STATE OF WISCONSIN Department of Employee Trust Funds Robert J. Conlin SECRETARY

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1 STATE OF WISCONSIN Department of Employee Trust Funds Robert J. Conlin SECRETARY 801 W Badger Road PO Box 7931 Madison WI (toll free) Fax etf.wi.gov DATE: January 29, 2015 TO: FROM: Wisconsin Deferred Compensation Board Investment Committee Shelly Schueller, Director Wisconsin Deferred Compensation Program SUBJECT: Socially Responsible Investments Overview Attached is a presentation from Bill Thornton of Advised Assets Group (AAG) regarding potential replacements for the Wisconsin Deferred Compensation Program s socially responsible investment option. Although no change is currently anticipated, the Board requested a review of socially responsible investment options at the November 2014 meeting. The Calvert Social Investment Equity Fund (Ticker symbol: CEYIX) is the current socially responsible fund option in the WDC core investment lineup. This fund meets the Board s investment policy statement criteria, but its performance has lagged over the past 18 months. The presentation includes a discussion of the non-economic principles used by most firms offering socially responsible investments, a review of the socially responsible funds in the Morningstar database, and the Board s Investment Policy Statement criteria. There are approximately 20 funds that might be appropriate replacement options, if the Board decides to change its socially responsible investment offering. The committee will review this presentation with AAG at the meeting and if warranted, the results of the discussion may be shared with the full Board at its meeting on March 12, Attachment: Wisconsin SRI Overview Reviewed and approved by Matt Stohr, Administrator, Division of Retirement Services Electronically Signed 2/2/15 Board Mtg Date Item # DCIC

2 Wisconsin Deferred Compensation Program Socially Responsible Investment Overview January, 2015

3 Contents I. Socially Responsible Overview II. III. Investment Policy Criteria Search Results Criteria Used Fund Performance Report of Resulting Funds Appendix: Glossary of Terms 2

4 Socially Responsible Investment Overview Socially Responsible: A fund that selectively invests based on certain non-economic principles May actively invest in companies based on: Environmental Responsibility Human Rights Religious Views Favorable Employee Relations May avoid investing in companies based on: Alcohol Tobacco Gambling Defense Industry 3

5 Socially Responsible Investment Overview Morningstar Database As of 12/31/14, the Morningstar Direct Database contained: 186 Socially Responsible Funds (492 including all share classes) Domestic Equity International / Global Sector Fixed Income Asset Allocation / Target Date 154 of funds have at least a 5 year track record (353 including all share classes) 4

6 Investment Policy Criteria 5

7 Investment Option Criteria From the Wisconsin Deferred Compensation Program Deferred Compensation Board Investment Policy Statement (revised November 4, 2014) Minimum Criteria for Selecting and Monitoring Mutual Fund and Institutional Investment Product Options Minimum 5 year operating history may be waived for index funds Expense ratio [internal expense charge plus any 12(b)1 fee] not greater than the mean for the appropriate peer group 5-year rolling average performance must be equal or exceed appropriate benchmark or index Minimum total asset size of $400 million may be waived for certain categories of funds Anticipated WDC assets not greater than 5% of total fund (determined by comparing current WDC asset levels in a comparable fund) No loads or sales charges unless they are waived for the WDC Not a sector fund 6

8 Search Results 7

9 Search Criteria 1. Socially Responsible = Yes 2. Morningstar Category = All categories 3. Inception Date <= 12/31/ Prospectus Net Exp Ratio <= Category Average 5. Total Return % Rank 5 Yr <= Fund Size >= $400 million 7. Open to New Investors = Yes Results: Available to Trade: 37 Funds comprising 57 share classes 20 Funds comprising 35 share classes 8

