INVESTMENT STRATEGY

AND PORTFOLIO MANAGEMENT

October 2013

Contents

Executive Summary……. 1

Economic Outlook. …… 2

Market Outlook ….……. 3

Edward Campbell, Portfolio Manager

Ed Keon, Portfolio Manager

Joel Kallman, Portfolio Manager

Marcus Perl, Portfolio Manager

Rory Cummings, Associate

Executive Summary

Economic Outlook

• Global growth should continue to strengthen through the end of this year and into

2014.

• U.S. growth has been sluggish but resilient in the face of strong fiscal headwinds. As

the fiscal drag fades, we expect U.S. growth to pick up nicely, driven by pent-up

demand in consumer durables and stronger capital spending.

• The international growth picture is also brightening, with clear signs of a cyclical

economic recovery in the Euro-zone and faster growth in Japan and the U.K.

• Tentative signs that the emerging markets growth slowdown may have run its course

may mean a synchronized global upturn.

• Downside risks remain, as evidenced by recent market volatility surrounding the

U.S. government shutdown.

• If the shutdown is resolved reasonably quickly, it should have a limited impact on

global growth prospects. However, if this escalates into a showdown on the debt

ceiling and raises serious fear of default, the situation becomes more dangerous.

Market Outlook

• Our investment strategy of overweighting risky assets, including global stocks and

high yield bonds, and underweighting government bonds has paid off so far in 2013.

However, in light of the risks posed by the fluid situation in Washington, we have

reduced our equity overweight on a tactical basis.

• We have brought our EAFE and U.S. equity overweights in line by reducing U.S.

and raising EAFE exposure, given EAFE’s better relative valuations, an upturn in

Euro-zone leading economic indicators, and continued strength in Japan.

• Despite strong equity performance this year, along with higher yields, equities are

still attractive relative to government bonds on a valuation basis.

• The trend in bond yields has been down since early September, and this may

continue as political and fiscal risks dominate the headlines over the coming weeks,

but our long term view has not changed, as we believe a slow Fed exit from

quantitative easing, along with accelerating economic growth, will drive yields higher.

• Within fixed income, we prefer high yield credit to Treasuries or investment grade,

given reasonable valuation, low default rates, and equity-like characteristics.

Confidential — Not For Further Distribution

ECONOMIC AND MARKET OUTLOOK

ECONOMIC AND MARKET OUTLOOK

2

October 2013

Economic Outlook

Overall, global growth will likely continue to strengthen through the end of this

year and into 2014. A more synchronized global recovery appears to be in place,

with a strengthening U.S. economy, a faster recovery in the Euro-zone, growth

normalization in Japan, and economic stabilization in China. OECD Leading

Indicators (chart 1) now suggest that the global, U.S., Japanese, Euro-zone, and

U.K. economies are all in an expansionary environment. This runs parallel with

our expectations that global growth will strengthen, moving into the new year,

given supportive financial conditions, continued monetary expansion, and a lack of

inflationary pressures in the developed world (chart 2).

U.S. growth has continued its sluggish pace, largely due to fiscal headwinds. These

headwinds should diminish next year, as federal spending cuts and tax rate hikes

will continue to slow. Recent data in the U.S. is mixed, with PMI surveys and auto

sales strengthening while job gains have not impressed and housing momentum

has slowed. Concerns with the latter seem to have factored into the Fed’s

unexpected decision to hold off on the tapering of their QE program in

September. With initial jobless claims reaching lows last seen in 2007, we expect

an improvement in job gains over the coming months; which may prompt the Fed

to begin tapering. The uncertainty of the Fed’s timetable may present some

downside risk, as financial conditions may tighten in response to an increase in

tapering rhetoric – a negative for housing and autos. Short-term risks of a

government shutdown and failure to raise the debt ceiling will also serve as

headwinds, though the impact on growth prospects should be marginal. With an

improving labor market backdrop, lower gas prices helping consumers, indications

of strengthening business investment, and the September manufacturing PMI

hitting a 29-month high, we maintain our view that U.S. growth should pick-up

momentum heading into 2014.

