S&P YearinReview_2011

8/7/2019 S&P YearinReview_2011

1/17

FORECASANNUAL

FORECASTANNUAL

20112011Whats Inside

Economic Outlook 2

Mutual Fund Strategies 3

Model Portfolios 4

Investment Outlook 5

International Outlook 7

Housing Forecast 9

2011 Predictions 9

Fixed-Income Outlook 11

Asset Allocation Update 12

U.S. PowerPicks 2011 13

Global PowerPicks 2011 15


2/17

Climbing Up Fromthe BottomThe recession may be over, but S&P Economics

forecasts a long, hard climb from the abyss.

Beth PiskoraS&P Editorial

S&P EVALUATION SYMBOLSSTARS RankingsOur evaluation of the 12-month potential of stocks is indicated bySTARS:

Strong BuyTotal return is expected to outper formthe total return of a relevant benchmark by a widemargin over the coming 12 months, with shares risingin price on an absolute basis.BuyTotal return is expected to outperform thetotal return of a relevant benchmark over thecoming 12 months, with shares rising in price on anabsolute basis.HoldTotal return is expected to closely approximatethe total return of a relevant benchmark over thecoming 12 months, with shares generally rising in pricon an absolute basis.SellTotal return is expected to underperform thetotal return of a relevant benchmark over the comin12 months, and the share price is not anticipated toshow a gain.Strong SellTotal return is expected to underperformthe total return of a relevant benchmark by a widemargin over the coming 12 months, with shares fallingin price on an absolute basis.

NR Not ranked.Quality Rankings (QR)Our appraisals of the growth and stability of earnings and dividends

over the past 10 years for STARS and other companies are indicateby Quality Rankings:

A+ Highest B+ Average C LowestA High B Below Avg. D In reorganizationA- Above Avg. B- Lower NR Not Ranked

Quality Rankings are not intended to predict stock price movements.

Copyright 2011 by Standard & Poors Financial Services LLC. Allrights reserved. S&P, S&P 500, and Standard & Poors areregistered trademarks of The McGraw-Hill Companies, Inc. S&PMidCap 400 and S&P SmallCap 600 are trademarks of TheMcGraw-Hill Companies, Inc. This special edition publication isan excerpt from Standard & Poors The Outlook. Reproduction inwhole or in part prohibited except by permission. All rightsreserved. Officers of The McGraw-Hill Companies: Harold W.McGraw, III, Chairman, President and Chief Executive Officer;Jack F. Callahan, Jr., Executive Vice President and Chief FinancialOfficer; Elizabeth OMelia, Senior Vice President, TreasuryOperations; Kenneth M. Vittor, Executive Vice President andGeneral Counsel. Because of the possibility of human or mechan-

ical error by S&Ps sources, S&P, or others, S&P does not guar-antee the accuracy, adequacy, or completeness of any informa-tion and is not responsible for any errors or omissions or for theresults obtained from the use of such information. Permission toreprint or distribute any content from this newsletter requires thewritten approval of Standard & Poors.

(Continued on page 16)

As forecast, the longest and deepest recession since World War II is officiallyover, but Standard & Poors Economics believes the recovery will be slow anduneven. Whats more, another dip into recession is possible if financial marketslock up again, oil prices jump, or consumers remain scared.

S&P Economics expects U.S. gross domestic product (GDP) growth of 3.0%in 2011, up from an estimated 2.9% in 2010. But consumer spending, whichled the way out of most previous recessions, is not leading the way this time.

By the time 2010 ends, we expect 1.8% growth in consumer spending,about half the pace of growth after a recession ends, explains Beth AnnBovino, senior economist for S&P. The consumer led previous recoveries, but

thats not happening this time, due to concerns about lost wealth (401k bal-ances) and lost job fears.S&P Economics anticipates consumer spending to recover somewhat in

2011, growing at a 3.0% pace.Extreme consumer pessimism appears to have subsided but consumers

remain cautious, at least by pre-recession standards. The saving rate held at5.8% in the second quarter, well above the 2.1% of 2007 but still far belowthe pre-1990 average of 8.9%. Car sales are beginning to come back, showingthat consumers are no longer afraid of big-ticket purchases, but the Novembersales pace of 12.3 million light vehicles remains far below the 16.5 million of2006. Consumer borrowing rose in September, but only because of loans fromthe federal government (presumably concentrated in student loan programs).Credit card receivables continued to decline. S&P Economics expects con-sumers to remain cautious but to continue to crawl out of their foxholes.

And theres other good news. Overseas partners are recovering, helpingexports, albeit very slowly, says S&P Economics. Whats more, the financialsystem appears to be stabilizing. Most importantly, the fiscal stimulus helpedboost the economy.

The Fed lowered the Fed funds rate to about zero, and started the alphabetsoup of liquidity boosts, with TARP, QE1, and QE2, says Bovino, referring tothe first and second rounds of quantitative easing. And they got the desiredimpact: calmer markets.

However, the fiscal stimulus will likely be withdrawn in 2011. Private non-residential construction is still plunging. And the recent dollar strength coulddetract from some economic growth.

The most important negative? Housing.The U.S. housing market continues to soften, according to S&P Economics.

The spring surge in sales and prices was clearly a temporary response to the taxrebates. After the expiration of the rebate, sales and prices have dropped back.The S&P/Case-Shiller Home Price Index fell 2.0% nationally in the second quar-ter, though the 20-city index remains up 0.6% from a year earlier in October.Although the average home price is below its historical average relative toincome, and interest rates are very low, the high unemployment rate, the tighten-ing of credit standards, and the lack of savings mean fewer households can quali-fy to buy a home. At the same time, the glut of houses in the process of foreclo-sure or likely to go into foreclosure is holding prices down even more.

2 STANDARD & POORS www.marketscope.com

For important regulatory information, please go to:www.standardandpoors.com and click onRegulatory Affairs and Disclaimers.All prices in this report are as of the close onJanuary 21, 2011.


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Now that 2010 has drawn to aclose, we can take a look backand see what funds were the topperformers and how they rankin S&Ps methodology. Althoughthe following phrase has beenuttered so often that mostinvestors can recite it by heart,Past performance is not indica-

tive of future results, webelieve that it is at least some-what helpful to look at howmanagers performed over thepast.

In 2010, three-star rankedProfunds Internet UltrasectorProfund was one of the top per-formers out of all the fundswithin our coverage universe,with the investor class sharesreturning nearly 53%. The

funds goal is to return 150% ofthe Dow Jones CompositeInternet Index. To meet thatgoal, the fund uses leverage andis relatively concentrated. Thisinvestment style tends to lead tohigher levels of volatility, andthis fund is no exception: itsstandard deviation is over 50%higher than its Domestic

Equity Science & TechnologyFunds peer group average.Further, its top 10 holdingsaccounted for over 51% of thefunds total assets as ofSeptember 30.

Another fund among the topperformers in 2010 was four-star ranked Saratoga Technology

& Communications Portfolio.The investor shares posted areturn of over 49% last yearthrough December 31st. Thefunds objective is long-termgrowth of capital throughinvestments in technology stockswith potential for positive earn-ings surprises. The fund hassoundly outperformed itsScience & Technology Fundspeers over the past three- and

five-year periods as well withlower volatility.

The top performing fund thatis currently five-star ranked wasEncompass Fund, which posteda 55% return on the year, wellabove its Global Equity Global Multi-Cap Growth peergroup average of less than 16%.ENCPX had a portfolio heavy in

commodity and energy stocks,including uranium productionand exploration companyUranium Energy Corp. (UEC 6NR), L&L Energy Inc. (LLEN11 NR), and Avion Gold Corp.Although the funds risk consid-erations score is neutral, its costfactor is positive due to its low

turnover and the absence of asales load.

