CAPTRUST Strategic Research Report Q2 2012 Wealth Management Edition

WEALTH MANAGEMENT | Q2 12

Strategic research reportStrategic research report

In This Issue

Market News 2

Wealth Management Planning 4

Portfolio Strategy 12

Index Returns 15

Asset Allocation Research 16

Discretionary Research Highlights 18

Investment Asset Classes 20

CAPTRUST in the News 23

You’ve Got Mail — Proceed with CautionIncreased fi nancial identity theft calls for heightened investor awareness

Karen O. DeniseSenior Manager, CAPTRUST Wealth Client Services

The term doppelganger is defi ned as “an apparition or double of a living person.”1 It’s originally a German word that literally means “double-goer” or “double-walker.” This concept appears in literature and cinema as the proverbial evil twin, with examples including the short story “William Wilson” by Edgar Allan Poe, and the 2010 thriller Black Swan starring Natalie Portman. In popular culture, the protagonist is often plagued by visions of his or her look-alike, with the specter usually signifying some type of diabolical foreshadowing for the hero or heroine. Sometimes these malicious alter egos assume the lead character’s identity, representing themselves as the heroes while in reality their true character is anything but heroic. Obviously, these are fi ctional examples of doppelgangers, but as many individuals know all too well, the threat also applies to us in our everyday lives in the form of identity fraud. In fact, a report administered by Javelin Strategy and Research states that over 11 million Americans were subject to identity fraud in 2011.2

As fi nancial identity fraud commonly goes, criminals attempt to take over a person’s identity by illegally acquiring personal information in an attempt to conduct unauthorized transactions within the individual’s fi nancial accounts. Criminals use various methods to commit identity fraud. One technique involves “phishing,” or the act of obtaining another’s account information under false pretenses. The fraudster might send what appears to be a very legitimate email, ostensibly from someone at a fi nancial institution, requesting personal information such as a Social Security number, brokerage account information, or the size of an investment portfolio. Others have even received emails that claim their account will be closed if certain information is not updated. After the recipient unknowingly clicks on a provided link within the email to update the information, the deceiver then takes this knowledge and uses it to assume the victim’s fi nancial identity.

Another increasingly disturbing trend involves fraudulent individuals “hacking” into an investor’s email account and sending messages to the investor’s Financial

continued on page 3

2 WWW.CAPTRUSTADVISORS.COM

MARKET NEWSMARKET NEWS

In the second quarter, global fi nancial markets gave back some of early 2012’s strong

gains across riskier asset classes. Three principal issues surrounded the investment

climate: (1) European sovereign and fi nancial sector woes; (2) slowing economic growth

from emerging markets, particularly China; and (3) increased concerns regarding the

second half of 2012 for the U.S., including political developments that could dramatically

shape markets. The combination of a presidential election showdown and the pending

“fi scal cliff ” will make the coming investment period a challenging one as investors weigh

how much news fl ow has been priced into global markets versus what potential risks,

both upside and downside, are not yet refl ected in asset classes. We expect a volatile

capital markets environment for the near term.

All Publication Rights Reserved. None of the

material in this publication may be reproduced

in any form without the express written

permission of CAPTRUST: 919.870.6822

©2012 CAPTRUST Financial Advisors

The opinions expressed in this report are subject to change without notice. This material has

been prepared or is distributed solely for informational purposes and is not a solicitation

or an offer to buy any security or instrument or to participate in any trading strategy. The

information and statistics in this report are from sources believed to be reliable, but are

not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance

data depicts historical performance and is not meant to predict future results. CAPTRUST

Financial Advisors, Member FINRA/SIPC.

S&P 500 Large Cap

Stocks (R1000)

International Equities (MSCI EAFE)

Fixed Income

(BC Aggregate)

Commodities(DJ-UBS)

Fund of Funds(HFRI

Composite)

Real Estate

(WilshireREIT

Index)

Small Cap

Stocks (R2000)

Cash (Merrill Lynch

3-month T-Bill)

-6%

-0%

6%

12%

18%

-3%

3%

9%

15%

So

urce

: MP

I S

tylu

s P

ro

-3.12% -3.47%-2.75%

-6.85%

8.53%

3.38%

9.38%9.49%

-9%

-4.55%

-2.30%

0.03%

-3.70%

0.04%0.99%

3.71%

14.90%

2.06%

Index performance depicts historical performance and is not meant to predict future results. Index averages are provided for comparison purposes only. The information and statistics in this report are from sources believed to be reliable, but are not warranted by CAPTRUST Financial Advisors to be accurate or complete.

Major Asset Class Returns

Q2-12 2012

2.37%


3

continued from page 1

Advisor from the contact list or email addresses easily found in the “Sent Items” folder. Because the bogus email appears to be from an address the fi nancial institution has on record, it may look credible. The thief, posing as the legitimate investor, requests that the fi nancial institution transfer funds out of the brokerage account into a third-party bank account. Several federal agencies have recently issued statements about an alarming swell in the number of reports involving investor accounts being compromised in this manner.

The following list outlines what are considered to be general best practices for protecting one’s personal fi nancial information.

• Do not share your user names or passwords, and

do not save them on your hard drive. Sharing this

information with others, even those you trust,

relinquishes your complete control over your accounts.

• Safeguard your computer with personal fi rewalls and

security software. These measures can help prevent

personal computer compromise, or help prevent

malicious programs from transferring personal data

over the Internet, in the event of a compromise.

• Change your account passwords periodically (every

60–90 days). This will decrease the likelihood of

misuse if your passwords are accidentally disclosed.

• Use a password at least eight characters long

consisting of at least three of the four primary

character types: uppercase and lowercase letters,

numbers, and special characters. These complexities

will decrease the likelihood of your password being

guessed or hacked.

• If you receive emails requesting personal information

from a fi nancial institution, always contact your trusted

fi nancial representative via phone before responding

to validate the request.

• Be prudent when using wireless connections. Avoid

connections advertised as “free.” Using these publicly

available Internet connections is risky given the

unknown identity of other computers or connected

users who may have malicious intent.

• Avoid using public computers to access personal

fi nancial information. Users do not have any control

over how these computers are secured, and using

them is risky.

• Check the authenticity of any secure web site by

verifying the site’s SSL certifi cate. A legitimately secure

site will have a valid SSL certifi cate from a third-party

provider that is easily viewed by clicking on the

padlock icon in your Internet Explorer address fi eld.

• Remain proactive about examining your fi nancial

accounts. Review your monthly transaction activity

and always alert your fi nancial institution if you see

transactions you do not recognize.

• Review your credit report for any suspicious activity;

you may order a free credit report annually by either

calling 1.877.322.8228 or visiting annualcreditreport.com.

At CAPTRUST, we take the matter of fi nancial fraud attempts very seriously. Our employees are trained to recognize potential fraud attempts by identifying red fl ags commonly found in potentially hacked emails. It is also our policy to verbally confi rm any money movement [request] prompted by email. We also have the ability to exchange sensitive Client information (e.g., attachments including account and Social Security numbers, letters of authorization, etc.) via encrypted emails and document exchange using a secure fi le transfer. We facilitate a very thorough process to confi rm that your funds are distributed only as you instruct and that your personal information is protected.

Should you have any questions, please contact us. We will gladly explain our policies to safeguard your information. For more tips, you can also visit captrustadvisors.com/account as well as the Federal Trade Commission’s Consumer Protection site at ftc.gov/bcp.