10 Fund Performance Report Performance Summary: Wisconsin SRI Overview period ended 12/31/2014 Overall Rating 1 Long-Term Rolling Analysis 2 Fund Consecutive # of Quarters Morningstar Complex Ticker Composite %'s Mstar Quarters Below out of Category Rating Symbol Fund Name Overall Return Sharpe Rating Below trailing 12 Intl 3 Diversified Emerging Mkts 1 DFESX DFA Emerging Markets Social Core Eq Above 0 0 out of 12 Pass Mid-Cap 8 Mid-Cap Growth 1 CCPIX Calvert Capital Accumulation I Above 0 0 out of 12 Pass Mid-Cap Blend 1 DFUEX DFA US Social Core Equity Above 0 0 out of 12 Pass Mid-Cap Blend 1 CAAPX Ariel Appreciation Investor Above 0 1 out of 12 Pass Mid-Cap Blend 1 ARGFX Ariel Investor Neutral 0 9 out of 12 Warning Large-Cap Large Growth 1 PARWX Parnassus Endeavor Fund Above 0 0 out of 12 Pass Large Growth 1 PARNX Parnassus Above 0 0 out of 12 Pass Large Growth 1 NBSLX Neuberger Berman Socially Rspns Inst Above 0 0 out of 12 Pass Large Growth 1 CEYIX Calvert Equity I Above 0 0 out of 12 Pass Large Blend 1 PRILX Parnassus Core Equity Institutional Above 0 0 out of 12 Pass Large Blend 1 AVEDX Ave Maria Rising Dividend Above 0 0 out of 12 Pass Large Blend 1 DFSIX DFA US Sustainability Core Above 0 0 out of 12 Pass Large Blend 1 TISCX TIAA-CREF Social Choice Eq Instl Above 0 0 out of 12 Pass Large Blend 1 DIEQX Domini Social Equity Instl Neutral 0 0 out of 12 Pass Asst All/Other Moderate Allocation 1 CBAIX Calvert Balanced I Above 0 0 out of 12 Pass Bond 9 Intermediate-Term Bond 1 CBDIX Calvert Bond I Above 0 0 out of 12 Pass Intermediate-Term Bond 1 PTSAX PIMCO Total Return III Instl Above 0 0 out of 12 Pass Short-Term Bond 1 CDSIX Calvert Short Duration Income I Above 0 0 out of 12 Pass Index Funds 6 Large Growth 1 CISIX Calvert Social Index I (idx) N/A N/A N/A out of 12 Pass Large Blend 1 VFTNX Vanguard FTSE Social Index I (idx) N/A N/A N/A out of 12 Pass 1.The Overall Rating is derived from the 3, 5 and 10 year net-of-fee performance figures, the 3 and 5 year Sharpe Ratios and the Morningstar Rating TM. 2.The Long-Term Rolling Analysis accumulates the trailing 12 quarter Overall Ratings and determines a pass/fail designation accordingly. Data Source: Morningstar Direct Please refer to the Appendix page for additional footnotes For all funds, lowest-cost share class is shown. 9

11 Fund Performance Report Return Analysis: Wisconsin SRI Overview period ended 12/31/2014 4th Qtr 4th Qtr Performance vs. Benchmark (Annualized Returns and Return Percentiles %) Year 1 Year 3 Year 3 Year 5 Year 5 Year 10 Year 10 Year Incept. Fund Name Return Percentile Return Percentile Return Percentile Return Percentile Return Percentile Date Intl 3 Diversified Emerging Mkts Peer Group DFA Emerging Markets Social Core Eq N/A N/A 8/31/2006 Mid-Cap 8 Mid-Cap Growth Peer Group Calvert Capital Accumulation I /26/1999 Mid-Cap Blend Peer Group DFA US Social Core Equity N/A N/A 10/1/2007 Ariel Appreciation Investor /1/1989 Ariel Investor /6/1986 Large-Cap Large Growth Peer Group Parnassus Endeavor Fund N/A N/A 4/29/2005 Parnassus /27/1984 Neuberger Berman Socially Rspns Inst /28/2007 Calvert Equity I /1/1999 Large Blend Peer Group Parnassus Core Equity Institutional /28/2006 Ave Maria Rising Dividend N/A N/A 5/2/2005 DFA US Sustainability Core N/A N/A 3/12/2008 TIAA-CREF Social Choice Eq Instl /1/1999 Domini Social Equity Instl /28/2008 Asst All/Other Moderate Allocation Peer Group Calvert Balanced I /26/1999 Bond 9 Intermediate-Term Bond Peer Group Calvert Bond I /31/2000 PIMCO Total Return III Instl /1/1991 Short-Term Bond Peer Group Calvert Short Duration Income I /11/2006 Index Funds Calvert Social Index I (idx) /30/2000 Vanguard FTSE Social Index I (idx) /14/2003 A Percentile Ranking of 100% represents the best in class performance w hereas 0% represents the low est. Investment options available in the plan may be through mutual funds and/or a group fixed annuity contract. Total return performance show n above represents that of the underlying fund and does not include a deduction for any applicable annuity contract of administrative fees/expenses. Performance numbers show n above w ould be less after applicable fee/expenses are deducted. Data Source: Morningstar Direct Please refer to the Appendix page for additional disclosures 10