With just one of these threefunds holding a five-star rank,we decided to also look at fundsthat were relatively strong per-formers over the past year butthat were five-star ranked byS&P due to other fundamentalfactors. To narrow the fielddown a bit, we concentrated onlarge-cap stocks, which our

Global Investment PolicyCommittee believes will outper-form in 2011 as we enter thethird year of the current eco-nomic recovery. Among theLarge-Cap Core, Value, andGrowth peer groups, we lookedfor funds with positive metricsfor performance analytics, risk

The Top Mutual Fund

Performances of 2010Selections from the top five performers, as well as strong five-star funds.

Dylan CathersS&P Mutual Fund Analyst

FUND

STRATEG

POSITIVE POTENTIAL IMPLICATIONS

BBH Core Select Fund; N / BBTEX 5 0.1 14.6 4.3 6.2 14 1.21 2.21

Encompass Fund / ENCPX 5 -2.9 48.3 12.3 NA 14 1.50 3.80

Invesco Van Kampen Comstock Fund; Y / ACSDX 5 1.7 16.0 0.6 1.9 16 0.64 2.65

Profunds Internet Ultrasector Profund; Investor / INPIX 3 4.7 59.1 14.2 6.5 124 1.78 3.86

Saratoga Tech. & Communications Portfolio; I / STPIX 4 4.7 54.9 13.1 12.0 15 3.35 1.01

Walden Social Equity Fund / WSEFX 5 0.5 15.6 1.3 3.5 13 1.17 2.11

*Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. **As of 10/31/10.

NA-Not available. Source: S&P MarketScope Advisor.

GROSS

S&P *TOTAL RETURN CURRENT EXPENSE **YIELD

FUND NAME / TICKER RANKING YTD 1-YEAR 3-YEAR 5-YEAR PRICE RATIO (%)

(Continued on page 16)

www.marketscope.com STANDARD & POORS 3


4/17

S&P analysts and portfolio com-

mittee members turned in terrificoverall stock selection performancein 2010. Against the backdrop offits and starts to economic activityand uncertainly with respect togovernment policy changes andassistance programs, stock pricesremained volatile, leading to bothopportunities and challenges. Ourmost visible portfolio, 5 STARS orStrong Buy ranked stocks, turnedin a 21.9% performance for 2010,versus 12.8% for the S&P 500.This was the best year for 5 STARSsince 2005, when the portfolio wasup 12% versus a 3% rise in theS&P 500. The 4 STARS perform-ance was slightly ahead of 5 STARSat 22.1%. The year 2010 markedthe 18th time in 24 years that the 5STARS portfolio has outperformedthe S&P 500 on an annual basissince inception on December 31,1986. This performance has result-ed in the value of $100 during that

period being worth $1,990 as ofDecember 31, 2010, versus $519 inthe S&P 500.

Some of our best performing 5STARS in 2010 included UnderArmour in the consumer discre-tionary area (up 101% as a 5STARS), CBL & Associates infinancials (up 89%) and ADCTelecommunications in the technol-ogy sector (up 72%). Historically,STARS has benefited from stock

selection performance over sectorselector performance for its outper-formance relative to the bench-mark, and 2010 was no different.In 8 of 10 S&P economic sectors,stock selection performance wasthe primary contributor to STARSoutperformance. In other words, itis bottoms-up stock picking thatproduces the results, not correctly

being overweight a particular sec-

tor at a given time. As a researchdirector, Im always pleased to seethat metric, as it shows analystsare correctly recommending thebest names in their sector-basedcoverage universes, regardless ofhow well the sector performs rela-tive to the S&P 500. In addition,since were large proponents ofbeing properly diversified, we donot recommend taking sizablesector bets.

Other model portfolios per-formed well in 2010 also. Ourflagship PowerPicks portfolio,which is a frozen portfolio repre-senting the 40 best ideas of the USEquity Research team for the yearahead, was up 19.1% in 2010 ver-sus the 12.8% S&P 500 perform-ance. On a total return basis,PowerPicks was up 20.9% in2010, versus 15.1% for the S&P500. This portfolio continues toattract interest as a UIT sponsored

by Invesco, allowing a way to pur-chase all 40 names and with noturnover throughout the year. TheGlobal Picks portfolio, which is a30-stock portfolio with 10 nameseach from the U.S., Europe, andAsia, also had a solid year, up15.3% in 2010 versus its bench-mark, the S&P Global 1200, whichwas up 13%.

Our Focus Stock of the Weekportfolio, which is a Research

Directors pick for the week andheld for six months, also per-formed well, up 15.7% versus12.8%. Portfolios activity managedby the senior portfolio committeealso mostly did well. The HighQuality Capital Appreciation port-folio was up 16.6% versus theS&Ps 12.8%, while the TotalReturn portfolio was up 22.8%

versus its benchmark, the S&P 500

total return at 15.1%. However,the Small/Midcap Growth portfo-lios rise of 18.8% could not keeppace with the blistering 24.9%rise for its benchmark, theS&P 400.

More quantitatively chosen portfolios turned in very respectable per-formance also. The Platinum portfo-lio, which requires both a 5 STARSand 5 in the Fair Value methodologyto be a member, was up 17.4% ver-sus 12.8% for the S&P 500. TheTraders Platinum portfolio mean-while was up 20.4% versus 12.8%.

More information about all ofthese portfolios, and others, canbe found on the Portfolios tabof MarketScope Advisor, www.marketscope.com.

A Look at 2010 STARS and ModelPortfolio Performance

Stephen BiggaGlobal Director of Equity Researc



5/17

The year 2011 should offer a trio ofthree-year milestones:

In January, President Obamabegins his third year in office.

In March, the S&P 500 startsthe third year of this bullmarket.

In June, the U.S. economy entersits third year of recovery.

Since 1945, the S&P 500 has risenan average 17% in the third year ofa presidents term in office, while

bull markets and economic expan-sions have historically lasted an aver-age of more than four years each.Will the economy, market, andadministration wind down or crankup? Will these three milestones endup being a charm, or bad luck? (InWWI, lighting three cigarettes on asingle match gave an enemy sniperenough time to ready, aim, fire.)

S&Ps Investment PolicyCommittee believes that, while mar-ket volatility may increase over thecoming year, so will equity prices.We forecast the S&P 500 to be trad-ing at 1370 twelve months fromnow. In addition, we are more opti-mistic about stocks than bonds, andbelieve emerging market equitieshave higher price appreciationpotential than U.S. or developedinternational equities.

History indicates, but does notguarantee, that 2011 has the poten-tial to be a good year. In January,

President Obama starts his third yearin office, which historically has beenthe strongest of the four-year presi-dential cycle.

During all years since 1900, theS&P 500 increased by an average6.8% annually (8.5% since 1945)and posted an annual advance 67%of the time (71% since 1945).During the third year of the four-year presidential cycle, the 500has enjoyed an average annualincrease of 11.3% (17.1% since

1945) and has posted an annualadvance 78% of the time (94% since1945). During years one, two, andfour, however, the S&P 500 under-performed, rising only 5.4% (5.7%since 1945) and only 63% of thetime (64% since 1945).

A rational for third-year outper-formance, in our opinion, is stimulusanticipation. To stay in power, thepresident typically uses policiesdesigned to stimulate the economy

before voters go back to the polls inNovember of year four. Investorsanticipate the benefit of this stimulusto economic growth, corporate earn-ings, and consumer confidence, andbid stocks higher in year three.Whats more, a lot of stimulus including several rounds of quantita-tive easing has already been inject-ed into this economy, causing manyto fear that hyper-inflation will bethe only outcome. Therefore, this

time the presi-dent may beout of silverbullets, andleft with noth-ing to offer.

The currentbull marketshould enter itsthird year onMarch 10,2011. Since

1932, bull market durations haveaveraged 45 months (3-3/4 years),with the bulls of 1949, 1974, 1982,1990, and 2002 surviving five yearsor more. Of course some, like thebulls of 1932, 1935, 1938 and 1947petered out early and never celebrat-ed their third birthdays. Yet all 10since 1949 at least started theirthird years.

