THIRD QUARTER 2012

Russell Quarterly Economic and Market ReviewMarkets move ahead of events?

Important information and disclosures

Please remember that all investments carry some level of risk, including the potential loss of Principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Diversification does not assure a profit and does not protect against loss in declining markets.

Risks of assets classes discussed in this presentation:

Non-U.S. markets entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile. If applicable, please see a Prospectus for further detail.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer-established non-U.S. markets. If applicable, please see the Prospectus for further detail.

Real Asset risks:

Investments in infrastructure-related companies have greater exposure to adverse economic, financial, regulatory, and political risks, including, governmental regulations. Global securities may be significantly affected by political or economic conditions and regulatory requirements in a particular country.

Commodities may have greater volatility than traditional securities. The value of commodities may be affected by changes in overall market movements, changes in interest rates or sectors affecting a particular industry or commodity, and international economic, political and regulatory developments.

Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks. Investments in international markets can involve risks of currency fluctuation, political and economic instability, different accounting standards, and foreign taxation.

Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $2 billion) than larger company stocks (large cap). Small cap investments are subject to considerable price fluctuations and are more volatile than large company stocks. Investors should consider the additional risks involved in small cap investments.

Large capitalization (large cap) investments involve stocks of companies generally having a market capitalization between $10 billion and $200 billion. The value of securities will rise and fall in response to the activities of the company that issued them, general market conditions and/or economic conditions.

Defensive style emphasizes investments in equity securities of companies that are believed to have lower than average stock price volatility, characteristics indicating high financial quality, (which may include lower financial leverage) and/or stable business fundamentals.

Dynamic style emphasizes investments in equity securities of companies that are believed to be currently undergoing or are expected to undergo positive change that will lead to stock price appreciation. Dynamic stocks typically have higher than average stock price volatility, characteristics indicating lower financial quality, (which may include greater financial leverage) and/or less business stability.

Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.

An Investment Grade is a system of gradation for measuring the relative investment qualities of bonds by the usage of rating symbols, which range from the highest investment quality (least investment risk) to the lowest investment quality (greatest investment risk).

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living.

Russell Investment Group, is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Copyright © Russell Investments 2012. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Financial Services, Inc., member FINRA, part of Russell Investments.

First Used: October 2012

RFS 12-9375

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Not FDIC InsuredMay Lose ValueNo Bank Guarantee

Table of contents

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Topic Page

Market consensus vs. market results 4

Economic indicators 5

Capital markets 6

Forces impacting capital markets› Federal Reserve, elections, fiscal imbalances and fiscal cliffs

8

Investor responses to economic uncertainty 13

Summary 17

Themes entering 2012* YTD economic outcome YTD market outcome

Europe headed for recession Europe in recession Russell Developed Europe Index +12%

U.S. will experience sub-par growth GDP below 2% YTD 2012 Russell 3000® Index +16%

Emerging markets leading global growth EM GDP at ~ 6-7% in 2012 Russell Emerging Mkts Index +13%

Rising interest rates on horizon 10-Yr Treasury down 25 bps Barclays Aggregate Index +4%

Monetary stimulus to prompt inflation U.S. CPI at 1.7% in August DJ UBS Commodities Index +5%

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Consensus views don’t drive market returnsDiversified index portfolios increased opportunities and managed risks

*Source: cbsnews.com, April 6, 2012, “How are 2012’s Financial Predictions Panning Out?”Each asset class has unique risks and some may be more volatile than others. See the disclosure slide at the beginning for an explanation of these risks.Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Russell3000®

RussellDev ex-U.S. LC

RussellEmerging Mkts

BarclaysAgg

BarclaysTreasuries

Barclays1-3 Month Treas

FTSEEPRA/NAREIT

S&P GlobalInfrastructure

DJ UBSCommodity

60% Russell Global40% Barclays Agg

Economic recovery continues – slowly

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http://www.russell.com

Current state as of August 31, 2012.

See appendix for category definitions.

Russell’s Economic Indicators Dashboard charts several key indicators to help investors assess the current “health” of the economic and market trends. Dashboard is updated on the 22nd of each month.

