dfa all slides 2013

Diversification

I. The Impact of Volatility

II. The Randomness of Returns

III. The Randomness of Returns: Bonds

IV. The Randomness of Returns: Sectors

V. Model Portfolio: Allocations

VI. Model Portfolio: Historical Returns

VII. Equity Returns of Emerging Markets

VIII. Equity Returns of Developed Markets

IX. World Market Capitalization

DV1000.2

2

The Impact of Volatility

For illustrative purposes only.

DV1010.2

Impact on a Hypothetical $100,000 Portfolio

Year 1 Return

Year 2 Return

Average Return

Compound Return

Value at End of Year 2

Portfolio #1 50% -50% 0% -13.4% $75,000

Portfolio #2 10% -10% 0% -0.5% $99,000

3

The Randomness of Returns

In US dollars. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. Russell data copyright © Russell Investment Group 1997-2013, all rights reserved. US Real Estate is the Dow Jones US Select REIT Index, provided by Dow Jones Indexes. International Value data provided by Fama/French from Bloomberg and MSCI securities data. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Small Cap Value data compiled by Dimensional from Bloomberg and StyleResearch securities data. Emerging Markets is the MSCI Emerging Markets Index (gross dividends), copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. One-Year US Fixed is the BofA Merrill Lynch One-Year US Treasury Note Index, used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Five-Year US Government Fixed is the Barclays Capital Treasury Bond Index 1-5 Years, formerly Lehman Brothers, provided by Barclays Bank PLC. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years (hedged), copyright 2013 by Citigroup. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1030.10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Highest Return 28.6 66.4 31.0 14.0 7.6 69.2 35.1 34.5 36.0 39.8 8.8 79.0 28.1 9.4 21.223.1 33.0 22.8 12.3 5.1 66.8 33.2 24.1 33.0 8.2 6.6 48.6 26.9 3.4 18.615.6 30.2 9.0 8.4 3.8 60.2 32.1 22.6 32.6 8.0 4.7 47.8 24.5 2.3 18.210.2 21.5 8.3 7.3 3.6 56.3 30.6 15.1 27.5 6.3 -28.9 44.8 20.7 2.1 18.19.7 21.3 7.3 6.4 3.4 47.3 26.0 13.8 26.3 6.3 -33.8 28.5 19.2 0.6 17.58.4 21.0 7.0 2.5 -2.9 46.0 22.3 7.0 23.5 6.2 -36.8 27.2 19.2 0.4 17.17.8 7.4 4.0 -2.4 -6.0 36.2 18.3 4.9 22.2 5.9 -37.0 26.5 15.5 -4.2 16.85.9 4.0 -2.0 -5.6 -11.4 30.0 16.5 4.7 18.4 5.5 -39.2 20.6 15.1 -5.5 16.4

-2.6 3.6 -3.0 -6.5 -13.8 28.7 10.9 4.6 15.8 -0.2 -42.5 19.7 13.3 -15.1 16.0-6.4 1.9 -9.1 -11.9 -15.5 2.0 2.7 3.1 4.3 -1.6 -45.1 2.3 3.7 -15.6 2.1

-17.0 -1.5 -12.3 -15.4 -20.5 1.9 1.3 2.4 4.1 -9.8 -47.1 0.8 2.0 -17.1 0.9Lowest Return -25.3 -2.6 -30.6 -16.7 -22.1 1.5 0.8 1.3 3.8 -17.6 -53.2 0.2 0.8 -18.2 0.2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US Large Cap 28.6 21.0 -9.1 -11.9 -22.1 28.7 10.9 4.9 15.8 5.5 -37.0 26.5 15.1 2.1 16.0

US Large Cap Value 15.6 7.4 7.0 -5.6 -15.5 30.0 16.5 7.0 22.2 -0.2 -36.8 19.7 15.5 0.4 17.5

US Small Cap -2.6 21.3 -3.0 2.5 -20.5 47.3 18.3 4.6 18.4 -1.6 -33.8 27.2 26.9 -4.2 16.4

US Small Cap Value -6.4 -1.5 22.8 14.0 -11.4 46.0 22.3 4.7 23.5 -9.8 -28.9 20.6 24.5 -5.5 18.1

US Real Estate -17.0 -2.6 31.0 12.3 3.6 36.2 33.2 13.8 36.0 -17.6 -39.2 28.5 28.1 9.4 17.1

Intl Large Cap Value 23.1 33.0 4.0 -15.4 -13.8 69.2 30.6 15.1 33.0 6.3 -45.1 48.6 13.3 -17.1 21.2

Intl Small Cap 10.2 30.2 -12.3 -16.7 -2.9 60.2 32.1 22.6 26.3 8.0 -47.1 44.8 20.7 -15.6 16.8

Intl Small Cap Value 9.7 21.5 -2.0 -6.5 3.8 66.8 35.1 24.1 27.5 6.2 -42.5 47.8 19.2 -15.1 18.2

Emerging Markets -25.3 66.4 -30.6 -2.4 -6.0 56.3 26.0 34.5 32.6 39.8 -53.2 79.0 19.2 -18.2 18.6

One-Year US Fixed 5.9 4.0 7.3 7.3 3.4 1.5 0.8 2.4 4.3 5.9 4.7 0.8 0.8 0.6 0.2

Five-Year US Government Fixed 7.8 1.9 9.0 8.4 7.6 2.0 1.3 1.3 3.8 8.2 8.8 0.2 3.7 3.4 0.9

Five-Year Global Fixed 8.4 3.6 8.3 6.4 5.1 1.9 2.7 3.1 4.1 6.3 6.6 2.3 2.0 2.3 2.1

4

Model Portfolio: Allocations

International Small Cap Index data compiled by Dimensional.The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. For illustrative purposes only. The balanced strategies are not recommendations for an actual allocation. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.

DV1030.9

ModelPortfolio 1

ModelPortfolio 2

ModelPortfolio 3

ModelPortfolio 4

ModelPortfolio 5

EQUITY 60% 60% 60% 60% 60%

US STOCKS 60% 60% 60% 60% 30%

US Large Cap S&P 500 Index 60.0% 60.0% 30.0% 15.0% 7.5%

US Large Cap Value Fama/French US Large Cap Value Research Index — — — 15.0% 7.5%

US Small Cap Fama/French US Small Cap Index — — 30.0% 15.0% 7.5%

US Small Cap Value Fama/French US Small Cap Value Research Index — — — 15.0% 7.5%

NON-US STOCKS 0% 0% 0% 0% 30%

International Large Cap Value Fama/French International Value Index — — — — 15.0%

International Small Cap International Small Cap Index — — — — 15.0%

FIXED INCOME 40% 40% 40% 40% 40%

One-Year US Fixed BofA Merrill Lynch One-Year US Treasury Note Index — 40.0% 40.0% 40.0% 40.0%

US Fixed (all maturities) Barclays Capital US Government/Credit Bond Index 40.0% — — — —

5

Model Portfolio: Historical Returns

Assumes all strategies have been rebalanced quarterly.The S&P data are provided by Standard & Poor’s Index Services Group. Fama/French data provided by Fama/French. International Small Cap data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. The Merrill Lynch indices are used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. The returns and other characteristics of the allocation mixes contained in this presentation are based on model/back-tested simulations to demonstrate broad economic principles. They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.

Annual Return (%)

DV1030.9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Highest Return 21.63 16.76 5.82 8.12 -6.61 31.75 14.80 8.93 16.42 6.29 -21.22 24.75 13.75 5.37 11.96

19.89 15.27 3.19 5.81 -9.18 26.31 11.04 5.74 13.70 5.74 -21.40 22.27 12.94 1.96 11.83

11.69 14.32 -1.02 0.48 -9.87 25.46 9.31 4.15 11.69 4.18 -21.90 20.75 12.24 0.00 11.64

10.82 11.64 -2.70 -3.30 -11.19 18.89 8.31 3.92 11.14 3.29 -22.27 17.77 11.96 -1.58 10.09

Lowest Return 9.92 10.35 -3.50 -3.91 -12.01 17.49 6.85 3.90 10.91 1.60 -24.72 16.29 9.66 -5.48 9.66

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Annualized

Return

Annual Standard Deviation

Model Portfolio 1 21.63 11.64 -1.02 -3.30 -9.18 18.89 8.31 3.92 10.91 6.29 -21.40 17.77 12.24 5.37 11.64 5.64 11.34

Model Portfolio 2 19.89 14.32 -2.70 -3.91 -12.01 17.49 6.85 3.90 11.14 5.74 -21.90 16.29 9.66 1.96 9.66 4.46 11.46

Model Portfolio 3 10.82 16.76 -3.50 5.81 -11.19 25.46 9.31 4.15 11.69 3.29 -22.27 22.27 13.75 0.00 10.09 5.71 12.34

Model Portfolio 4 9.92 10.35 5.82 8.12 -9.87 26.31 11.04 5.74 13.70 1.60 -21.22 20.75 12.94 -1.58 11.96 6.40 11.62

Model Portfolio 5 11.69 15.27 3.19 0.48 -6.61 31.75 14.80 8.93 16.42 4.18 -24.72 24.75 11.96 -5.48 11.83 7.02 13.68

The Randomness of Returns: Sectors

Mutual fund universe statistical data and non-Dimensional money managers' fund data provided by Morningstar, Inc. Morningstar’s Sector Index family consists of 11 sector indices that track the US equity market using a consumption-based analysis of economic sectors in a comprehensive, non-overlapping structure. Index constituents are drawn from the available pool of US-domiciled stocks that trade on one of the three major US exchanges. Real Estate Sector Index is not included in the above illustration. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1032.1

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Morningstar SEC/Basic Materials -7.05 23.95 -14.16 0.86 -9.09 37.62 17.94 5.96 14.98 27.51 -48.14 53.60 24.87 -14.12 16.46

Morningstar SEC/Consumer Cyclical 49.92 23.46 -40.14 -17.44 -37.31 19.84 14.39 -6.04 39.41 0.20 -38.17 35.63 23.16 0.64 32.39

Morningstar SEC/Consumer Dfnsve 31.22 17.65 -25.78 3.63 -23.78 41.04 15.39 -1.40 11.90 -8.69 -41.22 50.17 30.53 4.06 24.56

Morningstar SEC/Energy 17.79 -2.89 7.24 1.41 -6.31 17.43 10.10 3.01 15.12 12.58 -16.09 15.62 14.46 13.39 10.08

Morningstar SEC/Financial Svc -15.90 25.07 45.67 -14.86 -6.63 26.07 38.05 40.83 19.74 32.88 -38.39 33.97 23.38 5.05 4.32

Morningstar SEC/Healthcare 10.28 1.81 26.76 -7.11 -13.09 32.09 12.53 6.03 17.57 -17.88 -51.35 14.55 11.81 -16.51 29.05

Morningstar SEC/Industrials 38.70 -6.66 38.42 -12.77 -21.08 18.87 3.51 8.11 6.65 8.05 -23.35 20.97 5.11 11.90 19.32

Morningstar SEC/Technology 8.54 12.79 0.29 1.31 -23.58 34.83 19.24 5.17 15.44 11.95 -39.41 24.05 24.16 -0.71 15.28

Morningstar SEC/Communication Svc 61.93 82.58 -35.38 -28.40 -38.33 50.32 0.79 3.69 10.87 16.56 -41.99 61.85 13.39 -0.38 13.30

Morningstar SEC/Utilities 13.86 -14.64 54.05 -16.67 -23.84 24.71 23.25 14.75 21.76 17.18 -28.11 11.76 7.31 18.46 2.19

Highest Return

Lowest Return

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

61.93 82.58 54.05 3.63 -6.31 50.32 38.05 40.83 39.41 32.88 -16.09 61.85 30.53 18.46 32.39

49.92 25.07 45.67 1.41 -6.63 41.04 23.25 14.75 21.76 27.51 -23.35 53.60 24.87 13.39 29.05

38.70 23.95 38.42 1.31 -9.09 37.62 19.24 8.11 19.74 17.18 -28.11 50.17 24.16 11.90 24.56

31.22 23.46 26.76 0.86 -13.09 34.83 17.94 6.03 17.57 16.56 -38.17 35.63 23.38 5.05 19.32

17.79 17.65 7.24 -7.11 -21.08 32.09 15.39 5.96 15.44 12.58 -38.39 33.97 23.16 4.06 16.46

13.86 12.79 0.29 -12.77 -23.84 26.07 14.39 5.17 15.12 11.95 -39.41 24.05 14.46 0.64 15.28

10.28 1.81 -14.16 -14.86 -23.78 24.71 12.53 3.69 14.98 8.05 -41.22 20.97 13.39 -0.38 13.30

8.54 -2.89 -25.78 -16.67 -23.58 19.84 10.10 3.01 11.90 0.20 -41.99 15.62 11.81 -0.71 10.08

-7.05 -6.66 -35.38 -17.44 -37.31 18.87 3.51 -1.40 10.87 -8.69 -48.14 14.55 7.31 -14.12 4.32

-15.90 -14.64 -40.14 -28.40 -38.33 17.43 0.79 -6.04 6.65 -17.88 -51.35 11.76 5.11 -16.51 2.19

7

Equity Returns of Emerging Markets

Source: MSCI emerging markets country indices (gross dividends) with at least fifteen years of data. MSCI data copyright MSCI 2013, all rights reserved.Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1037.3