Since 1970, investors have gravi-tated away in the third year of thebull market from the sectors that

traditionally perform so well duringthe first two years (consumer discre-tionary, industrials, financials, andinformation technology) and towardthe later-cycle/early defensive sectorssuch as consumer staples, energy,health care, and utilities. Of course,this rotation does not instantly startat the very beginning of the thirdlap; it is gradual and sometimesdelayed.

So much for history. What do

S&Ps economists and analyststell us?

S&P equity analysts forecast oper-ating results for the S&P 500 toadvance 47% in 2010 and 13% in2011. This estimated bottom-up,or analyst-derived EPS (earnings pershare) integer (which rolls up theprojections for the individual companies in the S&P 500), is projected toreach $84 this year and $94 by theend of 2011, as a result of cost-cut-ting and share-repurchase programs,revenue growth improvements, andstrong demand from emergingeconomies.

S&P equity analysts project nextyears EPS advance to be fairly even-ly distributed across sectors. Weproject that all 10 of the 10 sectorswithin the 500 will post full-yearEPS increases, with gains of 10% forconsumer staples and 19% for finan

Investment OutlookWill the markets be up again in 2011?

Sam Stova

S&P ChieInvestment Strategis

S&P 500 % CHANGES DURING THE AVERAGE FOUR-YEARPRESIDENTIAL CYCLE

SINCE 1900 SINCE 1945

YEARS % CHG. UP YEARS % CHG. UP YEARS

All Years 6.8 67% 8.5 71%

Third Years 11.3 78% 17.1 94%

>1st Term 13.3 81% 21.0 100%

>2nd Term 7.3 73% 12.2 86%

Years 1, 2 & 4 5.4 63% 5.7 64%

Past performance is no guarantee of future results. Source: S&P Equity Research. (Continued on page 6



6/17


cials. The materials sector is currentlyexpected to show the strongest EPSadvance at 28%, while the telecom-

munications services and utilitiesgroups should see EPS increases of6% and 5%, respectively.

We believe the risk of a globaldouble-dip recession is evaporating.That combined with strengtheningcommodity prices and a weakeningof the U.S. dollar will aid the indus-trials and materials groups, whilelow valuations, healthy demand, andstrong balance sheets will be cata-lysts for gains in information tech-

nology share prices. We recommendunderweighting the defensive healthcare and utilities sectors.

Even though bottom-up earningsgrowth for the S&P 500 is projectedto be substantial, the S&P 500 hasrisen more than 90% in price sincethe bull market started in March2009. Are valuations therefore vul-nerable to a decline?

As of January 18, 2011, the S&P500 was trading at 15.5 times trail-ing operating results, which equates

to a 14.5% discount to the mediantrailing P/E since S&P started cap-turing operating EPS in 1988. It is

trading at 13.6 times analysts pro-jected 2011 results. Whats more, the500 is trading at 18.0 times trail-

ing GAAP (also known as AsReported) results, which is 17%below the median since 1988 andtwo percentage points above themedian of 15.7 times since 1936.Therefore, it doesnt appear to us asif the market multiple is anythingbut supportive of a further advancein equity prices.

Several issues, in our opinion,cloud an otherwise bullish forecast,such as the discouraging jobs trend

and the weak housing market.Yet the biggest concern of all, inour opinion, is the mountain of debtthat will need to be addressed at thesovereign, state, local, and personallevel. Most of the market declinesover the past year have been triggeredby a reawakening of concerns oversovereign debt contagion. S&Pbelieves that lingering sovereign stressis likely to persist into 2011, since thedebt woes of Europes peripheralnations are structural in nature and

wont be resolved overnight.Overall we think 2011 will be a

good year, but not a great one, for

economic and equity markets, ashistorys positive leaning will bepartly offset by the strong econom-

ic headwinds. Volatility will likelyincrease, but we believe investorswill be rewarded by maintaining aslight overweighting to equities atthe expense of bonds. In addition,S&P recommends embracing amore cyclical approach to equitymarkets early on, but warns thatthe age of this bull market mayrequire an attitude adjustment asthe year progresses.

Investment Outlook (Continued from page 5)

5-STARS VS. MARKET

AVERAGE

COMPOUND

ANNUAL GAIN

(1/1/87-12/31/10)

+13.3%

+8.8%

+7.8%

+7.1%S&P 500

DOW JONES

INDUSTRIALS

NASDAQ

5-STARS

Five-STARS stocks, which are those

Standard & Poors ranks highest for

potential year-ahead appreciation, have

outperformed the major market indices

by a wide margin over recent years.

The compound annual gain of 13% for

the 5-STARS group from the start of

1987 to December 31, 2010 was 1.9

times the gain for the S&P 500.

Performance results of the 5-STARS stock group havebeen calculated using standard time-weighted perform-

ance formulae. Since results are exclusive of transac-

tion costs and dividend income, the actual results

obtained by investors may be different. Because 5-

STARS recommendations are made with the intent of

maximizing gains, the volatility of the group is likely to

be above average. There is no assurance that the

future performance of any or all 5-STARS stocks will

match the past performance, and you should under-

stand that such recommendations do not take into

account a subscribers personal circumstances, such as

tolerance for risk, investment goals, or access to

investment capital.

AVERAGE S&P 500 SECTOR PERFORMANCES AND FREQUENCIES OF MARKETOUTPERFORMANCE DURING THE FIRST THREE YEARS OF BULL MARKETSSINCE 1970

YEAR 1 YEAR 2 YEAR 3

S&P 500 SECTORS % CHG. F.O. % CHG. F.O. % CHG. F.O.

Consumer Discretionary 46 83% 12 40% (4) 0%

Consumer Staples 28 33% 19 60% 8 80%

Energy 30 33% 18 40% 16 80%

Financials 47 83% 16 80% (2) 40%

Health Care 25 0% 14 40% 10 60%

Industrials 44 67% 14 40% (0) 40%

Info. Technology 44 50% 9 40% 3 60%

Materials 36 67% 10 20% (4) 0%

Telecom Services 17 17% 4 60% 7 40%

Utilities 21 17% 8 40% 12 80%

S&P 500 35 NA 13 NA 3 NA

Past performance is no guarantee of future results. NA-Not available. Source: S&P Equity Research.


7/17

After posting strong gains in 2009,

most global equity markets have con-tinued to rise modestly thus far in2010 with emerging markets (EM)leading the advances and Europe trail-ing. However, given the depth of theprior bear market, as of December 8,developed international, EM and U.S.equity benchmarks remain 25%,9.1% and 15.7% below their respec-tive October 2007 all-time highs.Looking ahead to 2011, we see devel-oped foreign equity upside continuing,thanks to attractive valuations andsolid fundamentals in NorthernEurope, Canada, and Australia,although lingering sovereign jittersand potential weakness in the euro,whose volatility detracts from U.S.investors dollar-denominated devel-oped overseas equity returns, may

constrain gains somewhat.

As for EM, we think faster seculargrowth and reasonable valuationsmake continued outperformancelikely, although upside may be tem-pered by inflation-induced interestrate hikes, which we believe are like-ly to stoke periodic growth fears.

S&P Economics sees global growthslowing slightly in 2011 as consumerspending and business investmentreplace inventory restocking and gov-ernment stimulus as growth drivers.While we do not see inflation-inducedmonetary policy tightening in faster-growing economies like China, India,Brazil, and Australia derailing strongexpansions, we do expect it to sloweconomic growth somewhat. As forEurope, we do not expect Europeansovereign austerity measures to fuel a

double-dip recession in theregion, as most of the gov-ernment spending cuts willlikely occur in the periph-eral countries. Also, we

think Germany and Franceare likely to continueenjoying better momentumthan the periphery, as thetwo-track European recov-ery persists.

