Exploration in DiversificationInvestors often wonder how many funds they need toreduce risk through diversification. The answer isn’t aspecific number of funds, but rather the holdings of eachfund. If multiple funds in a portfolio have similarholdings, an investor can fail to achieve diversificationbenefits. Portfolio A and Portfolio Z in the imagecontain five mutual funds. Each oval represents theownership zone, which accounts for 75% of the fund’sholdings. The funds in Portfolio A overlap, indicatingthat each fund shares similar style characteristics. Toomuch overlap defeats the purpose of using multiplefunds to create a diversified portfolio. Portfolio Z spansacross many styles, so positive performance by someinvestments can neutralize the negative effect of others.As illustrated, it is important to be aware of thepossibility of security overlap when constructing adiversified portfolio.

February 2012 Vol. 2 Education Brief

About Keating Capital

mb@keatinginvestments.com(720) 889-0139www.KeatingCapital.com

Keating Capital, Inc. is a businessdevelopment company thatspecializes in making pre-IPOinvestments in innovative, highgrowth private companies thatare committed to and capable ofbecoming public. We provideindividual investors with theability to participate in a uniquefund that invests in a privatecompany's later stage, pre-IPOfinancing round — an opportunity

that has historically beenreserved for institutionalinvestors.

Keating Capital shares are tradedon Nasdaq under the tickersymbol KIPO.

Portfolio Companies:*Agilyx*BrightSource Energy*Corsair Components*Harvest Power

*Kabam*Livescribe*MBA Polymers*Metabolon*NeoPhotonics*Solazyme*Suniva*Tremor Video*TrueCar*XTime*Zoosk

Monthly Market Commentary The S&P 500 has risen by almost 7% so far in

2012, causing investors to wonder whether theeconomy is slowly improving or whether thisgrowth was merely the result of the January effect.Global economic news have generally beenpositive—it included China’s slight drop infourth-quarter GDP (as opposed to a plunge), arelatively quiet Europe, a positive U.S.employment/unemployment report, and theFederal Reserve’s promise to extend low ratesthrough 2014. Corporate earnings have so farbeen a mixed bag, and Morningstar economistsbelieve that even as the U.S. economy continuesto recover, earnings may continue to slow,especially for companies with significant exposureto China and Europe.

GDP: Real GDP grew by 2.8% in the fourthquarter, reflecting an overall positive trend in2011. Consumer goods and inventories (GDPmeasures production, whether it is sold or simplysitting on a shelf somewhere) led this growth,contributing 1.3% and 1.9%, respectively, whilegovernment spending declined by 0.9%, mainlybecause of cuts in the defense budget.Morningstar economists believe that the 2.8%growth does not represent the new baseline for2012, because the results were artificially boostedby unexpectedly good weather, the return of morenormal auto production, inventory rebuilding,and shifts in retail employment.

Employment: Employment in January grew by animpressive 243,000 jobs, with 257,000 comingfrom the private sector, while the number ofgovernment jobs shrunk by 14,000. Although jobgrowth rose across most sectors (only finance,information services, and government weredown), the surprise came mainly from autos anddurable goods, which benefited from favorableweather and large jumps in manufacturing andovertime hours, respectively. Retail also came as asurprise, as declines in seasonal hiring were offsetby higher department-store and auto-showroomhiring, which boosted overall retail employmentinto growth territory.

Unemployment: The unemployment rate inJanuary dropped to 8.3% from 8.5%. Moreimportant, this reduction came mostly from jobgrowth as opposed to discouraged workersdropping out of the labor force or ceasing to claimbenefits. To date, the U.S. economy has regained41% of the 8.9 million private-sector jobs thatwere lost during the recession.

Manufacturing: The ISM Manufacturing surveyreported better-than-expected numbers,indicating the third consecutive increase in theindex and reflecting continued improvement inthe auto industry. New durable-goods orders alsorose much higher than expected in December,indicating that the manufacturing sector may bepicking up steam and growing stronger.

Federal Reserve: The bold decision to keepinterest rates low through late 2014 came as asurprise to many, and markets reacted positivelyto this unexpected news. Morningstar economistsbelieve that continued low interest rates willactually start to pinch savers and hurt the personalincome report in a meaningful way. Furthermore,this extended length of time does not lend anysense of urgency to either potential homebuyersor corporations considering large capitalexpenditures, further suppressing housing andprivate-sector growth. Given all the globaleconomic uncertainty, there’s almost no point inbuying anything today when rates are guaranteedto stay low for the foreseeable future.

Despite the good employment news, the overalloutlook remains far from optimistic. Rising pricesand stagnant incomes put pressure on savings,while the low interest rate environment offerslittle yield as stocks continue to struggle.Although everybody is hoping for economicgrowth, the question remains—where will thatgrowth come from?

