january 15, 2013 michael j. oyster, cfa managing principal / portfolio strategist

January 15, 2013

Michael J. Oyster, CFAManaging Principal / Portfolio Strategist

FLATTENING YOUR INVESTMENT PORTFOLIO

FUND EVALUATION GROUP, LLC

Confidential Not For Redistribution2©2012 Fund Evaluation Group, LLC

MANAGED OPPORTUNITIES

FEG Managed Portfolios

Moderate Growth Portfolio (70/30)

Balanced Growth Portfolio (60/40)

Balanced Portfolio (50/50)

Income and Growth Portfolio (40/60)

Capital Preservation Portfolio (20/80)

Equity Portfolio

Fixed Income Portfolio

Real Assets Portfolio1

Diversifying Strategies Portfolio1

1 Subject to availability

Benefits

•Combination of ETF and mutual fund holdings

•Dynamic asset allocation

•Low portfolio costs

•10 year performance track record

•Minimum account generally $50,000


History

• Over 24 years of client service since 1988

• Approximately $33 billion* in client assets under advisement

• Employee owned, with broad equity ownership

• Monetary compensation derived solely from clients

FUND EVALUATION GROUP, LLC PROFILE

*As of June 30, 2012


Institutional Clients

FEG CLIENTS AND SERVICES

Financial Advisors

Consulting Services

Outsourced CIO

Managed Portfolios

Alternative InvestmentStrategies

Research Services Endowment Alliance Program


INVESTMENT PHILOSOPHY

FEG’s Investment Philosophy

• Investment decisions should be made with a long-term perspective

• Portfolios should be constructed to help achieve diversification by global risk factors

• Valuation considerations should drive investment decisions

• Skillful active management has the potential to add value


FEG seeks to add value by utilizing active and passive solutions for both asset allocation and manager selection.

INVESTMENT OVERVIEW

Outperformance

ACTI

VE

Global Diversification


Dynamic AllocationDynamic

AllocationActive

ManagersActive

Managers

IndexStrategies

IndexStrategies

PASS

IVE

ALLOCATION POLICY

MANAGER SELECTION

Risk ManagementLow Cost


PORTFOLIO DESIGN - GLOBAL DIVERSIFICATION


AllocationActive

ManagersActive

Managers

IndexStrategies

IndexStrategies



• Portfolios should be constructed to help achieve diversification by global risk factors

• Broad based view of asset allocation, with investments falling into one of four asset categories

Asset Categories Role RiskGlobal Equity Total Return

Stock MarketDeclines

Global Fixed Income and Credit Deflation Protectionand Total Return

Rising Rates and/or Credit Downgrades

Real Assets Inflation Protectionand Total Return Deflation

Diversifying Strategies Diversification and Total Return Active Management


CORE AND CATEGORY PORTFOLIOS

GLOBAL EQUITYGLOBAL EQUITY GLOBAL FIXED INCOME AND CREDIT

GLOBAL FIXED INCOME AND CREDIT REAL ASSETS*REAL ASSETS* DIVERSIFYING

STRATEGIES*DIVERSIFYING STRATEGIES*

Income & Growth40/60

Balanced50/50

Moderate Growth70/30

Capital Preservation

20/80

Equity Fixed Income

Real Assets

Diversifying Strategies

Category Portfolios

Core Portfolios

*Subject to availability


PORTFOLIO DESIGN - INDEX STRATEGIES


AllocationActive

ManagersActive

Managers



IndexStrategies

IndexStrategies

Index strategies are used where:

• It can be difficult for active management to outperform over long periods of time

• There is a significant cost savings to gaining beta exposure

• ETFs or index funds can help provide targeted asset classes/ styles

FEG’s philosophy incorporates passive and active strategies in different aspects of portfolio construction. We utilize passive solutions in the broad policy allocation to help provide low-cost global diversification while drawing upon active strategies to dynamically allocate between asset classes.