Source:1 The Oxford English Dictionary.2 “2012 Identity Fraud Report: Social Media and Mobile Forming the New Fraud Frontier.” Javelin Strategy and Research.


wealth management planningwealth management planning

THINK LIKE A SCOUTR. Michael Gray, CPA, PFSSenior Vice President, CAPTRUST Financial Advisor

As a child of two hardworking parents who ran a retail shop, I had to choose between scouting, other extracurricular activities, and my beloved team sports due to the demanding nature of the family business. The latter prevailed, but luckily, because many of my teammates also participated in scouting, I picked up some secondhand exposure to fundamental Boy Scout practices and traditions. I remember their long-standing motto, “Be Prepared,” which encourages the importance of understanding your situation and how it might change, maintaining a mentality of being ready to react.

The current uncertainty we face with our income tax laws, the so-called “taxmageddon,” is a good reason to think like a Scout throughout the remainder of 2012. While it is impossible to know the ultimate outcome, it is possible to understand and prepare for potential outcomes and evaluate actions that may make sense depending on your individual circumstances.

Several potential scenarios exist, including expiration or extension of the Bush-era tax cuts, adoption of proposed legislation (like President Obama’s proposed budget), and introduction of completely new legislation. Additionally, the recent Supreme Court ruling on the constitutionality of President Obama’s Patient Protection and Affordable Care Act (PPACA) adds tax considerations. Many worry that political intractability will lead to gridlock and that nothing will occur prior to year-end. By default, taxpayers would face pre-Bush-era tax policies in 2013 and possibly PPACA taxes as well.

Specifi cally, if the Bush-era tax cuts expire, expect three primary impacts on 2013 income taxes:

• The maximum rate on ordinary income would increase from 35% to 39.6%.

• The maximum rate on qualifi ed dividends would increase from 15% to 39.6%.

• The maximum rate on long-term capital gains would increase from 15% to 20%.


5

If the PPACA taxes come along for the ride in 2013, the tax effect would become foreseeably worse. If this were to actually happen, the maximum rates for qualifi ed dividends and long-term capital gains would effectively be 43.4% and 23.8% respectively, due to a new 3.8% Medicare tax on investment income for those with Adjusted Gross Income (AGI) over $250,000.

The challenge of being prepared is complicated by the need to think in ways sometimes contrary to a more traditional approach. For example, as year-end approaches, we traditionally look to “harvest” capital losses that can be used to offset realized capital gains. In Client accounts where we have investment discretion, this goal is implemented in different ways, including taking steps to avoid material capital gain distributions from mutual funds. However, if higher rates seem likely in 2013 and beyond, one might take the opposite approach and choose to have a long-term gain taxed at 15% in 2012 and save the capital losses for the future, where they have more value against higher rates. The answer is likely different if the realized capital gains are short-term and using available losses as an offset will make sense.

Another call to action may lie with ordinary income, where an element of control over timing exists. Some examples are the exercise of nonqualifi ed stock options, Roth IRA conversions, and bonus payments. The ordinary income from a stock option is triggered at exercise, and the timing of that exercise is up to the option owner. The lever here is the expectation of the tax rate for ordinary income being higher after 2012. As previously

noted, the expiration of the Bush-era tax cuts alone will increase the maximum marginal rate on ordinary income by 4.6%; additionally, if the PPACA taxes survive, we add another 0.9% to Medicare payroll tax for income levels over $250,000. Paying taxes at a rate 5.5% lower might motivate accelerated stock option exercise in 2012.

While a bit less time-sensitive, potential tax rate increases may require evaluation of how investment portfolios are constructed. For example, if we have higher marginal rates on ordinary income, municipal bonds’ tax advantage may increase. Similarly, if dividends’ preferential tax treatment is lost, those seeking portfolio income may need to fi nd more effi cient ways to achieve this goal.

And there are even more potential rule changes. The pre-Bush-era tax policy applied an 18% long-term capital gain rate to a security purchased after January 1, 2001, that has been held more than fi ve years. This rule will re-apply in 2013 if the Bush-era tax cuts are allowed to sunset.

In conclusion, the uncertainty surrounding the future course of U.S. tax rates could be likened to packing for an adventurous camping trip without knowing the destination’s weather forecast. I believe my loyal Boy Scout friends’ advice would go something like this: Be prepared for multiple environmental conditions and anticipate unforeseen situations that may require skilled action. Such advice is helpful as we wait for electoral outcomes and future legislation to unfold, revealing a set of more defi nitive conditions.

Source: www.irs.gov; “Early Look at Possible 2013 Income Tax Changes,” www.FocusFinancialadvisors.com Feb. 2012; CAPTRUST Investment Research. www.gfc.com “Insights on Income Tax Rates to Soar by 2013.”

Tax Scenario Pre-Bush-era tax cuts (2001) Current (2012) If cuts are allowed

to expire (2013) 2013 with PPACA Taxes

Maximum Rate on Ordinary Income 39.6% 35% 39.6% 39.6%

Maximum Rate on Qualifi ed Dividends 39.6% 15% 39.6% 43.4%

Maximum Rate on Long-Term Capital Gains 20% 15% 20% 23.8%

Potential Tax Scenarios for 2013


Alternative investments have traditionally been reserved only for the most sophisticated institutional and high-net-worth individual investors. Because of product innovation, that trend is changing. The development of alternative mutual funds and exchange traded funds has brought a once seemingly exclusive investment tool to more investors through “liquid alternatives,” a term we use to describe alternative investment strategies available in daily priced investment vehicles like mutual funds.

Liquid alternatives have been a fast-growing and quickly evolving product set since the fi nancial crisis. While the crisis wreaked havoc on so many areas in the investment industry, it provided a catalyst for this segment’s further growth. It also immediately focused investors on liquidity concerns, especially within their alternative allocations. While many investors have continued to believe in these strategies’ investment merits, they have become increasingly leery of their illiquidity. As a result, over the last four years investors have poured assets into liquid alternatives. Last year alone, liquid alternatives soaked up $23 billion in investor infl ows. To put that in perspective, investors withdrew $85 billion out of U.S. equity mutual funds during the same time. Liquid alternatives have grown from an asset base of under $40 billion in 2006 to over $120 billion at the end of 2011. The number of available products has also exploded. In 2007, there were only 11 new liquid alternative mutual funds launched. In 2010 and 2011, the industry launched a total of 54 and 79 products, respectively.1

As the origination and growth of liquid alternatives signals a potentially exciting new era for investors, it brings with it a unique set of challenges and risks. On one hand, liquid alternatives eliminate some of the most obvious risks associated with private alternative investments, including

GETTING LIQUIDDavid A. HoodSenior Manager, CAPTRUST Investment Research


7

liquidity risk and transparency issues. However, underneath these simplifi ed vehicles are still complex investment strategies. Additionally, because of the need for liquidity, they may provide investors with only a diluted version of an investment they could access in private form. The fact that most of these products are still in their infancy with little to no public track record to analyze makes life tougher.

During the fi rst half of the year, our due diligence team conducted an exhaustive review of the entire liquid alternative universe in order to create a guide to this complex product set. The goal of this project was to strip away any predefi ned categories and analyze these investments strictly from the bottom up. While Morningstar has developed their own categorization for these investments, which includes seven different categories, we started by identifying the entire opportunity set regardless of assigned category. This was crucial in certain categories. While some of Morningstar’s categories are relatively straightforward and useful, others are more nebulous, nuanced, and complicated. For example, Morningstar’s “multi-alternative” category captures two different investment strategies that we would consider distinct: fund of hedge funds and multi-strategy. In the fi rst, a manager allocates to a collection of sub-advisors, who often specialize in a particular strategy, region, or industry. With the second, the multi-strategy manager invests directly in complex markets across a number of different hedge fund strategies. While overall portfolio positioning and characteristics could be similar between a fund of hedge funds manager and a multi-strategy manager, the investment strategies themselves are completely different and distinct. We applied our expertise to this analysis, brought from the same methods and comprehensive tools gained from providing coverage and analysis of private alternative products.