12 Fund Performance Report Sharpe Ratio and Expense Analysis: Wisconsin SRI Overview period ended 12/31/2014 Sharpe Ratios and Percentiles % Standard Deviation Expense Expense Manager Fund Size Fund Name 3 Yr Ratio 3 Yr % 5 Yr Ratio 5 Yr % 3 Yr 5 Yr Ratio Percentile % Tenure (yrs) $MM Intl 3 Diversified Emerging Mkts Peer Group DFA Emerging Markets Social Core Eq Mid-Cap 8 Mid-Cap Growth Peer Group Calvert Capital Accumulation I Mid-Cap Blend Peer Group DFA US Social Core Equity Ariel Appreciation Investor ,987 Ariel Investor ,268 Large-Cap Large Growth Peer Group Parnassus Endeavor Fund Parnassus Neuberger Berman Socially Rspns Inst ,366 Calvert Equity I ,791 Large Blend Peer Group Parnassus Core Equity Institutional ,318 Ave Maria Rising Dividend DFA US Sustainability Core TIAA-CREF Social Choice Eq Instl ,685 Domini Social Equity Instl ,073 Asst All/Other Moderate Allocation Peer Group Calvert Balanced I Bond 9 Intermediate-Term Bond Peer Group Calvert Bond I PIMCO Total Return III Instl ,510 Short-Term Bond Peer Group Calvert Short Duration Income I ,686 Index Funds Calvert Social Index I (idx) Vanguard FTSE Social Index I (idx) ,535 A Percentile Ranking of 100% represents the best in class performance w hereas 0% represents the low est. Expense refers to the Prospectus Net Expense Ratio Data Source: Morningstar Direct Please refer to the Appendix page for additional disclosures 11

13 Fund Performance Report Annual Returns and Statistics: Wisconsin SRI Overview period ended 12/31/2014 Portfolio Construction Calendar Year Returns MPT Statistics ( 3 year) Turnover Number of % in top Fund Name Alpha Beta R2 Ratio Holdings 10 holdings Intl 3 Diversified Emerging Mkts Peer Group DFA Emerging Markets Social Core Eq % Mid-Cap 8 Mid-Cap Growth Peer Group Calvert Capital Accumulation I % Mid-Cap Blend Peer Group DFA US Social Core Equity % Ariel Appreciation Investor % Ariel Investor % Large-Cap Large Growth Peer Group Parnassus Endeavor Fund % Parnassus % Neuberger Berman Socially Rspns Inst % Calvert Equity I % Large Blend Peer Group Parnassus Core Equity Institutional % Ave Maria Rising Dividend % DFA US Sustainability Core % TIAA-CREF Social Choice Eq Instl % Domini Social Equity Instl % Asst All/Other Moderate Allocation Peer Group Calvert Balanced I % Bond 9 Intermediate-Term Bond Peer Group Calvert Bond I % PIMCO Total Return III Instl % Short-Term Bond Peer Group Calvert Short Duration Income I % Index Funds Calvert Social Index I (idx) % Vanguard FTSE Social Index I (idx) % A Percentile Ranking of 100% represents the best in class performance w hereas 0% represents the low est. The Fund Performance Review is a proprietary high level analytical tool that is used to evaluate fund performance and is not intended as an offer or solicitation of securities, or as investment advice. Investment options available in the plan may be through mutual funds and/or a group fixed annuity contract. Total return performance show n above represents that of the underlying fund and does not include a deduction for any applicable annuity contract of administrative fees/expenses. Performance numbers show n above w ould be less after applicable fee/expenses are deducted. Data Source: Morningstar Direct Please refer to the Appendix page for additional disclosures 12

