IBF - Updates - 2007 (Q3 v2.0)

Copyright © 2007 by Institute of Business and Finance. All rights reserved. v2.0

INSTITUTE OF BUSINESS & FINANCE

QUARTERLY UPDATES

Q3 2007

Quarterly Updates

Table of Contents

U.S. STOCK MARKET

MARKET UPDATE 1.1

DIVIDEND POWER 1.2

ROLLING PERIOD RETURNS 1.4

MARKET-CAP CLASSIFICATIONS 1.5

YEAR-END P/E RATIOS 1.5

S&P 500 INFLECTION POINTS 1.6

STOCKS VS. HOME VALUES VS. RENTING 1.6

HOME PRICES 1.7

CORRELATION COEFFICIENTS [OCTOBER 2003—MAY 2007] 1.7

BEAR MARKET PERFORMANCE 1.8

INVESTING JUST BEFORE A DISASTER 1.9

STYLE AND MARKET CAPITALIZATION 1.10

PROFESSOR PREDICTIONS 1.10

U.S. BONDS

FIXED-INCOME SECTOR PERFORMANCE 2.1

TAX-EXEMPT SECTOR RETURNS 2.2

FIXED-INCOME CORRELATIONS 2.3

FACTS ABOUT FLOATING-RATE BONDS 2.4

MUNIS VS. TREASURIES 2.5

FIXED-INCOME CORRELATIONS 2.6

MUTUAL FUNDS

RETURNS AFTER TAXES 3.1

FUNDS WITH CONSISTENCY 3.1

TURNOVER AND TAX EFFICIENCY 3.3

2006 TAX EFFICIENCY OF 96% 3.4

WHEN A FUND MANAGER LEAVES 3.4

130/30 FUNDS 3.4

TARGET DATE FUND RUSSIAN ROULETTE 3.5

CRITERIA FOR BUYING A SECTOR FUND 3.5

FUND FAMILY RATINGS 3.6

ETFS AND CEFS

ETF INDUSTRY STATISTICS 4.1

UTILITY AND BOND ETFS 4.1

INDEX FUNDS OUTPERFORM ETFS 4.2

BOND ETFS 4.2

BUY-WRITE STRATEGY 4.3

CLOSED-END FUNDS 4.3

COLLEGE EDUCATION

KIDDIE TAX EXTENDED 5.1

COLLEGE FINANCIAL AID 5.1

HEALTH CARE

HEALTH CARE PREMIUMS DOUBLE 6.1

MEDICAID PLANNING UPDATE 6.1

MEDICARE PART B PREMIUMS 6.2

UNIVERSAL HEALTH CARE COVERAGE 6.3

SPOUSAL MEDICAL COVERAGE 6.4

ANNUITIES

2006 ANNUITY SALES 7.1

LIVING BENEFITS INCREASE SALES 7.1

RETIREMENT PLANNING

ADVISOR INFO FROM SOCIAL SECURITY 8.1

2007 SOCIAL SECURITY UPDATE 8.1

REQUIRED IRA WITHDRAWALS 8.2

CALCULATING REQUIRED WITHDRAWALS 8.2

FOREIGN SECURITIES

WORLD STOCK MARKET WEIGHTINGS 9.1

WORLD ECONOMICS 9.1

WORLD DEMOGRAPHICS 9.2

FOREIGN OWNERSHIP OF TREASURIES 9.3

PLAYING IT SAFE WITH CHINA 9.3

VALUATION OF MAJOR WORLD MARKETS 9.4

20-YEAR STATISTICS [1987-2006] 9.4

FOREIGN REAL ESTATE FUNDS 9.5

REAL ESTATE

REVERSE MORTGAGE UPDATE 10.1

REVERSE MORTGAGE CALCULATOR AVAILABLE 10.2

TOP 5 REASONS SENIORS STILL HAVE A MORTGAGE 10.2

HOME FOR RETIREMENT INCOME 10.2

EDUCATION

ADVANCED DEGREE BENEFIT 11.1

HOW ADULTS LEARN 11.1

QUARTERLY UPDATES

U.S. STOCK MARKET

1.1 U.S. STOCK MARKET

QUARTERLY UPDATES

IBF | GRADUATE SERIES

1.MARKET UPDATE

As of June 2007, the S&P 500 was trading at about 17 times its expected

earnings over the next year—not much higher than its average (16 times

earnings) since the 1930s. At the end of 1999, just before the market meltdown,

its average P/E ratio was over 30. The dividend yield of the S&P 500 is roughly

1.8%, well below its historical average, but 60% higher than it was in 1999. Back

then, technology stocks comprised a third of the value of the index, versus 15%

today.

The current bull market is more than four years old; the S&P 500 is up 95% since

the October 2002 market low. However, when compared to other asset categories,

large U.S. stocks have been poor performers since the March 2000 market peak.

No stock is considered for the S&P 500 unless its market value is at least $4

billion. The average market capitalization is $28 billion (vs. $150 billion for the

Dow). Additionally, only U.S. companies that are at least 50% owned by the

public are included. On May 30th

, 2007, the index beat its old 2000 record

(1527.46) by 2.77 points. The table below shows cumulative returns of several

market indexes.

Cumulative Returns [March 2000 to May 2007]

Sector Return Sector Return

Large Stocks 11% Foreign Mkts. 47%

Small Stocks 65% Emerging Mkts. 129%

REITs 332%

U.S. STOCK MARKET 1.2

QUARTERLY UPDATES


DIVIDEND POWER

Dividend investing tends to be an unknown concept to investors raised during the

high growth periods of the 1980s and 1990s. As you can see by the chart below,

dividends have had a major impact on the total return of equities over the past

several decades (note: ―Average Payout‖ refers to the percentage of a

corporation’s profits that are paid out as a common or preferred stock dividend).

Dividend Contribution to Total Return

Decade Total Return Dividend % Average Payout

1950s 437% 41% 55%

1960s 108% 50% 56%

1970s 76% 77% 45%

1980s 370% 39% 49%

1990s 411% 23% 48%

2000s -6% n/a 32%

Even within the confines of GAAP (Generally Accepted Accounting Principals),

corporations are able to present financial statements in the most favorable light.

But, companies that pay dividends must have the cash to do so.

From 1960 to 2006, $10,000 invested in the S&P 500 grew to $1,080,000; take

away the dividends, the ending value would drop to $23,680 (source: Lipper). An

interesting comparison with the S&P 500, long-term corporate bonds, and 30-day

Treasury bills. Over the past 80 years (ending 2006), stock dividends had

annualized returns of 4.3% (which represents 40% of the market’s overall

return), versus a total return of 5.9% a year for bonds, and 3.7% for T-bills.

The chart below, provided by Ned Davis Research, shows that companies that

consistently increased dividends had better returns than all dividend-paying stocks,

plus dramatically outperformed non-dividend paying issues.


QUARTERLY UPDATES


Returns for Stocks in the S&P 500 [1972-2006]

Stock Description Annualized

Dividend Growers and Initiators 11.0%

All Dividend Paying Stocks 10.3%

Dividend Payers—No Change in Dividends 7.2%

Dividend Cutters or Eliminators 3.6%

Non-Dividend Paying Stocks 2.4%

Since May 2003, when Congress reduced the dividend tax rate (to a maximum of

15%) to December 31st, 2006, companies in the S&P 500 had 1037 dividend

increases and 41 initiators versus 22 decreases and eight suspensions. As of the

third quarter of 2007, $300 billion was invested in dividend funds, a three-fold

increase over the past five years. Roughly a quarter of these funds assets are

invested in financial services companies (2.4% yield), 11% in energy stocks, and

just 5% in utilities (3.2% yield). The dividend yield of the S&P 500 was 1.75%

as of the middle of September 2007, down from 6.2% 25 years ago. The ―payout

ratio,‖ the percentage of corporate earnings that gets paid out as dividends, was

29% for the second quarter of 2007.

Investors believe that dividend funds offer some safety during market turbulence.

Yet, during the month of August 2007, when stock markets were very volatile,

dividend funds slightly underperformed diversified equity funds (+0.92% vs.

+0.95%). For the 12 months ending August 31st, 2007, the 388 stocks in the S&P

500 that pay dividends had a total return of 13.8% versus 14.2% return for the

remaining 122 non-dividend stocks. From the beginning of 1972 through the end

of July 2007, dividend stocks experienced an average annual return of 10.2%,

versus just 2.4% for non-dividend stocks, according to Ned Davis Research.


QUARTERLY UPDATES


ROLLING PERIOD RETURNS

The two tables below show annualized returns for the S&P 500 (top table) and the

Ibbotson small cap index from 1950 through the end of 2006. For the 57-year

period, the standard deviation was 14.1 for the S&P 500 and 19.6% for the small

cap stocks.

S&P 500 Rolling Periods [1950-2006]

3-Year 5-

Year

7-

Year

10-

Year

20-

Year

Maximum 33.4% 29.7% 23.1% 19.5% 18.3%

Median 11.9% 12.0% 12.2% 12.1% 11.5%

Low -16.1% -4.2% -2.6% 0.5% 6.4%

High minus Low 49.5% 33.9% 25.7% 19.0% 11.9%

note: Annualized returns from 1/1/50 to 4/1/07 were 12.0%

Ibbotson Small Cap Stock Index [1950-2006]

3-Year 5-

Year

7-

Year

10-

Year

20-

Year

Maximum 44.5% 39.8% 35.8% 30.6% 20.3%

Median 15.5% 14.3% 14.5% 14.1% 14.1%

Low -16.7% -

12.3%

-7.8% 3.2% 8.2%

High minus Low 61.2% 52.1% 43.6% 27.4% 12.1%

note: Annualized returns from 1/1/50 to 4/1/07 were 12.0%


QUARTERLY UPDATES


MARKET-CAP CLASSIFICATIONS

There is no universal definition when it comes to stock market capitalization. The

table below shows some examples of companies and how they are classified

(source: Merrill Lynch). When talking to clients, it may be helpful to give them

examples of companies that represent the market capitalizations you are

recommending.

Market Capitalization [# of shares x share price]

Market Cap Sample Companies

Over $100b Mega IBM, P & G, GE

$10b—$100b Large Coach, Starbucks, GM

$2b—$10b Mid Ann Taylor, JetBlue, Barnes & Noble

< $2b Small Panera Bread, palmOne, Gateway

YEAR-END P/E RATIOS

The table below shows the year-end price/earnings ratios for the S&P 500 (S&P)

and Dow Jones Industrial Average (DJIA) from the end of 1987 to the end of 2006

(sources: S&P and Barron’s Online).

