global investment strategy using diversification to help ...» among its potential benefits,...

A prudent approach to investing over the long term

Using Diversification to Help Manage Risk and Return

Global Investment Strategy

Gary ThayerHead of Global Macro Strategy

Tracie McMillion, CFA®Head of Global Asset Allocation Strategy

Chris Haverland, CFA®Global Asset Allocation Strategist

Sameer Samana, CFA®Global Strategist

Key takeaways» 2014 was very good for some asset classes, such as U.S. large-capital-

ization stocks, while others delivered a more lackluster performance.

» If your portfolio was diversified to include asset classes that did well along with some that underperformed, you may be disappointed because your overall return was less than optimal.

» Obviously, investing only in the top-performing asset class each year would generate the best returns, however, doing that is extremely difficult, if not impossible, to do consistently, even for seasoned investors.

» Because forecasting market performance is challenging, we believe it’s important to have a diversified portfolio, even though it will produce a lower return than if you were able to pick the best performer in any given year.

» Among its potential benefits, diversification is likely to generate more consistent returns. As a result, over the long term, a diversified portfolio may increase more in value than one that produces more volatile returns, which is the probable result of being concentrated in a single asset class. Of course, diversification does not guarantee a profit or protect against loss in a declining market.

Using Diversification to Help Manage Risk and Return2

2014: A solid year for some, but not all, asset classesToday, the U.S. stock market is experiencing heightened volatility following a year in which U.S. large-cap stocks’ total return (price appreciation and income combined) as measured by the S&P 500 Index was 13.7 percent. However, not all investors saw such strong performance in their portfolios. That’s because U.S. large caps were one of the best-performing asset classes in 2014 while many others exhibited more lackluster performance.

Many investors “watch the markets” by following the widely reported Dow Jones Industrial Average (DJIA) or S&P 500 Index. If these market indicators are the only ones an investor considers, they can often miss what’s happening in other markets, including overseas. That’s because the world of investments is significantly more diverse than these two domestic large-cap equity indexes.

During some periods, certain asset classes will underperform these indexes, while in other periods the opposite holds true. This disparity in returns from one time period to the next often affects how a well-diversified portfolio performs when compared to a single-market index.

History has shown that global markets at times can rise and fall in tandem, and when they do, returns across asset classes tend to be similar. In this type of environment, overall index returns are a fair representation of asset-class performance. However, at other times, global market performance diverges, and the returns across asset classes can vary greatly. In these years, some overseas markets can decline while U.S. markets rise. As a result, the DJIA or the S&P 500 Index will not be a fair representation of the global markets.

Unfortunately, 2014 was one of these types of years when individual asset class returns varied significantly, and the U.S. indexes did not accurately reflect what was happening in the global markets. Consequently, some investors may be surprised, or even disappointed, that their well-diversified portfolio did not reflect the S&P 500 Index’s 2014 performance.

The chart shows the S&P 500 Index’s performance diverged significantly from global equity indices in late 2014 with weaker global equity markets driving down returns of a well-diversified portfolio that included international equities.

Source: S&P, MSCI, Bloomberg, Wells Fargo Investment Institute. See page 8 for index definitions. Past performance is no guarantee of future results.

Investors favored U.S. equities at year end

A portfolio invested solely in U.S. large-cap stocks was likely to end the year better than one composed of global equities.

1,500

2,100280

260

240

220

2,000

1,900

1,800

1,700

1,600

2,200

200

300

MSCI All Country World Index excluding U.S.

MSC

I All C

ountry World Index

S&P 500

S&P

500

7/5/13 10/5/13 1/5/14 4/5/14 7/5/14 10/5/14 1/5/15

Using Diversification to Help Manage Risk and Return 3

What happened in 2014?A well-diversified portfolio in 2014 likely included some of the year’s best-performing asset classes as well as some of the worst-performing. The best-performing assets included real estate investment trusts (REITs), U.S. large-cap equities, and high-quality, long-term U.S. Treasury bonds. On the other hand, the worst-performing asset classes included commodities, international developed-market equities, and emerging-market equities.

