© 2008 morningstar, inc. all rights reserved. 3/1/2008 managing the investment process david c....

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Managing the Investment Process

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLC

David C. Voss

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCLearning Objectives

• Overview of the investment management process

• Historical risk and return characteristics of investments

• Management of investment risks

• Advantages and disadvantages of investment vehicles

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvestment Management Process

• Quantify investment goals and objectives

• Develop asset allocation policy

• Identify appropriate investment vehicles

• Implement asset allocation

• Monitor performance

• Make ongoing adjustments

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCExamples of Investment Objectives

• Meet current and future pension liabilities

• Accumulate sufficient assets for retirement

Be able to retire at age 62

Generate $100,000 of income per year (increasing by inflation) from investments

Ensure sufficient funds to provide for potential 30-year retirement

90 percent or higher probability of success

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTypes of Asset Classes


Stocks/Equities Large stocks Small stocks International stocks

Bonds Government bonds Corporate bonds Municipal bonds High-yield bonds International bonds

Cash equivalents Money market funds Treasury bills Certificates of deposit

Real assets Real estate Commodities Gold

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTypes of Risk


Market timing Inflation

Risk

Credit

Industry/company

Market

Interest rateCall/reinvestment

Liquidity

Political/economic

Currency

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMeasuring Historical Investment Performance


Compound annual return (geometric mean) The average performance of an asset that measures the change in wealth over more

than one period.

Arithmetic mean Simple average of returns

Risk (standard deviation) The fluctuation of returns around the arithmetic average return of the investment. The

higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCSummary Statistics 1926–2007

Past performance is no guarantee of future results. *The 1933 small company stock total return was 142.9%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Compoundannualreturn

Arithmeticannualreturn

Risk(standarddeviation)

Large stocks

Small stocks*

Governmentbonds

Treasurybills

Inflation

10.4%

12.5%

5.5%

3.7%

3.0%

12.3%

17.1%

5.8%

3.8%

3.1%

20.0%

32.6%

9.2%

3.1%

4.2%

–90 0 90

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStock Selection Risk

Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

1 2 4 6 8 16 30 50 100 1000

Risk

• Company risk• Market risk

Number of stocks in portfolio

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Timing RiskHypothetical value of $1 invested from 1988–2007


$9.33

$2.36 $2.41

0

2

4

6

8

$10

Stocks Stocks minus best 18 months Treasury bills

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Timing RiskThe effects of missing the best month of annual returns


–40

–30

–20

–10

0

10

20

30

40% Return

1988 1994 2000 2006198219761970

• Annual return• Annual return minus best month

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInterest Rate RiskWhen yields increase, bond prices decrease


2

4

6

8

10

12

14

16%

0

0.20

0.40

0.60

0.80

1.00

1.20

1.40

$1.60

1996 20061986197619661956194619361926

• Bond prices ($)• Bond yields (%)

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInflation Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power

Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$100k

80

60

40

20

0

0 Years 5 10 15 20 25 30

$73,742

$63,325

$54,379

$46,697

$40,101

$85,873

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInflation Risk1926–2007

Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

10.4%

7.1%

5.5%

2.4%

3.7%

0.7%

Stocks Bonds Cash

0

2

4

6

8

10

12%

Before inflation After inflationBefore inflation After inflation Before inflation After inflation


Asset Class ReturnsHighs and lows: 1926–2007

Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Compoundannual return:12.5% 10.4%

5.5% 5.3% 3.7%

Smallstocks

Largestocks

Long-termgovernment bonds

Intermediate-termgovernment bonds

Treasury bills

150%

100

50

0

–50

–100

142.9%

–58.0%

–43.3%

–9.2% –5.1%0.0%

14.7%

29.1%

40.4%

54.0%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStock Market Contractions and Expansions1973–2007


0

1

10

$100

200520011997199319891985198119771973

• Contraction• Expansion• Stocks

–42.6% –14.1% –16.9% –29.5% –14.7% –15.4% –44.7%0

200

400%

85.9% 86.5%

281.5%

71.2%

354.8%

62.6%98.3%

–200

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Downturns and Recoveries1926–2007