Today, the current liquid alternative universe consists of around 230 products. For our review, we identifi ed 110 of those that initially met our criteria. After due diligence began, the list quickly shrank to 57. Of those 57, a small subset were identifi ed as true investment opportunities that we would consider for Client portfolios. The prevailing products represent a broad range of alternative investment categories. While many are strategic in nature, a few are more tactical and should be used only to capture a specifi c opportunity. While we have completed an initial assessment and have identifi ed a number of potential Client solutions, this space continues to grow and evolve. As it does, we will continue to ensure that Client portfolios, where appropriate, maintain exposure to the most skilled managers in the liquid alternatives domain.

As the origination

and growth of liquid

alternatives signals a

potentially exciting new

era for investors, it brings

with it a unique set of

challenges and risks.

Source:1 Morningstar and Barron’s 2011 Alternative Investment Survey of U.S. Institutions and Financial Advisors, May 2012.


FRONTLINE PERSPECTIVES:A TIMELY Q&A WITH MOHAMED EL-ERIANDavid A. HoodSenior Manager, CAPTRUST Investment Research

Questions abound across global capital markets. The health of the U.S. economy, the future of the Eurozone, a potential “fi scal cliff” late this year, plus a persistently low interest rate environment all present unique challenges and opportunities. How investors prepare for these variables will determine their investment outcomes. As a fi rm with over $76 billion in Client assets, CAPTRUST has direct access to some of the brightest minds in the asset management industry.

This quarter we use that leverage to share macroeconomic perspectives from a renowned thought leader. Mohamed El-Erian is chief executive offi cer and co-chief investment offi cer of PIMCO, a Newport Beach-based asset management fi rm currently managing $1.8 trillion in assets. PIMCO is the manager of the largest bond mutual fund and is one of the largest fi xed income asset managers in the world. Mohamed recently joined me to answer a few questions and provide his thoughts on the principal issues facing investors today.

Q: Starting fi rst in the U.S., as we’ve passed the midpoint of the year, how healthy is the U.S. economy? Is it fi nally healthy enough to fl y on its own without the help of stimulus and achieve “escape velocity”?

Mohamed: There certainly are factors that suggest the U.S. economy is gradually healing, but the deleveraging process is still very much with us and continues to suggest weak growth ahead. Positive factors include healthy corporate balance sheets, signifi cant cash on the sidelines, and data that indicate the housing market is in the process of forming a bottom.

But it is unlikely that these factors on their own will propel the U.S. economy to escape velocity given the lack of robust demand and ongoing structural challenges, including stubbornly high long-term unemployment, government debt and defi cit issues, clogged credit pipes for medium- and small-scale companies, and inadequate investment in education, worker training, and infrastructure. Also, the risk of collateral damage from Europe cannot be underestimated.


9

Q: One of the questions we fi eld often is the possibility of a “fi scal cliff” at year-end and its implications on investment returns. How is PIMCO positioning portfolios for this uncertain event?

Mohamed: Economists, including Federal Reserve Chairman Ben Bernanke, are rightly starting to warn that the U.S. faces a worrisome “fi scal cliff” at year’s end. If politicians take no action before the end of the year, tax stimulus and government spending worth approximately 4% of Gross Domestic Product (GDP) are scheduled to be cut. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling along with across-the-board tax increases would derail the U.S. recovery and undermine the well-being of the global economy.

Investors should remain defensive, possibly moving up in quality and maintaining broad portfolio diversifi cation. PIMCO is emphasizing liquidity, both for defensive reasons and to take advantage of market dislocations should they occur. This gives us important optionality and fl exibility so we can be prepared to capture opportunities should there be policy mistakes.

Q: Shifting gears now to Europe, what is PIMCO’s current view on the Eurozone? Will the European Union survive?

Mohamed: We believe the status quo is no longer an option for the Eurozone. The Eurozone will either evolve to a less imperfect union or fragment.

Our baseline view is that eventually there will be a smaller, less imperfect union anchored by Germany, the owner of the strongest balance sheet in Europe, along with France, Italy, and Spain.

For this union to be sustainable, it will have to be underpinned by a much stronger fi scal union as well as greater support for the banking system, adequate mutualization of debt, and greater political integration. All of these solutions are grounded in the sharing of Germany’s balance sheet, and Germany must play a leading role in several of the critical fi scal decisions.

In the interim, however, the risk of a disorderly breakup of the Eurozone will remain a key tail risk for global markets for some time to come.

Q: Is there still a chance that global leaders, including in the U.S., are able to work in a synchronized fashion to promote, as you would say, a “virtuous cycle,” where growth and expansion promote regulatory reform, thereby further boosting confi dence and stability?

Mohamed: In order to promote a virtuous cycle, policy makers need a common analysis, a shared vision, and political consensus for implementation.

Unfortunately, policy makers in Washington and Europe have failed over the past few years to address pressing fi scal issues and structural challenges to their economies. They are opting instead for short-term fi xes and half measures instead of seriously confronting looming sovereign debt issues. Now they must pivot quickly and respond in a much more comprehensive way. Diffi cult decisions need to be made to restore the public’s faith in elected leaders and to ensure an orderly solution to the problems facing the global economy.

If policy makers continue to opt for political posturing rather than grand bargains, legitimate concerns about growth, jobs, inequality, debt, and defi cits will persist and undermine the basic functioning of markets and, in Europe, possibly lead to a disorderly outcome.

Q: Today, forecasting policy leaders’ and regulatory offi cials’ actions are at the center of the investment process. How do you analyze such large non-investment uncertainties, and what changes have you made to adapt to this new reality?

Mohamed: It is now almost four years since the full onset of the global fi nancial crisis. The economic and social costs have been immense, and they continue to accumulate. Against this reality, it should come as no surprise that there have been many regulatory policy initiatives at the national, regional, and multilateral levels.

Our ongoing assessment of the regulatory landscape now always includes recognition of how much is still in fl ux and, essentially, both what is unknowable and unquantifi able at this stage.

continued on page 10


From a PIMCO business perspective, we have increased our legal and compliance staff around the world, and doing so has enhanced our ability to monitor and react to regulatory changes in a large number of national jurisdictions.

Q: To date, much of the policy response from leaders to the crisis has come in the form of lower interest rates and quantitative easing. Central banks have used these tools to try to lower borrowing costs to encourage growth. The byproduct has been the creation of historically low interest rates. Given the current low level of rates, what role should fi xed income play in a portfolio?

Mohamed: We believe fi xed income will continue to play an important role in portfolios, especially given the uncertainty surrounding the global economy. Despite historically low yields, the fi xed income asset class tends to provide investors with liquidity, income, and a cushion against defl ation. It also provides important optionality in a world in which volatility is likely to create opportunities down the road.

Given our view that consequential risks to the global economy still remain, we suggest investors look to strategies that can take advantage of the changing global opportunity set and have the fl exibility to preserve capital during bouts of market volatility. This would suggest an evolution in the way investors have traditionally deployed capital in the fi xed income markets.

Measures that investors might consider include “smart” benchmarks that focus on a country’s contribution to global GDP, an increased allocation to emerging market debt and currencies given favorable growth dynamics, and the use of tail risk hedging to help guard against unexpected shocks.

Q: While portfolio liquidity and optionality are important, many investors look to their fi xed income allocations for yield. How would you advise a retiree to invest in this low-rate environment with a need for income?

Mohamed: We understand that generating a high level of income is often a primary goal for some investors who are looking to preserve their savings and generate reliable, steady cash streams.

Given the current low-rate environment, U.S. Treasury securities may not provide investors suffi cient income to meet their needs. And traditional credit-centric portfolios could expose a retiree’s principal to substantial risks. We believe that it makes sense to look more broadly at other sectors of the fi xed income market and also look outside the U.S. for opportunities to generate income without taking excessive risk. These sectors could include high-quality non-U.S. government bonds as well as infl ation-linked bonds and mortgage-backed securities, among other options.