An investor comparing a well-diversified portfolio against a simple benchmark composed of the S&P 500 Index and the Barclay’s Aggregate Bond Index might see that the diversified portfolio underperformed the benchmark. That’s because the assets in the simple benchmark happened to be two of the top-performing assets for 2014. In other words, a well-diversified portfolio would probably have included more components found at the lower end of the return spectrum than the simple benchmark last year.

Looking back, many of last year’s worst-performing assets were actually the best-performing assets during the greater part of the previous decade. That’s because strong economic growth overseas attracted many investors into international markets and commodities to try to capture some of those growth opportunities.

However, in recent years, including 2014, overseas economic growth lagged that of the U.S., and international assets’ returns reflected the global economic slowdown. As a result, many of these global asset classes experienced low, or even negative, returns. Consequently, a well-diversified portfolio that benefited from overseas diversification between 2001 and 2011 suffered during the past few years by using the same strategy.

Understanding diversification’s potential benefits and limitsThe beginning of the year is prime season for investors to try to anticipate the outlook for the financial markets in the months ahead. Unfortunately, no one can know with certainty what the best- or worst-performing asset will be in any given year. An investor who chooses to own only one asset – U.S. large-cap stocks, for example – with the hopes it will be the best performer that year could suffer disappointing results. That’s because the best-performing asset in one year can easily become the worst-performer the next.

The bottom line is putting all your eggs in one proverbial basket and making inadequate investment decisions can significantly impede investment results and the ability to achieve your long-term goals.

Experience has shown that long-term investors are more likely to achieve consistent results and grow their assets over time if they hold a diversified portfolio. That’s because a diversified portfolio is more likely to benefit from growth opportunities across many different asset classes, not just one or two.

Of course, a second benefit of portfolio diversification is it can help mitigate volatility of overall returns. The average return of a portfolio filled with an assortment of diversified assets is likely to fluctuate less year-to-year than the annual returns of the individual assets that compose the portfolio.

Once your asset allocation is set, it’s important to annually rebalance your portfolio back to your intended allocation if the markets have moved significantly or you’ve experienced a noteworthy life event (a birth, death, divorce, etc.) It’s likely you’ll be better off ignoring what goes on day-to-day in the markets and focusing instead on your long-term plan.

Many of last year’s worst-performing assets were actually the best-performing assets during the greater part of the previous decade.


As the chart below illustrates, a portfolio with more consistent returns over time may increase more in value when compared to portfolios that experience more volatile returns. All three portfolios in this example started with a $1 million investment and provided a 30% total arithmetic return over three years, but Portfolio A offered more consistent returns than the other two and, in the end, produced the better ending value.

A diversified portfolio’s most important benefit may be that it can help mitigate the effects of unanticipated risks. Unexpected events can happen at any time. Unfortunately, such developments typically affect some assets more than others. We believe the best approach for investors to deal with uncertainty is to hold a diversified portfolio that includes some asset classes that tend to be less impacted by market surprises.

Of course, the notion of hedging against uncertainty is akin to buying insurance protection. You are glad you did if you need it, but it comes at a cost. Holding a wide array of assets in a portfolio will probably help smooth out returns during periods of heightened market volatility; however, adding assets to a portfolio can increase the likelihood that some may not perform as well as others. And this could dampen portfolio returns at times, particularly when markets are calm.

More consistent returns can produce better results

Source: Wells Fargo Investment Institute

Hypothetical examples do not represent actual performance results achieved and are for illustrative purposes only.

A portfolio that generates consistent returns (Portfolio A) is likely to increase your wealth more than portfolios that produce more volatile returns (Portfolios B and C).

Focus on long-term goalsInvestors need to keep in mind that the benefits of diversification are often long-term rather than short-term in nature. However, investors tend to focus on how their portfolios perform on a shorter-term, year-to-year basis. They compare their portfolio performance to the return of a popular benchmark (like the DJIA or S&P 500), which may, or may not, reflect the characteristics of their portfolio holdings.