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Korea 141.15

Turkey 252.41

Czech Rep. 1.62

Russia 55.85

Czech Rep. 44.16

Thailand 144.56

Colombia 132.95

Egypt 161.59

China 82.87

Peru 94.74

Morocco -10.87

Brazil 128.62

Thailand56.27

Indonesia6.50

Turkey64.87

Morocco 24.57

Russia 247.06

Poland -4.04

Korea 48.71

Indonesia 42.83

Turkey 125.88

Egypt 126.23

Colombia 107.52

Indonesia 74.83

Brazil 79.99

Colombia -25.10

Indonesia 127.63

Peru53.35

Malaysia0.12

Philippines47.56

Philippines 13.45

Malaysia 114.33

Brazil -11.37

Colombia 45.77

Hungary 30.69

Brazil 115.01

Hungary 92.49

Russia 73.77

Morocco 68.58

Turkey 74.81

Chile -35.37

Russia 104.91

Chile44.81

Philippines0.10

Egypt47.10

Thailand 11.56

Indonesia 93.46

Chile -15.14

Peru 19.92

Peru 30.50

Peru 94.32

Czech Rep. 87.25

Korea 58.00

Peru 62.55

India 73.11

South Africa -37.89

India 102.81

Colombia43.41

Thailand-2.40

Poland40.97

Czech Rep. 0.54

Korea 92.42

Malaysia -15.95

Mexico 18.55

South Africa 27.99

Egypt 91.84

Poland 61.52

Brazil 57.05

Philippines 59.65

China 66.24

Peru -40.11

Turkey 98.49

Malaysia37.01

Czech Rep.-5.02

Colombia35.89

Poland -6.69

Egypt 88.40

South Africa -17.19

Taiwan 10.47

Thailand 27.59

China 87.57

Indonesia 52.21

Turkey 56.94

Russia 55.93

Egypt 58.43

Malaysia -41.21

Chile 86.73

Philippines35.49

Colombia-5.02

Thailand34.94

Hungary -8.16

India 87.35

Mexico -20.49

Thailand 5.25

Colombia 25.36

Chile 84.41

Mexico 48.32

Mexico 49.11

India 51.00

Czech Rep. 55.93

Czech Rep. -42.75

Colombia 84.35

Indonesia34.62

Korea-11.76

Mexico29.06

Taiwan -20.64

Mexico 80.07

Morocco -21.55

Malaysia 4.56

Russia 15.71

India 78.36

South Africa 44.91

Czech Rep. 46.20

Brazil 45.80

Indonesia 55.03

Mexico -42.94

Taiwan 80.25

South Africa34.21

Mexico-12.11

India25.97

India -21.24

Brazil 67.23

India -21.74

Czech Rep. -2.01

Korea 8.62

Indonesia 78.20

Turkey 42.03

India 37.57

Poland 41.93

Morocco 48.15

Taiwan -45.88

Hungary 77.61

Mexico27.61

South Africa-14.36

China23.10

Egypt -27.00

South Africa 57.20

Peru -23.82

Chile -2.83

India 8.38

Russia 75.94

Brazil 36.47

Peru 35.00

Mexico 41.44

Thailand 46.63

Thailand -48.27

Thailand 77.31

Korea27.15

Morocco-14.76

Hungary22.79

South Africa -27.56

Taiwan 52.71

Hungary -26.80

Indonesia -8.49

Egypt 1.59

Colombia 66.93

Chile 29.01

South Africa 28.34

Malaysia 37.14

Malaysia 46.07

China -50.83

Korea 72.06

Taiwan22.73

China-18.24

Korea21.48

Chile -28.50

Thailand 47.16

Russia -30.03

Hungary -9.16

Poland 1.26

Czech Rep. 66.20

Philippines 26.58

Poland 24.96

Czech Rep. 34.69

Philippines 41.68

Philippines -51.87

Peru 72.06

Turkey21.24

Russia-19.30

Peru20.24

Malaysia -30.81

Chile 39.01

China -30.54

Morocco -13.70

Malaysia -0.66

Morocco 49.03

Korea 22.86

Philippines 23.92

Hungary 33.70

Korea 32.58

Egypt -52.35

Philippines 67.98

India20.95

Chile-20.00

South Africa19.01

Indonesia -31.53

Poland 31.50

Colombia -38.85

Brazil -16.99

Morocco -8.42

South Africa 45.86

Morocco 22.56

Chile 21.62

Chile 29.33

Poland 25.79

Poland -54.49

China 62.63

Russia19.40

Taiwan-20.15

Taiwan17.66

Mexico -33.53

Peru 18.86

Egypt -43.71

South Africa -17.21

Mexico -13.31

Philippines 42.76

India 19.11

China 19.77

Taiwan 20.90

Russia 24.79

Korea -55.07

South Africa 57.82

Poland15.86

Peru-21.37

Russia14.39

Brazil -39.62

China 13.33

Taiwan -44.90

Philippines -19.29

China -14.05

Taiwan 42.55

Malaysia 15.17

Hungary 18.50

South Africa 20.53

Chile 23.68

Brazil -56.06

Mexico 56.63

Morocco15.33

Brazil-21.59

Malaysia14.27

Peru -40.22

Hungary 11.66

Philippines -45.01

India -19.45

Chile -19.81

Korea 35.94

Taiwan 9.83

Indonesia 15.76

Egypt 17.08

South Africa 18.14

Indonesia -56.20

Malaysia 52.06

Egypt12.42

Poland-29.52

Chile8.34

Colombia -41.71

Czech Rep. 5.35

Turkey -45.65

China -24.70

Taiwan -24.45

Poland 35.48

Russia 5.69

Morocco 13.97

Colombia 13.76

Hungary 16.80

Hungary -61.53

Poland 42.51

Brazil6.81

Hungary-33.65

Indonesia5.22

China -42.37

Philippines 3.32

Korea -49.62

Poland -27.44

Philippines -28.98

Mexico 32.81

Peru 3.16

Thailand 9.16

Korea 13.19

Colombia 15.00

Turkey -62.10

Egypt 39.74

China4.83

Turkey-35.16

Czech Rep.3.48

Turkey -52.51

Morocco -11.92

Thailand -56.27

Turkey -32.66

Brazil -30.65

Hungary 32.31

China 1.89

Taiwan 7.25

Thailand 11.61

Mexico 12.15

India -64.63

Czech Rep. 27.77

Czech Rep.-1.66

India-37.17

Brazil0.34

Russia -82.99

Colombia -14.38

Indonesia -61.90

Egypt -41.30

Turkey -35.70

Malaysia 26.61

Thailand -0.92

Malaysia 2.29

Turkey -6.97

Taiwan 9.13

Russia -73.83

Morocco -4.98

Hungary-9.58

Egypt-46.86

Morocco-11.48

Highest Return

Lowest Return

8

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Brazil -39.62 67.23 -11.37 -16.99 -30.65 115.01 36.47 57.05 45.80 79.99 -56.06 128.62 6.81 -21.59 0.34

Chile -28.50 39.01 -15.14 -2.83 -19.81 84.41 29.01 21.62 29.33 23.68 -35.37 86.73 44.81 -20.00 8.34

China -42.37 13.33 -30.54 -24.70 -14.05 87.57 1.89 19.77 82.87 66.24 -50.83 62.63 4.83 -18.24 23.10

Colombia -41.71 -14.38 -38.85 45.77 25.36 66.93 132.95 107.52 13.76 15.00 -25.10 84.35 43.41 -5.02 35.89

Czech Republic 0.54 5.35 1.62 -2.01 44.16 66.20 87.25 46.20 34.68 55.93 -42.75 27.77 -1.66 -5.02 3.48

Egypt -27.00 88.40 -43.71 -41.30 1.59 91.84 126.23 161.59 17.08 58.43 -52.35 39.74 12.42 -46.86 47.10

Hungary -8.16 11.66 -26.80 -9.16 30.69 32.31 92.49 18.50 33.70 16.80 -61.53 77.61 -9.58 -33.65 22.79

India -21.24 87.35 -21.74 -19.45 8.37 78.36 19.11 37.57 51.00 73.11 -64.63 102.81 20.95 -37.17 25.97

Indonesia -31.53 93.46 -61.90 -8.49 42.83 78.20 52.21 15.76 74.83 55.03 -56.20 127.63 34.62 6.50 5.22

Korea 141.15 92.42 -49.62 48.71 8.62 35.94 22.86 58.00 13.19 32.58 -55.07 72.06 27.15 -11.76 21.48

Malaysia -30.81 114.33 -15.95 4.56 -0.66 26.61 15.17 2.29 37.14 46.07 -41.21 52.06 37.01 0.12 14.27

Mexico -33.53 80.07 -20.49 18.55 -13.31 32.81 48.32 49.11 41.44 12.15 -42.94 56.63 27.61 -12.11 29.06

Morocco 24.57 -11.92 -21.55 -13.70 -8.42 49.03 22.56 13.97 68.58 48.15 -10.87 -4.98 15.33 -14.76 -11.48

Peru -40.22 18.86 -23.82 19.92 30.50 94.32 3.16 35.00 62.55 94.74 -40.11 72.06 53.35 -21.37 20.24

Philippines 13.45 3.32 -45.01 -19.29 -28.98 42.76 26.58 23.92 59.65 41.68 -51.87 67.98 35.49 0.10 47.56

Poland -6.69 31.50 -4.04 -27.44 1.26 35.48 61.52 24.96 41.93 25.79 -54.49 42.51 15.86 -29.52 40.97

Russia -82.99 247.06 -30.03 55.85 15.71 75.94 5.69 73.77 55.93 24.79 -73.83 104.91 19.40 -19.30 14.39

South Africa -27.56 57.20 -17.19 -17.21 27.99 45.86 44.91 28.34 20.53 18.14 -37.89 57.82 34.21 -14.36 19.01

Taiwan -20.64 52.71 -44.90 10.47 -24.45 42.55 9.83 7.25 20.90 9.13 -45.88 80.25 22.73 -20.15 17.66

Thailand 11.56 47.16 -56.27 5.25 27.59 144.56 -0.92 9.16 11.61 46.63 -48.27 77.31 56.27 -2.40 34.94

Turkey -52.51 252.41 -45.65 -32.66 -35.70 125.88 42.03 56.94 -6.97 74.81 -62.10 98.49 21.24 -35.16 64.87

Boxed Return is highest return for the year.

Equity Returns of Emerging Markets

Source: MSCI emerging markets country indices (gross dividends) with at least fifteen years of data. MSCI data copyright MSCI 2013, all rights reserved.Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1037.3

9

Equity Returns of Developed Markets

In US dollars.Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1040.9

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Belg. Austria UK H.K. H.K. H.K. Norway Switz. Spain Switz. 44.25

Belg. 67.76

Sing. Switz. Austral.

Austria Sweden

Austria Can. Spain 49.36

H.K. J apan Norway Sweden US Belg.53.63 103.91 10.29 49.52 32.29 116.70 23.57 44.12 40.05 44.25 67.75 99.40 5.85 1.68 16.55 64.53 71.52 28.31 49.36 41.20 -29.21 87.07 33.75 1.36 39.55

Den. Ger. H.K. Austral.

Switz. Sing. J apan US Sweden

Italy Italy Sweden

Can. Austria Austral.

Ger. Belg. J apan Sing. Ger. Switz. Austral. Den. UK Den.

52.67 46.26 9.18 33.64 17.23 67.97 21.44 37.14 37.21 35.48 52.52 79.74 5.34 -5.65 -1.34 63.80 43.53 25.52 46.71 35.21 -30.49 76.43 30.73 -2.56 31.27

Sweden

Norway Austria US US Switz. Sweden

Sweden

H.K. Den. Spain J apan Den. Belg. Norway Spain Norway Austria Norway Norway US Sing. H.K. Switz. Sing.

48.33 45.53 6.33 30.07 6.39 45.79 18.34 33.36 33.08 34.52 49.90 61.53 3.44 -10.89 -7.26 58.46 38.39 24.64 45.12 31.43 -37.57 73.96 23.23 -6.77 30.96

Norway Den. Norway Sing. Sing. Norway Neth. Spain Norway US France H.K. Norway Spain Italy Austria Sweden

Den. Can. Spain Sweden Sing. Norway Ger.

42.40 43.94 0.65 24.96 6.28 42.04 11.70 29.83 28.63 33.38 41.54 59.52 -0.89 -11.36 -7.33 56.96 36.28 24.50 29.57 -40.60 64.16 22.14 -10.01 30.90

France Sing. Den. France France Sweden

Italy Neth. Can. Spain US Can. Italy Norway J apan Can. Italy Norway Den. 38.77

Sing. France H.K. Can. Belg. H.K.

37.87 42.26 -0.91 17.83 2.81 36.99 11.56 27.71 28.54 25.41 30.14 53.74 -1.33 -12.22 -10.28 54.60 32.49 24.26 38.77 28.35 -43.27 60.15 20.45 -10.62 28.27

Austral.

France US Neth. Neth. Ger. Belg. Belg. Neth. Ger. Ger. Norway Neth. US Switz. Austral.

Den. Switz. Belg. Austral.

Can. Belg. J apan Austral. Austria

36.40 36.15 -3.15 17.80 2.30 35.64 8.24 25.88 27.51 24.57 29.43 31.70 -4.09 -12.39 -10.31 49.46 30.82 16.33 36.66 28.34 -45.51 57.49 15.44 -10.95 25.90

J apan Neth. Neth. Den. Belg. Neth. Sing. H.K. UK Neth. Switz. France France UK Sing. Den. Austral.

Austral.

Austria 36.54

Den. Ger. Can. US Neth. Austral.

35.39 35.79 -3.19 16.56 -1.47 35.28 6.68 22.57 27.42 23.77 23.53 29.27 -4.31 -14.05 -11.05 49.25 30.34 16.02 36.54 25.59 -45.87 56.18 14.77 -12.12 22.07

Sing. Sweden

Switz. UK UK Austral.

Austral.

UK US UK Neth. US Austral.

Den. Can. Norway Spain Sing. Ger. Spain Sing. Spain Austral. Spain Sweden

33.32 31.79 -6.23 16.02 -3.65 35.17 5.40 21.27 23.24 22.62 23.23 21.92 -9.95 -14.81 -13.19 48.11 28.93 14.37 35.99 23.95 -47.35 43.48 14.52 -12.28 21.97

H.K. US Ger. Switz. Ger. Den. Ger. Den. Den. Belg. UK Ger. UK H.K. Belg. France H.K. Neth. Neth. Den. UK Switz. Can. France

28.12 30.01 -9.36 15.77 -10.27 32.81 4.66 18.78 21.79 13.55 17.80 20.04 -11.53 -18.61 -14.97 40.22 24.98 13.85 20.59 -47.56 43.30 11.79 -12.71 21.29

Ger. Switz. Belg. Spain Austria Spain Den. Can. France Sweden

Sweden

Austral.