In Europe, compelling evidence is forming that suggests their economies have

emerged from recession. This recovery has been driven by fiscal, financial, and

policy headwinds slowing, rather than positive demand shocks. There are signs of

fundamental improvement with the latest Euro-zone PMI and consumer

confidence numbers reaching two year highs. Also, the ECB has opened the door

to looser monetary policy, expanding the LTRO lending facilities. We don’t expect

a particularly vigorous recovery in Europe, given continued fiscal tightening and

financial deleveraging, though the current recovery looks sustainable, with scope

for acceleration into 2014.

Japan has been the fastest growing developed economy this year, with real GDP

rising nearly 4%, annualized, through the second quarter, driven by monetary and

fiscal policy easing and a weaker yen. Today, the effects from demand-enhancing

structural policies specific to Abe’s “Third Arrow” remain unknown, but will likely

offset the prospective dampening brought on from the recent consumption tax

hike. Along with the tax hike, a rapid surge in energy prices should weaken

consumer spending. Going forward, strong corporate cash flow, upcoming tax

incentives for capex, and privately financed infrastructure projects should be a

major boost to business spending, serving as a major tailwind for growth. The

latest PMI and Tankan surveys further emphasize improving business sentiment.

The risk of slower growth within emerging economies remains elevated. In China,

the September PMI was recently revised lower, though still above 50. Consumer

confidence remains at record lows, suggesting that a consumption-driven rebalance

has yet to take place. Tightening labor costs and declining EM currencies continue

to create inflationary pressures, while volatile commodity prices impact growth for

producing nations. Notably; manufacturing PMIs for India, Russia, and Brazil all

remain below the 50-mark, while Asian economies that are more synchronized to

the global recovery continue to decouple on improving growth prospects (chart 3).

Downside risks remain, as evidenced by recent U.S. market volatility surrounding

the government shutdown. If short-lived, these risks should have a limited impact

on global growth prospects as global inflationary pressures remain in check and a

synchronized manufacturing recovery takes form. This should be especially

beneficial for the U.S. and other developed economies going forward.

98.5

99.0

99.5

100.0

100.5

101.0

101.5

102.0 OECD Leading Economic Indicators

As of 7/15/13

Euro-zone Global Japan

United States United Kingdom

Chart 1: Global Growth: Set To Accelerate?

Source: QMA

Ind

ex

Chart 3: Emerging Markets PMI

Capital Economics BRIC & Non-BRIC PMIs

Source: Capital Economics

Chart 2: Global Inflation Rates

ECONOMIC AND MARKET OUTLOOK

3

October 2013

Market Outlook

Equities continued higher in the third quarter, as the market, for the most part,

shrugged off lackluster top line growth, as well as rising geopolitical tensions as

the S&P 500 provided a total return of 5.24%. The quarter was characterized by

renewed hope for accelerating domestic and global growth, as well as

speculation of a bottom in emerging markets. This drove risk assets higher

through mid-September. During the second half of September, sentiment

shifted as the Fed surprised the market by not tapering its QE purchases. This,

along with heightened concerns over a government shutdown and the potential

for default, have driven the VIX higher, while putting pressure on equities and

bond yields.

Despite the noise introduced by the volatility in Washington, our outlook for

the economy remains positive. Economic indicators are pointing to renewed

global growth, as improving labor markets, expectations for increased

corporate spending, and at least a partial waning of global fiscal drags appear to

be paving the way for a strong 2014. While we believe that external concerns,

such as those posed by Washington, could drive near-term volatility, ultimately

the market should look through this and focus on underlying private sector

fundamentals. However, though we remain overweight in risk assets, we have

trimmed these positions on a tactical basis, as the situation in Washington

remains fluid.

Our view of above-consensus economic growth for 2014, along with

reasonable, though rising, valuations, has kept us overweight equities despite

the increased volatility. What has changed, however, is our positioning in U.S.

equities relative to EAFE. As shown in chart 4, during the first half of 2013, the

U.S. enjoyed strong outperformance relative to both its developed and

emerging market counterparts, with an excess return of 10% compared to the

MSCI® EAFE Index. We maintained our overweight position in the U.S.

during that time, amid a backdrop of declining tail risks, low volatility,

improved expectations for U.S. economic growth, and recessionary conditions

throughout developed Europe. During the third quarter, this dynamic changed,

as European leading indicators turned up and the valuation skew began to more

heavily favor EAFE countries (chart 5). This, combined with continued

strength in Japan, drove EAFE outperformance from July through September.