3Q 2012 reflected central bank actions across the globe

3Q 2012 reflected central bank actions across the globe

Disappointing employment growth since early 2012

Disappointing employment growth since early 2012

Core inflation remains below long term trend

Core inflation remains below long term trend

Source: Russell, Barclays, Dow Jones, and FTSE NAREIT. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

U.S. Equity: (Russell 3000® Index) U.S. stock index which includes the 3,000 largest U.S. stocks as measured by market capitalizationNon-U.S. Developed Equity: (Russell Developed ex-U.S. Large Cap Index) International market index that includes Western Europe, Japan, Australia and CanadaEmerging Markets: (Russell Emerging Markets Index) Emerging markets index that includes S. Korea, Brazil, Russia, India and ChinaU.S. Bonds: (Barclays Agg Bond Index) Broad index for U.S. Fixed Income marketGlobal REITs: (FTSE EPRA/NAREIT Index) Index for global publicly traded real estate securitiesCommodities: (DJ UBS Comm Index) Broad index of common commodities

Annualized

Capital Markets:

› Strong quarter for U.S. equities across all cap tiers and styles. One-year returns of 30%.

› Despite Eurozone concerns, non-U.S. developed stocks finished ahead of U.S. stocks during the quarter and led over 10 years.

› Emerging markets rallied in September to produce the best equity results during the quarter in exchange for higher risk.

› Fixed income provided another solid quarter of results.

› Global REITs delivered consecutive strong quarters and produced the best year-to-date results of the major asset classes.

› Strong quarter for commodities markets as energy, agriculture, and metals all rallied during the quarter.

Capital Market Returns

3Q 1 Year 3 Years 5 Years 10 Years

Rat

e o

f R

etu

rn (

%)

YTD

Capital marketsPeriods ending September 30, 2012

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What worked and what didn’t in 3Q 2012

Index Legend: Energy – Russell 3000® U.S. Energy; Consumer Discretionary – Russell 3000® Consumer Discretionary; Consumer Staples – Russell 3000® Consumer Staples; Utilities – Russell 3000® Utilities; Dynamic – Russell 1000® Dynamic Index; Defensive – Russell 1000® Defensive Index; Euro Area – Russell Eurozone Index; Japan – Russell Japan Index; Emerging Market Debt – Barclays Emerging Mkt Debt Index; U.S. Treasuries – Barclays U.S. Treasury Index; Global High Yield – Barclays Global HY Index; Grains, Livestock, Precious Metals, Sugar, represent sub-indexes of the Dow Jones UBS Commodity Sub-index Series; Infrastructure Energy – S&P Global Listed Infrastructure Sub-index Sector; Infrastructure: Utilities – S&P Global Listed Infrastructure Sub-index Sector; REITs Asia – FTSE/EPRA NAREIT Developed Asia Sector; REITs North America – FTSE/EPRA NAREIT Developed North America Sector. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

What didn’t work› Equities

› Cons. Staples +3% / Utilities +4%

› Defensive Stocks +5%

› Japan 0%› Fixed Income

› U.S. Treasuries +1%

› Alternatives/Real Assets

› Livestock -6% / Sugar -6%

› Infrastructure: Utilities +1%

› REITs North America +1%

What worked› Equities

› Energy +10% / Cons. Disc. +8%

› Dynamic Stocks +7%

› Euro Area +10%› Fixed Income

› Emerging Market Debt +7%

› Global High Yield +6%› Alternatives/Real Assets

› Grains +16% / Precious Metals +13%

› Infrastructure: Energy +7%

› REITs Asia +13%

Defensive Stocks: Securities that tend to be higher quality, more stable.

Dynamic Stocks: Securities that tend to be less stable and have greater return potential.

Looking at a stock’s price volatility and balance sheet quality allow for classification between these stability indexes: Defensive/Dynamic

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JUL AUG SEPT OCT NOV DEC JAN

7/26/12›Draghi says “the ECB is ready to do whatever it takes to preserve the Euro”

9/6/12›ECB backs unlimited bond buying program

9/12/12›European Banking Union proposal unveiled›German constitutional court backs European rescue fund

9/13/12›FED announces QE3

10/5/12›September jobs report

10/18/12-10/19/12›EU Summit

11/2/12›October jobs report

11/6/12›U.S. Election day

11/13/12›Lame Duck Congressional session begins

12/7/12›November jobs report

12/13/12-12/14/12›EU Summit

12/31/12›“Fiscal Cliff” deadline

1/3/13›113th Congress begins

Macro and policy events influencing markets

3Q 2012You AreHere

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Federal Reserve steps in (again)

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The potential impact of the U.S. elections

› Markets desire clarity on policy and direction of regulation (they want to know the rules even if they may not like them)

› Uncertainty around fiscal cliff likely larger impact to markets

› Control of the Senate and the House will matter

› Regardless of who holds majorities, fiscal imbalance increases the need for compromise in regards to both spending and revenues

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 REPUBLICANS win White House DEMOCRATS retain White House

› Likely retain Bush-era tax rates into 2013

› Additional tax reform efforts to reduce marginal tax rates by limiting/closing tax deductions

› Stated goal of allowing Bush-era tax rates to expire (increase) for those with income greater than $250k

Note: There is no guarantee events will occur as depicted.