Unfortunately, holding up a diversified portfolio’s return against a simple benchmark can be like comparing apples to oranges. Consequently, investors need to understand diversification’s benefits along with its limitations. Specifically, they should recognize that a well-diversified portfolio will, by definition, not be the best-performing asset in any given year. Some portfolio assets will have higher returns than the portfolio average, and others will have lower returns. Of course, collectively, the weighted average of the individual returns will match the overall portfolio return in any given year.

Portfolio A Portfolio CPortfolio B

$1,331,000Ending value $1,296,000$1,181,250

Starting investment = $1 millionArithmetic Return for All Three Portfolios = 30%

$.5

$1.0

$1.5

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

In m

illio

ns

10% 10% 10% 20% 20% -10%5% -25% 50%

$1.10$1.21

$1.33$1.20

$1.44$1.29

$1.05

$.79

$1.18


The most widely used comparisons of returns may not always consider the reduced portfolio volatility diversification can offer. That’s because portfolio performance is usually measured on the basis of total return and does not reflect the volatility of returns. For example, investors often select common benchmarks to compare portfolio performance. A simple two- or three-asset benchmark may not have the same return as a well-diversified portfolio, especially in years when many assets in the portfolio do not move in tandem. This has been the case during the past two years and, in fact, during three of the past four years.

Diversification’s benefits tend to be long term One-year rolling excess return (diversified portfolio vs. simple-benchmark portfolio)

15-year rolling excess return (diversified portfolio vs. simple-benchmark portfolio)

Diversified allocation: Target allocation is for a growth and income oriented investor of moderate risk tolerance. The historical returns are based on allocations as of Dec. 31, 2014, with monthly rebalance to target allocations at the beginning of each period. Allocation: 22% S&P 500; 8% Russell Midcap; 6% Russell 2000; 6% MSCI EAFE NR; 7% MSCI EM NR;3% FTSE EPRA/NAREIT Developed; 2% Bloomberg Commodity; 29% Barclays U.S. Aggregate Bond; 6% Barclays U.S. Corporate High Yield; 3% JPM GBI Global Ex U.S.; 5% JPM EMBI Global; 3% Barclays U.S. Treasury Bills 1-3 Month.

Simplified allocations: 40% S&P 500 Index; 45% Barclays U.S. Aggregate Bond Index; 15% MSCI AC World ex-U.S. Prior to 12/1/2010: 50% S&P 500 Index; 50% Barclays U.S. Aggregate Bond Index.

Sources: Wells Fargo Investment Institute and Morningstar Direct.

See page 8 for index definitions. Charts represent hypothetical allocations and are for illustrative purposes only. Past performance is no guarantee of future results. The indices are unmanaged and not available for direct investment.

The chart shows that on a rolling one-year basis, a diversified portfolio consisting of many different asset classes has not always outperformed a simple-benchmark portfolio holding fewer assets.

On the other hand, the chart below shows that over a much longer 15-year holding period, a diversified portfolio of many assets has consistently outperformed a simple-benchmark portfolio with fewer assets.

’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14-15%

-10%

-5%

0%

5%

10%

15%Diversified Outperformed Simple

Simple Outperformed Diversified

3/09 12/14-0.4%

1.2%

1.4%

1.0%

0.8%

0.6%

0.4%

0.2%

0%

-0.2%

6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11 9/11 12/11 3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14 9/14

Diversified Outperformed Simple

Simple Outperformed Diversified

Comparing the two charts helps demonstrate the importance of taking a longer- versus shorter-term perspective when looking at performance.