Austria Can. UK H.K. Sing. Sweden

France Neth. Austria Norway J apan Neth.

20.60 26.21 -10.98 15.63 -10.65 29.78 3.77 18.31 21.20 12.92 13.96 17.62 -11.96 -20.44 -15.23 38.10 22.27 10.31 13.24 -48.22 43.20 10.95 -14.33 20.59

Can. Can. Sing. Sweden

Austral.

Italy Switz. Ger. Austral.

Can. Den. UK US Switz. Spain Italy Can. Ger. Neth. 31.38

UK UK Neth. Austria Sweden Switz.

17.07 24.30 -11.66 14.42 -10.82 28.53 3.54 16.41 16.49 12.80 8.99 12.45 -12.84 -21.38 -15.29 37.83 22.20 9.92 31.38 8.36 -48.34 42.25 9.88 -15.98 20.35

US UK Can. Belg. Can. Austria US France Ger. France Austral.

Den. H.K. Neth. Den. Sing. UK France Austral. 30.86

Italy Sweden

Den. UK Den. Norway

14.61 21.87 -13.00 13.77 -12.15 28.09 1.13 14.12 13.58 11.94 6.07 12.06 -14.74 -22.10 -16.03 37.60 19.57 9.88 30.86 6.06 -49.86 36.57 8.76 -16.02 18.65

Neth. Italy France Can. Sweden

J apan UK Austral.

Italy Norway J apan Neth. Ger. France H.K. J apan France Belg. UK 30.61

US Italy France Ger. H.K. US

14.19 19.42 -13.83 11.08 -14.41 25.48 -1.63 11.19 12.59 6.24 5.05 6.88 -15.59 -22.36 -17.79 35.91 18.48 9.05 30.61 5.44 -49.98 31.83 8.44 -16.02 15.33

Spain Belg. Spain J apan J apan UK Can. Sing. Belg. Austria Austria Spain Spain Ger. Neth. Belg. Ger. H.K. H.K. 30.35

Switz. Austral.

Italy Neth. France UK

13.53 17.29 -13.85 8.92 -21.45 24.44 -3.04 6.45 12.03 1.57 0.35 4.83 -15.86 -22.39 -20.83 35.33 16.17 8.40 30.35 5.29 -50.67 26.57 1.74 -16.87 15.25

Italy Spain Austral.

Ger. Spain Belg. Spain Norway Austria Austral.

H.K. Italy Belg. Sing. France Switz. J apan UK Switz. 27.40

Austria H.K. US Belg. Sing. Italy

11.46 9.76 -17.54 8.16 -21.87 23.51 -4.80 6.02 4.51 -10.44 -2.90 -0.26 -16.85 -23.42 -21.18 34.08 15.86 7.35 27.40 2.17 -51.21 26.25 -0.42 -17.92 12.48

Switz. Austral.

Italy Italy Italy France France Italy Switz. H.K. Can. Switz. Sweden

Italy US UK Switz. US Can. 17.80

Sweden

Norway Switz. France Ger. Can.

6.18 9.30 -19.19 -1.82 -22.22 20.90 -5.18 1.05 2.28 -23.29 -6.14 -7.02 -21.29 -26.59 -23.09 32.06 14.96 5.14 17.80 0.62 -64.24 25.31 -4.11 -18.08 9.09

UK H.K. Sweden

Austria Norway Can. Austria J apan Sing. J apan Sing. Austria Sing. Sweden

Sweden

US Neth. Spain US 14.67

Belg. Belg. Ger. Italy Italy J apan

5.95 8.39 -20.99 -12.23 -22.29 17.58 -6.28 0.69 -6.86 -23.67 -12.88 -9.11 -27.72 -27.18 -30.49 28.41 12.24 4.41 14.67 -2.73 -66.48 25.15 -15.01 -23.18 8.18

Austria J apan J apan Norway Den. US H.K. Austria J apan Sing. Norway Belg. J apan J apan Ger. Neth. US Italy J apan 6.24

J apan Austria J apan Spain Austria Spain

0.57 1.71 -36.10 -15.50 -28.25 9.15 -28.90 -4.72 -15.50 -30.05 -30.06 -14.26 -28.16 -29.40 -33.18 28.09 10.14 1.90 6.24 -4.23 -68.41 6.25 -21.95 -36.43 3.00

France 34.48

Italy 32.49

Sweden 43.39

Highest Return

Lowest Return

10

Equity Returns of Developed Markets

In US dollars.Source: MSCI developed markets country indices (net dividends) with at least twenty-five years of data. MSCI data copyright MSCI 2013, all rights reserved; see MSCI disclosure page for additional information. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Annual Return (%)

DV1040.9

Boxed Return is highest return for the year.

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Australia 36.40 9.30 -17.54 33.64 -10.82 35.17 5.40 11.19 16.49 -10.44 6.07 17.62 -9.95 1.68 -1.34 49.46 30.34 16.02 30.86 28.34 -50.67 76.43 14.52 -10.95 22.07

Austria 0.57 103.91 6.33 -12.23 -10.65 28.09 -6.28 -4.72 4.51 1.57 0.35 -9.11 -11.96 -5.65 16.55 56.96 71.52 24.64 36.54 2.17 -68.41 43.20 9.88 -36.43 25.90

Belgium 53.63 17.29 -10.98 13.77 -1.47 23.51 8.24 25.88 12.03 13.55 67.75 -14.26 -16.85 -10.89 -14.97 35.33 43.53 9.05 36.66 -2.73 -66.48 57.49 -0.42 -10.62 39.55

Canada 17.07 24.30 -13.00 11.08 -12.15 17.58 -3.04 18.31 28.54 12.80 -6.14 53.74 5.34 -20.43 -13.19 54.60 22.20 28.31 17.80 29.57 -45.51 56.18 20.45 -12.71 9.09

Denmark 52.67 43.94 -0.91 16.56 -28.25 32.81 3.77 18.78 21.79 34.52 8.99 12.06 3.44 -14.81 -16.03 49.25 30.82 24.50 38.77 25.59 -47.56 36.57 30.73 -16.02 31.27

France 37.87 36.15 -13.83 17.83 2.81 20.91 -5.18 14.12 21.20 11.94 41.54 29.27 -4.31 -22.36 -21.18 40.22 18.48 9.88 34.48 13.24 -43.27 31.83 -4.11 -16.87 21.29

Germany 20.60 46.26 -9.36 8.16 -10.27 35.64 4.66 16.41 13.58 24.57 29.43 20.04 -15.59 -22.39 -33.18 63.80 16.17 9.92 35.99 35.21 -45.87 25.15 8.44 -18.08 30.90

Hong Kong 28.12 8.39 9.17 49.52 32.29 116.70 -28.90 22.57 33.08 -23.29 -2.92 59.52 -14.74 -18.61 -17.79 38.10 24.98 8.40 30.35 41.20 -51.21 60.15 23.23 -16.02 28.27

Italy 11.46 19.42 -19.19 -1.82 -22.22 28.53 11.56 1.05 12.59 35.48 52.52 -0.26 -1.33 -26.59 -7.33 37.83 32.49 1.90 32.49 6.06 -49.98 26.57 -15.01 -23.18 12.48

Japan 35.39 1.71 -36.10 8.92 -21.45 25.48 21.44 0.69 -15.50 -23.67 5.05 61.53 -28.16 -29.40 -10.28 35.91 15.86 25.52 6.24 -4.23 -29.21 6.25 15.44 -14.33 8.18

Netherlands 14.19 35.79 -3.19 17.80 2.30 35.28 11.70 27.71 27.51 23.77 23.23 6.88 -4.09 -22.10 -20.83 28.09 12.24 13.85 31.38 20.59 -48.22 42.25 1.74 -12.12 20.59

Norway 42.40 45.53 0.65 -15.50 -22.29 42.04 23.57 6.02 28.63 6.24 -30.06 31.70 -0.89 -12.22 -7.26 48.11 38.39 24.26 45.12 31.43 -64.24 87.07 10.95 -10.01 18.65

Singapore 33.32 42.26 -11.66 24.96 6.28 67.97 6.68 6.45 -6.86 -30.05 -12.88 99.40 -27.72 -23.42 -11.05 37.60 22.27 14.37 46.71 28.35 -47.35 73.96 22.14 -17.92 30.96

Spain 13.53 9.76 -13.85 15.63 -21.87 29.78 -4.80 29.83 40.05 25.41 49.90 4.83 -15.86 -11.36 -15.29 58.46 28.93 4.41 49.36 23.95 -40.60 43.48 -21.95 -12.28 3.00

Sweden 48.33 31.79 -20.99 14.42 -14.41 36.99 18.34 33.36 37.21 12.92 13.96 79.74 -21.29 -27.18 -30.49 64.53 36.28 10.31 43.39 0.62 -49.86 64.16 33.75 -15.98 21.97

Switzerland 6.18 26.21 -6.23 15.77 17.23 45.79 3.54 44.12 2.28 44.25 23.53 -7.02 5.85 -21.38 -10.31 34.08 14.96 16.33 27.40 5.29 -30.49 25.31 11.79 -6.77 20.35

UK 5.95 21.87 10.29 16.02 -3.65 24.44 -1.63 21.27 27.42 22.62 17.80 12.45 -11.53 -14.05 -15.23 32.06 19.57 7.35 30.61 8.36 -48.34 43.30 8.76 -2.56 15.25

US 14.61 30.01 -3.15 30.07 6.39 9.15 1.13 37.14 23.24 33.38 30.14 21.92 -12.84 -12.39 -23.09 28.41 10.14 5.14 14.67 5.44 -37.57 26.25 14.77 1.36 15.33

11

World Market Capitalization

In US dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison.

$37.5 Trillion as of December 31, 2012

DV1060.7

Capitalization over time($ trillions):

Developed Markets Emerging Markets Frontier Markets

Market Efficiency

I. Peter Lynch

II. Warren E. Buffett

III. Efficient Markets Hypothesis

IV. US Large Cap Returns

V. The Failure of Active Management

VI. The Mutual Fund Landscape

VII. Morningstar Predictive Power

ME1100.4

13

Peter Lynch

Peter Lynch, Beating the Street (New York: Simon & Schuster, 1993), 60.

“All the time and effort that people devote to picking the right fund, the hot hand, the great manager,

have in most cases led to no advantage.”

ME1120.4

14

Warren E. Buffett

Berkshire Hathaway Inc., 1996 Annual Report, chairman’s letter, in www.berkshirehathaway.com.

“Most investors, both institutional and individual, will find that the best way to own common stocks is

through an index fund that charges minimal fees.”

Chairman and CEO, Berkshire Hathaway, Inc.

ME1130.2

15

Efficient Markets Hypothesis

Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2 (May 1970): 383-417. Eugene F. Fama, “Foundations of Finance,” Journal of Finance 32, no. 3 (June 1977): 961-64.

The Hypothesis States:

• Current prices incorporate all available information and expectations.

• Current prices are the best approximation of intrinsic value.

• Price changes are due to unforeseen events.

• “Mispricings” do occur but not in predictable patterns that can lead to consistent outperformance.

Implications

• Active management strategies cannot consistently add value through security selection and market timing.

• Passive investment strategies reward investors with capital market returns.

Eugene F. Fama, University of Chicago

ME1140.2

16

US Large Cap Returns

Source: Morningstar data provided by Morningstar Inc. Includes all Morningstar US large cap funds with fifteen-year returns, distinct portfolios only, as of December 31, 2012. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

1997-2012

ME1150.7

- 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400 420 440 460 480 0

2

4

6

8

10

12

14

16

Number of Funds

Ann

ualiz

ed C

ompo

und

Ret

urns

(%

)

Morningstar Fund Average

S&P 500 IndexCRSP 1-10 Index

Annualized Compound Return (%)

S&P 500 Index 4.75

CRSP 1-10 Index 5.34

Morningstar Fund Average 4.71

17

The Failure of Active Management

Source: Standard & Poor’s Indices Versus Active Funds Scorecard, year-end 2012. Index used for comparison: US Large Cap—S&P 500 Index; US Mid Cap—S&P MidCap 400 Index; US Small Cap—S&P SmallCap 600 Index; Global Funds—S&P Global 1200 Index; International—S&P 700 Index; International Small—S&P World ex. US SmallCap Index; Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database.

Percentage of active public equity funds that failed to beat the indexFive Years as of December 2012

ME1160.8

US Large Cap US Mid Cap US Small Cap Global International International Small Emerging Markets0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

75%

90%

83%

62%

74%

21%

76%

Equity Fund Category

% o

f A

ctiv

e F

unds

Tha

t F

aile

d to

Out

perf

orm

Ben

chm

ark

18

The Failure of Active Management

Source: Standard & Poor’s Indices Versus Active Funds Scorecard, year-end 2012. Index used for comparison: Government Long—Barclays Capital US Long Government Index; Government Intermediate—Barclays Capital US Intermediate Government Index; Government Short—Barclays Capital US 1-3 Year Government Index; Investment Grade Long—Barclays Capital US Long Government/Credit; Investment Grade Intermediate—Barclays Capital US Intermediate Government/Credit; Investment Grade Short—Barclays Capital US 1-3 Year Government/Credit; National Muni—S&P National AMT-Free Municipal Bond Index; CA Muni—S&P California AMT-Free Municipal Bond Index. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC.

