Quarterly Investment Briefing

February 5, 2014

Clayton T. Bill, CFA Stephen J. Nilles, CFP

Topic Page 2013 Review 3

Corporate Earnings and Profit Margins 5

Equity Market Valuations 7

Bonds and Expected Returns 9

Outlook and Market Assessment 11

U.S. Government Fiscal Outlook /Taxes 13

Employment 15

Summary 16

Agenda

Source: Russell

Year In Review: 2013 Was A Great Year For Equities Amidst political brinkmanship, global stock market climbed 24%

90

95

100

105

110

115

120

125

130

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13

Russell Global Index

Gro

wth

of $

100

MAR: Cyprus sought financial rescue; Italy struggled to form a government weeks after general election.

MAR: U.S. sequester-triggered spending cuts and tax increases began.

OCT: Congressional brinkmanship led to U.S. government shutdown.

DEC: Federal Reserve announced plans to begin winding down bond-buying program. Janet Yellennominated to lead the Federal Reserve.

APR: Bank of Japan launched bold stimulus program to boost growth and inflation.

MAY: Bernanke’s taper talk got a reaction. Equities1

pulled-back -6% between May 21–June 24.

AUG: Eurozoneexited 18-month recession, led by Germany and France.

Source: Russell 3

Capital Market Returns Period Ending December 31, 2013

10.1

33.5

16.2 18.7

7.9 5.8

21.7

7.6

13.1

7.3

2.4 0.0

-1.4

16.5

11.4

-0.1 -2.0

3.3 4.4 4.5

-0.7

3.7 7.4

15.2

7.4

-5 0 5

10 15 20 25 30 35 40

4Q 1YR 3YR 5YR 10YR

Rat

e of

Ret

urn

%

U.S. Equities Non-U.S. Equities Emerging Market Equities Fixed Income Real Estate

Source: Russell 4

A Good Earnings Season Thus Far

Source: J.P. Morgan 5

Why Are U.S. Companies So Profitable?

Source: BofA Merrill Lynch

6

Source: Russell

Market Valuations Don’t Appear Overextended Current Price/Earnings levels suggest prices are fairly valued

8

13

18

23

28

P/E

Average = 16.3

U.S. Large Cap

99’ tech bubble = 27

2008: Extremely low earnings

8

13

18

23

28

P/E

Europe

Average = 16.2

8

13

18

23

28

P/E

Emerging Markets

Average = 14.4

P/E Ratio =Average stock price of an index

Overall corporate earnings of an index

› U.S. and Europe appear near historic averages

› Emerging Markets appear moderately undervalued

7

Lower Emerging Market Valuations Consistent With Growth Expectations

Price over 36-month trailing earnings for selected global equity indexes

Source: Vanguard

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

FTSE Emerging Index United States FTSE Developed Ex US Index

In the early 2000s, valuations in the developed world were much higher than those in emerging markets

Valuations across regions are now more similar

8

Bonds Can Provide Ballast In An Equity Bear Market

Median return of various asset classes during the worst decile of monthly equity returns, 1988-2012

-10%

-8%

-6%

-4%

-2%

0%

2%

Med

ian

retu

rn

Source: Vanguard

9

Bond Math = Low Expected Returns

Source: Vanguard

10

Outlook: Market Assessment

Source: Fidelity

According to Fidelity’s Business Cycle Board, composed of portfolio managers responsible for a variety of asset allocation strategies across Fidelity’s asset management unit, the U.S. macro environment provides a stable backdrop for U.S. assets. The global economy has cyclical momentum, but policy risks have become more acute among emerging economies.

11

Coordinated Central Bank Action Supported Growth

40 50 60 70 80 90

100 110 120 130 140

12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/30/2011 12/31/2012 12/31/2013 Russell 1000 Russell Large Cap Japan Russell Developed EuroZone

Eurozone Outright Monetary

Transaction › In 3Q 2012, European

Central Bank (ECB) President Draghi committed ECB to buying debt to protect weaker Euro members

United States Quantitative

Easing › Federal Reserve’s

Treasury Bond buying program started in March 2009 and later extended to include mortgages

Japan “ Abenomics ”

› Prime Minister Abe’s economic plan announced in January 2013 targeted fiscal and monetary reform

QE1

QE2

QE3

Operation Twist

“Whatever it takes”

“ Abenomics”

Inde

x Va

lue

Source: Russell 12

Improved 2014 Fiscal Outlook: Less Drag, Lower Deficit

Source: Fidelity

Tax increases and budget cuts in 2013 reduced the federal budget deficit and created significant drag on the economy. The budget outlook is expected to improve further in 2014 but with much less fiscal drag, which, combined with the two-year budget deal struck by Congress, provides greater certainty and a better near-term fiscal outlook than at any point in years.

13

Are You Ready For Higher Taxes?

It’s not what you earn, it’s what you keep! Work with your advisor to try maximizing after - tax wealth.

› Taxable distributions have increased

› Strong market returns have created sizable gains

› Generally, investment vehicles must pass along these gains to taxable investors

› Tax rates have increased for many investors

› New top marginal rate

› Increased capital gains rates

› New investment income tax

*Source: Internal Revenue Service, January 2014

$17,850 or less $17,851 –

$ 72,500

10% 15%

25% 28% 33% 35%

39.6%

$72,501 – $146,400 $146,401 –

$223,050 $223,051 – $398,350 $398,351 –

$450,000 $450,001 or more

35% Marginal Taxable Income Rates 2013

MARRIED FILING JOINT

New

14 Source: Russell

Retirements Now Driving Decline in Participation Rate

Source: Fidelity

The aging of the U.S. population has been pushing the labor force participation rate lower for close to a decade. Although the recession caused a cyclical decline in the participation rate, the number of discouraged workers peaked in 2012, which suggests that demographics have been a stronger driver of recent participation-rate declines than employment conditions.

15

Diversification Over Time

5.6 2.2

14.3

3.5

17.2

- 10.0

- 5.0

0.0

5.0

10.0

15.0

20.0

Non - U.S. Equity EM Equity U.S. Bonds Global REITs Commodities

U.S. Equity Excess Return vs. Other Asset Classes

2009 - 2013

- 3.8 - 8.5 - 6.6

- 2.1 - 2.2

- 10.0

- 5.0

0.0

5.0

10.0

15.0

20.0

Non - U.S. Equity EM Equity U.S. Bonds Global REITs Commodities

U.S. Equity Excess Return vs. Other Asset Classes

2004 - 2008

› 2013’s +33% U.S. equity return highlights a superior five - year stretch

› The prior five years demonstrate how dramatically markets can swing

› Russell believes diversified portfolios are best positioned to capitalize on this behavior

U.S. stocks outperformed non - U.S. stocks by 5.6% per year

U.S. stocks underperformed non - U.S. stocks by 3.8% per year

Source: Russell 16

Ann

ualiz

ed E

xces

s R

etur

ns

Ann

ualiz

ed E

xces

s R

etur

ns

Rebalance

Create a game plan for maximizing after-tax wealth

Reassess the amount and types of fixed income exposure

Ask yourself, “Are my lifestyle expectations consistent with a more modest return outlook?”

It’s Time For Action Ideas to discuss with Indiana Trust

Source: Russell