Calendar year asset class and Moderate Growth & Income (MGI) allocation returns

■ Wells Fargo Advisors Moderate Growth & Income Target Allocation: See below

■ Cash Alternatives: Barclays U.S. Treasury Bills (1-3 month) Index■ Commodities: Bloomberg Commodity Index■ Developed International Equity: MSCI EAFE (Europe, Australasia, Far East)

Index■ Emerging Market Equity: MSCI Emerging Markets Index■ Investment Grade Bonds: Barclays U.S. Aggregate Bond Index

■ High-Yield Bonds: Barclays U.S. Corporate High Yield Bond Index■ Emerging Market Debt: BofA Merrill Lynch Global High Yield & Emerging

Market Index■ Large-Cap Equity: S&P 500 Index■ Mid-Cap Equity: Russell Mid-Cap Index■ Small-Cap Equities: Russell 2000 Index■ REIT Equity: FTSE EPRA/NAREIT Equity Index

Sources: Wells Fargo Investment Institute and Morningstar Direct. As of Dec. 31, 2014. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Different investments offer different levels of potential return and market risk. Please see page 8 for the descriptions of the risks associated with these asset classes and definitions of the indices. The historical returns are with monthly rebalance to target allocations at the beginning of each period.Wells Fargo Advisors Moderate Growth & Income Target Allocation: 22% S&P 500; 8% Russell Mid Cap; 6% Russell 2000; 6% MSCI EAFE NR; 7% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 2% Bloomberg Commodity; 29% Barclays U.S. Aggregate Bond; 6% Barclays U.S. Corporate High Yield; 3% JPM GBI Global Ex U.S.; 5% JPM EMBI Global; 3% Barclays U.S. Treasury Bills 1-3 Month.Prior to 8/13/14: 21% S&P 500; 8% Russell Mid Cap; 6% Russell 2000; 6% MSCI EAFE NR; 7% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 2% Bloomberg Commodity; 29% Barclays U.S. Aggregate Bond; 6% Barclays U.S. Corporate High Yield; 3% JPM GBI Global Ex U.S.; 6% JPM EMBI Global; 3% Barclays U.S. Treasury Bills 1-3 Month.Prior to 9/16/13: 19% S&P 500; 8% Russell Mid Cap; 6% Russell 2000; 6% MSCI EAFE NR; 7% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 2% Bloomberg Commodity; 31% Barclays U.S. Aggregate Bond; 6% Barclays U.S. Corporate High Yield; 3% JPM GBI Global Ex U.S.; 6% JPM EMBI Global; 3% Barclays U.S. Treasury Bills 1-3 Month.Prior to 8/20/12: 19% S&P 500; 8% Russell Mid Cap; 6% Russell 2000; 7% MSCI EAFE NR; 6% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 2% Bloomberg Commodity; 31% Barclays U.S. Aggregate Bond; 6% Barclays U.S. Corporate High Yield; 5% JPM GBI Global Ex U.S.; 4% JPM EMBI Global; 3% Barclays U.S. Treasury Bills 1-3 Month.Prior to 9/20/11: 23% S&P 500; 8% Russell Mid Cap; 6% Russell 2000; 7% MSCI EAFE NR; 6% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 30% Barclays U.S. Aggregate Bond; 8% Barclays U.S. Corporate High Yield; 3% JPM GBI Global Ex U.S.; 4% JPM EMBI Global; 2% Barclays U.S. Treasury Bills 1-3 Month.Prior to 8/2/10: 28% S&P 500; 6.5% Russell Mid Cap; 3.5% Russell 2000; 7% MSCI EAFE NR; 2% MSCI EM NR; 3% FTSE EPRA/NAREIT Developed; 31% Barclays U.S. Aggregate Bond; 12% Barclays U.S. Corporate High Yield; 5% JPM EMBI Global; 2% Barclays U.S. Treasury Bills 1-3 Month.Prior to 5/18/09: 28% S&P 500; 6% Russell Mid Cap; 4% Russell 2000; 10% MSCI EAFE NR; 2% MSCI EM NR; 27% Barclays U.S. Aggregate Bond; 15% Barclays U.S. Corporate High Yield; 6% JPM EMBI Global; 2% Barclays U.S. Treasury Bills 1-3 Month.Prior to 6/30/08: 25% S&P 500; 7.5% Russell Mid Cap; 7.5% Russell 2000; 10% MSCI EAFE NR; 4% FTSA EPRA/NAREIT Developed; 27% Barclays U.S. Aggregate Bond; 11.5% Barclays U.S. Corporate High Yield; 5.5% JPM EMBI Global; 2% Barclays U.S. Treasury Bills 1-3 Month.

