to persist. • High costs and excessive turnover may have contributed to underperformance. Lessons • Markets do a good job of pricing securities. • Intense competition makes consistent outperformance difficult. • Managers face cost barriers as they try to beat the market. • Successful fund investing involves more than picking past winners. • Consider a fund’s market philosophy, investment objectives, strategy, trading costs, and other factors. Past performance is no guarantee of future results. 29
  • ME1161.1 Data Appendix Research conducted by Dimensional Fund Advisors LP. Mutual fund data is from the CRSP Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago. Certain types of equity and fixed income funds were excluded from the performance study. For equities, sector funds and funds with a narrow investment focus, such as real estate and gold, were excluded. Money market funds, municipal bond funds, and asset-backed security funds were excluded from fixed income. Funds are identified using Lipper fund classification codes and are matched to their respective benchmarks at the beginning of the sample periods. Winner funds are those whose cumulative return over the period exceeded that of their respective benchmark. Loser funds are funds that did not survive the period or whose cumulative return did not exceed their respective benchmark. Expense ratio ranges — The ranges of expense ratios for equity funds over the one-, five-, and 10-year periods are 0.02% to 4.95%, 0.01% to 4.47%, and 0.02% to 4.43%, respectively. For fixed income funds, ranges over the same periods are 0.02% to 2.61%, 0.03% to 2.56%, and 0.10% to 2.32%, respectively. Portfolio turnover ranges — Ranges for equity fund turnover over the one-, five-, and 10-year periods are 1% to 1,135%, 1% to 5,062%, and 1% to 2,447%, respectively. Benchmark data provided by Barclays, MSCI, and Russell. Barclays data provided by Barclays Bank PLC. MSCI data copyright MSCI 2013, all rights reserved. Russell data copyright © Russell Investment Group 1995 2013, all rights reserved. Benchmark indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market. Past performance is no guarantee of future results. 30
  • RR1200.8 Risk/Return I. Capital Asset Pricing Model IX. II. Size and Value Effects Are Strong around the World Average US Small Cap and Value Premiums Following Multi-Year Runs X. Precision in Portfolios XI. Structure Determines Performance III. Historical US Value and Small Cap Premiums IV. Yearly Observations of the US Size, Value, and Market Premiums V. Five-Year Moving Average of the US Size, Value, and Market Premiums VI. Distribution of the US Size, Value, and Market Premiums VII. Distribution of the Market Returns VIII. US Small Cap and Value Performance Following a Run XII. Market Premium XIII. Market Risk Premium Is Countercyclical XIV. Risk and Return Are Related XV. The Risk Dimensions Deliver XVI. Five Factor Help Determine Expected Return
  • RR1210.2 Capital Asset Pricing Model William Sharpe: Nobel Prize in Economics, 1990 Total Equity Risk Unsystematic Company Risk • Specific to firm or industry (lawsuit, fraud, etc.) • Diversifiable Unsystematic • No compensation Industry Risk Systematic Market Risk Systematic • Marketwide, affects all firms (war, recession, inflation, etc.) • Non-diversifiable • Investor compensation • Measured by beta Beta measures volatility relative to the total market. A beta higher than the market’s beta of 1 implies more volatility, and a beta lower than the market’s implies less volatility. 32
  • RR1221.5 Historical US Value and Small Cap Premiums Annual VALUE MINUS GROWTH Top 30% – Bottom 30% Average Premium (%) Standard Deviation (%) SMALL MINUS LARGE Bottom 50% – Top 50% Average Premium (%) Standard Deviation (%) Jan 1926–Dec 2012 4.77 16.60 4.53 16.08 Jan 1946–Dec 2012 4.56 13.83 3.04 13.67 Jan 1975–Dec 2012 3.55 14.53 3.35 12.83 Data provided by Fama/French. 33
  • RR1222.7 Yearly Observations of the US Size Premium Small Stocks minus Big Stocks 1927-2012 Average 60% Within 2% of Average Premiums within Range 50% 40% Return Premium 30% 20% 10% 3.58% 0% -10% -20% -30% -40% 1927 1944 1961 1978 1995 Multifactor data provided by Fama/French. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money. 2012 34
  • RR1222.7 Yearly Observations of the US Value Premium Value Stocks minus Growth Stocks 1927-2012 Average Within 2% of Average 50% Premiums within Range 40% 30% Return Premium 20% 10% 4.80% 0% -10% -20% -30% -40% 1927 1944 1961 1978 1995 Multifactor data provided by Fama/French. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money. 2012 35
  • RR1222.7 Yearly Observations of the US Market Premium Market minus One-Month Treasury Bills 1927-2012 Average 60% Within 2% of Average Premiums within Range 50% 40% 30% Return Premium 20% 10% 8.05% 0% -10% -20% -30% -40% -50% 1927 1944 1961 1978 1995 2012 Data provided by Fama/French. Total US Market Research Factor (total market minus one-month Treasury bills). Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money. 36
  • RR1223.6 Five-Year Moving Average of the US Size and Value Premiums Annual: 1927–2012 US Size Premium • On an annualized basis, small cap and value stocks have had more positive than negative five-year periods relative to large cap and growth stocks. Annualized Return 25% • These periods typically offer stronger performance relative to large cap and growth. 15% 5% -5% -15% 1931 • Small cap and value stocks are still subject to extended periods of underperformance. 1940 1949 1958 1967 1958 1967 1976 1985 1994 2003 2012 US Value Premium 20% Annualized Return 15% 10% 5% 0% -5% -10% 1931 1940 1949 1976 1985 1994 2003 Multifactor data provided by Fama/French. SmB and HmL research factors. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money. 2012
  • RR1223.6 Five-Year Moving Average of the US Market Premium Annual: 1927–2012 30% 25% 20% Annualized Return 15% 10% 5% 0% -5% -10% -15% 1931 1940 1949 1958 1967 1976 1985 1994 2003 2012 Data provided by Fama/French. Total US Market Research Factor (total market minus one-month Treasury bills). Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money. 38
  • RR1225.6 Distribution of the US Size Premium 1927–2012 18 16 Number of Years 14 12 10 8 6 4 2 0 ≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35% ≥40% ≥45% ≥50% Return Premium (Small minus Large) 1998 1929 1973 1990 1989 1987 1972 1970 1969 1937 Average Annual Premium: 3.58% Green and orange years indicate 1990s and 2000s respectively. Data provided by Fama/French. SmB research factor. 2011 2007 1995 1986 1984 1963 1962 1955 1952 1948 1947 2005 2000 1997 1996 1994 1974 1964 1960 1957 1956 1954 1953 1951 1946 1941 1930 1927 2012 2008 2006 2004 2002 1985 1966 1961 1950 1949 1940 1931 1928 2009 1993 1992 1988 1982 1981 1980 1971 1959 1942 1939 1935 1932 2010 1983 1978 1976 1958 1938 2001 1999 1991 1975 1944 1936 1979 1977 1968 1965 2003 1945 1934 1943 1967 1933
  • RR1225.6 Distribution of the US Value Premium 1927–2012 14 Number of Years 12 10 8 6 4 2 0 ≥-35% ≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35% 2001 1993 1984 1973 1968 1963 1944 1942 1933 1992 1983 1976 1970 1981 1954 1950 1936 1943 2000 Return Premium (Value minus Growth) 1999 1980 1934 1939 1931 Average Annual Premium: 4.80% Green and orange years indicate 1990s and 2000s respectively. Data provided by Fama/French. HmL research factor. 2007 1991 1971 1938 1930 2011 2009 1998 1990 1969 1967 1957 1953 1951 1928 2010 1994 1989 1987 1979 1966 1960 1956 1949 1940 1937 1927 2008 2003 1996 1995 1985 1978 1972 1959 1952 1948 1946 2012 2005 2004 2003 1986 1977 1975 1974 1965 1962 1961 1955 1947 1932 2006 2002 1997 1988 1982 1964 1958 1945 1941 1935 1929 40
