2010 portfolio management institute forum investment advisory services equitycompass portfolio and...

2010 Portfolio Management Institute Forum

Investment Advisory Services

EquityCompass Portfolioand Stock Selection Insights

2

Investment AdvisoryServices

I EquityCompass Overview

II Blueprint for Core Investing

III EquityCompass Market Cycle Ratings & Ranks

IV Investment Philosophy & Principles for Stock Selection

Table of Contents

3


Subsidiary of Stifel Financial

Full-service brokerage andinvestment banking firm

SEC Registered Investment

Adviser

Stifel Financial

EquityCompass Current Offerings

• Part of Stifel Nicolaus’ acquisition of Legg Mason Capital Markets

• EquityCompass portfolios first offered on the Stifel platform

EquityCompass becomes a subsidiary of Stifel Financial and an SEC Registered Investment Adviser

Launched as the Portfolio Strategy Group at Legg Mason

Started publishing stock recommendations and portfolio strategies

January 1998

October 2001

December 2005

June 2008

Firm History Over the past decade, EquityCompass has evolved from a pure investment research provider to an investment advisory firm providing

quantitative investment portfolios and products on the Stifel Nicolaus platform

The investment team is led by Richard Cripps, CIO. Former Managing Director of Portfolio Strategy at Stifel Nicolaus Former Chief Market Strategist and Co-chairman of the investment committee at Legg Mason Wood Walker

Quantitative based Investment portfolios and products Offered via Stifel Nicolaus as managed accounts and as investment products like structured notes Partners with institutional clients in the U.S. and Europe to develop investment solutions tailored to specific objectives Over $350 million under management Current offerings include

U.S. – Six managed account portfolios and one equity-linked note on the Stifel Nicolaus platform Europe – Equity certificate issued via Sociéte Générale

Provide investment research, market commentary, and investment tools Distributed by Stifel Nicolaus to its institutional clients

EquityCompass Overview

4


EquityCompass Overview

Investment Process

Research Driven, Quantitative Approach to Investment Management

Based on investment themes that demonstrate a statistically significant ability to forecast returns and contribute to excess returns

Implemented using proprietary — but fully transparent — quantitative models, all developed and maintained in-house

Valuation Momentum

Ranks stocks relative to the broader universe based on company fundamentals

Compares a company’s current stock price to its historical average on a relative and absolute basis

Over-/Underreaction Quality

Identifies misalignments between stock price and fundamental expectations

Ranks stocks relative to the broader universe based on factors that create long-term shareholder value

We employ a structured and fully-transparent approach that combines fundamental analysis and behavioral investment strategies using sophisticated

quantitative modeling

Based on the investment research that EquityCompass professionals have been publishing on behalf of Legg Mason and Stifel Nicolaus for more than

10 years

Benefits

Quantitative techniques expedite security selection and portfolio construction enabling us to bring to market new or custom strategies quickly

and effortlessly

Rules-based approach that minimizes the subjective biases that often characterize traditional managers’ stock selection process

Consistent performance that is both explainable and repeatable

Manage proprietary databases that incorporate extensive quality control measures to ensure the integrity of the data used in making investment

decisions

See Section IV for

Further Detail

Blueprint for Core InvestingII

6


The Stock Market Rollercoaster

600

800

1000

1200

1400

1600

12/3

1/99

6/19

/00

12/0

4/00

5/23

/01

11/1

3/01

5/03

/02

10/1

8/02

4/08

/03

9/24

/03

3/12

/04

8/30

/04

2/15

/05

8/03

/05

1/20

/06

7/10

/06

12/2

2/06

6/14

/07

11/2

9/07

5/19

/08

11/0

3/08

4/23

/09

10/0

8/09

3/29

/10

12/31/1999 – 4/13/2010 | Source: Bloomberg

S&P 500

Predicting the course of the economy and stock market is difficult. Instead, investors should prepare for the inevitable ups & downs

ofour dynamic financial markets.

7


The Ebb & Flow of Equity Market Performance Since 1928, there have been 92 instances of a market pullback of 10% or

more, for an average of 1 every 11 months. Since 1960, the average is 1 in every 15 months. The current market recovery is now in its 13th month of recovery without a 10% or more market correction.

Market pullbacks are often a correction of investor sentiment or expectations that are ahead of fundamentals. Two-thirds of historical market corrections have been sentiment-related, are relatively brief (average of 2 months), and represent good buying opportunities.

One-third of market pullbacks exceed 20% and are defined as a bear market with deteriorating fundamentals. Bear markets occur, on average, about every 3–4 years.

The periods from 1990 to 1997 and 2003 to 2008 were the two longest stretches without a 10% or more market pullback. These periods likely lulled investors to complacency and an underestimation as to the risks of equity investing. The complacency exaggerated the emotional impact of the 2008 bear market.

Stocks are an undeniable long-term wealth creator but their path higher is uneven and unpredictable in the short-term.

8


Key Investment Risks Buying and selling at the wrong time

Poor investment process that does not effectively capture market returns

Staying invested over desired investment horizon

How does the most successfully performing stock fund from 2000–2009 produce a loss for the average shareholder?

9


CGM Focus Fund(12/31/1999 - 12/31/2009)

-200%

0%

200%

400%

600%

800%

1000%

12/3

1/99

6/30

/00

12/3

1/00

6/30

/01

12/3

1/01

6/30

/02

12/3

1/02

6/30

/03

12/3

1/03

6/30

/04

12/3

1/04

6/30

/05

12/3

1/05

6/30

/06

12/3

1/06

6/30

/07

12/3

1/07

6/30

/08

12/3

1/08

6/30

/09

12/3

1/09

Fu

nd

NA

V (

$)

CGM Focus Fund S&P 500 Total Return Index

2/3 of assets flow into CGMat its peak

12/31/1999 – 12/31/2009 | Source: Bloomberg, Morningstar

CGM Focus Fund

10


Volatility is the Culprit of Buying High and Selling Low

Volatility is at the root of the investor behavior penalty and may cause investors to

expand/contract their time horizon at the wrong time.

Average Stock Fund Return

0%

Average Stock Fund Investor Return

10%

5%

8.4%

The “Investor Behavior”Penalty

1.9%

Average Stock Fund Return

0%

Average Stock Fund Investor Return

10%

5%

8.4%

The “Investor Behavior”PenaltyThe “Investor Behavior”Penalty

1.9%

The Average Stock Fund Return vs. Average Stock Fund Investor Return (1989–2008)

Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. published in March 2009 and Lipper. Dalbar computed the “Average Stock Fund Investor” returns by using industry cash flow reports from the Investment Company Institute. The “Average Stock Fund Return” figures represent the average return for all funds listed in Lipper‘s U.S. Diversified Equity fund classification model. “The Stock Market” is represented by the S&P 500 Index. Past performance is not a guarantee of future results.