The European FinancialStability Facility (EFSF), a750 billion euro rescuefacility put in place by theEuropean Union and theInternational Monetary

Fund last spring after theGreek crisis, is seen aslarge enough to handlebailouts of Greece,Ireland, and, potentially,Portugal, but not Spain,Europes fourth-largesteconomy, which accountsfor roughly 12% of euro-zone gross domestic prod-uct (GDP). The latestwave of sovereign stress

has been driven by the possibility

that investors will have to take hair-cuts on sovereign debt holdings as acondition of any rescue plans initiat-ed after 2013, when the EFSFexpires. Not surprisingly, this fueleda sharp rise in the borrowing costs ofalready heavily indebted and growth-challenged peripheral nations,increasing the likelihood thatPortugal and Spain may be forced toseek help, by our analysis. As such,the cost of insuring peripheral sover-eign debt has spiked higher thanwhere it traded last May at theheight of the first wave of 2010 sov-ereign turmoil.

While boosting the size of theEFSF and other European CentralBank stop gap measures may diffusemarket fears over the near term, wethink lingering sovereign stress islikely to persist in 2011, as Europesperipheral debt woes are structuraland wont be resolved overnight.Although, in our view, strong eco-

nomic and corporate profit growthmomentum in the larger northerncore of Europe and very attractivevaluations should allow for contin-ued European equity appreciation,we think sovereign risk will detractfrom gains somewhat. There are twotransmission mechanisms throughwhich debt problems in smallernations can take a broader toll oninternational stock performance.First, the possibility of investor hair-

cuts on peripheral sovereign debtholdings is causing significant uncer-tainty in the financial services sector,amid concerns over the extent ofbanks peripheral sovereign debtexposures. Financial services is, byfar, the largest developed overseassector, representing roughly one-quarter of the asset class marketvalue. Secondly, sovereign stress is

International Outlook: Tactical is PracticalWhile the ride may get bumpier, foreign equities should rise in 2011.

Alec YounInternationa

Equity Strategis

LED BY EMERGING MARKETS, GLOBAL EQUITIESCLAW THEIR WAY BACK

TOTAL RETURN

ASSET CLASS/COUNTRY YTD DISTANCE FROM RALLY OFF

07 HIGH 09 LOWSDeveloped International 4.0% -25.0% 88.3%

Canada 17.4% -8.9% 129.8%Europe 2.7% -27.3% 93.3%

U.K. 7.7% -26.5% 100.9%France -4.1% -28.9% 77.2%

Germany 8.4% -25.7% 98.9%Switzerland 7.7% -9.0% 88.4%

Italy -14.8% -45.6% 79.6%Spain -20.3% -33.1% 72.0%

Japan 9.9% -25.7% 57.1%Australia 8.3% -14.5% 144.2%

Emerging Markets 16.0% -9.1% 160.8%China 6.0% -30.7% 159.4%

Taiwan 15.1% -2.5% 140.9%India 15.2% -20.4% 191.5%

Korea 19.9% -17.4% 188.5%Indonesia 39.1% 27.5% 344.4%

Russia 17.6% -41.3% 188.9%Brazil 4.2% -15.5% 207.0%

Mexico 14.3% 0.3% 173.4%

Chile 43.8% 53.2% 206.9%Turkey 30.1% -6.9% 266.2%

South Africa 25.7% 9.4% 196.4%S&P 500 12.3% -15.7% 88.4%

Data through 12/8/10 (in U.S. dollars). Sources: S&P Indices, MSCI. (Continued on page 8



8/17

weighing on the euro, which tum-bled 8% versus the greenback inNovember. U.S. investors dollar-

denominated foreign equity returnsare diluted by dollar strength.

While we believe that the oft-repeated bullish EM secular storyremains largely intact, macro risksare surfacing that may make EMequity performance more volatile in2011 even if the prevailing trendremains up. In light of relativelyslow expansions in the U.S., Europe,and Japan, the world has never beenas dependent on developing

economies to drive growth, by ouranalysis. IHS Global Insight, anindependent forecasting firm, proj-ects 2011 EM GDP growth of 6.2%versus only 2.0% for developedeconomies, highlighting the impor-tance of EM in helping the globaleconomy reach the 3.4% growthrate IHS forecasts for next year. Thisprojection is very much a consensusview. As such, we think investors arevery sensitive to anything that couldthreaten EM expansions.

Rising food and energy prices,growing industrial, labor, agricultur-

al, and environmental capacity con-straints and a quantitative easing-driven liquidity surge into develop-

ing economies are beginning to stokeinflation pressures. This is increasingthe odds of greater-than-expectedmonetary policy tightening in largeemerging nations like China, India,Brazil, and Indonesia, all of whichhave begun to hike rates in an effortto cool price pressures. We thinkinflation-induced tightening is likelyto continue to fuel growth jitters andworries of hard landings in theseincreasingly important global eco-

nomic engines, thereby increasingEM equity choppiness in 2011.Ultimately though, we expect EM

central banks to engineer soft land-ings in these red hot economieswhereby rate hikes succeed in slow-ing inflation without jeopardizingstrong growth. EM economiesshould continue to expand at a fastenough clip to both power the globaleconomy and fuel healthy mid-teensEM profit growth, in our view. This,coupled with low valuations of only

11.3 times 2011 consensus earningsestimates and an attractive dividend

yield of 2.3%, bolster our confidencin continued outperformance even ifthe ride gets a little bumpier.

International Outlook: Tactical is Practical (Continued from page 7)

GLOBAL GROWTH SEEN SLOWING IN 2011

China

India

Latin Amer.

Russia

Korea

Australia

Japan

EurozoneGermany

U.K.

France

Italy

Spain

Canada

U.S.

World

2% 0%

2011E GDP 2010E GDP

4% 8%2% 6% 10%

E-Estimated. Sources: S&P Economics and IHS Global Insight. Data through December 8, 2010.

ATTRACTIVE FUNDAMENTALSCUSHION MACRO RISKS

E2011 E2011

ASSET CLASS/COUNTRY P/E EPS GR. DIV. YLD

Developed Intl 11.2 13.5% 3.3%Canada 13.5 24.4% 2.5%U.K. 10.0 17.4% 3.2%Germany 10.7 9.0% 3.3%France 10.4 13.4% 4.1%Switzerland 11.7 11.0% 2.8%Spain 8.8 8.0% 4.9%Italy 9.3 17.0% 4.5%Japan 14.3 10.2% 2.0%Australia 11.8 12.5% 4.5%

Emerging Markets 11.3 16.0% 2.4%China 12.1 14.9% 2.0%

India 15.0 22.8% 1.2%Indonesia 14.2 21.8% 2.4%South Korea 10.0 10.0% 1.3%Taiwan 13.0 10.2% 3.4%Russia 7.0 13.0% 1.6%Turkey 10.5 7.9% 1.9%Brazil 10.3 18.0% 3.2%Mexico 15.0 25.1% 3.3%South Africa 11.2 25.8% 3.1%

S&P 500 13.1 13.0% 1.9%

Data through 12/8/10. E-Estimated. Sources: S&P Indices, S&P

Equity Research, Bloomberg, MSCI.



9/17


Standard & Poors Equity ResearchServices (ERS) has a negative funda-mental outlook for the homebuildingindustry for the next 12 months.Assuming 5% to 10% decreases inhousing prices in the next ninemonths, ERS believes most publiclytraded builders are in a stable com-petitive position after reducing costs,retiring debt, and increasing cashpositions. However, ERS thinks thehousing market will remain weak formost of 2011 as buyers confidence

and the job market continue toapply downward pressure.

Our negative view of the industryis dependent on the housing marketsinability to continue to reduce exist-ing home inventory over time, whichstood at 10.5 months at the end ofOctober 2010, up from 8.0 monthsin September, and still well abovenormalized levels of 6.0 months. Inour opinion, normalized levels maynot be realized until some time in2012, considering the high levels of

foreclosed homes and risingdistressed inventories.

ERS believes the key factors thatwould drive an improved housingmarket are an increase in buyersconfidence with improving job con-ditions, available mortgage creditfrom lenders, a better balance ofnew and existing homes available forsale, and an easing of increasedforeclosed properties, which contin-ues to put downward pressure onhousing prices.