MGITarget13.8%

MGITarget0.9%

MGITarget13.8%

MGITarget6.2%

The historical returns are with monthly rebalance to target allocations at the beginning of each period.

MGITarget11.8%

MGITarget10.9%

MGITarget-24.6%

MGITarget26.8%

MGITarget5.2%

Wor

stBe

stPe

rfor

man

ce

Mid-CapEquity34.8%

Emerg-MktEquity18.6%

Emerg-MktDebt

-10.9%

Dev IntlEquity11.6%

Large-CapEquity15.1%

Commodities

-1.1%

CashAlternatives

0.1%

REITEquity42.4%

REITEquity4.4%

REITEquity15.9%

REITEquity-7.0%

REITEquity-47.7%

REITEquity38.3%

REITEquity20.4%

REITEquity15.4%

REITEquity28.7%

Mid-CapEquity5.6%

Mid-CapEquity40.5%

Mid-CapEquity25.5%

Mid-CapEquity13.2%

Mid-CapEquity15.3%

Mid-CapEquity-41.5%

Commodities

21.4%

Commodities

16.2%

Commodities

-9.5%

Commodities

-17.0%

Commodities

-2.1%

Commodities

-35.6%

Commodities

18.9%

Commodities

16.8%

Emerg-MktDebt18.5%

Emerg-MktDebt10.7%

Emerg-MktDebt28.2%

Emerg-MktDebt9.9%

Emerg-MktDebt6.3%

Emerg-MktDebt12.0%

Emerg-MktDebt5.5%

Emerg-MktDebt-6.6%

High-YieldBonds2.5%

High-YieldBonds2.7%

High-YieldBonds1.9%

High-YieldBonds7.4%

High-YieldBonds15.1%



Dev IntlEquity-43.1%

Dev IntlEquity8.2%

Dev IntlEquity32.5%

Dev IntlEquity14.0%

Dev IntlEquity26.9%

Dev IntlEquity-4.5%

Emerg-MktEquity-1.8%








CashAlternatives

3.0%

CashAlternatives

4.8%

CashAlternatives

4.8%

CashAlternatives

0.1%

CashAlternatives

0.1%

CashAlternatives

1.8%

CashAlternatives

0.0%

CashAlternatives

0.0%

Inv-GradeBonds4.3%

Inv-GradeBonds5.9%

Inv-GradeBonds6.5%

Inv-GradeBonds6.0%

Inv-GradeBonds2.4%

Inv-GradeBonds-2.0%

Inv-GradeBonds7.0%

Inv-GradeBonds5.2%

Inv-GradeBonds4.2%

Large-CapEquity4.9%

Large-CapEquity5.5%

Large-CapEquity-37.0%




Small-CapEquity26.9%

REITEquity-5.8%

Mid-CapEquity-1.5%

Emerg-MktDebt8.5%

High-YieldBonds5.0%

Commodities

-13.3%

Dev IntlEquity-11.7%


CashAlternatives

0.1%

Inv-GradeBonds7.8%

Large-CapEquity

2.1%

Small-CapEquity-4.2%



Small-CapEquity4.9%

Small-CapEquity4.6%



Mid-CapEquity17.3%


Dev IntlEquity17.9%



2009 2010 2011200720062005 2014201320122008

MGITarget

6.1%


Mid-CapEquity12.7%

High-YieldBonds-26.2%


Dev IntlEquity23.3%


The “quilt chart” of yearly asset-class returns on page 6 shows a diversified portfolio will not generate the highest return in any given year, but it is also unlikely to drop from one of the best to one of the worst performers from one year to the next. In other words, the performance of a diversified portfolio could be smoother and steadier over time than any individual asset class.