We believe it’s important to invest in strategies that maintain fl exibility, while

allowing for the generation of attractive income and the diversifi cation of risk away from a single sector.

Q: Earlier you mentioned that consequential risks to the global economy still remain and that investors may need to evolve from the ways they have traditionally deployed capital in fi xed income markets to consider “smart” benchmarks that focus on a country’s contribution to global GDP. Is the Barclays Capital Aggregate Bond index still an appropriate benchmark for core fi xed income managers?

Mohamed: As a starting point we can ask ourselves the following question: “Do we want to lend to the countries that have the lowest income growth and the most debt?” That’s the outcome that traditional indices can produce. Global investors need a new approach for allocating capital across regions and countries by being forward-looking and seeking attractive opportunities wherever they are.

At PIMCO we have developed the Global Advantage Index (GLADI) to help investors capture investment opportunities in the “New Normal.” The index’s GDP-weighting methodology makes it more inclusive of newly developing countries with stronger underlying fundamentals and avoids an overallocation to debt-laden developed countries. This feature positions investors for future rather than past opportunities.



11

The index also includes broad exposure across fi xed income markets and sectors, including infl ation-linked bonds and currencies, which can help preserve and enhance purchasing power over the long-term.

Q: And lastly, given all that we’ve discussed, have any of these largely macroeconomic issues changed the way PIMCO manages fi xed income portfolios or manages risk?

Mohamed: We believe the focus on macroeconomic issues gives PIMCO a signifi cant advantage to add value in client portfolios. The current environment reinforces our belief that an investment manager must have a well-informed top-down view, and

supplement this with detailed bottom-up analyses. This has been a central tenet in our investment process going back to the founding of the fi rm.

Our investment process starts with an annual Secular Forum in which PIMCO professionals across our twelve global offi ces gather for a three-day discussion about the future of the global economy and fi nancial markets. The Secular Forum has proven enormously important for PIMCO’s ability to deliver consistent value to our clients. We debate the major trends that will play out over the next three to fi ve years and assess not what should happen but what is likely to happen. Think of the outcome as providing medium-term guardrails for where and

how we invest the funds that have been entrusted to us.

While we have not made any signifi cant changes to our risk management process since the global fi nancial crisis, we have continued to invest in human, analytical, and technological resources to continuously enhance our risk management framework. We believe in a “mosaic” approach to analyzing and managing risk that uses many different measures while not relying too heavily on any single one. As the global fi nancial crisis highlighted, any one measure of risk can often be incomplete or even misleading. Risk management always has been as it should be, at the forefront of all that we do at PIMCO.

Dr. El-Erian is CEO and co-CIO of PIMCO and is based in the Newport Beach offi ce. He

re-joined PIMCO at the end of 2007 after serving for two years as president and CEO of

Harvard Management Company, the entity that manages Harvard’s endowment and related

accounts. Dr. El-Erian also served as a member of the faculty of Harvard Business School. He

fi rst joined PIMCO in 1999 and was a senior member of PIMCO's portfolio management and

investment strategy group. Before coming to PIMCO, Dr. El-Erian was a managing director

at Salomon Smith Barney/Citigroup in London, and before that, he spent 15 years at the

International Monetary Fund in Washington, D.C.

Dr. El-Erian has published widely on international economic and fi nance topics. His book, When Markets Collide,

was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business

Book of the Year and was named a book of the year by The Economist and one of the best business books of all

time by The Independent (UK). He was named to Foreign Policy’s list of “Top 100 Global Thinkers” for 2009, 2010,

and 2011. Dr. El-Erian has served on several boards and committees, including the U.S. Treasury Borrowing Advisory

Committee, the International Center for Research on Women, the Peterson Institute for International Economics,

and the IMF's Committee of Eminent Persons. He is currently a board member of the NBER, the Carnegie

Endowment for International Peace, and Cambridge in America. He holds a master's degree and doctorate in

economics from Oxford University and received his undergraduate degree from Cambridge University.

Mohamed A. El-Erian


portfolio Strategyportfolio Strategy

Youth sports have taken a much different turn from what they were in my day (just reading that sentence, and listening to the cracking noise from my right knee as I ascend stairs, confi rms that I am offi cially old). All three of my children, ages 12, 9, and 4, play a variety of sports, leaving my wife and me to help coordinate car pools, tournament sign-ups, and other logistical feats, not the least of which includes halftime and post-game snack detail. Having taken several operations classes in graduate school, I feel I have been reasonably trained for handling this trying schedule.

Currently, all three children play soccer, which for the eldest two entails long road trips across state lines (a recent Final Jeopardy! question on TV asked contestants which of the original 13 colonies was the widest, and I correctly blurted “North Carolina!” — my knowledge based 100 percent on experience), and as much as I try to commiserate with fellow road-weary parents, I am told that your kids grow up faster than you know it, so I try to savor every moment.

Given the distance of some of these trips, conversations can head into interesting places. I am not allowed to discuss boys with my 12-year-old daughter (I am in a state of suspended disbelief anyway, so I am not sure what I would say), and our musical tastes mostly diverge, but Hailey does like to talk about current events. Given our European heritage, Hailey has always had an interest in the Continent, but the convergence of recent developments and weekly current events assignments in social studies have made today’s European plight of particular interest. Being a rising seventh grader with her mother’s brains, Hailey understands concepts like debt and even productivity differentials across countries. We have kept up a running dialogue during trips about the latest European developments. Hailey’s

THE LEADERSHIP CRISISEric J. FreedmanCAPTRUST Chief Investment Offi cer


13

nine-year-old sister Elle is not quite ready for such concepts, but she too knows that part of her dad’s job is to keep aware of current events. When I try to explain to her what is going on in Europe, the most digestible explanation is that it is a leadership crisis.

European policy makers have a challenging task assigned to them; the region’s countries have disparate productivity levels, growth potential, and debt characteristics along with minimal fi scal integration — yet they share the euro as the common currency. The original Maastricht Treaty, signed two decades ago at the European Union’s inception, attempted to enforce fi scal rules by imposing penalties on countries whose debt-to –Gross Domestic Product (GDP) percentages exceeded 60% or whose budget defi cits exceeded 3%. However, once large countries like Germany and France breached those limits, policy makers looked the other way. German and French leaders missed an opportunity to lead by example, and the initial fi scal control attempts gave way to self-determination, or in Elle’s world, handing in a book report and grading it yourself.

The twentieth European Summit since the Greek crisis began in 2009, held June 28–29, 2012 in Brussels, was met with considerable fanfare. Leaders released a statement long on what they intend to do (including the potential for a centralized European bank regulator, easier access to aid capital, and other considerations) yet short on how they will do it. Successful implementation is a cross-country coordination problem, described eloquently in Surowiecki’s The Wisdom of Crowds. Surowiecki details how some groups excel at coordination (schools of fi sh, New York City pedestrians) while others have had historically weak performance (the fragmented U.S. intelligence operations). Europe’s individual countries are driven fi rst by self-interest and a distant second (or perhaps third) by their common bond as Europeans. Most U.S. citizens view themselves as Americans fi rst and Iowans or South Carolinians second; this identity helps our governments, at least on a relative basis, to react more quickly to crises and coordinate better than Europe.

We are in an environment driven by policy makers, so we must consider one other variable: political self-interest. A recent quote by simultaneous Luxembourg and Eurogroup President

Jean-Claude Juncker aptly summarizes this confl ict: “We all know what to do. We just don’t know how to get re-elected after we’ve done it.”1 Whether or not all European politicians truly know what to do, Mr. Juncker’s quote does provide insight into why Europe may be focused on certain types of legislation that appear more popular with constituents.

