2011

What’s Inside
Economic Outlook 2 ANNUAL
FORECAST
Mutual Fund Strategies 3
Model Portfolios 4
Investment Outlook 5
International Outlook 7
Housing Forecast 9
2011 Predictions 9
Fixed-Income Outlook 11
Asset Allocation Update 12
U.S. PowerPicks 2011 13
Global PowerPicks 2011 15
2 STANDARD & POOR’S
Beth Piskora
Climbing Up From S&P Editorial
the Bottom
The recession may be over, but S&P Economics
forecasts a long, hard climb from the abyss.
As forecast, the longest and deepest recession since World War II is officially
over, but Standard & Poor’s Economics believes the recovery will be slow and
uneven. What’s more, another dip into recession is possible if financial markets
lock up again, oil prices jump, or consumers remain scared.
S&P Economics expects U.S. gross domestic product (GDP) growth of 3.0%
in 2011, up from an estimated 2.9% in 2010. But consumer spending, which
led the way out of most previous recessions, is not leading the way this time.
“By the time 2010 ends, we expect 1.8% growth in consumer spending,
about half the pace of growth after a recession ends,” explains Beth Ann
Bovino, senior economist for S&P. “The consumer led previous recoveries, but
that’s not happening this time, due to concerns about lost wealth (401k bal-
ances) and lost job fears.”
S&P Economics anticipates consumer spending to recover somewhat in
2011, growing at a 3.0% pace.
Extreme consumer pessimism appears to have subsided but consumers
remain cautious, at least by pre-recession standards. The saving rate held at
5.8% in the second quarter, well above the 2.1% of 2007 but still far below
the pre-1990 average of 8.9%. Car sales are beginning to come back, showing
that consumers are no longer afraid of big-ticket purchases, but the November
sales pace of 12.3 million light vehicles remains far below the 16.5 million of
2006. Consumer borrowing rose in September, but only because of loans from
the federal government (presumably concentrated in student loan programs).
Credit card receivables continued to decline. S&P Economics expects con-
sumers to remain cautious but to continue to crawl out of their foxholes.
And there’s other good news. Overseas partners are recovering, helping
exports, albeit very slowly, says S&P Economics. What’s more, the financial
system appears to be stabilizing. Most importantly, the fiscal stimulus helped
boost the economy.
“The Fed lowered the Fed funds rate to about zero, and started the alphabet
soup of liquidity boosts, with TARP, QE1, and QE2,” says Bovino, referring to
the first and second rounds of quantitative easing. “And they got the desired
impact: calmer markets.”
However, the fiscal stimulus will likely be withdrawn in 2011. Private non-
residential construction is still plunging. And the recent dollar strength could
detract from some economic growth.
The most important negative? Housing.
The U.S. housing market continues to soften, according to S&P Economics.
The spring surge in sales and prices was clearly a temporary response to the tax
rebates. After the expiration of the rebate, sales and prices have dropped back.
The S&P/Case-Shiller Home Price Index fell 2.0% nationally in the second quar-
ter, though the 20-city index remains up 0.6% from a year earlier in October.
Although the average home price is below its historical average relative to
income, and interest rates are very low, the high unemployment rate, the tighten-
ing of credit standards, and the lack of savings mean fewer households can quali-
fy to buy a home. At the same time, the glut of houses in the process of foreclo-
sure or likely to go into foreclosure is holding prices down even more.
(Continued on page 16)
www.marketscope.com
S&P EVALUATION SYMBOLS
STARS Rankings
Our evaluation of the 12-month potential of stocks is indicated by
STARS:
Strong Buy—Total return is expected to outperform
the total return of a relevant benchmark by a wide
margin over the coming 12 months, with shares rising
in price on an absolute basis.
Buy—Total return is expected to outperform the
total return of a relevant benchmark over the
coming 12 months, with shares rising in price on an
absolute basis.
Hold—Total return is expected to closely approximate
the total return of a relevant benchmark over the
coming 12 months, with shares generally rising in price
on an absolute basis.
Sell—Total return is expected to underperform the
total return of a relevant benchmark over the coming
12 months, and the share price is not anticipated to
show a gain.
Strong Sell—Total return is expected to underperform
the total return of a relevant benchmark by a wide
margin over the coming 12 months, with shares falling
in price on an absolute basis.
NR Not ranked.
Quality Rankings (QR)
Our appraisals of the growth and stability of earnings and dividends
over the past 10 years for STARS and other companies are indicated
by Quality Rankings:
A+ Highest B+ Average C Lowest
A High B Below Avg. D In reorganization
A- Above Avg. B- Lower NR Not Ranked
Quality Rankings are not intended to predict stock price movements.
Copyright ©2011 by Standard & Poor’s Financial Services LLC. All
rights reserved. “S&P,” “S&P 500,” and “Standard & Poor’s” are
registered trademarks of The McGraw-Hill Companies, Inc. “S&P
MidCap 400” and “S&P SmallCap 600” are trademarks of The
McGraw-Hill Companies, Inc. This special edition publication is
an excerpt from Standard & Poor’s The Outlook. Reproduction in
whole or in part prohibited except by permission. All rights
reserved. Officers of The McGraw-Hill Companies: Harold W.
McGraw, III, Chairman, President and Chief Executive Officer;
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“Regulatory Affairs and Disclaimers.”
All prices in this report are as of the close on
January 21, 2011.
www.marketscope.com STANDARD & POOR’S 3

FUND
STRATEGIES

The Top Mutual Fund Dylan Cathers

S&P Mutual Fund Analyst

Performances of 2010
Selections from the top five performers, as well as strong five-star funds.

Now that 2010 has drawn to a Equity — Science & Technology commodity and energy stocks,
close, we can take a look back Funds peer group average. including uranium production
and see what funds were the top Further, its top 10 holdings and exploration company
performers and how they rank accounted for over 51% of the Uranium Energy Corp. (UEC 6
in S&P’s methodology. Although fund’s total assets as of NR), L&L Energy Inc. (LLEN
the following phrase has been September 30. 11 NR), and Avion Gold Corp.
uttered so often that most Another fund among the top Although the fund’s risk consid-
investors can recite it by heart, performers in 2010 was four- erations score is neutral, its cost
“Past performance is not indica- star ranked Saratoga Technology factor is positive due to its low
tive of future results,” we & Communications Portfolio. turnover and the absence of a
believe that it is at least some- The investor shares posted a sales load.
what helpful to look at how return of over 49% last year With just one of these three
managers performed over the through December 31st. The funds holding a five-star rank,
past. fund’s objective is long-term we decided to also look at funds
In 2010, three-star ranked growth of capital through that were relatively strong per-
Profunds Internet Ultrasector investments in technology stocks formers over the past year but
Profund was one of the top per- with potential for positive earn- that were five-star ranked by
formers out of all the funds ings surprises. The fund has S&P due to other fundamental
within our coverage universe, soundly outperformed its factors. To narrow the field
with the investor class shares Science & Technology Funds down a bit, we concentrated on
returning nearly 53%. The peers over the past three- and large-cap stocks, which our
fund’s goal is to return 150% of five-year periods as well with Global Investment Policy
the Dow Jones Composite lower volatility. Committee believes will outper-
Internet Index. To meet that The top performing fund that form in 2011 as we enter the
goal, the fund uses leverage and is currently five-star ranked was third year of the current eco-
is relatively concentrated. This Encompass Fund, which posted nomic recovery. Among the
investment style tends to lead to a 55% return on the year, well Large-Cap Core, Value, and
higher levels of volatility, and above its Global Equity — Growth peer groups, we looked
this fund is no exception: its Global Multi-Cap Growth peer for funds with positive metrics
standard deviation is over 50% group average of less than 16%. for performance analytics, risk
higher than its Domestic ENCPX had a portfolio heavy in (Continued on page 16)

POSITIVE POTENTIAL IMPLICATIONS

GROSS
S&P *TOTAL RETURN CURRENT EXPENSE **YIELD
FUND NAME / TICKER RANKING YTD 1-YEAR 3-YEAR 5-YEAR PRICE RATIO (%)