  • RR1225.6 Distribution of the US Market Premium 1927–2012 12 Number of Years 10 8 6 4 2 0 ≥-50% ≥-45% ≥-40% ≥-35% ≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35% ≥40% ≥45% ≥50% ≥55% Return Premium (Market minus One-Month T-Bills) 1931 2008 1974 1937 1930 1973 2002 2001 2000 1981 1969 1929 1990 1966 1962 1957 1941 1984 1977 1970 1946 1940 1932 1994 1987 1960 1953 Average Annual Premium: 8.05% Green and orange years indicate 1990s and 2000s respectively. Data provided by Fama/French. Total US market research factor (total market minus one-month Treasury bills). 2011 2007 2005 1978 1948 1947 1939 1934 1993 1992 1968 1959 1956 2006 2004 1988 1986 1983 1982 1979 1972 1971 1965 1964 1952 2012 2010 1998 1996 1963 1951 1949 1942 1999 1989 1985 1980 1976 1967 1961 1955 1944 2009 1997 1991 1950 1943 1938 2003 1995 1975 1936 1927 1945 1928 1958 1935 1954 1933
  • RR1226.4 Distribution of US Market Returns CRSP 1-10 Index Returns by Year 1926–2012 Positive Years: 65 (25%) 1993 11.1 2004 12.0 1959 12.7 1952 13.4 1968 14.1 1965 14.5 2006 15.5 1942 16.0 1964 16.1 1971 16.1 2012 16.2 1986 16.2 1972 16.8 2010 17.9 1988 18.0 10% to 20% 20% to 30% (75%) Negative Years: 22 1949 20.2 1951 20.7 1963 21.0 1982 21.0 1944 21.3 1996 21.4 1983 22.0 1979 22.6 1998 24.3 1955 25.2 1999 25.3 1976 26.8 1961 26.9 1938 28.1 1943 28.4 1967 28.7 2009 28.8 1989 28.9 1950 29.6 1931 -43.5 2008 -36.7 1937 -34.7 1930 -28.5 1974 -27.0 2002 -21.1 1973 -18.1 1929 -14.6 2000 -11.4 2001 -11.1 1969 -10.9 1962 -10.2 1957 -10.1 1941 -10.0 1966 -8.7 1932 -8.7 1940 -7.1 1990 -6.0 1946 -5.9 1977 -4.3 1981 -3.6 1994 -0.1 1970 0.0 1953 0.7 2011 0.8 1960 1.2 1987 1.7 1948 2.1 1939 2.9 1947 3.6 1934 4.3 1984 4.5 2007 5.8 2005 6.2 1978 7.5 1956 8.3 1926 9.2 1992 9.8 -50% to -40% -40% to -30% -30% to -20% -20% to -10% -10% to 0% 0% to 10% • In 2008, the US stock market experienced its second worst performance year since 1926. • In 2009, US market performance was in the top quartile of historical calendar year returns. 1997 31.4 2003 31.6 1985 32.2 1936 32.3 1980 32.8 1927 33.4 1991 34.7 1995 36.8 1945 38.1 1975 38.8 1928 38.9 1935 44.3 1958 45.0 1954 50.0 1933 57.1 30% to 40% 40% to 50% 50% to 60% Annual Return Range CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
  • RR1227.6 US Small Cap Performance Following a Run Annual: January 1946–December 2012 Move to Large when Small outperforms for at least: Stay in Small all the time 3 Years 4 Years 5 Years Average Annual Return (%) 15.28 12.63 13.68 14.72 Compound Annualized Return (%) 12.78 10.62 11.49 12.41 Standard Deviation (%) 23.81 21.05 22.31 23.02 • For the period beginning January 1946, implementing a fixed timing strategy based on the duration of a small cap run would not earn higher returns than simply holding small cap all the time. • A small cap run of 3, 4, or 5 years offers no insight into whether small or large cap stocks will outperform in the next year. Data provided by Fama/French. The strategy of staying invested in Small Cap all the time is compared to timing rules that switch back and forth between Small Cap and Large Cap based on the length of the Small Cap Run. Each June 30, the timing rule looks back to see how many years in a row Small Cap has had a higher return than Large Cap. This is the Small Cap Run. If the Small Cap Run is at least 3 years (or 4, or 5), the timing rule switches to Large Cap for the next twelve months. At the end of those twelve months, the Small Cap Run is computed again, and the process is repeated. 43
  • RR1227.6 US Value Performance Following a Run Annual: January 1946–December 2012 Move to Growth when Value outperforms for at least: Stay in Value all the time 3 Years 4 Years 5 Years Average Annual Return (%) 16.24 14.38 15.32 15.93 Compound Annualized Return (%) 14.26 12.54 13.40 14.03 Standard Deviation (%) 21.25 20.61 21.04 20.89 • For the period beginning January 1946, implementing a fixed timing strategy based on the duration of a value run would not earn higher returns than simply holding value all the time. • A value run of 3, 4, or 5 years offers no insight into whether value or growth stocks will outperform in the next year. Data provided by Fama/French. The strategy of staying invested in Value all the time is compared to timing rules that switch back and forth between Value and Growth based on the length of the Value Run. Each June 30, the timing rule looks back to see how many years in a row Value has had a higher return than Growth. This is the Value Run. If the Value Run is at least 3 years (or 4, or 5), the timing rule switches to Growth for the next twelve months. At the end of those twelve months, the Value Run is computed again, and the process is repeated. 44
  • RR1229.6 Average US Small Cap Premiums Following Multi-Year Runs Annual SMALL MINUS LARGE Run = 3 Years Average Premium (%) Subsequent Premium (%) Run = 4 Years Events Subsequent Premium (%) Run = 5 Years Events Subsequent Premium (%) Events Jan 1926–Dec 2012 4.53 10.17 22 7.28 15 2.16 10 Jan 1946–Dec 2012 3.04 10.29 17 8.79 12 4.07 9 Jan 1975–Dec 2012 3.35 7.89 12 9.22 10 6.50 8 • In the January 1926–December 2012 period, there were 22 periods (events) when small cap beat large cap in three consecutive years. The Subsequent Premium in the following year averaged 10.17% across the 22 periods. A small cap run of 3, 4, or 5 years may not increase the likelihood of underperformance in the following year. Data provided by Fama/French. 45
  • RR1229.6 Average US Value Premiums Following Multi-Year Runs Annual VALUE MINUS GROWTH Run = 3 Years Average Premium (%) Subsequent Premium (%) Run = 4 Years Events Subsequent Premium (%) Run = 5 Years Events Subsequent Premium (%) Events Jan 1926–Dec 2012 4.77 9.16 22 6.32 17 3.32 12 Jan 1946–Dec 2012 4.56 6.79 18 4.32 14 2.02 10 Jan 1975–Dec 2012 3.55 7.15 12 3.33 9 0.26 6 • In the January 1926–December 2012 period, there were 22 periods (events) when value beat growth in three consecutive years. The Subsequent Premium in the following year averaged 9.16% across the 22 periods. A value run of 3, 4, or 5 years may not increase the likelihood of underperformance in the following year. Data provided by Fama/French.
  • RR1250.2 Precision in Portfolios Traditional Consulting Style Box Three-Factor Model Small Large Mid Growth Value Small Value Blend Growth • Traditionally, ―products‖ have been classified into rigid and sometimes arbitrary categories. • Style boxes force crude strategic allocation. Large • Using the three-factor model, the total portfolio is measured by factors that determine risk and expected return. • Freedom from brittle definitions allows precisely tuned portfolios. 47
  • RR1255.1 Advancements in Research Single-Factor Model (1963) Market Size Effect (1981) Size Large Small Value Effect (1991) Expected Profitability (2012) Size Large Low Large High Small Low Small Size Direct Profitability High Large Small Low High Relative Price Low High Relative Price 48
  • Structure Determines Performance Structured Exposure to Factors explain 96% of return variation • The vast majority of the variation in returns is due to risk factor exposure. • Market • Size • Value/Growth • After fees, traditional management typically reduces returns. Unexplained Variation is 4% THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING average expected return = [minus T-bills] average excess return + sensitivity to market [market return minus T-bills] + sensitivity to size + [small stocks minus big stocks] Priced Risk • Positive expected return • Systematic • Economic • Long-term • Investing sensitivity to BtM [value stocks minus growth] + random error e(t) Unpriced Risk • Noise • Random • Short-term • Speculating
  • Dimensions of Higher Expected Returns Annual Average US Premiums: 1927–2012 8.05% 4.80% 3.58% 2.52% 0.85% 1 Market Premium 2 Size Premium 3 BtM Premium All Equity Universe minus T-Bills Small Stocks minus Large Stocks 4 High BtM minus Low BtM 1. Credit premium data (1973–2012) provided by Barclays Bank PLC. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Equity premiums provided by Fama/French. Maturity premium data provided by © Stocks, Bonds, Bills, and Inflation Yearbook©, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 5 Maturity Premium 6 Credit1 Premium LT Govt. minus T-Bills Int. Corp. minus LT Govt.