Something’s got to giveImbalance between the government people say they want and government they are willing to pay for

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› Balancing the differences between revenues and expenses will likely include compromise in regards to both taxes and spending

Source: Office of Management and Budget, as of February 2012

Average Expenditures: 20.0%Average Revenues: 17.8%

% o

f G

DP

Federal Revenues and Spending as % of GDP (1950–2011)

Tax Revenue Gov’t Expenditures

Republican

Democrat

U.S. President:

The looming fiscal cliffPart tax increase and part spending cuts

› Absent government action, the economy will face tax and spending headwinds beginning in 2013. Will the government allow both in the face of near 8% unemployment and < 2% GDP growth?

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Committee for a Responsible Federal Budget, Between A Mountain of Debt and a Fiscal Cliff, July 12, 2012.

$380bnTax

Increase

Alternative Minimum Tax (AMT) Expiration*

$100bnSpending

Cuts

Lower Medicare Payments*

Sunset of Bush Era Rates

Expirationof extended unemployment benefits

Expiration of Payroll

Tax Cut Defense Cuts

Other Taxes

Other Cuts

New HealthCare Taxes

Medicare Cuts

*Historically “patched” by Congress and not incurred

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Where do the markets and economy go from here?And how should investors react?

Stocks Bonds

Alternatives

Looming headwinds:

› European debt concerns

› U.S. fiscal cliff

› Political uncertainty

› Economic slowdown

Looming headwinds:

› European debt concerns

› U.S. fiscal cliff

› Political uncertainty

› Economic slowdown

Potential tailwinds:› European progress› Political decisions› Continued profit growth

Potential tailwinds:› European progress› Political decisions› Continued profit growth

Russell’s expectations:›Markets likely remain in lower-return, higher-volatility mode

›Long-term discipline will help mitigate the effects of short-term shocks and uncertainty›Global strategies, asset allocation, and active insights will be essential to meeting long-term objectives

Russell’s expectations:›Markets likely remain in lower-return, higher-volatility mode

›Long-term discipline will help mitigate the effects of short-term shocks and uncertainty›Global strategies, asset allocation, and active insights will be essential to meeting long-term objectives

In uncertain times when investors are left to wonder if the markets go off a cliff, to the moon, or somewhere in between, often the most prudent investment solution is to be disciplined and diversified.

There is no guarantee the stated results will occur.

Diversification: To manage volatility and riskConsider alternatives

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Index Calendar Year Returns 2000-2011

What are Alternatives?›Investments typically found outside of traditional long only global equities and fixed income›At Russell, we group alternatives into real assets and alpha-driven investments (hedge fund strategies)

Source: Alternatives category represented by the HFRX Equal-Weighted Strategies Index. Non-U.S. Equity category represented by the Russell Developed ex-U.S. Large Cap Index. Fixed Income category represented by the Barclays U.S. Aggregate Bond Index. U.S. Equity category represented by the Russell 3000® Index.

Why incorporate them in your portfolio?

›Low historical correlation with traditional equities and fixed income

›Diversification can help mitigate total portfolio volatility

In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments.Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

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Diversification: Seeking to broaden opportunities

Non-U.S. = More attractive valuations Non-U.S. has higher EarningsForecasts & Dividend Yields

› Non-U.S. outperforms 3Q 2012 › Non-U.S. trails over five years

› Non-U.S. looks attractive

Source: Russell Indexes – Russell 3000® Index and Russell Developed ex-U.S. Large Cap Index; P/E: Price to Earnings; P/B: Price to Book; P/CF: Price to Cash Flow; EPS Growth: One-Year IBES Earnings Growth Projection. Diversification does not assure a profit and does not protect against loss in declining markets.Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

› Non-U.S. outperforms 3Q 2012

Diversification during rising rate environments

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Rising rates can be a headwind for fixed income but…

› Equities, real assets, non-Treasury fixed income sectors have generally done well during these periods

› Increasing rates often occur during a strong or recovering economy

Oct 93–Sep 94Rates rise

2.6%

Barclays Agg = -3.5%

Nov 98–Jan 00Rates rise

2.2%

Barclays Agg = -0.3%

Jun 03–Jun 07Rates rise

1.5%

Barclays Agg = 12.6%

Dec 08–Apr 10Rates rise

1.4%

Barclays Agg = 13.0%

Ten-Year Treasury Yield %

Other time periods will produce different results. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.Diversification does not assure a profit and does not protect against loss in declining markets.