Take, for example, the European Court of Justice’s late-June decision that European Union citizens who get sick while on vacation must receive paid time off equivalent to the duration of their illness.2 This benefi t is layered on top of the EU minimum of 20 paid vacation days that can be superseded by more favorable national laws like those in France, which allows for ten days of vacation for those working up to 39 hours a week on top of the national 25 day minimum, or Spain, which allows three weeks of vacation for marriage.3 It is hard to compete in a globally integrated marketplace if you are not in the offi ce very often. These are certainly policies that may get you temporarily elected by the benefi ciaries of such generosity, but it will also lead to rampant unemployment, lower productivity, and a perpetual state of uncompetitive bliss, which leads to youth unemployment rates of 22% for countries using the euro versus 11% for the total Eurozone. Most strikingly, Greek and Spanish youth unemployment stands at over 50%. These are not levels consistent with leadership and today’s global economic realities.

A graduate professor of mine, Dr. Michael Useem, wrote a book called The Leadership Moment, which chronicles nine leaders throughout history and across geographies, detailing moments they faced as leaders and the choices they made, some with favorable results and some with catastrophic implications.

Europe is facing its own set of leadership moments, but as we approach the twenty-fi rst European leadership summit, it is time to be long on details and short on promises. I applaud Europe’s focus on work-life balance, but global capital markets and economic forces are indifferent about Europe’s intentions. They seek results. More open labor and trade practices, fewer unsustainable benefi ts, and a more credible path toward debt reduction are all steps capital markets need to see before we can reverse Europe’s negative feedback loop. Otherwise, investors will cling to political developments, press conference

continued on page 14


outtakes, and the “he said, she said” of back room negotiations. Case in point was yours truly on Father’s Day, alternating between the U.S. Open golf tournament and Greek election coverage — not your typical Sunday programming schedule.

The U.S. faces its own leadership moments later this year with the presidential election as well as the impending “fi scal cliff.” These events, coupled with the ongoing European saga, will continue to shape markets and portfolios more than anything else. I am encouraged when I read quotes from the likes of Italian Economic Undersecretary Gianfranco Polillo, who states that having Italians work one more week a year would help jump-start productivity, but I fear it may take further market pain to push policy makers into durable reforms.

In this environment, we continue to recommend that Clients greatly spread out their portfolio risks; capital market environments driven by policy makers are fraught with volatility and we expect the tug-of-war to continue until the hard choices are made. As such, taking heroic stands for or against asset classes may work against you. As an example, the 10-Year U.S. Treasury touched an all-time low yield of 1.44% on June 1, and as paltry as that yield may be, should things deteriorate in Europe, the “fi scal cliff” become a reality, or the global growth picture rapidly decelerate, that yield could go a lot lower. Not having that defensive exposure could hurt when you need it the most.

I want to write columns rich with charts, data, and provocative hypotheses. I want to drill into specifi c asset classes and opine on what will fundamentally drive them. But those variables are subordinated by macroeconomic developments, specifi cally political economy challenges that we will continually digest in our goal to help CAPTRUST Clients navigate through a diffi cult landscape. We are seeing some progress out of Europe, but we need to see more; the aforementioned U.S. issues await. No rest for the weary, dear travelers; it’s time to put both hands on the wheel and continue on this road trip. We at CAPTRUST are committed to handling whatever roadblocks capital markets may put up, but like a Freedman family weekend soccer excursion to Anytown, North Carolina, it is likely to be a long drive. Just remember, no talking about boys.


Sources:1 http://www.msnbc.msn.com/id/46880512/ns/business/t/analysis-europes-reform-drive-risks-running-outsteam.2, 3 http://online.wsj.com/article/SB10001424052702304782404577490130796396386.html.

More open labor and trade

practices, fewer unsustainable

benefi ts, and a more credible

path toward debt reduction are

all steps capital markets need

to see before we can reverse

Europe’s negative feedback loop.


15

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2012 2ND QUARTER INDEX PERFORMANCE

The information contained in this report is from sources believed to be reliable, but not warranted by CAPTRUST Financial Advisors to be accurate or complete. Index performance depicts historical performance and is not meant to predict future results.

Small Cap Stocks (Russell 2000 Index)

Large Cap Stocks (Russell 1000 Index)

Commodities (Dow Jones UBS Commodity Index)

Real Estate (MSCI U.S. REIT Index)

Fund of Funds (HFRI FoF Composite Index)

Mid Cap Stocks (Russell Mid Cap Index)

International Equities (ACWI Ex-U.S. Index)

Fixed Income (Barclay’s Capital U.S. Aggregate Index)

Cash (Merrill Lynch 3-Month Treasury Bill)

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD

S&P 500 -2.75% 9.49% 2.11% 15.06% 26.46% -37.00% 5.49% 5.45% 16.40% 0.22% 5.33%

Dow Jones Industrial Average -1.85% 6.83% 8.38% 14.06% 22.68% -31.93% 8.88% 6.63% 18.25% 2.00% 6.02%

NASDAQ Composite -5.06% 12.66% -1.80% 16.91% 43.89% -40.54% 9.81% 5.82% 16.95% 2.43% 7.21%

Russell 1000 -3.12% 9.38% 1.50% 16.10% 28.43% -37.60% 5.77% 4.37% 16.64% 0.39% 5.72%

Russell 1000 Growth -4.02% 10.08% 2.64% 16.71% 37.21% -38.44% 11.81% 5.76% 17.50% 2.87% 6.03%

Russell 1000 Value -2.20% 8.68% 0.39% 15.51% 19.69% -36.85% -0.17% 3.01% 15.80% -2.19% 5.28%

Russell Mid Cap Index -4.40% 7.97% -1.55% 25.48% 40.48% -41.46% 5.60% -1.65% 19.44% 1.06% 8.45%

Russell 2000 -3.47% 8.53% -4.18% 26.85% 27.17% -33.79% -1.57% -2.08% 17.80% 0.54% 7.00%

Russell 2000 Growth -3.94% 8.81% -2.91% 29.09% 34.47% -38.54% 7.05% -2.71% 18.09% 1.99% 7.39%

Russell 2000 Value -3.01% 8.23% -5.50% 24.50% 20.58% -28.92% -9.78% -1.44% 17.43% -1.05% 6.50%

AC World Index Free Ex-U.S. -7.38% 3.13% -13.33% 11.60% 42.14% -45.24% 17.12% -14.15% 7.43% -4.18% 7.20%

HFRI Fund of Funds -2.30% 0.99% -5.72% 5.70% 11.47% -21.37% 10.25% -4.50% 2.17% -2.04% 3.23%

Wilshire REIT Index 3.71% 14.90% 9.24% 28.60% 28.60% -39.20% -17.55% 13.21% 33.62% 2.05% 10.31%

Barclays Govt. Intermediate Bond 1.45% 1.07% 6.08% 4.98% -0.32% 10.43% 8.47% 5.01% 4.44% 5.77% 4.63%

Barclays Corporate IG Bond 2.52% 4.65% 8.15% 9.00% 18.68% -4.94% 4.56% 9.71% 10.57% 7.64% 6.60%

Barclays Aggregate Bond 2.06% 2.37% 7.84% 6.54% 5.93% 5.24% 6.97% 7.47% 6.93% 6.79% 5.63%

Barclays Intermediate Govt./Credit 1.48% 2.10% 5.80% 5.89% 5.24% 5.08% 7.39% 5.42% 5.81% 6.01% 5.08%

Barclays Muni Bond 1.88% 3.66% 10.70% 2.38% 12.91% -2.47% 3.36% 9.90% 7.62% 5.95% 5.28%

Barclays High Yield 1.83% 7.27% 4.98% 15.12% 58.21% -26.16% 1.87% 7.27% 16.28% 8.45% 10.16%

90-Day U.S. Treasury 0.03% 0.04% 0.10% 0.13% 0.21% 2.06% 5.00% 0.06% 0.12% 0.98% 1.87%