  • RR1271.5 The Risk Dimensions Delivered July 1926–December 2012 US Value vs. US Growth US Small vs. US Large OVERLAPPING PERIODS In 25-Year Periods Value beat growth 100% of the time. Small beat large 97% of the time. In 20-Year Periods Value beat growth 100% of the time. Small beat large 88% of the time. In 15-Year Periods Value beat growth 99% of the time. 95% Small beat large 82% of the time. In 10-Year Periods Value beat growth 96% of the time. 91% Small beat large 75% of the time. In 5-Year Periods Value beat growth 86% of the time. 80% Small beat large 60% of the time. Periods based on rolling annualized returns. 739 total 25-year periods. 799 total 20-year periods. 859 total 15-year periods. 919 total 10-year periods. 979 total 5-year periods. Performance based on Fama/French Research Factors. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Mutual funds distributed by DFA Securities LLC.
  • RR1271.5 The Risk Dimensions Delivered January 1975–December 2012 January 1970–December 2012 International Value vs. International Growth International Small vs. International Large OVERLAPPING PERIODS In 25-Year Periods Value beat growth 100% of the time. Small beat large 100% of the time. In 20-Year Periods Value beat growth 100% of the time. Small beat large 97% of the time. In 15-Year Periods Value beat growth 100% of the time. Small beat large 83% of the time. In 10-Year Periods Value beat growth 100% of the time. Small beat large 80% of the time. In 5-Year Periods 96% Value beat growth 98% of the time. Small beat large 79% of the time. Based on rolling annualized returns. Rolling multi-year periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. International Value vs. International Growth data: 157 overlapping 25-year periods. 217 overlapping 20-year periods. 277 overlapping 15-year periods. 337 overlapping 10-year periods. 397 overlapping 5-year periods. International Small vs. International Large data: 217 overlapping 25-year periods. 277 overlapping 20-year periods. 337 overlapping 15-year periods. 397 overlapping 10-year periods. 457 overlapping 5-year periods. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Large is MSCI World ex USA Index gross of foreign withholding taxes on dividends; copyright MSCI 2013, all rights reserved.
  • RR1272.6 Market Premium Fama/French US Market Research Factor Returns Monthly: January 1990–December 2012 Year Annual Return 1990 1991 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -13.80% -7.60% 0.90% 1.80% -3.50% 8.20% -1.10% -1.60% -9.90% -6.00% -1.90% 6.00% 2.40% 29.10% 4.40% 7.10% 2.50% -0.20% 3.60% -4.80% 4.20% 2.20% -1.60% 1.40% -4.10% 10.30% 1992 6.40% -0.50% 1.10% -2.70% 1.00% 0.40% -2.30% 3.70% -2.30% 1.00% 0.90% 3.80% 1.50% 1993 8.40% 1.00% 0.30% 2.30% -2.80% 2.70% 0.30% -0.30% 3.70% -0.20% 1.60% -2.00% 1.70% 1994 -4.10% 2.90% -2.60% -4.90% 0.70% 0.60% -3.10% 2.80% 3.90% -2.20% 1.10% -4.10% 0.80% 1995 31.00% 1.60% 3.60% 2.20% 2.10% 2.90% 2.70% 3.60% 0.50% 3.20% -1.60% 3.90% 1.00% 1996 16.20% 2.40% 1.20% 0.70% 2.10% 2.30% -1.20% -5.80% 2.80% 4.90% 0.90% 6.10% -1.60% 1997 26.10% 4.90% -0.50% -4.90% 3.80% 6.70% 4.00% 7.20% -4.00% 5.40% -3.90% 2.70% 1.30% 1998 19.40% 0.00% 6.90% 4.70% 0.70% -3.00% 2.80% -2.70% -16.20% 5.90% 7.10% 5.90% 5.90% 1999 20.20% 3.50% -4.20% 3.40% 4.50% -2.40% 4.70% -3.40% -1.40% -2.70% 5.80% 3.30% 8.00% 2000 -16.70% -4.40% 2.80% 4.90% -6.40% -4.40% 4.80% -2.20% 7.10% -5.60% -3.00% -10.80% 1.50% 2001 -14.80% 3.40% -10.30% -7.50% 8.00% 0.70% -2.00% -2.10% -6.20% -9.40% 2.60% 7.70% 1.60% 2002 -22.90% -1.80% -2.30% 4.30% -5.10% -1.20% -7.20% -8.30% 0.70% -10.10% 7.40% 6.00% -5.40% 2003 30.70% -2.40% -1.60% 0.90% 8.20% 6.30% 1.50% 2.20% 2.40% -1.00% 6.00% 1.60% 4.50% 2004 10.70% 2.20% 1.50% -1.20% -2.50% 1.40% 2.10% -3.90% 0.20% 2.00% 1.70% 4.70% 3.40% 2005 3.20% -2.80% 2.10% -1.90% -2.70% 3.60% 0.90% 4.10% -0.90% 0.80% -2.40% 3.70% 0.00% 2006 10.60% 3.70% -0.50% 1.50% 0.90% -3.50% -0.40% -0.60% 2.10% 1.50% 3.30% 2.00% 0.70% 2007 0.80% 1.50% -1.80% 0.90% 3.60% 3.50% -1.90% -3.60% 0.70% 3.80% 2.30% -5.30% -0.70% 2008 -38.40% -6.40% -2.30% -1.20% 5.00% 2.20% -8.00% -1.50% 1.00% -10.00% -18.60% -8.50% 2.10% 2009 29.10% -7.70% -10.10% 8.80% 11.10% 6.70% -0.30% 8.20% 3.20% 4.50% -2.80% 5.70% 2.90% 2010 18.00% -3.70% 3.50% 6.40% 2.00% -8.00% -5.20% 7.20% -4.40% 9.20% 3.90% 0.60% 6.80% 2011 -0.90% 0.50% 3.90% 0.30% 2.80% -1.50% -1.90% -2.40% -5.90% -8.40% 11.50% -0.60% 0.50% 2012 15.00% 5.10% 4.40% 3.10% -0.80% -6.20% 3.90% 0.80% 2.60% 2.70% 1.80% 0.80% 1.20% Indicates a monthly return greater than 6.0% or less than -6.0%. Monthly returns greater than 6% 25 Monthly returns less than 6% 21 Sources: Fama/French data provided by Fama/French. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 53
  • RR1272.6 Market Premium Fama/French US Market Research Factor Returns Monthly: January 1990–December 2012 20% 15% Highest Monthly Return: 11.5% (Oct 2011) Monthly Return 10% 5% Average Monthly Return: 0.53% 0% -5% Lowest Monthly Return: -18.6% (Oct 2008) -10% -15% -20% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: Fama/French data provided by Fama/French. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 54
  • RR1272.6 S&P 500 Index Returns Monthly: January 1990–December 2012 20% 15% Highest Monthly Return: 11.4% (Dec 1991) Monthly Return 10% 5% Average Monthly Return: 0.78% 0% -5% Lowest Monthly Return: -16.8% (Oct 2008) -10% -15% -20% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: Dimensional; the S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 55
  • RR1273.3 Market Risk Premium Is Countercyclical Business Cycle Peak Trough Risk Premium The risk premium is the additional return an investor requires to compensate for the risk borne. Business cycle is a repetitive cycles of economic expansion and contractions. Peak is the high point at the end of an economic expansion until the start of a contraction. Trough is the transition point between economic recession and recovery. 56
  • Risk and Return Are Related Dimensions of Stock Returns around the World Small • Equity Market (complete value-weighted universe of stocks) Stocks tend to have higher expected returns than fixed income over time. • Company Size (measured by market capitalization) Small company stocks tend to have higher expected returns than large company stocks over time. • Company Price (measured by ratio of company book value to market equity) Lower-priced ―value‖ stocks tend to have higher expected returns than higher-priced ―growth‖ stocks over time. Increased Risk Exposure and Expected Return Value Growth Decreased Risk Exposure and Expected Return Total Stock Market Large Eugene F. Fama and Kenneth R. French, ―The Cross-Section of Expected Stock Returns,‖ Journal of Finance 47, no. 2 (June 1992): 427-65. Eugene F. Fama and Kenneth R. French are consultants for Dimensional Fund Advisors. This page contains the opinions of Eugene F. Fama and Kenneth R. French but not necessarily of Dimensional Fund Advisors or DFA Securities LLC, and does not represent a recommendation of any particular security, strategy, or investment product. The opinions expressed are subject to change without notice. This material is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. Dimensional Fund Advisors (―Dimensional‖) is an investment advisor registered with the Securities and Exchange Commission. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described. ©2012 by Dimensional Fund Advisors. All rights reserved.