Grey bars indicate periods of rate troughs to peaks as measured by the 10-year Treasury yield

Where do you go from here?

› Avoid temptation to confuse economic outcomes with market expectations› Waiting for perfect clarity may be too late

› Base your investment decisions on probabilities, not possibilities

› Expect continued market volatility as macro-events unfold› U.S. fiscal cliff

› Eurozone sovereign debt

› China economic slowdown

› Strive for disciplined diversification and maintain a long-term perspective

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International/Global:International/Global investing value may be significantly affected by political or economic conditions and regulatory requirements in a particular country.

Investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Such securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and political systems with less stability than those in more developed countries.

Bonds: Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased

volatility, limited liquidity, prepayment, nonpayment and increased default risk, is inherent in portfolios that invest in high-yield ("junk") bonds or mortgage backed-securities, especially mortgage-backed securities with exposure to subprime mortgages. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.

Growth:Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short-term or have grown consistently over the long-term.

Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. A stock’s value may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments.

Value:Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value.

Such investments are subject to risks that the stocks’ intrinsic values may never be realized by the market, or, that the stocks may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments.

Important information and disclosures

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Index definitions

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Index definitions (cont’d)

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Market IndicatorsCORPORATE DEBT (OAS) – Option Adjusted Spread is a measurement tool for evaluating yield differences between similar-maturity fixed-income products with different embedded options. The OAS employed in the dashboard measures the difference between interest rates for similar-maturity investment-grade corporate bonds and treasury bonds and is viewed as a gauge of credit spreads.

MARKET VOLATILITY(VIX) – CBOE VIX (Chicago Board Options Exchange Volatility Index) measures annualized implied volatility as conveyed by S&P 500 stock index option prices and is quoted in percentage points per annum. For instance, a VIX value of 15 represents an annualized implied volatility of 15% over the next 30 day period. The VIX measures implied volatility, which is a barometer of investor sentiment and market risk.

INTEREST RATES – The spread between 3 month Treasury bill yields and 10 year Treasury note yields measures the market outlook for future interest rates. A normal or upward-sloping yield curve, can imply that investors expect the economy to grow and inflation to eat into asset returns. They thus demand a higher yield for long-term Treasuries. An inverted yield curve has often been an indicator of coming recessions, but not always. For example, reduced inflation expectations could cause the yield curve to flatten.

MORTGAGE DELINQUENCIES – Residential Mortgage Delinquencies measure delinquency percentages for residential real estate loans secured by one- to four-family properties. It includes home-equity lines of credit. Delinquent loans represent those loans that are past due 30 days or more and are still accruing interest, as well as loans in non-accrual status.

Economic IndicatorsCORE INFLATION (PCE PI) – The core Personal Consumption Expenditures Price Index (PCE PI) measures the average price increase for American consumers on an annualized basis. It excludes food and energy prices, which tend to be volatile from month-to-month. It also allows for consumer substitution of more expensive goods for cheaper goods, which the Consumer Price Index (CPI) does not. It is the preferred lagging inflation measure of the Federal Reserve.

EMPLOYMENT GROWTH (NF PAY) – The NF PAY (Non-Farm Payroll) measures the number of jobs added or lost in the economy over the previous month, not including jobs related to the farming industry due to its seasonal hiring.

CONSUMER SPENDING (PCE) – PCE (Personal Consumption Expenditures) measures the value of goods and services purchased by individual consumers, families and the nonprofit institutions serving them. It consists mostly of new goods and services purchased by individuals from businesses. It excludes purchases of residential structures by individuals and buildings or equipment used by nonprofit institutions serving individuals.

ECONOMIC EXPANSION (GDP) – GDP (Gross Domestic Product) measures the total market value of a nation’s output of goods and services during a specific time period. It is usually measured on a quarterly basis. Current GDP is based on the current prices of the period being measured. Nominal GDP growth refers to GDP growth in nominal prices (unadjusted for price changes). Real GDP growth refers to GDP growth adjusted for price changes. Calculating Real GDP growth allows economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency.

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Economic recovery dashboard definitions

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