Consumer Price Index (Infl ation) 0.45% 2.10% 2.96% 1.50% 2.72% 0.09% 4.08% 2.08% 2.23% 2.03% 2.51%

INDICES Q2-12 2012 2011 2010 2009 2008 2007 1 YEAR 3 YEAR 5 YEAR 10 YEAR

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

Commodities

24.35%

Fund of Funds

7.45%

RealEstate

-37.97%

Commodities

-35.65%

International Equities

-45.25%

Fund of Funds

-21.34%

Large CapStocks

-37.60%

Small CapStocks

-33.79%

Cash

1.51%

Fixed Income

5.24%

Mid CapStocks

-41.46%

Large CapStocks

6.27%


17.12%

Fund of Funds

10.26%

Large CapStocks

5.77%

Commodities

16.23%

Small CapStocks

-1.57%

Cash

4.71%

Fixed Income

6.97%

Large CapStocks

9.38%


3.13%

Fixed Income

2.37%

Cash

0.04%

Fund of Funds

0.99%

Small CapStocks

8.53%

RealEstate

14.88%

Commodities

-3.70%


30.98%

Fund of Funds

26.47%

Small CapStocks

21.26%

Large CapStocks

20.91%

Cash

5.01%

Fixed Income

-0.82%

RealEstate

-4.55%

Commodities

31.84%

RealEstate

26.81%

Fixed Income

11.63%

Cash

6.36%

Fund of Funds

4.08%

Small CapStocks

-3.02%

Large CapStocks

-7.79%


-15.11%

RealEstate

12.83%

Fixed Income

8.44%

Cash

3.64%

Fund of Funds

2.79%

Small CapStocks

2.49%

Large CapStocks

-12.45%


-19.50%

Commodities

-19.51%

Commodities

25.90%

Fixed Income

10.25%

RealEstate

3.64%

Cash

1.68%

Fund of Funds

1.01%


-14.67%

Small CapStocks

-20.48%

Large CapStocks

-21.65%

Small CapStocks

47.25%


41.41%

RealEstate

36.74%

Large CapStocks

29.89%

Commodities

23.93%

Fund of Funds

11.62%

Fixed Income

4.10%

Cash

1.05%

Commodities

9.15%

RealEstate

31.49%


21.36%

Small CapStocks

18.33%

Large CapStocks

11.40%

Fund of Funds

6.79%

Fixed Income

4.34%

Cash

1.44%

Commodities

21.36%


17.11%

RealEstate

12.13%

Small CapStocks

4.55%

Cash

3.35%

Fixed Income

2.43%

RealEstate

35.92%


27.16%

Small CapStocks

18.37%

Large CapStocks

15.46%

Fund of Funds

10.34%

Cash

5.08%

Fixed Income

4.33%

Commodities

2.07%

RealEstate

-16.82%

Mid CapStocks

7.97%

Mid CapStocks

18.23%

Mid CapStocks

8.25%

Mid CapStocks

-5.62%

Mid CapStocks

-16.19%

Mid CapStocks

40.06%

Mid CapStocks

20.22%

Mid CapStocks

12.65%

Mid CapStocks

15.26%

Mid CapStocks

5.60%

RealEstate

28.61%

Small CapStocks

27.17%


42.14%

Large CapStocks

28.43%

Mid CapStocks

40.48%

Commodities

18.91%

Cash

0.21%

Fixed Income

5.93%

Fund of Funds

11.16%

RealEstate

28.48%

Small CapStocks

26.85%


11.60%

Large CapStocks

16.10%

Mid CapStocks

25.48%

Commodities

16.83%

Cash

0.13%

Fixed Income

6.54%

Fund of Funds

5.46%

RealEstate

8.69%

Small CapStocks

-4.18%


-13.33%

Large CapStocks

1.50%

Mid CapStocks

-1.55%

Commodities

-13.32%

Cash

0.10%

Fixed Income

7.84%

Fund of Funds

-5.51%

2012 2ND QUARTER ASSET CLASS RETURNS


We include our asset allocation research for illustrative purposes

only. These recommendations are being implemented only

in instances where CAPTRUST has been granted full trading

discretion on asset allocation decisions within Client portfolios.

asset allocation researchasset allocation research

90.0%

10.0%

65.0%

20.0%

3.0% 3.0% 6.0%3.0%

50.0%

16.0%

17.0%

10.0%

3.0%4.0%

STRATEGY 1

MIN TARGET MAX

U.S. Equities 0.0% 0.0% 0.0%

International Equities 0.0% 0.0% 0.0%

Fixed Income 75.0% 90.0% 100.0%

Hedge Funds�/�Private Equity 0.0% 10.0% 20.0%

Commodities 0.0% 0.0% 0.0%

Real Estate 0.0% 0.0% 0.0%


Fixed Income

Hedge Funds / Private Equity

Commodities

U.S. Equities

Real Estate

STRATEGY 2

MIN TARGET MAX

U.S. Equities 0.0% 6.0% 10.0%


Fixed Income 50.0% 65.0% 75.0%



Real Estate 0.0% 3.0% 6.0%


Fixed Income


Commodities

U.S. Equities

Real Estate

STRATEGY 3

MIN TARGET MAX

U.S. Equities 10.0% 17.0% 21.0%


Fixed Income 30.0% 50.0% 60.0%



Real Estate 0.0% 3.0% 6.0%


Fixed Income


Commodities

U.S. Equities

Real Estate


17

32.0%

21.0%

24.0%

16.0%

3.0%4.0%

21.0%

21.5%

28.5%

20.0%

4.0%5.0%

11.0%

23.5%

32.5%

24.0%

4.0%5.0%

4.5%

20.0%

36.5%

28.0%

5.0%6.0%

STRATEGY 4

MIN TARGET MAX

U.S. Equities 15.0% 24.0% 29.0%


Fixed Income 20.0% 32.0% 38.0%



Real Estate 0.0% 3.0% 6.0%


Fixed Income


Commodities

U.S. Equities

Real Estate

STRATEGY 5

MIN TARGET MAX

U.S. Equities 20.0% 28.5% 35.0%


Fixed Income 15.0% 21.0% 25.0%



Real Estate 0.0% 4.0% 8.0%


Fixed Income


Commodities

U.S. Equities

Real Estate

STRATEGY 6

MIN TARGET MAX

U.S. Equities 25.0% 32.5% 40.0%


Fixed Income 0.0% 11.0% 20.0%



Real Estate 0.0% 4.0% 8.0%


Fixed Income


Commodities

U.S. Equities

Real Estate

STRATEGY 7

MIN TARGET MAX

U.S. Equities 26.0% 36.5% 44.0%


Fixed Income 0.0% 4.5% 7.0%



Real Estate 0.0% 5.0% 10.0%


Fixed Income


Commodities

U.S. Equities

Real Estate


CAPTRUST Discretionary research highlightsCAPTRUST Discretionary research highlights

• We switched from a more defensive posturing early in Q2

2010 to a more optimistic orientation in August 2010 and

then an even more optimistic view in early October 2010,

feeling that the market had overshot to the downside.

• In mid-May 2011, we ratcheted back to a more neutral

posturing, anticipating a potential growth slowdown as

well as to take profi ts on our previously held constructive

positioning.

• After the initial sharp sell-off in August 2011, we

deployed some more capital into small- and mid-

capitalization stocks in a contrarian fashion but reversed

that positioning a month later fearing more potential

downside. While we have not deployed fresh capital into

the U.S., we have rebalanced portfolios back to policy

levels and currently favor large-cap and growth.

• We continue to have a footing in international equities,

yet remain concerned about the overhang surrounding

the European Union as well as the potential for Chinese

growth deceleration.