  • LT1300.7 Long-Term Discipline I. The Importance of Long-Term Discipline II. The Stock Market’s Reaction III. Performance of the S&P 500 Index IV. Historical Performance vs. Large Stocks V. Bull and Bear Markets VI. The Market’s Response to Crisis VII. Stocks vs. The Risk-Free Rate VIII. Volatility and Market Downturns IX. Long-Term Market Stability X. Perils of Market Timing XI. Missing Opportunity XII. Recessionary Periods 58
  • LT1310.7 The Importance of Long-Term Discipline Annualized Compound Returns (%) 1926-2012 1965-1981 1982-2012 S&P 500 Index 9.84 6.33 11.14 One-Month US Treasury Bills 3.53 6.66 4.49 The S&P data are provided by Standard & Poor’s Index Services Group. One-Month US Treasury Bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). For illustrative purposes only. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. 59
  • LT1320.2 The Stock Market’s Reaction As Measured by the Dow Jones Industrial Average First Trading Session Response Prior Day Close Subsequent Market Behavior Close Change Percent Change 9,605.51 8,920.70 -684.81 -7.13% -3.66% 11.12% -8.71% US launches bombing attack on Iraq 2,508.91 2,623.51 114.60 4.57% 16.97% 18.93% 29.52% August 2, 1990 Iraq invades Kuwait 2,899.26 2,864.60 -34.66 -1.20% -8.74% -4.67% 4.95% March 30, 1981 President Reagan shot by John Hinckley Jr. 994.78 992.16 -2.62 -0.26% 1.95% -14.33% -16.90% August 9, 1974 President Nixon resigns 784.89 777.30 -7.59 -0.97% -14.71% -8.87% 5.98% November 22, 1963 President Kennedy assassinated in Dallas 732.64 711.48 -21.16 -2.89% 6.57% 15.37% 24.99% October 22, 1962 Cuban missile crisis 568.60 558.06 -10.54 -1.85% 15.55% 27.41% 33.89% September 24, 1955 President Eisenhower heart attack 487.44 455.55 -31.89 -6.54% 0.04% 12.48% 5.72% June 25, 1950 North Korea invades South Korea 224.30 213.90 -10.40 -4.64% -4.49% 7.34% 15.13% December 7, 1941 Japan attacks Pearl Harbor, Hawaii 115.90 112.52 -3.38 -2.92% -0.86% -6.19% 2.88% Date Event September 11, 2001 World Trade Center towers destroyed January 16, 1991 Dow Jones data provided by Dow Jones Indexes. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. One Six Month Months One Year 60
  • LT1330.9 Performance of the S&P 500 Index Daily: January 1, 1970-December 31, 2012 $58,769 Growth of $1,000 $52,702 $38,212 $22,191 $13,999 $9,195 Total Period Annualized Compound Return 9.94% Missed 1 Best Day 9.66% Missed 5 Best Single Days 8.84% Missed 15 Best Single Days 7.47% Missed 25 Best Single Days 6.33% One-Month US T-Bills 5.30% Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2012 provided by Bloomberg. The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006. 61
  • LT1330.8 Performance of the S&P 500 Index Daily: January 1, 1970-December 31, 2012 • The best single day was October 13, 2008. Best/Worst Missed Period • The best one-month return, October 1974, happened immediately after the second-worst one-year period. • 8 of the top 25 days occurred between September 2008 and February 2009, during which time the S&P dropped 41.8% • 5 of the Top 10 days occurred between October 2008 and November 2008, during which time, the S&P 500 dropped 22.8%. 14% Annualized Compound Returns % • The occurrence of strongly positive returns has been especially unpredictable. Investors attempting to wait out an apparent downturn ran a high risk of missing these best periods. Day 12% 3 Months Ending 10/19/87 10/87 11/08 2/09 10.49% Total Period Month 6 Months Ending 12 Months Ending 10.56% 10.84% 11.33% 11.40% 9.66% 9.55% 9.05% 8.73% 10/13/08 10/74 2/09 Worst Periods and the Return If Missed 9.94% 10% 8% 6% 9.33% 10/82 6/75 6/83 Best Periods and the Return If Missed 4% 2% 0% Time periods greater than one month are based on monthly rolling periods, and dates indicated are end of period. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.
  • LT1340.9 Value Stocks vs. Large Stocks Monthly: July 1926-December 2012 Rolling Time Periods Total Number of Periods Number of Periods US Large Value Index Outperformed S&P 500 Index 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years 40 Years 1027 1003 979 919 859 799 679 559 573 654 735 751 775 766 679 559 96% 100% 100% 90% 82% 75% 65% 56% Percentage of All Rolling Periods Where US Large Value Index Outperformed S&P 500 Index US Large Value Index is Fama/French US Large Value Index (ex utilities), provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. US Large Value Index measures the performance of US stocks with lower price-to-book ratios.
  • LT1340.9 Small Stocks vs. Large Stocks Monthly: January 1926-December 2012 Rolling Time Periods Total Number of Periods Number of Periods US Small Cap Index Outperformed S&P 500 Index 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years 40 Years 1033 1009 985 925 865 805 685 565 551 536 570 593 622 658 629 565 100% 92% 82% 72% 64% 58% 53% 53% Percentage of All Rolling Periods Where US Small Cap Index Outperformed S&P 500 Index The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. The CRSP 610 Index measures the performance of US small cap stocks, those in the five smallest deciles of the US market.
  • LT1340.9 Large Stocks vs. Fixed Income Monthly: January 1926-December 2012 Rolling Time Periods Number of Periods S&P 500 Index Outperformed One-Month T-Bills 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years 40 Years 1033 1009 985 925 865 805 685 565 709 754 739 774 821 805 685 565 100% Total Number of Periods 1 Year 100% 100% 95% 84% 75% 75% 69% Percentage of All Rolling Periods Where S&P 500 Index Outperformed One-Month T-Bills The S&P data are provided by Standard & Poor’s Index Services Group. One-Month Treasury Bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. One-Month T-Bills measure the performance of US government-issued Treasury bills.