BBH Core Select Fund; N / BBTEX 5 0.1 14.6 4.3 6.2 14 1.21 2.21
Encompass Fund / ENCPX 5 -2.9 48.3 12.3 NA 14 1.50 3.80
Invesco Van Kampen Comstock Fund; Y / ACSDX 5 1.7 16.0 0.6 1.9 16 0.64 2.65
Profunds Internet Ultrasector Profund; Investor / INPIX 3 4.7 59.1 14.2 6.5 124 1.78 3.86
Saratoga Tech. & Communications Portfolio; I / STPIX 4 4.7 54.9 13.1 12.0 15 3.35 1.01
Walden Social Equity Fund / WSEFX 5 0.5 15.6 1.3 3.5 13 1.17 2.11
*Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. **As of 10/31/10.
NA-Not available. Source: S&P MarketScope Advisor.
4 STANDARD & POOR’S
A Look at 2010 STARS and Model
Portfolio Performance
S&P analysts and portfolio com-
mittee members turned in terrific
overall stock selection performance
in 2010. Against the backdrop of
fits and starts to economic activity
and uncertainly with respect to
government policy changes and
assistance programs, stock prices
remained volatile, leading to both
opportunities and challenges. Our
most visible portfolio, 5 STARS or
Strong Buy ranked stocks, turned
in a 21.9% performance for 2010,
versus 12.8% for the S&P 500.
This was the best year for 5 STARS
since 2005, when the portfolio was
up 12% versus a 3% rise in the
S&P 500. The 4 STARS perform-
ance was slightly ahead of 5 STARS
at 22.1%. The year 2010 marked
the 18th time in 24 years that the 5
STARS portfolio has outperformed
the S&P 500 on an annual basis
since inception on December 31,
1986. This performance has result-
ed in the value of $100 during that
period being worth $1,990 as of
December 31, 2010, versus $519 in
the S&P 500.
Some of our best performing 5
STARS in 2010 included Under
Armour in the consumer discre-
tionary area (up 101% as a 5
STARS), CBL & Associates in
financials (up 89%) and ADC
Telecommunications in the technol-
ogy sector (up 72%). Historically,
STARS has benefited from stock
selection performance over sector
selector performance for its outper-
formance relative to the bench-
mark, and 2010 was no different.
In 8 of 10 S&P economic sectors,
stock selection performance was
the primary contributor to STARS
outperformance. In other words, it
is bottoms-up stock picking that
produces the results, not correctly
www.marketscope.com
Stephen Biggar
Global Director of Equity Research
being overweight a particular sec- versus its benchmark, the S&P 500
tor at a given time. As a research total return at 15.1%. However,
director, I’m always pleased to see the Small/Midcap Growth portfo-
that metric, as it shows analysts lio’s rise of 18.8% could not keep
are correctly recommending the pace with the blistering 24.9%
best names in their sector-based rise for its benchmark, the
coverage universes, regardless of S&P 400.
how well the sector performs rela- More quantitatively chosen portfo-
tive to the S&P 500. In addition, lios turned in very respectable per-
since we’re large proponents of formance also. The Platinum portfo-
being properly diversified, we do lio, which requires both a 5 STARS
not recommend taking sizable and 5 in the Fair Value methodology
sector bets. to be a member, was up 17.4% ver-
Other model portfolios per- sus 12.8% for the S&P 500. The
formed well in 2010 also. Our Traders Platinum portfolio mean-
flagship PowerPicks portfolio, while was up 20.4% versus 12.8%.
which is a frozen portfolio repre- More information about all of
senting the 40 best ideas of the US these portfolios, and others, can
Equity Research team for the year be found on the Portfolios tab
ahead, was up 19.1% in 2010 ver- of MarketScope Advisor, www
sus the 12.8% S&P 500 perform- .marketscope.com.
ance. On a total return basis,
PowerPicks was up 20.9% in
2010, versus 15.1% for the S&P
500. This portfolio continues to
attract interest as a UIT sponsored
by Invesco, allowing a way to pur-
chase all 40 names and with no
turnover throughout the year. The
Global Picks portfolio, which is a
30-stock portfolio with 10 names
each from the U.S., Europe, and
Asia, also had a solid year, up
15.3% in 2010 versus its bench-
mark, the S&P Global 1200, which
was up 13%.
Our Focus Stock of the Week
portfolio, which is a Research
Director’s pick for the week and
held for six months, also per-
formed well, up 15.7% versus
12.8%. Portfolios activity managed
by the senior portfolio committee
also mostly did well. The High
Quality Capital Appreciation port-
folio was up 16.6% versus the
S&P’s 12.8%, while the Total
Return portfolio was up 22.8%
www.marketscope.com
Investment Outlook
Will the markets be up again in 2011?
The year 2011 should offer a trio of
three-year milestones:
• In January, President Obama
begins his third year in office.
• In March, the S&P 500 starts
the third year of this bull
market.
• In June, the U.S. economy enters
its third year of recovery.
Since 1945, the S&P 500 has risen
an average 17% in the third year of
a president’s term in office, while
bull markets and economic expan-
sions have historically lasted an aver-
age of more than four years each.
Will the economy, market, and
administration wind down or crank
up? Will these three milestones end
up being a charm, or bad luck? (In
WWI, lighting three cigarettes on a
single match gave an enemy sniper
enough time to “ready, aim, fire.”)
S&P’s Investment Policy
Committee believes that, while mar-
ket volatility may increase over the
coming year, so will equity prices.
We forecast the S&P 500 to be trad-
ing at 1370 twelve months from
now. In addition, we are more opti-
mistic about stocks than bonds, and
believe emerging market equities
have higher price appreciation
potential than U.S. or developed
international equities.
History indicates, but does not
guarantee, that 2011 has the poten-
tial to be a good year. In January,
S&P 500 % CHANGES DURING THE AVERAGE FOUR-YEAR
PRESIDENTIAL CYCLE
YEARS
All Years
Third Years
>1st Term
>2nd Term
Years 1, 2 & 4
Past performance is no guarantee of future results. Source: S&P Equity Research.
STANDARD & POOR’S 5
Sam Stovall
S&P Chief
Investment Strategist
President Obama starts his third year 1932, bull market durations have
in office, which historically has been averaged 45 months (3-3/4 years),
the strongest of the four-year presi- with the bulls of 1949, 1974, 1982,
dential cycle. 1990, and 2002 surviving five years
During all years since 1900, the or more. Of course some, like the
S&P 500 increased by an average bulls of 1932, 1935, 1938 and 1947,
6.8% annually (8.5% since 1945) petered out early and never celebrat-
and posted an annual advance 67% ed their third birthdays. Yet all 10
of the time (71% since 1945). since 1949 at least started their
During the third year of the four- third years.
year presidential cycle, the “500” Since 1970, investors have gravi-
has enjoyed an average annual tated away in the third year of the
increase of 11.3% (17.1% since bull market from the sectors that
1945) and has posted an annual traditionally perform so well during
advance 78% of the time (94% since the first two years (consumer discre-
1945). During years one, two, and tionary, industrials, financials, and
four, however, the S&P 500 under- information technology) and toward
performed, rising only 5.4% (5.7% the later-cycle/early defensive sectors
since 1945) and only 63% of the such as consumer staples, energy,
time (64% since 1945). health care, and utilities. Of course,
A rational for third-year outper- this rotation does not instantly start
formance, in our opinion, is stimulus at the very beginning of the third
anticipation. To stay in power, the lap; it is gradual and sometimes
president typically uses policies delayed.
designed to stimulate the economy So much for history. What do
before voters go back to the polls in S&P’s economists and analysts
November of year four. Investors tell us?
anticipate the benefit of this stimulus S&P equity analysts forecast oper-
to economic growth, corporate earn- ating results for the S&P 500 to
ings, and consumer confidence, and advance 47% in 2010 and 13% in
bid stocks higher in year three. 2011. This estimated “bottom-up,”
What’s more, a lot of stimulus – or analyst-derived EPS (earnings per
including several rounds of quantita- share) integer (which rolls up the
tive easing – has already been inject- projections for the individual compa-
ed into this economy, causing many nies in the S&P 500), is projected to
to fear that hyper-inflation will be reach $84 this year and $94 by the
the only outcome. Therefore, this end of 2011, as a result of cost-cut-
time the presi- ting and share-repurchase programs,
dent may be revenue growth improvements, and
out of “silver strong demand from emerging
bullets,” and economies.
SINCE 1900 SINCE 1945
% CHG. UP YEARS % CHG. UP YEARS left with noth- S&P equity analysts project next
6.8 67% 8.5 71% ing to offer. year’s EPS advance to be fairly even-
11.3 78% 17.1 94%
The current ly distributed across sectors. We
bull market project that all 10 of the 10 sectors
13.3 81% 21.0 100%
should enter its within the “500” will post full-year
7.3 73% 12.2 86% third year on EPS increases, with gains of 10% for
5.4 63% 5.7 64% March 10, consumer staples and 19% for finan-
2011. Since (Continued on page 6)
6 STANDARD & POOR’S www.marketscope.com