–83.4%

–21.8%

–10.2%

–15.0%

–22.3%

–15.6%

–29.3%

–42.6%

–14.1%

–16.9%

–29.5%

–14.7%

–15.4%

–44.7%

% Loss

34 months

6 months

7 months

5 months

6 months

8 months

19 months

21 months

14 months

20 months

3 months

5 months

2 months

25 months

Downturn

151 months

35 months

5 months

7 months

10 months

6 months

9 months

21 months

5 months

3 months

18 months

4 months

49 months

3 months

Recovery

Sep 1929–Jun 1932 Jul 1932–Jan 1945

Jun 1946–Nov 1946 Dec 1946–Oct 1949

Aug 1956–Feb 1957 Mar 1957–Jul 1957

Aug 1957–Dec 1957 Jan 1958–Jul 1958

Jan 1962–Jun 1962 Jul 1962–Apr 1963

Feb 1966–Sep 1966 Oct 1966–Mar 1967

Dec 1968–Jun 1970 Jul 1970–Mar 1971

Jan 1973–Sep 1974 Oct 1974–Jun 1976

Jan 1977–Feb 1978 Mar 1978–Jul 1978

Dec 1980–Jul 1982 Aug 1982–Oct 1982

Sep 1987–Nov 1987 Dec 1987–May 1989

Jun 1990–Oct 1990 Nov 1990–Feb 1991

Jul 1998–Aug 1998 Sep 1998–Nov 1998

Sep 2000–Sep 2002 Oct 2002–Oct 2006

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPeriods of Consecutive Negative Stock Returns1926–2007


20%

37%

29%

54%

–25%

–12%

–0.4%–10%

–26%

–8%

–43%

–8%

–15%

–9%–12%

–22%

Average stock market return from 19262007 was 10.4%

–50

–40

–30

–20

–10

0

10

20

30

40

50

60% Return

1939 1940 1941 1942 2000 2001 2002 20031973 1974 19751929 1930 1931 1932 1933

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAsset Class Performance – Past 10 Years1998–2007

Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1998. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

.80

1

3

$5

1998 2000 2002 2004 2006

$1.30

$1.42

$1.78

$2.02

$2.73

Compound annual return

• Small stocks 10.6%

7.3• Large stocks

• Government bonds

• Treasury bills

• Inflation

5.9

3.5

2.7



1988 1993 1998 2003

1

10

$20

.60

$2.41

$1.82

$5.89

$9.33

$12.54Compound annual return

• Small stocks 13.5%• Large stocks


• Treasury bills

• Inflation

11.8

9.3

4.5

3.0



0.10

1

10

100

$10,000

1,000

1926 1946 1966 19861936 1956 1976 1996 2006

$15,091

$3,246

$79

$20

$12


• Small stocks 12.5%• Large stocks


• Treasury bills

• Inflation

10.4

5.5

3.7

3.0

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCLong-Term Asset Class Performance1926–2007

Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Annual

12-monthrollingperiods


Standard deviation

Highest return

Lowest return

Average positive return

Average negative return

Percent periods positive

Percent periods negative

12.5%

32.6%

316.4%

–75.9%

31.3%

–18.5%

72.9%

27.1%

10.4%

20.0%

162.9%

–67.6%

21.7%

–13.7%

74.5%

25.5%

5.5%

9.2%

54.4%

–17.1%

8.5%

–3.8%

77.8%

22.2%

3.7%

3.1%

15.2%

0.0%

3.8%

0.0%

98.4%

1.6%

Smallstocks

Largestocks

Governmentbonds

Treasurybills

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStocks, Commodities, Real Estate and Gold1988–2007


$1.72

$5.36

$4.48

$6.98

$9.33

11.8%10.28.87.82.8

Compound annual return$10

.50

1

1988 1993 1998 2003

• U.S. stocks• Commodities• Real estate• International stocks• Gold

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTime Narrows the Range of Investment Returns1926–2007

Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Small stocks Large stocks Government bonds Treasury bills

–60

–30

0

30

60

90

120

150%

1-year

Holding period

5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year

Compound annual return:12.5% 10.4%

5.5% 3.7%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPower of CompoundingHypothetical investment in stocks


Years contributing: 10Annual amount contributed: $2,000

Years contributing: 10Annual amount contributed: $4,000

Investor BInvestor A

$40,000

$55,138

$20,000

$104,555

• Total amount invested• Compounded value at year-end 2007

0

20

40

60

80

100

120

$140k

1988–2007 1998–2007

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat is Asset Allocation?