  • LT1370.15 Bull and Bear Markets S&P 500 Index (USD) Daily Returns: January 1, 1926–June 30, 2013 Average Duration Bull Market Bear Market Average Return Bull Market Bear Market 413 Days 216 Days 58% -21% 303% 220% 156% 121% 119% 100% 99% 87% 113% 96% 91% 83% 59% 53% 44% 40% 23% 26% 25% 22% 27% 20% 56% 44% 19% 26% 18% 26% 84% 78% 69% 50% 38% 22% 15% 73% 27% 48% 38% 26% 21% 6/30/2012 58% 37% 50% 16% 35% 23% 21% 13% 1% -13% -11% -13% -16% -39% -15% -13% -33% -14% -53% -25% -10% -11% -26% -11% -13% -16% -11% -10% -11% -13% -21% -27% -11% -27% -11% -10% -13% -15% -20% -13% -13% -16% -12% -21% -32% -10% -19% -33% -12% -12% -11% -19% -45% -14% -47% -16% -19% -55% -85% 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by CRSP (January 1, 1926–August 31, 2008) and Bloomberg (September 1, 2008–present). Returns include reinvested dividends. Bull and bear markets are defined in hindsight using cumulative daily returns. A bear market (1) begins with a negative daily return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. Performance data represents past performance and does not predict future performance. 2011
  • LT1370.15 Bull and Bear Markets S&P 500 Index (USD) Monthly Returns: January 1926–June 30, 2013 116 mos. 491% Average Duration Bull Market Bear Market Average Return Bull Market Bear Market 30 Months 11 Months Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 111% -26% 92 mos. 355% 61 mos. 282% 44 mos. 193% 49 mos. 210% 2 mos. 92% 6 mos. 100% 3 mos. 23 mos. 26% 133% 4 mos. 9 mos. 12% 48 mos. 105% 61% 43 mos. 90% 5 mos. 22% 61 mos. 108% 9 mos. 33 mos. 30 mos. 55% 86% 26 mos. 76% 15 mos. 52% 35% 30 mos. 71% 24 mos. 63% 14 mos. 65% 10 mos. 34% Jun 2013 48% 5 mos. 12% 6 mos. 4 mos. -30% 13 mos. -16% 2 mos. -50% 31 mos. 34 mos. -19% -30% -83% 6 mos. -21% 4 mos. -10% 1925 1930 1935 1940 7 mos. -10% 5 mos. -15% 6 mos. -22% 1945 1950 1955 3 mos.14 mos. 20 mos. 6 mos. 8 mos. -11% -14% -17% -16% 19 mos. 21 mos. -22% -29% -43% 1960 1965 1970 1975 1980 1985 5 mos. 3 mos. -15% -30% 1990 2 mos. -15% 1995 25 mos. -45% 2000 Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by Standard & Poor’s Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. 5 mos. -16% 2 mos. 16 mos. -13% -51% 2005 2010
  • LT1370.15 Bull and Bear Markets Russell 2000 Index (USD) Monthly Returns: January 1979–June 2013 Average Duration Bull Market Bear Market 18 Months 8 Months 67 mos. 234% Average Return Bull Market Bear Market 68% -23% Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 11 mos. 14 mos. 100% 22 mos. 82% 22 mos. 8 mos. 22 mos. 69% 3 mos. 21 mos. 65% 38% 14 mos. 85% 18 mos. 87% 74% 8 mos. 50% 11 mos. 26% Jun 2013 25 mos. 57% 32% 56% 45% 2 mos. 12% 4 mos. 2 mos. -11% 2 mos. 14 mos. -20% -22% 13 mos. -21% 2 mos. 3 mos. 4 mos. -12% -12% -11% -11% 3 mos. -36% 13 mos. 4 mos. -30% -32% 4 mos. -16% 31 mos. -35% 5 mos. -25% 21 mos. -53% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. 2009 2011 2013
  • LT1370.15 Bull and Bear Markets MSCI EAFE Index, Net Dividends (USD) Monthly Returns: January 1970–June 30, 2013 Average Duration Bull Market Bear Market 37 mos. 323% 24 Months 11 Months Average Return Bull Market Bear Market 87% -23% 55 mos. 206% Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 34 mos. 57mos. 39 mos. 103% 93% 67% 7 mos. 41% 93% 18 mos. 47% 36% 4 mos. 5 mos. -15% -13% 18 mos. 9 mos. -13% 2 mos. -11 % 17 mos. -20% 53% 5 mos. 8 mos. 26% 19% 5 mos. 15 mos. 26 mos. 13 mos. 4 mos. -15% 20 mos. 2 mos. -17% 18% 9 mos. -15% 4 mos. 2 mos. -11% -15% -31% Jun 2013 39 mos. -42% Feb 2009 16 mos. -48% -57% 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. 2010 -18%
  • LT1370.15 Bull and Bear Markets MSCI Emerging Markets Index, Gross Dividends (USD) Monthly Returns: January 1988–June 2013 Average Duration Bull Market Bear Market Average Return Bull Market Bear Market 15 Months 6 Months 72% -26% Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market 19 mos. 109% 17 mos. 101% 98% 21 mos. 114% 16 mos. 17 mos. 18 mos. 92% 16 mos. 89% 85% 4 mos. 31% 8 mos. 7 mos. 29 mos. 43% 42% 38% 5 mos. 21% 5 mos. 1 mo. 1 mo. -12% -14% 4 mos. 3 mos. 4 mos. 2 mos. -14% -12% 5 mos. -25% -11% -11% -29% 5 mos. Jun 2013 -24% -18% 18 mos. 13 mos. -48% Feb 2009 16 mos. -56% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 -61% Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. 2010 2012
  • LT1385.5 The Market’s Response to Crisis Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds Cumulative Total Return After 1 year After 3 years 84% After 5 years 59% 50% 50% 48% 42% 35% 21% 20% 21% 13% 12% 8% 1% -2% October 1987: Stock Market Crash August 1989: US Savings and Loan Crisis -5% September 1998: Asian Contagion Russian Crisis Long-Term Capital Management Collapse March 2000: Dot-Com Crash -4% September 2001: Terrorist Attack September 2008: Bankruptcy of Lehman Brothers Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each International Value Index, International Small Index; 40% BofA Merrill Lynch One-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French. International Small Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semiannually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. 71
  • LT1387.6 Stocks vs. the Risk-Free Rate January 1926–December 2012 The S&P 500 has Beaten Treasury Bills in 83% of all Ten-Year Periods Rolling 120-Month Annualized Returns (925 Total Periods) January 1926–December 2012 Annualized Return S&P 500 Index: 9.8% One-Month Treasury Bills: 3.5% 22% 20% 18% 16% Annualized Returns 14% 12% 10% S&P 500 Index 8% 6% 4% 2% One-Month Treasury Bills 0% -2% -4% Rolling 120-Month Periods Beginning at Date Shown -6% 1926 1938 1950 1962 1974 1986 1998 The S&P data are provided by Standard & Poor’s Index Services Group. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.
  • LT1388.6 Long-Term Returns vs. Short-Term Volatility 1999 S&P 500 Illustration April 1999 Daily Returns Total Month of April Return: 3.9% S&P 500 $2,980 Dec 2010 -2.24% 1 15 30 During this month, the S&P 500 had 10 days of negative returns out of 21 trading days. 1999 Monthly Returns Total Annual Return: 21% 21.04% -0.49% J • Even during periods of positive stock returns, investors may experience substantial volatility. -3.11% F M A -2.36% -3.12% -2.74% M J J A S O N D During this year, the S&P 500 had 5 out of 12 months with negative returns. • Short-term volatility is a typical characteristic of stock market investing. • Long-term returns are the sum of short-term volatility. The S&P data are provided by Standard & Poor's Index Services Group. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.
  • LT1388.7 Market Downturns—A Historical Perspective Individual Index Monthly Downturns As of December 31, 2012 Domestic Large Cap Fund Equivalent Index Start Date End Date Threshold Months at or below Threshold Months in Sample Percentage of Months below Threshold Domestic Small Cap International Emerging S&P 500 Index January 1926 December 2012 -7% 63 1,044 6.0% CRSP 6-10 Index January 1926 December 2012 -7% 111 1,044 10.6% MSCI EAFE Index January 1970 December 2012 -7% 33 516 6.4% MSCI Emerging Markets Index January 1988 December 2012 -7% 37 300 12.3% 21.1% 16.4% 16.1% 13.9% 10.4% 11.1% 12.8% 11.2% 8.0% 11.8% 13.1% 12.3% Annualized Average Compound Return over Subsequent Periods (starting the next month) 1 Year 3 Years 5 Years 10 Years 9.1% 9.5% 9.9% 8.4% • Individual asset class volatility and negative returns have occurred in the past. • Despite these downturns, investors who remained disciplined were rewarded in the long run. • Use balanced diversified portfolios and focus on longterm results. Sources: The S&P data are provided by Standard & Poor's Index Services Group; CRSP Index returns from the Center for Research in Security Prices, University of Chicago; MSCI data copyright MSCI 2013, all rights reserved. MSCI EAFE Index is net of foreign withholding taxes on dividends. MSCI Emerging Markets Index is gross of foreign withholding taxes on dividends. Annualized average compound return over subsequent periods is calculated as the compound growth rate required to produce the average total return over the same time period. Performance for periods greater than one year are annualized. Indices are not available for direct investment; therefore, their performance does not reflect expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor may lose money. 74