14 Fund Performance Report Index Performance period ending 12/31/2014 Total Total Total Total Return Return Return Annual Annual Annual Annual Annual Return Annlzd Annlzd Annlzd Return Return Return Return Return Index 1 Year 3 Year 5 Year 10 Year International 3 MSCI EMF ID MSCI Eafe Ndtr_D MSCI World Ndtr_D Small-Cap 5 Russell 2000 Growth Russell Russell 2000 Value Mid-Cap 8 Russell Midcap Growth Standard & Poor's Midcap Russell Midcap Value Large-Cap Russell 1000 Growth Standard & Poor's 500 TR Russell 1000 Value Bond 9 Barclays Capital Aggregate Bond Barclays Capital Credit Barclays Capital Mortgage-Backed Barclays Capital Government Bond Barclays Capital 1-3 Year Governm MSCI EMF ID MSCI EAFE Ndtr_D MSCI World Ndtr_D Russell 2000 Growth Russell 2000 Russell 2000 Value Russell Mid Cap Growth Standard & Poor's Midcap 400 Russell Mid Cap Value Russell 1000 Growth Standard & Poor's 500 Russell 1000 Value BarCap US Aggregate Bond BarCap US Credit BarCap US MBS BarCap US Government Bond BarCap US Govt 1-3 Yr A capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors. The reported returns reflect equities priced in US dollars and do not include the effects of reinvested dividends. Widely accepted as a benchmark for international stock performance, the EAFE Index is an aggregate of 21 individual country indexes that collectively represent many of the major markets of the world. Includes all 23 MSCI developed market countries. Ndtr_D indexes are calculated daily and take into account actual dividends reinvested daily before withholding taxes, but exclude special tax credits declared by companies. Market-weighted total return index that measures the performance of companies within the Russell 2000 Index having higher price-to-book ratios and higher forecasted growth values. Consists of the smallest 2000 companies in the Russell 3000 Index, representing approximately 7% of the Russell 3000 total market capitalization. Market-weighted total return index that measures the performance of companies within the Russell 2000 Index having lower price-to-book ratios and lower forecasted growth values. Market-weighted total return index that measures the performance of companies within the Russell Midcap Index having higher price-to-book ratios and higher forecasted growth values. Includes approximately 10% of the capitalization of U.S. equity securities. These are comprised of stocks in the middle capitalization range. Market-weighted total return index that measures the performance of companies within the Russell Midcap Index having lower price-to-book ratios and lower forecasted growth values. Market-weighted total return index that measures the performance of companies within the Russell 1000 Index having higher price-to-book ratios and higher forecasted growth values. A market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard and Poor's chooses the member companies for the 500 based on market size, liquidity and industry group representation. Market-weighted total return index that measures the performance of companies within the Russell 1000 Index having lower price-to-book ratios and lower forecasted growth values. Composed of the Barclays Capital Govt/Credit Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Listed for corporate bond-general and high-quality funds. This index tracks the returns of all publicly issued, fixed-rate, nonconvertible, dollar-denominated, SEC-registered, investment-grade corporate debt. Includes 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA). Listed for government-bond general and Treasury funds because it tracks the returns of U.S. Treasuries, agency bonds, and one- to three-year U.S. government obligations. This index is effective for tracking portfolios holding non-mortgage government securities. Comprised of both the Treasury Bond index (all public obligations of the U.S. Treasury, excluding flower bonds and foreign-targeted issues) and the Agency Bond Index (all publicly issued debt of U.S. Government agencies and quasi-federal corporations and corporate-debt guaranteed by the U.S. Government). A benchmark index is not actively managed, does not have a defined investment objective, and does not incur fees or expenses. Therefore, performance of an Index Fund will generally be less than its benchmark index. You cannot invest directly in a benchmark index. Data Source: Morningstar Direct S&P 500 Index is a registered trademark of Standard & Poor's Financial Services LLC ("Standard & Poor's), and is an unmanaged index considered indicative of the domestic Large-Cap equity market. S&P 400 Index is a registered trademark of Standard & Poor's Financial Services LLC ("Standard & Poor's), and is an unmanaged index considered indicative of the domestic Mid-Cap equity market. Please refer to the Appendix page for additional disclosures 2010 Morningstar, Inc. All Rights Reserved. 13