Year-End P/E Ratios: S&P 500 and DJIA

Year S&P DJIA Year S&P DJIA

2006 17.4 17.1 1996 19.1 18.2

2005 17.9 22.5 1995 18.1 16.4

2004 20.7 18.3 1994 15.0 15.0

2003 22.8 20.1 1993 21.3 25.6

2002 31.9 21.6 1992 22.8 30.5

2001 46.5 27.1 1991 26.1 34.3

2000 26.4 22.2 1990 15.5 15.3

1999 29.2 24.1 1989 15.5 12.4

1998 32.6 24.0 1988 11.7 10.1

1997 24.4 20.2 1987 20.3 14.6


QUARTERLY UPDATES


S&P 500 INFLECTION POINTS

From the beginning of 1997 through the first half of 2007, the S&P 500 has:

[1] grown from less than 800 to 1,503;

[2] seen its P/E (trailing earnings) ratio peak at 31 (3/24/2000);

[3] peaked at 1,527 (3/24/2000);

[4] experienced a decline of 49% (3/24/2000 to 10/9/2002);

[5] seen a 94% increase from its 10/9/2002 low (777 to 1,503);

[6] had a P/E (trailing earnings) of 18.1 on 6/30/2007; and

[7] 1.6% more to go before matching its 3/24/2000 peak.

STOCKS VS. HOME VALUES VS. RENTING

For the 1987-1991 period, the price of residential rents annually increased by 4.7%

versus 3.8% for home appreciation; from 1992-1996, rents went up each year an

average of 3.2% versus 3.7% for housing prices. For the 1997-2001 period, rents

went up 3.3% a year versus 6.3% yearly appreciation for homes; from 2002-2006,

rents were up an average of 2.9% a year versus 6.9% annual appreciation for

homes. Thus, from 1997 to the beginning of 2007, renting was considered a ―good

deal‖ when compared to real estate appreciation.

The table below covers the period 12/31/86 through 12/31/06. The figures are

based on the S&P 500 and the median sales price of existing one-family homes.

As you can see, large cap stocks, as represented by the S&P 500, greatly

outperformed the average American home. Moreover, the residential real estate

figures do not factor in the negative consequences of: debt service, insurance,

repairs, maintenance, remodeling, or the eventual sales fee and closing costs that

typically total 7% (sources: S&P, NAR, BLS, FactSheet, and JP Morgan Asset

Management).

Stocks vs. Homes

20-year

Return

Inflation

(CPI)

Real

Return

1986

Value

2006

Value

S&P 500 Index 11.8% 3.0% 8.8% $100 $931

Residential Real Estate 5.2% 3.0% 2.2% $100 $274


QUARTERLY UPDATES


HOME PRICES

The index produced by the Office of Federal Housing Enterprise Oversight, based on millions of loans

purchased by Fannie Mae and Freddie Mac over the past 30 years, is considered to one of the best measures

of house prices in the U.S. According to this index, housing prices have increased every quarter since 1993.

During 2006, prices increased about 4%.

Residential real estate represents more than a third of the total value of domestic

assets, according to the Chicago Mercantile Exchange; the second largest asset

class is fixed income investments. Starting in 2006, the Chicago Mercantile

Exchange began offering a suite of futures contracts based on the S&P/Case-

Shiller housing indexes.

These contracts track 10 metropolitan areas: Boston, Chicago, Denver, Las Vegas,

Los Angeles, Miami, New York, San Diego, San Francisco, and Washington,

D.C.—plus a U.S. composite benchmark. Robert Shiller of Yale University and

Karl Case of Wellesley College developed these real estate benchmarks. The table

below shows the correlation between San Francisco housing and a number of other

indexes.

Correlation Coefficients [October 2003—May 2007]

S.F. Housing Bonds Stocks REITs

S.F. Housing ---

Bonds -0.12 ---

Stocks -0.20 -0.03 ---

REITs -0.12 -0.05 -0.03 ---

Before recommending any of the S&P/Case-Shiller real estate futures contracts to

any of your clients, keep in mind the following risk considerations: [1] there

may be a tracking error between the contract’s underlying index and the value of a

given home; [2] areas outside a metropolitan area are subject to unique price

dynamics; [3] the amount of money needed to fulfill the initial margin requirement

can be high;


QUARTERLY UPDATES


[4] there may be a substantial amount of time between hedging and the actual sale

of the home—time that the hedging client is paying for; [5] the real estate futures

contracts can be highly leveraged and additional cash may be needed quickly (to

maintain the minimum amount of collateral in the account); [6] the furthest

available contract is less than a year out (the client can always buy other contracts

in the future); [7] any futures contract needs to be monitored daily; and [8]

commodities (futures contracts) commissions need to be factored in (as well as

any bid-ask spread if a soon-to-expire contract is going to be replaced with a new

contract that has greater longevity).

BEAR MARKET PERFORMANCE

As shown below, stock (S&P 500) and bond (Merrill Lynch U.S. Corporate and

Government Master Index) returns often move in different directions. The figures

below are cumulative returns (sources: Lipper and Bloomberg).

Bear Market Returns

Bear Market S&P 500 U.S. Bonds

Jan. ’77 — Feb. ‘78 -14.2% 3.2%

Dec. ’80 — July ‘82 -17.2% 21.0%

Sept. ’87 — Nov. ‘87 -29.6% 2.3%

June ’90 — Oct. ‘90 -14.7% 3.7%

May ’98 — Aug. ‘98 -13.4% 4.2%

Mar. ’00 — Dec. ‘02 -33.0% 33.1%

Average for Above -23.5% 11.2%


QUARTERLY UPDATES


INVESTING JUST BEFORE A DISASTER

The table below shows subsequent S&P 500 returns if an investment had been

made the day before the disaster shown. For example, an investment in the S&P

500 made one day before President Kennedy’s assassination grew by 79% five

years later, 97% 10 years later, and 815% by the end of 2006.

S&P 500 Cumulative Returns

Event 5 Years 10 Years 12/31/06

Great Depression (1/1/34) 66% 100% 252,900%

Pearl Harbor (12/7/41) 105% 348% 179,100%

JFK Assassination (11/22/63) 79% 97% 8,250%

Vietnam Escalation (8/10/64) 35% 37% 6,860%

Nixon Resignation (8/9/74) 65% 235% 4,910%

1987 Market Crash (10/19/87) 189% 463% 879%

Iraq Invades Kuwait (8/2/90) 85% 417% 467%

Tech Bubble Burst (3/24/00) -17% —— 4%

Terrorists Attack U.S. (9/11/01) 30% —— 42%

U.S. Invades Iraq (3/20/03) —— —— 73%


QUARTERLY UPDATES


STYLE AND MARKET CAPITALIZATION

The table below shows annualized returns for the Dow Jones Wilshire Index for

the period 1982-2006. As you can see, ―blend‖ outperformed its ―value‖ and

―growth‖ counterparts; similarly, ―mid‖ cap stocks did better than ―large‖ or

―small‖ cap issues. For the entire 25-year period, the Dow Jones Wilshire 5000

Equity Index averaged 10.1% a year versus 13.5% for the Dow Jones Wilshire

U.S. Micro-Cap Index (source: Bloomberg).

Style and Market Cap Returns [1982-2006]

Value Blend Growth

Large 12.7% 13.7% 10.6%

Mid 14.9% 15.5% 11.9%

Small 10.3% 15.0% 6.3%

PROFESSOR PREDICTIONS

As of the middle of 2007, Burton Malkiel, a professor of economics at Princeton

University and author of A Random Walk Down Wall Street, believes that U.S.

stocks are poised to return about 7.5% year in the future (2% stock dividend plus

earnings growth of about 5.5% annually). Such a return would be well below the

market’s historical returns from 1926 through 2006 of 10.5% annually (4.75% for

Treasury bond yields).

The share of after-tax corporate profits, increasingly influenced by the foreign

profits of multinational corporations, is almost 9% relative to GDP, versus an

average of about 5% during the 1970s and 1980s. Wages and salaries has a percent

of GDP have fallen from 53% to under 46% since 1970. Corporate profits have

shown strong tendencies to revert to the mean in the past. Inflation-adjusted

earnings of the S&P 500 showed zero growth from 1900 through 1947 and again

from 1967 through 1987.

According to Yale University economist Robert Shiller, inflation- and quality-

adjusted home prices are still more than 50% higher than their averages

throughout most of the 20th

century. Such data suggests that the real estate

correction could last much longer than expected.

QUARTERLY UPDATES

U.S. BONDS

2.1 U.S. BONDS

QUARTERLY UPDATES


2.FIXED-INCOME SECTOR PERFORMANCE

The table below shows the total annual returns of fixed-income indexes, ranking in

order of performance (best to worst) for the period 1997-2006 (sources: Lipper,

Merrill Lynch, and S&P).

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

HY

13.3

Treas.

10.0

Cash

4.7

Muni

17.1

LD

8.7

Treas.

11.6

HY

28.1

HY

10.9

Muni

3.9

HY

11.8

Muni

10.9

Inv. G

8.9

LD

3.2

Treas.

13.4

Inv. G

8.3

Muni

10.7

Muni

6.2

Muni

5.4

Cash

3.0

Muni

5.0

Inv. G

9.6

Muni

7.1

HY

2.5

Inv. G

11.7

Treas.

6.7

Inv. G

10.4

Inv. G

4.1

Inv. G

4.3

Treas.

2.8

Cash

4.8

Treas.

9.6

LD

7.0

Inv. G

–1.0

LD

8.1

HY

4.5

LD

6.1

LD

2.7

Treas.

3.5

HY

2.7

Inv. G

4.3

LD

6.7

Cash

5.1

Treas.

–2.4

Cash

6.0

Muni

4.5

Cash

1.7

Treas.

2.3

Cash

1.2

Inv. G

2.5

LD

4.2

Cash

5.3

HY

3.0

Muni

–6.4

HY –

5.1

Cash

4.1

HY –

1.9

Cash

1.1

LD

1.2

LD

1.7

Treas.

3.1

HY: ML U.S. High-Yield Master Index

Cash: ML U.S. Treasury bill 0-3 Month Index

Treas.: ML Treasury Bill Master Index

Muni: ML Municipal Master Index

LD: ML 1-3 Corporate & Government Index (low duration)

Inv. G: ML U.S. Domestic Master Index (investment grade)

U.S. BONDS 2.2

QUARTERLY UPDATES


TAX-EXEMPT SECTOR RETURNS

The table below shows the total annual returns of municipal bond indexes, ranking

in order of performance (best to worst) for the period 1997-2006 (sources: Lipper,

Merrill Lynch, and S&P).