Asset allocation is theprocess of combining assetclasses such as stocks,bonds, and cash in aportfolio in orderto meet your goals. Stocks Bonds

Cash

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Reduce Risk or Increase Return1970–2007

Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Lower risk portfolio Higher return portfolioFixed income portfolio

Return: 8.2%Risk: 5.5%



15%

85%

21%30%

43%

20%

36%

50%

• Stocks• Bonds• Cash

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStocks and Bonds: Risk Versus Return1970–2007

Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

13% Return

12

11

10

9

10% Risk 11 12 13 14 15 16 17

Maximum risk portfolio:100% Stocks

80% Stocks, 20% Bonds



100% Bonds

Minimum risk portfolio:25% Stocks, 75% Bonds


10.1

9.1

6.8

5.5

Diversification Reduces the Impact of Market Swings


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

11.2% 1.3 37.4 23.1 33.4 28.6 21.0 12.6 7.6 12.9 28.7 10.9 4.9

11.0 –0.3 32.0 17.6 26.9 24.4 15.1 7.0 2.9 3.6 21.8 8.7 4.1

10.7 –1.9 26.8 12.3 20.5 19.9 9.3 1.5 –2.0 –5.3 15.1 6.6 3.2

10.3 –3.5 21.7 7.1 14.4 15.1 3.7 –3.9 –6.9 –13.9 8.6 4.4 2.3

10.0 –5.1 16.8 2.1 8.4 10.2 –1.8 –9.1 –11.9 –22.1 2.4 2.3 1.4

15.8

12.5

9.3

6.2

3.1

2007

Highest return

Lowest return

(100% Stocks) (75% Stocks, 25% Bonds) (25% Stocks, 75% Bonds) (100% Bonds)(50% Stocks, 50% Bonds)• Portfolio 1 • Portfolio 2 • Portfolio 4 • Portfolio 5 • Portfolio 3

8.0

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Case for Diversifying

Past performance is no guarantee of future results. Time period illustrated is from 1956–1962. This time period was chosen as a dramatic illustration of stock and bond return behavior and how their often opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

50% Return

40

30

20

10

0

–10

–20

Year 1 2 3 4 5 6 7


1.9

• Stocks

• 50/50 portfolio

• Bonds

8.5%

5.8

Stocks

50/50 portfolio

Bonds

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDiversification in Up and Down Markets


$3,000

Bull market

2,500

2,000

1,500

1,000

500

1996 1997 1998 1999 2000 2001 2002

250

500

750

1,000

1,250

$1,500

Bear market

$1,484

$985

$624$1,181

$1,763

$2,555

• Stocks

• 50/50 portfolio

• Bonds

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCCorrelation Can Help Evaluate Potential Diversification Benefits1926–2007

Past performance is no guarantee of future results. Correlation ranges from –1 to 1, with –1 indicating that the returns move perfectly opposite to one another, 0 indicating no relationship, and 1 indicating that the asset classes react exactly the same. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Smallstocks

Largestocks

LT corporatebonds

LT govtbonds

IT govtbonds

Treasurybills

Small stocks

Large stocks

LT corporate bonds

LT govt bonds

IT govt bonds

Treasury bills

1.00

0.79

0.08

–0.02

–0.07

–0.10

1.00

0.19

0.12

0.04

–0.02

1.00

0.93

0.89

0.20

1.00

0.90

0.23

1.00

0.48 1.00

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvesting in Stocks


Ownership in a corporation Voting rights Historically higher returns More risk


–20

–10

0

10

20

30

40

50%

19961998

20032005

19611963

19681970

19751977

19821984

19891991

19261928

19331935

19401942

19471949

19541956

Small and Large Stock Returns Tend to Be Cyclical36-month rolling period returns 1926–2007


• Small stock excess return

JanDec

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDo Stock Winners Repeat?Top ten performing stocks 1986–2007

Past performance is no guarantee of future results. Annualized returns of an equally weighted portfolio of top 10 stocks by three-year return and return in subsequent three-year period (excluding the smallest 20% of the market). This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

–50

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 20041990 1991 1992 1993 19941986 1987 1988 1989

150.9%4.7

Average return

• First 3 years• Subsequent 3 years

300% Annualized return

2003

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBenefits of Bonds in a Portfolio


Potential growth Historically lower risk Diversification benefits Income generation Expand efficient opportunities

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBonds Produced Greater Income1970–2007


Stocks Bonds

• Capital appreciation

• Income

27%

71%

2%

80%

15%5%

• Reinvestment of income

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBonds Expand the Efficient Frontier1970–2007

Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2007. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

5% Risk 7 9 11 13 15 17 19 21 23 25

17% Return

16

15

14

13

12

11

10

9

8

• Stock portfolios

• Stock and bond portfolios

Small stocks

Large stocks

Bonds

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAdding a Bond Allocation to Diversify1970–2007

Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2007. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

55%

40%

5%

Return 10.4%Risk 10.0%

Lower risk portfolio

30%

70%

Return 10.4%Risk 11.7%

Original portfolio

• Stocks• Bonds• Cash

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCIntroduction to Sector Investing


Sector An area of the economy in which businesses have the same or related products and

services.