11


Volatility is Reduced With Diversification

(*) Annually rebalanced Stock returns are represented by the S&P 500 Total Return IndexBond total returns are represented by the Ibbotson Long-Term Government Bond Index (1933-1973) and Barclays Government Bond Index (1974-2008)Dividends includedSource: Ned Davis Research

24.6%

-6.4%

10.6%

13.7%

-0.9%

5.3%

18.1%

-1.0%

8.9%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

S&P 500 Total Return

LT Govt Bonds

60/40*74% upside capture

60/40 Allocation - Historical PerformanceAnnualized Rolling 5-Year Returns | J an. 31, 1947 – Dec. 31, 2009

83% upside capture

Only 15% downside capture

Avg. of 5 best

Avg. of 5 Worst

Avg. of All

24.6%

-6.4%

10.6%

13.7%

-0.9%

5.3%

18.1%

-1.0%

8.9%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

S&P 500 Total Return

LT Govt Bonds

60/40*74% upside capture

60/40 Allocation - Historical PerformanceAnnualized Rolling 5-Year Returns | J an. 31, 1947 – Dec. 31, 2009

83% upside capture

Only 15% downside capture

Avg. of 5 best

Avg. of 5 Worst

Avg. of All Trailing 5-Year 2009

S&P 500 0.3%

Bonds 5.0%

60/40 3.0%

12


60/40 Allocation is Attractive Risk/Reward Trade-off

5.5

6.5

7.5

8.5

9.5

10.5

11.5

4.4 4.9 5.4 5.9 6.4 6.9Standard Deviation (%)

Ann

ualiz

ed R

etur

n (%

)

100% Bonds

100% Stocks60% Stocks/40% Bonds

Stock/Bond Allocation – Risk/Reward ComparisonAnnualized Rolling 5-year Returns | 31 J an 1947 - 31 Dec 2009

Case for 60/40 Stock/Bond Allocation

Source: Ned Davis Research

13


National Endowment for Financial EducationGuidelines for investing assets at retirement:*

• Assume a 4% annual withdrawal rate that increases annually by 3%• Segregate assets into “buckets” with a specific purpose

Incomefor Years

1–5

Incomefor Years

1–5

Incomefor Years

6–10

Incomefor Years

6–10Long-TermLong-Term

Bucket 3

60%

Bucket 2

20%

Bucket 1

20%

Bucket 3

60%

Bucket 2

20%

Bucket 1

20%

StocksHigh QualityIntermediate Bonds

CDsShort-Term Treasuries

StocksHigh QualityIntermediate Bonds

CDsShort-Term Treasuries

60 / 40 Stock Bond Allocation*www.NEFE.org

14


When to Alter the 60/40 Allocation

When Stock and Bond Returns are Abnormally Above or Below their Long-Term Average

Stocks returns are well-below long-term average and should be overweighted

Bond returns are within theiraverage long-term range

Strategic Allocation Adjusted from 60/40 stock/bond to 65/35

15


Equity Risk Manager is a tactical strategy that adjusts stock exposure fromnear-term factors coinciding with unfavorable equity market performance

and restores exposure when the factors are favorable

TechnicalDow Jones Industrial

Average (DJIA) current levels relative to market peak & subsequent lows

How It Works

Step 1 This example assumes a 60% stock / 40% bond allocation with 33% of the equity allocation invested in the Equity Risk Manager (ERM).

ERM will analyze fundamental and technical indicators and determine whether to be fully invested in the S&P 500 or, when conditions are unfavorable, reduce equity exposure by shifting an amount to cash or inverse (short).

Bonds40% Stocks

60%

Bonds40%

Stocks40%

RiskManager

20%

Monthly Indicators

Equity Exposure Index(Adjusted Monthly)

Equity Risk ManagerComponent Allocation

(Adjusted Monthly)

100%

Cash

100%Long

Equities

90%Short

Equities

10%Unfavorable

100%Favorabl

e

FundamentalForward change in

S&P 500 overnext 12 months

Step 2

EC Equity Risk Manager

16


$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Equity Risk Manager– See it Work

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

PeriodDecember

2007

January

2008

February

2008

May

2008

June

2008

July

2008

September

2008

November

2008

January

2009

February

2009

April

2009

May

2009

July

2009

September

2009

November

2009

Equity

Risk

Manager

Allocatio

n

The 2007–2010 Bear Market Decline and RecoveryEquity Risk Manager$14,165

Based on pre-defined rule-set, Risk Manager can be either long the equity markets, short the equity markets or in cash

100% Short

100% Long

100% Cash

100% Long 100% Cash90% Short

+10% Cash

100% Cash90% Short

+10% Cash

40% Cash +

60% Long

90% Short +

10% Cash

100% Cash 100% Cash90% Short

+10% Cash

100% Cash90% Short

+10% Cash

40% Cash +

60% Long

100% Long

Dec 1, 2007 – Mar 31, 2010 | Monthly Data | Includes Dividends

S&P 500 Total Return Index

$8,338

$10,000 Initial

Investment

1 2 3 4 56 7

8 9 10 11 1213

14

95% Long+5% Cash

15

Source: EquityCompass

For illustrative purposes only – not indicative of actual portfolio returns.

Source: EquityCompass

17


-10%

0%

10%

20%

30%

-40%

-20%

0%

20%

40%

60%

Equity Risk Manager Performance

Performance Simulation : EC Equity Risk Manager vs. S&P 500 IndexTotal Returns Including Dividends | Monthly Data

Calendar Year ReturnsJan 1, 1990 – Mar 31, 2010 | Monthly Data | Total Returns Including Dividends


S&P 500

Rolling 5-Year Returns

Source: EquityCompass, Bloomberg


S&P 500

Rolling 12-Month Returns


30%

1%

-22%

29%

5%

26%

5%1%

-13% -14%

21%27%

5%8%

29%21%

-9%

11% 5%

-37%

-3%

10%

-12%

16%23%

38% 33%

5%11%

22%13%

5%

-4%

10%7% 10%

16%21%

31%23%38%

11%

-40.0%

-20.0%

0.0%

20.0%

40.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010YTD

S&P 500 Index Equity Risk Manager

Dec 31, 1990 Mar 31, 2010Dec 31, 1994 Mar 31, 2010

For illustrative purposes only – not indicative of actual portfolio returns.


Combining Strategic Allocation (60/40 mix) andEquity Risk Manager Alters Exposure to Stocks

from Long and Shorter-Term Factors

Synchronizing Equity Risk Management strategy with longer-term adjustments in strategic allocation (60/40 stock/bond mix) provides a comprehensive and adaptive approach consistent with sound investment principles that grow and protect wealth

Annual rebalancing of strategic allocation aligns portfolio to the timeless principles producing superior risk/reward tradeoff

Monthly rebalancing of Equity Risk Manager provides portfolio flexibility to adapt to changing market conditions that are not reflected in longer-term strategic allocation

One-third of Stock Allocation in Equity Risk Manager

60%Stocks

40%Fixed

Income

50%50%

Balanced

35%65%

ModeratelyAggressive

20%

80%

Conservative 35%65%

ModeratelyConservative

20%

80%

Aggressive

60%Stocks

40%Fixed

Income

50%50%

Balanced

50%50%

Balanced

35%65%


35%65%


20%

80%

Conservative

20%

80%

Conservative 35%65%


35%65%


20%

80%

Aggressive

20%

80%

Aggressive

30/70 June 2009

35/65 Jan 2010

78/22 July 2008

60/40 Jan 2008

18


19

Investment AdvisoryServices 19


$40,000

$60,000

$80,000

$100,000

$120,000

Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10


$81,169

60/40 Portfolio$97,492

60/40 Portfolio with Tactical Adjustment (1)

$111,776

Growth of $100,000 1Sep 2007 – 31 Mar 2010 | Monthly Data | Includes Dividends

60/40 Portfolio with Tactical Adjustment outperformed the S&P 500 Total Return Index by 38% and the 60/40 portfolio by 15%

during the simulation period

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

60/40

70/30

80/20

40/60

20/80

Strategic Allocation 60% Stocks/40% Bonds

Intermediate Tactical Allocation Stock/Bond allocation changed

to 70%/30% January 2009

Stock / BondAllocation

Equity Exposure Changes1 Sep 2007 – 31 Mar 2010 | Monthly Data | Includes Dividends