Our most recent country analysis is in line with the markets’ view of the relative

prospects between the U.S. and Europe (and Japan), as we believe near-term

returns will likely favor the latter.

Emerging markets have been the subject of much controversy among market

pundits over the past several months. While emerging market equities

undoubtedly had a strong third quarter, questions remain as to whether the

underlying economic fundamentals have truly bottomed (chart 6). With China

as the largest emerging market economy, as well a significant importer of

emerging market goods, much of the focus centers around its economic

outlook. While Chinese economic readings have been marginally positive over

the past several weeks, we maintain our view that the transition to a

consumption-driven economy will likely be a bumpy one. We are currently

taking a cautious approach to EM, despite its recent strength, while continuing

to closely monitor the economic data.

Turning to bonds, the 10-year treasury rate rose from a low of 2.5% to a high

of 2.97% before declining back to the 2.6% range post the Fed announcement

that they would delay tapering. While we see the potential for a continued

pullback in yields as political and fiscal risks dominate the headlines over the

coming weeks, our long-term view remains unchanged, as we believe a slow

Fed exit from quantitative easing, along with accelerating economic growth will

drive yields higher.

Chart 4: Recent EAFE Outperformance

Chart 5: Rising Confidence in Developed Economies

Chart 6: BRICS LEIs Continue to Look Weak

ECONOMIC AND MARKET OUTLOOK

4

October 2013

Please see page 5 for index definitions.

Source: FactSet Research Systems.

Source of sector classification: S&P/MSCI.

Performance Summary as of 9/30/13 ---------------Annualized---------------

Quarter YTD 1 Year 3 Year 5 Year 10 Year Equity S&P 500 Index 5.24% 19.79% 19.34% 16.27% 10.02% 7.57%

Consumer Staples 0.80% 16.08% 14.05% 15.86% 10.87% 9.89% Consumer Discretionary 7.79% 29.12% 31.84% 24.13% 18.77% 9.79% Energy 5.15% 15.42% 12.25% 15.38% 6.60% 14.15% Financials 2.87% 22.93% 30.20% 13.58% 1.72% -0.12% Health Care 6.82% 28.45% 28.55% 20.95% 13.07% 8.18% Industrials 8.91% 23.92% 28.50% 16.69% 10.62% 8.71% Information Technology 6.62% 13.39% 6.91% 13.70% 12.03% 7.13% Materials 10.30% 13.50% 16.55% 11.92% 8.16% 9.41% Telecommunications Services -4.40% 5.69% -0.68% 12.56% 11.17% 8.93% Utilities 0.19% 10.14% 6.99% 10.58% 7.06% 9.76%

Russell 1000® Index 6.02% 20.76% 20.91% 16.64% 10.53% 7.98% Russell 1000® Growth 8.11% 20.87% 19.27% 16.94% 12.07% 7.82% Russell 1000® Value 3.94% 20.47% 22.30% 16.25% 8.86% 7.99%

Russell 2000® Index 10.21% 27.69% 30.06% 18.29% 11.15% 9.64% Russell 2000® Growth 12.80% 32.47% 33.07% 19.96% 13.17% 9.85% Russell 2000® Value 7.59% 23.07% 27.04% 16.57% 9.13% 9.29%

Russell 3000® Index 6.35% 21.30% 21.60% 16.76% 10.58% 8.11% Russell 3000® Growth 8.48% 21.75% 20.30% 17.18% 12.16% 7.99% Russell 3000® Value 4.23% 20.68% 22.67% 16.27% 8.89% 8.09%

Wilshire 5000℠ 6.03% 20.85% 20.96% 16.48% 10.43% 8.19%

MSCI EAFE® in Local Currency 7.50% 19.34% 28.31% 9.11% 5.54% 6.28% MSCI EAFE® in US$ 11.56% 16.14% 23.77% 8.47% 6.35% 8.01%