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

22+

11.5%

12-22

7.3%

1-3

2.5%

22+

18.6%

1-3

6.0%

7-12

11.5%

12-22

6.6%

22+

6.2%

22+

6.8%

22+

6.6%

12-22

11.2%

22+

7.2%

3-7

0.7%

Index

17.1%

3-7

6.0%

12-22

11.0%

22+

6.4%

12-22

6.1%

12-22

4.4%

12-22

5.3%

Index

10.9%

Index

7.1%

7-12 –

1.2%

12-22

15.6%

12-22

4.6%

Index

10.7%

Index

6.2%

Index

5.4%

Index

3.9%

Index

5.0

7-12

9.0%

7-12

6.8%

12-22

–4.4%

7-12

11.3%

7-12

4.5%

22+

10.7%

7-12

5.6%

7-12

4.2%

7-12

2.8%

7-12

4.6%

3-7

6.5%

3-7

5.9%

Index

–6.4%

3-7

8.2%

Index

4.5%

3-7

10.1%

3-7

4.2%

3-7

2.9%

3-7

1.4%

3-7

3.4%

1-3

4.7%

1-3

5.0%

22+

-7.6%

1-3

5.7%

22+

4.3%

1-3

5.0%

1-3

2.1%

1-3

1.3%

1-3

1.3%

1-3

3.2%

22+: 22+ Year Municipal Securities Index

12-22: 12-22 Year Municipal Securities Index



Index: ML Municipal Master Index (investment-grade muni bonds)

2.3 U.S. BONDS

QUARTERLY UPDATES


FIXED-INCOME CORRELATIONS

The table below shows the correlation coefficients for six different bond

categories for the 30-year period, 1977-2006 (sources: Bloomberg and Lipper

LANA). High-yield bonds have the lowest correlation to other bond categories,

followed by emerging markets debt.

Bond Category Correlations [1977-2006]

Treas. Mort. Corp. Munis Emerg. HY

Treas. 1.0 0.9 0.9 0.8 0.1 0.0

Mort. 0.9 1.0 0.8 0.7 0.2 0.1

Corp. 0.9 0.8 1.0 0.8 0.3 0.4

Munis 0.8 0.7 0.8 1.0 0.2 0.2

Emerg. 0.1 0.2 0.3 0.2 1.0 0.5

HY 0.0 0.1 0.4 0.2 0.5 1.0

Over this same 30-year period (1977-2006), these six categories had the following

annualized returns and risk (standard deviation shown in parentheses):

U.S. Treasuries — 6.0% (4.4)

Mortgage-Backed Securities — 6.2% (2.6)

Municipals — 6.3% (5.1%) High-

Yield Corporates — 6.6% (7.2) Corporate Quality

— 6.6% (4.6) Emerging Markets —

10.7% (13.8)

U.S. BONDS 2.4

QUARTERLY UPDATES


FACTS ABOUT FLOATING-RATE BONDS

By the end of 2006, there was close to $1.5 trillion of outstanding floating-rate

loans. Floating-rate bonds have historically provided very good risk-adjusted

returns and a low correlation to other asset classes. However, their lower credit

quality and the overall complexity of their marketplace make this a difficult

investment.

Floating-rate bank loans are structured by banks and other lenders to help

companies finance restructurings, acquisitions, or other highly leveraged

transactions. The interest rate of floating-rate loans are periodically reset, usually

quarterly, to an underlying benchmark rate, such as the prime rate or the London

Interbank Offered Rate (LIBOR). Most loans are priced to spread relative to the

underlying benchmark rate.

Floating-rate loans are typically the most senior source of capital of the borrower.

The loans are also secured by the borrower’s capital, which places them first in

line for repayment if a bankruptcy or liquidation of assets occurs. From 1997 to

2006, even in default, the recovery rate on these loans was roughly 70¢ on the

dollar; a rate significantly higher than high-yield bonds over the same period,

according to a 12/31/2006 report by Credit Suisse.

Over the ten years ending 12/31/2006, floating-rate securities have been less

volatile than corporate bonds, as measured by standard deviation (2.1 vs. 4.5),

according to S&P Micropal. The correlation to other asset categories has also been

low, as shown in the table below (source: S&P Micropal).

Correlation to Other Asset Categories

[5-year period ending 12/31/2006]

Asset Category Fixed-Rate Loans

Investment-Grade Corporates 0.1

U.S. Government Bonds -0.1

U.S. Equities 0.3

Foreign Equities 0.4

2.5 U.S. BONDS

QUARTERLY UPDATES


MUNIS VS. TREASURIES

In theory, municipal bond yields should equal treasury yields multiplied by one

minus the investor’s tax rate. From 1994 through June 2007, the yield on

municipal bonds has ranged from about 81% to 83.5%. During this same period of

time, the percentage has been as low as 77% (1995 and 1998) to as high as 95%

(2004). Using the June 2007 figure of 83.5%, this means that if your client’s

federal tax bracket is 16.5% or higher (1.0 – 16.5 = 83.5), a national municipal

bond portfolio should be considered.

If the after-tax return of the treasuries is the same or slightly higher than what a

national municipal bond fund, UIT, or CEF is offering, choosing the tax-free

portfolio may still be the better risk choice. As the table below shows, municipal

bond interest rate sensitivity is usually dramatically lower than that of treasuries

(the exceptions being 2005 and the first half of 2007) The table shows the change

in yield (bps) of U.S. Treasuries vs. municipals (source: FactSet).

Interest Rate Sensitivity [1994-2007]

Year Treasury Muni Year Treasury Muni

1994 203 134 2001 -6 4

1995 -225 -116 2002 -124 -81

1996 85 11 2003 43 -12

1997 -68 -34 2004 -4 2

1998 -109 -27 2005 18 25

1999 179 95 2006 32 0

2000 -133 -60 6/30/07 33 36

U.S. BONDS 2.6

QUARTERLY UPDATES


FIXED-INCOME CORRELATIONS

The table below shows the five-year correlation coefficient for different bond

categories plus the S&P 500 (source: S&P Micropal).

5-Year Correlations [ending 12/31/2006]

T MBS C HY I TIPS Muni FR S&P

T 1.0 0.9 0.9 0.0 0.5 0.9 0.9 -0.1 -0.4

MBS 0.9 1.0 0.8 0.1 0.5 0.7 0.9 -0.2 -0.3

C 0.9 0.8 1.0 0.3 0.5 0.9 0.9 0.1 -0.1

HY 0.0 0.1 0.3 1.0 0.1 0.0 0.1 0.7 0.5

I 0.5 0.5 0.5 0.1 1.0 0.6 0.5 0.0 -0.1

TIPS 0.9 0.7 0.9 0.0 0.6 1.0 0.8 0.0 -0.3

Muni 0.9 0.9 0.9 0.1 0.5 0.8 1.0 0.0 -0.4

FR -0.1 -0.2 0.1 0.7 0.0 0.0 0.0 1.0 0.3

S&P -0.4 -0.2 -0.1 0.5 -0.1 -0.3 -0.4 0.3 1.0

T = Treasuries

MBS = Mortgage-Backed Securities

C = Investment-Grade Corporates

HY = High-Yield Bonds

I = International Bonds

TIPS = Treasury Inflation-Protected Securities

Muni = Municipal Bonds

FR = Floating-Rate Loans

S&P = S&P 500

QUARTERLY UPDATES

MUTUAL FUNDS

3.1 MUTUAL FUNDS

QUARTERLY UPDATES


3.RETURNS AFTER TAXES

The table below shows returns before and after taxes for index funds. It is assumed

that all distributions are taxed at a 35% tax rate; it is also assumed that the investor

does not sell any shares and that the expense ratio of the index fund is low. The

return figures shown in parentheses are after-tax returns.

Index Mutual Funds: Before and After-Tax Returns

[all periods ending 12-31-2006]

Index Fund 1 Year 5 Years 10 Years

Total U.S. Market 15.5% (15.2%) 3.4% (7.4%) 7.1% (8.1%)

Growth 9.0% (8.9%) 3.4% (7.1%) 7.1% (8.8%)

Value 22.1% (21.7%) 9.5% (9.1%) 9.5% (8.1%)

Small Cap Value 19.2% (18.8%) 13.0% (12.3%) 10.2% (8.9%)

Small Cap Growth 11.9% (11.9%) 11.2% (11.2%) 8.1% (7.9%)

Small Cap 15.6% (15.4%) 11.6% (11.3%) 10.0% (8.8%)

Mid Cap 13.6% (13.4%) 12.3% (12.0%) 11.8% (10.7%)

REITs 35.1% (33.6%) 22.7% (20.7%) 14.2% (12.0%)

FUNDS WITH CONSISTENCY

One reason to select an actively-managed mutual fund is performance consistency.

Your clients can end up with much more money if you select funds that have

consistent results as opposed to those that have wild swings. A 2007 Morningstar

study looked at 14 categories (the 9 U.S. style-boxes, 3 large cap foreign stock

groups, the intermediate bond and intermediate-government bond groups) and did

not include survivorship bias.

Morningstar’s looked at how frequently a fund outperformed its category median

over rolling one-, three- and five-year periods. It turns out that the most consistent

funds delivered top-quartile results more often than those with the best trailing

returns in 10 out of the 14 categories reviewed.

MUTUAL FUNDS 3.2

QUARTERLY UPDATES


The table below shows the mutual funds that were the most consistent winners, as

defined by the frequency of being in the top-quartile of results for the periods from

August 1994 through the end of February 2007. All of the funds shown below had

a Morningstar consistency rating of 100 for all five-year rolling periods which the

fund outperformed its peers.

Consistent Performers [1994-2007]

Fund Name Category Expense

EuroPacific Growth foreign large blend 0.8

Davis NY Venture A large blend 0.9

Dodge & Cox Income intermediate bond 0.4

Fidelity Government intermediate gov’t 0.4

Harbor International Institution foreign large value 0.9

Met West Total Return Bond intermediate bond 0.7

Oakmark Select I large blend 1.0

Sound Shore large value 0.9

T. Rowe Price Equity Income large value 0.7

T. Rowe New American Growth large growth 0.9

TCW Total Return Bond I intermediate bond 0.4

USAA International foreign large blend 1.2

Vanguard Mid Cap Index mid-cap blend 0.2

Vanguard Select Value mid-cap value 0.5

Vanguard Tax-Man Small Cap small blend 0.1

3.3 MUTUAL FUNDS

QUARTERLY UPDATES


TURNOVER AND TAX EFFICIENCY

The financial press emphasizes the ―connection‖ between a mutual fund’s turnover

rate and its after-tax returns. The belief is that the higher the turnover, the less tax

efficient the fund. The discussion never includes the fact that the sale of losing

securities can offset realized gains, dollar for dollar.

The reality is that mutual fund can have quite a bit of selling activity that generates

tax losses that may offset some, most, or all of securities sold for a profit. Equally

important, large gains may be due to securities in the portfolio that have enjoyed

substantial appreciation but are still owned by the fund. Such paper profits are not

taxed since no gain (or loss) has yet been realized.

The table below shows turnover and tax efficiency for a handful of equity mutual

funds; performance figures and rankings are through the end of February 2007. All

of the funds shown are either mid or large cap growth, value, or blend. As you can

see, a fund can have very high turnover and still be extremely tax efficient.