  • LT1388.7 Market Downturns—A Historical Perspective Simultaneous Index Monthly Downturns As of December 31, 2012 Domestic Large Cap Fund Equivalent Index Start Date DomesticSmall Cap International Emerging S&P 500 Index CRSP 6-10 Index MSCI EAFE Index MSCI Emerging Markets Index January 1970 January 1970 January 1970 January 1988 End Date December 2012 December 2012 December 2012 December 2012 Threshold -7% -7% -7% -7% -8.9% -16.9% -8.4% – -10.8% -18.9% -14.4% – -8.3% -8.2% -10.4% – -11.7% -8.4% -7.4% – -9.9% -17.5% -10.7% – October 1987 -21.5% -28.7% -14.0% – August 1990 -9.0% -12.6% -9.7% -12.8% August 1998 -14.5% -20.6% -12.4% -28.9% February 2001 -9.1% -10.0% -7.5% -7.8% September 2001 -8.1% -14.9% -10.1% -15.5% July 2002 -7.8% -14.8% -9.9% -7.6% -10.9% -7.3% -10.7% -10.8% -8.4% -9.4% -8.2% • Simultaneous asset class volatility and negative returns have occurred in the past. -10.0% Historical Simultaneous Index Monthly Downturns (7% threshold) April 1970 November 1973 August 1974 September 1974 March 1980 September 2002 June 2008 September 2008 October 2008 May 2010 September 2011 Average -8.9% -8.9% -14.5% -21.4% -20.2% -27.4% -8.0% -7.7% -11.5% -8.8% -7.0% -10.6% -10.9% -13.9% -9.5% -11.1% • Use balanced diversified portfolios and focus on long-term results. -17.5% -16.8% • Despite these downturns, investors who remained disciplined were rewarded in the long run. -14.6% -14.7% Annualized Average Compound Return over Subsequent Periods (starting the next month) 1 Year 13.6% 25.3% 9.0% 24.8% 3 Years 10.5% 19.6% 8.9% 19.9% 5 Years 10.5% 19.4% 11.7% 25.6% 10 Years 10.5% 16.1% 9.3% 15.2% Sources: The S&P data are provided by Standard & Poor's Index Services Group; CRSP Index returns from the Center for Research in Security Prices, University of Chicago; MSCI data copyright MSCI 2013, all rights reserved. MSCI EAFE Index is net of foreign withholding taxes on dividends. MSCI Emerging Markets Index is gross of foreign withholding taxes on dividends. Annualized average compound return over subsequent periods is calculated as the compound growth rate required to produce the average total return over the same time period. Performance for periods greater than one year are annualized. Indices are not available for direct investment; therefore, their performance does not reflect expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor may lose money. 75
  • LT1392.7 Long-Term Market Stability 87 Years of Daily Returns: 1926-2012 January 2, 1926-December 31, 2012 20% Total trading days: 23,030 Days within one standard deviation of the daily average: 81% (18,745) Days within two standard deviations of the daily average: 95% (21,931) 15% 10% 5% Avg + 2 Std Dev: 2.35% Avg + 1 Std Dev: 1.19% Avg Daily Return: 0.04% Avg - 1 Std Dev: -1.11% Avg - 2 Std Dev: -2.26% 0% -5% -10% -15% -20% -25% 1926 1936 1946 1956 1966 1976 1986 Returns shown are for the S&P 500 Index. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. 1996 2006 2012
  • LT1394.3 Perils of Market Timing A Case Study of Q1 2009 • March 9 was the low closing date for four of the five featured indices year-to-date. • The Dow Jones Industrial Average rose 5.8% on March 10, 2009. 43.8% • Looking at daily returns, it’s difficult to tell if a recovery is occurring. Positive Return Period 3/10-3/31 23.4% Q1 2009 Returns 1/1-3/31 Negative Return Period 1/1-3/9 16.4% 18.1% 20.5% Return excluding March 10, 2009 -2.7% -12.4% -11.0% -14.9% Dow Jones Industrial Average -19.3% S&P 500 Index -24.7% -24.6% Russell 2000 Index -31.0% Nasdaq Composite Index -35.8% KBW Bank Index -55.3% Returns are from market-close to market-close. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data are provided by Standard & Poor’s Index Services Group. Dow Jones data provided by Dow Jones Indexes. Russell data copyright © Russell Investment Group 1995-2010 all rights reserved. Mutual fund universe statistical data and nonDimensional money managers’ fund data provided by Morningstar, Inc. Nasdaq Composite Index data provided by The Nasdaq Stock Market, Inc. KBW Bank Index data provided by Keefe, Bruyette & Woods, Inc. (KBW). Past performance is not a guarantee of future results. 77
  • LT1395.5 Missing Opportunity • Strong performance among a few stocks accounts for much of the market’s return each year. • There is no evidence that managers can identify these stocks in advance—and attempting to pick them may result in missed opportunity. Compound Average Annual Returns: 1926-2012 All US Stocks Excluding the Top 10% of Performers Each Year Excluding the Top 25% of Performers Each Year 9.6% • Investors should diversify broadly and stay fully invested to capture expected returns. 6.3% -0.6% Results based on the CRSP 1-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago.
  • LT1396.5 Recessionary Periods Observations • The last four recessions have looked different in terms of length, stock market performance, unemployment rates, and subsequent recovery. • In each of the last four recessions prior to 2007, unemployment rates peaked after the recession ended. • Stock markets tend to be a leading indicator of economic prosperity, and in each case, the S&P 500 Index started to rebound before the end of the recession was announced. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. 79
  • LT1396.5 Recessionary Periods Mid 1970s and Early 1980s Recession 17 months Recession Begins November 1973 Unemployment Peaks at 9.0% May 1975 Recession Ends March 1975 Recession 17 months Unemployment Peaks at 10.8% Nov/Dec 1982 Recession End Announced July 8, 1983 Recession Begins July 1981 Recession Ends November 1982 Recession Announced January 6, 1982 Prior to 1979, there were no formal announcements of business cycle turning points. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.
  • LT1396.5 Recessionary Periods Early 1990s and Early 2000s Recession 9 months Recession Announced April 25, 1991 Unemployment Peaks at 7.8% June 1992 Recession Begins July 1990 Recession End Announced December 22, 1992 Recession Ends March 1991 Recession 9 months Recession Begins March 2001 Recession Announced November 26, 2001 Recession Ends November 2001 Unemployment Peaks at 6.3% June 2003 Recession End Announced July 17, 2003 Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data. 81
  • LT1396.6 Recessionary Period January 2007-December 2012 60% Recession 30 months S&P 500 Index Cumulative Total Return 40% 20% December 2006 Unemployment Rate at 4.4% Recession Begins December 2007 Unemployment Rate at 5.0% Unemployment Unemployment Rate at 8.5% Rate at 9.4% December 2011 Recession Ends December 2010 June 2010 Unemployment Rate at 9.5% 0% Recession Announced December 1, 2008 Unemployment Rate at 7.3% -20% Unemployment Rate Peaks at 10.1% October 2009 -40% Unemployment Rate at 7.8% December 2012 End of Recession Announced September 20, 2010 Unemployment Rate at 9.6% -60% Dec 2006 Feb 2008 Feb 2009 Feb 2010 Feb 2011 Feb 2012 For illustrative purposes only. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data. Dec 2012
  • IC1400.1 Investment Considerations I. Investment Considerations II. Mutual Fund Expenses III. Fees Matter IV. The Limits of Fund Rating Services V. Traditional Asset Allocation Generates Excess Turnover 83
  • IC1410.1 Investment Considerations • Reduce expenses. • Diversify systematically. • Minimize taxes and turnover. • Think long-term. • Apply discipline. • Hold low-cost funds. • Maintain asset allocation. 84
  • IC1420.6 Mutual Fund Expenses ―After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period.‖ —William F. Sharpe, 1990 Nobel Laureate Domestic Mutual Fund Expense Ratios International Mutual Fund Expense Ratios 1.55% 1.35% 0.99% 0.88% 0.73% 0.68% 0.20% 0.13% Average of Weighted Average, Average of Weighted Average, All Funds Based on Fund Assets All Funds Based on Fund Assets Active Average of Weighted Average, Average of Weighted Average, All Funds Based on Fund Assets All Funds Based on Fund Assets Passive William F. Sharpe, ―The Arithmetic of Active Management,‖ Financial Analysts Journal 47, no. 1 (January/February 1991): 7-9. Mutual fund expense ratios as of August 21, 2012. Asset weighting based on net assets as of July 31, 2012. Data provided by Morningstar, Inc. Passive funds are those coded by Morningstar as Index Funds. Active Passive
  • IC1430.4 Fees Matter • Fees matter. Assumed 6.5% Annualized Return over 30 Years • Over long time periods, high management fees and related expenses can be a significant drag on wealth creation. $5,000,000 $4,000,000 Dollars • Passive investments generally maintain lower fees than the average actively managed investment by minimizing trading costs and eliminating the costs of researching stocks. 1% Fee $4,983,951 2% Fee $3,745,318 $3,000,000 3% Fee $2,806,794 $2,000,000 $1,000,000 1 Year 3 Years 5 Years 10 Years Time For illustrative purposes only. 20 Years 30 Years
  • IC1440.1 The Limits of Fund Rating Services Fund A Fund B Fund C Fund D     C A A+ D 34 50 10 93 Wall Street Journal (Jan 2001) E C A B BusinessWeek (Jan 2001) A No Rating B+ C Morningstar (Dec 2000) Forbes (Dec 2000) US News & World Report (Dec 2000) • Funds A, B, C, and D are actual funds. They are not identified because the purpose of this illustration is to emphasize that ratings, by themselves, do not provide enough information to make a sound investment decision. Morningstar: Five stars is highest rating; one star is lowest rating. US News & World Report: 100 is highest rating; 1 is lowest rating. 87
  • IC1450.7 Integrated Solutions Reduce Turnover • In effect, a component portfolio buys and sells from itself, generating needless costs and taxable events. Russell 3000 Russell 3000 via Components Buys and Sells in Excess of Russell 3000 R1000 3.4% R2000 R1000G R1000V R3000 27.1% R2000G R2000V R200G R200V RMCG RMCV R2000G R2000V Annual: January 1989–December 2012. Russell components are Russell indices weighted according to Russell 3000 market value weights (buys and sells measured by the weight of each component). Estimated annual cost assumes transaction costs of 50 bps. Russell data copyright ©Russell Investment Group 1995-2013, all rights reserved. For illustrative purposes only. 33.5% 88