Percentage of active public fixed income funds that failed to beat the indexFive Years as of December 2012

ME1160.8

Government Long

Government Intermediate

Government Short

Investment-Grade Long

Investment-Grade

Intermediate

Investment-Grade Short

National Muni

CA Muni0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%94%

50%

59%

95%

40%

90%

60%

76%

Fixed Income Category

% o

f A

ctiv

e F

unds

Tha

t F

aile

d to

Out

perf

orm

Ben

chm

ark

19

ME1161.1

The Mutual Fund Landscape2013 report

20

ME1161.1

The US Mutual Fund Industry

Number of funds as of December 2012. International equities include all non-US developed funds. Global fixed includes all non-US funds, both developed and emerging markets. See Data Appendix for more information. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Number of equity and fixed income funds, 2012

21

ME1161.1

The US Mutual Fund Industry

Assets under management as of the end of each December from 2003 to 2012. International equities include all non-US developed funds. Global fixed includes all non-US funds, both developed and emerging markets. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Assets under management (in USD billions)20032012

22

ME1161.1

Beginning sample includes funds as of the beginning of the one-, five-, and 10-year periods ending in 2012. The number of funds as of the beginning of each sample time period is indicated below the period label. Survivors are funds that are still in existence as of December 2012. Winners are funds that survive and beat their respective benchmarks over the period. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Survivorship and OutperformancePerformance periods ending December 31, 2012—equity funds

23

ME1161.1

Beginning sample includes funds as of the beginning of the one-, five-, and 10-year periods ending in 2012. The number of funds as of the beginning of each sample time period is indicated below the period label. Survivors are funds that are still in existence as of December 2012. Winners are funds that survive and beat their respective benchmarks over the period. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Survivorship and OutperformancePerformance periods ending December 31, 2012—fixed income funds

24

ME1161.1

Do Winners Keep Winning?

The sample includes funds at the beginning of the three-, five-, and seven-year periods, ending in December 2009. The graph shows the proportion of funds that outperform and underperform their respective benchmarks. Winner funds are reevaluated in the subsequent period from 2010 to 2012, with the graph showing the proportion of outperformance and underperformance among past winners. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Past performance vs. subsequent performance—equity funds

25

ME1161.1

Do Winners Keep Winning?

The sample includes funds at the beginning of the three-, five-, and seven-year periods, ending in December 2009. The graph shows the proportion of funds that outperform and underperform their respective benchmarks. Winner funds are reevaluated in the subsequent period from 2010 to 2012, with the graph showing the proportion of outperformance and underperformance among past winners. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Past performance vs. subsequent performance—fixed income funds

26

ME1161.1

High Costs Make Outperformance Difficult

The sample includes funds at the beginning of the one-, five-, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average expense ratio over the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each expense ratio quartile. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Winners and losers based on expense ratios (%)—equity funds

27

ME1161.1

High Costs Make Outperformance Difficult

The sample includes funds at the beginning of the one-, five-, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average expense ratio over the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each expense ratio quartile. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Winners and losers based on expense ratios (%)—fixed income funds

28

ME1161.1

High Trading Costs Make Outperformance Difficult

The sample includes equity funds at the beginning of the one-, five, and 10-year periods ending in 2012. Funds are ranked into quartiles based on average turnover during the sample period and performance is compared to their respective benchmarks. The chart shows the proportion of winner and loser funds within each turnover quartile. Fixed income funds are excluded from the analysis because turnover is not a good proxy for fixed income trading costs. See Data Appendix for more information. Data provided by the CRSP Mutual Fund Database. Source: CRSP data provided by the Center for Research in Security Prices, University of Chicago. Past performance is no guarantee of future results.

Winners and losers based on turnover (%)—equity funds

29

ME1161.1

Report Summary

Past performance is no guarantee of future results.

Findings

• Most funds underperformed.

• Strong track records failed to persist.

• High costs and excessive turnover may have contributedto underperformance.

Lessons

• Markets do a good job of pricing securities.

• Intense competition makes consistent outperformance difficult.

• Managers face cost barriers as they try to beat the market.

• Successful fund investing involves more than picking past winners.

• Consider a fund’s market philosophy, investment objectives, strategy, trading costs, and other factors.

The mutual fund landscape

30

ME1161.1

Data Appendix

Research conducted by Dimensional Fund Advisors LP. Mutual fund data is from the CRSP Mutual Fund Database, provided by the Center for Research in Security Prices, University of Chicago.

Certain types of equity and fixed income funds were excluded from the performance study. For equities, sector funds and funds with a narrow investment focus, such as real estate and gold, were excluded. Money market funds, municipal bond funds, and asset-backed security funds were excluded from fixed income.

Funds are identified using Lipper fund classification codes and are matched to their respective benchmarks at the beginning of the sample periods. Winner funds are those whose cumulative return over the period exceeded that of their respective benchmark. Loser funds are funds that did not survive the period or whose cumulative return did not exceed their respective benchmark.

Expense ratio ranges — The ranges of expense ratios for equity funds over the one-, five-, and 10-year periods are 0.02% to 4.95%, 0.01% to 4.47%, and 0.02% to 4.43%, respectively. For fixed income funds, ranges over the same periods are 0.02% to 2.61%, 0.03% to 2.56%, and 0.10% to 2.32%, respectively.

Portfolio turnover ranges — Ranges for equity fund turnover over the one-, five-, and 10-year periods are 1% to 1,135%, 1% to 5,062%, and 1% to 2,447%, respectively.

Benchmark data provided by Barclays, MSCI, and Russell. Barclays data provided by Barclays Bank PLC. MSCI data copyright MSCI 2013, all rights reserved. Russell data copyright © Russell Investment Group 19952013, all rights reserved.

Benchmark indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market. Past performance is no guarantee of future results.

Risk/Return

I. Capital Asset Pricing Model

II. Size and Value Effects Are Strong around the World

III. Historical US Value and Small Cap Premiums

IV. Yearly Observations of the US Size, Value, and Market Premiums

V. Five-Year Moving Average of the US Size, Value, and Market Premiums

VI. Distribution of the US Size, Value, and Market Premiums

VII. Distribution of the Market Returns

VIII. US Small Cap and Value Performance Following a Run

IX. Average US Small Cap and Value

Premiums Following Multi-Year Runs

X. Precision in Portfolios

XI. Structure Determines Performance

XII. Market Premium

XIII. Market Risk Premium Is Countercyclical

XIV. Risk and Return Are Related

XV. The Risk Dimensions Deliver

XVI. Five Factor Help Determine Expected Return

RR1200.8

32

Total Equity Risk

Company Risk

Industry Risk

Market Risk

Unsystematic

Systematic

Capital Asset Pricing ModelWilliam Sharpe: Nobel Prize in Economics, 1990

Beta measures volatility relative to the total market. A beta higher than the market’s beta of 1 implies more volatility, and a beta lower than the market’s implies less volatility.

Unsystematic

• Specific to firm or industry (lawsuit, fraud, etc.)

• Diversifiable

• No compensation

Systematic

• Marketwide, affects all firms (war, recession, inflation, etc.)

• Non-diversifiable

• Investor compensation

• Measured by beta

RR1210.2

http://www.uwants.com/overture_ss.php?srchtxt=music

http://www.uwants.com/overture_ss.php?srchtxt=music

33

VALUE MINUS GROWTHTop 30% – Bottom 30%

SMALL MINUS LARGEBottom 50% – Top 50%

Average Premium (%)

Standard Deviation (%)

Average Premium (%)

Standard Deviation (%)

Jan 1926–Dec 2012 4.77 16.60 4.53 16.08

Jan 1946–Dec 2012 4.56 13.83 3.04 13.67

Jan 1975–Dec 2012 3.55 14.53 3.35 12.83

Historical US Value and Small Cap Premiums

Data provided by Fama/French.

Annual

RR1221.5

34

Yearly Observations of the US Size Premium

Multifactor data provided by Fama/French. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

Small Stocks minus Big Stocks1927-2012

RR1222.7

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

3.58%

Ret

urn

Pre

miu

m

Average

Within 2% of Average

Premiums within Range

35

Yearly Observations of the US Value Premium

Multifactor data provided by Fama/French. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

Value Stocks minus Growth Stocks1927-2012

RR1222.7

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

4.80%

Ret

urn

Pre

miu

m

Average



36

Yearly Observations of the US Market Premium

Data provided by Fama/French. Total US Market Research Factor (total market minus one-month Treasury bills).Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

Market minus One-Month Treasury Bills1927-2012

RR1222.7

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

8.05%

Ret

urn

Pre

miu

m

Average



Five-Year Moving Average of the US Size and Value Premiums

Multifactor data provided by Fama/French. SmB and HmL research factors. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

Annual: 1927–2012

RR1223.6

US Value Premium

• On an annualized basis, small cap and value stocks have had more positive than negative five-year periods relative to large cap and growth stocks.

• These periods typically offer stronger performance relative to large cap and growth.

• Small cap and value stocks are still subject to extended periods of underperformance.

US Size Premium

1931

1935

1939

1943

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

-10%

-5%

0%

5%

10%

15%

20%

An

nu

aliz

ed

Re

turn

1931

1935

1939

1943

1947

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

-15%

-5%

5%

15%

25%

An

nu

aliz

ed

Re

turn

38

Five-Year Moving Average of the US Market Premium

Data provided by Fama/French. Total US Market Research Factor (total market minus one-month Treasury bills).Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.

Annual: 1927–2012

RR1223.6

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Ann

ualiz

ed R

etur

n

Distribution of the US Size Premium

Green and orange years indicate 1990s and 2000s respectively.Data provided by Fama/French. SmB research factor.

1927–2012

RR1225.6

1998 1973 1990 2011 2005 2012 2009 2010 2001 1979 2003 1943 19671929 1989 2007 2000 2008 1993 1983 1999 1977 1945 1933

1987 1995 1997 2006 1992 1978 1991 1968 19341972 1986 1996 2004 1988 1976 1975 19651970 1984 1994 2002 1982 1958 19441969 1963 1974 1985 1981 1938 19361937 1962 1964 1966 1980

1955 1960 1961 19711952 1957 1950 19591948 1956 1949 19421947 1954 1940 1939

1953 1931 19351951 1928 19321946194119301927

≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35% ≥40% ≥45% ≥50%0

2

4

6

8

10

12

14

16

18

Return Premium (Small minus Large)

Num

ber

of Y

ears

Average Annual Premium:3.58%

40

Distribution of the US Value Premium

Green and orange years indicate 1990s and 2000s respectively.Data provided by Fama/French. HmL research factor.

1927–2012

RR1225.6

1999 1980 1939 2007 2011 2010 2008 2012 2006 2001 1992 1981 1943 20001934 1931 1991 2009 1994 2003 2005 2002 1993 1983 1954

1971 1998 1989 1996 2004 1997 1984 1976 19501938 1990 1987 1995 2003 1988 1973 1970 19361930 1969 1979 1985 1986 1982 1968

1967 1966 1978 1977 1964 19631957 1960 1972 1975 1958 19441953 1956 1959 1974 1945 19421951 1949 1952 1965 1941 19331928 1940 1948 1962 1935

1937 1946 1961 19291927 1955

19471932

≥-35% ≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35%0

2

4

6

8

10

12

14

Return Premium (Value minus Growth)

Num

ber

of Y

ears


Distribution of the US Market Premium

Green and orange years indicate 1990s and 2000s respectively.Data provided by Fama/French. Total US market research factor (total market minus one-month Treasury bills).

1927–2012

RR1225.6

1931 2008 1937 1973 2002 2001 1990 1984 1994 2011 1993 2006 2012 1999 2009 2003 1945 1958 1954 19331974 1930 2000 1966 1977 1987 2007 1992 2004 2010 1989 1997 1995 1928 1935

1981 1962 1970 1960 2005 1968 1988 1998 1985 1991 19751969 1957 1946 1953 1978 1959 1986 1996 1980 1950 19361929 1941 1940 1948 1956 1983 1963 1976 1943 1927

1932 1947 1982 1951 1967 19381939 1979 1949 19611934 1972 1942 1955

1971 1944196519641952

≥-50% ≥-45% ≥-40% ≥-35% ≥-30% ≥-25% ≥-20% ≥-15% ≥-10% ≥-5% ≥0% ≥5% ≥10% ≥15% ≥20% ≥25% ≥30% ≥35% ≥40% ≥45% ≥50% ≥55%0

2

4

6

8

10

12

Return Premium (Market minus One-Month T-Bills)

Num

ber

of

Years


194920.2

195120.7

196321.0

1970 19820.0 21.0

1953 1993 19440.7 11.1 21.3

2011 2004 19960.8 12.0 21.4

1960 1959 19831.2 12.7 22.0

1987 1952 19791.7 13.4 22.6

1948 1968 1998 19972.1 14.1 24.3 31.4

1939 1965 1955 2003 2.9 14.5 25.2 31.6

1947 2006 1999 1985 3.6 15.5 25.3 32.2

1973 1966 1934 1942 1976 1936-18.1 -8.7 4.3 16.0 26.8 32.3

1929 1932 1984 1964 1961 1980-14.6 -8.7 4.5 16.1 26.9 32.8

2000 1940 2007 1971 1938 1927-11.4 -7.1 5.8 16.1 28.1 33.4

2001 1990 2005 2012 1943 1991-11.1 -6.0 6.2 16.2 28.4 34.7

1969 1946 1978 1986 1967 1995 -10.9 -5.9 7.5 16.2 28.7 36.8

1930 1962 1977 1956 1972 2009 1945 1935 -28.5 -10.2 -4.3 8.3 16.8 28.8 38.1 44.3

2008 1974 1957 1981 1926 2010 1989 1975 1958 -36.7 -27.0 -10.1 -3.6 9.2 17.9 28.9 38.8 45.0

1931 1937 2002 1941 1994 1992 1988 1950 1928 1954 1933-43.5 -34.7 -21.1 -10.0 -0.1 9.8 18.0 29.6 38.9 50.0 57.1

-50% to -40% -40% to -30% -30% to -20% -20% to -10% -10% to 0% 0% to 10% 10% to 20% 20% to 30% 30% to 40% 40% to 50% 50% to 60%

Annual Return Range

Distribution of US Market Returns

CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

CRSP 1-10 Index Returns by Year1926–2012

Positive Years: 65(75%)

Negative Years: 22(25%)

• In 2008, the US stock market experienced its second worst performance year since 1926.