Sector funds An investment fund that makes investments solely in businesses that operate in

a particular industry or sector of the economy. Common industries include financial services, technology, health care, energy, and

utilities.

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of Sector Funds


Owning sector funds may be an alternative to traditional investments or individual stocks

Potential benefits

Concentrated exposure to a single industry increases overall investment risk

Potential risks

Sector funds offer more diversification across an industry than individual securities

Different funds focused on the same industry can have widely varying strategies

Investing in sectors that have low correlation to each other may reduce the overall risk of a portfolio

Individual sectors may be heavily affected by world, political and economical forecasts

Sector funds allow investors to take advantage of changes in business cycles, thereby potentially targeting growth, income, or a blend

Sector funds can have high management fees

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCSector Risk and Return Comparison1992–2007


5

9

13

17% Return

5% Risk 15 20 25 30 35 4010

Telecom

Media

Software

Hardware

Financial services

Business services

Health care

Consumer services

Utilities

Industrial materials

Energy

Consumergoods

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAnnual Sector Winners and LosersHigh and low returns 1998–2007


–4.5% –3.8%

–60

–40

–20

0

20

40

60

80

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Financialservices

Energy Utilities

Software

Hardware

Hardware

Telecom

Hardware

Healthcare

Media

Software

Software

Utilities

Consumerservices

Consumergoods

Hardware

EnergyEnergy Telecom Energy

–11.2%

–46.2%

–32.9%

–41.3%

9.0%

–11.0%

7.9%

66.9%

97.0%

55.5%

10.4%

–4.1%

65.3%

33.0% 34.4% 35.6%

–15.9%

37.2%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBull Market PerformanceSector performance relative to the overall U.S. market

Past performance is no guarantee of future results. Time period represented herein is Oct 1996 to Jul 1998. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Businessservices

Energy

Health care

Telecom

Financial servicesMedia

Software

Utilities

Industrialmaterials

Consumergoods

Consumerservices

Hardware

U.S. market: 33% return

• Underperformers• Outperformers

0

10

20

30

40

50% Return

15% Risk 20 25 30 35 40

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBear Market PerformanceSector performance relative to the overall U.S. market

Past performance is no guarantee of future results. Time period represented herein is Feb 2001 to Jul 2002. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Consumer goods

Consumer services

Financial services

Energy

Industrialmaterials

Health care

Utilities

Media

SoftwareTelecom

Hardware

Business services

U.S. market: –23% return

–50

–40

–30

–20

–10

0% Return

10% Risk 15 20 25 30 35

• Underperformers• Outperformers

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCHistorical View of Returns by Industry1992–2007


Percentage of positive/negative 12-month returns

Range of 12-month rolling returns

• Positive• Negative

0

50

100%

–50

0

50

100

150%

Consumergoods

Business Industrialmaterials

Consumerservices

Healthcare

Utilities Energy Financial Telecom Media Software Hardware

19% 24% 17% 24% 23% 22% 21% 19%28% 27%

19%26%

–19.6%–32.0% –28.3%

–20.5%–22.5% –19.4%

–46.0%–60.0%

–68.3%

39.7% 40.4%47.7%

55.5%55.3%70.2% 74.2%

97.0%

124.9%

–27.2%

55.0%

–28.6%

55.5%

–56.9%

70.6%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCReal Estate Beyond Your Home


Traditionally, investing in real estate has been synonymous with buying a home. For years, opportunities in commercial real estate, either indirectly through real estate investment trusts (REITs) or directly through private transactions, were classified as alternative opportunities that were mostly available to institutional investors.

Today, real estate investing has gained more popularity among investors around the globe. With increased access to commercial real estate through REITs, competitive historical performance, potential diversification benefits, and the increased globalization of commercial real estate, this once alternative sector now has a place in a diversified portfolio.