Investment Outlook (Continued from page 5)

cials. The materials sector is currently trading at 13.6 times analysts’ pro- economic and equity markets, as
expected to show the strongest EPS jected 2011 results. What’s more, the history’s positive leaning will be
advance at 28%, while the telecom- “500” is trading at 18.0 times trail- partly offset by the strong econom-
munications services and utilities ing GAAP (also known as “As ic headwinds. Volatility will likely
groups should see EPS increases of Reported”) results, which is 17% increase, but we believe investors
6% and 5%, respectively. below the median since 1988 and will be rewarded by maintaining a
We believe the risk of a global two percentage points above the slight overweighting to equities at
double-dip recession is evaporating. median of 15.7 times since 1936. the expense of bonds. In addition,
That combined with strengthening Therefore, it doesn’t appear to us as S&P recommends embracing a
commodity prices and a weakening if the market multiple is anything more cyclical approach to equity
of the U.S. dollar will aid the indus- but supportive of a further advance markets early on, but warns that
trials and materials groups, while in equity prices. the age of this bull market may
low valuations, healthy demand, and Several issues, in our opinion, require an attitude adjustment as
strong balance sheets will be cata- cloud an otherwise bullish forecast, the year progresses. ■
lysts for gains in information tech- such as the discouraging jobs trend
nology share prices. We recommend and the weak housing market.
underweighting the defensive health Yet the biggest concern of all, in 5-STARS VS. MARKET
care and utilities sectors. our opinion, is the mountain of debt
Even though bottom-up earnings that will need to be addressed at the
growth for the S&P 500 is projected sovereign, state, local, and personal 5-STARS +13.3%
to be substantial, the S&P 500 has level. Most of the market declines
risen more than 90% in price since over the past year have been triggered
NASDAQ +8.8%
the bull market started in March by a reawakening of concerns over
2009. Are valuations therefore vul- sovereign debt contagion. S&P
nerable to a decline? believes that lingering sovereign stress DOW JONES
+7.8%
INDUSTRIALS
As of January 18, 2011, the S&P is likely to persist into 2011, since the AVERAGE
COMPOUND
500 was trading at 15.5 times trail- debt woes of Europe’s peripheral ANNUAL GAIN
S&P 500 +7.1%
ing operating results, which equates nations are structural in nature and (1/1/87-12/31/10)

to a 14.5% discount to the median won’t be resolved overnight.

trailing P/E since S&P started cap- Overall we think 2011 will be a
turing operating EPS in 1988. It is good year, but not a great one, for Five-STARS stocks, which are those
Standard & Poor’s ranks highest for
potential year-ahead appreciation, have
outperformed the major market indices
AVERAGE S&P 500 SECTOR PERFORMANCES AND FREQUENCIES OF MARKET by a wide margin over recent years.
OUTPERFORMANCE DURING THE FIRST THREE YEARS OF BULL MARKETS The compound annual gain of 13% for
SINCE 1970
YEAR 1 YEAR 2 YEAR 3
the 5-STARS group from the start of
S&P 500 SECTORS % CHG. F.O. % CHG. F.O. % CHG. F.O. 1987 to December 31, 2010 was 1.9
Consumer Discretionary 46 83% 12 40% (4) 0% times the gain for the S&P 500.
Consumer Staples 28 33% 19 60% 8 80%
Performance results of the 5-STARS stock group have
Energy 30 33% 18 40% 16 80% been calculated using standard time-weighted perform-
Financials 47 83% 16 80% (2) 40% ance formulae. Since results are exclusive of transac-
tion costs and dividend income, the actual results
Health Care 25 0% 14 40% 10 60% obtained by investors may be different. Because 5-
Industrials 44 67% 14 40% (0) 40% STARS recommendations are made with the intent of
maximizing gains, the volatility of the group is likely to
Info. Technology 44 50% 9 40% 3 60%
be above average. There is no assurance that the
Materials 36 67% 10 20% (4) 0% future performance of any or all 5-STARS stocks will
Telecom Services 17 17% 4 60% 7 40% match the past performance, and you should under-
stand that such recommendations do not take into
Utilities 21 17% 8 40% 12 80% account a subscriber’s personal circumstances, such as
S&P 500 35 NA 13 NA 3 NA tolerance for risk, investment goals, or access to
investment capital.
Past performance is no guarantee of future results. NA-Not available. Source: S&P Equity Research.
www.marketscope.com STANDARD & POOR’S 7

Alec Young
International Outlook: Tactical is Practical International
Equity Strategist
While the ride may get bumpier, foreign equities should rise in 2011.