• In 2009, US market performance was in the top quartile of historical calendar year returns.

RR1226.4

43

Stay in Small all the time

Move to Large when Small outperforms for at least:

3 Years 4 Years 5 Years

Average Annual Return (%) 15.28 12.63 13.68 14.72

Compound Annualized Return (%) 12.78 10.62 11.49 12.41

Standard Deviation (%) 23.81 21.05 22.31 23.02

US Small Cap Performance Following a Run

Data provided by Fama/French. The strategy of staying invested in Small Cap all the time is compared to timing rules that switch back and forth between Small Cap and Large Cap based on the length of the Small Cap Run. Each June 30, the timing rule looks back to see how many years in a row Small Cap has had a higher return than Large Cap. This is the Small Cap Run. If the Small Cap Run is at least 3 years (or 4, or 5), the timing rule switches to Large Cap for the next twelve months. At the end of those twelve months, the Small Cap Run is computed again, and the process is repeated.

• For the period beginning January 1946, implementing a fixed timing strategy based on the duration of a small cap run would not earn higher returns than simply holding small cap all the time.

• A small cap run of 3, 4, or 5 years offers no insight into whether small or large cap stocks will outperform in the next year.

Annual: January 1946–December 2012

RR1227.6

44

Stay in Value all the time

Move to Growth when Value outperforms for at least:

3 Years 4 Years 5 Years

Average Annual Return (%) 16.24 14.38 15.32 15.93

Compound Annualized Return (%) 14.26 12.54 13.40 14.03

Standard Deviation (%) 21.25 20.61 21.04 20.89

US Value Performance Following a Run

Data provided by Fama/French. The strategy of staying invested in Value all the time is compared to timing rules that switch back and forth between Value and Growth based on the length of the Value Run. Each June 30, the timing rule looks back to see how many years in a row Value has had a higher return than Growth. This is the Value Run. If the Value Run is at least 3 years (or 4, or 5), the timing rule switches to Growth for the next twelve months. At the end of those twelve months, the Value Run is computed again, and the process is repeated.

• For the period beginning January 1946, implementing a fixed timing strategy based on the duration of a value run would not earn higher returns than simply holding value all the time.

• A value run of 3, 4, or 5 years offers no insight into whether value or growth stocks will outperform in the next year.

Annual: January 1946–December 2012

RR1227.6

45

Average US Small Cap Premiums Following Multi-Year Runs


• In the January 1926–December 2012 period, there were 22 periods (events) when small cap beat large cap in three consecutive years. The Subsequent Premium in the following year averaged 10.17% across the 22 periods.

A small cap run of 3, 4, or 5 years may not increase the likelihood of underperformance in the following year.

Annual

RR1229.6

SMALL MINUS LARGE

Run = 3 Years Run = 4 Years Run = 5 Years

Average Premium (%)

Subsequent Premium (%) Events



Jan 1926–Dec 2012 4.53 10.17 22 7.28 15 2.16 10

Jan 1946–Dec 2012 3.04 10.29 17 8.79 12 4.07 9

Jan 1975–Dec 2012 3.35 7.89 12 9.22 10 6.50 8

Average US Value Premiums Following Multi-Year Runs


• In the January 1926–December 2012 period, there were 22 periods (events) when value beat growth in three consecutive years. The Subsequent Premium in the following year averaged 9.16% across the 22 periods.

A value run of 3, 4, or 5 years may not increase the likelihood of underperformance in the following year.

Annual

RR1229.6

VALUE MINUS GROWTH

Run = 3 Years Run = 4 Years Run = 5 Years

Average Premium (%)




Jan 1926–Dec 2012 4.77 9.16 22 6.32 17 3.32 12

Jan 1946–Dec 2012 4.56 6.79 18 4.32 14 2.02 10

Jan 1975–Dec 2012 3.55 7.15 12 3.33 9 0.26 6

47

Precision in Portfolios

• Traditionally, “products” have been classified into rigid and sometimes arbitrary categories.

• Style boxes force crude strategic allocation.

• Using the three-factor model, the total portfolio is measured by factors that determine risk and expected return.

• Freedom from brittle definitions allows precisely tuned portfolios.

RR1250.2

Traditional Consulting Style Box

Large

Mid

SmallValue Blend Growth

Three-Factor Model Small

Growth Value

Large

48

Advancements in Research

Size

Small

Large

Relative Price

HighLow

Value Effect(1991)

Market

Single-Factor Model(1963) Size

Large

Small

Size Effect(1981)

Size

Large

Large

Small

Small High

Low

High

Low

Direct Profitability

Relative Price

HighLow

Expected Profitability (2012)

RR1255.1

Structure Determines Performance

• The vast majority of the variation in returns is due to risk factor exposure.

• After fees, traditional management typically reduces returns.

sensitivity to market

[market return minus T-bills]

sensitivity to size

[small stocksminus big stocks]

sensitivity to BtM

[value stocksminus growth]

randomerrore(t)

++ + +=average expected return

[minus T-bills]

average excess return

THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING

Priced Risk• Positive expected return• Systematic• Economic• Long-term• Investing

Unpriced Risk• Noise• Random• Short-term• Speculating

Structured Exposure to Factors explain 96% of return variation

Unexplained Variation is 4%

• Market• Size• Value/Growth

THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING

Dimensions of Higher Expected Returns

1. Credit premium data (1973–2012) provided by Barclays Bank PLC.Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Equity premiums provided by Fama/French. Maturity premium data provided by © Stocks, Bonds, Bills, and Inflation Yearbook©, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Annual Average US Premiums: 1927–2012

1 2 3 4 5

8.05%

3.58%

4.80%

2.52%

0.85%

Market Premium

All Equity Universe

minus T-Bills

Size Premium

Small Stocks minus

Large Stocks

BtM Premium

High BtMminus

Low BtM

Maturity Premium

LT Govt.minus

T-Bills

Credit1 Premium

Int. Corp.minus

LT Govt.

The Risk Dimensions Delivered

Periods based on rolling annualized returns. 739 total 25-year periods. 799 total 20-year periods. 859 total 15-year periods. 919 total 10-year periods. 979 total 5-year periods.Performance based on Fama/French Research Factors. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Mutual funds distributed by DFA Securities LLC.

July 1926–December 2012

RR1271.5

Value beat growth 100% of the time.





US Value vs. US GrowthOVERLAPPING PERIODS

In 5-Year Periods

In 10-Year Periods

In 15-Year Periods

In 20-Year Periods

In 25-Year PeriodsValue beat growth 100% of the time.





US Small vs. US Large

Small beat large 97% of the time.





The Risk Dimensions Delivered

Based on rolling annualized returns. Rolling multi-year periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. International Value vs. International Growth data: 157 overlapping 25-year periods. 217 overlapping 20-year periods. 277 overlapping 15-year periods. 337 overlapping 10-year periods. 397 overlapping 5-year periods. International Small vs. International Large data: 217 overlapping 25-year periods. 277 overlapping 20-year periods. 337 overlapping 15-year periods. 397 overlapping 10-year periods. 457 overlapping 5-year periods. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. International Large is MSCI World ex USA Index gross of foreign withholding taxes on dividends; copyright MSCI 2013, all rights reserved.

RR1271.5

International Small vs. International Large











International Value vs. International GrowthOVERLAPPING PERIODS

In 5-Year Periods

In 10-Year Periods

In 15-Year Periods

In 20-Year Periods

In 25-Year PeriodsValue beat growth 100% of the time.





January 1975–December 2012 January 1970–December 2012

53

Market Premium

Sources: Fama/French data provided by Fama/French. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Fama/French US Market Research Factor ReturnsMonthly: January 1990–December 2012

RR1272.6

Indicates a monthly return greater than 6.0% or less than -6.0%.

Monthly returns greater than 6% 25

Monthly returns less than 6% 21

YearAnnual Return Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1990 -13.80% -7.60% 0.90% 1.80% -3.50% 8.20% -1.10% -1.60% -9.90% -6.00% -1.90% 6.00% 2.40%

1991 29.10% 4.40% 7.10% 2.50% -0.20% 3.60% -4.80% 4.20% 2.20% -1.60% 1.40% -4.10% 10.30%

1992 6.40% -0.50% 1.10% -2.70% 1.00% 0.40% -2.30% 3.70% -2.30% 1.00% 0.90% 3.80% 1.50%

1993 8.40% 1.00% 0.30% 2.30% -2.80% 2.70% 0.30% -0.30% 3.70% -0.20% 1.60% -2.00% 1.70%

1994 -4.10% 2.90% -2.60% -4.90% 0.70% 0.60% -3.10% 2.80% 3.90% -2.20% 1.10% -4.10% 0.80%

1995 31.00% 1.60% 3.60% 2.20% 2.10% 2.90% 2.70% 3.60% 0.50% 3.20% -1.60% 3.90% 1.00%

1996 16.20% 2.40% 1.20% 0.70% 2.10% 2.30% -1.20% -5.80% 2.80% 4.90% 0.90% 6.10% -1.60%

1997 26.10% 4.90% -0.50% -4.90% 3.80% 6.70% 4.00% 7.20% -4.00% 5.40% -3.90% 2.70% 1.30%

1998 19.40% 0.00% 6.90% 4.70% 0.70% -3.00% 2.80% -2.70% -16.20% 5.90% 7.10% 5.90% 5.90%

1999 20.20% 3.50% -4.20% 3.40% 4.50% -2.40% 4.70% -3.40% -1.40% -2.70% 5.80% 3.30% 8.00%

2000 -16.70% -4.40% 2.80% 4.90% -6.40% -4.40% 4.80% -2.20% 7.10% -5.60% -3.00% -10.80% 1.50%

2001 -14.80% 3.40% -10.30% -7.50% 8.00% 0.70% -2.00% -2.10% -6.20% -9.40% 2.60% 7.70% 1.60%

2002 -22.90% -1.80% -2.30% 4.30% -5.10% -1.20% -7.20% -8.30% 0.70% -10.10% 7.40% 6.00% -5.40%

2003 30.70% -2.40% -1.60% 0.90% 8.20% 6.30% 1.50% 2.20% 2.40% -1.00% 6.00% 1.60% 4.50%

2004 10.70% 2.20% 1.50% -1.20% -2.50% 1.40% 2.10% -3.90% 0.20% 2.00% 1.70% 4.70% 3.40%

2005 3.20% -2.80% 2.10% -1.90% -2.70% 3.60% 0.90% 4.10% -0.90% 0.80% -2.40% 3.70% 0.00%

2006 10.60% 3.70% -0.50% 1.50% 0.90% -3.50% -0.40% -0.60% 2.10% 1.50% 3.30% 2.00% 0.70%

2007 0.80% 1.50% -1.80% 0.90% 3.60% 3.50% -1.90% -3.60% 0.70% 3.80% 2.30% -5.30% -0.70%

2008 -38.40% -6.40% -2.30% -1.20% 5.00% 2.20% -8.00% -1.50% 1.00% -10.00% -18.60% -8.50% 2.10%

2009 29.10% -7.70% -10.10% 8.80% 11.10% 6.70% -0.30% 8.20% 3.20% 4.50% -2.80% 5.70% 2.90%

2010 18.00% -3.70% 3.50% 6.40% 2.00% -8.00% -5.20% 7.20% -4.40% 9.20% 3.90% 0.60% 6.80%

2011 -0.90% 0.50% 3.90% 0.30% 2.80% -1.50% -1.90% -2.40% -5.90% -8.40% 11.50% -0.60% 0.50%

2012 15.00% 5.10% 4.40% 3.10% -0.80% -6.20% 3.90% 0.80% 2.60% 2.70% 1.80% 0.80% 1.20%

54

Market Premium

Sources: Fama/French data provided by Fama/French. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Fama/French US Market Research Factor ReturnsMonthly: January 1990–December 2012

RR1272.6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Mon

thly

Ret

urn

HighestMonthlyReturn: 11.5%(Oct 2011)

AverageMonthlyReturn: 0.53%

LowestMonthlyReturn: -18.6%(Oct 2008)

55

S&P 500 Index Returns

Sources: Dimensional; the S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Monthly: January 1990–December 2012

RR1272.6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Mon

thly

Ret

urn

HighestMonthlyReturn: 11.4%(Dec 1991)

AverageMonthlyReturn: 0.78%

LowestMonthlyReturn: -16.8%(Oct 2008)

56

Business Cycle

Risk Premium

Peak

Trough

Market Risk Premium Is Countercyclical

The risk premium is the additional return an investor requires to compensate for the risk borne. Business cycle is a repetitive cycles of economic expansion and contractions. Peak is the high point at the end of an economic expansion until the start of a contraction. Trough is the transition point between economic recession and recovery.

RR1273.3

• Equity Market(complete value-weighted universe of stocks)Stocks tend to have higher expected returns than fixed income over time.

• Company Size(measured by market capitalization)Small company stocks tend to have higher expected returns than large company stocks over time.

• Company Price(measured by ratio of company book value to market equity)Lower-priced “value” stocks tend to have higher expected returns than higher-priced “growth” stocks over time.

Value

Large

Small

Growth

Increased RiskExposure andExpected Return

TotalStockMarket

Decreased Risk Exposure and

Expected Return

Dimensions of Stock Returns around the World

Risk and Return Are Related

Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (June 1992): 427-65.Eugene F. Fama and Kenneth R. French are consultants for Dimensional Fund Advisors. This page contains the opinions of Eugene F. Fama and Kenneth R. French but not necessarily of Dimensional Fund Advisors or DFA Securities LLC, and does not represent a recommendation of any particular security, strategy, or investment product. The opinions expressed are subject to change without notice. This material is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. Dimensional Fund Advisors (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described. ©2012 by Dimensional Fund Advisors. All rights reserved.