Near-Term Tactical Allocation Equity Risk Manager

Intermediate Tactical Allocation Stock/Bond allocation changed

to 65%/35% January 2010

Impact of Synchronizing Long and Short-Term Tactical Strategies

(1) Uses TTC with S&P 500 Total Return Index representing the U.S. equity component (which forms 80% of the overall equity allocation)Past performance should not and cannot be viewed as an indicator of future performance. Past performance is no guarantee of future results.For illustrative purposes only – not indicative of actual portfolio returns.Source: EquityCompass using Bloomberg Data

20


Putting it All Together –Tactical Total Core Strategy

Stocks

Fully Invested Equity 67% International

Equity

Equity Risk Manager

33%

U.S Corporate

35%

Inflation ProtectedTreasuries

15%

Cash10%

Short-Term Treasuries

25%Long-Term Treasuries

15%

Bonds

• Diversified portfolio of synchronized strategies to effectively capture stock & bond returns with unemotional and objective decision-making

• Multi-asset portfolio including domestic and international stocks and quality fixed income vehicles

• Annual rebalancing of strategic allocation that adapts to advantageous risk/reward trade-off

• Incorporates an overlay risk management strategy that systematically reduces equity exposure when market conditions are unfavorable

• EquityCompass stock selection approach of balanced sector with exposure to all market-cap segments

• Fixed income strategy that emphasizes capital stability and quality — no high yield or foreign bonds

• Tactical Total Core is a centerpiece strategy designed to provide investors with the confidence to stay invested through the tumultuous ebb and flow of financial markets

For further information, please our September 2009 white paper, “Blueprint for Core Investing” at www.equitycompass.com

21


0%

4%

8%

12%

16%

0% 5% 10% 15% 20%

Volatility (Standard Deviation)

Annual

ized

Ret

urn

s

Tactical Total Core Strategy - Attractive Risk-Adjusted ReturnsSimulated Performance | 29 Nov 2002 - 31 Mar 2010 | Monthly Data | Includes Dividends

Tactical Total Core

60/40 Portfolio(1)

S&P 500

Historical Risk-Return Simulation Key Statistics

Tactical Total Core Benchmark(1)

# of Holdings 56 -

Cash Position 4.5% -

Std Deviation 7.3% 8.9%

Sharpe Ratio 1.2 0.4

Beta 0.6 -

Alpha 7.4% -

Tracking Error 5.6% -

Information Ratio 0.9 -

Up-Market Capture(2) 67.9% 62.7%

Down-Market Capture(2) 35.4% 58.8%

(1) Represented by 60% S&P 500 Total Return Index and 40% Barclays Capital Aggregate Bond Index(2) Using S&P 500 Total Return Index as the benchmark

For illustrative purposes only – not indicative of actual portfolio returns.Past performance should not and cannot be viewed as an indicator of future performance. Past performance is no guarantee of future results.

22


Tactical Total Core Strategy – PerformanceSimulated Performance | 29 Nov 2002 - 31 Mar 2010 | Monthly Data | Includes Dividends

TTC Strategy $21,451

60% Stocks/40% Bonds

$15,075


$14,452

Growth of $10,000

Performance Summary

Total Returns Average Annual Total Returns

1-Month 3-Month 6-Month YTD 2010 Inception 1-Year 2-Year 3-Year 5-Year InceptionTactical Total Core 3.8% 3.1% 7.3% 3.1% 114.5% 31.3% 9.2% 7.1% 9.2% 11.0%

60/40 Portfolio (1) 3.5% 3.9% 8.0% 3.9% 50.7% 31.5% 1.6% 1.0% 4.1% 5.8%

S&P 500 6.0% 5.4% 11.8% 5.4% 44.5% 49.8% -3.7% -4.2% 1.9% 5.2%

Calendar-year Returns

2003 2004 2005 2006 2007 2008 2009Tactical Total Core 20.9% 13.3% 9.5% 13.3% 7.7% -7.4% 3.1%

60/40 Portfolio(1) 18.9% 8.3% 3.9% 11.2% 6.1% -20.1% 18.3%S&P 500 28.7% 10.9% 4.9% 15.8% 5.5% -37.0% 26.5%

See Section IV, slide 47 for Description of Active Domestic Equity Component of Strategy

(1) Represented by 60% S&P 500 Total Return Index and 40% Barclays Capital Aggregate Bond IndexSource: EquityCompass Strategies, iShares, Bloomberg

For illustrative purposes only – not indicative of actual portfolio returns.Past performance should not and cannot be viewed as an indicator of future performance. Past performance is no guarantee of future results.

23


“To invest successfully over a lifetime does not require a

stratospheric IQ, unusual business insights, or inside information.

What’s needed is a sound intellectual framework for making decisions and the ability to keep

emotions from corroding that framework.”

— Warren Buffett

EquityCompass Market Cycle Ratings & RanksIII

25


EquityCompass Market Phase Ratings & Ranks Timeless investment principles represent stock attributes that produce attractive risk-

adjusted performance over a market cycle while timely insights focus on stock attributes specific to a phase in a market cycle

EC Market Cycle Ratings and Ranks help identify timely opportunities consistent with the current or anticipated market phase

Phases in a stock market cycle are the result of cyclical economic activity and changes in investors’ behavioral risk and reward preferences

Our research shows that better relative performance during each phase of a market cycle is driven by distinct stock attributes

We identified individual stock attributes that measure valuation, technical, and risk characteristics and are the key to outperformance in each of the market phases

We then ranked each of the 3,000+ U.S. stocks in our coverage universe based on the consistency between their attributes and those that drive performance in each market phase – called EC Market Cycle Rating and Ranking

We also developed indices for each market phase comprising of the top 100 stocks based on the EC Market Cycle Rating and Ranking for that phase of the market cycle

An analysis of the recent index performances suggests that the stock market is currently in the Mid Bull phase of the current market cycle

26


Two Distinct Methodologies for Stock Selection

EC Ratings & Opinions EC Market Cycle Rankings

Timeless Principles –Stock attributes that produce attractive risk-adjusted performance over a complete market cycle

Timely Opportunities –Stock attributes that outperform in specific phases of a market cycle

Stock Opinions Based on 4 Cornerstone Stock Attributes:

1. Valuation

2. Price Momentum

3. Quality

4. Investor Over-/Underreaction

Stock Opinions Based on 4 Phases of the Market Cycle:

1. Early Bull – driven by deeply oversold stocks from a prior bear market

2. Mid Bull – characterized by a growing confidence and a focus on improving fundamentals and attractive value

3. Late Bull - momentum forces get established and exert an outsized influence on individual stock performance

4. Bear Market - focuses on defensive attributes such as high quality and low beta

27


The cyclical nature of the economy and changes in investor risk/reward preferences produce market phases

Relative performance during each phase of a market cycle is driven by distinct stock attributes

Market Cycle Phases and Performance Drivers

Represents data from 12/31/2002 to 3/31/2010 | Source: EquityCompass Strategies, Bloomberg

Market Phase Early Bull Mid Bull Late Bull Bear Market

Key to Outperformance

Oversold Stocks Stocks with Attractive Relative Value

Momentum Stocks Defensive Stocks

Key Attributes

Low PriceHigh BetaLow Quality Extreme ValuationsNegative Relative Price Momentum

Low Valuations Over-/UnderreactionHigh Sales GrowthImproving OperatingMarginsHigh ROEStrong Implied EPS Growth