For example, over the past five years, Eaton Vance Growth A averaged 10.60%

per year before taxes and 10.53% after taxes (the rate assumes the investor did not

sell his or her shares). Even though this fund experienced an annual turnover rate

of 208%, its tax efficiency was quite a bit higher than what is considered a tax

efficient fund, Vanguard 500 Index, which had an annual tax cost that was five

times greater than the Eaton Vance fund (0.36 vs. 0.07%).

Annual Turnover vs. Tax Efficiency

Fund Name

Annual

Turnover

Annual

Tax Cost

5-Year

Return

Category

Ranking

Amer. Century Heritagel 230% 0.21% 10.6% top 23%

Aston/Veredus Select Gr. 270% 0.01% 8.0% top 9%

Eaton Vance Growth A 208% 0.07% 10.6% top 24%

Fidelity Large Cap Value 175% 0.71% 10.2% top 17%

Wells Fargo Adv. Gr. Inv. 123% 0.00% 7.7% top 11%

Vanguard 500 Index 5% 0.36% 6.7% top 42%

MUTUAL FUNDS 3.4

QUARTERLY UPDATES


2006 TAX EFFICIENCY OF 96%

The average capital gains distribution from a U.S. stock fund for the 2006 calendar

year was just under 4.2%. Assuming the maximum capital gains tax rate of 15%,

this means that investors were able to keep 3.6% of the 4.2% distribution. This

means that domestic equity fund investors had a gross return of 15.9% (assuming

such funds had the same 2006 return as the S&P 500) and an after-tax return of

15.3%. Phrased another way, shareholders enjoyed a tax efficiency of 96%

(15.3/15.9).

WHEN A FUND MANAGER LEAVES

According to a study by Standard & Poor’s, the average tenure of a large company

stock fund was 5.6 years, for the five years ending 12/31/2006. The managers

whose performance consistently ranked in the top half had an average tenure of

9.5 years. In a different S&P study, manager tenure was ―a primary differentiator‖

of the funds that beat their peers or index.

130/30 FUNDS

A 130/30 fund may invest X amount in a basket of stocks, such as the S&P 500

and then short 30% of X in different stocks. This means the fund uses leverage and

borrows 30% to short those stocks or baskets of equities it believes are overvalued.

Proceeds from the short sale, 30% in this example, are then used to buy more

stocks. When fully implemented, $10 million of assets has purchased $130 million

of equities and shorted $30 million of other securities. There are also other

variations of this theme, such as a 120/20 fund (120% long and 20% short).

A number of well-known companies offer such leveraged funds, including

Barclays, ING, State Street, UBS, Martingale, Goldman Sachs, J.P. Morgan,

MainStay funds, Dreyfus, and BlackRock Advisors. A March 2007 report from

Merrill Lynch indicates that roughly $50 billion is invested in 130/30 strategies;

with a sizeable amount coming from pension plans.

3.5 MUTUAL FUNDS

QUARTERLY UPDATES


TARGET DATE FUND RUSSIAN ROULETTE

Opinions vary as to how much a target date fund should have in equities. Some

funds that have a target retirement date of 2045 have close to 95% of their assets

in common stocks. There is also criticism as to what type of bonds should

comprise the fixed-income portion. A couple of fund families feel that the lowest

risk asset should be TIPS rather than cash equivalents. What is receiving little

press is ―the luck of the draw‖—when an investor actually retires.

For example, someone born in 1919 who retired at age 65 would have

experienced an annual return of just 2.2% above inflation while someone born in

1935 who retired in 2000 would have earned an inflation-adjusted 9.3% per year.

Using the same contributions, the person born in 1935 ended up with a lump sum

that was four times greater than the worker born 16 years earlier. The annual

income of the person born in 1919 came out to $9,630 a year versus $38,580 for

the worker who was born in 1935.

CRITERIA FOR BUYING A SECTOR FUND

The most important criteria for selecting any mutual fund once the category has

been determined is strong management, a strategy that makes sense, and a low

expense (if possible). In the case of sector funds, there are four additional

guidelines:

[1] Be a contrarian—do not chase a hot sector or fund.

[2] Must fulfill an objective—do not buy based on returns alone.

[3] Experience—most have management with limited experience.

[4] Long-Term hold—five year minimum; advise a hold of 10 years.

10 Sector Funds Favored By Morningstar — July 2007

[manager tenure in years shown in parentheses]

Allianz RECM Technology Instl (11.6) T. Rowe Price Media & Telecom (2.3)

Davis Financial (5.2) T. Rowe Price Real Estate (9.8)

JP Morgan U.S. Real Estate A (10.3) Third Ave. Real Estate Value (8.8)

T. Rowe Price Financial Services (—) Vanguard Health Care (23.2)

T. Rowe Price Health Sciences (7.5) Vanguard Precious Metals Mining (11.1)

MUTUAL FUNDS 3.6

QUARTERLY UPDATES


FUND FAMILY RATINGS

The next 33 pages are a rating directory of mutual fund families. You may wish to

print out these pages and use them as an ongoing mutual fund reference source.

The following information is included for each of the 98 fund groups covered:

[1] rating of ownership costs (e.g., low, average, etc.)

[2] number of funds in family and inception date

[3] fund family assets under management

[4] equity management style

[5] stock funds’ risk level and return (e.g., low, high, etc.)

[6] bond funds’ risk level and return

[7] toll-free phone number

ALGER [800.992.3863]

inception: 1964 stock funds’ risk level: high

number of funds: 19 stock funds’ return: above average

total assets: $5 billion bond funds’ risk level: no bond funds

ownership costs: average bond funds’ return: no bond funds

equity management: emphasis on in-house research and high growth stocks; started offering funds in 1986

ALLEGIANT [800.622.3863]

inception: 1986 stock funds’ risk level: average

number of funds: 26 stock funds’ return: average

total assets: $17 billion bond funds’ risk level: very low

ownership costs: very low bond funds’ return: above average

equity management: bottom-up and/or top-down

3.7 MUTUAL FUNDS

QUARTERLY UPDATES


ALLIANCE CAPITAL [800.247.4154]



total assets: $660 billion bond funds’ risk level: above average

ownership costs: low bond funds’ return: above average

equity management: bottom-up emphasis with some top-down

AMERICAN CENTURY [800.378.9878]




ownership costs: very low bond funds’ return: high

equity management: bottom-up and/or top-down

AMERICAN FUNDS [800.421.4120]

inception: 1932 stock funds’ risk level: low

number of funds: 25 stock funds’ return: below average

total assets: $875 billion bond funds’ risk level: average

ownership costs: low bond funds’ return: average

equity management: multiple-portfolio counselor; buy-and-hold

ARTISAN [800.344.1770]




ownership costs: low bond funds’ return: no bond funds

equity management: bottom-up with an emphasis toward value

MUTUAL FUNDS 3.8

QUARTERLY UPDATES


ASTON [800.992.8151]




ownership costs: low bond funds’ return: below average

equity management: fundamental analysis

AXA [800.432.4320]




ownership costs: average bond funds’ return: high

equity management: mostly oversees institutional accounts

BB&T [800.228.1872]



total assets: $5 billion bond funds’ risk level: below average

ownership costs: average bond funds’ return: above average

equity management: quantitative growth and value offerings

BJURMAN [800.227.7264]


number of funds: 3 stock funds’ return: high



equity management: capital appreciation using quantitative factors

3.9 MUTUAL FUNDS

QUARTERLY UPDATES


BLACKROCK [800.441.7762]



total assets: $1.1 trillion bond funds’ risk level: average

ownership costs: below average bond funds’ return: average

equity management: fundamental top-down and bottom-up

BNY HAMILTON [800.426.9363]

inception: late 1700s stock funds’ risk level: average




equity management: offshoot of Bank of New York, which was founded by Alexander Hamilton; offers both top-

down growth and value funds

BRIDGEWAY CAPITAL [800.661.3550]





equity management: quantitative factors using computer programs

BUFFALO [800.492.8332]

inception: 1994 stock funds’ risk level: above average



ownership costs: very low bond funds’ return: low

equity management: fundamental analysis using proprietary model

MUTUAL FUNDS 3.10

QUARTERLY UPDATES


CALAMOS [800.823.7386]



total assets: $900 billion bond funds’ risk level: high

ownership costs: average bond funds’ return: average

equity management: emphasis on convertibles; uses top-down and bottom-up

CALVERT [800.368.2745]



total assets: $14 billion bond funds’ risk level: low


equity management: socially-responsible small-, mid-, and large cap offerings

COLUMBIA [800.426.3750]




ownership costs: low bond funds’ return: high

equity management: top-down and/or bottom-up

CREDIT SUISSE [800.927.2874]





equity management: bottom-up growth and value offerings

3.11 MUTUAL FUNDS

QUARTERLY UPDATES


DAVIS [800.279.0279]


number of funds: 6 stock funds’ return: low



equity management: fundamental-value approach

DELAWARE [800.523.1918]




ownership costs: average bond funds’ return: below average

equity management: bottom-up growth and value styles

DIMENSIONAL FUND ADVISORS [800.342.6684]




ownership costs: very low bond funds’ return: below average

equity management: academic approach to specific benchmark indexes; minimum $50,000 shareholder investment

DODGE & COX [800.621.3979]

inception: 1930 stock funds’ risk level: below average



ownership costs: very low bond funds’ return: very low

equity management: emphasis on well-established companies

MUTUAL FUNDS 3.12

QUARTERLY UPDATES


DREYFUS [800.782.6620]





equity management: variety of investment approaches

DWS SCUDDER [800.621.1048]





equity management: quantitative research with a strong global perspective; offered first international fund in the U.S.

(1952)

EATON VANCE [800.262.1122]





equity management: all managers have at least 20 years of experience; pioneer of tax-managed investing

3.13 MUTUAL FUNDS

QUARTERLY UPDATES


EVERGREEN [800.343.2898]





equity management: managers on five continents

EXCELSIOR [800.446.1012]




ownership costs: lov bond funds’ return: average

equity management: investment advisor, U.S. Trust, was founded in 1853; bottom-up approach uses both value and

growth strategies

FEDERATED INVESTORS [800.341.7400]





equity management: bottom-up emphasis varies depending on fund

MUTUAL FUNDS 3.14

QUARTERLY UPDATES


FIDELITY INVESTMENTS [800.522.7297]



total assets: $1.3 trillion bond funds’ risk level: average

ownership costs: very low bond funds’ return: below

equity management: emphasizes structure over individual stock selection; largest fund family in the U.S.