58

Long-Term Discipline

I. The Importance of Long-Term Discipline

II. The Stock Market’s Reaction

III. Performance of the S&P 500 Index

IV. Historical Performance vs. Large Stocks

V. Bull and Bear Markets

VI. The Market’s Response to Crisis

VII. Stocks vs. The Risk-Free Rate

VIII. Volatility and Market Downturns

IX. Long-Term Market Stability

X. Perils of Market Timing

XI. Missing Opportunity

XII. Recessionary Periods

LT1300.7

59

The Importance of Long-Term Discipline

The S&P data are provided by Standard & Poor’s Index Services Group. One-Month US Treasury Bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).For illustrative purposes only. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

LT1310.7

Annualized Compound Returns (%)

1926-2012 1965-1981 1982-2012

S&P 500 Index 9.84 6.33 11.14

One-Month US Treasury Bills 3.53 6.66 4.49

60

The Stock Market’s Reaction

Dow Jones data provided by Dow Jones Indexes.Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

As Measured by the Dow Jones Industrial Average

LT1320.2

Date Event

First Trading Session Response Subsequent Market Behavior

Prior Day

Close Close ChangePercent Change

One Month

Six Months

One Year

September 11, 2001 World Trade Center towers destroyed 9,605.51 8,920.70 -684.81 -7.13% -3.66% 11.12% -8.71%

January 16, 1991 US launches bombing attack on Iraq 2,508.91 2,623.51 114.60 4.57% 16.97% 18.93% 29.52%

August 2, 1990 Iraq invades Kuwait 2,899.26 2,864.60 -34.66 -1.20% -8.74% -4.67% 4.95%

March 30, 1981 President Reagan shot by John Hinckley Jr. 994.78 992.16 -2.62 -0.26% 1.95% -14.33% -16.90%

August 9, 1974 President Nixon resigns 784.89 777.30 -7.59 -0.97% -14.71% -8.87% 5.98%

November 22, 1963 President Kennedy assassinated in Dallas 732.64 711.48 -21.16 -2.89% 6.57% 15.37% 24.99%

October 22, 1962 Cuban missile crisis 568.60 558.06 -10.54 -1.85% 15.55% 27.41% 33.89%

September 24, 1955 President Eisenhower heart attack 487.44 455.55 -31.89 -6.54% 0.04% 12.48% 5.72%

June 25, 1950 North Korea invades South Korea 224.30 213.90 -10.40 -4.64% -4.49% 7.34% 15.13%

December 7, 1941 Japan attacks Pearl Harbor, Hawaii 115.90 112.52 -3.38 -2.92% -0.86% -6.19% 2.88%

61

Performance of the S&P 500 Index

Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2012 provided by Bloomberg. The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.

Daily: January 1, 1970-December 31, 2012

LT1330.9

Total Period Missed 1 Best Day

Missed 5 Best Single Days



One-Month US T-Bills

Annualized Compound Return 9.94% 9.66% 8.84% 7.47% 6.33% 5.30%

$58,769

$52,702

$38,212

$22,191

$13,999

$9,195

Gro

wth

of

$1,0

00

• The best single day was October 13, 2008.

• The best one-month return, October 1974, happened immediately after the second-worst one-year period.

• The occurrence of strongly positive returns has been especially unpredictable. Investors attempting to wait out an apparent downturn ran a high risk of missing these best periods.

• 8 of the top 25 days occurred between September 2008 and February 2009, during which time the S&P dropped 41.8%

• 5 of the Top 10 days occurred between October 2008 and November 2008, during which time, the S&P 500 dropped 22.8%.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Day Month 3 Months Ending

6 Months Ending

12 Months Ending

10/13/08 10/74 10/82 6/75 6/83

10/19/87 10/87 11/08 2/09 2/09 Worst Periods and the Return If Missed

Best Periods and the Return If Missed

Best/Worst Missed Period

Total Period

9.66% 9.55% 9.33% 9.05% 8.73%

11.40%11.33%10.84%10.56%10.49%9.94%

Ann

ua

lized

Co

mp

oun

d R

etu

rns

%

Performance of the S&P 500 Index

Time periods greater than one month are based on monthly rolling periods, and dates indicated are end of period.The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.

Daily: January 1, 1970-December 31, 2012

LT1330.8

Value Stocks vs. Large Stocks

US Large Value Index is Fama/French US Large Value Index (ex utilities), provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. US Large Value Index measures the performance of US stocks with lower price-to-book ratios.

Monthly: July 1926-December 2012

LT1340.9

Rolling Time Periods 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years 40 Years

Total Number of Periods 1027 1003 979 919 859 799 679 559

Number of Periods US Large Value Index Outperformed S&P 500 Index 573 654 735 751 775 766 679 559

56%

65%

75%82%

90%96%

100% 100%

Percentage of All Rolling Periods Where US Large Value Index Outperformed S&P 500 Index

Small Stocks vs. Large Stocks

The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Securities of small companies are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. The CRSP 6-10 Index measures the performance of US small cap stocks, those in the five smallest deciles of the US market.

Monthly: January 1926-December 2012

LT1340.9

53% 53%58%

64%

72%

82%

92%

100%

Percentage of All Rolling Periods Where US Small Cap Index Outperformed S&P 500 Index



Number of Periods US Small Cap Index Outperformed S&P 500 Index 551 536 570 593 622 658 629 565

Large Stocks vs. Fixed Income

The S&P data are provided by Standard & Poor’s Index Services Group. One-Month Treasury Bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. One-Month T-Bills measure the performance of US government-issued Treasury bills.

Monthly: January 1926-December 2012

LT1340.9

69%75% 75%

84%

95%100% 100% 100%

Percentage of All Rolling Periods Where S&P 500 Index Outperformed One-Month T-Bills



Number of Periods S&P 500 IndexOutperformed One-Month T-Bills 709 754 739 774 821 805 685 565

Bull and Bear Markets

Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by CRSP (January 1, 1926–August 31, 2008) and Bloomberg (September 1, 2008–present).Returns include reinvested dividends. Bull and bear markets are defined in hindsight using cumulative daily returns. A bear market (1) begins with a negative daily return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. Performance data represents past performance and does not predict future performance.

S&P 500 Index (USD)Daily Returns: January 1, 1926–June 30, 2013

LT1370.15

1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

220%

-13%

-85%

20%

-16%-39%

119%

87%

27%

-15%

-10%

-13%

100%

44%

-53%

25%

40%

-13%-14%

26%

-25%

22%

-11%

23%

-33%

83%

-11%

99%

-26%

19%

-11%-16%

26%

53%

91%

-13%

121%

-11%

26%

-13%

18%

69%

-21%-11%

44%

-27%

15%

96%

-11%

59%

-27%

-10%-21%

-32%

56%

-12%

38%

-45%

22%

-13%

50%

-13%

38%

-15%

27%

-13%

26%

-10%

21%

-16%

48%

-20%

78%

-11%

156%

-33%

73%

-10%

16%

-19%

303%

-12%

37% 50%

-19%

-12%

23%

-11%

13%

-47%

21%

-14%

113%

-55%

6/30/201258%

1%

84%

35%

-16% -19%

Average Duration Average ReturnBull Market 413 Days Bull Market 58%Bear Market 216 Days Bear Market -21%


Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by Standard & Poor’s Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

LT1370.15

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

6 mos.-30%

2 mos.-19%

6 mos.-21%

4 mos.-10%

44 mos.193%

2 mos.92%

6 mos.100%3 mos.26%

4 mos.12%

34 mos.-83%

23 mos.133%

9 mos.61%

5 mos.22%

13 mos.-50%

4 mos.-16%

31 mos.-30%

6 mos.-22%

49 mos.210%

116 mos.491%

5 mos.12%

48 mos.105% 43 mos.

90%26 mos.

52%

7 mos.-10%

5 mos.-15%

6 mos.-22%

8 mos.-16%

30 mos.76%

9 mos.55%

15 mos. 35%

19 mos.-29%

33 mos.86%

21 mos.-43%

3 mos.-11%

14 mos.-14%

20 mos.-17% 3 mos.

-30%

5 mos.-15%

2 mos.-15%

25 mos.-45%

61 mos.282%

92 mos.355%

30 mos.71%

24 mos.63%

61 mos.108%

Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market

Jun 201348%

10 mos.34%

14 mos.65%

5 mos.-16%

2 mos.-13%16 mos.

-51%

Average Duration Average ReturnBull Market 30 Months Bull Market 111%Bear Market 11 Months Bear Market -26%

S&P 500 Index (USD)Monthly Returns: January 1926–June 30, 2013


Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

Russell 2000 Index (USD)Monthly Returns: January 1979–June 2013

LT1370.15

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

3 mos.26%

14 mos.82%

11 mos.100%

22 mos.69%

11 mos.32%

22 mos.65%

67 mos.234%

21 mos.57%

18 mos.74%

22 mos.85%

2 mos.12%

25 mos.50%

21 mos.-53%

4 mos.-11%

3 mos.-11%

31 mos.-35%

4 mos.-30%

2 mos.-12%

13 mos.-32%

3 mos.-36%

4 mos.-12%13 mos.

-21%14 mos.-22%

2 mos.-20%

2 mos.-11%

8 mos.38%

14 mos.87%

4 mos.-16%

8 mos.45%


5 mos.-25%

Jun 201356%

Average DurationBull Market 18 MonthsBear Market 8 Months

Average ReturnBull Market 68%Bear Market -23%


Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

MSCI EAFE Index, Net Dividends (USD)Monthly Returns: January 1970–June 30, 2013

LT1370.15

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

34 mos.103%

5 mos.-15%

7 mos.41%

4 mos.19%

39 mos.93%

13 mos.36%

18 mos.67%

37 mos.323%

57mos.93%

26 mos.47% 5 mos.

26%

15 mos.53%

8 mos.18%

55 mos.206%

18 mos.-42%

5 mos.-13%

9 mos.-13%

2 mos.-11 % 17 mos.

-20%

4 mos.-17%

2 mos.-15% 9 mos.

-31%

20 mos.-15%

4 mos.-11%

2 mos.-15%

39 mos.-48%

Feb 200916 mos.-57%

Jun 2013-18%


Average DurationBull Market 24 MonthsBear Market 11 Months

Average ReturnBull Market 87%Bear Market -23%


Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

MSCI Emerging Markets Index, Gross Dividends (USD)Monthly Returns: January 1988–June 2013

LT1370.15

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

17 mos.98%

1 mo.-12%

16 mos.101%

8 mos.43%

17 mos.92%

29 mos.38%

5 mos.21%

19 mos.114%

7 mos.42%

18 mos.89%

21 mos.109%

16 mos.85%

1 mo.-14%

4 mos.-29%

5 mos.-14%

3 mos.-12% 5 mos.

-25%

13 mos.-56%

18 mos.-48%

5 mos.-24%

4 mos.-11%

2 mos.-11%

Feb 200916 mos.-61%

4 mos.31%

Jun 2013-18%


Average Duration Average ReturnBull Market 15 Months Bull Market 72%Bear Market 6 Months Bear Market -26%

71

20%

-2%

21%

1%

-4%

8%

35%

13%

21%

-5%

42%

12%

59%

50% 48% 50%

84%

Cumulative Total Return

After 1 year After 3 years After 5 years

October 1987:Stock Market Crash

August 1989:US Savings and

Loan Crisis

September 1998:Asian ContagionRussian Crisis

Long-Term Capital Management Collapse

March 2000:Dot-Com Crash

September 2001:

Terrorist Attack

The Market’s Response to Crisis

Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each International Value Index, International Small Index; 40% BofA Merrill Lynch One-Year US Treasury Note Index.The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French. International Small Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semiannually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.

Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds

LT1385.5

September 2008:

Bankruptcy of Lehman Brothers

The S&P 500 has Beaten Treasury Bills in 83% of all Ten-Year PeriodsRolling 120-Month Annualized Returns (925 Total Periods)

January 1926–December 2012

Annualized Return

S&P 500 Index: 9.8%

One-Month Treasury Bills: 3.5%

An

nu

aliz

ed R

etu

rns

1926 1938 1950 1962 1974 1986 1998

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

S&P 500 Index

One-Month Treasury Bills

Rolling 120-Month Periods Beginning at Date Shown

Stocks vs. the Risk-Free Rate

The S&P data are provided by Standard & Poor’s Index Services Group. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.

January 1926–December 2012

LT1387.6

S&P 500$2,980Dec 2010

Long-Term Returns vs. Short-Term Volatility

The S&P data are provided by Standard & Poor's Index Services Group. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.

1999 S&P 500 Illustration

LT1388.6

April 1999 Daily ReturnsTotal Month of April Return: 3.9%

During this month, the S&P 500 had 10 days of negative returns out of 21 trading days.

1999 Monthly ReturnsTotal Annual Return: 21%

During this year, the S&P 500 had 5 out of 12 months with negative returns.

J F M A M J J A S O N D

1 15 30

-2.24%

-0.49%

-3.11% -2.36% -3.12% -2.74%

21.04%

• Even during periods of positive stock returns, investors may experience substantial volatility.

• Short-term volatility is a typical characteristic of stock market investing.

• Long-term returns are the sum of short-term volatility.