  • IT1600.2 Investment Theory I. Innovations in Finance II. Fixed Income Investing III. Value Added: Efficient Market Investing 89
  • IT1610.2 Innovations in Finance Conventional Wisdom circa 1950 ―Once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. Competent investors will never be satisfied beating the averages by a few small percentage points.‖ Gerald M. Loeb, The Battle for Investment Survival, 1935 Analyze securities one by one. Focus on picking winners. Concentrate holdings to maximize returns. Broad diversification is considered undesirable. Efficient Markets Hypothesis Single-Factor Asset Pricing Risk/Return Model Eugene F. Fama, University of Chicago William Sharpe Nobel Prize in Economics, 1990 Extensive research on stock price patterns. Capital Asset Pricing Model: Theoretical model defines risk as volatility relative to market. Shifts focus from security selection to portfolio structure. A stock’s cost of capital (the investor’s expected return) is proportional to the stock’s risk relative to the entire stock universe. Develops Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. It is difficult if not impossible to capture returns in excess of market returns without taking greater than market levels of risk. ―Liquidity Preference as Behavior Toward Risk,‖ Review of Economic Studies, February 1958. Theoretical model for evaluating the risk and expected return of securities and portfolios. Investors cannot identify superior stocks using fundamental information or price patterns. The Role of Stocks James Tobin Nobel Prize in Economics, 1981 Separation Theorem: 1. Form portfolio of risky assets. 2. Temper risk by lending and borrowing. The Birth of Index Funds John McQuown, Wells Fargo Bank, 1971; Rex Sinquefield, American National Bank, 1973 Banks develop the first passive S&P 500 Index funds. 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Diversification and Portfolio Risk Harry Markowitz Nobel Prize in Economics, 1990 Diversification reduces risk. Assets evaluated not by individual characteristics but by their effect on a portfolio. An optimal portfolio can be constructed to maximize return for a given standard deviation. Investments and Capital Structure Merton Miller and Franco Modigliani Nobel Prizes in Economics, 1990 and 1985 Theorem relating corporate finance to returns. A firm’s value is unrelated to its dividend policy. Dividend policy is an unreliable guide for stock selection. Behavior of Securities Prices Paul Samuelson, MIT Nobel Prize in Economics, 1970 First Major Study of Manager Performance Michael Jensen, 1965 A.G. Becker Corporation, 1968 Market prices are the best estimates of value. First studies of mutual funds (Jensen) and of institutional plans (A.G. Becker Price changes follow random patterns. Corp.) indicate active managers Future share prices are unpredictable. underperform indices. ―Proof That Properly Anticipated Becker Corp. gives rise to consulting Prices Fluctuate Randomly,‖ Industrial industry with creation of ―Green Book‖ Management Review, Spring 1965. performance tables comparing results to benchmarks. Options Pricing Model Fischer Black, University of Chicago; Myron Scholes, University of Chicago; Robert Merton, Harvard University Nobel Prize in Economics, 1997 The development of the Options Pricing Model allows new ways to segment, quantify, and manage risk. The model spurs the development of a market for alternative investments. 90
  • IT1610.2 Innovations in Finance Multifactor Asset Pricing Model and Value Effect A Major Plan First Commits to Indexing Integrated Equity Eugene Fama and Kenneth French, University of Chicago Improves on the single-factor asset pricing model (CAPM). Steven L. Heston, K. Geert Rouwenhorst, and Roberto E. Wessels Identifies market, size, and ―value‖ factors in returns. The first major plan to index. The Size Effect Helps launch the era of indexed investing. Rolf Banz, University of Chicago Analyzed NYSE stocks, 1926-1975. Burton G. Malkiel, A Random Walk Down Wall Street, 1973 ed. 1976 1977 1978 1979 Find evidence of higher average returns to small companies in twelve international markets. Develops the three-factor asset pricing model, an invaluable asset allocation and portfolio analysis tool. Finds that, in the long term, small companies have higher expected returns than large companies and behave differently. ―Fund spokesmen are quick to point out you can’t buy the market averages. It’s time the public could.‖ 1975 Eugene F. Fama and Kenneth R. French International Size Effect New York Telephone Company invests $40 million in an S&P 500 Index fund. ―Common Risk Factors in the Returns on Stocks and Bonds,‖ Journal of Financial Economics 33, no. 1 (February 1993): 3-56. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Database of Securities Prices since 1926 Variable Maturity Strategy Implemented Eugene F. Fama 1994 1995 1996 1997 1998 1999 2000 ―Migration,‖ CRSP Working Paper No. 614, Center for Research in Security Prices, University of Chicago, February 2007. 2001 2002 2003 2004 2005 2006 Nobel Prize Recognizes Modern Finance Roger Ibbotson and Rex Sinquefield, Stocks, Bonds, Bills, and Inflation 1993 ―The Structure of International Stock Returns and the Integration of Capital Markets,‖ Journal of Empirical Finance 2, no. 3 (September 1995): 173-97. Increasing exposure to small and value companies relative to their market weights and integrating the portfolio across the full range of securities may reduce the turnover and transaction costs normally associated with forming an asset allocation from multiple components. Economists who shaped the way we invest are recognized, emphasizing the role of science in finance. An extensive returns database for multiple asset classes is first developed and will become one of the most widely used investment databases. The first extensive, empirical basis for making asset allocation decisions changes the way investors build portfolios. With no prediction of interest rates, Eugene Fama develops a method of shifting maturities that identifies optimal positions on the fixed income yield curve. ―The Information in the Term Structure,‖ Journal of Financial Economics 13, no. 4 (December 1984): 509-28. William Sharpe for the Capital Asset Pricing Model. Harry Markowitz for portfolio theory. Merton Miller for work on the effect of firms’ capital structure and dividend policy on their prices. 91
  • IT1620.1 Fixed Income Investing One aspect of fixed income’s role in a portfolio is to reduce volatility. This may be accomplished by employing: • Shorter maturities with lower equity correlations. • High-quality issues. • A global approach that hedges all currencies. 92
  • IT1630.3 Investment Philosophy Value Added: Efficient Market Investing Asset Class Management • Believes that in liquid markets, prices reflect all available information • Focuses strategies on the dimensions of higher expected returns • Adds value through portfolio design and implementation Traditional Active Management • Attempts to identify mispricing in securities on a consistent basis. • Often relies on forecasting techniques to pick securities and/or time market • Generates higher expenses, trading costs, and excess risk Index Management • Allows commercial benchmarks to define strategy • Tethered to a benchmark, reducing flexibility • Accepts lower returns and increased trading costs in favor of tracking 93
  • LI1700.3 Limitations of Indexing I. Tracking an Index Can Be Costly II. The Effect of Index Reconstitution on Stock Prices III. Percentage of Assets by Market Cap IV. Annual Index Reconstitution Effects V. The Failure of Active Management 94
  • LI1720.2 Tracking an Index Can Be Costly • Tracking an index may result in significant trading costs. • Index replication requires executing with pre-specified transactions, stocks, amounts, and trade dates. • Timing lag between reconstitution announcement and effective date enables non-indexers to buy additions and sell deletions before tracking-sensitive investors, when prices are often more attractive. 95
  • LI1740.2 The Effect of Index Reconstitution on Stock Prices • Stocks rise on announcement of inclusion. Price • Index funds are forced to buy high on effective date. • Buying and selling to track index changes reduces tracking error but generates transaction costs. Time Announcement Effective S&P 500 Index MSCI EAFE Index One-Day Return after Announcement (%) 3.2 3.4 Run-Up to Effective Date (%) 3.8 4.5 Decay after Effective Date (%) -2.1 -2.6 S&P 500 data source: Anthony Lynch and Richard Mendenhall, ―New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,‖ Journal of Business 70, no. 3 (July 1997): 351-83. MSCI EAFE Index data source: Rajesh Chakrabarti, Wei Huang, Narayanan Jayaraman, and Jinsoo Lee, ―Price and Volume Effects of Changes in MSCI Indices: Nature and Causes,‖ Journal of Banking and Finance 29, no. 5 (May 2005): 1237-64. For illustrative purposes only. Past performance is not a guarantee of future results.