FIFTH THIRD [800.282.5706]





equity management: bottom up

FIRST AMERICAN [800.677.3863]





equity management: team approach uses fundamental analysis

3.15 MUTUAL FUNDS

QUARTERLY UPDATES


FIRST EAGLE [800.334.2145]

inception: 1987 stock funds’ risk level: very low




equity management: value-oriented with an emphasis on fundamentals

FIRST INVESTORS [800.423.4026]





equity management: conservative bottom-up approach; first to offer an insured tax-free fund

FPA [800.982.4372]




ownership costs: average bond funds’ return: very low

equity management: value contrarian approach with an emphasis toward small caps; initially an advisory firm in 1953

MUTUAL FUNDS 3.16

QUARTERLY UPDATES


FRANKLIN TEMPLETON [800.632.2350]





equity management: bottom-up with target-selling prices; well-known fixed-income funds but has special talents in

foreign and value securities

GABELLI [800.422.3554]





equity management: fundamental Graham and Dodd approach

GOLDMAN SACHS [800.292.4726]



total assets: $5.8 trillion bond funds’ risk level: low


equity management: growth and value plus value offerings using proprietary models; offices in 22 countries

3.17 MUTUAL FUNDS

QUARTERLY UPDATES


HARBOR [800.422.1050]





equity management: star manager used; value and growth equity options

HARTFORD [800.843.7824]





equity management: growth at a reasonable price (GARP); leading seller of annuities that originally started as a fire

insurance co. in 1810

HERITAGE [800.421.4184]




ownership costs: average bond funds’ return: low

equity management: relies on multiple advisory services

HIGHMARK [800.433.6884]





equity management: single fund managers offer growth and value plays

MUTUAL FUNDS 3.18

QUARTERLY UPDATES


HUNTINGTON [800.253.0412]





equity management: managers each average 20 years experience

ING [800.992.0180]





equity management: growth and value choices plus sector funds

IXIS [800.633.3330]





equity management: top-down and/or bottom up

JANUS [800.525.3713]




ownership costs: very low bond funds’ return: above average

equity management: bottom-up fundamental approach

3.19 MUTUAL FUNDS

QUARTERLY UPDATES


JENNISONDRYDEN [800.225.1852]





equity management: bottom-up growth-style investing

JOHN HANCOCK [800.257.3336]





equity management: fundamental bottom-up undervalued approach

JPMORGAN [800.480.4111]

inception: n/a stock funds’ risk level: average




equity management: top-down and bottom up; 700 researchers in 14 countries

LAZARD [800.823.6300]





equity management: undervalued bottom-up approach; formed over 150 years ago as a banking concern

MUTUAL FUNDS 3.20

QUARTERLY UPDATES


LEGG MASON [800.822.5544]





equity management: concentration on value investing

LORD ABBETT [800.821.5129]





equity management: value-oriented using quantitative screening

MAINSTAY [800.624.6782]





equity management: includes value and growth offerings; began as New York Life Insurance in 1854

MANAGERS [800.835.3879]





equity management: multi-manager approach using different investment styles

3.21 MUTUAL FUNDS

QUARTERLY UPDATES


MERIDIAN [800.446.6662]





equity management: value-oriented bottom-up approach

MFS [800.343.2829]





equity management: bottom-up fundamental analysis; MIT is the oldest mutual fund in the country

MORGAN STANLEY [800.869.6397]





equity management: multi-manager strategy

MOSAIC [800.336.3063]





equity management: highly-concentrated portfolios using fundamental analysis

MUTUAL FUNDS 3.22

QUARTERLY UPDATES


MUNDER [800.468.6337]





equity management: fundamental quantitative and qualitative analysis; offers one of the oldest internet funds

NEUBERGER BERMAN [800.461.1899]





equity management: bottom-up approach with an emphasis on value stocks; introduced the first no-load value fund

NICHOLAS [800.544.6547]





equity management: low turnover with blended investment approach

3.23 MUTUAL FUNDS

QUARTERLY UPDATES


NORTHERN [800.595.9111]




ownership costs: very low bond funds’ return: average

equity management: growth and value using top-down and bottom-up

NUVEEN [800.257.8787]





equity management: pioneer in tax-free bonds; added large- and mid-cap growth and values stocks in 1996; started as

an investment bank in 1898

OAK ASSOCIATES [888.462.5386]





equity management: qualitative, fundamental, and volatile

OAKMARK [800.625.6275]





equity management: bottom-up value-based stock selection

MUTUAL FUNDS 3.24

QUARTERLY UPDATES


OLD MUTUAL ADVISOR II [800.433.0051]





equity management: aggressive growth; formally PBHG—a seasoned fund group

OPPENHEIMER [800.225.5677]





equity management: fundamental and quantitative analysis

PAYDEN & RYGEL [800.572.9336]





equity management: team decisions

PHOENIX [800.403.5000]

inception: n/a stock funds’ risk level: above average




equity management: each fund is managed with a distinct approach

3.25 MUTUAL FUNDS

QUARTERLY UPDATES


PIMCO [800.927.4648]





equity management: varies by fund—group is known for savvy bond manager; company is now owned by insurance

giant, Allianz

PIONEER INVESTMENTS [800.225.6292]





equity management: emphasis on value with solid fundamentals

PRINCIPAL FINANCIAL GROUP [800.247.4123]





equity management: value orientation using bottom-up

PUTNAM INVESTMENTS [800.225.1581]





equity management: team decisions with oversight by risk-management committee

MUTUAL FUNDS 3.26

QUARTERLY UPDATES


RIVERSOURCE INVESTMENTS [800.862.7919]





equity management: growth and value; owned by American Express

RS [800.766.3863]





equity management: specializes in small and mid cap stocks

SCHWAB [800.855.9102]





equity management: indexing strategy; some with a value slant

SELIGMAN GROUP [800.221.2783]





equity management: growth and value offerings; company dates back to 1864

3.27 MUTUAL FUNDS

QUARTERLY UPDATES


SSGA [800.647.7327]





equity management: conservative fundamental approach

STI CLASSIC [877.984.7321]





equity management: growth and value

SUNAMERICA GROUP [800.858.8850]





equity management: technical and fundamental; also offers annuities

T. ROWE PRICE [800.638.5660]





equity management: fundamental bottom-up approach

MUTUAL FUNDS 3.28

QUARTERLY UPDATES


TAMARACK [800.422.2766]





equity management: emphasis on small- and mid-cap stocks

THIRD AVENUE [800.443.1021]





equity management: fundamental approach to ―safe and cheap‖ stocks

THORNBURG [800.847.0200]

inception: n/a stock funds’ risk level: average




equity management: fundamental approach

THRIVENT [800.847.4836]





equity management: growth and value choices; formerly Lutheran Brotherhood and AAL—seasoned fund groups

3.29 MUTUAL FUNDS

QUARTERLY UPDATES


TIAA-CREF [800.842.2252]





equity management: active and passive; has overseen annuities assets for decades

TOUCHSTONE [800.543.0407]





equity management: growth and value

U. S. GLOBAL INVESTORS [800.873.8637]



total assets: $2.2 trillion bond funds’ risk level: low


equity management: growth and value team approach

USAA GROUP [800.531.8181]





equity management: bottom-up blend

MUTUAL FUNDS 3.30

QUARTERLY UPDATES


VAN ECK [800.221.2220]



total assets: $1.4 billion bond funds’ risk level: no bond funds


equity management: the first gold fund plus offers a mid-cap value fund

VAN KAMPEN [800.421.5666]





equity management: bias toward large cap stocks; also offers UITs and closed-end funds

VANGUARD [800.662.7447]



total assets: $1.2 trillion bond funds’ risk level: above average


equity management: top-down and bottom-up; pioneer of index funds

VICTORY [800.539.3863]





equity management: flexible value style with large cap bias

3.31 MUTUAL FUNDS

QUARTERLY UPDATES


WADDELL & REED [800.923.3355]





equity management: growth-oriented top-down approach

WASTACH [800.551.1700]





equity management: emphasis on small- and mid-cap stocks

WEISS, PECK & GREEN [800.223.3332]

inception: 1971 stock funds’ risk level: n/a

number of funds: 9 stock funds’ return: n/a



equity management: emphasis on cash flow and small-cap value

WEITZ SERIES [800.304.9745]





equity management: discount value

MUTUAL FUNDS 3.32

QUARTERLY UPDATES


WELLS FARGO [800.222.8222]





equity management: bottom-up approach; parent company dates back to 1852

WM [800.222.5852]





equity management: focus on small- and mid-cap stocks; well-known for its ―funds of funds‖

QUARTERLY UPDATES

ETFS AND CEFS

4.1 ETFS AND CTFS

QUARTERLY UPDATES


4.ETF INDUSTRY STATISTICS

By the middle of 2007, there were 500 ETFs whose total market capitalization was

about $475 billion. The expense ratios for ETFs vary quite a bit. Typically, the

lowest cost ETFs are those that cover broad, well-known U.S. stock market

indexes (e.g., Vanguard’s Total Market ETF charges 0.07% annually, or $7 for

every $10,000 invested). The average expense ratio for a U.S. stock ETF has gone

from 0.43% to 0.52% from the first to second quarter of 2007; the increase is due

to new specialized offerings that have comparatively high expense ratios. Advisors

can compare expenses for ETFs and mutual funds using actual dollar figures by

using the expense-analyzer tool at www.nasd.com, the National Association of

Securities Dealers’ web site.

A fund’s expense ratio does not include commission costs or the bid-ask spread;

the greater the turnover rate, the more these ―hidden costs‖ affect returns.

Sometimes, these spreads can equal or exceed the ETF’s expense ratio (e.g., First

Trust DB Strategic Value Index). At the other end of the spectrum are SPDRs,

whose average bid-ask is less than 0.01%. The average bid-ask spread for each

ETF can be obtained (for free) by going to the web site, xtf.com.

Another web site, IndexUniverse.com, is an index-industry web site that does

ETF analysis, including tracking error (how close does the ETF track its

underlying index). The average tracking error among U.S. major-market ETFs was

0.3% in 2006, up from 0.2% in 2005, according to Morgan Stanley.

In its study of major ETF providers’ tracking error for 2006, Morgan Stanley

found that Vanguard had the lowest average annual fees and the lowest average

tracking error, 0.28%. Vanguard’s Small Cap Growth ETF had a tracking error of

just 0.01%. PowerShares ETFs had the highest average fees and also the highest

average tracking error, 0.7%.

UTILITY AND BOND ETFS

Through the first quarter of 2007, the Utilities Select Sector SPDR (XLU), which

mirrors utility stocks inside the S&P 500, delivered five-year annualized gains of

11.2%. Historically, investors have been attracted to utilities because of their

stability and dividends. During the first half of 2007, utilities had a projected

dividend of 2.9%, versus 4.7% for 10-year Treasuries. Utility sector SPDRs have a

p/e ratio of 16, close to that of the S&P 500.

http://www.nasd.com/

ETFS AND CEFS 4.2

QUARTERLY UPDATES


In April 2007, Vanguard launched four ETFs (0.11% expense ratios) that track

Lehman Brothers bond indices: Vanguard Total Bond Market (BND), Vanguard

Short-Term Bond (BSV), Vanguard Intermediate-Term Bond (BIV), and

Vanguard Long-Term Bond (BLV). In 1986, Vanguard introduced the first mutual

fund bond index for individual investors.