74

Domestic Large Cap

DomesticSmall Cap International Emerging

Fund Equivalent IndexS&P 500

IndexCRSP 6-10

IndexMSCI EAFE

IndexMSCI Emerging

Markets Index

Start Date January 1926 January 1926 January 1970 January 1988End Date December 2012 December 2012 December 2012 December 2012Threshold -7% -7% -7% -7%Months at or below Threshold 63 111 33 37Months in Sample 1,044 1,044 516 300Percentage of Months below Threshold 6.0% 10.6% 6.4% 12.3%

Annualized Average Compound Return over Subsequent Periods (starting the next month)1 Year 9.1% 21.1% 10.4% 8.0%3 Years 9.5% 16.4% 11.1% 11.8%5 Years 9.9% 16.1% 12.8% 13.1%10 Years 8.4% 13.9% 11.2% 12.3%

Market Downturns—A Historical Perspective

Sources: The S&P data are provided by Standard & Poor's Index Services Group; CRSP Index returns from the Center for Research in Security Prices, University of Chicago; MSCI data copyright MSCI 2013, all rights reserved. MSCI EAFE Index is net of foreign withholding taxes on dividends. MSCI Emerging Markets Index is gross of foreign withholding taxes on dividends. Annualized average compound return over subsequent periods is calculated as the compound growth rate required to produce the average total return over the same time period. Performance for periods greater than one year are annualized. Indices are not available for direct investment; therefore, their performance does not reflect expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor may lose money.

Individual Index Monthly DownturnsAs of December 31, 2012

• Individual asset class volatility and negative returns have occurred in the past.

• Despite these downturns, investors who remained disciplined were rewarded in the long run.

• Use balanced diversified portfolios and focus on long-term results.

LT1388.7

75

Domestic Large Cap DomesticSmall Cap International Emerging

Fund Equivalent Index

S&P 500

Index

CRSP 6-10

Index

MSCI EAFE

Index

MSCI Emerging

Markets Index

Start Date January 1970 January 1970 January 1970 January 1988

End Date December 2012 December 2012 December 2012 December 2012

Threshold -7% -7% -7% -7%

Historical Simultaneous Index Monthly Downturns (7% threshold)

April 1970 -8.9% -16.9% -8.4% –

November 1973 -10.8% -18.9% -14.4% –

August 1974 -8.3% -8.2% -10.4% –

September 1974 -11.7% -8.4% -7.4% –

March 1980 -9.9% -17.5% -10.7% –

October 1987 -21.5% -28.7% -14.0% –

August 1990 -9.0% -12.6% -9.7% -12.8%

August 1998 -14.5% -20.6% -12.4% -28.9%

February 2001 -9.1% -10.0% -7.5% -7.8%

September 2001 -8.1% -14.9% -10.1% -15.5%

July 2002 -7.8% -14.8% -9.9% -7.6%

September 2002 -10.9% -7.3% -10.7% -10.8%

June 2008 -8.4% -9.4% -8.2% -10.0%

September 2008 -8.9% -8.9% -14.5% -17.5%

October 2008 -16.8% -21.4% -20.2% -27.4%

May 2010 -8.0% -7.7% -11.5% -8.8%

September 2011 -7.0% -10.9% -9.5% -14.6%Average -10.6% -13.9% -11.1% -14.7%

Annualized Average Compound Return over Subsequent Periods (starting the next month)

1 Year 13.6% 25.3% 9.0% 24.8%

3 Years 10.5% 19.6% 8.9% 19.9%

5 Years 10.5% 19.4% 11.7% 25.6%

10 Years 10.5% 16.1% 9.3% 15.2%

Market Downturns—A Historical Perspective

Sources: The S&P data are provided by Standard & Poor's Index Services Group; CRSP Index returns from the Center for Research in Security Prices, University of Chicago; MSCI data copyright MSCI 2013, all rights reserved. MSCI EAFE Index is net of foreign withholding taxes on dividends. MSCI Emerging Markets Index is gross of foreign withholding taxes on dividends. Annualized average compound return over subsequent periods is calculated as the compound growth rate required to produce the average total return over the same time period. Performance for periods greater than one year are annualized. Indices are not available for direct investment; therefore, their performance does not reflect expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor may lose money.

Simultaneous Index Monthly DownturnsAs of December 31, 2012

• Simultaneous asset class volatility and negative returns have occurred in the past.

• Despite these downturns, investors who remained disciplined were rewarded in the long run.

• Use balanced diversified portfolios and focus on long-term results.

LT1388.7

1926 1936 1946 1956 1966 1976 1986 1996 2006-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%January 2, 1926-December 31, 2012

Total trading days: 23,030

Days within one standard deviation of the daily average: 81% (18,745)

Days within two standard deviations of the daily average: 95% (21,931)

2012

Long-Term Market Stability

Returns shown are for the S&P 500 Index. The S&P data are provided by Standard & Poor’s Index Services Group. Indexes are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice.

87 Years of Daily Returns: 1926-2012

LT1392.7

Avg + 2 Std Dev: 2.35%

Avg - 2 Std Dev: -2.26%

Avg Daily Return: 0.04%Avg + 1 Std Dev: 1.19%

Avg - 1 Std Dev: -1.11%

77

Perils of Market Timing

Returns are from market-close to market-close. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data are provided by Standard & Poor’s Index Services Group. Dow Jones data provided by Dow Jones Indexes. Russell data copyright © Russell Investment Group 1995-2010 all rights reserved. Mutual fund universe statistical data and non-Dimensional money managers’ fund data provided by Morningstar, Inc. Nasdaq Composite Index data provided by The Nasdaq Stock Market, Inc. KBW Bank Index data provided by Keefe, Bruyette & Woods, Inc. (KBW). Past performance is not a guarantee of future results.

A Case Study of Q1 2009

LT1394.3

-12.4%

-24.7%

16.4%

-11.0%

-24.6%

18.1%

-14.9%

-31.0%

23.4%

-2.7%

-19.3%

20.5%

-35.8%

-55.3%

43.8%

Dow Jones Industrial Average

S&P 500 Index

Russell 2000 Index

Nasdaq Composite Index

KBW Bank Index

Negative Return Period1/1-3/9

Q1 2009 Returns1/1-3/31

Positive Return Period

3/10-3/31

• March 9 was the low closing date for four of the five featured indices year-to-date.

• The Dow Jones Industrial Average rose 5.8% on March 10, 2009.

• Looking at daily returns, it’s difficult to tell if a recovery is occurring.

Return excluding March 10, 2009

9.6%

6.3%

-0.6%

All US Stocks Excluding the Top 10% of Performers

Each Year

Excluding the Top 25%of Performers

Each Year

Compound Average Annual Returns: 1926-2012

Missing Opportunity

Results based on the CRSP 1-10 Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago.

• Strong performance among a few stocks accounts for much of the market’s return each year.

• There is no evidence that managers can identify these stocks in advance—and attempting to pick them may result in missed opportunity.

• Investors should diversify broadly and stay fully invested to capture expected returns.

LT1395.5

79

Recessionary Periods

Past performance is not a guarantee of future results and there is always the risk that an investor will lose money.

• The last four recessions have looked different in terms of length, stock market performance, unemployment rates, and subsequent recovery.

• In each of the last four recessions prior to 2007, unemployment rates peaked after the recession ended.

• Stock markets tend to be a leading indicator of economic prosperity, and in each case, the S&P 500 Index started to rebound before the end of the recession was announced.

Observations

LT1396.5

Recession BeginsNovember 1973

Recession EndsMarch 1975

Unemployment Peaks at 9.0%May 1975

Recession17 months

Recession BeginsJuly 1981

Recession AnnouncedJanuary 6, 1982

Unemployment Peaks at 10.8%Nov/Dec 1982

Recession17 months

Recession EndsNovember 1982

Recession End AnnouncedJuly 8, 1983


Prior to 1979, there were no formal announcements of business cycle turning points.Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.

Mid 1970s and Early 1980s

LT1396.5

81

Recession BeginsJuly 1990

Recession AnnouncedApril 25, 1991

Unemployment Peaks at 7.8%June 1992

Recession9 months

Recession EndsMarch 1991

Recession End AnnouncedDecember 22, 1992


Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.

Early 1990s and Early 2000s

LT1396.5

Recession BeginsMarch 2001

Recession EndsNovember 2001

Unemployment Peaks at 6.3%June 2003

Recession9 months

Recession AnnouncedNovember 26, 2001

Recession End AnnouncedJuly 17, 2003

Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012-60%

-40%

-20%

0%

20%

40%

60%

Recessionary Period

For illustrative purposes only. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.

January 2007-December 2012

LT1396.6

Recession BeginsDecember 2007Unemployment Rate at 5.0%

Unemployment Rate Peaks at 10.1%October 2009

Recession AnnouncedDecember 1, 2008Unemployment Rate at 7.3%

Unemployment Rate at 9.4%December 2010

S&

P 5

00 I

nd

ex C

um

ula

tive

To

tal

Ret

urn

Recession Ends June 2010Unemployment Rate at 9.5%

End of Recession AnnouncedSeptember 20, 2010Unemployment Rate at 9.6%

Recession30 months



December 2006Unemployment Rate at 4.4%

Dec 2012

83

Investment Considerations

I. Investment Considerations

II. Mutual Fund Expenses

III. Fees Matter

IV. The Limits of Fund Rating Services

V. Traditional Asset Allocation Generates Excess Turnover

IC1400.1

84

Investment Considerations

• Reduce expenses.

• Diversify systematically.

• Minimize taxes and turnover.

• Think long-term.

• Apply discipline.

• Hold low-cost funds.

• Maintain asset allocation.

IC1410.1

1.55%

0.99%

0.68%

0.20%

1.35%

0.88%0.73%

0.13%

Mutual Fund Expenses

William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal 47, no. 1 (January/February 1991): 7-9.Mutual fund expense ratios as of August 21, 2012. Asset weighting based on net assets as of July 31, 2012. Data provided by Morningstar, Inc.Passive funds are those coded by Morningstar as Index Funds.

IC1420.6

“After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar for any time period.”

—William F. Sharpe, 1990 Nobel Laureate

Average of All Funds

Weighted Average, Based on Fund Assets

Active Passive

Domestic Mutual Fund Expense Ratios





Active Passive



International Mutual Fund Expense Ratios

Fees Matter

For illustrative purposes only.

• Fees matter.

• Over long time periods, high management fees and related expenses can be a significant drag on wealth creation.

• Passive investments generally maintain lower fees than the average actively managed investment by minimizing trading costs and eliminating the costs of researching stocks.

IC1430.4

$4,983,951

$3,745,318

$2,806,794

1% Fee

2% Fee

3% Fee

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

1 Year 3 Years 5 Years 10 Years 20 Years 30 Years

Time

Dol

lars

Assumed 6.5% Annualized Return over 30 Years

87

Fund A Fund B Fund C Fund D

Morningstar (Dec 2000)

Forbes (Dec 2000) C A A+ D

US News & World Report (Dec 2000) 34 50 10 93

Wall Street Journal (Jan 2001) E C A B

BusinessWeek (Jan 2001) A No Rating B+ C

The Limits of Fund Rating Services

Morningstar: Five stars is highest rating; one star is lowest rating.US News & World Report: 100 is highest rating; 1 is lowest rating.

• Funds A, B, C, and D are actual funds. They are not identified because the purpose of this illustration is to emphasize that ratings, by themselves, do not provide enough information to make a sound investment decision.

IC1440.1

88

Integrated Solutions Reduce Turnover

Annual: January 1989–December 2012.Russell components are Russell indices weighted according to Russell 3000 market value weights (buys and sells measured by the weight of each component).Estimated annual cost assumes transaction costs of 50 bps. Russell data copyright ©Russell Investment Group 1995-2013, all rights reserved.For illustrative purposes only.

• In effect, a component portfolio buys and sells from itself, generating needless costs and taxable events.

IC1450.7

R3000

3.4%

27.1%

33.5%

Russell 3000via ComponentsRussell 3000

Buys and Sells in Excess of Russell 3000

R2000

R1000

R2000G R2000V

R1000G R1000V

R200G R200V

R2000G R2000V

RMCG RMCV

89

Investment Theory

I. Innovations in Finance

II. Fixed Income Investing

III. Value Added: Efficient Market Investing

IT1600.2

90

Innovations in Finance

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

The Birth of Index Funds

John McQuown,Wells Fargo Bank, 1971;Rex Sinquefield,American National Bank, 1973

Banks develop the first passive S&P 500 Index funds.

Efficient Markets Hypothesis

Eugene F. Fama,University of Chicago

Extensive research on stock price patterns.

Develops Efficient Markets Hypothesis, which asserts that prices reflect values and information accurately and quickly. It is difficult if not impossible to capture returns in excess of market returns without taking greater than market levels of risk.

Investors cannot identify superior stocks using fundamental information or price patterns.

Single-Factor Asset Pricing Risk/Return Model

William SharpeNobel Prize in Economics, 1990

Capital Asset Pricing Model: Theoretical model defines risk as volatility relative to market.

A stock’s cost of capital (the investor’s expected return) is proportional to the stock’s risk relative to the entire stock universe.

Theoretical model for evaluating the risk and expected return of securities and portfolios.

The Role of Stocks

James TobinNobel Prize in Economics, 1981

Separation Theorem:1. Form portfolio of risky assets.2. Temper risk by lending and borrowing.

Shifts focus from security selection to portfolio structure.

“Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies, February 1958.

Conventional Wisdom circa 1950

“Once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. Competent investors will never be satisfied beating the averages by a few small percentage points.”

Gerald M. Loeb, The Battle for Investment Survival, 1935

Analyze securities one by one. Focus on picking winners. Concentrate holdings to maximize returns.

Broad diversification is considered undesirable.

Diversification and Portfolio Risk

Harry MarkowitzNobel Prize in Economics, 1990

Diversification reduces risk.

Assets evaluated not by individual characteristics but by their effect on a portfolio. An optimal portfolio can be constructed to maximize return for a given standard deviation.

Investments and Capital Structure

Merton Miller and Franco ModiglianiNobel Prizes in Economics,1990 and 1985

Theorem relating corporate finance to returns.

A firm’s value is unrelated to its dividend policy.

Dividend policy is an unreliable guide for stock selection.

Behavior of Securities Prices

Paul Samuelson, MITNobel Prize in Economics, 1970

Market prices are the best estimates of value.

Price changes follow random patterns. Future share prices are unpredictable.

“Proof That Properly Anticipated Prices Fluctuate Randomly,” Industrial Management Review, Spring 1965.