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCConsistent Long-Term PerformanceCompound annual returns 1972–2007


8.7%

11.2%

13.0%

14.3%

15%

10

5

0

Bonds Large stocks Equity REITs Small stocks

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCReliable Income ReturnsEquity REIT annual returns, past 20 years


–30

–20

–10

0

10

20

30

40%

1988 1993 1998 2003

53

Price return

Income return

% of total return from income

20-year averages (%)

7.2

6.1

• Price return

• Income return• Average annual income return

Total return 13.7

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Reduce Risk and Increase ReturnStock and bond investors 1972–2007


Stocks and bonds With 10% REITs With 20% REITs

Return: 10.6%Risk: 10.7%Sharpe ratio: 0.42



10%

45%

40%

10%

10%20%

10%50%

35%

40%

30%

• Stocks• Bonds• T-bills• REITs

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDirect Commercial Real Estate


Unlike REITs, direct investment in real estate is not traded on an exchange

Traditionally part of the asset-allocation strategy for pension funds and large institutional investors

Direct control Ability to select individual properties

Investment performance characteristics Competitive risk-adjusted returns Low volatility of returns Low correlation with other investments

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDiversification Through Global Real Estate


For most of the past 36 years, the United States and Australia have provided investors with the majority of opportunities for investing in publicly traded equity REITs and listed property companies

Introduction of REITs and publicly traded real estate in Europe and Asia has created new investment opportunities abroad

Global real estate investments have low correlations to other asset classes

May provide additional diversification benefits

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal ReturnsStocks, bonds and real estate 1990–2007


9.6%

8.1%

7.4%

0

2

4

6

8

10%Return

Global real estate Global stocks Global bonds

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Increase Return and Maintain Risk1990–2007

Past performance is no guarantee of future results. *Global real estate portfolio composition—North American Real Estate 8%, European Real Estate 1%, Asian Real Estate 1%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008

Return 9.7%Risk 11.1%Sharpe ratio 0.50

Sample portfolio

Return 10.3%Risk 11.1%Sharpe ratio 0.55

Sample portfolio with 10% RE

• Stocks

• International stocks• Bonds• Global real estate

33%

33%

33%

10%

30%

30%

30%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhy Invest Outside Your Home Country?


Additional investment opportunities Growth potential Diversification benefits Expand efficient range

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWorld Stock Market CapitalizationYear-end 2007

Capitalization calculated at year-end 2007. Total market capitalization is $39.1 trillion. Estimates are not guaranteed. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

• United States

43%

27%

11%

9%6%

4%

• Other Europe• Japan• United Kingdom• Other Pacific• Canada

International:

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGDP by Region Five-year average annual percentage change 2003–2007

Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

India8.5%

Japan2.0%

Canada2.7%

United States2.8%

United Kingdom2.8%

China10.6%

Australia3.3%

Brazil3.6%

South Africa4.5%

U.A.E.9.4%

Russia6.9%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Household Names


Health care Merck & Co (US) GlaxoSmithKline (UK) Novartis (Switzerland) Roche (Switzerland) Bayer (Germany)

Technology Microsoft (US) Samsung (Korea) Fujitsu (Japan) Nokia (Finland) LG Electronics (Korea)

Financial services Citigroup (US) HSBC Holdings (UK) Allianz (Germany) Deutsche Bank

(Germany)

Automobiles Hyundai (Korea) Ford (US) Honda (Japan) Toyota (Japan) Volkswagen (Germany)

Telecoms AT&T (US) Deutsche Telekom

(Germany) BT Group (UK) NTT (Japan)

Consumer non-durables Procter & Gamble (US) Nestlé (Switzerland) L’Oréal (France) Colgate-Palmolive (US) Unilever (UK)

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Stock Market ReturnsHighest and lowest historical annual returns 1970–2007

Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each region over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

–– –

–

11.0%12.3%11.6%

Compound annual return:11.1%

26.5%23.2% 22.8%

34.3%

107.5%

79.8%

69.9%

37.4%

Annual ranges of returns

120%

100

80

60

40

20

0

–20

–40

PacificEuropeInternationalUnited States

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Investing1970–2007

Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1970. All values in U.S. dollars. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$5.60

$25.53

$33.70

$54.05$64.03

$100

10

1

0.10

1970 1975 1980 1985 1990 1995 2000 2005

11.6%11.19.78.94.6


• International stocks• U.S. stocks• International bonds• U.S. bonds• U.S. inflation

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWorld Stock Markets Exhibit Different PerformanceHigh and low returns 1998–2007

Past performance is no guarantee of future results. Returns expressed in U.S. dollars. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