So it all boils down to this: Diversification has helped investors manage risk and return, but it did so at a potential cost. One way to calculate that cost is to look at the difference in any given year between a diversified portfolio’s return and that of the year’s best-performing asset. Rather than diversifying, an investor would get better returns if he or she were able to pick the best-performing asset at the beginning of each year. But there’s the rub. Even seasoned investors find it difficult, if not impossible, to pick the best performer on a consistent basis. That’s a primary reason why we recommend investors diversify.

A final case for diversificationInvestors face many types of risk and uncertainty. Although the equity market historically has trended upward, investors must frequently deal with market volatility. Market timing rarely works, and we do not suggest this approach for investors. Instead, we believe a strategic and tactical asset allocation strategy, including a diversified portfolio and regular rebalancing, offers the optimal approach for investors over the long term.

Performance measurement is also fundamental in determining a specific investment strategy’s effectiveness. Moreover, it is equally important to consider portfolio performance over the long term and not for a matter of weeks or months. Benchmarks are essential tools used to measure performance, but they must be selected carefully and match an investor’s risk profile.

Help maximize the performance of your portfolio. Talk to your Financial Advisor to help ensure your investments are aligned with your goals and risk tolerance.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. First Clearing, LLC, Member SIPC, is a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

© 2015 Wells Fargo Investment Institute. All rights reserved.

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

0215-03185 [95893-v1] 0000592821 (Rev 00, 1 ea)

Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including you existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Asset class risk disclosuresCommodities: Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies, which may expose investors to additional risks.

Equity investments: Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Fixed income: Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. Government bonds are guaranteed as to payment of principal and interest by the U.S. government if held to maturity. Although government bonds are considered free from credit risk, they are subject to interest rate risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Foreign investments: Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Real estate: There are special risks associated with an investment in real estate, including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Small- and mid-cap companies: The prices of small- and mid-company stocks are generally more volatile than large-company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification, and competitive strengths to endure adverse economic conditions.

Index definitionsAn index is unmanaged and unavailable for direct investment.

Barclays U.S. Aggregate Bond Index is composed of the Barclays U.S. Government/Credit Index and the Barclays U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.

Barclays U.S. Corporate High-Yield Bond Index covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB= or below. Included issues must have at least one year until final maturity.

Barclays U.S. Treasury Bills (1-3M) Index is representative of money markets.

Bloomberg Commodity Index is a broadly diversified index of commodity futures on 20 physical commodities, subdivided into energy, U.S. agriculture, livestock, precious metals, and industrial metals sectors. Commodity weights are derived in a manner that attempts to fairly represent the importance of a diversified group of commodities to the world economy. To that end, liquidity and product data are used to derive individual weights. To ensure diversification, there is a maximum weight limit of 33 percent and a minimum weight limit of two percent.

BofA Merrill Lynch Global High Yield & Emerging Markets Index tracks the performance of the below investment grade global debt markets denominated in the major developed market currencies.

FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real-estate companies and REITs in developed countries worldwide.

JP Morgan Global Ex United States Index (JPM GBI Global Ex U.S.) is a total return, market capitalization weighted index, rebalanced monthly, consisting of the following countries: Australia, Germany, Spain, Belgium, Italy, Sweden, Canada, Japan, United Kingdom, Denmark, Netherlands, and France.

JPM EMBI Global Index is a U.S. dollar-denominated, investible, market cap-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt. While products in the asset class have become more diverse, focusing on both local currency and corporate issuance, there is currently no widely accepted aggregate index reflecting the broader opportunity set available, although the asset class is evolving. By using the same index provider as the one used in the developed-market bonds asset class, there is consistent categorization of countries among developed international bonds (ex. U.S.) and emerging market bonds.

MSCI All Country World ex U.S. Index (MSCI AC World Ex U.S.) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the U.S. The index consists of 45 country indices comprising 22 developed and 23 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The emerging market country indices included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

MSCI EAFE Index (Europe, Australasia, Far East) Index (MSCI EAFE NR) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The index consists of the following 21 developed-market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets Index (MSCI EM NR) is a free float-adjusted market capitalization index designed to measure equity market performance of emerging markets. The index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000® Index.

S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value.

global investment strategy using diversification to help ...» among its potential benefits,...

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