Strong Relative Price MomentumLarge Market-CapHigh Sales GrowthFavorable Consensus Analyst OpinionLow Short Interest

Low BetaHigh QualityPositive Relative Price MomentumAverage ValuationHigh Share Price

Market Phase Early Bull Mid Bull Late Bull Bear Market Early Bull


Oversold Stocks

Attractive Relative Value Momentum Defensive OversoldStocks

600

800

1000

1200

1400

1600

Dec

-02

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Bear Market

Mid Bull

S&P 500 Index

28


Stocks are ranked based on the consistency between their attributes and those that drive performance in each market phase

Ranks range from 0–100 with the higher ranked stocks considered more attractive Stocks most suited for a certain market phase are the ones with the highest rank

for that particular phase

EC Market Cycle Ratings and Ranks are updated monthly

EC Market Cycle Ratings and Ranks

29


Each EC Market Cycle Index represents the top 100 ranking stocks in that market phase

Indices are equally weighted, reconstituted monthly, and include dividends

EC Market Cycle Indices

EC Early Bull Index

S&P Equal Weight Index

12/31/2002 – 3/31/2010 | Source: EquityCompass Strategies, Bloomberg

EC Early Bull Index

0

50

100

150

200

250

300

350

400

De

c-0

2

Ap

r-0

3

Au

g-0

3

De

c-0

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r-0

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g-0

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c-0

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r-0

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g-0

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c-0

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r-0

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g-0

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g-0

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g-0

8

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c-0

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r-0

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Au

g-0

9

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c-0

9S&P Equal Weight Index EC Early Bull Index

Sharpe 0.23

Best Period of Relative Performance

0

50

100

150

200

250

300

350

400

De

c-0

2

Ap

r-0

3

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g-0

3

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r-0

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g-0

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c-0

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r-0

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g-0

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c-0

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r-0

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g-0

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De

c-0

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Ap

r-0

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Au

g-0

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De

c-0

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r-0

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g-0

8

De

c-0

8

Ap

r-0

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Au

g-0

9

De

c-0

9S&P Equal Weight Index EC Early Bull Index

Sharpe 0.23


EC Mid Bull Index



EC Mid Bull Index

0

50

100

150

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300

De

c-0

2

Ap

r-0

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g-0

3

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c-0

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r-0

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g-0

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c-0

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r-0

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c-0

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r-0

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g-0

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De

c-0

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r-0

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Au

g-0

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De

c-0

9

S&P Equal Weight Index EC Mid Bull Index


Sharpe 0.410

50

100

150

200

250

300

De

c-0

2

Ap

r-0

3

Au

g-0

3

De

c-0

3

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

S&P Equal Weight Index EC Mid Bull Index


Sharpe 0.41

EC Late Bull Index



EC Late Bull Index

0

50

100

150

200

250

300

350

De

c-0

2

Ap

r-0

3

Au

g-0

3

De

c-0

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Ap

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Au

g-0

4

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Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

S&P Equal Weight Index EC Late Bull Index


Sharpe: 0.240

50

100

150

200

250

300

350

De

c-0

2

Ap

r-0

3

Au

g-0

3

De

c-0

3

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

S&P Equal Weight Index EC Late Bull Index


Sharpe: 0.24

EC Bear Market Index



EC Bear Market Index

0

50

100

150

200

250

De

c-0

2

Ap

r-0

3

Au

g-0

3

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c-0

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Ap

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De

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Au

g-0

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De

c-0

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Ap

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6

Au

g-0

6

De

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Ap

r-0

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Au

g-0

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De

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7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

S&P Equal Weight Index EC Bear Index

Best Period of Relative

Performance

Sharpe: 0.040

50

100

150

200

250

De

c-0

2

Ap

r-0

3

Au

g-0

3

De

c-0

3

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

S&P Equal Weight Index EC Bear Index

Best Period of Relative

Performance

Sharpe: 0.04

30


EC Market Cycle Indices Yearly Performances

Market Phase Early Bull Mid Bull Late Bull Bear Market Early Bull


Oversold Stocks

Attractive Relative Value Momentum Defensive OversoldStocks

600

800

1000

1200

1400

1600

Dec

-02

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Bear Market

Mid Bull

S&P 500 Index

(1) Through March 31, 2010

EC Market Cycle Indices are reconstituted monthly, equal weighted, and include dividends

Reconstituted monthly | Equal weighted | Include dividends

2003 2004 2005 2006 2007 2008 2009 2010 (1)

124.4% 13.4% -5.8% 14.9% -15.0% -62.0% 224.0% 10.3%

49.7% 24.4% 9.9% 12.7% 9.6% -54.6% 70.7% 9.2%

31.9% 17.6% 23.6% 13.6% 29.1% -46.0% 17.0% 5.3%

17.2% 12.4% 8.0% 12.8% 11.0% -26.2% 13.3% 4.5%

38.7% 15.2% 6.4% 14.0% 0.0% -41.0% 43.3% 7.6%

Bear Market Top 100

S&P 500 EW

Market Cycle Index

Early Bull Top 100

Mid Bull Top 100

Late Bull Top 100

Early Bull Mid Bull Late Bull Bear Market Early Bull Index performance over the last six months indicates that the U.S. stock market has transitioned into a Mid Bull phase Trailing 6 Mos.(1)

-5.4%

15.1%

12.5%

11.1%

14.0%

Bear Market Top 100

S&P 500 EW

Market Cycle Index

Early Bull Top 100

Mid Bull Top 100

Late Bull Top 100

31


Mid Bull (12/31/04 – 06/30/06)

Un-Adj. Ticker Name

Abv. GICS Sector GICS Sub Ind

Mid Bull Rank

Market Cap (Mil)

PRICE 12/31/04

PRICE 06/30/06 Return

WNC Wabash National Corp Industrials Construction & Farm Machinery & Heavy Trucks 100.0% $735 $26.93 $15.36 -43.0%MVK Maverick Tube Energy Oil & Gas Equipment & Services 99.9% $1,290 $30.30 $63.19 108.5%BSX Boston Scientific Health Care Health Care Equipment 99.8% $30,021 $35.55 $16.84 -52.6%DISH EchoStar Comm. 'A' Cons. Disc. Broadcasting & Cable TV 99.7% $15,110 $33.25 $30.81 -7.3%JCOM J2 Global Communications Inc Info. Tech. Internet Software & Services 99.7% $811 $17.25 $31.22 81.0%ORB Orbital Sci Corp Industrials Aerospace & Defense 99.6% $610 $11.83 $16.14 36.4%MU Micron Technology Info. Tech. Semiconductors 99.5% $7,552 $12.35 $15.06 21.9%STLD Steel Dynamics Materials Steel 99.5% $1,885 $9.47 $16.44 73.5%RI Ruby Tuesday Cons. Disc. Restaurants 99.4% $1,694 $26.08 $24.41 -6.4%CECO Career Education Industrials Diversified Commercial & Professional Services 99.4% $4,097 $40.00 $29.89 -25.3%XTO XTO Energy Energy Oil & Gas Exploration & Production 99.3% $9,207 $21.23 $35.42 66.8%NAV Navistar Int'l Industrials Construction & Farm Machinery & Heavy Trucks 99.2% $3,070 $43.98 $24.61 -44.0%PCAR PACCAR Inc. Industrials Construction & Farm Machinery & Heavy Trucks 99.1% $13,979 $35.77 $36.61 2.4%FCX Freep't-McMoRan C&G Materials Diversified Metals & Mining 99.0% $6,825 $38.23 $55.41 44.9%MHR Magnum Hunter Resources Energy Oil & Gas Exploration & Production 99.0% $1,122 $12.90 $16.70 29.5%WWCA Western Wireless 'A' Telecom. Wireless Telecommunication Services 98.9% $2,929 $29.30 $44.67 52.5%SWN Southwestern Energy Energy Oil & Gas Exploration & Production 98.8% $1,837 $6.34 $15.58 145.9%LOW Lowe's Cos. Cons. Disc. Home Improvement Retail 98.8% $44,459 $28.80 $30.34 5.3%BC Brunswick Corp. Cons. Disc. Leisure Products 98.6% $4,758 $49.50 $33.25 -32.8%EPIC Epicor Software Cp Info. Tech. Application Software 98.6% $720 $14.09 $10.53 -25.3%