15 Fund Performance Report FUND PERFORMANCE REVIEW IMPORTANT DISCLOSURES: The Fund Performance Review is compiled at the request of the Plan Sponsor and/or broker. It is designed as a high level analytical tool to aide plan sponsors in carrying out their fiduciary responsibilities; it is not intended as investment advice. Plan Sponsors may wish to review the enclosed material with their investment adviser, consultant or broker, if necessary, prior to making final investment decisions. Funds listed on the Fund Performance Review are designed to meet stated investment objectives and risk profiles. Risks associated with the investment options can vary significantly and the relative risks of investment categories may change under certain economic conditions. The investment return and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be more or less than their original cost. Current performance may be lower or higher than performance data shown due to market activity. Past performance is not a guarantee of future results. CONFIDENTIAL - DO NOT DISCLOSE OR DISSEMINATE Data Source: Morningstar Direct FOR PLAN SPONSOR USE ONLY - NOT FOR USE WITH PLAN PARTICIPANTS Not intended as an offer or solicitation of securities 14

16 Fund Performance Report FUND PERFORMANCE REVIEW: OVERVIEW OBJECTIVE: * To quantify historical fund performance relative to peer group benchmarks. * To identify funds that have consistently underperformed over the long-term. * To assist in identifying style drift and discern gaps within the plan portfolio. FUNDAMENTALS: * An objective analysis based on set criteria. * Based on long-term and risk-adjusted performance. * Comparison against peer group of similar funds as determined by Morningstar, Inc. SOURCE: * Statistics are derived from an independent third-party: primarily Morningstar Direct SCOPE: * The Fund Performance Review is designed as a high level analytical tool to aide plan sponsors in carrying out their fiduciary responsibilities; it is not intended as investment advice. The purpose of this document is to provide investment-related information only for the plan sponsor in its role as a fiduciary to the Plan, not as investment advice for plans or plan participants. Although the data contained in this report is from reliable sources. Advised Assets Group, LLC cannot guarantee its completeness or accuracy. Risks associated w ith investment options can vary significantly w ith each particular Investment category and the relative risks of categories may change under certain economic conditions. The investment return and principal of an investment w ill fluctuate so that an investor's shares, w hen redeemed, may redeemed, may be more or less Current performance may be lower or higher than performance data shown due to market volatility. Past performance is no guarantee of future returns Morningstar, Inc. All Rights Reserved. Use of the content requires expert know ledge. It is to be used by specialist institutions only. The information contained herein; (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not w arranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from the use of this information, except w here such damages or losses cannot be limited or excluded by law in your jurisdiction. CONFIDENTIAL - DO NOT DISCLOSE OR DISSEMINATE Data Source: Morningstar Direct FOR PLAN SPONSOR USE ONLY - NOT FOR USE WITH PLAN PARTICIPANTS Not intended as an offer or solicitation of securities 15

17 Fund Performance Report FUND PERFORMANCE REVIEW: CRITERIA OVERALL RATING: Based on performance, risk-adjusted performance and the Overall Morningstar Rating. Return Composite: Determined by taking the equal-weighted average of the 3-, 5- and 10-year category return percentiles. Sharpe Composite: Calculated by averaging the 3- and 5-year category sharpe percentiles. Overall Composite: The equally-weighted average of the Return Composite and Sharpe Composite. Overall Morningstar Rating: Represents a measure of an investment's risk-adjusted return, relative to similar investments. The Overall Composite is the sole determinate for the Overall Rating for funds that do not have an Overall Morningstar Category Rating. Overall Overall Morningstar Composite Rating > 50.00% AND w, x, or y > 50.0% OR w, x, or y < 50.0% AND u, or v Overall Rating Above Neutral Below LONG-TERM ROLLING ANALYSIS: Based on the accumulated trailing 12 quarter "Overall Ratings". Consecutive number Total number of of Quarters Receiving Quarters Below out a Below Rating of trailing 12 quarters < 4 Quarters AND < 7 Quarters > 4 Quarters OR > 7 Quarters Warning OR Fail Overall Rating: < 25.0% Warning OR Fail Funds receiving a Warning: Please see the footnotes page for Special Product Consideration Funds. CONFIDENTIAL - DO NOT DISCLOSE OR DISSEMINATE Data Source: Morningstar Direct OR Long-Term Rolling Analysis Pass For expanded definitions of the Composites, Sharpe Ratio and Ratings, please refer to the corresponding glossary. Information for this fund evaluation was received from what we believe to be reliable sources, but we cannot absolutely guarantee accuracy, The performance data quoted within represents past performance and is not a guarantee or indication of future investment results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of the funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages). The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures with its three -, five -, and then-year (if-applicable) Morningstar Rating metrics. Past Performance is no guarantee of future results. FOR PLAN SPONSOR USE ONLY - NOT FOR USE WITH PLAN PARTICIPANTS Not intended as an offer or solicitation of securities 16

