The Swarthmore GroupInvestment & Financial Advisors

The Swarthmore Group, Inc.

ReviewReview2nd Quarter 2013

A rare phenomenon was experienced by stargazers during June with the appearance of a Supermoon on June 23. A Supermoon occurs when a full moon coincides with the point at which the moon is closest to Earth during its elliptical orbit around the planet. Equity investors also experienced what has lately become a rare phenomenon, as domestic equity i d i d i i J h fi i hi h d i O bindexes registered negative returns in June, the first time this has occurred since October 2012. The declines were not only limited to domestic markets however, as more than $2.6 trillion in value was erased from global equities last month. Investors were principally reacting to comments made by Federal Reserve Chairman Bernanke that the Fed could reduce the amount of asset purchases from $85 billion per month to a lesser level should economic conditions warrant. These remarks were interpreted to mean this could happen before the end of this year which led to a swift and negative reaction for most asset classes. Subsequent to these remarks, a number of Fed Governors made comments suggesting any slowing in asset purchases would be done at a measured pace, when data warranted in the face of improving economic activity. The commentary appeared to ease investor fears of a bad moon rising and stemmed the slide in equity prices by the end of the month.

A difficult June was not enough to derail a positive performance quarter for the S&P 500 Index. Despite compiling a return of -1.34% for the month, the S&P 500 Index still posted a p p g psolid return of 2.91% in the second quarter. The Beaver County Employees’ Retirement Fund Portfolio managed by The Swarthmore Group also proved resilient, producing a second quarter total return of 4.23% following a negative return of -1.20% in June. Stock selection was responsible for 95 basis points of the relative outperformance in the quarter while sector allocation provided 37 basis points. Leading to the upside were the Industrials, Telecommunications, Health Care and Financials sectors. Underperforming was the Information Technology sector.Information Technology sector.

1The Swarthmore Group, Inc. | 1650 Arch Street, Suite 2100 | Philadelphia, PA 19103 | 215.557.9300

The Swarthmore GroupInvestment & Financial Advisors

The Swarthmore Group, Inc.Economic Outlook3rd Quarter 2013

As the second half of the year unfolds, financial markets appear to have absorbed the initial concern over the waning of Fed stimulus. While investors now have a realistic understanding that the Fed will reduce asset purchases over time, there is no definitive date or amount which has yet been

d b h lik lih d f i i i h h l Sh ld h F d b i dannounced, but the likelihood of timing is sooner rather than later. Should the Fed begin to reduce asset purchases, it will come in the face of an improving economic climate in the US. In that vein, the US economy does appear to be in a still moderate, but positive growth environment, which should reach in excess of 2.5% in the second half. The growth continues to be driven by the steady recovery in the housing market as prices are rising and both new home and existing home sales are moving higher. There are also signs of a nascent recovery in commercial construction activity. Durable goods orders have improved. Manufacturing in the US has gained strength, benefiting from a more competitive labor market, improved quality, and the energy renaissance driven by shale drilling. The consumer is also playing a role, with rising consumer confidence and increased tourism spending supporting retail sales.

There are however, some headwinds that could stall or push the steady growth outlook for the US economy off course. Following the recent Fed statements, interest rates have moved higher. Already rising mortgage rates have slowed mortgage activity, and continued upward pressure has the potential to derail the recovery in the housing market. The full impact of the sequester has yet to be felt. Spending cuts and job furloughs were implemented in the second quarter which could lead to some pressure on the consumer and less spending on certain defense and health care programs. Fed Chairman Bernanke’s term expires at the end of the year and speculation is he will not be reappointed. Uncertainty as to who will be the next Chairman and whether there might be any change in policy has the potential to create near-term disruptions. From a global perspective, the China growth engine appears to be losing some horsepower, and recent turmoil in China’s credit markets has createdappears to be losing some horsepower, and recent turmoil in China s credit markets has created additional growth concerns. Growth in Europe has shown signs of bottoming, but any recovery appears to be far off. In Latin America growth has stalled, and weakening currencies and social unrest continue to muddy the outlook.

Equity market volatility is likely to be more pronounced in the second half as investors face the uncertainty surrounding the tapering of Fed asset purchases, the appointment of a new Fed Chairman and a slower growth outlook in China However we believe equity prices can still produce upside byand a slower growth outlook in China. However, we believe equity prices can still produce upside by year end given the US economy continues to rebound, valuations remain reasonable and inflows should accelerate into equity markets in the face of rising interest rates. Merger and acquisition activity is also expected to accelerate as companies look to use historically high cash balances to acquire businesses to supplement organic growth. A slowly improving growth outlook supported by a more optimistic consumer drives our greater exposure to the Industrials, Consumer Discretionary, Health Care, Information Technology, and Financials sectors, while leaving us more cautious on the C St l E d Utiliti t

1The Swarthmore Group, Inc. | 1650 Arch Street, Suite 2100 | Philadelphia, PA 19103 | 215.557.9300

Consumer Staples, Energy and Utilities sectors.