After posting strong gains in 2009, constrain gains somewhat. has been driven by the possibility
most global equity markets have con- As for EM, we think faster secular that investors will have to take hair-
tinued to rise modestly thus far in growth and reasonable valuations cuts on sovereign debt holdings as a
2010 with emerging markets (EM) make continued outperformance condition of any rescue plans initiat-
leading the advances and Europe trail- likely, although upside may be tem- ed after 2013, when the EFSF
ing. However, given the depth of the pered by inflation-induced interest expires. Not surprisingly, this fueled
prior bear market, as of December 8, rate hikes, which we believe are like- a sharp rise in the borrowing costs of
developed international, EM and U.S. ly to stoke periodic growth fears. already heavily indebted and growth-
equity benchmarks remain 25%, S&P Economics sees global growth challenged peripheral nations,
9.1% and 15.7% below their respec- slowing slightly in 2011 as consumer increasing the likelihood that
tive October 2007 all-time highs. spending and business investment Portugal and Spain may be forced to
Looking ahead to 2011, we see devel- replace inventory restocking and gov- seek help, by our analysis. As such,
oped foreign equity upside continuing, ernment stimulus as growth drivers. the cost of insuring peripheral sover-
thanks to attractive valuations and While we do not see inflation-induced eign debt has spiked higher than
solid fundamentals in Northern monetary policy tightening in faster- where it traded last May at the
Europe, Canada, and Australia, growing economies like China, India, height of the first wave of 2010 sov-
although lingering sovereign jitters Brazil, and Australia derailing strong ereign turmoil.
and potential weakness in the euro, expansions, we do expect it to slow While boosting the size of the
whose volatility detracts from U.S. economic growth somewhat. As for EFSF and other European Central
investors’ dollar-denominated devel- Europe, we do not expect European Bank stop gap measures may diffuse
oped overseas equity returns, may sovereign austerity measures to fuel a market fears over the near term, we
double-dip recession in the think lingering sovereign stress is
region, as most of the gov- likely to persist in 2011, as Europe’s
LED BY EMERGING MARKETS, GLOBAL EQUITIES
CLAW THEIR WAY BACK ernment spending cuts will peripheral debt woes are structural
TOTAL RETURN likely occur in the periph- and won’t be resolved overnight.
ASSET CLASS/COUNTRY YTD DISTANCE FROM RALLY OFF eral countries. Also, we Although, in our view, strong eco-
‘07 HIGH ‘09 LOWS
think Germany and France nomic and corporate profit growth
Developed International 4.0% -25.0% 88.3% are likely to continue momentum in the larger northern
Canada 17.4% -8.9% 129.8%
enjoying better momentum “core” of Europe and very attractive
Europe 2.7% -27.3% 93.3%
than the periphery, as the valuations should allow for contin-
U.K. 7.7% -26.5% 100.9%
France -4.1% -28.9% 77.2% two-track European recov- ued European equity appreciation,
Germany 8.4% -25.7% 98.9% ery persists. we think sovereign risk will detract
Switzerland 7.7% -9.0% 88.4% The European Financial from gains somewhat. There are two
Italy -14.8% -45.6% 79.6% Stability Facility (EFSF), a transmission mechanisms through
Spain -20.3% -33.1% 72.0% 750 billion euro rescue which debt problems in smaller
Japan 9.9% -25.7% 57.1% facility put in place by the nations can take a broader toll on
Australia 8.3% -14.5% 144.2% European Union and the international stock performance.
Emerging Markets 16.0% -9.1% 160.8% International Monetary First, the possibility of investor hair-
China 6.0% -30.7% 159.4% Fund last spring after the cuts on peripheral sovereign debt
Taiwan 15.1% -2.5% 140.9%
Greek crisis, is seen as holdings is causing significant uncer-
India 15.2% -20.4% 191.5%
large enough to handle tainty in the financial services sector,
Korea 19.9% -17.4% 188.5%
Indonesia 39.1% 27.5% 344.4% bailouts of Greece, amid concerns over the extent of
Russia 17.6% -41.3% 188.9% Ireland, and, potentially, banks’ peripheral sovereign debt
Brazil 4.2% -15.5% 207.0% Portugal, but not Spain, exposures. Financial services is, by
Mexico 14.3% 0.3% 173.4% Europe’s fourth-largest far, the largest developed overseas
Chile 43.8% 53.2% 206.9% economy, which accounts sector, representing roughly one-
Turkey 30.1% -6.9% 266.2% for roughly 12% of euro- quarter of the asset class’ market
South Africa 25.7% 9.4% 196.4% zone gross domestic prod- value. Secondly, sovereign stress is
S&P 500 12.3% -15.7% 88.4% uct (GDP). The latest
Data through 12/8/10 (in U.S. dollars). Sources: S&P Indices, MSCI. wave of sovereign stress (Continued on page 8)
8 STANDARD & POOR’S www.marketscope.com

International Outlook: Tactical is Practical (Continued from page 7)

weighing on the euro, which tum- al, and environmental capacity con-
bled 8% versus the greenback in straints and a quantitative easing- ATTRACTIVE FUNDAMENTALS
November. U.S. investors’ dollar- driven liquidity surge into develop- CUSHION MACRO RISKS
E2011 E2011
denominated foreign equity returns ing economies are beginning to stoke ASSET CLASS/COUNTRY P/E EPS GR. DIV. YLD.
are diluted by dollar strength. inflation pressures. This is increasing
Developed Int’l 11.2 13.5% 3.3%
While we believe that the oft- the odds of greater-than-expected Canada 13.5 24.4% 2.5%
repeated bullish EM secular story monetary policy tightening in large U.K. 10.0 17.4% 3.2%
remains largely intact, macro risks emerging nations like China, India, Germany 10.7 9.0% 3.3%
are surfacing that may make EM Brazil, and Indonesia, all of which France 10.4 13.4% 4.1%
equity performance more volatile in have begun to hike rates in an effort Switzerland 11.7 11.0% 2.8%
2011 even if the prevailing trend to cool price pressures. We think Spain 8.8 8.0% 4.9%
Italy 9.3 17.0% 4.5%
remains up. In light of relatively inflation-induced tightening is likely
Japan 14.3 10.2% 2.0%
slow expansions in the U.S., Europe, to continue to fuel growth jitters and Australia 11.8 12.5% 4.5%
and Japan, the world has never been worries of hard landings in these Emerging Markets 11.3 16.0% 2.4%
as dependent on developing increasingly important global eco- China 12.1 14.9% 2.0%
economies to drive growth, by our nomic engines, thereby increasing India 15.0 22.8% 1.2%
analysis. IHS Global Insight, an EM equity choppiness in 2011. Indonesia 14.2 21.8% 2.4%
independent forecasting firm, proj- Ultimately though, we expect EM South Korea 10.0 10.0% 1.3%
Taiwan 13.0 10.2% 3.4%
ects 2011 EM GDP growth of 6.2% central banks to engineer soft land-
Russia 7.0 13.0% 1.6%
versus only 2.0% for developed ings in these red hot economies Turkey 10.5 7.9% 1.9%
economies, highlighting the impor- whereby rate hikes succeed in slow- Brazil 10.3 18.0% 3.2%
tance of EM in helping the global ing inflation without jeopardizing Mexico 15.0 25.1% 3.3%
economy reach the 3.4% growth strong growth. EM economies South Africa 11.2 25.8% 3.1%
rate IHS forecasts for next year. This should continue to expand at a fast S&P 500 13.1 13.0% 1.9%
projection is very much a consensus enough clip to both power the global Data through 12/8/10. E-Estimated. Sources: S&P Indices, S&P
view. As such, we think investors are economy and fuel healthy mid-teens Equity Research, Bloomberg, MSCI.

very sensitive to anything that could EM profit growth, in our view. This,
threaten EM expansions. coupled with low valuations of only yield of 2.3%, bolster our confidence
Rising food and energy prices, 11.3 times 2011 consensus earnings in continued outperformance even if
growing industrial, labor, agricultur- estimates and an attractive dividend the ride gets a little bumpier. ■

GLOBAL GROWTH SEEN SLOWING IN 2011

World
U.S.
Canada
Spain
Italy
France
U.K.
Germany
Eurozone
Japan
Australia
Korea
Russia
Latin Amer.
India
China