18 Fund Performance Report FUND COMPLEX RATING OVERVIEW: Due to the issues involving mutual fund complexes and their compliance with security laws and regulations, Great- West FinancialSM developed a ratings system for funds involved in its packaged products. Mutual fund complexes are assigned a rank of red, yellow or green. RED RATING: A fund complex or any of its respective funds may be placed on the Red Fund Complex Corporate Rating and may be terminated or disqualified from participating in the packaged products if that fund complex is determined by a court or appropriate regulatory agency or the fund complex admits to having allowed regulatory violations or corporate infractions in its funds by its employees (officers or portfolio managers) of the complex. In such event, depending on the severity of the violation or infraction, the fund(s) may be terminated even if such activity was not found to have occurred in a fund used by Great-West FinancialSM but elsewhere in the fund complex. YELLOW RATING: A fund or fund complex will be put on the Yellow Fund Complex Corporate Rating if that fund complex is charged by a court or appropriate regulatory agency or admits to having allowed regulatory violations or corporate infractions in its funds. While a fund is on the Yellow Fund Complex Corporate Rating, no action shall be taken to terminate or replace the fund. GREEN RATING: A fund or fund complex that has not been implicated in any regulatory violations or infractions nor has admitted to committing such activities. CONFIDENTIAL - DO NOT DISCLOSE OR DISSEMINATE Data Source: Morningstar Direct FOR PLAN SPONSOR USE ONLY - NOT FOR USE WITH PLAN PARTICIPANTS Not intended as an offer or solicitation of securities 17

19 Fund Performance Report SPECIAL NOTE REGARDING SPECIAL PRODUCT CONSIDERATION FUNDS Funds receiving the 'Warning' rating represent a limited number of Special Product Consideration funds that have not earned a 'Pass' rating and are given a 'Warning' due to exceptional circumstances. These circumstances include: funds offered by companies on an exclusive or restricted basis to GWRS in specific markets; Great-West funds that have historical performance of the prior management; funds that occupy unique product positioning for Minority Business Enterprise status, Women Business Enterprise status, or Disabled Business Enterprise status; or funds, in the opinion of GWRS, misclassified by Morningstar or have restricted investment policies or some other unique positioning of the fund. Funds with a 'Warning' rating are monitored closely and can be reclassified when appropriate to a 'Pass' or 'Fail' rating. GWRS will periodically review the funds in the product array and assign the Special Product Consideration (SPC) as appropriate. Funds currently designated by GWRS for Special Product Consideration: FUND FUND American Funds American Hi-Inc Tr American Funds US Government Sec American Funds Bond Fund of Amer Ariel Discovery American Funds Interm Bd Fd of Amer Ariel American Funds Invmt Co of Amer Great-West Aggressive Profile American Funds IS Mortg Great-West Lifetime 2025 I American Funds IS US Govt/AAA-Rtd Secs Great-West Lifetime 2055 I American Funds Ltd-Term Tx-Ex Bd Great-West Money Market American Funds Money Market Great-West Multi-Manager LgCpGr American Funds Mortgage Great-West Putnam High Yield Bond American Funds NVIT Bond Great-West SecureFoundation LT 2055 American Funds ST Bd Fd of Amer Great-West Small Cap Growth American Funds Tax-Exempt Bond 18