2011 Housing ForecastWatch the supply/demand dynamics.

Kenneth LeoS&P Equity Analys

What to Look for in 2011Highlights of S&P Equity Analyst Predictions.

S&P Equity Researc

Here is a list of predictions for theyear ahead from the analysts at

Standard & Poors Equity Research.Arranged by sector, these are thehighlights of a more wide-ranginglist found on the Trends & Ideas tabon MarketScope Advisor.

Materials

We look for gold to finish 2011 at$1,600 per ounce, up from$1,421/oz at the end of 2010. Wesee the fundamental drivers of thegold market staying essentially thesame, with the threat of sovereigndebt defaults and general currencyinstability increasing the appeal forgold as an alternative monetaryasset. Also, a further rise in com-modity prices during 2011 could addto demand for gold as a hedgeagainst falling currencies.

Energy

We look for the current count ofdeepwater floating drilling rigs todrop in the U.S. Gulf of Mexico as

operators lose patience with the slowpace of permit issuance in the region.

Despite the official end of the drillingmoratorium on October 12, per-mits which are required by regula-tors before work can begin havebeen hard to come by, and those thatare being issued are often for ancil-lary work rather than core drillingactivities. Using data from RigLogix,we estimate that of the 32 currentlyactive floaters in the Gulf, 15 unitsare slated to start three year contractsduring the next six months, and one

is now idle. For the three drillshipscurrently under construction and con-tracted to come to the Gulf duringthe second half of 2011, we expectthat alternative plans will be reached.With the vast majority of the com-bined 35 units capable of drilling inultradeep waters (i.e., 7,500 feet ofwater or more), and more than halfthe current customer list for theseunits comprised of global heavy-weights such as Shell (RDS.A 69

), Chevron (CVX 94 ),BP (BP 48 ), Eni (E 48 NR), and

Statoil (STO 24 NR), we think theodds are good that customers andtheir respective rig contractors maycome to agreements to modify exist-ing rig contracts to have these rigsmove to alternative overseas projects.We also expect such moves to putpressure on leading edge dayrates asmore rigs chase jobs outside of theU.S. Gulf. While we expect the permiprocess to eventually recover, rigs thado go overseas are unlikely to come

back for some time, and the averageremaining term length on these 35units is about 3.1 years.

TechnologyWe project 2011 to show an exten-

sion of the recovery in computer hard-ware that has taken place since sales hia deep cyclical trough in 2009. While2010 saw a sharp initial rebound for

(Continued on page 10


10/17


many hardware categories, the progressin 2011 may be less dramatic as theexpansion proceeds from a higher base.Thus, we project global PC unit ship-ments to rise 14% in 2011 after anestimated 17% gain in 2010. Pent-updemand and a desire for more robustmobile computing platforms shouldhelp drive laptop sales. The desire fordata, chatter, and video on the goshould make it a lively year for tabletcomputers and smartphones too, asnew products enter the market. In theserver markets, we expect similar cycli-cal improvement. Hewlett-Packard(HPQ 47 ) has exposure to allof these areas.

We expect sales of tablet computersto surge and begin to cannibalize salesof netbooks and mini notebooks.Excluding tablet computers, 2011growth in notebook sales will bemuch less than the 24% we see for2010.

Despite having less functionalitythan tablet computers, sales of e-bookreaders will be strong again in 2011,in our view. We see unit sales increas-ing from 7 million in 2010 to 11 mil-

lion in 2011, led by Amazon.coms(AMZN 177 ) Kindle.We think Intel (INTC 21 )

will finally gain some traction in thehandset and tablet markets. With itsproposed acquisition of Infineons(IFNNY 10 NR) wireless businessunit expected to close in early 2011,Intel will instantly become a formi-dable competitor in the basebandsegment of the handset market, inour view. We also see the companysuccessfully cross-selling its Atom

processor with Infineons basebandchips, and expect even more progressupon creating a single chip solutionthat integrates both functions.Additionally, we believe that Atomwill find some success in the lower-end segment of the tablet market.

We believe Microsoft (MSFT 28) will continue to lose marketshare in smartphones, as WindowsPhone 7 fails to capture the interest

of consumers.We forecast that global solar sys-

tem installations will increase at least20% in 2011, well below our 2010projected growth rate for a two-foldincrease. We see demand slowing in

the first half of 2011, as customersrefrain from purchases followingreductions of government subsidiesin important solar markets like asGermany. However, we expect solarmanufacturers to respond by lower-ing selling prices to enhance projectreturns, which should stimulate fur-ther demand for solar offerings.

We expect solar manufacturersthat have a greater proportion oftheir sales devoted to customers in

the U.S. to outperform their peers.We estimate that the U.S. will experi-ence at least a 60% rise in unitinstallations, far greater than our20% forecast for the industry over-all. We attribute this mostly torobust utility and commercial proj-ects, as companies transition torenewable sources of electricity,given favorable incentives and moreattractive prices.

We think Yahoo (YHOO 16) will engage in at least one

significant transaction intended toenhance shareholder value.Possibilities, in our view, include asale of the stake in Alibaba Group,reduction of its interest in YahooJapan, and a material acquisition(perhaps focused on international,social media and/or mobile).

Consumer DiscretionaryWe predict a formal announcement

of a news gathering partnership

between Time Warners (TWX 33) CNN and either CBS (CBS21 ) or one of the three othermajor broadcast networks couldfinally evolve in what would be aground-breaking deal and mark anunprecedented level of collaborationbetween traditional competitors.

In-car connectivity will likelybecome an increasingly hot topic, asconsumers spend more time in vehi-cles. In response, auto manufacturers

are equipping their vehicles to beconnected to smart phones and theWeb, as more listeners tune intostreaming audio services such asPandora, as well as more sophisticat-ed smart phone apps for navigation.

Industrials

We think industrial companies willfurther expand their footprints inemerging markets in 2011. We thinkthe most aggressive expansion willtake place in construction equipmentindustrial machinery, and engineer-ing/construction, which will likelybenefit from infrastructure develop-ment projects and growth in emerg-ing market economies. One company

that has been putting significantfocus on its emerging market foot-print is Caterpillar (CAT 93 ).

We believe that agricultural equip-ment companies will post anotheryear of sales and profit gains, as thebig rise seen in crop prices in thesummer of 2010 encourages farmersto lift their business spending. In linewith this forecast, we believe thatDeere (DE 89 ) will experi-ence solid demand for its farmequipment. However, we also believe

that investors should keep in mindthat part of the rise in crop priceswas temporary in nature, asdroughts and fires in Russia led tolower than expected global wheatand corn supplies.

We expect trends to soften fordefense contractors, as thePresidents current review ofAfghanistan may lead to a July 2011start date for troop withdrawal andthe U.S. proceeds with its withdraw-

al of troops from Iraq. In addition, afive-year, $100 billion Pentagonoverhead cost reduction, mandatedby Secretary of Defense Gates, seemsunlikely to be reinvested in weaponsprograms (as was originally intend-ed), in our view. We think L-3Communications Holdings (LLL 78), whose products are beingused in our current war efforts, willbe limited by these expected changesin our military activities.

(Continued from page 9)


11/17

For years, one consistent piece of finan-cial-planning advice given to individualinvestors as they age has been to incre-mentally move more assets into the rel-ative safety of government bonds. Butis the advice any good in the era of per-sistently low interest rates held downby the Federal Reserve? Would theadvice be any good even if bond yieldswere higher?

These questions are cruciallyimportant for the Baby Boom genera-

tion. The Baby Boomers, defined asthose born between 1946 and 1964,started to enter their 60s in 2006 andstarted retiring in 2008. If this grouphas been following traditional finan-cial-planning advice, their move intotheir seventh decade should beaccompanied by a big shift fromstocks to bonds.