−2% 0% 2% 4% 6% 8% 10%

2011E GDP 2010E GDP

E-Estimated. Sources: S&P Economics and IHS Global Insight. Data through December 8, 2010.
www.marketscope.com
2011 Housing Forecast
Watch the supply/demand dynamics.
Standard & Poor’s Equity Research
Services (ERS) has a negative funda-
mental outlook for the homebuilding
industry for the next 12 months.
Assuming 5% to 10% decreases in
housing prices in the next nine
months, ERS believes most publicly
traded builders are in a stable com-
petitive position after reducing costs,
retiring debt, and increasing cash
positions. However, ERS thinks the
housing market will remain weak for
most of 2011 as buyers’ confidence
What to Look for in 2011
Highlights of S&P Equity Analyst Predictions.
Here is a list of predictions for the
year ahead from the analysts at
Standard & Poor’s Equity Research.
Arranged by sector, these are the
highlights of a more wide-ranging
list found on the Trends & Ideas tab
on MarketScope Advisor.
Materials
We look for gold to finish 2011 at
$1,600 per ounce, up from
$1,421/oz at the end of 2010. We
see the fundamental drivers of the
gold market staying essentially the
same, with the threat of sovereign
debt defaults and general currency
instability increasing the appeal for
gold as an alternative monetary
asset. Also, a further rise in com-
modity prices during 2011 could add
to demand for gold as a hedge
against falling currencies.
Energy
We look for the current count of
deepwater floating drilling rigs to
drop in the U.S. Gulf of Mexico as
and the job market continue to
apply downward pressure.
Our negative view of the industry
is dependent on the housing market’s
inability to continue to reduce exist-
ing home inventory over time, which
stood at 10.5 months at the end of
October 2010, up from 8.0 months
in September, and still well above
normalized levels of 6.0 months. In
our opinion, normalized levels may
not be realized until some time in
2012, considering the high levels of
operators lose patience with the slow
pace of permit issuance in the region.
Despite the official end of the drilling
moratorium on October 12, per-
mits — which are required by regula-
tors before work can begin — have
been hard to come by, and those that
are being issued are often for ancil-
lary work rather than core drilling
activities. Using data from RigLogix,
we estimate that of the 32 currently
active floaters in the Gulf, 15 units
are slated to start three year contracts
during the next six months, and one
is now idle. For the three drillships
currently under construction and con-
tracted to come to the Gulf during
the second half of 2011, we expect
that alternative plans will be reached.
With the vast majority of the com-
bined 35 units capable of drilling in
ultradeep waters (i.e., 7,500 feet of
water or more), and more than half
the current customer list for these
units comprised of global heavy-
weights such as Shell (RDS.A 69
STANDARD & POOR’S 9
Kenneth Leon
S&P Equity Analyst
foreclosed homes and rising
distressed inventories.
ERS believes the key factors that
would drive an improved housing
market are an increase in buyers’
confidence with improving job con-
ditions, available mortgage credit
from lenders, a better balance of
new and existing homes available for
sale, and an easing of increased
foreclosed properties, which contin-
ues to put downward pressure on
housing prices. ■
S&P Equity Research
★★★), Chevron (CVX 94 ★★★★★),
BP (BP 48 ★★★), Eni (E 48 NR), and
Statoil (STO 24 NR), we think the
odds are good that customers and
their respective rig contractors may
come to agreements to modify exist-
ing rig contracts to have these rigs
move to alternative overseas projects.
We also expect such moves to put
pressure on leading edge dayrates as
more rigs chase jobs outside of the
U.S. Gulf. While we expect the permit
process to eventually recover, rigs that
do go overseas are unlikely to come
back for some time, and the average
remaining term length on these 35
units is about 3.1 years.
Technology
We project 2011 to show an exten-
sion of the recovery in computer hard-
ware that has taken place since sales hit
a deep cyclical trough in 2009. While
2010 saw a sharp initial rebound for
(Continued on page 10)
10 STANDARD & POOR’S www.marketscope.com