MSCI EAFE® Growth in U.S.$ 10.50% 16.54% 23.27% 8.88% 6.79% 8.00% MSCI EAFE® Value in U.S.$ 12.63% 15.71% 24.27% 7.99% 5.86% 7.94%

MSCI® EM in Local Currency 5.63% 0.47% 5.82% 2.74% 8.18% 12.49% MSCI® EM in US$ 5.77% -4.35% 0.98% -0.33% 7.22% 12.80%

MSCI® World 8.18% 17.29% 20.21% 11.82% 7.84% 7.58% Fixed Income Barclays Capital Aggregate 0.57% -1.89% -1.68% 2.86% 5.41% 4.59% Citi BIG 3 Mo T-bill 0.01% 0.04% 0.07% 0.08% 0.15% 1.61%

Barclays High Yield 2.28% 3.73% 7.14% 9.19% 13.53% 8.86% Barclays TIPS 0.70% -6.74% -6.10% 4.02% 5.31% 5.23% Barclays Government 0.12% -1.92% -1.98% 2.13% 4.00% 4.17% Barclays Credit 0.72% -2.91% -1.90% 4.13% 8.54% 5.19%

Citi Non U.S. Gov't ($ hedged) 1.01% 0.98% 2.19% 2.79% 4.18% 4.21% Citi Non U.S. Gov't (unhedged) 4.06% -3.37% -5.65% 0.55% 4.27% 4.91%

JPM EMBI+ 0.51% -8.89% -5.94% 4.69% 9.51% 8.74% Other DJAIG Commodities 2.13% -8.56% -14.35% -3.16% -5.29% 2.14% DJ Wilshire REIT -3.04% 2.71% 5.26% 12.48% 5.55% 9.42%

ECONOMIC AND MARKET OUTLOOK

5

October 2013

Explanation of Indices

Citigroup (formerly Salomon Smith Barney) Non-U.S. World Government Bond Index—Unhedged. This Index is based on the Citigroup

formerly Salomon Brothers) World Bond Index, and excludes issues denominated in U.S. dollars. The Index measures the total return of

government securities in major sectors of the international bond market.

Citi Non-US Government Hedged is an international fixed-income fund.

Citi BIG T-Bill (3-month) is the 3-month Treasury bill subsector of the Broad Investment Grade (BIG) index.

Dow Jones - AIG Commodity Index is a diversified benchmark for the commodity futures market. It is composed of futures contracts on 19

physical commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange

(LME).

Dow Jones Wilshire REIT Index. Measures U.S. publicly traded Real Estate Investment Trusts. The index is a subset of the Dow Jones Wilshire

Real Estate Securities Index (WRESI). The indexes are weighted by both full market capitalization and float-adjusted market capitalization.

JP Morgan Emerging Markets Bond Index Plus. The JP Morgan Emerging Markets Bond Index Plus is a market capitalization-weighted total

return index of U.S. dollar and other external currency denominated Brady bonds, loans, eurobonds, and local market debt instruments traded in

emerging markets.

Barclays Capital Aggregate. Composed of U.S. investment-grade fixed-rate bond market, including government and credit securities, agency

mortgage pass-through securities, asset-backed securities, and commercial mortgage-based securities.

Barclays US Corporate High Yield Index. Covers the universe of high-yield corporate bonds.

Barclays Capital US TIPS Index. An unmanaged index that represents securities that protect against adverse inflation and provide a minimum level

of real return. To be included in this index, bonds must have cash flows linked to an inflation index, be sovereign issues denominated in U.S.

currency, and have more than one year to maturity, and, as a portion of the index, total a minimum amount outstanding of $100 million U.S.

dollars.

Market Volatility Index of the Chicago Board Options Exchange. A measure of market expectations of near-term volatility conveyed by S&P 500

stock index option prices.

Morgan Stanley Capital International (MSCI®) Europe, Australasia, and Far East (EAFE) Equity Index. MSCI® EAFE acts as a benchmark for 24

developed-market stock portfolios. MSCI® Japan Equity Index is a subset of MSCI® EAFE.

Morgan Stanley Capital International (MSCI®) Emerging Markets Equity Index. MSCI® EM acts as a benchmark for 27 emerging-market stock

portfolios.

