© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Growth and Value Investing

© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997

Growth and Value Investing

Equity Investment Classification

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

Large-cap 9,500 Mutual funds 283 Stocks

Mid-cap 2,486 Mutual funds 701 Stocks

Small-cap 2,066 Mutual funds 4,908 Stocks

What are Growth and Value Stocks?


Growth stocks High growth rate of earnings, sales Low book-to-price, high price-to-

earnings ratios Paying lower or no dividends

Risks Future growth does not occur as

expected Book-to-price ratios rise unexpectedly,

price-to-earnings ratio decline unexpectedly

Value stocks Slower growth of earnings and sales High book-to-price, low price-to-

earnings ratios Higher dividend yields Turnaround opportunities

Risks Evaluation of stocks as good value is

misread Difficult to stick to value policy when

prices are beaten down

Risk and Return by Size and StyleGrowth and value stocks 1969–2007

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

Large value

Mid value

Small value

Large growth Mid growthSmall growth

14

12

10

8

16% Compound annual return

15%Standard deviation

17 19 21 23 25 27

Range of Annual ReturnsGrowth and value stocks 1969–2007

Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1969–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

60% Return

40

20

0

–20

–40

Large growth Large value Mid growth Mid value Small growth Small value

47.6%

–32.4%

39.4%

–22.1%

10.8%

51.3%

–33.0%

9.7%

61.2%

–20.8%

13.6%

60.5%

–40.6%

9.1%

58.3%

–24.4%

14.8%Compoundannual return:9.2%

Growth and Value Investing1969–2007

Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1969. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

14.8%10.89.29.1

Compound annual return

• Small value• Large value• Large growth• Small growth

$220.84

$55.22

$31.02$29.69

$1,000

100

10

1

0

1969 1975 1981 1987 1993 1999 2005

Growth and Value Investing1998–2007

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

$1.53

$1.75$1.84

$2.79

10.8% 6.35.84.3

Compound annual return

$5

0.7

1

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

• Small value• Large value• Small growth• Large growth

One-Year Growth and Value Cycles1969–2007

Past performance is no guarantee of future results. Performance differential measures the outperformance of each asset class over one another on a 12-month rolling basis. Each 12-month rolling return represents the annualized return over the prior 12 months. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

12-month rolling returns

40%

30

20

10

• Large growth • Large valuePerformance differential

75%

50

25

0

–25

1969

Jan–Dec

1974

Jan–Dec

2004

Jan–Dec

1999

Jan–Dec

1994

Jan–Dec

1989

Jan–Dec

1984

Jan–Dec

1979

Jan–Dec

Three-Year Growth and Value Cycles1969–2007

Past performance is no guarantee of future results. Performance differential measures the outperformance of each asset class over one another on a 36-month rolling basis. Each 36-month rolling return represents the annualized return over the prior 36 months. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

Performance differential

36-month rolling returns

• Large value• Large growth

0

25

50%

5

10

15

20

25%

2006200119961991198619811976Dec 1971

2004199919941989198419791974Jan 1969–25

0

Growth and Value by DecadeCompound annual rates of return by decade

Past performance is no guarantee of future results. *Based on the years 1928–1929. **Based on the years 2000–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s**

20

15

10

5

0

–5

• Growth stocks• Value stocks

25% Return

Moving With the MarketAnnual performance comparison 1988–2007


• Large growth • Large value • S&P 500

50%

40

30

20

10

0

–10

–20

–30 2006 20071988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Bull Market PerformanceBooming 1990s: 1995–1999

Past performance is no guarantee of future results. Hypothetical value of $1,000 invested at the beginning of 1995. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$4,500

3,500

2,500

1,500

500

1995 1996 1997 1998 1995 1997 19981999 19991996

Growth Value

• Small growth:

Compound annual return:

17.6• Mid growth: 23.2• Large growth: 34.4%

$4,379

$2,842

$2,249

Compound annual return:• Large value:• Mid value:• Small value:

24.8%17.716.4

$3,033

$2,258$2,136

Bear Market PerformanceEarly 2000s bear market: July 2000–December 2003

Past performance is no guarantee of future results. Hypothetical value of $1000 invested at the beginning of July 2000. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008

$1,800

1,400

1,000

600

200 July2000

July2001

July2002

July2003

July2000

July2001

July2002

July2003

• Small growth:Compound annual return:

–5.8%• Mid growth: –7.3• Large growth: –14.5

$577

$767$812

Compound annual return:

• Large value:• Mid value:• Small value:

–0.913.716.5% $1,705

$1,568

$969

Growth Value

Blending Growth and Value


Balance growth investments with those that produce income

Invest in both large and small companies, as well as a mix of well established and new companies

Consider investments that are currently out of favor but have potential to increase in value

Blending effectively may cushion against the many ups and downs in the market

Style Winners and Losers1998–2007


Highestreturns

Lowest returns

20071998 1999 2000 2001 2002 2003 2004 2005 2006

• Large growth (LG)

• Large value (LV)

• Mid growth (MG)

• Mid value (MV)

• Small growth (SG)

• Small value (SV)

• Diversified portfolio (DP)

12.1LG

8.7MG

7.4SG

4.1DP

2.5LV

0.4MV

–5.6SV

47.6%LG

16.6LV

10.7DP

6.4MG

2.3SG

0.8MV

–4.1SV

51.3MG

39.3SG

29.8LG

23.2DP

13.1LV

4.8MV

4.6SV

25.4MV

22.7SV

–3.0LV

–3.4DP

–18.5MG

–22.0LG

–22.6SG

14.8SV

3.9MV

–0.4SG

–2.9DP

–7.2MG

–8.8LV

–20.1LG

–12.8MV

–13.3SV

–19.8DP

–20.1LV

–21.5MG

–23.9LG

–27.8SG

48.4SG

47.9SV

43.9MV

40.3MG

39.0DP

29.9LV

24.8LG

21.1SV

20.8MV

19.6SG

15.8DP

13.4LV

13.1MG

6.7LG

14.0MV

9.2SV

8.8MG

7.9DP

7.0LV

4.7SG

3.3LG

23.2SV

22.1LV

15.3DP

13.9 MG

13.0MV

10.8SG

8.9LG

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© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Growth and Value Investing