Average of All Stocks 21.6%S&P 500 Index 1211.92 1270.20 4.8%S&P 500 Equal Weight Index 1558.62 1713.17 9.9%

20 Highest Mid Bull Ranking Stocks on 12/31/04

Ranking Factors

Strong Earnings Growth

Strong Sales Growth

High Est. EPS Growth

High Op. Margin Growth

Low Valuations

Valuation Discounts to LT Average

List Filter

• No ADRs

• Avg. Daily Trad. Vol. > 300K

• No Pending Acquisitions

• 20 Stocks with HIGHEST Mid Bull Rank

Source: EquityCompass Strategies, Bloomberg

20 Highest Ranking Mid Bull Stocks on 12/31/04

32


Late Bull (06/30/06 – 10/31/07)

Ticker Name Sector Sub IndustryLate Bull

RankMarket Cap (Mil)

PRICE 06/30/06


VLO Valero Energy Energy Oil & Gas Refining & Marketing 100.0% $40,919 $66.52 $70.43 5.9%GOOG Google Info. Tech. Internet Software & Services 99.8% $123,729 $419.33 $707.00 68.6%OXY Occidental Petro. Energy Integrated Oil & Gas 99.7% $43,919 $51.28 $69.05 34.7%UTX United Tech. Industrials Aerospace & Defense 99.6% $64,109 $63.42 $76.59 20.8%UBS UBS AG Financials Diversified Capital Markets 99.5% $109,608 $52.24 $51.13 -2.1%ORCL Oracle Sys. Corp. Info. Tech. Systems Software 99.4% $76,971 $14.49 $22.17 53.0%PEP Pepsi Co. Inc. Cons. Staples Soft Drinks 99.4% $99,426 $60.04 $73.72 22.8%NBL Noble Energy Energy Oil & Gas Exploration & Production 99.3% $8,304 $46.86 $76.54 63.3%XTO XTO Energy Energy Oil & Gas Exploration & Production 99.2% $16,115 $35.42 $53.10 49.9%MRO Marathon Oil Energy Integrated Oil & Gas 99.2% $30,306 $41.65 $59.13 42.0%MS M. Stanley D. Witter Financials Investment Banking & Brokerage 99.1% $67,660 $63.21 $67.26 6.4%CTSH Cognizant Tech Info. Tech. IT Consulting & Other Services 99.0% $9,457 $33.69 $41.46 23.1%GS Goldman Sachs Financials Investment Banking & Brokerage 98.9% $64,874 $150.43 $247.92 64.8%NSC Norfolk So. Corp. Industrials Railroads 98.8% $22,070 $53.22 $51.65 -3.0%KSS Kohls Corp. Cons. Disc. Department Stores 98.6% $20,127 $59.12 $54.97 -7.0%CVS C V S Corp. Cons. Staples Drug Retail 98.6% $25,107 $30.70 $41.66 35.7%CELG Celgene Health Care Biotechnology 98.4% $16,428 $47.43 $66.00 39.2%SLB Schlumberger Ltd. Energy Oil & Gas Equipment & Services 98.2% $76,821 $65.11 $96.57 48.3%AES A E S Corp. Utilities Independent Power Producers & Energy Traders 98.2% $12,136 $18.45 $21.41 16.0%OII Oceaneering Int'l. Energy Oil & Gas Equipment & Services 98.1% $2,463 $45.85 $77.27 68.5%


20 Highest Ranking Late Bull Stocks on 06/30/06

Ranking Factors

Strong Price Momentum

Strong ST Sales Growth

Large Market-Cap

Favorable Analyst Opinion

Low Short Interest

List Filter

• No ADRs



• 20 Stocks with HIGHEST Late Bull Rank


20 Highest Ranking Late Bull Stocks on 6/30/06

33


Bear Market (10/31/07 – 02/28/09)

Ticker Name Sector Sub IndustryBear Rank

Market Cap (Mil)

PRICE 10/31/07


SPW SPX Corp. Industrials Industrial Machinery 99.8% $5,518 $101.30 $44.28 -56.3%DVA DaVita Inc. Health Care Health Care Svcs. 99.6% $6,887 $65.19 $46.92 -28.0%PAS PepsiAmericas Inc. Cons. Staples Soft Drinks 99.4% $4,490 $35.72 $16.61 -53.5%IVGN Invitrogen Corp. Health Care Life Sciences Tools & Svcs. 99.2% $4,199 $45.44 $29.15 -35.8%TDS Telephone & Data Systems Inc. Telecom. Wireless Telecom. Svcs. 99.2% $8,262 $69.80 $29.50 -57.7%LLL L-3 Communications Holdings Inc.Industrials Aerospace & Defense 99.1% $13,423 $109.64 $67.65 -38.3%MHS Medco Health Solutions Inc. Health Care Health Care Svcs. 99.1% $25,695 $47.19 $40.58 -14.0%PBG Pepsi Bottling Group Inc. Cons. Staples Soft Drinks 98.9% $9,650 $43.08 $18.50 -57.1%NBL Noble Energy Inc. Energy Oil & Gas Exploration & Prod. 98.9% $13,156 $76.54 $45.54 -40.5%TUP Tupperware Brands Corp. Cons. Disc. Housewares & Specialties 98.8% $2,230 $36.10 $14.18 -60.7%GR Goodrich Corp. Industrials Aerospace & Defense 98.7% $8,702 $69.66 $33.14 -52.4%ATK Alliant Techsystems Inc. Industrials Aerospace & Defense 98.5% $3,708 $110.39 $70.66 -36.0%HEW Hewitt Associates Inc. (Cl A) Info. Tech. Data Proc. & Outsourced Svcs. 98.3% $3,809 $35.28 $29.50 -16.4%SCHL Scholastic Corp. Cons. Disc. Publishing 98.2% $1,521 $39.58 $11.01 -72.2%BEC Beckman Coulter Inc. Health Care Health Care Equip. 98.1% $4,440 $70.82 $44.84 -36.7%CCE Coca-Cola Enterprises Inc. Cons. Staples Soft Drinks 98.0% $12,520 $25.81 $11.48 -55.5%GENZ Genzyme Corp. Health Care Biotechnology 97.9% $20,033 $75.97 $60.93 -19.8%FMC FMC Corp. Materials Div. Chem. 97.7% $4,375 $57.50 $40.43 -29.7%RAI Reynolds American Inc. Cons. Staples Tobacco 97.5% $19,007 $64.43 $33.58 -47.9%DGX Quest Diagnostics Inc. Health Care Health Care Svcs. 97.3% $10,294 $53.18 $45.83 -13.8%

Average of All Stocks -41.1%S&P 500 Index 1549.38 735.09 -52.6%S&P 500 Equal Weight Index 2022.38 908.4 -55.1%

20 Highest Ranking Bear Stocks on 10/31/07

Ranking Factors

Low Beta

Average Valuations

High Financial Quality

High Share Price

Positive Price Momentum

List Filter

• No ADRs



• 20 Stocks with HIGHEST Bear Rank


20 Highest Ranking Bear Market Stocks on 10/31/07

34


Early Bull (02/28/09 – 03/31/10)

Ticker Name Sector Sub Industry

Early Bull

RankMarket Cap (Mil)

PRICE 02/28/09


AHR Anthracite Capital Inc. Financials Mortgage REIT's 100.0% $64 $0.83 $0.02 -98.1%SHO Sunstone Hotel Investors Inc. Financials Specialized REIT's 99.9% $105 $2.19 $11.17 410.0%CEM Chemtura Corp. Materials Specialty Chem. 99.9% $82 $0.34 $1.37 302.9%BEE Strategic Hotels & Resorts Inc. Financials Specialized REIT's 99.9% $61 $0.82 $4.25 418.3%EVC Entravision Communications Corp.Cons. Disc. Broadcasting & Cable TV 99.8% $33 $0.38 $2.76 626.3%MNI McClatchy Co. (Cl A) Cons. Disc. Publishing 99.8% $40 $0.49 $4.91 902.0%FCH FelCor Lodging Trust Inc. Financials Specialized REIT's 99.7% $52 $0.81 $5.70 603.7%ETFC E*TRADE Financial Corp. Financials Inv. Banking & Brokerage 99.7% $451 $0.80 $1.65 106.6%XOMA XOMA Ltd. Health Care Biotechnology 99.6% $68 $0.51 $0.57 12.0%CNO Conseco Inc. Financials Life & Health Ins. 99.6% $224 $1.21 $6.22 414.0%DPTR Delta Petroleum Corp. Energy Oil & Gas Exploration & Prod. 99.6% $213 $2.06 $1.41 -31.6%EPL Energy Partners Ltd. Energy Oil & Gas Exploration & Prod. 99.5% $9 $4.38 $12.18 178.2%AHT Ashford Hospitality Trust Financials Specialized REIT's 99.4% $87 $1.00 $7.17 617.0%ICOG ICO Global Communications Holdings Ltd. (Cl A)Telecom. Wireless Telecom. Svcs. 99.3% $52 $0.25 $1.18 372.0%CHB Champion Enterprises Inc. Cons. Disc. Homebuilding 99.2% $23 $0.29 $0.03 -89.7%ESLR Evergreen Solar Inc. Industrials Electrical Components & Equip. 99.2% $201 $1.22 $1.13 -7.4%GMO General Moly Inc. Materials Div. Metals & Mining 99.1% $54 $0.76 $3.32 336.8%SIX Six Flags Inc. Cons. Disc. Leisure Facilities 99.1% $23 $0.24 $0.14 -43.3%FOE Ferro Corp. Materials Specialty Chem. 99.0% $64 $1.47 $8.79 498.0%PEIX Pacific Ethanol Inc. Energy Oil & Gas Refining & Marketing 99.0% $20 $0.34 $1.11 226.5%


20 Highest Early Bull Ranking Stocks on 02/28/09

Ranking Factors

High Beta

Extreme Valuations

Low Financial Quality

Low Share Price

Negative Price Momentum

List Filter

• No ADRs



• 20 Stocks with HIGHEST Early Bull Rank


20 Highest Ranking Early Bull Stocks on 2/28/09

35


The higher the numerical rank for a stock in a certain market phase, the greater the likelihood the stock is consistent with the attributes of that market phase

Early Bull

Mid Bull Late Bull Bear Market

Stocks (EC Market Cycle Rank)

AA (76)

XOM (96)

CVX (93)

T (68)

HPQ (99)

BAC (99)

BA (98)

MRK (97)

JPM (97)

CSCO(96)

INTC (96)

AXP (91)

DIS (89)

GE (84)

PFE (81)

CAT (75)

MCD (100)

JNJ (100)

UTX (99)

MMM (99)

PG (98)

HD (98)

KFT (97)

WMT (96)

MSFT (95)

IBM (95)

TRV (95)

DD (89)

KO (88)

VZ (79)

Key to

Outperformanc

e

Deeply Oversold Stocks

Stocks with Attractive

Relative Value

Momentum Stocks

Defensive Stocks

Market Cycle Ratings & Ranks for DJIA Stocks(1)

Insights for Stock Ratings & Ranks

(1) As of March 31, 2010

36


Market cycle ranks are determined based on current attributes

Not based on past attributes or stock price performance in previous cycles

As the attributes for each stock change, its market cycle rating and rank may change

Evaluating the rankings in all four market phases has several advantages

12 of the 30 DJIA stocks have ranks above 90 in two of the market phases Dominance of large stocks with price momentum in the late bull stages also have

attributes of high quality that are beneficial in a bear market

Insights for Stock Ratings & Ranks

Symbol NameEarly Bull

RankMid Bull

RankLate Bull

Rank Bear RankHighest Rank Market Cycle

MMM 3M Co. 1.3% 41.5% 95.4% 98.7% Bear

AXP American Express Co. 9.5% 71.2% 94.3% 90.6% Late Bull

BA Boeing Co. 8.6% 83.2% 98.3% 91.4% Late Bull

HPQ Hewlett-Packard Co. 7.2% 65.5% 99.0% 92.8% Late Bull

INTC Intel Corp. 19.0% 94.9% 95.8% 81.0% Late Bull

J NJ J ohnson & J ohnson 0.1% 27.0% 90.8% 99.9% Bear

J PM J PMorgan Chase & Co. 24.4% 93.1% 96.5% 75.7% Late Bull

MCD McDonald's Corp. 0.4% 31.6% 91.4% 99.6% Bear

MRK Merck & Co Inc 7.0% 49.5% 97.0% 93.0% Late Bull

MSFT Microsoft Corp. 4.9% 64.9% 94.1% 95.1% Bear

UTX United Technologies Corp. 0.9% 24.8% 98.0% 99.1% Bear

WMT Wal-Mart Stores Inc. 4.2% 66.9% 92.7% 95.8% Bear

37


Helps identify stocks that have high consistency to the attributes of an anticipated market phase (i.e., currently Mid or Late Bull)

Augment or challenge current stock selection criteria

Analyze current portfolio allocations based on the consistency of the current holdings with various phases of the market cycle

Insights for Stock Selection and Portfolio Management

38


SB Buy-Rated Stocks with EC Market Cycle Ratings of 90 or AboveEarly Bull Mid Bull Late Bull Bear Market

AMD (92)

AYR (91)

BZH (92)

ETFC (99)

JBLU (95)

ALTR (96)

AEO (90)

BWA (92)

CVC (96)

COF (90)

CVX (93)

CYPB (95)

DISH (91)

XOM (96)

FCX (91)

IDTI (95)

INTC (95)

JBLU (97)

JPM (93)

KSS (92)

LH (91)

MRO (91)

MCHP (96)

MYGN (92)

NSM (91)

BTU (97)

SMTC (91)

TXN (93)

TIF (91)

WDR (98)

XRX (90)

ALXN (92)

AGN (99)

ANR (98)

MO (92)

AMZN (100)

AXP (94)

AMT (98)

ABC (98)

APC (91)

AAPL (100)

FLY (90)

BAC (99)

BBBY (92)

BRCM (96)CVC (100)

CNQ (94)

CCL (91)

CTL (95)

