1. Q
Q3 2011 Baird Market Review
d k
Baird Private Wealth Management
B i d P i t W lth M g t
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Associates U.S. E it I t Small/Mid-Cap F d April 2011. S d t d ith U.S. ll p d id p f d
Robert W Baird & Co
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market Baird Market Review 2
3. Highlights from the Q3 2011 Baird Market Review
Hi hli ht f th B i dM k tR i
Economy and Market • Quality: High quality stocks outperformed Fixed Income
low quality stocks, on average. (Page 15)
stocks average
• At a Glance: The global stock markets were • Taxable Bonds: In a flight to quality
dec ded y egat e
decidedly negative in Q3 due to increased
c eased • S t
Sector: Th
There was a clear preference for
l f f e
environment Treasury bo ds were t e top
o e t easu y bonds e e the
concerns about the health of various defensive sectors with Utilities, Consumer performing bond segment. Overall, taxable
segment Overall
economies. (P g 6)
i (
(Page ) Staples and Telecomm outperforming
outperforming. bond t
b d returns were strong with th exception
t g ith the pti
Economically-sensitive sectors were hit hard
y of High Yield (Page 25)
Yield.
• Economic Growth: Q1 GDP f g
i h Q figures were in Q3 (Page 17)
Q3.
revised lower and Q2’s release showing
Q2 s • Municipal Bonds: Municipals bonds
1.0%
1 0% annualized growth was fairly
li d th f i l • Active Fund Management: The average continued to perform very well i Q3 lik l
ti dt f ll in Q3, likely
lackluster. (Page 7) mutual f d once again h d mixed success.
t l fund g i had i d due to limited supply and increased demand.
Small Cap and Large Value appear to be On a tax equivalent basis municipals
tax-equivalent basis,
• Employment: Unemployment remains areas of strength while Large Growth and outperformed taxable b d by a wide
p f d bl bonds by d
stubbornly high despite government efforts International were difficult areas to add margin.
margin (Page 25)
to create j
jobs. (Page 8)
( g ) value.
value (Page 19)
• Maturity and Credit Quality: Higher yields
• Volatility: Q3 was marked by large swings
and t t l return occurred with l
d total t d ith longer-dated
d t d
in stock prices as volatility surged, largely a
surged
International Equity bonds, both in the taxable and municipal
result of uncertainty i E
l f i y in Europe and other
p d h
markets.
markets Higher quality taxable bonds
factors.
factors (Page 9) • Market Cap and Style: Most international
outperformed, while that trend is less clear
p ,
markets underperformed the U.S.US
• Commodities: Oil retreated to its lowest with municipal bonds (Page 26)
bonds.
Furthermore, an appreciation of the dollar
levels i 2011 gold fi i h d the quarter with
l l in 2011; ld finished th t ith
led to even lower results for U.S. investors
U S investors. • Yield Curve: Yields fell across maturities as
a positive return but experienced a
(
(Page
(P g 21) ) demand f U S T
d d for U.S. Treasuries i
i increased. R t
d Rates
substantial drop in September. (Page 10)
September
on a 10-year Treasury are now at all-time
10 year all time
• Developed versus Emerging Markets: In
p g g
lows.
lows Spreads of major bond types widened
an environment where less risky assets
Domestic Equity outperformed, Emerging Markets l
t f d E i M k t lagged d
relative to last qua te , with t e most
e at e ast quarter, t the ost
pronounced move occurring in High Yield
Yield.
• Market Cap and Style: Large Cap Developed Countries, on average. (Page 22)
(
(Page
(P g 27/28) )
significantly outperformed Small Cap. Large
i ifi tl t f dS ll C L • Country: European countries were under
Growth was the best performing U.S. equity great stress, pushing stock markets
stress
asset class (Page 13)
class. considerably lower. Conversely, the
y y,
conservativeness often associated with
Japan h l d it t be a relative
J helped to b l ti
outperformer. (Page 23)
Opinions and factors are subject to change See important disclosures and definitions included with this publication.