• Valuation is very attractive from a historical standpoint;

however, valuation metrics could prove irrelevant should

the European Union’s structure unravel or additional

fi nancial system stress unhinge the potential for a “muddle

through” type of recovery.

• Given demographic factors, international equities remain

an important part of our long-term asset allocation

strategies, but it is challenging to be tactical in such

a reactionary market environment, so we continue to

retain a quality bias and await better risk/reward setups,

participating in market upside but with a bias toward

reducing exposure.

• We de-emphasized fi xed income in the second half of 2010

despite anticipating further federal stimulus in the form of

quantitative easing and open market bond purchases.

• We have since increased our weighting to fi xed income,

incorporating a diversifi ed approach by sector and

geography using a combination of active and passive

management. We expect a few persistent themes to

endure within the space that are accessible via highly

skilled managers.

• The consensus view is for higher interest rates, and we

have been contrarian in our thinking that bond yields are

unlikely to rise quickly as capital markets will likely remain

uneasy as 2012 unfolds. Unease regarding European policy

maker decisions and the U.S. presidential election all factor

into our thinking that bonds should retain a prominent

place in portfolios.

U.S. EQUITIES

INTERNATIONAL EQUITIES

FIXED INCOME


19

• Hedge fund strategies have had a challenging backdrop in

which to operate over the past three years, given market

oscillations. Yet we see investment merit in certain hedge

fund sub-strategies, particularly those that are less reliant

on overall market direction.

• We have emphasized more conservative hedge fund

strategies recently, with a goal of preserving capital

during large down periods in riskier asset classes versus

strategies that have higher equity market gearing or

economic sensitivity.

• Should risk assets overshoot to the downside following

our expectation for additional macro headline concerns

and the potential for more subdued earnings season

guidance from global companies, we may look to deploy

capital into more market-directional strategies. But for

now we remain focused on more defensive strategies.

• We remain long-term bullish on commodities, not only

due to the demand story but also because of a lack of

infrastructure investment across many key commodities.

• Given the challenging macro environment and the

potential for further growth scares, we expect to see

considerable volatility within commodities, especially

within the precious metals should the U.S. Dollar rally

relative to other major currencies, driving commodity

costs higher for non-Dollar holders.

• We have recently de-emphasized actively managed

strategies with the view that commodities present

considerable macro challenges for most active

managers to successfully navigate. Correlations between

commodities and more “crowded” active manager

positions leave us happy to invest in broad commodity

mandates and control the overall exposure levels versus

leaving that to an active manager.

• We added to real estate positions in mid-2010 based on

improved fundamentals as well as attractive yields given

subdued interest rates.

• In a low-yield world, REITs retain a strong distribution

profi le while off ering some growth potential, an attractive

combination for a variety of investors that should provide

an underlying bid to the space.

• Recent capital raising success across the REIT complex

in late 2011 and thus far in 2012 leaves operators poised

for opportunistic purchases and increased fl exibility, but

we remain watchful of investors chasing what has been

a strong asset class since the fi nancial crisis; last quarter

refl ected another period of relative strength that could

reverse should valuation become overly stretched.

The foregoing comments demonstrate our firm’s strategic and forward-looking views as they are implemented in cases where Clients have contractually granted CAPTRUST

sole tactical discretion over portfolio decisions.

HEDGE FUNDS�/�PRIVATE EQUITY

COMMODITIES

REAL ESTATE


investment asset classesinvestment asset classes

U.S. EQUITIES

INTERNATIONAL EQUITIES

• U.S. equities recorded their fi rst negative quarter in the

last three, with the S&P 500 falling a modest 2.8% after

posting much weaker intra-quarter losses, at one point

dropping 8.8% from April to early June on weakening

macroeconomic data.

• Four of the ten major S&P 500 sectors were positive

in the second quarter, with the traditionally defensive

telecom, utilities, consumer staples, and health care

sectors higher from last quarter. Financials (-6.8%) and

technology (-6.7%) were the weakest performers after

being the strongest to start the year.

• Since the U.S. equity market peaked in October 2007,

mid- and small-cap stocks have fully recovered their

losses when incorporating reinvested dividends. At the

end of the quarter, large-cap stocks were 3.4% lower than

their 2007 peak.

• Developed and emerging international equities both fell

in the second quarter, but have been higher 10 out of the

last 13 and 10 out of the last 14 quarters, respectively.

• Developed international equities declined 6.9% in Dollar

terms and 5.1% in local currency terms, behind Germany

(-11.7%) and France (-8.2%). In a reversal from last quarter,

the Dollar strengthened relative to the Pound and euro

but fell against the Yen.

• Emerging markets had weak performance, down 8.8%

in Dollar terms and matched their developed brethren’s

-5.1% local currency decline. Brazil reversed fi rst-quarter

strength and fell 18.8%, while Russia felt the commodity

price swoon and dropped 14.0%.

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Q2 ’12 2012

Q2 ’12 2012

Market Performance, 2nd Quarter 2012


Large Value (R1000 Value) -2.20% 8.68%

Large Blend (S&P 500) -2.75% 9.49%

Large Growth (R1000 Growth) -4.02% 10.08%

Mid Value (Russell) -3.26% 7.78%

Mid Blend (Russell) -4.40% 7.97%

Mid Growth (Russell) -5.60% 8.10%

Small Value (R2000 Value) -3.01% 8.23%

Small Blend (R2000 Blend) -3.47% 8.53%

Small Growth (R2000 Growth) -3.94% 8.81%

International Equities (MSCI EAFE) -6.85% 3.38%

Pacifi c Stocks (MSCI Pacifi c Ex-Japan) -4.89% 5.82%

European Stocks (MSCI Europe Ex-UK) -9.34% 1.87%

Japanese Stocks (MSCI Japan) -7.30% 3.14%

UK Stocks (MSCI UK) -3.97% 3.35%

Emerging Markets (MSCI EME) -8.77% 4.12%


21

FIXED INCOME

HEDGE FUNDS�/�PRIVATE EQUITY

• Hedge fund strategies gave up some of their fi rst-quarter

gains, but broad measures remain in positive territory. The

HFRI Fund Weighted Composite and HFRI Fund of Funds

Composite Index are both clinging to small year-to-date

gains. Relative value strategies have been strong year-to-

date, but dedicated short and short bias strategies have

had performance diffi culty.

• As noted over the prior two quarters, volatility fl uctuations

had been very diffi cult for most investment managers to

navigate as we experienced high correlation across asset

classes. With most asset classes refl ecting more consistent

price biases in the fi rst quarter, managers were able to add

some more value than in prior quarters, but this reversed

following a volatile second quarter.

• Private equity research fi rm Prequin noted an interesting

divergence in private equity fundraising in the second

quarter, where the number of private equity funds looking

to raise capital reached a record high while those funds

completing fundraising hit a record low, indicating that fi rms

continue to leave coff ers open in search of opportunities.

• The Barclays Aggregate Bond Index had its fourteenth

positive quarter in its past fi fteen, closing up 2.1% in the

second quarter of 2012. The index was up every quarter

in 2011.

• Within the broad fi xed income space, infl ation-protected

securities were up 3.2%, Treasury bonds turned in a

positive 2.8% quarter and investment-grade corporates

were up 2.5%. Mortgage-backed bonds lagged this

quarter but are up 1.7% thus far in 2012.

• On June 1, a day when the Labor Department released

disappointing employment data, the 10-Year U.S. Treasury

yield touched 1.44%, an all-time low as investors continue

to seek perceived safety in U.S. government bonds

relative to other global choices.