20 Glossary

21 Glossary 12b-1 Fee The maximum annual charge deducted from fund assets to pay for distribution and marketing costs. Although usually set on a percentage basis, this amount will occasionally be a flat figure. Actively managed fund A fund manager buys and sells securities attempting to outperform the market as a whole. Adjustable Bonds A bond whose coupon is reset periodically usually every six months to three years. At the reset date, the coupon is set equal to some base index, such as the one-year constant Treasury rate, plus a spread (or margin). When interest rates are falling, these bonds do better than an in-year Treasury, but when interest rates rise, they can lag Treasury yields. Aggressive Growth (Objective) Funds that seek rapid growth of capital and that may invest in emerging market growth companies without specifying a market capitalization range. They often invest in small or emerging growth companies and are more likely than other funds to invest in IPO's or in companies with high price/earnings and price/book ratios. They may use such investment techniques as heavy sector concentrations, leveraging, and short-selling. Alpha A measure of the difference between a fund s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates the fund s underperformance, given the expectations established by the fund s beta. Annual Returns Total returns calculated on a calendar-year basis. The annual return for a fund will be the same as its trailing 12-month total return only at year-end. Annualized Returns Returns for periods longer than one year are expressed as "annualized returns." This is equivalent to the compound rate of return which, over a certain period of time, would produce a fund s total return over that same period. Asset Allocation (Objective) Income and capital appreciation are dual goals for funds in this objective. Managers often use a flexible combination of stocks, bonds, and cash. Managers may shift assets based on analysis of business-cycle trends. Average Credit Quality Gives a snapshot of the portfolio s overall credit quality. It is an average of each bond s credit rating, adjusted for its relative weighting in the portfolio. Average Effective Duration A measure of a fund's interest-rate sensitivity--the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. Duration is determined by a formula that includes coupon rates and bond maturities. Small coupons tend to increase duration, while shorter maturities and higher coupons shorten duration. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Average Effective Maturity Used for taxable fixed-income funds only, this figure takes into consideration all mortgage prepayments, puts, and adjustable coupons; it does not, however, account for call provisions. The number listed is a weighted average of all the maturities of the bonds in the portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security. Balanced (Objective) Funds that seek both income and capital appreciation by investing in a generally fixed combination of stocks and bonds. These funds generally hold a minimum of 25% of their assets in fixed-income securities at all times. Basis Point One-hundredth of a percentage point. For example, 50 basis points equals.50%. Beta A measure of a fund s sensitivity to market movements. The beta of the market is 1.00 by definition. Beta is calculated by comparing a fund s excess return over Treasury bills to the market's excess return over Treasury bills, so a beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the fund s excess return is expected to perform 15% worse than the market s excess return during up markets and 15% better during down markets. Bonds Interest-bearing certificates of indebtedness or IOUs. While bonds' rates of return remain fixed, bond prices change in relation to interest rates when interest rates go up, bond prices go down, and vice versa. However, bond funds are variable funds and fluctuate with market conditions. Bond funds Contrary to individual bonds, which offer a guaranteed rate of return, bond funds are variable funds and their returns may rise or fall depending on market conditions. Funds with 70% or more of their assets invested in bonds are classified as Bond Funds. Bond funds are divided into two main groups: Taxable Bond and Municipal Bond. Taxable Bond Fund categories include the following: Long-Term Government, Intermediate-Term Government, Short-Term Government, Long-Term Bond, Intermediate-Term Bond, Short-Term Bond, Ultrashort-Bond, International- Bond, High-Yield Bond, Emerging-Markets Bond and Multisector Bond. Breakpoint The investment amount at which investors in a load fund qualify for a discount on the fund s sales charges. G - 1

22 Glossary Broker A firm or individual that acts as an intermediary between a buyer and a seller of securities, thereby earning a commission on the transaction. Unlike a broker-dealer, a broker does not own the securities that he or she sells. Callable Bond A bond that can be repaid early, at the issuer s discretion. A callable bond allows an issuer to refinance debt at a lower rate, should interest rates drop below the coupon rate on the bond. If interest rates have dropped significantly since the date of issue, a callable bond will trade as though its maturity were shortened to the call date, which is the earliest time at which the bond can be redeemed. Capital Appreciation The taxable income generated when a security is sold. The amount of appreciation is measured by subtracting the purchase price from the sale price. Capital Gains Taxable income generated only when a security is sold. This figure is calculated by subtracting the purchase price from the sale price. Under IRS regulations, funds must distribute 98% of their capital gains each year to avoid paying taxes on them. Shareholders pay taxes on these distributions, even if the gains are reinvested. Further capital gains can be generated by selling shares in a fund for more than the original purchase price. Capitalization The total dollar value of all stock issued by a company. Small-cap stocks are issued by companies with market cap less than $1 billion. Mid-cap stocks are issued by medium-sized companies with market cap anywhere from $1 billion to $5 billion. Large-cap stocks include companies with market cap greater than $5 billion. CMOs Collateralized mortgage obligations are derivative securities, created by chopping up mortgage pass-throughs or whole loans into various slices in order to redistribute the cash flows (both principal and interest payments) from the underlying bonds. The CMO group, except for adjustable-rate mortgage funds, includes PACs (planned amortization class bonds), floating- and inversefloating-rate CMOs, and accrual or Z-tranche bonds, among other varieties. