Client Name

1. Client Name Market Analysis / Fourth Quarter 2008

2. 2008 Was a Global Financial Train Wreck • U.S. mortgage defaults set off what turned into a firestorm of deleveraging among global financial institutions • As the value of low-quality debt holdings was consumed, it set off a vicious cycle of selling, in which further depressed values fueled further selling • It reached a head in the fall (autumn) of 2008 with panic taking the global financial system to the brink of a systemic failure – only intervention by governments around the globe staved off a worse disaster • Stock investors were initially slow to recognize the magnitude of economic damage that was coming • As they did, a brutal wave of selling – including forced selling by hedge funds – took stocks back to levels not seen since the 1990s • Stocks had their worst year since 1931, and no asset class was spared • The “secular” bear market now dates back almost 10 years Market Analysis 4Q08

3. Asset Class Returns Past performance may not be indicative of future returns. Market Analysis 4Q08

4. Our Portfolios Performed Poorly in 2008 • We are disappointed we didn’t do a better job protecting our clients’ capital • We exceeded our risk threshold targets by large margins in our portfolios • Diversification offered little help as all risk assets dropped by large margins • While we recognized that an extremely negative scenario was possible we considered it unlikely • When credit markets froze in September we recognized that the most negative scenario was becoming the most likely scenario • This led us to reduce risk • We also adjusted our estimates of fair value to much lower market levels • But this did little to cushion the blow from a very damaging year Market Analysis 4Q08

5. Same Process, Very Different Environment • Anchoring to old frames of reference like buying on dips led some investors to miss the severity of the damage and make poor decisions • Few investors have relevant experience to draw on in this environment • Our ability to quickly assess the new environment allowed us to stay grounded and adjust our valuation estimates downward to reflect the severe damage we believed likely • Still, our process remains exactly the same • We seek to identify the occasional periods when non-rational pricing presents compelling investment opportunities • We are willing to look out over a five-year time horizon and believe that eventually fundamentals and prices will converge • We only invest if we believe the odds are overwhelmingly in our favor Market Analysis 4Q08

6. The Key Question, as Always, Is: What Expectations Are Currently Reflected in Asset Class Prices? • We believe we are in the midst of what will be a lengthy and deep recession • Earnings are likely to recover only slowly after the recession finally ends • The process of reducing debt and rebuilding balance sheets will take individuals and institutions a number of years • But bad news and investing can be counterintuitive • Markets typically bottom well before the economy because markets are forward looking • If prices more than adequately discount economic weakness, returns will be decent • We believe the markets are already discounting major economic damage Market Analysis 4Q08

7. Negatives We Are Weighing Include • Risk to the economy remains high • Despite massive policy response … • Credit markets remain dysfunctional and lack of credit could further damage businesses and consumers • Banks continue to face gigantic credit losses • The housing market remains highly stressed • Secular bear markets usually end at extreme levels of undervaluation • Most measures show stocks as cheap, but not at “screaming buy” levels • The end of lengthy bear markets can be characterized by several years of grinding along with sharp gains followed by sharp retractions before a new bull market finally takes hold • It is possible in the shorter term that stocks could retest or exceed lows seen in November Market Analysis 4Q08

8. But There Are a Number of Positives for Stocks • In similarly lengthy and similarly terrible past market periods, ensuing returns over the multi-year periods that followed were very good • Even assuming a very negative earnings environment (the worst since the Great Depression) and an historically below-average P/E, stocks would earn mid-single-digit returns over the next five years • In less negative scenarios returns would be higher • There is a huge amount of cash on the sidelines – the most since the advent of money funds more than 35 years ago Market Analysis 4Q08

9. Trailing Risk Premiums During Other Horrible Market Environments Are One of a Number of Encouraging Signs Market Analysis 4Q08

10. Market Analysis 4Q08

11. We Continue to See Some Potential Tactical Opportunities • High-yield & Investment Grade bonds are currently the most compelling tactical opportunity • We own several vehicles that are positioned to take advantage of the many other fixed-income opportunities that exist • Stocks are not at compelling valuations, but are priced to deliver at least decent returns in coming years • Emerging-market equities reached very attractive levels last fall before rebounding somewhat Market Analysis 4Q08

12. Why We View Some Bonds as Attractive • Amid a wave of selling from October through early December, junk bond yields climbed above 20% to all-time record highs • Our scenario analysis shows strong longer-term returns even under very pessimistic scenarios • How pessimistic? Even applying Depression-era defaults and recovery rates we believe we will see returns at least in the low double digits over a multi-year horizon from current levels • But over the short term it is still possible that this asset class could remain volatile and experience losses • Relative to equities, high-yield and investment grade bonds are directly competitive in most scenarios, with better returns, a narrower range of outcomes, and less risk Market Analysis 4Q08

13. Yield History for High-Yield Bonds Market Analysis 4Q08

14. We Are Optimistic That Huge Valuation Disparities Between Stocks Will Favor Our Stock Pickers • Valuation Differential Between Cheapest Stocks and Broader Market Is Among the Widest Periods Seen Over Past 50 Years Oct 2008 Wider valuation disparities 2001 1974 1991 1958 1994-98 1968 Narrower valuation disparities Adapted from data published by Empirical Research Partners in their October 2008 Portfolio Strategy Market Analysis 4Q08

15. Key Factors for the Years Ahead The recession is likely to linger at least through the first half of 2009 and possibly into 2010 Foreclosures remain a risk to the economy Credit markets remain dysfunctional, and improvements must take hold for the economy to begin to recover Huge fiscal stimulus should provide support Sizeable ups and downs in the equity market could continue over years as households retrench and rebuild savings This will seriously slow consumption and corporate earnings Market Analysis 4Q08

16. Key Aspects of Our Investment View • Overall the evidence does not conclusively suggest that stocks are at highly compelling valuation levels or that we hit bottom in November • Despite near-term caution, we believe the evidence very strongly suggests investors will see at least satisfactory returns five to 10 years out and quite possibly better • Periods of extreme dislocation usually create opportunities for significant value-added through tactical allocation and by active managers • Outside the stock market, there are other potentially compelling investment ideas: • High-yield bonds • Investment-grade corporate bonds and some parts of the mortgage market • Emerging-markets equities if they retest their previous lows Market Analysis 4Q08

17. Closing Thoughts • We believe we are well equipped to navigate the challenges of 2009 and beyond • We believe financial assets have priced in enough damage so that sustained losses over multi-year periods are very unlikely • Think about your true investment time horizon • If it is longer term, you can be confident that your assets will grow and you will benefit from better periods to come • Consider your shorter-term needs and risk tolerance • Unless capital preservation is necessary this is not a good time to get much more conservative, because many asset classes will outperform cash over coming years • We remain committed to focusing everything we do on rewarding you for your confidence Market Analysis 4Q08