PORTFOLIO DESIGN - ACTIVE MANAGERS



IndexStrategies

IndexStrategies

Dynamic Allocation

Active Managers

Active Managers

FEG seeks to identify managers with:• Experienced personnel• Sound investment philosophy• Demonstrated ability to outperform

Six-Tenet Manager Review Process

Conviction strong belief in the investment philosophy; willing to put investment decisions ahead of business decisions; invests alongside of clients, aligning interests

Consistency stability of organizational structure, composition of the investment professionals, and the investment philosophy and process

Pragmatism understand core strengths and have the ability to capitalize and sustain their competitive edge

Investment Culture strong ethical foundation, passionate about investing; proper organizational and compensation structure; culture pervades across organization

Risk Control not blind risk takers, but risk conscious; acknowledge mistakes; robust and effective risk mitigation

Active Return ability to identify and profit from investment opportunities; successful track record


PORTFOLIO DESIGN - DYNAMIC ALLOCATION

Active ManagersActive

Managers



IndexStrategies

IndexStrategies


Allocation

FEG Portfolio Team seeks to add alpha through dynamic asset allocation decisions that overweight asset classes with an opportunity to out-perform in the mid to long-term time frame.

Key Considerations

•Valuation – main criteria we focus on when making a portfolio change.

•Sentiment – measures the pulse of market participants; their level of fear and greed. It comprises the stories that investors tell themselves.

•Fundamentals – Fundamentals are what is happening now, which we then compare to the past and use to speculate about the future.


0%

10%

20%

30%

40%

50%

60%

70%

Equities Fixed Income/Credit

Real Assets Diversifying Strategies

Perc

enta

ge o

f Po

rtfol

io

FLAT

FLATTENING THE PORTFOLIO

•The low return environment

•The impact of interest rates and inflation on financial assets

• Our recommendation to “flatten” portfolio allocations (i.e., reduce financial assets, equities and bonds, in favor of real assets and diversifying strategies)

• can help improve return potential• can help to diversify risk

Source: FEG Data Source: FEG Data

0%

10%

20%

30%

40%

50%

60%

70%

Equities Fixed Income/Credit

Real Assets Diversifying Strategies

Perc

enta

ge o

f Po

rtfol

io

STEEP


DURATION TAILWIND

From 1981 through 1999, equities returned an unprecedented annualized return of 18.5% while bonds returned 10% annualized

•Performance was supported by the decline of interest rates (i.e., bond yields), which resulted in an expansion of credit and supported a secular bull market in equities that drove price/earnings multiples higher

0

5

10

15

20

25

30

35

40

45

50

0%

2%

4%

6%

8%

10%

12%

14%

16%

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Pric

e/Ea

rnin

gs M

ulti

ple

Bond

Yie

ld

INTERMEDIATE GOVERNMENT BOND YIELD AND PRICE/EARNINGS MULTIPLE EXPANSION (1981-2011)

Bond Yield P/E Normalized

Sources: Ibbotson Associates and Robert Shiller


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Retu

rn

RETURNS VS. OBJECTIVE60/40 Equity/Bond Portfolio, 10-year Rolling Return

Rolling 10-year Return

8% Return Objective

DURATION TAILWIND

Two easy decades - but not the norm

Return objectives vary, we use 8% for illustration

Source: Ibbotson Associates and Barclays Capital

Uniquely strong returns in the 1980s and 1990s allowed a simple equity/bond portfolio to meet investors’ goals


EMPHASIS ON VALUE

• Russell data since 1979 reiterates conclusion from Fama and French• The “value premium” has been more pronounced in Small Cap than Large Cap• The recent outperformance of Small Cap Growth over Small Cap Value is rare

-15

-10

-5

0

5

10

15

20

Dec

-83

Dec

-85

Dec

-87

Dec

-89

Dec

-91

Dec

-93

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Large Cap Value vs. Large Cap Growth5 Year Excess Return

-15-10

-505

1015202530

Dec

-83

Dec

-85

Dec

-87

Dec

-89

Dec

-91

Dec

-93

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Small Cap Value vs. Small Cap Growth5 Year Excess Return

Large Cap Growth has outperformed Large Cap Value in 60% of historical 5-year periods

Small Cap Value has outperformed Small Cap Growth in 83% of historical 5-year periods

Source: FEG Data


EMPHASIS ON VALUE

• Relative valuations are near historical norms suggesting the tactical posture return to “strategic equilibrium”, specifically a bias toward Value

1.2x

1.5x

0x

1x

2x

3x

4x

03/8

4

03/8

6

03/8

8

03/9

0

03/9

2

03/9

4

03/9

6

03/9

8

03/0

0

03/0

2

03/0

4

03/0

6

03/0

8

03/1

0

03/1

2

Russ

ell 1

000

Gro

wth

/ Ru

ssel

l 100

0 Va

lue

P/E

Source: Rimes

RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/E

+2 standard deviations

-1 standard deviation

-2 standard deviations

+1 standard deviation

Large Cap Value Attractive

Large Cap Growth Attractive

2.7x

2.4x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

03/8

4

03/8

6

03/8

8

03/9

0

03/9

2

03/9

4

03/9

6

03/9

8

03/0

0

03/0

2

03/0

4

03/0

6

03/0

8

03/1

0

03/1

2

Russ

ell 1

000

Gro

wth

/ Ru

ssel

l 100

0 Va

lue

P/B

Source: Rimes

RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/B





Large Cap Value Attractive

Large Cap Growth Attractive

1.3x1.7x

-2x

0x

2x

4x

6x

8x

10x

03/8

4

03/8

6

03/8

8

03/9

0

03/9

2

03/9

4

03/9

6

03/9

8

03/0

0

03/0

2

03/0

4

03/0

6

03/0

8

03/1

0

03/1

2

Russ

ell 2

000

Gro

wth

/ Ru

ssel

l 200

0 Va

lue

P/E

Source: Rimes

RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/E

Small Cap Value Attractive

Small Cap Growth Attractive





2.4x2.4x

0x

1x

2x

3x

4x

5x

03/8

4

03/8

6

03/8

8

03/9

0

03/9

2

03/9

4

03/9

6

03/9

8

03/0

0

03/0

2

03/0

4

03/0

6

03/0

8

03/1

0

03/1

2

Russ

ell 2

000

Gro

wth

/ R

usse

ll 20

00 V

alue

P/B

RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/B

Source: Rimes




Small Cap Value Attractive

Small Cap Growth Attractive


Source: Rimes


OVERWEIGHT EMERGING MARKETS

Emerging markets are attractive for 4 primary reasons:

•Valuations

•Expected economic growth

•Demographic trends

•Low debt-to-GDP



Valuations

15.0x

18.6x

0x

5x

10x

15x

20x

25x

30x

2000 2002 2004 2006 2008 2010

Pric

e / E

arni

ngs (

Nom

inal

10-

Year

Nor

mal

ized

)

MSCI Emerging P/E5

Average P/E5

Source: MSCI

HISTORICAL VALUATIONS: INTERNATIONAL PRICE/5-YEAR NORMALIZED EARNINGSMSCI EMERGING MARKETS, 2000 - PRESENT

11.8x

15.8x

0x

5x

10x

15x

20x

25x

30x

35x

40x

45x

03/9

9

03/0

0

03/0

1

03/0

2

03/0

3

03/0

4

03/0

5

03/0

6

03/0

7

03/0

8

03/0

9

03/1

0

03/1

1

03/1

2

Pric

e / E

arni

ngs (

Trai

ling

12 M

o.)

MSCI Emerging Markets Index Average

Source: Rimes

HISTORICAL VALUATIONS: EMERGING MARKETS P/E

1.7x1.8x

0x

1x

2x

3x

4x

03/9

809

/98

03/9

909

/99

03/0

009

/00

03/0

109

/01

03/0

209

/02

03/0

309

/03

03/0

409

/04

03/0

509

/05

03/0

609

/06

03/0

709

/07

03/0

809

/08

03/0

909

/09

03/1

009

/10

03/1

109

/11

03/1

2

Pric

e / B

ook V

alue

(Tra

iling

12

Mo.

)

HISTORICAL VALUATIONS: EMERGING MARKETS P/B

MSCI Emerging Markets Index Average

Source: Rimes



Expected Economic Growth•Estimated GDP Compound Annual Growth Rates 2011-2015

Source: IMF, Everest Capital

> 7% 5% to 7% 3% to 5% < 3%China Indonesia Australia AustriaIndia Malaysia Brazil Belgium

Taiwan Canada DenmarkThailand Chile Finland

Hong Kong FranceIreland GermanyIsrael Greece

Mexico ItalyNew Zealand Jamaica

Norway JapanPoland NetherlandsRussia Portugal

Singapore SpainSouth Africa SwitzerlandSouth Korea

SweedenTurkeyUkraine

United Arab EmiratesUnited Kingdom

United StatesZimbabwe

Emerging MarketsDeveloped Markets



Demographic Trends•Developed countries have aging populations

Source: PIMCO



Demographic Trends•Emerging economies will have a greater percentage in working age

Source: PIMCO



Debt to GDP•Lower in emerging economies than developed economies


BENCHMARK WEIGHT IN REAL ASSETS

Inflation was severely depressed following the financial crisis but is trending toward a more normal level today

-20%-15%

-10%

-5%

0%

5%

10%

15%

20%

25%30%

1915 1927 1939 1951 1963 1975 1987 1999 2011

Source: Bloomberg LP

Consumer Price Index (YoY)

2.7%

3.4%


BENCHMARK WEIGHT IN REAL ASSETS

0%

1%

2%

3%

4%

5%

6%

7%Lo

ng

Te

rm

Go

v B

on

ds

Bo

nd

s

Sto

cks

TIP

S

Hig

h Y

ield

Bo

nd

s

Priv

ate

Re

al

Esta

te

-O

pp

ortu

nis

tic

Pu

bli

c R

ea

l E

sta

te

MLP

s

Co

mm

od

itie

s

Priv

ate

Re

al

Esta

te

Tim

be

r

Priv

ate

En

erg

y

Average Quarterly ReturnsAs of March 31, 2012

Unexpected Inflation Remaining Inflation

Sources: Lipper,NCREIF, Ibbotson, Alerian


DOUBLELINE

• DoubleLine (DBLTX) exhibits a high current yield (7.5%) and a low historical volatility (see below)

• The management team is experienced and proven• The supply of non-agency Mortgage Backed Securities (MBS) is shrinking• Combining agency and non-agency MBS helps reduce expected risks

Annualized Volatility Inception of Strategy at TCW Investment Management Company to Present

August 1993 – May 2012: 3.95% DoubleLine-Branded Strategy to Present

April 2010 – May 2012: 2.94%

Source: Morningstar


CURRENT EMPHASIS

GLOBAL EQUITYGLOBAL EQUITY GLOBAL FIXED INCOME & CREDIT

GLOBAL FIXED INCOME & CREDIT REAL ASSETSREAL ASSETS DIVERSIFYING

STRATEGIESDIVERSIFYING STRATEGIES

Tactical emphasis on Residential

Mortgage Backed Securities

Tactical emphasis on Residential

Mortgage Backed Securities

Strategic weightStrategic weight Absolute Return Strategies

Absolute Return Strategies

Overweight Emerging Markets and International

Small Cap

Overweight Emerging Markets and International

Small Cap

Emphasize a Value tilt and Fundamental

Indexing

Emphasize a Value tilt and Fundamental

Indexing

Commodities, MLPs and hedged

REITs

Commodities, MLPs and hedged

REITs

Underweight Treasuries

Underweight Treasuries

Uncorrelated Return StreamsUncorrelated

Return Streams


QUESTIONS & ANSWERS


BIOGRAPHY

MICHAEL J. OYSTER, CFAManaging Principal - Portfolio Strategist

• B.B.A. in Finance, University of Cincinnati• Investment professional since 1994• FEG team member since 1999

Career Highlights:• Author. 2005. Mission Possible, Achieving Outperformance in a

Low-Return World. Chicago: Dearborn Trade.

Prior experience:• Schaeffer Investment Research, Inc. – Senior Quantitative Analyst

Memberships:• CFA Society of Cincinnati• CFA Institute• FEG Investment Policy Committee

Michael J. Oyster 513.719.5120

[email protected]

The CFA designation is a professional certification issued by the CFA Institute to qualified financial analysts who: (i) have a bachelor’s degree and four years of professional experience involving investment decision making or four years of qualified work experience[full time, but not necessarily investment related]; (ii) complete a self-study program (250 hours of study for each of the three levels); (iii) successfully complete a series of three six-hour exams; and (iv) pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct.


FEG ADVISOR SUPPORT TEAM

Matthew J. Boyko

INTERNAL SUPPORT

[email protected]

Matthew J. Mullane

WEST

[email protected]

Jeremiah Whiteley

EAST

[email protected]


This one on one report was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.

The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it.

FEG, its affiliates, directors, officers, employees, employee benefit programs and client accounts may have a long position in any securities of issuers discussed in this report. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. Past performance is not indicative of future results. Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.

DISCLOSURES


FIRM CONTACT INFORMATION

201 East Fifth StreetSuite 1600

Cincinnati, OH 45202Phone: 513.977.4400

Fax: 513.977.4430www.feg.com

Satellite Offices: Detroit / Indianapolis

january 15, 2013 michael j. oyster, cfa managing principal / portfolio strategist

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