But Standard & Poors EquityResearch Services (ERS) believes long-term Treasuries offer little long-term

value as very low yields are unlikely tokeep pace with inflation. Conversely,equity dividends are likely to rise withinflation over time and stocks alsooffer attractive long-term capital appre-ciation potential, unlike Treasuries,says Alec Young, an S&P equity strate-gist. As of December 2, 2010, 10-yearTreasuries are yielding about 3% and30-year bonds are yielding 4.3%.

Nevertheless, there is plenty of evi-dence investors are shifting more oftheir portfolios assets into what areperceived to be less risky assets, prin-cipally fixed-income instruments suchas bonds and bond funds, especiallyas they age.

U.S. household surveys by researchfirm Investment Company Institute(ICI) suggest that even within specifiedage groups, willingness to take invest-ment risk has dropped since the late1990s. For example, only 22% ofhouseholds headed by someoneyounger than 35 in 2009 were willing

to take above-average or substantialinvestment risk, compared with 30%of such households in 1998.

According to research from the ICI,401(k)-type plan participants are muchmore likely to invest in stocks when theyare younger and in bonds as they age.As investors grow older, their willingnessto take investment risk tends to decline,according to ICI. In 2009, ICI foundthat only 19% of households headed bysomeone who is 50 to 64 year old and

only 8% of households headed bysomeone 65 or older were willing totake above-average or substantial invest-ment risk, versus 24% of householdsheaded by younger investors, specificallysomeone under the age of 49.

There is even a formula, known asthe rule of 100 to determine abouthow much of someones assets shouldbe in bonds versus stocks. A 49-year-old investor subtracts their age from100 to come up with an asset alloca-

tion of 49% bonds and 51% stocks.A 60-year-old, by contrast, wouldcome up with an allocation of 60%bonds and 40% stocks.

But David Blitzer, managing direc-tor and chairman of the index com-mittee at S&P Indices, which oper-ates independently from S&P ERS,

questions the wisdom of the rule of100. According to the U.S. CensusBureau, the average retirement age inAmerica is 62, and the average lengthof retirement is 18 years. Assumethe leading edge of the Baby Boombegan retiring at age 62 in 2008 andassume they have 18 years to live,Blitzer posits. Did we expect themto dump all their stocks when theyhave an 18-year time horizon?

Some data suggest stocks paying divi-

dends have increasingly become animportant source of income, too. S&PIndices notes the percentage of dividendincome as part of personal income hassteadily increased over time. In 2008,dividend income comprised 5.61% ofper capita personal income in the U.S.,compared to 4.65% 10 years prior and3.07% 20 years prior.

S&P Indices also points out that dur-ing the same period, the source ofincome from capital markets, such as

all kinds of interest-bearing instrumentssteadily shrunk from 15.06% in 1988to 10.69% in 2008. But the value oftotal dividend income in 2000 dollarshas grown fivefold from $129.7 billionin 1988 to $686.4 billion in 2008.

Bond ETFs For Income? Maybe NotThese securities could suffer if investors increasingly shun long-term bond ETFs

in favor of dividend-paying equity funds.

Isabelle SendeS&P Editoria

NEGATIVE POTENTIAL IMPLICATIONSGROSS

TOTAL RETURN** EXPENS

FUND NAME / TICKER YTD 1-YEAR 3-YEAR PRICE RATIO

Guggenheim Bulletshares 2017 Corporate Bond ETF / BSCH NA NA NA 21 0.24

iShares 10+ Year US Credit Bond Fund / CLY 7.0 6.4 NA 52 0.20

iShares 10+ Year US Government/Credit Bond Fund / GLJ 5.5 4.7 NA 51 0.20

iShares Barclays 10-20 Year Treasury Bond Fund / TLH 7.9 5.7 6.5 112 0.15

iShares Barclays 7-10 Year Treasury Bond Fund / IEF 8.1 6.2 6.6 93 0.15

PIMCO 15+ Year US Tips Index Fund / LTPZ 7.3 6.2 NA 54 0.27

PIMCO 7-15 Year Treasury Index Fund / TENZ 7.3 5.3 NA 76 0.25

PowerShares 1-30 Laddered Treasury Portfolio / PLW 6.9 4.9 5.6 28 0.25

SPDR Barclays Capital Long Term Credit Bond ETF / LWC 6.0 5.1 NA 36 0.15

SPDR Barclays Capital Long Term Treasury ETF / TLO 6.2 4.3 5.2 55 0.13

Data through 12/16/10. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the

effect of sales charges. NA-Not available. Source: S&P MarketScope Advisor.

(Continued on page 12



12/17

The Standard & Poors InvestmentPolicy Committee (IPC) has a 12-month target level of 1370 for theS&P 500 index, which, as IPCChairman and S&P ChiefInvestment Strategist Sam Stovallsays, represents a forecast for agood year for domestic stocks in2011.

At recent IPC meetings, the recentrally in domestic stocks has been afrequent topic.

In our opinion, investors are

encouraged that the U.S. governmentis willing to entertain extending theexisting tax plan, as well cut payrolltaxes and encourage capital spend-ing, despite a lame duck Congressand the resulting increase in debt,says Stovall. Bond investors, how-ever, feel as if a lump of coal hasbeen dropped into their stockingsand have sold, pushing the yield onthe 10-year Treasury note up bynearly 100 basis points since their

October low. Even though bondsmay now offer a short-term tradingopportunity, as they undergo acounter-trend rally and provideinvestors with a second chance tolighten up, S&P still believes the

trend in yields is higher and recom-mends underweighting.

The table indicates the IPCs recom-mended allocation for each asset classand advises an exchange-traded fund totrack each recommended asset class.

MODERATE PORTFOLIO*ANNUALIZED

ASSET CLASS/ S&P TOTALALLOCATION INVESTMENT STYLE ETF/TICKER RANKING RETURN (%) PRICE

*Data as of 12/16/10. The Outlooks Moderate ETF Portfolio gained 6.2% year to date through November 30 vs. a gain of 6.6% for itscustom benchmark. Past performance is no guarantee of future results. MW-Marketweight. OW-Overweight. Source: S&P ETFReports.

Beth PiskorS&P Editoria

Interest income, on the otherhand, has grown only 205% duringthe same period. S&P Indices proj-ects that as equity ownershipbecomes even more ubiquitous, anda growing number of retiringAmericans seek income-generatingassets, the importance of personaldividend income shall increase.

But investor confidence in stockshas been shattered over the lastdecade while risk aversion has beenon the rise. An overview of the pastfive- and 10-year performance analy-sis shows that stocks, even thosepaying dividends, have not proved tobe a fruitful investment, owing main-ly to the losses experienced after thecredit crisis in 2008. With this crisis

spreading globally, bonds proved tobe a safe haven for investors, under-scoring the most important risk fac-tor differentiating debt from equityinvestments.

Looking ahead, however, the invest-ment outlook bodes better for stocksthan bonds, according to S&P.Economic news in the U.S. has beenimproving and may help fuel a rallyin risk assets over the next severalquarters, says Young, who is a mem-ber of the S&P Investment PolicyCommittee (IPC). The S&P IPC cur-rently advises a 65% weighting toglobal equities in its recommendedasset allocation and only a 20%weighting in fixed income.

Theres evidence at least some

investors share the IPCs concernsabout bonds. Bonds have startedweakening in the past month.

S&P Chief Economist David Wyss(also a member of the IPC) says ifinvestors want bonds, we recom-mend those with maturities of twoto five years.

We simply arent recommending10-year bonds right now, Wyssexplains, since shorter-term bonds arepaying out yields that are not signifi-cantly lower than 10-year bonds.

We just dont think it pays to gofor a longer-maturity bond, saysWyss. We still believe that yields willgo up in time, so its better not to lockin with an investment in a longer-termbond at todays low rates.

Bond ETFs For Income? Maybe Not (Continued from page 11)

Global Asset Allocation UpdateThe allocation model is unchanged.