FinlandSpain

Finland

Finland

Switzerland

NewZealand

Greece Austria

CanadaNewZealand

Japan

Belgium

Greece FinlandGermany

Finland

FinlandIreland

Norway

Ireland

175%

125

75

25

0

–25

–75

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

4.9% 5.5%U.S.annualreturn

28.6%21.0%

–9.1% –11.9%

–22.1%

28.7%

10.9%15.8%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCComparing U.S. and International Stock PerformanceAverage returns over 10-year holding periods

Past performance is no guarantee of future results. Based on data from 1974–2007. Calculated using rolling 10-year average returns. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

0

5

10

15

20

25%

1983 1986 1989 1992 1995 2007

• U.S. stocks• International stocks

1998 2001 2004

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Risks of International Investing


Currency risk Economic/political risk Market liquidity risk Differences in accounting standards Costs of investing internationally

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Impact of Currency Fluctuation2007


Return to local investors

Currencyimpact

Return toU.S.investors

United States

Pacific region

Japan

European region

United Kingdom

International composite

5.5% 0.0% 5.5%

–1.4% 7.0% 5.6%

–10.1% 6.1% –4.0%

6.5% 7.9% 14.4%

6.6% 1.5% 8.1%

4.0% 7.6% 11.6%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDifferences Between Developed and Emerging Markets


Developed countries Established and stable economies with strong consumption activities and ample

resources. Ex. Australia, Canada, Japan, Germany, U.K., U.S.

Emerging countries Countries that are starting to participate globally by implementing reform programs and

undergoing economic improvement. Ex. Brazil, China, Mexico, Thailand, Russia, Israel.

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCEmerging Market PerformanceRisk and return 1998–2007


EmergingLatin America

EmergingAsia

EmergingMideast and Africa

EmergingEurope

0

40%

30

20

10

• Risk• Return

39.9% 39.7%

27.7%

19.9%19.0%

16.5%

32.6%

16.5%

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCEmerging Markets Are More Volatile1988–2007

Past performance is no guarantee of future results. All values are expressed in U.S. dollars. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

0.9%

13.7% 11.9% 12.4% 10.6%

25.0%

9.4% 7.2% 7.6% 8.3%

Developed markets Emerging markets150%Return

125

100

75

50

25

0

–25

–50

–75

Australia U.S. Germany U.K. Japan Mexico Korea Taiwan Jordan Philippines

* compound annual return

*

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCUndeveloped Opportunities1988–2007


Returns as of December 2007

0

40%

10

20

30

1yr 5yr 10yr 20yr

$206,400

$93,296

• Emerging markets

• United States

39.8%

5.5%

37.5%

12.8%14.5%

5.9%

16.3%

11.8%

Growth of $10k

80

$240k

2003199819931988

0

160

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvestment Vehicles

• Index versus active management

• Mutual funds

• Exchange Traded Funds (ETFs)

• Private investment managers

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of Active and Passive Management


Active

Passive(Index)

Potential to outperform Professional management

expertise May add more value in less

efficient asset classes

Lower cost Lower turnover/more tax

efficient

Tend to have higher fees and expenses

Majority do not outperform benchmark

Upside potential is limited to index performance

Limited selection of index funds in some categories

Pros Cons

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMany Mutual Fund Investment Categories Exist


Domestic-stock funds Large-/Mid-/Small-cap Growth/Blend/Value Specialty Target Date

Taxable-bond funds Domestic/International Corporate/Government Short-/Intermediate-/

Long-term High/Medium/Low quality

Municipal-bond funds Single state/National Short-/Intermediate-/ Long-

term

International-stock funds

Foreign World Regional Emerging market

Money market funds

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat are Exchange-Traded Funds?


Index fund

Track one specific index

Buy/sell like stocks

Price set by underlying index

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat Kinds of ETFs are Available?


Track a variety of indexes Domestic and global Sectors or industry groups Style-specific such as growth and value Equity and fixed income

May focus on market capitalization (small-, mid- and large-cap)

May concentrate on characteristic based diversification (dividend income)

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of ETFs


Cons

Brokerage costs

Market pricing

Relatively new with limited track record

Limited selection in certain asset classes. For example: fixed-income ETFs

D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCClass Summary

• Investment management performance

• Risk and return characteristics of investments

• Asset allocation as a risk management tool

• Investment vehicles

© 2008 morningstar, inc. all rights reserved. 3/1/2008 managing the investment process david c....

Documents

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investment process david

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