(Continued from page 9) of consumers. are equipping their vehicles to be

many hardware categories, the progress We forecast that global solar sys- connected to smart phones and the
in 2011 may be less dramatic as the tem installations will increase at least Web, as more listeners tune into
expansion proceeds from a higher base. 20% in 2011, well below our 2010 streaming audio services such as
Thus, we project global PC unit ship- projected growth rate for a two-fold Pandora, as well as more sophisticat-
ments to rise 14% in 2011 after an increase. We see demand slowing in ed smart phone apps for navigation.
estimated 17% gain in 2010. Pent-up the first half of 2011, as customers
refrain from purchases following Industrials
demand and a desire for more robust
reductions of government subsidies We think industrial companies will
mobile computing platforms should
in important solar markets like as further expand their footprints in
help drive laptop sales. The desire for
Germany. However, we expect solar emerging markets in 2011. We think
data, chatter, and video on the go
manufacturers to respond by lower- the most aggressive expansion will
should make it a lively year for tablet
ing selling prices to enhance project take place in construction equipment,
computers and smartphones too, as
returns, which should stimulate fur- industrial machinery, and engineer-
new products enter the market. In the
ther demand for solar offerings. ing/construction, which will likely
server markets, we expect similar cycli-
We expect solar manufacturers benefit from infrastructure develop-
cal improvement. Hewlett-Packard
that have a greater proportion of ment projects and growth in emerg-
(HPQ 47 ★★★★★) has exposure to all
their sales devoted to customers in ing market economies. One company
of these areas.
the U.S. to outperform their peers. that has been putting significant
We expect sales of tablet computers
We estimate that the U.S. will experi- focus on its emerging market foot-
to surge and begin to cannibalize sales
ence at least a 60% rise in unit print is Caterpillar (CAT 93 ★★★★).
of netbooks and mini notebooks.
installations, far greater than our We believe that agricultural equip-
Excluding tablet computers, 2011
20% forecast for the industry over- ment companies will post another
growth in notebook sales will be
all. We attribute this mostly to year of sales and profit gains, as the
much less than the 24% we see for
robust utility and commercial proj- big rise seen in crop prices in the
2010.
ects, as companies transition to summer of 2010 encourages farmers
Despite having less functionality
renewable sources of electricity, to lift their business spending. In line
than tablet computers, sales of e-book
given favorable incentives and more with this forecast, we believe that
readers will be strong again in 2011,
attractive prices. Deere (DE 89 ★★★★) will experi-
in our view. We see unit sales increas-
We think Yahoo (YHOO 16 ence solid demand for its farm
ing from 7 million in 2010 to 11 mil-
★★★★) will engage in at least one equipment. However, we also believe
lion in 2011, led by Amazon.com’s
significant transaction intended to that investors should keep in mind
(AMZN 177 ★★★) Kindle.
enhance shareholder value. that part of the rise in crop prices
We think Intel (INTC 21 ★★★★)
Possibilities, in our view, include a was temporary in nature, as
will finally gain some traction in the
sale of the stake in Alibaba Group, droughts and fires in Russia led to
handset and tablet markets. With its
reduction of its interest in Yahoo lower than expected global wheat
proposed acquisition of Infineon’s
Japan, and a material acquisition and corn supplies.
(IFNNY 10 NR) wireless business
(perhaps focused on international, We expect trends to soften for
unit expected to close in early 2011,
social media and/or mobile). defense contractors, as the
Intel will instantly become a formi-
President’s current review of
dable competitor in the baseband
Consumer Discretionary Afghanistan may lead to a July 2011
segment of the handset market, in
We predict a formal announcement start date for troop withdrawal and
our view. We also see the company
of a news gathering partnership the U.S. proceeds with its withdraw-
successfully cross-selling its Atom
between Time Warner’s (TWX 33 al of troops from Iraq. In addition, a
processor with Infineon’s baseband
★★★★) CNN and either CBS (CBS five-year, $100 billion Pentagon
chips, and expect even more progress
21 ★★★★) or one of the three other overhead cost reduction, mandated
upon creating a single chip solution
major broadcast networks could by Secretary of Defense Gates, seems
that integrates both functions.
finally evolve — in what would be a unlikely to be reinvested in weapons
Additionally, we believe that Atom
ground-breaking deal and mark an programs (as was originally intend-
will find some success in the lower-
unprecedented level of collaboration ed), in our view. We think L-3
end segment of the tablet market.
between traditional competitors. Communications Holdings (LLL 78
We believe Microsoft (MSFT 28
In-car connectivity will likely ★★★), whose products are being
★★★) will continue to lose market
become an increasingly hot topic, as used in our current war efforts, will
share in smartphones, as Windows
consumers spend more time in vehi- be limited by these expected changes
Phone 7 fails to capture the interest
cles. In response, auto manufacturers in our military activities. ■
www.marketscope.com
Bond ETFs For Income? Maybe Not
These securities could suffer if investors increasingly shun long-term bond ETFs
in favor of dividend-paying equity funds.
For years, one consistent piece of finan-
cial-planning advice given to individual
investors as they age has been to incre-
mentally move more assets into the rel-
ative safety of government bonds. But
is the advice any good in the era of per-
sistently low interest rates held down
by the Federal Reserve? Would the
advice be any good even if bond yields
were higher?
These questions are crucially
important for the Baby Boom genera-
tion. The Baby Boomers, defined as
those born between 1946 and 1964,
started to enter their 60s in 2006 and
started retiring in 2008. If this group
has been following traditional finan-
cial-planning advice, their move into
their seventh decade should be
accompanied by a big shift from
stocks to bonds.
But Standard & Poor’s Equity
Research Services (ERS) believes long-
term Treasuries offer little long-term
value as very low yields are unlikely to
keep pace with inflation. “Conversely,
equity dividends are likely to rise with
inflation over time and stocks also
offer attractive long-term capital appre-
ciation potential, unlike Treasuries,”
says Alec Young, an S&P equity strate-
gist. As of December 2, 2010, 10-year
Treasuries are yielding about 3% and
30-year bonds are yielding 4.3%.
Nevertheless, there is plenty of evi-
dence investors are shifting more of
their portfolio’s assets into what are
perceived to be less risky assets, prin-
cipally fixed-income instruments such
as bonds and bond funds, especially
as they age.
U.S. household surveys by research
firm Investment Company Institute
(ICI) suggest that even within specified
age groups, willingness to take invest-
ment risk has dropped since the late
1990s. For example, only 22% of
households headed by someone
younger than 35 in 2009 were willing
STANDARD & POOR’S 11
Isabelle Sender
S&P Editorial
to take above-average or substantial questions the wisdom of the “rule of
investment risk, compared with 30% 100.” According to the U.S. Census
of such households in 1998. Bureau, the average retirement age in
According to research from the ICI, America is 62, and the average length
401(k)-type plan participants are much of retirement is 18 years. “Assume
more likely to invest in stocks when they the leading edge of the Baby Boom
are younger and in bonds as they age. began retiring at age 62 in 2008 and
As investors grow older, their willingness assume they have 18 years to live,”
to take investment risk tends to decline, Blitzer posits. “Did we expect them
according to ICI. In 2009, ICI found to dump all their stocks when they
that only 19% of households headed by have an 18-year time horizon?”
someone who is 50 to 64 year old and Some data suggest stocks paying divi-
only 8% of households headed by dends have increasingly become an
someone 65 or older were willing to important source of income, too. S&P
take above-average or substantial invest- Indices notes the percentage of dividend
ment risk, versus 24% of households income as part of personal income has
headed by younger investors, specifically steadily increased over time. In 2008,
someone under the age of 49. dividend income comprised 5.61% of
There is even a formula, known as per capita personal income in the U.S.,
the “rule of 100” to determine about compared to 4.65% 10 years prior and
how much of someone’s assets should 3.07% 20 years prior.
be in bonds versus stocks. A 49-year- S&P Indices also points out that dur-
old investor subtracts their age from ing the same period, the source of
100 to come up with an asset alloca- income from capital markets, such as
tion of 49% bonds and 51% stocks. all kinds of interest-bearing instruments,
A 60-year-old, by contrast, would steadily shrunk from 15.06% in 1988
come up with an allocation of 60% to 10.69% in 2008. But the value of
bonds and 40% stocks. total dividend income in 2000 dollars
But David Blitzer, managing direc- has grown fivefold from $129.7 billion
tor and chairman of the index com- in 1988 to $686.4 billion in 2008.
mittee at S&P Indices, which oper-
ates independently from S&P ERS, (Continued on page 12)
NEGATIVE POTENTIAL IMPLICATIONS
GROSS
TOTAL RETURN** EXPENSE
FUND NAME / TICKER YTD 1-YEAR 3-YEAR PRICE RATIO
Guggenheim Bulletshares 2017 Corporate Bond ETF / BSCH NA NA NA 21 0.24
iShares 10+ Year US Credit Bond Fund / CLY 7.0 6.4 NA 52 0.20
iShares 10+ Year US Government/Credit Bond Fund / GLJ 5.5 4.7 NA 51 0.20
iShares Barclays 10-20 Year Treasury Bond Fund / TLH 7.9 5.7 6.5 112 0.15
iShares Barclays 7-10 Year Treasury Bond Fund / IEF 8.1 6.2 6.6 93 0.15
PIMCO 15+ Year US Tips Index Fund / LTPZ 7.3 6.2 NA 54 0.27
PIMCO 7-15 Year Treasury Index Fund / TENZ 7.3 5.3 NA 76 0.25
PowerShares 1-30 Laddered Treasury Portfolio / PLW 6.9 4.9 5.6 28 0.25
SPDR Barclays Capital Long Term Credit Bond ETF / LWC 6.0 5.1 NA 36 0.15
SPDR Barclays Capital Long Term Treasury ETF / TLO 6.2 4.3 5.2 55 0.13
Data through 12/16/10. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the
effect of sales charges. NA-Not available. Source: S&P MarketScope Advisor.
12 STANDARD & POOR’S
Global Asset Allocation Update
The allocation model is unchanged.
The Standard & Poor’s Investment
Policy Committee (IPC) has a 12-
month target level of 1370 for the
S&P 500 index, which, as IPC
Chairman and S&P Chief
Investment Strategist Sam Stovall
says, “represents a forecast for a
good year for domestic stocks in
2011.”
At recent IPC meetings, the recent
rally in domestic stocks has been a
frequent topic.
“In our opinion, investors are
encouraged that the U.S. government
is willing to entertain extending the
existing tax plan, as well cut payroll
taxes and encourage capital spend-
ing, despite a lame duck Congress
and the resulting increase in debt,”
says Stovall. “Bond investors, how-
ever, feel as if a lump of coal has
been dropped into their stockings
and have sold, pushing the yield on
the 10-year Treasury note up by
nearly 100 basis points since their
Bond ETFs For Income? Maybe Not (Continued from page 11)
Interest income, on the other
hand, has grown only 205% during
the same period. S&P Indices proj-
ects that as equity ownership
becomes even more ubiquitous, and
a growing number of retiring
Americans seek income-generating
assets, the importance of personal
dividend income shall increase.
But investor confidence in stocks
has been shattered over the last
decade while risk aversion has been
on the rise. An overview of the past
five- and 10-year performance analy-
sis shows that stocks, even those
paying dividends, have not proved to
be a fruitful investment, owing main-
ly to the losses experienced after the
credit crisis in 2008. With this crisis
www.marketscope.com
Beth Piskora
S&P Editorial
MODERATE PORTFOLIO
*ANNUALIZED
ASSET CLASS/ S&P TOTAL
ALLOCATION INVESTMENT STYLE ETF/TICKER RANKING RETURN (%) PRICE
45% U.S. STOCKS
37 Large-Cap Blend SPDR S&P 500 / SPY OW 13.6 124
5 Mid-Cap Blend S&P MidCap 400 SPDR / MDY MW 25.3 163
3 Small-Cap Blend iShares S&P SmallCap 600 / IJR MW 25.7 68
20% FOREIGN STOCKS
13 International iShares MSCI EAFE / EFA OW 6.6 57
7 Emerging Markets iShares MSCI Emerging Markets / EEM MW 12.4 46
20% BONDS
15 U.S. Debt iShares Barclays U.S. Aggregate / AGG NR 5.1 105
5 U.S. Short-Term Debt iShares Barclays 1-3 Year Treasury / SHY NR 2.1 84
15% CASH U.S. 6-Month Treasury Bills
Total=100
*Data as of 12/16/10. The Outlook’s Moderate ETF Portfolio gained 6.2% year to date through November 30 vs. a gain of 6.6% for its
custom benchmark. Past performance is no guarantee of future results. MW-Marketweight. OW-Overweight. Source: S&P ETF
Reports.
October low. Even though bonds trend in yields is higher and recom-
may now offer a short-term trading mends underweighting.”
opportunity, as they undergo a The table indicates the IPC’s recom-
counter-trend rally and provide mended allocation for each asset class,
investors with a second chance to and advises an exchange-traded fund to
lighten up, S&P still believes the track each recommended asset class. ■
spreading globally, bonds proved to investors share the IPC’s concerns
be a safe haven for investors, under- about bonds. Bonds have started
scoring the most important risk fac- weakening in the past month.
tor differentiating debt from equity S&P Chief Economist David Wyss
investments. (also a member of the IPC) says if
Looking ahead, however, the invest- investors want bonds, “we recom-
ment outlook bodes better for stocks mend those with maturities of two
than bonds, according to S&P. to five years.”
Economic news in the U.S. has been “We simply aren’t recommending
improving and may help fuel a rally 10-year bonds right now,” Wyss
in risk assets over the next several explains, since shorter-term bonds are
quarters, says Young, who is a mem- paying out yields that are not signifi-
ber of the S&P Investment Policy cantly lower than 10-year bonds.
Committee (IPC). The S&P IPC cur- “We just don’t think it pays to go
rently advises a 65% weighting to for a longer-maturity bond,” says
global equities in its recommended Wyss. “We still believe that yields will
asset allocation and only a 20% go up in time, so it’s better not to lock
weighting in fixed income. in with an investment in a longer-term
There’s evidence at least some bond at today’s low rates.” ■
www.marketscope.com
2011 PowerPicks
The S&P PowerPicks Portfolio 2011 represents the collective
best ideas of Standard & Poor’s equity research staff.
Each of the contributing S&P equity
research industry analysts considers
the stocks highlighted within this
report, which are from each of the
analyst’s coverage universe, to be
positioned for superior total return
during 2011. The S&P PowerPicks
Portfolio 2011 is diversified across
all 10 of the economic sectors that
comprise the S&P 500 index.
The portfolio will be frozen,
meaning that it will undergo no
changes during 2011. The objec-
tive of the portfolio is to exceed
the total return (capital apprecia-
tion plus dividends paid) generat-
ed by the S&P 500.
From inception (January 1, 1997)
through December 31, 2010, the
S&P PowerPicks portfolio outpaced
the S&P 500, gaining 208.3% vs.
an advance of 117.1% for the
index. In 2010, the portfolio rose
20.9% vs. a gain of 15.1% for the
“500”. Past performance is not a
guarantee of future results.
U.S. OUTLOOK
U.S. equities represent roughly
42% of global free float-adjusted
equity market capitalization. The
Standard & Poor’s Investment
Policy Committee (IPC), chaired
by Chief Investment Strategist Sam
Stovall, set a 12-month target for
the S&P 500 of 1,370, which rep-
resents a 8.9% price gain, plus
1.9% dividend yield, for a 10.8%
As of December 31, 2010, the
median capitalization of the S&P
PowerPicks Portfolio 2011 was
about $16.5 billion, ranging from a
high of $368.7 billion for Exxon
Mobil to a low of $600 million for
Advanced Energy Industries. By con-
trast, the median market capitaliza-
tion of the S&P 500 index was
about $11.2 billion, ranging from a
high of $368.7 billion for ExxonMobil
to a low of $1.6 billion for Meredith.
The S&P PowerPicks Portfolio
2011 is comprised of 26 stocks
considered by S&P Equity
Research to be large capitaliza-
tion issues (market cap above $8
billion), ten considered mid-cap
issues ($2 billion to $7.99 bil-
lion), and four considered small-
cap issues (below $2 billion).
The sector representations within
the S&P PowerPicks Portfolio 2011
are broadly representative of those
within the S&P 500. On an equally
weighted basis, the most significant
upside from the index’s closing
level for 2010.
“A steady stream of better-than-
expected economic reports is adding
to the enthusiasm initiated by strong
pre-Christmas holiday sales. What’s
more, the market tends to perform
well in both the first month and first
quarter following mid-term elec-
tions,” comments Stovall. “In addi-
STANDARD & POOR’S 13
2011
POWER
PICKS
weightings in the portfolio are con-
centrated in seven sectors, informa-
tion technology (20.0%), financials
(15.0%), consumer staples (12.5%),
energy (12.5%), health care
(12.5%), consumer discretionary
(10.0%), and industrials (10.0%),
which collectively account for 92.5%
of the portfolio. On a market capi-
talization-weighted basis, the collec-
tive weightings of these sectors with-
in the S&P 500 was 90.1% as of
December 31, 2010.
The Global PowerPicks Portfolio
gained 82.7% from its inception on
January 1, 2005 through
December 31, 2010, vs. a rise of
30.3% in the S&P Global 1200. In
2010, the portfolio rose 15.3% vs.
an increase of 12% for the S&P
Global 1200. Past performance is
not a guarantee of future results.
More information and insight into
our 2011 PowerPicks Portfolio can
be found on MarketScope Advisor
at www.marketscope.com.■
tion, fourth-quarter 2010 operating
results for the S&P 500 are expect-
ed to be strong. We remain posi-
tive on equities in 2011.”
Fourth-quarter 2010 profits should
rise 27% for the S&P 500, 31% for
the MidCap 400, and 66% for the
SmallCap 600, while full year
results are expected to be up 47%,
59% and 127%, respectively. ■
 14 STANDARD & POOR’S www.marketscope.com