45% U.S. STOCKS

37 Large-Cap Blend SPDR S&P 500 / SPY OW 13.6 124

5 Mid-Cap Blend S&P MidCap 400 SPDR / MDY MW 25.3 163

3 Small-Cap Blend iShares S&P SmallCap 600 / IJR MW 25.7 68

20% FOREIGN STOCKS

13 International iShares MSCI EAFE / EFA OW 6.6 57

7 Emerging Markets iShares MSCI Emerging Markets / EEM MW 12.4 46

20% BONDS

15 U.S. Debt iShares Barclays U.S. Aggregate / AGG NR 5.1 105

5 U.S. Short-Term Debt iShares Barclays 1-3 Year Treasury / SHY NR 2.1 8415% CASH U.S. 6-Month Treasury Bills

Total=100



13/17


Each of the contributing S&P equityresearch industry analysts considersthe stocks highlighted within thisreport, which are from each of theanalysts coverage universe, to bepositioned for superior total returnduring 2011. The S&P PowerPicks

Portfolio 2011 is diversified acrossall 10 of the economic sectors thatcomprise the S&P 500 index.

The portfolio will be frozen,meaning that it will undergo nochanges during 2011. The objec-tive of the portfolio is to exceedthe total return (capital apprecia-tion plus dividends paid) generat-ed by the S&P 500.

From inception (January 1, 1997)

through December 31, 2010, theS&P PowerPicks portfolio outpacedthe S&P 500, gaining 208.3% vs.an advance of 117.1% for theindex. In 2010, the portfolio rose20.9% vs. a gain of 15.1% for the500. Past performance is not aguarantee of future results.

As of December 31, 2010, themedian capitalization of the S&PPowerPicks Portfolio 2011 wasabout $16.5 billion, ranging from ahigh of $368.7 billion for ExxonMobil to a low of $600 million for

Advanced Energy Industries. By con-

trast, the median market capitaliza-tion of the S&P 500 index wasabout $11.2 billion, ranging from ahigh of $368.7 billion for ExxonMobilto a low of $1.6 billion for Meredith.

The S&P PowerPicks Portfolio2011 is comprised of 26 stocksconsidered by S&P EquityResearch to be large capitaliza-tion issues (market cap above $8billion), ten considered mid-cap

issues ($2 billion to $7.99 bil-lion), and four considered small-cap issues (below $2 billion).

The sector representations withinthe S&P PowerPicks Portfolio 2011are broadly representative of thosewithin the S&P 500. On an equallyweighted basis, the most significant

weightings in the portfolio are con-centrated in seven sectors, informa-tion technology (20.0%), financials(15.0%), consumer staples (12.5%),energy (12.5%), health care(12.5%), consumer discretionary(10.0%), and industrials (10.0%),

which collectively account for 92.5%of the portfolio. On a market capi-talization-weighted basis, the collec-tive weightings of these sectors with-in the S&P 500 was 90.1% as ofDecember 31, 2010.

The Global PowerPicks Portfoliogained 82.7% from its inception on

January 1, 2005 throughDecember 31, 2010, vs. a rise of30.3% in the S&P Global 1200. In

2010, the portfolio rose 15.3% vs.an increase of 12% for the S&PGlobal 1200. Past performance isnot a guarantee of future results.

More information and insight intoour 2011 PowerPicks Portfolio canbe found on MarketScope Advisorat www.marketscope.com.

2011 PowerPicks

The S&P PowerPicks Portfolio 2011 represents the collectivebest ideas of Standard & Poors equity research staff.

POW

PIC

20

U.S. OUTLOOKU.S. equities represent roughly42% of global free float-adjustedequity market capitalization. TheStandard & Poors InvestmentPolicy Committee (IPC), chairedby Chief Investment Strategist SamStovall, set a 12-month target forthe S&P 500 of 1,370, which rep-resents a 8.9% price gain, plus1.9% dividend yield, for a 10.8%

upside from the indexs closinglevel for 2010.

A steady stream of better-than-expected economic reports is addingto the enthusiasm initiated by strongpre-Christmas holiday sales. Whatsmore, the market tends to performwell in both the first month and firstquarter following mid-term elec-tions, comments Stovall. In addi-

tion, fourth-quarter 2010 operatingresults for the S&P 500 are expect-ed to be strong. We remain posi-tive on equities in 2011.

Fourth-quarter 2010 profits shouldrise 27% for the S&P 500, 31% forthe MidCap 400, and 66% for theSmallCap 600, while full yearresults are expected to be up 47%,59% and 127%, respectively.


14/17


POWER

PICKS

2011

U.S. POWERPICKS PORTFOLIO 2011

Advanced Energy / AEIS 5 C High S-Blend 14 18 Information TechnologyAltria Group / MO 5 A Medium L-Blend 24 28 Consumer StaplesApache / APA 5 A- High L-Blend 126 140 EnergyApple / AAPL 5 B High L-Growth 327 420 Information TechnologyAvnet / AVT 5 C High M-Value 35 39 Information TechnologyBoston Properties / BXP 5 B+ Low L-Blend 90 104 FinancialsCelgene / CELG 5 C High L-Growth 56 76 HealthcareChevron / CVX 5 A- Low L-Blend 94 107 EnergyCisco Systems / CSCO 4 B+ Medium L-Growth 21 26 Information TechnologyCoca-Cola / KO 5 A+ Low L-Growth 63 73 Consumer StaplesCummins / CMI 5 B Medium L-Value 105 140 IndustrialsCVS Caremark / CVS 5 A+ Medium L-Blend 35 38 Consumer StaplesDiscovery Communications / DISCA 5 NR Medium L-Growth 40 55 Consumer Discretionary

EMC / EMC 5 B Medium L-Blend 24 28 Information TechnologyExxonMobil / XOM 5 A+ Low L-Blend 79 85 EnergyFamily Dollar Stores / FDO 5 A+ Medium L-Blend 44 58 Consumer DiscretionaryFifth Third Bancorp / FITB 5 B+ Medium L-Blend 15 17 FinancialsGeneral Mills / GIS 5 A Low L-Blend 36 41 Consumer StaplesITC Holdings / ITC 5 NR Low M-Blend 65 74 UtilitiesJacobs Engineering Group / JEC 5 B+ Medium L-Growth 50 57 IndustrialsKelly Services / KELYA 5 B- Medium S-Value 18 25 IndustrialsMcKesson / MCK 5 A- Medium L-Blend 73 78 HealthcareMedcoHealth Solutions / MHS 5 NR Medium L-Blend 64 70 HealthcareMetroPCS Communications / PCS 5 NR High L-Blend 13 19 Telecommunication ServicesMylan / MYL 5 A- Medium L-Growth 23 25 HealthcarePeople's United Financial / PBCT 5 B Medium L-Blend 13 17 FinancialsPPG / PPG 5 B+ Medium L-Blend 82 100 Materials

Precision Castparts / PCP 5 B Medium L-Growth 141 168 IndustrialsPrudential Financial / PRU 5 NR Medium L-Value 61 75 FinancialsRightNow Technologies / RNOW 5 NR Medium S-Growth 26 28 Information TechnologySimon Property Group / SPG 5 B- Low L-Blend 100 115 FinancialsTesco / TESO 5 B- High S-Growth 14 20 EnergyThermo Fisher Scientific / TMO 5 B- Medium L-Growth 56 68 HealthcareTravelers / TRV 5 NR Medium L-Value 55 65 FinancialsTRW Automotive / TRW 5 NR High M-Value 58 62 Consumer DiscretionaryTyson Foods / TSN 5 B- High L-Blend 17 21 Consumer StaplesV.F. / VFC 5 A Medium L-Blend 82 106 Consumer DiscretionaryWebMD Health / WBMD 5 B- High M-Growth 53 62 Information TechnologyWorld Fuel Services / INT 5 A+ High S-Blend 36 42 EnergyXerox / XRX 5 B High L-Blend 11 16 Information Technology

*Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other

factors. See definitions on page 2. L-Large cap. M-Mid cap. S-Small cap. Source: S&P Equity Research.