change. publication Robert W Baird & Co
W. Co.
Baird Market Review 3
4. Table of Contents
1 | Economy & M k t
E y Market
2 | Domestic Equity
3 | International Equity
4 | Fixed Income
Fi d I
Robert W Baird & Co
W. Co.
Baird Market Review | Table of Contents 4
6. The Markets at a Glance…
Glance
Last Qtr YTD
Asset Class Return (%) Return (%) Benchmark
U.S. Stocks
Large Cap Value
g p (
(16.2)
) (
(11.2)
) Russell 1000® Value
Large Cap Growth
g p (
(13.1)
) (
(7.2)
) Russell 1000® Growth
Mid Cap (18.9) (12.3) Russell Midcap®
Small C
S ll Cap (21.9)
(21 9) (17.0)
(17 0) Russell 2000®
R ll
International Stocks
Developed Markets (19.0)
(19 0) (14.6)
(14 6) MSCI EAFE (Gross)
Bonds
Short Term
Short-Term Taxable 0.3
03 1.3
13 BarCap 1-3 Yr Govt/Credit
1 3
Intermediate Term
Intermediate-Term Taxable 2.4 4.9 BarCap Intermed. Govt/Credit
Short Term Tax-Exempt
Short-Term Tax Exempt 0.5 1.9 BarCap 1 3 Yr Municipal
1-3
Intermediate-Term Tax-Exempt
p 2.0 5.4 BarCap 5 Yr Municipal
p p
Cash
Cash/Cash Equivalents 0.0
00 0.0
00 Citi 3 Month T-bills
T bills
Satellite
High Yield (6.3) (1.7) BoA ML High Yield Master II
Real E t t
R l Estate (15.3)
(15 3) (6.8)
(6 8) DJ US REIT
Commodities
C diti (11.3)
(11 3) (13.6)
(13 6) DJ UBS C
Commodity
dit
Emerging Markets (22.5)
(22 5) (21.7)
(21 7) MSCI Emerging Mkts (Gross)
Source: Morningstar Direct. See important disclosures in appendix
Direct appendix. Robert W Baird & Co
W. Co.
Baird Market Review | Economy & Market 6
7. Inflation d
I fl ti and GDP Growth
Gr th
Historic CPI Level (Last 20 Years)
6
4
rai ng 1-Year I %)
Tr lin 1 Ye r CPI (%)
2
0
Current: 3.8%
3 8%
Average: 2 5%
2.5%
-2
2
-4
4 Consumer Price Index
Aug-91
A 91 Aug-93
A 93 Aug-95
A 95 Aug-97
A 97 Aug-99
A 99 Aug-01
A 01 Aug-03
A 03 Aug-05
A 05 Aug-07
A 07 Aug-09
A 09 Aug-11
A 11 (CPI)
Measuring the change in the
CPI provides an estimate for
GDP Growth (Last 20 Years) inflation. The CPI tracks the
9 price of a basket of consumer
goods and services. High
inflation or deflation
6
(negative inflation) can be
signs of economic worry.
o
GDP G ow h (%)
DP Growth (%
3
Gross Domestic Product
0 (
(GDP) )
GDP is a basic measure of
-3
3 U.S. economic output.
p
Quarterly GDP, annualized
Q l GDP li d Alternatively,
Alternatively it can be
thought of as the final value
g
-6
6
of all goods and services
p
produced within the U.S.
-9
Positive GDP growth signals
Dec 1
Dec 2
Dec 3
Dec 4
Dec 5
Dec 6
Dec 7
Dec 8
Dec 9
Dec 0
Dec 1
Dec 2
Dec 3
Dec 4
Dec 5
Dec 6
Dec 7
Dec 8
Dec 9
Dec 0
J un 1
J un 2
J un 3
J un 4
J un 5
J un 6
J un 7
J un 8
J un 9
J un 0
J un 1
J un 2
J un 3
J un 4
J un 5
J un 6
J un 7
J un 8
J un 9
J un 0
J un 1
an expanding economy.
p g y
D c-9
D c-9
D c-9
D c-9
D c-9
D c-9
D c-9
D c-9
D c-9
D c-0
D c-0
D c-0
D c-0
D c-0
D c-0
D c-0
D c-0
D c-0
D c-0
D c-1
n-9
n-9
n-9
n-9
n-9
n-9
n-9
n-9
n-9
n-0
n-0
n-0
n-0
n-0
n-0
n-0
n-0
n-0
n-0
n-1
n-1
Source: Factset; Baird Analysis. GDP figures lag one quarter, CPI figures lag one month See important disclosures and
Analysis quarter month. Robert W Baird & Co
W. Co.
definitions included with this p
f publication. Baird Market Review | Economy & Market 7
8. U.S. Empl m t
U S Employment
Historic Unemployment Rate (Last 30 Years)
12
nempl ym t R te %)
Unem loyment Rat (%)
9
Current: 9.1%
9 1%
Average: 6 3%
6.3%
6
3
0
Monthly Jobs Gained/Lost (Last 10 Years)
600
Unemployment Rate
Calculated monthly by the
hang e n No farm P yro ls ( 0s)
Cha ge in Nonf rm Pay oll (0 00 )
400
Bureau of Labor Statistics,
200 the unemployment rate is a
nemplo ment ate
gauge of the health of the
0 U.S. labor
U S l b market. Hi h
k t High
unemployment can stifle the
-200
200 growth of th economy
th f the
-400
400 Monthly Jobs Gained/Lost
Based on changes in monthly
g y
-600 nonfarm payroll this
payroll,
indicator shows whether
-800
companies have been adding
or reducing employees.
g p y
Source: BLS; Baird Analysis BLS data will lag one month and are subject to revision Employment figures are seasonally
Analysis. revision. Robert W Baird & Co
W. Co.
adjusted. See important disclosures and definitions included with this p
j p f publication. Baird Market Review | Economy & Market 8
9. Market Volatility (as f
M rk t V l tilit ( of 9/30/11)
Historic VIX Level (Last 10 Years)
80
60
Current: 43 0
43.0
Average: 21 8
21.8
VI Level
VIX ev
40
20
0 VIX (CBOE Volatility Index)
Sep-01
p Sep-02
p Sep-03
p Sep-04
p Sep-05
p Sep-06
p Sep-07
p Sep-08
p Sep-09
p Sep-10
p Sep-11
p The VIX measures the implied
Q
Quarterly S&P 500 Trading Volatility (
y g y (Last 10 Years)
) volatility of S&P 500 future
options. Simply put, it
100%
00%
measures the expected
volatility of the S&P 500 Index
80% over the next 30 days The
days.
Pe cen of Trad ng D ys
di g Days
+/
+/- 1% or greater move higher the index, the higher
+/- 2% or g
/ greater move the e pected volatility. It is
expected olatilit
60% also commonly referred to as
the “fear i d
th “f index.””
erc nt f
40% S&P Trading Volatility
Rather than focus on implied
p
volatility,
volatility this measures actual
20%
trading volatility. Trading days
g y g y
where the S&P 500 Index
closes up/down more than 1%
p/
0%
or 2% are reported on a
Q3 001
Q 20 1
Q4 001
Q 20 1
Q1 002
Q 20 2
Q2 002
Q 20 2
Q3 002
Q 20 2
Q4 002
Q 20 2
Q1 003
Q 20 3
Q2 003
Q 20 3
Q3 003
Q 20 3
Q4 003
Q 20 3
Q1 004
Q 20 4
Q2 004
Q 20 4
Q3 004
Q 20 4
Q4 004
Q 20 4
Q1 005
Q 20 5
Q2 005
Q 20 5
Q3 005
Q 20 5
Q4 005
Q 20 5
Q1 006
Q 20 6
Q2 006
Q 20 6
Q3 006
Q 20 6
Q4 006
Q 20 6
Q1 007
Q 20 7
Q2 007
Q 20 7
Q3 007
Q 20 7
Q4 007
Q 20 7
Q1 008
Q 20 8
Q2 008
Q 20 8
Q3 008
Q 20 8
Q4 008
Q 20 8
Q1 009
Q 20 9
Q2 009
Q 20 9
Q3 009
Q 20 9
Q4 009
Q 20 9
Q1 010
Q 20 0
Q2 010
Q 20 0
Q3 010
Q 20 0
Q4 010
Q 20 0
Q1 011
Q 20 1
Q2 011
Q 20 1
Q3 011
Q 20 1
q
quarterly basis.
y
Source: Yahoo! Finance; Baird Analysis. See important disclosures and definitions included with this publication.
Analysis publication Robert W Baird & Co
W. Co.
Baird Market Review | Economy & Market 9
10. Commodity Prices (as f
C mm dit Pri ( of 9/30/11)
Oil Prices (Last 10 Years) Oil Prices (This Year)
$160
$ $120
$ 20
$140
W I Crude il P ice $/b bl)
WTI C ud Oi Pri es ($ bb )
Current: $79
C t $
$110
W I Cru e O P es $/b bl)
Average: $
$61
WTI C ude Oi l Pri ce ($ bb
$
$120
$100
$100
$80
$60 $90
$40
$80
$20
$-
$ $70
Gold Prices (Last 10 Years) Gold Prices (This Year)
$ ,
$2,000 $1,900
$1 900
$ ,
$1,800
$ ,
$1,800
Lond on M Go d Fix $/ z)
L nd n PM Go d Fix $/ z)
Current: $1 620
$1,620
Lo do PM Gold F x ($ /oz
London PM Gold F x ($ oz
$ ,
$1,600
Average: $715
A
$1,400 $1,700
$1 700
$1,200
$1,000
$ 000 $1,600
$1 600
$800
$1,500
$1 500
$600
$400 $ ,
$1,400
$200
$0 $1,300
$1 300
Source: U S Dept of Energy; London PM Gold Fix Index; Baird Analysis. See important disclosures and definitions included
U.S. Analysis Robert W Baird & Co
W. Co.
with this p
publication. Baird Market Review | Economy & Market 10
11. Mutual F d d
M t l Fund and ETF Fl
Flows ( of 8/31/11)
(as f
Annual Mutual Fund and ETF Flows ($millions)
Year-to-Date Fl
Y t D t Flows
Calendar Year Flows ($M)
($ )
($M)
Total Assets Quarter- Year-to-
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
($B) to Date
to-Date Date
Money Market
y $ ,
$2,551 ( ,
(32,666)
) (
(147,562)
, ) (
(457,104)
, ) (
(361,888)
, ) 576,020
, 332,296
, 214,437
, 108,960
, ( ,
(92,043)
) (
(357,087)
, ) ( ,
(40,415)
) 356,758
,
Municipal Bond
p $
$485 (
(860)
) ( ,
(22,511)
) 13,518
, 76,387
, 11,494
, 11,242
, 17,147
, 6,725
, ( ,
(8,509)
) ( ,
(5,172)
) 14,278
, 7,784
,
Taxable Bond $2,164 4,718 111,161 248,461 345,891 54,716 113,862 50,126 36,760 19,667 45,489 109,831 62,670
Balanced
B l d $768 (3,782)
(3 782) 20,430
20 430 14,203
14 203 4,013
4 013 (19,975)
(19 975) 46,291
46 291 28,810
28 810 49,852
49 852 63,725
63 725 48,235
48 235 19,692
19 692 12,753
12 753
U.S. Stock
U S St k $3,793
$3 793 (33,692)
(33 692) (560) (28,463)
(28 463) (21,399)
(21 399) 17,703
17 703 50,254
50 254 52,966
52 966 77,418
77 418 149,859
149 859 136,241
136 241 59,049
59 049 82,462
82 462
International
Inte national Stock $1,516
$1 516 (9,726)
(9 726) 19,910
19 910 82,983
82 983 58,260
58 260 (51,104)
(51 104) 183,007
183 007 169,178
169 178 133,812
133 812 83,442
83 442 35,611
35 611 9,593
9 593 (10,308)
(10 308)
Alternative $161 5,867
5 867 21,679
21 679 26,921
26 921 32,574
32 574 23,447
23 447 14,852
14 852 13,806
13 806 5,299
5 299 5,963
5 963 4,527
4 527 2,594
2 594 635
Commodities $179 3,786
3 786 8,796
8 796 25,070
25 070 36,070
36 070 12,066
12 066 6,677
6 677 8,809
8 809 8,018
8 018 6,248
6 248 1,393
1 393 73 1
Annual Fund Flows
The
Th examination of annual
i ti f l
Biggest % Gainers/Losers by Asset Class
mutual fund and ETF flows shows
Top 10 In-Flows
op 0 o s Trailing 1-Year
a g ea Top 10 Out-Flows
op 0 Out o s Trailing 1-Year
a g ea the investment pattern of the
th i t t tt f th
(as
( a % of assets)
f t ) Growth R t
G th Rate (as
( a % of assets)
f t ) Growth R t
G th Rate
average investor by broad asset
class. For example, i 2008
l F l in
Bank Loan 69.3%
69 3% Europe Stock -16.2%
-16 2%
investors exited stocks when the
Japan Stock
p k 63.0% Trading-Leveraged Equity
d g g d q y -13.8%
markets f ll I 2009 large
k t fell. In 2009, l
Emerging Markets Bond 58.7%
58 7% China Region -12 0%
12.0%
amounts of capital went to fixed
Currency
C 53.4%
53 4% Money Market Tax F
M M k T Free -11.3%
11 3%
income, but littl fl
i b t little flowed b k t
d back to
Multialternative 44.0%
44 0% Aggressive Allocation -10 3%
10.3%
Commodities B d B k t
C diti Broad Basket 39.5%
39 5% Muni N ti
M i National L
l Long -9.9%
9 9% stocks.