CHKP (97)

CSCO (96)

CLF (95)

COH (97)

CTSH (100)

GLW (98)COV (99)

CMI (91)

CVS (93)DVA (96)

DNDN (98)

DISH (93)DPZ (90)

DPS (95)

EMC (93)

EL (92)

EXPE (90)

ESRX (100)

FLEX (98)

FCX (92)

GIS (95)

GS (92)GR (95)

GOOG (98)

HAL (90)

HPQ (99)HGSI (100)

INCY (98)

INTC (96)

JAH (97)

JDSU (96)

JNJ (91)

JPM (96)

LBTYA (96)

M (95)

MRVL (99)MAT (97)

MDR (97)

MCK (99)

MHS (99)

MD (91)

MDT (95)

MRK (97)

MET (92)

MSFT (94)

NTAP (96)

NWSa (97)

NIHD (99)

NE (95)

JWN (92)

BTU (93)

PM (93)

PCLN (99)

TGT (94)

TEVA (99)

WMB (92)

TIF (91)

TEL (96)

UNM (91)

URBN (99)

VECO (94)

WMT (93)

XL (93)

ACN (98)

ADTN (90)

AGN (91)

ALTR (91)

DOX (94)

AXP (91)

ABC (92)

AON (98)

AAPL (93)

AZO (98)

BBT (97)

BDX (100)

BBBY (98)

BFb (97)

CHKP (100)

ED (93)

COV (95)

DVA (99)

ETN (95)

EW (94)

EMS (93)

ETR (96)

EL (97)

EXPD (93)

ESRX (98)

FISV (95)

BEN (95)

GIS (99)

GILD (91)

GR (92)

HSY (96)

HPQ (93)

HNZ (94)

HD (98)

IBM (95)

JNJ (100)

K (99)

KMB (97)

KFT (97)

LH (97)

LNCR (99)

LMT (97)

MAT (91)

MCK (98)

MHS (100)

MD (98)

MDT (98)

MRK (93)

MSFT (95)

NKE (99)

OMC (93)

PM (97)

PG (98)

PSA (92)

DGX (96)

RAI (97)

SRE (90)

SLGN (90)

SYY (99)

TGT (91)

TEVA (99)

TIF (96)

TRV (95)

URBN (98)

VAR (98)

VFC (99)

VPRT (91)

WDR (95)

WMT (96)

WPI (98)

WWW (95)

Attribute Focus

Low Price

High Beta

Low Quality

Extreme Valuations

Negative RelativePrice Momentum

Attribute Focus

Low Valuations

Over-/Underreaction

High Sales Growth

Improving OperatingMargins

High ROE

Strong Implied EPSGrowth

Attribute Focus

Strong Relative PriceMomentum

Large Market-Cap

High Sales Growth

Consensus Analyst Opinion

Low Short Interest Ratio

Attribute Focus

Low Beta

High Quality

Positive Relative PriceMomentum

Average Valuation

High Share Price

39


Where are We?

Trailing 6 Mos.-5.4%15.1%12.5%11.1%14.0%

Bear Market Top 100S&P 500 EW

Market Cycle IndexEarly Bull Top 100Mid Bull Top 100Late Bull Top 100

Transition to Mid Bull in Last Six Months

Through 3/31/10 Source: EquityCompass Strategies, Bloomberg

600

800

1000

1200

1400

1600D

ec-0

2

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

600

800

1000

1200

1400

1600D

ec-0

2

Apr

-03

Aug

-03

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-03

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Bear Market Mid Bull

IVInvestment Philosophy & Principles for Stock Selection

EquityCompass Quantitative ModelsInvestment Philosophy &

Principles

Represents the opinion on a stock’s likely risk-adjusted performance relative to the broader market over the next 12 to 18 months

Uses the combined insights of the Value and Momentum models to form opinion on individual stocks categorized as favorable, neutral, and unfavorable

Favorable: Positive momentum/low value Least favorable: Negative momentum/high valuation

Value-Momentum Model

Over-/Underreaction

Model

Quality Model

Measures a stock’s quality as the company’s ability to create value (sales and operating margins) and increase shareholder rewards (dividend growth, share buybacks, and long-term debt levels).

Represents the opinion of likely performance over a multiyear time horizon

Identifies extreme misalignment between a change in price of a stock and the change in fundamental expectations (i.e., sales, earnings, cash flow and EBITDA estimates)

Undervalued Stock – Share price significantly trailing change in fundamental estimates

Overvalued Stock – Share price significantly exceeding change in fundamental estimates

The model output represents the opinion of likely performance over the next three to six months.

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Utilizes 12-month forward consensus estimates on eight valuation measures to rank a stock relative to the 3,000+ stocks in the universe

Low ranks imply low expectations or “Value,” high scores represent high expectations or “Growth”

Valuation Measures 1. Price to Earnings (P/E) 2. Price to Sales (P/S) 3. Price to Book Value (P/BV) 4. Price to Cash Flow (P/CF) 5. Price to Earnings Growth (PEG) 6. Enterprise Value to EBITDA

(EV/EBITDA) 7. Financial Strength 8. Earnings Quality

Source: EquityCompass Strategies

Source: EquityCompass StrategiesBased on July 2008 Data

Ent. Value to EBITDA

PEG Ratio

Price to Earnings

Price to Sales

Price to Cash Flow

Price to Book Value

100%

0%

75%

25%

50%

Relative Valuation Percentile Rank

98.3% 41.2 1.4 29.4 20.8 19.2 1.9Amazon.com (AMZN)

Valuation Percentile

1.0 10.4 1.6

Nokia Corp. ADR (NOK)

71.8%

McDonald's Corp. (MCD)

Duke Energy Corp. (DUK)

Intel Corp. (INTC)

Nissan Motor Co. (NSANY)

Kraft Foods (KFT) 9.8 2.1

68.9% 15.8 2.7 11.8 4.4 9.5 1.4

14.5

51.7% 13.3 1.6 5.9 1.0 6.9 2.8

36.3% 15.6 3.0 11.1 3.0 6.8 1.0

25.7% 10.0 0.4 4.4 1.0 5.1 2.4

5.2% 9.5 1.1 7.9 3.5 5.4 0.7

Pure Growth

Growth

Market Average

Value

Deep Value

Value ModelInvestment Philosophy &

Principles

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Investment thesis Stock price trends, whether positive or negative, are the result of an imbalance between supply

and demand and can be used to predict a future performance bias The EquityCompass Momentum model identifies the likely direction of opportunity-seeking capital and

possesses the risk discipline necessary to recognize when trends are changing Through an analysis of each stock’s current price relative to its longer-term average, as well as to that

of the broader market, the Momentum model identifies stocks that have a confirmed positive, negative, or neutral long-term relative price momentum

The Momentum Model requires absolute confirmation before signaling a trend change even at the risk of lagging the absolute high and low prices of a stock

On average, stocks within the EquityCompass coverage universe remain in either a positive or negative price trend for 12–18 months

Momentum ModelInvestment Philosophy &

Principles

43


Represents the opinion on a stock’s likely risk-adjusted performance relative to the broader market over the next 12 months

Uses the combined insights of EquityCompass’ Valuation and Momentum models to form opinion on all the stocks currently under coverage

Opinions are categorized as favorable, neutral, and unfavorable

Favorable: Positive price momentum/low valuation

Least favorable: Negative price momentum/high valuation

Value-Momentum ModelInvestment Philosophy & Process

Source: EquityCompass Strategies

44


Over-/Underreaction ModelInvestment Philosophy & Process

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Source: Behavioral Finance and the Sources of Alpha, Russell J. Fuller, CFA, President, RJF Asset Management, February 6, 2000