INDEX FUNDS OUTPERFORM ETFS

According to a May 7th

, 2007 article in The Wall Street Journal, big, low-cost

index mutual funds often outperform their ETF counterparts. The study looked at

some of the biggest and best-known ETFs and mutual funds in four different

categories: the S&P 500, the total U.S. stock market, international stock markets,

and a broad-based U.S. bond index.

The margins of victory for the top performers in each of the four categories were

about 0.05% (or $5 on a $10,000 investment). Moreover, the analysis did not take

into account any commissions paid to buy the ETFs.

Looking at different periods from 1997 through the first quarter of 2007, index

mutual funds prevailed 34 of the 40 time periods; the funds were always the

winner when comparing after-tax returns for one-, three-, and 10-year after-tax

categories. ETFs sold by Barclays and State Street usually beat the average

performance of index funds in their respective categories—but so did the big, low

cost index funds.

According to Jim Wiandt, editor of the Journal of Indexes, an index-investment

industry publication, investors ―should consider an index fund’s philosophy and

execution more than whether the fund is an ETF.‖ In theory, an index fund should

trail its benchmark by at least the amount of its expense ratio. Fund managers

can reduce some of the costs by techniques such as lending out the fund’s

underlying securities and buying stocks ahead of anticipated additions to

their index.

BOND ETFS

Advisors interested in bond ETFs may want to check out some new offerings:

Barclays Global Investors (recently added 10 debt ETFs), Vanguard, Ameristock,

State Street, and Bear Sterns. As of the middle of 2007, no ETFs tracked

municipal bonds.

4.3 ETFS AND CTFS

QUARTERLY UPDATES


BUY-WRITE STRATEGY

The iPath CBOE S&P 500 BuyWrite Index ETN tracks the S&P 500 and

systematically sells covered call options on the index. The covered call strategy,

sometimes referred to as a ―buy-write strategy,‖ can enhance a portfolio’s return

and reduce risk. The underlying portfolio, the S&P 500 in this case, has limited

upside potential since appreciation past a certain level means the securities will be

called away.

Barclays Bank, which oversees all ETF ―iShares,‖ has an expense ratio of 0.75%,

versus 1.20% for two closed-end funds offered by Eaton Vance that utilize the

same strategy. The buy-write ETN is similar to an exchange-traded fund (ETF)

except it is a senior, unsecured, unsubordinated debt security linked to the

performance of an index. Because the Barclays ETN continuously sells covered

calls, it is expected to have returns that have little correlation to the U.S. stock

market.

CLOSED-END FUNDS

Typically, closed-end funds (CEFs) trade at about a 4% discount to NAV; the

discount has widened to 6.5% as of August 20th

, 2007 due liquidity and quality

concerns in the debt marketplace. According to CEF expert Thomas Herzfeld,

―small closed-end funds selling at a large NAV discount generally don’t have long

lives ahead of them‖ (meaning it is likely that the fund’s shareholders will vote to

change the fund into an open-end fund and thereby have an immediate profit—the

difference between the discount and NAV).

Some CEFs to consider include: Lazard Global Total Return & Income Fund (a

stock and foreign currency portfolio trading at a 12% discount), Morgan Stanley

Global Opportunity Bond Fund (down 39% since its February 2007 peak and

trading at a 10% NAV discount), Black Rock California Investment Quality

Municipal Trust (7% discount and trading at 24% less than its February 2007

peak), and Morgan Stanley Quality Municipal Securities (taxable equivalent yield

of 8% for investors in a 35% federal tax bracket).

QUARTERLY UPDATES

COLLEGE EDUCATION

5.1 COLLEGE EDUCATION

QUARTERLY UPDATES


5.KIDDIE TAX EXTENDED

Beginning in 2008, the new age limit for the ―Kiddie Tax‖ is increased from age

17 to children who are under age 18, or under 24 if the child is a full-time student.

The provision will not apply to some children with paid jobs. Furthermore, the

new law applies only to children ―whose earned income does not exceed one-half

of the amount of their support.‖ Investment income, sometimes referred to as

―unearned income,‖ above a certain level ($1,700 for 2007), is subject to the

parents’ tax rates.

COLLEGE FINANCIAL AID

Average college tuition and fees at private colleges rose to $22,218 for the 2006-

2007 school year, a 6% increase from the previous year, according to The Wall

Street Journal. Add room and board and the total cost averages $30,367. In May

2007, Education Secretary Margaret Spelling commented that the student-aid

system she oversees is ―redundant, Byzantine, and broken.‖

There are two different systems of federal student-loan distribution. Whether your

clients use banks for these loans or borrow directly from the federal government

depends entirely on the college attended. Additionally, there is confusion

associated with the different tax-advantaged college-savings vehicles—Roth IRAs,

529 plans, and Coverdell Education Savings Accounts. On top of all this are the

varied ways your clients finances are considered, ranging from the U.S.

Department of Education’s assessment for federal financial-aid purposes to a

school’s use of their own formula to figure out how to distribute their own

financial aid.

Defining Financial Aid In addition to scholarships and grants, there are different types of loans available.

The most common student loan is the Stafford loan. The annual limits for students

who are considered ―dependents‖ is $3,500 for freshmen and $4,500 for

sophomores; juniors and seniors can borrow up to $5,000 a year.

Stafford loans are only available to those who fill out a Fafsa form (Free

Application for Federal Student Aid). The unsubsidized variety of these loans does

not require the student to demonstrate need. As of the middle of 2007, the interest

rate on Stafford loans was a maximum of 6.8%. As a side note, the rate on loans

from private lenders is not capped and was about 10% during the same period.

COLLEGE EDUCATION 5.2

QUARTERLY UPDATES


Another advantage of a federal student loan (such as Stafford loans) is that they

provide more repayment flexibility than what is afforded by a private lender. For

example, a borrower who became unemployed (economic hardship) could receive

a deferment. In the case of a deferment, some loans continue to accrue interest

while other loans have the government pay such interest during the economic

hardship period.

Besides Stafford, another type of federal loan is PLUS. Unlike Stafford loans, Plus

loans have no pre-set limit. However, the total amount borrowed cannot exceed

the cost of attendance minus other forms of aid received. As of the middle of

2007, the maximum rate for a PLUS loan was 8.5%. The federal government

expects repayment of a PLUS loan from the parent (the borrower) and not the

student.

Formula Used For Qualification In order to qualify for a federal loan, certain assets are excluded from the formula.

In addition to a personal residence and retirement plans, the borrower is granted an

―asset protection allowance‖ which varies based on age; for the typical parent, the

figure is roughly $50,000. A number of private colleges use a different formula

which excludes retirement accounts but caps the net home equity at 2-3 times

annual income.

Getting A Second Opinion Many people rely on their college’s financial-aid office to provide them with

objective information on loans and to make specific recommendations. During the

past few years, investigations by Congress have shown that such recommendations

are not always the best and not always objective. For this reason, your clients

should do some comparison shopping (e.g., Citigroup, Nelnet, Northstar Education

Finance, MyRichUncle).

Two College Students Federal assessment for aid eligibility is based on the parents’ total expected

contribution. Thus, parents with two or more children in college at the same time

are likely to qualify for more financial aid.

Special Circumstances The Higher Education Act, which authorizes federal aid programs, gives college

aid officers the ability to make adjustments when warranted. If you have a client

whose circumstances are special, recommend that they complete a ―Professional

Judgment Review‖ letter.

5.3 COLLEGE EDUCATION

QUARTERLY UPDATES


A Dose Of Reality Close to 90% of parents believe that their college-bound children will receive a

scholarship or grant. An independent study shows that 92% of parents

overestimate the amount of such grants and scholarships. Web sites such as

fastweb.com and collegeboard.com match student profiles to scholarship

opportunities.

Ranking 529 Plans All 50 states and the District of Columbia offer their own 529 plan. Some state

plans include a tax break for state residents. In addition to possibly receiving a

state income tax break, your clients should be advised to compare fees. Experts

generally agree that annual 529 plan fees should be no more than 1.5% of the

amount in the plan. The Utah Educational Savings Plan, the Maryland College

Investment Plan, and the College Savings Plan of Nebraska have been cited as

having very low fees and very good performance.

QUARTERLY UPDATES

HEALTH CARE

6.1 HEALTH CARE

QUARTERLY UPDATES


6.HEALTH CARE PREMIUMS DOUBLE

For 2007, health care insurance premiums increased 6% from 2006 prices. The

annual cost for family coverage through an employer plan is now more than

$12,000, a figure greater than what a minimum-wage worker earns in a year.

The average worker now pays $3,281 a year to cover his portion of the health

insurance premium; double what workers paid in 2000. Since the beginning of

2000 to the beginning of 2007, wages and inflation have both increased by roughly

20%, versus an 80% increase for health insurance, according to the Kaiser Family

Foundation’s annual survey.

MEDICAID PLANNING UPDATE

Rules for qualifying for Medicaid long-term care were tightened in 2006; as of the

middle of 2007, some states are still in the process of implemented the new

regulations. The 2006 rules make it harder for someone to make gifts and still

qualify for Medicaid benefits (e.g., the ―look-back‖ period was extended from

three to five years—see below).

In the past, individuals generally became eligible for Medicaid assistance to pay

for long-term care after using up a certain amount of assets. The remaining amount

varies from state to state, but it is as little as $2,000 in cash and investments. This

meant that a Medicaid applicant with a $50,000 bank account and $130,000

brokerage account would have to ―spend down‖ (i.e., use assets to pay for medical

care or other expenses) up to $178,000 of the $180,000 combined accounts. Such

spend downs mean that there would be little to pass on to heirs.

A strategy used in the past was to make gifts of assets to heirs such as children and

grandchildren before entering a nursing home. Such a gift-giving program meant

that assets stayed ―in the family‖—but at a cost. For example if the nursing home

applicant gave away the equivalent of 16 months of hospital payments within three

years of entering the nursing home, he or she would not qualify for Medicaid for

16 months. The new rules extend the number of years from three to five. This is

what is referred to as ―look-back‖ period. Today, there are only a few strategies

available to shelter assets for prospective Medicaid applicants.

HEALTH CARE 6.2

QUARTERLY UPDATES


One strategy is to set up an irrevocable income-only trust and retitling the

ownership of the house from an individual (or couple) into the name of the

irrevocable trust. Such an arrangement would allow the parent(s) to still live in the

house and even sell it.

A second strategy is to have your client purchase a long-term care policy that will

cover any look-back period (which ranges from 1-60 months). Such an insurance

policy would only be beneficial if the client were to enter a nursing home, had

spent down his or her assets to the state’s minimum requirements, and gifts had

been made within five years of entering the nursing home.