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Q2 ’12 2012

Q2 ’12 2012



HFRI Fund Weighted Composite Index -2.88% 1.70%

HFRI Equity Hedge Index -4.49% 2.09%

HFRI Relative Value Index 0.18% 4.32%

HFRI Fund of Funds Composite Index -2.30% 0.99%

HFRI Fund of Funds Conservative Index -1.66% 0.79%

Broad Market (Barclays Capital U.S. Aggregate) 2.06% 2.37%

Barclays Capital U.S. Treasurys 2.83% 1.51%

Barclays Capital Mortgage Backed Securities 1.08% 1.66%

Barclays Capital Municipals 1.88% 3.66%

Barclays Capital Intermediate Corporates 1.58% 4.37%

Barclays Capital High Yield 1.83% 7.27%


COMMODITIES

REAL ESTATE

• Public real estate, as measured by the NAREIT Equity

REIT Index, increased 4.0% in the second quarter after

rising 10.5% in the fi rst quarter and a 15.3% fourth quarter

2011 performance. REITs have outperformed U.S. equities

four out of the last fi ve quarters.

• Based on Pension Real Estate Association data, commercial

mortgage backed security issuance�—�a gauge of industry

health�—�continued to show robust growth in the second

quarter on both a sequential and a year-over-year basis.

• REITs continue to have attractive income profi les relative

to Treasurys and their capital raising eff orts last year, and

so far this year provides them with fl exibility. Their strong

performance relative to other asset classes may leave

some concerned about the path forward; however, the

market continues to reward their strong fundamentals.

• The Dow Jones UBS Commodity Index fell 4.6% in the

second quarter, leaving it in negative territory year-to-

date after falling 13.4% in 2011. The energy complex was

hit especially hard (apart from natural gas, which was up

over 38.3% in the quarter) despite a massive rip higher

on June 29.

• Metals fell across the board, with gold the best performer

(down 4.3%), while industrial metals fell harder on slowing

growth concerns.

• Recently, commodities have demonstrated considerably

higher correlations to public equities than over longer time

periods; correlations between crude oil and U.S. equities

were extremely high in the second quarter, higher than the

correlation between U.S. stocks and international stocks.

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MSCI U.S. REIT Index 3.75% 14.88%

Wilshire REIT Index 3.71% 14.90%

Dow Jones UBS Index -4.55% -3.70%

S&P GSCI Commodity Index -12.38% -7.23%

Gold (Spot, $/oz) -4.25% 2.16%

Natural Gas (U.S. Spot Henry Hub) 38.38% -8.05%

Crude Oil (U.S. Spot, WTI Cushing) -17.53% -14.03%


23

captrust in the newscaptrust in the news

CAPTRUST GROWTHThe CAPTRUST team grew in the second quarter of 2012 with the addition of three key senior management team members.

Client Services

Doreen O’DowdSenior Director, Client Services

In her new position, Doreen will manage and support all our

client services efforts. She joins CAPTRUST from Stock Yards

Bank and Trust Company, where she developed plan and

investment reviews, procedures for processing contributions

and distributions, and tracking mechanisms for retention and

revenues. She also trained a team of associates, and developed training curricula. Prior

to that Doreen worked at ADP Retirement Services.

Consulting Research

Hunter BrackettSenior Manager, Investment Research

Hunter joins CAPTRUST from NCM Capital where, as a sector

leader, fi nancials, he managed the fi rm’s fi nancial sector exposure

across all equity portfolios for its institutional and high net-worth

Clients. Prior to that he was an associate, large-/mid-cap banks at

Lehman Brothers, Equity Research Division and an international

corporate banking associate at First Union Corporation. In his new position, he will

support our investment research team efforts. Hunter is a graduate of Washington and

Lee University with a BA in economics and a MBA from UNC Kenan-Flagler Business

School, and holds a CFA designation.

Marketing

John CurrySenior Director, Marketing

As head of CAPTRUST marketing, John will develop and

oversee the fi rm’s day-to-day and strategic marketing efforts. He

joins CAPTRUST from ProShares, where, as head of product

management, he worked with product development, branding,

marketing, and sales to prioritize marketing efforts, orchestrate

product focus, execute campaigns, and support product launches. Prior to that he

worked at AllianceBernstein and Putnam Investments, where he was responsible for

marketing and product management for various aspects of their retirement businesses.

John is a graduate of the University of North Carolina at Chapel Hill with a BS in

biology and a MBA from McColl School of Business, Queens University.

Doylestown Hospital Awarded

for Outstanding Patient Safety

and Experience

Doylestown Hospital was recently honored

as recipient of the 2012 HealthGrades

Outstanding Patient Experience Award™

and the 2012 HealthGrades Patient Safety

Excellence Award™. Doylestown Hospital

is one of only fi ve hospitals to receive the

Patient Safety Excellence Award™ four

years in a row (2009–2012) and one of

only two to be a fi ve-time recipient of the

Outstanding Patient Experience Award™

(2009, 2009/10, 2010/11, 2011, 2012)

across the state of Pennsylvania. Most

signifi cant of all, Doylestown Hospital is one

of only eight hospitals nationwide to be a fi ve-

time recipient of the Outstanding Patient

Experience Award™ and four-time recipient

of the Patient Safety Excellence Award™.

HealthGrades, a leading provider of

information to help consumers make

informed decisions about a physician or

hospital, identifi ed 332 hospitals performing

in the top 10% in the nation for patient

satisfaction, based on survey responses from

patients treated at those facilities. Hospitals

had to meet bed size, survey-response size,

and clinical-quality thresholds in order

to be eligible for the award. Information

on award recipients and the ratings

methodology is available, free to the public,

at HealthGrades.com.

CONGRATULATIONS


CAPTRUST continued its charitable efforts this past quarter through the CAPCommunity Foundation’s involvement with the following organizations and causes:

• Big Brothers and Big Sisters of the Triangle

• AMRAN Shriners

• Hubie Poteat Memorial Foundation

• Activate Good

• Read and Feed

• Royal Family Kids

• Light the Night

• Kid’s Peace

• YMCA

• Miracle League

• Boys and Girls Clubs of NC

• Hit it Farr for Kirby

• North Raleigh Ministries

• Camp Firefl y

• Triangle Family Services

• Easter Seals UPC

• Boys and Girls Clubs of Richmond

• Payton Wright Foundation

• Super Cooper’s Little Red Wagon Foundation

• Carolina Ball Foundation

• March of Dimes

• Walk MS

• Safechild

• UNICEF

• Hope Reins of Raleigh

• American Diabetes Association

• Harris YMCA

• Junior Achievement

GIVING BACK

UPCOMING INDUSTRY INVOLVEMENTThe following is a list of topical discussions to be led by CAPTRUST at

upcoming industry events in the third quarter.

CREATING BETTER OUTCOMES THROUGH PLAN DESIGNSeptember 9–12, 2012 | Las Vegas, NV

2012 Las Vegas Mid-Sized Retirement & Healthcare Plan Management Conference

For more information, visit www.ucs-edu.net/conferences

UNDERSTANDING THE FIVE COMPONENTS OF A SUCCESSFUL NONQUALIFIED DEFERRED COMPENSATION PLAN STRATEGYSeptember 20, 2012 | Dallas, TX

Dallas Country Club (CPE credit available for attending event)

Presented by Mike Curran, CAPTRUST senior vice president

CAPTRUST RECOGNITION

CAPTRUST’s Traynor

Reitmeier, vice president

and Financial Advisor,

was recently named one

of the Triangle Business

Journal’s “40 Under 40,” a

list of professionals from

the Raleigh, NC area,

under the age of 40, who are recognized for their

outstanding contributions to their organizations

and to the community. “The ‘40 Under 40’ winners

are the region’s up-and-coming thought leaders,”

says Bryan Hamilton, publisher of the Triangle

Business Journal. “Look for them to shape the

Triangle’s vision of tomorrow.”

CAPTRUST employees learn more about Read and Feed

Documents

CAPTRUST Strategic Research Report Q2 2012 Wealth Management Edition