12-MONTH

QUALITY CURRENT TARGET

COMPANY NAME / TICKER STARS RANK *RISK STYLE PRICE PRICE SECTOR


15/17

GLOBAL OUTLOOK

GLOBAL POWERPICKS PORTFOLIO 2011STARS TICKER EXCHANGE SECTOR

Amec 5 AMEC.LN FTSE International EnergyApache 5 APA New York Stock Exchange EnergyAvnet 5 AVT New York Stock Exchange Information Technology

Banco Santander 4 SAN SM Madrid Stock Exchange FinancialsBMW 5 BMW GY Frankfurt Stock Exchange Consumer DiscretionaryCarlberg 5 CARLB DC Copenhagen Stock Exchange Consumer StaplesCelgene 5 CELG NASDAQ Health CareChevron 5 CVX New York Stock Exchange EnergyChina Construction Bank 4 939 HK Hong Kong Stock Exchange FinancialsCredit Suisse 4 CSGN VX Switzerland FinancialsCVS Caremark 5 CVS New York Stock Exchange Consumer StaplesGenting 4 GENT MK Kuala Lumpur Stock Exchange Consumer DiscretionaryHon Hai Precision 4 2317 TT Taiwan Stock Exchange Information TechnologyHutchison Whampoa 4 13 HK Hong Kong Stock Exchange IndustrialsITC Holdings 5 ITC New York Stock Exchange UtilitiesJiangxi Copper 4 358 HK Hong Kong Stock Exchange MaterialsLVMH 5 MC FP Paris Stock Exchange Consumer Discretionary

Medco Health Solutions 5 MHS New York Stock Exchange Health CarePetroChina 5 857 HK Hong Kong Stock Exchange EnergyRioTinto 5 RIO LN FTSE International MaterialsSamsung Electronics 5 005930 KS Korean Stock Exchange Information TechnologyShenzhen Expressway 5 548 HK Hong Kong Stock Exchange IndustrialsSingapore Airlines 4 SIA SP Singapore Stock Exchange IndustrialsSwire Pacific 5 19 HK Hong Kong Stock Exchange FinancialsTelefonica 4 TEF SM Madrid Stock Exchange TelecommunicationsThermo Fisher Sciemtific 5 TMO New York Stock Exchange Health CareTyson Foods 5 TSN New York Stock Exchange Consumer StaplesVallourec 4 VK FP Paris Stock Exchange IndustrialsWebMD 5 WBMD NASDAQ Information TechnologyXstrata 4 XTA LN FTSE International Materials

Source: S&P Equity Research.

As the new year begins, investorcuriosity about whats in store forglobal equity markets in 2011 ispalpable, as hopes of another solidyear collide with fears of overdueprofit taking. Similarly, speculationabout what asset classes or countrieswill outperform is building, as isdivining potential laggards. Whilethese impulses are perfectly natural,we think the core of long-terminvestors global equity asset alloca-tions should be based not on what

country they think will be hot in2011, but on a globally diversifiedinvestment mix that has producedhigh risk-adjusted returns over time.

For this, we turn to the efficientfrontier, a staple of modern portfolio

theory that enables objective,unemotional risk-reward analysis, soas to address two essential assetallocation questions. First, withinglobal equity portfolios, how muchinternational exposure maximizesrisk-adjusted returns? Second, withinthe international stock allocation,whats the optimal blend of devel-oped and emerging market equities?

As always, past performance is notnecessarily indicative of future results.

Our analysis of the past 35 years

worth of total return and standarddeviation data for the S&P 500 andMSCI EAFE indexes revealed thatadding international equity expo-sure can improve returns whilereducing risk relative to a purely

domestic equity allocation. Thesweet spot on the efficient frontier,or the allocation that produced thehighest risk-adjusted returns was a75% domestic allocation coupledwith a 25% foreign weighting.

Our analysis then turned to opti-mizing overseas equity allocationsby discerning the ideal risk-adjust-ed blend of developed to emergingforeign exposure. We found that ablend of developed and emergingmarket stocks produced higher risk

adjusted returns than either a100% developed or a 100% EMallocation. Specifically, an even,50%-50% blend of developed andEM stocks produced some of thehighest risk adjusted returns.

POW

PIC

20



16/17

Equipment spending remains verystrong compared with a year ago butcould be showing early signs of

slowing. After rising 15% in 2010,only 13.8% growth is expected byS&P Economics in 2011. Thats stillhealthy, but a slowdown.

The biggest concern remainsemployment. The meager 39,000November job gain reverses theacceleration observed throughOctober. The unemployment ratebounced back to a seven-month highof 9.8% and will clearly break the1982-1983 record of 20 consecutive

months at or above 9% (now 19 andcounting). High unemploymentscares consumers. Weak job growthmeans weak income growth, furtherdamaging consumer spending.

Climbing Up From the Bottom (Continued from page 2)

S&P ECONOMIC OUTLOOKPERCENT CHANGE

E2010 E2011 E2012

Real GDP 2.9 3.0 2.6

Consumer Spending 1.8 3.0 2.2

Equip. Investment 14.8 13.8 8.8

Nonres. Construction -14.5 -7.8 1.8

Res. Construction -3.5 1.2 22.4

Federal Government Purchase 4.9 0.6 -3.8

S&L Purchase -1.2 0.1 -0.1

Total Exports 11.9 8.9 8.6

Total Imports 12.8 6.4 4.7

CPI 1.7 1.6 1.9

Core CPI 1.0 1.2 1.7

Levels

Unemployment Rate 9.7 9.4 8.9Mortgage rate (30-year conventional) 4.7 5.1 6.3

Crude Oil ($/bbl, WTI) $79.49 $88.29 $95.15

Housing Starts (mn) 0.59 0.67 1.04

Forecasts are constructed using the Global Insight model of the U.S. economy. E-Estimated. Source: S&P Economics.

The Top Mutual Fund Performances of 2010 (Continued from page 3)

considerations, and cost factors,again excluding funds that areclosed to new investors and institu-tional share classes.)

Walden Social Equity FundWalden Social Equity Fund outdis-

tanced its Large-Cap Core Fundspeer group in 2010, up nearly 16%,versus 12.1%. As important, it didso without incurring high levels ofrisk. In fact, WSEFX ranks positively

on all of S&Ps risk considerationscores, including manager tenure andstandard deviation. We note that thefund is invested in what S&P consid-ers high quality names, such asChubb (CB 57 ), InternationalBusiness Machines (IBM 156), and McDonalds Corp.(MCD 75 ). We also note thefunds modest costs, with an expense

ratio below its peer group average of1.28%, no sales load, and lowturnover rate.

Invesco Van Kampen Comstock Fund

Invesco Van Kampen ComstockFund also bested its peers in 2010,rising 16%, and also beat themover the past three- and five-yearperiods. The fund invests in stockswith solid credit ratings as meas-ured by S&P Ratings, which oper-

ates independently from S&PEquity Research. Further, manage-ment has been in charge of theportfolio since 1999. (The Y shareclass in this review was opened in2004). We also note that all threecost factors are positive: this fundhas no sales load, its expense ratioof 0.64% is about half of itsLarge-Cap Value Funds peer aver-

age, and its turnover rate of 14%is a fraction of its peer average of63%.

BBH Core Select Fund

BBH Core Select Fund has been astrong performer among its Large-Cap Core Funds peers over thetrailing one-, three-, five-, and 10-year periods. Like WSEFX, it haspositive scores for all of our riskconsideration metrics. The fund

invests in high quality stocks, suchas Wal Mart Stores Inc (WMT 56) and Baxter InternationalInc (BAX 49 ), and hasfavorable marks for managertenure and standard deviation.Lastly, its expense ratio is just a bitbelow peers, but the fund has nosales load and management keepsturnover to a minimum.



17/17

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