A third strategy that is still available is the purchase of an immediate annuity,

thus changing something that would have been an asset (and possibly spent down)

into an income stream only. The immediate annuity provides an income stream to

the healthy spouse while still allowing Medicaid eligibility for the other spouse. In

order for the annuity strategy to work, two requirements must be fulfilled. First,

the beneficiary of the annuity must be named the beneficiary of the contract.

Second, the income stream cannot be deferred (it must begin immediately) and the

payments must be at least somewhat uniform.

MEDICARE PART B PREMIUMS

As of the beginning of 2007, higher-income retirees began paying more for

Medicare Part B, which covers doctor visits and outpatient care. The standard

monthly premium for 2007 was $93.50; because of their income, some people

were paying as much as $161.40 per month. It has been estimated that about 4% of

Medicare beneficiaries are now paying more than the standard premium.

Part B premiums are based on ―modified adjusted gross income‖ (MAGI), which

is a combination of AGI, tax-exempt interest, and tax filing status. For example,

premiums are $105.890 a month for individuals with a MAGI from $80,001 to

$100,000 or a married couple filing a joint return with a MAGI from $160,001 to

$200,000.

The ―initial enrollment period‖ for Medicare Part B starts three months before the

applicant turns 65 and lasts for seven months. If signup does not occur during this

period, the applicant must wait for the ―general enrollment period‖ which lasts

from January 1st through March 31

st every year; coverage then begins the

following July 1st. Premiums can go up 10% for every 12 months of eligibility that

pass before signup.

6.3 HEALTH CARE

QUARTERLY UPDATES


The 10% annual premium increase can be avoided if either spouse is still working

and has health coverage through their employer. In such a case, the employee can

sign up for Part B anytime while still covered by the employer’s insurance or up to

eight months after employment is terminated or coverage ends, whatever comes

first. If application has not been made during such period, the person has to wait

until the next general enrollment period (see Social Security publication 10161

and 10162).

UNIVERSAL HEALTH CARE COVERAGE

Public support for universal health care coverage has increased, due to greater

awareness and increased costs. Per capita health care costs are $7,500 for 2007, an

$800 increase from 2005. The number of uninsured has grown from 37 million in

1993 to 45 million today. The cost of health care for the uninsured are simply

passed on to taxpayers and those with coverage. In 2005, those with insurance

paid a ―hidden tax‖ of over $920 on their insurance premiums, according to

Families USA, a consumer advocacy group.

Texas leads the nation with the highest rage of uninsured (27%), followed by

Florida (24%), New Mexico (24%), and Oklahoma (22%). Those between the ages

of 19-24 are the most likely to be uninsured; they represent 13% of the insured and

24% of the uninsured population. In 1940, 10% of employees received health

insurance from their employer. By 1950, that number had risen to 50%.

The U.S. spent 15.3% of its GDP on health care in 2004; other industrialized

nations spent an average of 8.6%, according to the Organization for Economic

Cooperation and Development. The U.S. ranks 29th

in overall life expectancy (78

years). According to the Center for American Progress, Medicare costs could be

reduced by $1 trillion over the next 25 years if obesity among seniors could be

returned to 1980s levels. The American Public Health Association says chronic

illness (obesity, heart disease, diabetes, etc.) account for 75% of health costs.

HEALTH CARE 6.4

QUARTERLY UPDATES


SPOUSAL MEDICAL COVERAGE

One of the biggest financial challenges for those about to retire is the transition

from private to federal health insurance. The first place to seek help is the retiring

spouse’s employer. A number of companies provide coverage for the spouse. The

uncovered spouse may have to pay up to 100% of any premiums. Large employers

may also provide free health insurance counseling.

The next place to seek help is the State Health Insurance Assistance Program

(SHIP). This agency has counselors in every state that provide free one-on-one

help (phone 800-434-0222). There is a national directory of SHIP contacts at

medicare.gov/contacts/static/ allStateContacts.asp. Another site, caremanager.org,

offers geriatric-care managers who can help your clients sort through the different

coverage options.

QUARTERLY UPDATES

ANNUITIES

7.1 ANNUITIES

QUARTERLY UPDATES


7.2006 ANNUITY SALES

For the 2006 calendar year, fixed-rate annuity sales totaled $76 billion ($5.5

billion of which was EIA sales), down 5% from the previous year. Variable

annuity sales totaled $161 billion. The combined sales for both fixed-rate and

variable, approximately $237 billion, was a record high, according the LIMRA

International.

LIVING BENEFITS INCREASE SALES

For the 2006 calendar year, two-thirds of all variable annuity sales included a

living benefit rider, up from 50% of sales in 2004. The cost of a living benefit,

which can protect an investor from market declines and/or guarantee minimum

rates of return while still enjoying the upside potential of the markets, ranges from

0.15% to %1.10, according to The Wall Street Journal. The typical living benefit

costs %0.60 per year. Once the rider is opted for, few insurers allow the contract

owner to later cancel the benefit.

The annual costs of a variable annuity without a living benefit generally range

from 0.7% to over 2.0%. Once a living benefit is added, the total costs frequently

range from 2.5% to 3.2% each year. Certain enhanced death benefits and/or

upfront bonuses can drive up the price another 0.1% to 0.4% per year. Advisors

need to be conscious of the total costs when counseling a client or prospect.

One approach would be to tell the client that he has all of the upside potential of

the stock market, minus about 3% a year, but none of the downside risk. As costly

as this may seem, it is equally important to point out that without a living

benefit, the client would not be able to have such a high equity exposure,

given his or her risk level. The additional equity returns could easily offset the

returns the older or conservative client would have experienced in fixed

income.

ANNUITIES 7.2

QUARTERLY UPDATES


There are three basic types of living benefits: (1) guaranteed minimum income

(assures future income at a minimum level—typically based on the living benefit

value and not the contract value); (2) guaranteed minimum withdrawal (withdraw

a certain percentage of the investment each year); and (3) guaranteed

accumulation (you cannot sustain living benefit losses if the market drops—you

can only experience gains and/or a set return). The most popular living benefit is

the guaranteed minimum withdrawal. Under this benefit, investors are usually

offered a guaranteed withdrawal over a set period (4-7% per year) and/or over

their remaining lifetime.

There are three costs to a living benefit. First, the cost of the rider. Second,

limitations as to how money is taken out if the benefit is used. Third, the

investment choices are frequently limited to asset allocation models that have 80%

or less exposure to equities. Two ―non-believers‖ in living benefits are

Northwestern Mutual Life Insurance (the company says ―a well-structured

financial plan can provide the same benefits the riders do‖) and the variable

annuity expert at Morningstar, Frank O’Connor (―allocate your assets properly and

have realistic expectations fro withdrawals, and you won’t need this benefit‖).

QUARTERLY UPDATES

RETIREMENT PLANNING

8.1 RETIREMENT PLANNING

QUARTERLY UPDATES


8.ADVISOR INFO FROM SOCIAL SECURITY

The web site, socialsecurity.gov/financial planners, links advisors to resources

about retirement, disability, taxation of Social Security benefits, and theft of a

Social Security number. Social Security spokespersons believe that this is an

excellent, ―one-stop-shopping portal for financial advisors and their clients that are

interested in retirement planning.‖ The web site contains a number of calculators

for determining retirement eligibility and the best time to start receiving retirement

and other benefits.

2007 SOCIAL SECURITY UPDATE

By law, Social Security taxes and benefits change each year. Whether your clients

are working or receiving benefits, these changes are important for the advisor to

know. The information below is divided into three tables: people who are working,

people who receive benefits, and people on Medicare.

People Who Are Working

Social Security Taxes 2007

Employer / employee (each) 6.2% on earnings up to $97,500

Self-employed 12.4% on earnings up to $97,500 *

Medicare Taxes

Employer / employee (each) 1.45% on all earned income

Self-employed 2.9% on all earned income *

* can be partially offset by income tax provisions

People Who Receive Social Security Benefits

Status 2007

At full retirement age or older No limit on earnings

Under full retirement age $12,960 limit (for every $2 over the limit,

benefits are reduced by $1)

In the year you reach full retirement age $34,440 limit (for every $3 over the limit,

benefits are reduced by $1 until the

month full retirement is reached)

RETIREMENT PLANNING 8.2

QUARTERLY UPDATES


People On Medicare

Hospital Insurance [Part A] 2007

1st 60 days in a hospital, patient pays $992

Days 61 through 90, patient pays $248 per day

Beyond 90 days in a hospital, patient pays (for up

to 60 more days)

$496 per day

1st 20 days in a skilled nursing facility, patient pays $0

Days 21 through 100, patient pays $124 per day

Medical Insurance [Part B]

Premium $93.50 per month *

Deductible $131 per year **

* Some people with higher incomes pay higher premiums.

** After the deductible, $131 for 2007, Part B pays for 80% of covered services.

REQUIRED IRA WITHDRAWALS

Investors have two choices when paying taxes on their required IRA or qualified

plan distributions: (1) file a quarterly estimated tax payment, or (2) have the

custodian withhold taxes from the distribution.

CALCULATING REQUIRED WITHDRAWALS

Even though required minimum withdrawals (RMDs) from qualified retirement

plans such as a 401(k) is calculated the same way as withdrawals from traditional

IRAs, you are not allowed to mix or match between the two. In other words, you

cannot add your IRA and 401(k) balances together to determine your required

distribution for the year.

You cannot add up different 401(k) account balances together (unlike traditional

IRA accounts). Thus, even if you take out ―extra‖ from a 401(k), it will not count

toward the RMD from your IRA. Someone who is still working and has a 401(k)

can delay taking money out until April 1st following the year of retirement (vs. 70

1/2 for traditional IRAs and most qualified plans).

8.3 RETIREMENT PLANNING

QUARTERLY UPDATES


To calculate the amount of an RMD, divide the account balance as of the end of

the previous year by the number supplied for your age in IRS Publication 590

(Uniform Lifetime Table). If the spouse is more than 10 years younger and is also

the sole beneficiary of the account for the entire year, the divisor used can be

found in the same publication under the heading, ―Joint Life and Last Survivor

Expectancy Table.‖

QUARTERLY UPDATES

FOREIGN SECURITIES

9.1 FOREIGN SECURITIES

QUARTERLY UPDATES


9.WORLD STOCK MARKET WEIGHTINGS

As of the end of the first half of 2007, U.S. markets continued to dominate the rest

of the stock markets around the world, according to JP Morgan, FactSet, MSCI,

and Standard & Poor’s―Emerging‖ is comprised of Korea, Brazil, Russia, India,

China (each is 1%) and other (4%); ―Europe‖ is comprised of France (5%),

Germany (4%), Switzerland (3%), Spain (2%), and other (6%). As of the

beginning of 2007, total global stock market capitalization was $31 trillion.