First Major Study of Manager Performance

Michael Jensen, 1965A.G. Becker Corporation, 1968

First studies of mutual funds (Jensen) and of institutional plans (A.G. Becker Corp.) indicate active managers underperform indices.

Becker Corp. gives rise to consulting industry with creation of “Green Book” performance tables comparing results to benchmarks.

Options Pricing Model

Fischer Black, University of Chicago;Myron Scholes, University of Chicago;Robert Merton, Harvard UniversityNobel Prize in Economics, 1997

The development of the Options Pricing Model allows new ways to segment, quantify, and manage risk.

The model spurs the development of a market for alternative investments.

IT1610.2

91

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Nobel Prize Recognizes Modern Finance

Economists who shaped the way we invest are recognized, emphasizing the role of science in finance.

William Sharpe for the Capital Asset Pricing Model.

Harry Markowitz for portfolio theory.

Merton Miller for work on the effect of firms’ capital structure and dividend policy on their prices.

Variable Maturity Strategy Implemented

Eugene F. Fama

With no prediction of interest rates, Eugene Fama develops a method of shifting maturities that identifies optimal positions on the fixed income yield curve.

“The Information in the Term Structure,” Journal of Financial Economics 13, no. 4 (December 1984): 509-28.

Multifactor Asset Pricing Model and Value Effect

Eugene Fama and Kenneth French,University of Chicago

Improves on the single-factor asset pricing model (CAPM).

Identifies market, size, and “value” factors in returns.

Develops the three-factor asset pricing model, an invaluable asset allocation and portfolio analysis tool.

“Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, no. 1 (February 1993): 3-56.

Database of Securities Prices since 1926

Roger Ibbotson andRex Sinquefield,Stocks, Bonds, Bills, and Inflation

An extensive returns database for multiple asset classes is first developed and will become one of the most widely used investment databases.

The first extensive, empirical basis for making asset allocation decisions changes the way investors build portfolios.

A Major Plan First Commits to Indexing

New York Telephone Companyinvests $40 million in an S&P 500Index fund.

The first major plan to index.

Helps launch the era of indexed investing.

“Fund spokesmen are quick to point out you can’t buy the market averages. It’s time the public could.”

Burton G. Malkiel, A Random Walk Down Wall Street, 1973 ed.

International Size Effect

Steven L. Heston, K. Geert Rouwenhorst, and Roberto E. Wessels

Find evidence of higher average returns to small companies in twelve international markets.

“The Structure of International Stock Returns and the Integration of Capital Markets,” Journal of Empirical Finance 2, no. 3 (September 1995): 173-97.

The Size Effect

Rolf Banz, University of Chicago

Analyzed NYSE stocks,1926-1975.

Finds that, in the long term, small companies have higher expected returns than large companies and behave differently.

Integrated Equity

Eugene F. Fama and Kenneth R. French

Increasing exposure to small and value companies relative to their market weights and integrating the portfolio across the full range of securities may reduce the turnover and transaction costs normally associated with forming an asset allocation from multiple components.

“Migration,” CRSP Working Paper No. 614, Center for Research in Security Prices, University of Chicago, February 2007.

Innovations in FinanceIT1610.2

92

Fixed Income Investing

One aspect of fixed income’s role in a portfolio is to reduce volatility.

This may be accomplished by employing:

• Shorter maturities with lower equity correlations.

• High-quality issues.

• A global approach that hedges all currencies.

IT1620.1

93

Investment Philosophy

Asset Class Management

• Believes that in liquid markets, prices reflect all available information

• Focuses strategies on the dimensions of higher expected returns

• Adds value through portfolio design and implementation

Traditional Active Management

• Attempts to identify mispricing in securities on a consistent basis.

• Often relies on forecasting techniques to pick securities and/or time market

• Generates higher expenses, trading costs, and excess risk

Index Management

• Allows commercial benchmarks to define strategy

• Tethered to a benchmark, reducing flexibility

• Accepts lower returns and increased trading costs in favor of tracking

Value Added: Efficient Market Investing

IT1630.3

94

Limitations of Indexing

I. Tracking an Index Can Be Costly

II. The Effect of Index Reconstitution on Stock Prices

III. Percentage of Assets by Market Cap

IV. Annual Index Reconstitution Effects

V. The Failure of Active Management

LI1700.3

95

Tracking an Index Can Be Costly

• Tracking an index may result in significant trading costs.

• Index replication requires executing with pre-specified transactions, stocks, amounts, and trade dates.

• Timing lag between reconstitution announcement and effective date enables non-indexers to buy additions and sell deletions before tracking-sensitive investors, when prices are often more attractive.

LI1720.2

The Effect of Index Reconstitution on Stock Prices

S&P 500 data source: Anthony Lynch and Richard Mendenhall, “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,” Journal of Business 70, no. 3 (July 1997): 351-83. MSCI EAFE Index data source: Rajesh Chakrabarti, Wei Huang, Narayanan Jayaraman, and Jinsoo Lee, “Price and Volume Effects of Changes in MSCI Indices: Nature and Causes,” Journal of Banking and Finance 29, no. 5 (May 2005): 1237-64. For illustrative purposes only. Past performance is not a guarantee of future results.

LI1740.2

S&P 500 Index MSCI EAFE Index

One-Day Return after Announcement (%) 3.2 3.4

Run-Up to Effective Date (%) 3.8 4.5

Decay after Effective Date (%) -2.1 -2.6

Announcement Effective

Price

Time

• Stocks rise on announcement of inclusion.

• Index funds are forced to buy high on effective date.

• Buying and selling to track index changes reduces tracking error but generates transaction costs.

97

Percentage of Assets by Market Cap

Area within box represents 90% or more of index value. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and Nasdaq exchanges. The CRSP 1-5 Index measures the performance of US large cap stocks, those in the five largest deciles of the US market. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change.

Large Company IndexesAs of December 31, 2012

LI1760.8

Market CapPercentile

S&P/Citigroup

500 Growth Index

S&P 500

Index

S&P/Citigroup

500 Value Index

Russell1000

GrowthIndex

Russell 1000Index

Russell 1000 ValueIndex

Russell 3000Index


CRSP 1-10 Index

CRSP1-5

Index

100.0 31.7 31.0 30.2 23.2 27.3 31.1 25.2 28.8 26.3 28.5

75.0 34.1 29.4 24.3 34.6 26.3 18.3 24.3 16.9 23.8 25.8

50.0 15.8 19.1 22.6 14.7 17.1 19.3 15.7 17.8 14.6 15.8

35.0 5.8 6.3 6.8 5.6 5.9 6.3 5.5 5.8 5.1 5.5

30.0 5.7 5.4 5.2 5.6 5.2 4.8 4.8 4.4 4.8 5.2

25.0 3.8 4.5 5.2 5.8 5.3 4.8 4.9 4.5 4.9 5.3

20.0 2.5 2.9 3.4 4.8 5.5 6.2 5.1 5.7 5.1 5.5

15.0 0.4 0.8 1.2 2.3 2.9 3.4 2.7 3.1 2.5 2.7

12.5 0.2 0.5 0.8 2.0 2.4 2.9 2.6 2.8 2.5 2.7

10.0 0.0 0.1 0.2 0.9 1.2 1.6 2.0 2.0 2.0 1.9

8.0 0.0 0.1 0.1 0.5 0.9 1.3 3.0 3.3 3.2 1.0

5.0 0.0 0.0 0.0 0.0 0.0 0.1 0.9 0.9 1.0 0.0

4.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 1.5 1.5 0.0

2.5 0.0 0.0 0.0 0.0 0.0 0.0 2.1 2.6 2.7 0.2

Number of Companies 290 500 360 571 991 696 2,969 2,118 3,377 981

Estimated Universe ($BB) 6,561 12,742 6,181 7,070 14,543 7,473 15,744 8,094 16,037 14,813

Wtd. Avg. Mkt. Cap ($MM) 119,964 106,007 91,192 99,774 94,179 88,886 87,096 82,165 88,520 95,749

Median Mkt. Cap ($MM) 13,474 12,641 11,733 6,349 5,775 4,984 1,016 895 681 5,603

Wtd. Avg. BtM 0.36 0.52 0.69 0.27 0.52 0.75 0.53 0.76 0.52 0.51

Median BtM 0.30 0.45 0.54 0.30 0.47 0.63 0.55 0.72 0.59 0.44

98


Area within box represents 90% or more of index value. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and Nasdaq exchanges. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc.CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change.

Market UniverseAs of December 31, 2012

LI1760.8


S&P/Citigroup 500 Growth

Index

S&P 500

Index

S&P/Citigroup

500 Value Index

Russell 1000Index


Russell 3000Index


CRSP 1-10 Index

Russell 2000Index


100.0 31.7 31.0 30.2 27.3 31.1 25.2 28.8 26.3 0.0 0.0

75.0 34.1 29.4 24.3 26.3 18.3 24.3 16.9 23.8 0.0 0.0

50.0 15.8 19.1 22.6 17.1 19.3 15.7 17.8 14.6 0.0 0.0

35.0 5.8 6.3 6.8 5.9 6.3 5.5 5.8 5.1 0.0 0.0

30.0 5.7 5.4 5.2 5.2 4.8 4.8 4.4 4.8 0.0 0.0

25.0 3.8 4.5 5.2 5.3 4.8 4.9 4.5 4.9 0.0 0.0

20.0 2.5 2.9 3.4 5.5 6.2 5.1 5.7 5.1 0.3 0.6

15.0 0.4 0.8 1.2 2.9 3.4 2.7 3.1 2.5 0.3 0.0

12.5 0.2 0.5 0.8 2.4 2.9 2.6 2.8 2.5 4.1 1.6

10.0 0.0 0.1 0.2 1.2 1.6 2.0 2.0 2.0 10.7 7.7

8.0 0.0 0.1 0.1 0.9 1.3 3.0 3.3 3.2 27.7 26.8

5.0 0.0 0.0 0.0 0.0 0.1 0.9 0.9 1.0 11.6 10.6

4.0 0.0 0.0 0.0 0.0 0.0 1.4 1.5 1.5 17.9 19.4

2.5 0.0 0.0 0.0 0.0 0.0 2.1 2.6 2.7 27.5 33.4

Number of Companies 290 500 360 991 696 2,969 2,118 3,377 1,978 1,422

Estimated Universe ($BB) 6,561 12,742 6,181 14,543 7,473 15,744 8,094 16,037 1,201 620

Wtd. Avg. Mkt. Cap ($MM) 119,964 106,007 91,192 94,179 88,886 87,096 82,165 88,520 1,326 1,173

Median Market Cap ($MM) 13,474 12,641 11,733 5,775 4,984 1,016 895 681 515 470

Wtd. Avg. BtM 0.36 0.52 0.69 0.52 0.75 0.53 0.76 0.52 0.61 0.85

Median BtM 0.30 0.45 0.54 0.47 0.63 0.55 0.72 0.59 0.61 0.77

99


Area within box represents 90% or more of index value. The CRSP 6-10 Index measures the performance of US small cap stocks, those in the five smallest deciles of the US market. The CRSP 9-10 Index measures the performance of US micro cap stocks, those in the two smallest deciles of the US market.Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. S&P/Citigroup data provided by S&P/Citigroup Global Markets Inc. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Attributes and characteristics are as of date shown and are subject to change.

Small Company IndexesAs of December 31, 2012

LI1760.7


Russell 2000

Russell 2000 Value

S&PSmall Cap600 Index

S&P/CitigroupSmall Cap600 Value

Index

CRSP 6-10 Index

CRSP9-10

Index

100.0 0.0 0.0 0.0 0.0 0.0 0.0

75.0 0.0 0.0 0.0 0.0 0.0 0.0

50.0 0.0 0.0 0.0 0.0 0.0 0.0

35.0 0.0 0.0 0.0 0.0 0.0 0.0

30.0 0.0 0.0 0.0 0.0 0.0 0.0

25.0 0.0 0.0 0.0 0.0 0.2 0.0

20.0 0.3 0.6 0.0 0.0 0.4 0.0

15.0 0.3 0.0 0.7 0.0 0.3 0.0

12.5 4.1 1.6 3.3 1.8 0.5 0.0

10.0 10.7 7.7 8.7 6.2 2.1 0.2

8.0 27.7 26.8 29.8 25.9 29.5 0.2

5.0 11.6 10.6 14.1 15.3 13.5 0.3

4.0 17.9 19.4 22.0 22.9 19.8 0.7

2.5 27.5 33.4 21.4 28.1 33.6 98.6

Number of Companies 1,978 1,422 600 444 2,396 1,514Estimated Universe ($BB) 1,201 620 516 256 1,224 281Wtd. Avg. Mkt. Cap ($MM) 1,326 1,173 1,356 1,199 1,113 327Median Market Cap ($MM) 515 470 787 693 327 161Wtd. Avg. BtM 0.61 0.85 0.59 0.76 0.65 0.78Median BtM 0.61 0.77 0.61 0.72 0.69 0.81

100

Annual Index Reconstitution EffectsConsistency of Asset Class Exposure

Month-end values from January 2004-December 2012. Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

• Over time, securities within an index can migrate from one asset class to another (such as from small cap to large cap)

• An index’s characteristics may be significantly different 11 months after reconstitution due to security migration.

• An index that purports to represent a certain asset class may not offer thorough, consistent exposure to the underlying risk factors.

LI1770.5

Percentage of Assets in Bottom 10% of Market

Russell 2000 Index

CRSP 6-10Index

June 30 Averages(reconstitution month) 96.30 96.61

May 31 Averages(11 months after reconstitution) 88.42 97.24

Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 201380%

85%

90%

95%

100%

CRSP 6-10 Index

Russell 2000 Index

Per

cent

age

of A

sset

s in

Bot

tom

10%

of

Mar

ket

dfa all slides 2013

Economy & Finance

advisors decision

foreign withholding

barclays bank

annually updated

mutual fund

london business

values change

msci disclosure