MSCI® World Index. A free-float weighted equity index that includes developed world markets but not emerging markets.

Russell 3000®, 2000®, & 1000®. The Russell 3000® is composed of 3,000 large U.S. companies representing approximately 98% of the U.S. equity

market. The Russell 1000® represents the largest 1,000 companies in the Russell 3000®, and the Russell 2000® represents the 2,000 smallest

companies. The Russell 1000® Growth includes those Russell 1000® companies with higher price-to-book ratios and higher forecast growth

values. The Russell 1000® Value includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. The

Russell 2000® Growth includes those Russell 2000® companies with higher price-to-book ratios and higher forecast growth values. The Russell

2000® Value includes those Russell 2000® companies with lower price-to-book ratios and lower forecast growth values. The indexes are value-

weighted. The Russell indices are trademarks/service marks of the Russell Investments. Russell is a trademark of the Russell Investments.

Wilshire 5000 Total Market IndexSM represents the broadest index for the US equity market, measuring the performance of all US equity securities

with readily available price data. A number of securities are over-the-counter and small companies. Wilshire®, the Wilshire IndexesSM and the

Wilshire 5000 Total Market IndexSM are service marks of Wilshire Associates Incorporated (“Wilshire”) and have been licensed for use by

QMA. All content of the Wilshire IndexesSM and Wilshire 5000 Total Market IndexSM is © 2010 Wilshire Associates Incorporated, all rights

reserved.

S&P 500 Index. Covers 500 industrial, utility, transportation, and financial companies of the U.S. markets. The value-weighted index represents

about 75% of the NYSE market capitalization and 30% of the NYSE issues.

Emerging market countries may have unstable governments and/or economies that are subject to sudden change. These changes may be

magnified by the countries’ emergent financial markets, resulting in significant volatility to investments in these countries.

Gold returns represent the performance of the price of gold bullion per the spot price of one ounce of London fixing. The spot price is valued in

USD.

These indices are all unmanaged. Investors cannot invest directly in an index.

ECONOMIC AND MARKET OUTLOOK

6

October 2013

IMPORTANT INFORMATION

These materials represent the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities,

issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally

delivered and to such person’s advisers is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of

the contents hereof, without prior consent of Quantitative Management Associates LLC (“QMA”) is prohibited. Certain information contained

herein has been obtained from sources that QMA believes to be reliable as of the date presented; however, QMA cannot guarantee the accuracy of

such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the

date of issuance (or such earlier date as referenced herein) and is subject to change without notice. QMA has no obligation to update any or all of

such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility

for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other

financial instrument or any investment management services and should not be used as the basis for any investment decision. Past

performance is not a guarantee or a reliable indicator of future results. No liability whatsoever is accepted for any loss (whether direct,

indirect, or consequential) that may arise from any use of the information contained in or derived from this report. QMA and its affiliates may

make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of QMA

or its affiliates.

The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as

recommendations of particular securities, financial instruments or strategies to particular clients or prospects. No determination has been made

regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. For any securities or financial

instruments mentioned herein, the recipient(s) of this report must make its own independent decisions.

Certain information contained herein may constitute “forward-looking statements,” (including observations about markets and industry and

regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual events or results may differ materially

from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in

making any decisions. No representation or warranty is made as to future performance or such forward-looking statements.

The financial indices referenced herein are provided for informational purposes only. You can not invest directly in an index. The statistical data

regarding such indices has been obtained from sources believed to be reliable but has not been independently verified.

QMA affiliates may develop and publish research that is independent of, and different than, the recommendations contained herein. QMA

personnel other than the author(s), such as sales, marketing and trading personnel, may provide oral or written market commentary or ideas to

QMA’s clients or prospects or proprietary investment ideas that differ from the views expressed herein. Additional information regarding actual

and potential conflicts of interest is available in QMA’s Form ADV Part 2A.

QMA is a wholly-owned subsidiary of Prudential Investment Management, Inc. and an indirect, wholly-owned subsidiary of Prudential Financial,

Inc.

Copyright 2013 QMA. All rights reserved.

QMA-20131004-128