Weights in MSCI All Country World Index

U.S. 44% Emerging 9%

Europe 20% Pacific 4%

U.K. 10% Canada 3%

Japan 10% Total 100%

WORLD ECONOMICS

The table below shows a number of economic figures as of the middle of 2007 for

10 different countries (sources: JP Morgan, EcoWin, and CIA).

World Economics

Country

GDP

($ t)

GDP Per

Capital

GDP

Growth

Unemployment

Rate

U.S. $13.1 $44,000 1% 5%

Canada 1.8 35,600 4 6

Japan 4.2 33,100 3 4

Germany 2.6 31,900 2 9

U.K. 1.9 31,800 3 6

France 1.9 31,100 2 8

Italy 1.8 30,200 1 6

Mexico 1.1 10,700 3 3

China 10.2 7,700 11 4

India 4.2 3,800 9 8

FOREIGN SECURITIES 9.2

QUARTERLY UPDATES


WORLD DEMOGRAPHICS

The table below shows a number of demographic figures as of the middle of 2007

for 10 different countries (sources: JP Morgan, EcoWin, and CIA).

World Economics

Country

Population

(mm)

Population

Growth

% Age

> 65

Median

Age

U.S. 301 0.9% 13 37

Canada 33 0.9 14 39

Japan 127 -0.1 21 44

Germany 82 0.0 20 43

U.K. 61 0.3 16 40

France 64 0.6 16 39

Italy 58 0.0 20 43

Mexico 109 1.2 6 26

China 1,322 0.6 8 33

India 1,130 1.6 5 25


QUARTERLY UPDATES


FOREIGN OWNERSHIP OF TREASURIES

From 1978 to the first half of 2007, the percentage of U.S. Treasuries owned by

foreigners has increased from 12% to 52%; there has only been a 1% increase

from 2003 to 2007 (from 51% to 52%). Foreign holders of U.S. Treasuries are

(numbers shown in parentheses are billions of U.S. dollars; source: U.S. Treasury

Dept).

Holders of U.S. Treasuries [April 2007]

Country Percentage

Japan 28% ($615 b)

China 19% ($414 b)

U.K. 6% ($134 b)

OPEC 5% ($112 b)

Brazil 4% ($80 b)

Caribbean 4% ($77 b)

Luxembourg 3% ($62 b)

Taiwan 3% ($59 b)

All others 28% ($613)

PLAYING IT SAFE WITH CHINA

As of the beginning of June 2007, stocks on the Shanghai exchange had a p/e ratio

of about 50, compared with 18 for the S&P 500. However, such high prices do not

affect U.S. investors since only Chinese citizens are allowed to invest in the vast

majority of stocks listed on either the Shanghai or Shenzhen exchanges, China’s

two main financial centers. U.S. investors are generally limited to stocks listed on

Hong Kong and elsewhere. Hong Kong’s Hang Seng Index is up less than 4%

year-to-date (with a p/e of about 16), versus 37% for the Shanghai Composite

Index.

Morningstar recommends that investors look to broadly diversified international

and emerging market funds that are not vulnerable to volatile events in a single

country. According to Morningstar, pure China funds with at least a 10-year

history have suffered drops of 15% or more in at least 12 three-month periods.

FOREIGN SECURITIES 9.4

QUARTERLY UPDATES


VALUATION OF MAJOR WORLD MARKETS

The table below compares valuations of several market indexes (source:

FactSheet).

Comparing Values Overseas [1/1/07]

Index

Forward

P/E Ratio

Price/Book

Ratio

Dividend

Yield

S&P 500 22 4.6 1.8

MSCI EAFE 18 3.5 2.4

MSCI Europe 16 3.7 2.7

MSCI Emerging Markets 18 4.7 0.4

MSCI Pacific 21 3.0 1.7

MSCI Japan 23 2.4 1.1

20-YEAR STATISTICS [1987-2006]

All of the statistics listed below cover the 20-year period from the beginning of

1987 through the end of 2006.

Poor Hedge Against Inflation—Gold has increased from $484.10 an ounce to

$636.70 (a 31.5% increase); the cumulative increase in the CPI was 82.6%,

142.4% in the case of three-month U.S. Treasury Bills.

Rising U.S. Trade Deficit—The U.S. trade deficit was $152 billion at the end of

1987 (and got down to $39 billion in 1992); by the end of 2006, it was $764

billion.

U.S. Dollar vs. the Euro—The first full year of the Euro was 1999, when it took

one Euro to equal one U.S. Dollar; by the end of 2006, it took 0.76 Euros to equal

one dollar—a cumulative decline for the dollar of 24%.

U.S. Dollar vs. the British Pound—In 1987, it took 0.53 British Pounds to equal

one U.S. Dollar; by the end of 2006, it took 0.51 Pounds to equal one dollar—a

cumulative decline for the dollar of less than 4%.


QUARTERLY UPDATES


U.S. Dollar vs. the Japanese Yen—In 1987, it took 121.1 Japanese Yen to equal

one U.S. Dollar; by the end of 2006, it took 119.2 Yen to equal one dollar—a

cumulative decline for the dollar of less than 1.6%.

U.S. Dollar vs. the Swiss Franc—In 1987, it took 1.27 Swiss Francs to equal one

U.S. Dollar; by the end of 2006, it took 1.22 Francs to equal one dollar—a

cumulative decline for the dollar of less than 4%.

U.S. Dollar vs. the Brazilian Real—The first full year of the Brazilian Real was

1990, when it took 0.0001 Real to equal one U.S. Dollar; by the end of 2006, it

took 2.13 Reals to equal one dollar—a cumulative appreciation for the dollar of

10,200%.

Currency trends tend to last several years. For example, the value of a trade-

weighted U.S. Dollar dropped over 25% for the eight-year period ending October

1978, appreciated over 50% from October 1978 to March 1985, declined about

40% from March 1985 to April 1995, appreciated roughly 40% from April 1995 to

February 2002, and then declined by about 40% from February 2002 to the end of

2006.

FOREIGN REAL ESTATE FUNDS

During the first half of 2007, investors poured $6 billion into foreign real estate

funds. Some of the companies offering a foreign real estate fund are: Alpine,

Charles Schwab, Cohen & Steers, Fidelity, State Street Global Advisors, and

WisdomTree Investments. Companies that offer global real estate funds include:

AIM, Franklin, ING, Kensington, and Northern Trust. A few of these funds hedge

against the U.S. dollar’s fluctuation.

QUARTERLY UPDATES

REAL ESTATE

10.1 REAL ESTATE

QUARTERLY UPDATES


10.REVERSE MORTGAGE UPDATE

A reverse mortgage is something that should be considered by the advisor who has

clients who own a residence and are at least 62 years old. The older the client, the

greater the loan. Money from a reverse mortgage can be used for anything and can

be received by the borrower as a lump sum or as periodic payouts.

A reverse mortgage can be paid off at anytime. The homeowner is never forced to

sell the home or make any payments. The loan does become due and payable

(principal plus all deferred compounded interest payments) when the owner dies

or permanently moves out of the house. In short, a reverse mortgage can provide

instant cash for the borrower and nothing ever has to be paid off (unlike a home

equity loan)—as long as the person keeps and lives in the residence.

Historically, homeowners have been turned off by reverse mortgages because of

misconceptions and/or the high costs and complexities of obtaining such a loan.

As competition heats up, the costs have started to come down. There are now a

large number of companies that deal in reverse mortgages, including: Bank of

America, Countrywide Financial, GNMA, IndyMac Bancorp, and Seattle

Mortgage.

The Department of Housing and Urban Development (HUD), insures most reverse

mortgages, is strongly considering lowering original costs and mortgage insurance

premiums. Guarantees by GNMA mean annual rates that are 0.5-0.8% lower.

Roughly 90% of all reverse mortgages are insured by the U.S. Government

through a Home Equity Conversion Mortgage (HECM). However, there is a trade-

off for such assurances and lower rates: the maximum loan amount for 2007 is

$362,790 ($200,160 if the home is in a rural area), regardless of the homes value.

Jumbo loans (which have no limits) from private insurers are also available, but

the cost of the loan could be as much as two percentage points higher each year.

Lenders typically charge an origination fee of 2% of the home’s value (not the

value being borrowed). A mandatory mortgage insurance premium adds another

one-time fee of 2%; there are also various closing costs. Thus, the upfront costs on

a reverse mortgage can easily exceed $12,000 for a $250,000 home. In the case of

more expensive homes, the combined fees can be much higher. Regardless of the

upfront (one time) fees, borrowers incur monthly interest charges (all of which are

deferred until the borrower dies or permanently moves out) that compound

annually.

REAL ESTATE 10.2

QUARTERLY UPDATES


The size of the reverse mortgage marketplace is still comparatively small. Close to

7.4 million traditional mortgages originated in 2005, versus about 60,000 reverse

mortgages for the same period. Regardless of a home’s value, all lenders will only

finance a portion of its value (they need a cushion of safety with the collateral).

For example, a 68 year old with a $1 million house could get a jumbo reverse

mortgage of about $386,000. The same homeowner would only receive between

$108,000 and $210,000 with a HECM loan (the trade-off is lower fees and

ongoing costs), depending on the location of the home. At age 72, a homeowner

with the same $1 million house would get roughly $434,000 by using a jumbo

reverse mortgage; at age 80 the loan would be approximately $494,000.

REVERSE MORTGAGE CALCULATOR AVAILABLE

A private insurer now provides prospective borrowers a reverse mortgage

calculator. To find out more information about the calculator, visit

www.circlelending.com. According to Financial Freedom, the top five reasons

why seniors are carrying a mortgage are:

Top 5 Reasons Seniors Still Have A Mortgage

Never paid off existing mortgage 34%

Took out a second mortgage 21%

Receiving a tax break (interest deduction) 17%

Took out a reverse mortgage 1%

Other 27%

HOME FOR RETIREMENT INCOME

According to an August 2007 survey by Bell Investment Advisors in Oakland,

California, almost 70% of affluent baby boomers count their personal residence as

a retirement asset. A quarter of the almost 70% stated that their home represented

half or more of their retirement savings. Bell interviewed 500 people age 60 with

more than $1 million in investible assets.

http://www.circlelending.com/

QUARTERLY UPDATES

EDUCATION

EDUCATION 11.1

QUARTERLY UPDATES


11.ADVANCED DEGREE BENEFIT

According to the April 2007 issue of Journal of Accountancy, an advanced degree

can bring, on average, a $16,000 bump in annual salary (see also

www.worldwidelearn.com).

HOW ADULTS LEARN

Whether you are giving a seminar or meeting with clients or prospects, it is

important to know what influences investors. According to a study cited by

SunAmerica, 50% of an adult’s ability to learn is determined by their mindset

(thus, you should address objections early), 40% is determined by their

perception of (or relationship with) the presenter, and just 10% is determined

by content.

http://www.worldwidelearn.com/

Documents

IBF - Updates - 2007 (Q3 v2.0)