  • LI1760.8 Percentage of Assets by Market Cap Large Company Indexes As of December 31, 2012 S&P/ Citigroup 500 Growth Index S&P 500 Index S&P/ Citigroup 500 Value Index Russell 1000 Growth Index Russell 1000 Index Russell 1000 Value Index Russell 3000 Index Russell 3000 Value Index CRSP 1-10 Index CRSP 1-5 Index 100.0 31.7 31.0 30.2 23.2 27.3 31.1 25.2 28.8 26.3 28.5 75.0 34.1 29.4 24.3 34.6 26.3 18.3 24.3 16.9 23.8 25.8 50.0 15.8 19.1 22.6 14.7 17.1 19.3 15.7 17.8 14.6 15.8 35.0 5.8 6.3 6.8 5.6 5.9 6.3 5.5 5.8 5.1 5.5 30.0 5.7 5.4 5.2 5.6 5.2 4.8 4.8 4.4 4.8 5.2 25.0 3.8 4.5 5.2 5.8 5.3 4.8 4.9 4.5 4.9 5.3 20.0 2.5 2.9 3.4 4.8 5.5 6.2 5.1 5.7 5.1 5.5 15.0 0.4 0.8 1.2 2.3 2.9 3.4 2.7 3.1 2.5 2.7 12.5 0.2 0.5 0.8 2.0 2.4 2.9 2.6 2.8 2.5 2.7 10.0 0.0 0.1 0.2 0.9 1.2 1.6 2.0 2.0 2.0 1.9 8.0 0.0 0.1 0.1 0.5 0.9 1.3 3.0 3.3 3.2 1.0 5.0 0.0 0.0 0.0 0.0 0.0 0.1 0.9 0.9 1.0 0.0 4.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 1.5 1.5 0.0 2.5 0.0 0.0 0.0 0.0 0.0 0.0 2.1 2.6 2.7 0.2 Number of Companies 290 500 360 571 991 696 2,969 2,118 3,377 981 Estimated Universe ($BB) 6,561 12,742 6,181 7,070 14,543 7,473 15,744 8,094 16,037 14,813 Wtd. Avg. Mkt. Cap ($MM) 119,964 106,007 91,192 99,774 94,179 88,886 87,096 82,165 88,520 95,749 13,474 12,641 11,733 6,349 5,775 4,984 1,016 895 681 5,603 Wtd. Avg. BtM 0.36 0.52 0.69 0.27 0.52 0.75 0.53 0.76 0.52 0.51 Median BtM 0.30 0.45 0.54 0.30 0.47 0.63 0.55 0.72 0.59 0.44 Market Cap Percentile Median Mkt. Cap ($MM) Area within box represents 90% or more of index value. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and Nasdaq exchanges. The CRSP 1-5 Index measures the performance of US large cap stocks, those in the five largest deciles of the US market. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change. 97
  • LI1760.8 Percentage of Assets by Market Cap Market Universe As of December 31, 2012 S&P/Citigroup 500 Growth Index S&P 500 Index S&P/ Citigroup 500 Value Index Russell 1000 Index Russell 1000 Value Index Russell 3000 Index Russell 3000 Value Index CRSP 1-10 Index Russell 2000 Index Russell 2000 Value Index 100.0 31.7 31.0 30.2 27.3 31.1 25.2 28.8 26.3 0.0 0.0 75.0 34.1 29.4 24.3 26.3 18.3 24.3 16.9 23.8 0.0 0.0 50.0 15.8 19.1 22.6 17.1 19.3 15.7 17.8 14.6 0.0 0.0 35.0 5.8 6.3 6.8 5.9 6.3 5.5 5.8 5.1 0.0 0.0 30.0 5.7 5.4 5.2 5.2 4.8 4.8 4.4 4.8 0.0 0.0 25.0 3.8 4.5 5.2 5.3 4.8 4.9 4.5 4.9 0.0 0.0 20.0 2.5 2.9 3.4 5.5 6.2 5.1 5.7 5.1 0.3 0.6 15.0 0.4 0.8 1.2 2.9 3.4 2.7 3.1 2.5 0.3 0.0 12.5 0.2 0.5 0.8 2.4 2.9 2.6 2.8 2.5 4.1 1.6 10.0 0.0 0.1 0.2 1.2 1.6 2.0 2.0 2.0 10.7 7.7 8.0 0.0 0.1 0.1 0.9 1.3 3.0 3.3 3.2 27.7 26.8 5.0 0.0 0.0 0.0 0.0 0.1 0.9 0.9 1.0 11.6 10.6 4.0 0.0 0.0 0.0 0.0 0.0 1.4 1.5 1.5 17.9 19.4 2.5 0.0 0.0 0.0 0.0 0.0 2.1 2.6 2.7 27.5 33.4 Number of Companies 290 500 360 991 696 2,969 2,118 3,377 1,978 1,422 Estimated Universe ($BB) 6,561 12,742 6,181 14,543 7,473 15,744 8,094 16,037 1,201 620 Wtd. Avg. Mkt. Cap ($MM) 119,964 106,007 91,192 94,179 88,886 87,096 82,165 88,520 1,326 1,173 Median Market Cap ($MM) 13,474 12,641 11,733 5,775 4,984 1,016 895 681 515 470 Wtd. Avg. BtM 0.36 0.52 0.69 0.52 0.75 0.53 0.76 0.52 0.61 0.85 Median BtM 0.30 0.45 0.54 0.47 0.63 0.55 0.72 0.59 0.61 0.77 Market Cap Percentile Area within box represents 90% or more of index value. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and Nasdaq exchanges. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc.CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change. 98
  • LI1760.7 Percentage of Assets by Market Cap Small Company Indexes As of December 31, 2012 Russell 2000 Russell 2000 Value S&P Small Cap 600 Index S&P/Citigroup Small Cap 600 Value Index CRSP 6-10 Index CRSP 9-10 Index 100.0 0.0 0.0 0.0 0.0 0.0 0.0 75.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 0.0 0.0 0.0 0.0 0.0 0.0 35.0 0.0 0.0 0.0 0.0 0.0 0.0 30.0 0.0 0.0 0.0 0.0 0.0 0.0 25.0 0.0 0.0 0.0 0.0 0.2 0.0 20.0 0.3 0.6 0.0 0.0 0.4 0.0 15.0 0.3 0.0 0.7 0.0 0.3 0.0 12.5 4.1 1.6 3.3 1.8 0.5 0.0 10.0 10.7 7.7 8.7 6.2 2.1 0.2 8.0 27.7 26.8 29.8 25.9 29.5 0.2 5.0 11.6 10.6 14.1 15.3 13.5 0.3 4.0 17.9 19.4 22.0 22.9 19.8 0.7 2.5 27.5 33.4 21.4 28.1 33.6 98.6 Number of Companies 1,978 1,422 Estimated Universe ($BB) 1,201 620 Wtd. Avg. Mkt. Cap ($MM) 1,326 1,173 Median Market Cap ($MM) 515 470 Wtd. Avg. BtM 0.61 0.85 Median BtM 0.61 0.77 Market Cap Percentile 600 516 444 256 2,396 1,224 1,514 281 1,356 787 1,199 693 1,113 327 327 161 0.59 0.61 0.76 0.72 0.65 0.69 0.78 0.81 Area within box represents 90% or more of index value. The CRSP 6-10 Index measures the performance of US small cap stocks, those in the five smallest deciles of the US market. The CRSP 9-10 Index measures the performance of US micro cap stocks, those in the two smallest deciles of the US market. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change. 99
  • LI1770.5 Annual Index Reconstitution Effects Consistency of Asset Class Exposure Percentage of Assets in Bottom 10% of Market Russell 2000 Index CRSP 6-10 Index June 30 Averages (reconstitution month) 96.30 96.61 May 31 Averages (11 months after reconstitution) 88.42 97.24 • Over time, securities within an index can migrate from one asset class to another (such as from small cap to large cap) • An index’s characteristics may be significantly different 11 months after reconstitution due to security migration. 100% Percentage of Assets in Bottom 10% of Market • An index that purports to represent a certain asset class may not offer thorough, consistent exposure to the underlying risk factors. 95% 90% 85% CRSP 6-10 Index Russell 2000 Index 80% Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Month-end values from January 2004-December 2012. Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. 100