Education Brief February 2012 2

A Quick Guide to Leading EconomicIndicators Turn on CNBC on any given day and you are

bound to hear about various economic indicatorsand how they might affect the markets. Althoughwe believe in investing with a long-term horizon,investors should learn what the key economicindicators mean and how they could potentiallyaffect one’s portfolio.

Leading indicators are economic indicators thatanticipate a change in the direction of theeconomy and are useful as short-term predictors.Some of these include the returns on the S&P 500Index, consumer sentiment and expectations,changes in the employment rate, and productionlevels in the manufacturing sectors.

The unemployment rate represents thepercentage of the working population that doesnot have a job, have actively looked for work inthe prior four weeks, or are waiting to be rehiredto a job from which they had been temporarily laidoff. This figure is seasonally adjusted to reflect theimpact of predictable seasonable patterns. Inaddition to the overall unemployment figure thatis often quoted in the media, data on sector-specific unemployment figures can be obtainedfrom the U.S. Bureau of Labor Statistics. Forexample, in December 2010, there were gains of12,000 retail jobs while the construction sectorlost 16,000 jobs. These figures can be importantfor investors who wish to invest in sector-specificETFs, or are looking to increase their portfolioexposure to a specific sector.

Average workweek hours looks at the productivityof the workforce. In the past few quarters,statistics have shown that companies have beencutting costs by getting their existing employeesto work longer hours, instead of rehiring laid offworkers. In addition, the U.S. Bureau of LaborStatistics provides quarterly statistics on outputper hour and productivity. Typically, in aneconomic recovery, real wages increase first,followed by hours worked, and finallyemployment. Given that there are only so manytechniques that companies can use to increase

productivity out of workers, further increases inproduction will eventually result in an increase inemployment. This indicator is a good gauge foroverall business confidence sentiment.

The University of Michigan ConsumerSentiment Index is created using results fromapproximately 500 telephone interviewsconducted each month. The index is used toforecast spending behavior and economicexpectations of consumers, and consumerattitudes on savings, spending, and the businessclimate. It is frequently cited that consumerspending accounts for about 70% of the GDP inthe United States and thus, is an importantindicator especially if you are heavily invested inthe consumer cyclical sector, in areas like therestaurant, retail, and travel industry.

Both the Chicago Purchasing Managers Index(PMI) and the Institute for Supply ManagementIndex (ISM) look at economic activity in themanufacturing sector based on factors such asproduction, inventories, new orders, and exportsand imports. These statistics are particularlyimportant to investors who wish to seek exposureto the industrials or basic material sectors.However, investors should also take note thatmanufacturing activity increases because ofincreased consumer demand, and has been ashrinking portion of our GDP, as compared to theservices sector.

The returns on the S&P 500 Index are alsoregarded as a leading economic indicator. Thisindex includes 500 of the largest publicly listedcompanies in the U.S., comprising 75% of all U.S.equities. It is considered a leading indicatorbecause changes in stock prices might reflectinvestor's expectations for the future of theeconomy.

Past performance is not indicative of futureresults. Returns and principal invested in stocksare not guaranteed. Sector investments arenarrowly focused investments that typicallyexhibit higher volatility than the market ingeneral.

Education Brief February 2012 3

Dangers of Market Timing

Two of the most dangerous words in the investingworld are “market timing.” Market timing occurswhen investors try to predict which direction thestock market will head. While some investors havebeen known to make money timing the market, itis highly inadvisable for long-term investors to trythis extremely risky strategy. Opponents ofMarket Timing: Most investors and academicsbelieve it is impossible to forecast marketmovements. Such a technique amounts togambling when compared with a sound investmentapproach. It fails far more than it works, andmarket timers often end up buying high and sellinglow. Furthermore, you run the risk of missingperiods of exceptional returns. For example, overthe past 20 years, a $1 investment in stocks, asrepresented by the Standard & Poor’s 500®, wouldhave grown to $5.75. If that same $1 investmenthappened to miss the best 13 months of stockreturns over the past 20 years, the ending valuewould have equaled only $1.96. This would havebeen less than the value for an investor in a 30-dayTreasury bill, a.k.a. cash, $1.97. Only those who

remained invested in stocks throughout the entireperiod were sure to get market exposure during thecrucial hot months.

Advocates of Market Timing: On the contrary, anumber of websites, newsletters, and other tradingservices boast they can time the market. Whiletheir returns may have in fact beaten the market bya considerable margin, it’s safe to assume that thesesystems can’t consistently hold up over the longterm. On some occasions and during somestretches of time, market timing can help generateimpressive profits. However, you must be familiarwith the dangers behind such an approach.

Education Brief February 2012 4

©2012 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/orthe content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor thecontent providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar"and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director ofEconomic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder.

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