2011
POWER
PICKS

U.S. POWERPICKS PORTFOLIO 2011

12-MONTH
‡QUALITY CURRENT TARGET
COMPANY NAME / TICKER ‡STARS RANK *RISK STYLE PRICE PRICE SECTOR

Advanced Energy / AEIS 5 C High S-Blend 14 18 Information Technology

Altria Group / MO 5 A Medium L-Blend 24 28 Consumer Staples
Apache / APA 5 A- High L-Blend 126 140 Energy
Apple / AAPL 5 B High L-Growth 327 420 Information Technology
Avnet / AVT 5 C High M-Value 35 39 Information Technology
Boston Properties / BXP 5 B+ Low L-Blend 90 104 Financials
Celgene / CELG 5 C High L-Growth 56 76 Healthcare
Chevron / CVX 5 A- Low L-Blend 94 107 Energy
Cisco Systems / CSCO 4 B+ Medium L-Growth 21 26 Information Technology
Coca-Cola / KO 5 A+ Low L-Growth 63 73 Consumer Staples
Cummins / CMI 5 B Medium L-Value 105 140 Industrials
CVS Caremark / CVS 5 A+ Medium L-Blend 35 38 Consumer Staples
Discovery Communications / DISCA 5 NR Medium L-Growth 40 55 Consumer Discretionary
EMC / EMC 5 B Medium L-Blend 24 28 Information Technology
ExxonMobil / XOM 5 A+ Low L-Blend 79 85 Energy
Family Dollar Stores / FDO 5 A+ Medium L-Blend 44 58 Consumer Discretionary
Fifth Third Bancorp / FITB 5 B+ Medium L-Blend 15 17 Financials
General Mills / GIS 5 A Low L-Blend 36 41 Consumer Staples
ITC Holdings / ITC 5 NR Low M-Blend 65 74 Utilities
Jacobs Engineering Group / JEC 5 B+ Medium L-Growth 50 57 Industrials
Kelly Services / KELYA 5 B- Medium S-Value 18 25 Industrials
McKesson / MCK 5 A- Medium L-Blend 73 78 Healthcare
MedcoHealth Solutions / MHS 5 NR Medium L-Blend 64 70 Healthcare
MetroPCS Communications / PCS 5 NR High L-Blend 13 19 Telecommunication Services
Mylan / MYL 5 A- Medium L-Growth 23 25 Healthcare
People's United Financial / PBCT 5 B Medium L-Blend 13 17 Financials
PPG / PPG 5 B+ Medium L-Blend 82 100 Materials
Precision Castparts / PCP 5 B Medium L-Growth 141 168 Industrials
Prudential Financial / PRU 5 NR Medium L-Value 61 75 Financials
RightNow Technologies / RNOW 5 NR Medium S-Growth 26 28 Information Technology
Simon Property Group / SPG 5 B- Low L-Blend 100 115 Financials
Tesco / TESO 5 B- High S-Growth 14 20 Energy
Thermo Fisher Scientific / TMO 5 B- Medium L-Growth 56 68 Healthcare
Travelers / TRV 5 NR Medium L-Value 55 65 Financials
TRW Automotive / TRW 5 NR High M-Value 58 62 Consumer Discretionary
Tyson Foods / TSN 5 B- High L-Blend 17 21 Consumer Staples
V.F. / VFC 5 A Medium L-Blend 82 106 Consumer Discretionary
WebMD Health / WBMD 5 B- High M-Growth 53 62 Information Technology
World Fuel Services / INT 5 A+ High S-Blend 36 42 Energy
Xerox / XRX 5 B High L-Blend 11 16 Information Technology
*Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other
factors. ‡See definitions on page 2. L-Large cap. M-Mid cap. S-Small cap. Source: S&P Equity Research.
www.marketscope.com STANDARD & POOR’S 15

GLOBAL OUTLOOK
As the new year begins, investor
curiosity about what’s in store for
global equity markets in 2011 is
palpable, as hopes of another solid
year collide with fears of overdue
profit taking. Similarly, speculation
about what asset classes or countries
will outperform is building, as is
divining potential laggards. While
these impulses are perfectly natural,
we think the core of long-term
investors’ global equity asset alloca-
tions should be based not on what
country they think will be hot in
2011, but on a globally diversified
investment mix that has produced
high risk-adjusted returns over time.
For this, we turn to the efficient
frontier, a staple of modern portfolio
theory that enables objective,
unemotional risk-reward analysis, so
as to address two essential asset
allocation questions. First, within
global equity portfolios, how much
international exposure maximizes
risk-adjusted returns? Second, within
the international stock allocation,
what’s the optimal blend of devel-
oped and emerging market equities?
As always, past performance is not
necessarily indicative of future results.
Our analysis of the past 35 years
worth of total return and standard
deviation data for the S&P 500 and
MSCI EAFE indexes revealed that
adding international equity expo-
sure can improve returns while
reducing risk relative to a purely
2011
POWER
PICKS
domestic equity allocation. The
“sweet spot” on the efficient frontier,
or the allocation that produced the
highest risk-adjusted returns was a
75% domestic allocation coupled
with a 25% foreign weighting.
Our analysis then turned to opti-
mizing overseas equity allocations
by discerning the ideal risk-adjust-
ed blend of developed to emerging
foreign exposure. We found that a
blend of developed and emerging
market stocks produced higher risk
adjusted returns than either a
100% developed or a 100% EM
allocation. Specifically, an even,
50%-50% blend of developed and
EM stocks produced some of the
highest risk adjusted returns. ■

GLOBAL POWERPICKS PORTFOLIO 2011

STARS TICKER EXCHANGE SECTOR

Amec 5 AMEC.LN FTSE International Energy

Apache 5 APA New York Stock Exchange Energy
Avnet 5 AVT New York Stock Exchange Information Technology
Banco Santander 4 SAN SM Madrid Stock Exchange Financials
BMW 5 BMW GY Frankfurt Stock Exchange Consumer Discretionary
Carlberg 5 CARLB DC Copenhagen Stock Exchange Consumer Staples
Celgene 5 CELG NASDAQ Health Care
Chevron 5 CVX New York Stock Exchange Energy
China Construction Bank 4 939 HK Hong Kong Stock Exchange Financials
Credit Suisse 4 CSGN VX Switzerland Financials
CVS Caremark 5 CVS New York Stock Exchange Consumer Staples
Genting 4 GENT MK Kuala Lumpur Stock Exchange Consumer Discretionary
Hon Hai Precision 4 2317 TT Taiwan Stock Exchange Information Technology
Hutchison Whampoa 4 13 HK Hong Kong Stock Exchange Industrials
ITC Holdings 5 ITC New York Stock Exchange Utilities
Jiangxi Copper 4 358 HK Hong Kong Stock Exchange Materials
LVMH 5 MC FP Paris Stock Exchange Consumer Discretionary
Medco Health Solutions 5 MHS New York Stock Exchange Health Care
PetroChina 5 857 HK Hong Kong Stock Exchange Energy
RioTinto 5 RIO LN FTSE International Materials
Samsung Electronics 5 005930 KS Korean Stock Exchange Information Technology
Shenzhen Expressway 5 548 HK Hong Kong Stock Exchange Industrials
Singapore Airlines 4 SIA SP Singapore Stock Exchange Industrials
Swire Pacific 5 19 HK Hong Kong Stock Exchange Financials
Telefonica 4 TEF SM Madrid Stock Exchange Telecommunications
Thermo Fisher Sciemtific 5 TMO New York Stock Exchange Health Care
Tyson Foods 5 TSN New York Stock Exchange Consumer Staples
Vallourec 4 VK FP Paris Stock Exchange Industrials
WebMD 5 WBMD NASDAQ Information Technology
Xstrata 4 XTA LN FTSE International Materials
Source: S&P Equity Research.
16 STANDARD & POOR’S www.marketscope.com

Climbing Up From the Bottom (Continued from page 2)

Equipment spending remains very
strong compared with a year ago but S&P ECONOMIC OUTLOOK
PERCENT CHANGE
could be showing early signs of E2010 E2011 E2012
slowing. After rising 15% in 2010, Real GDP 2.9 3.0 2.6
only 13.8% growth is expected by Consumer Spending 1.8 3.0 2.2
S&P Economics in 2011. That’s still Equip. Investment 14.8 13.8 8.8
healthy, but a slowdown. Nonres. Construction -14.5 -7.8 1.8
The biggest concern remains Res. Construction -3.5 1.2 22.4
employment. The meager 39,000 Federal Government Purchase 4.9 0.6 -3.8
November job gain reverses the S&L Purchase -1.2 0.1 -0.1
acceleration observed through Total Exports 11.9 8.9 8.6
October. The unemployment rate Total Imports 12.8 6.4 4.7
bounced back to a seven-month high CPI 1.7 1.6 1.9
of 9.8% and will clearly break the Core CPI 1.0 1.2 1.7
1982-1983 record of 20 consecutive Levels
months at or above 9% (now 19 and Unemployment Rate 9.7 9.4 8.9
counting). High unemployment Mortgage rate (30-year conventional) 4.7 5.1 6.3
scares consumers. Weak job growth Crude Oil ($/bbl, WTI) $79.49 $88.29 $95.15
means weak income growth, further Housing Starts (mn) 0.59 0.67 1.04
damaging consumer spending. ■ Forecasts are constructed using the Global Insight model of the U.S. economy. E-Estimated. Source: S&P Economics.

The Top Mutual Fund Performances of 2010 (Continued from page 3)

considerations, and cost factors,
again excluding funds that are
closed to new investors and institu-
tional share classes.)
Walden Social Equity Fund
Walden Social Equity Fund outdis-
tanced its Large-Cap Core Funds
peer group in 2010, up nearly 16%,
versus 12.1%. As important, it did
so without incurring high levels of
risk. In fact, WSEFX ranks positively
on all of S&P’s risk consideration
scores, including manager tenure and
standard deviation. We note that the
fund is invested in what S&P consid-
ers high quality names, such as
Chubb (CB 57 ★★★★), International
Business Machines (IBM 156
★★★★), and McDonald’s Corp.
(MCD 75 ★★★). We also note the
fund’s modest costs, with an expense
ratio below its peer group average of age, and its turnover rate of 14%
1.28%, no sales load, and low is a fraction of its peer average of
turnover rate. 63%.
Invesco Van Kampen Comstock Fund BBH Core Select Fund
Invesco Van Kampen Comstock BBH Core Select Fund has been a
Fund also bested its peers in 2010, strong performer among its Large-
rising 16%, and also beat them Cap Core Funds peers over the
over the past three- and five-year trailing one-, three-, five-, and 10-
periods. The fund invests in stocks year periods. Like WSEFX, it has
with solid credit ratings as meas- positive scores for all of our risk
ured by S&P Ratings, which oper- consideration metrics. The fund
ates independently from S&P invests in high quality stocks, such
Equity Research. Further, manage- as Wal Mart Stores Inc (WMT 56
ment has been in charge of the ★★★★★) and Baxter International
portfolio since 1999. (The Y share Inc (BAX 49 ★★★★), and has
class in this review was opened in favorable marks for manager
2004). We also note that all three tenure and standard deviation.
cost factors are positive: this fund Lastly, its expense ratio is just a bit
has no sales load, its expense ratio below peers, but the fund has no
of 0.64% is about half of its sales load and management keeps
Large-Cap Value Funds peer aver- turnover to a minimum. ■
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