stocks
Miscellaneous Sector 31.0%
31 0% Long Government -9 6%
9.6%
Gainers/Losers
/
World Bond
W ld B d 29.0%
29 0% Muni Single St t Interm
M i Si l State I t -9.6%
9 6%
These tables depict individual
Natural Res 29.0%
29 0% Muni Single State Long -9 4%
9.4%
asset classes that have exhibited
Convertibles
C tibl 26.9%
26 9% High Yield Muni
Hi h Yi ld M i -8.9%
8 9%
the greatest positive or negative
pe ce tage change
percentage c a ge in assets
assets.
Source: Morningstar Direct; Baird Analysis. Asset classes with less than $10 billion invested were excluded from the analysis.
Analysis analysis Robert W Baird & Co
W. Co.
See important disclosures and definitions included with this p
p f publication. Baird Market Review | Economy & Market 11
13. Domestic A t Cl Performance ( of 9/30/11)
D ti Asset Class P f (as f )
Latest Q
Quarter Return ( ) By Market Cap
(%) y p Year to Date Return ( ) By Market Cap
(%) y p
0 0
-5
5 -5
5
-10 -10
Re urn (%)
Re urn (%)
-8 7
8.7
etu n (%
etu n (%
-12.3
12 3
-15
15 -13.9
13 9 -15
15
-17.0
-20
20 -18.9 -20
20
-21.9
-25 -25
Large Cap Mid Cap Small Cap Large Cap Mid Cap Small Cap
Latest Quarter Return (%) By Style Year to Date Return (%) By Style
0 0
-5
5 -5
5
-7.2
-7 2
-10
10 -10
10
et rn %)
Re ur (%)
et rn %)
Re ur (%)
-11.2 -11 6
11.6
-13.1
13 1 -13.0
13 0
-15
15 -15
15
-15.6
15 6
-16 2
16.2
-20
20 -18 5
18.5 -20
20 -18 5
18.5
-19.3
-21.5
-22.2
22 2
-25 -25
Large Large Mid Mid Small Small Large Large Mid Mid Small Small
Value Growth Value Growth Value Growth Value Growth Value Growth Value Growth
Source: Vestek; Russell indices; Standard & Poors; Baird Analysis. Asset classes are represented by the f
k; d ; d d ; d y p d y following benchmarks: S&P 500 ( g
g k (Large
Cap),
Cap) Russell Midcap® (Mid Cap) Russell 2000® (Small Cap) Russell 1000 Value® (Large Value) Russell 1000 Growth® (Large Growth)
Cap), Cap), Value), Growth), Robert W Baird & Co
W. Co.
Russell Midcap Value® (
p ® (Mid Value), Russell Midcap Growth® (
) p ® (Mid Growth), Russell 2000 Value® (
) ® (Small Value), and Russell 2000
) Baird Market Review | Domestic Equity 13
Growth® (Small Growth). See important disclosures and definitions included with this publication.
Growth) publication