A Distribution of Expectations Based on New Information

10%

80%

10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Overreaction Correctly Processed Underreaction

Investment thesis

Over-/underreaction is a behavioral theory demonstrating how stocks can become mispriced and therefore create an exploitable condition for capturing excess returns

EquityCompass quantifies investor over and under reaction by identifying the extreme mispricing (defined as extreme misalignment between a change in stock price and change in fundamental expectations (i.e., sales, earnings, cash flow and EBITDA estimates)

Undervalued Stock – Share price significantly trailing change in fundamental estimates

Overvalued Stock – Share price significantly exceeding change in fundamental estimates

Model ratings represent the opinion of likely performance over the next three to six months and are assigned to only 20% of the EquityCompass coverage universe in any given month

Investment Philosophy & Process

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Investment thesis

Over long periods of time, companies that create and sustain the greatest level of shareholder value, will ultimately offer superior risk-adjusted returns for the patient investor

The EquityCompass Quality Model generates the Quality Rating on a stock by combining the outputs of the following two models and then ranking it relative to its peers

Value creation : Measures a stock's revenue growth and change in operating profit margins relative to sector peers

Shareholder benefits: Measures change in long-term debt outstanding, equity share dilution, and dividend growth relative to sector peers

The Quality rating represents the opinion of likely performance over a multiyear time horizon

Quality Model

+

IncreasingRevenues

DecreasingRevenues

Reve

nue

Gro

wth

Ran

k

ImprovingMargins

WorseningMargins

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argi

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ReducingDebt

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ReducingShares

Out

IncreasingShares

Out

Chan

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Sha

res

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ding

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k

+

IncreasingDividends

ReducingDividends

Divi

dend

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ATop 25%

DBottom 25%

Ove

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ompo

site

Rank

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e

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anki

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Sec

tor P

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Lowest

Highest

Shareholder Value Index

Value Creation

SVI Grade

Shareholder Benefits

HighROE

LowROE

Retu

rn o

n Eq

uity

(%)

=+

IncreasingRevenues

DecreasingRevenues

Reve

nue

Gro

wth

Ran

k

ImprovingMargins

WorseningMargins

Ope

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argi

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ReducingDebt

IncreasingDebt

Chan

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+ +

ReducingShares

Out

IncreasingShares

Out

Chan

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k

+

IncreasingDividends

ReducingDividends

Divi

dend

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+

ATop 25%

DBottom 25%

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ompo

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Rank

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ATop 25%

DBottom 25%

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Value Creation

SVI Grade

Shareholder Benefits

HighROE

LowROE

Retu

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(%)

=

All-Cap Blend Model PortfolioInvestment Philosophy & Process

47


All-Cap Blend114.6%

Benchmark (1)

44.5%

Nov 2002 Mar 2010

Portfolio Statistics

Simulated Performance Summary 29 Nov 2002 – 31 Mar 2010 | Monthly Data | Includes Dividends | Rebalanced Monthly | Gross of Fees

Stock Selection Criteria Initial Selection

Price : Greater than $7.50/share Avg. daily trading volume : Greater than

200K/day EquityCompass Rating : Buy Should be covered by at least three sell-side

research analysts as reported by IBES Sell criteria

EquityCompass Rating : Sell Price is less than $5/share Change in sector classification

Equally-weighted portfolio of 50 large-cap growth stocks

Five stocks in each of 10 S&P economic sectors

Rebalanced monthly

(1) S&P 500 Total Return IndexFor illustrative purposes only – not indicative of actual portfolio returns.


Portfolio

Benchmark

0%

4%

8%

12%

16%

0% 5% 10% 15% 20%

Volatility (Standard Deviation)

Ann

ualiz

ed R

etur

ns

Total Returns

1-Month 3-Month 6-Month YTD 2010

EC All-Cap Blend 6.2% 4.4% 10.6% 4.4%

S&P 500 6.0% 5.4% 11.8% 5.4%

Average Annual Total Returns

1-Year 2-Year 3-Year 5-Year Inception

EC All-Cap Blend 54.9% 0.2% -2.0% 5.4% 11.0%

S&P 500 49.8% -3.7% -4.2% 1.9% 5.2%

All-Cap Blend S&P 500

Ent. Val. / EBITDA 7.3 9.7

Price / Earnings 15.0 20.5

Price / Book Value 2.8 1.5

Earnings Growth 20.6 25.4

PEG Ratio 0.7 0.8

Risk/Reward Statistics

All-Cap Blend S&P 500

# of Holdings 50 500Median Mkt Cap (Mill) $2,795 $22,028Annual Turnover 59.5% -

Std Deviation 16.1% 14.6% Sharpe Ratio 0.5 0.2Dividend Yield 1.8% 1.7% Beta 1.1 -

Alpha 5.5% -Tracking Error 6.6% -Information Ratio 0.9 -Up-Market Capture 130% 100%

Down-Market Capture 95% 100%

EquityCompass Strategies1 South Street, 16th Floor

Baltimore, MD 21202Phone: (443) 224-1231

Email: [email protected]

Important Disclosures

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data nor is it considered an offer to buy or sell any securities referred to herein. EquityCompass Strategies is a research and investment advisory unit of Choice Financial Partners, Inc., a wholly owned subsidiary and affiliated SEC registered investment adviser of Stifel Financial Corp. Portfolios based on EquityCompass Strategies are available exclusively through Stifel, Nicolaus & Company, Incorporated. For information about Stifel Nicolaus’ advisory programs, please contact your Financial Advisor to request a copy of Stifel’s ADV Part II or equivalent disclosure brochure. Affiliates of EquityCompass Strategies may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Past performance should not and cannot be viewed as an indicator of future performance.

Exchange Traded Funds (ETFs) represent a share of all stocks in a respective index. ETFs trade like stocks and are subject to market risk, including the potential for loss of principal. The value of ETFs will fluctuate with the value of the underlying securities. Inverse ETFs are constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Investing in inverse ETFs is similar to holding various short positions, or using a combination of advanced investment strategies to profit from falling prices. Brokerage commissions will be associated with buying and selling ETFs unless trading occurs in a fee-based account. Investors should review the prospectus and consider the ETF’s investment objectives, risks, charges, and expenses carefully before investing. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. When investing in real estate, it is important to note that property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. High-yield bonds have greater credit risk than higher quality bonds.

The S&P 500 Index is a broad market index that tracks the performance of 500 stocks from major industries of the U.S. economy. This index is generally considered representative of the U.S. large capitalization market. A total return index tracks both the capital gains of a group of stocks over time, and assumes that any cash distributions, such as dividends, are reinvested back into the index. Looking at an index's total return displays a more accurate representation of the index's performance. By assuming dividends are reinvested, you effectively have accounted for stocks in an index that do not issue dividends and instead, reinvest their earnings within the underlying company. A total return index does not include adjustments for brokerage, custodian and advisory fees. The Dow Jones Industrial Average (DJIA) is an unmanaged, price-weighted index that consists of 30 blue chip U.S. stocks selected for their history of successful growth and interest among investors. The price-weighted arithmetic average is calculated with the divisor adjusted to reflect stock splits and occasional stock switches in the index. Indices are unmanaged, and it is not possible to invest directly in an index.

Additional Information Available Upon Request

© 2010 EquityCompass Strategies, 501 North Broadway, St. Louis, MO 63102. All rights reserved.

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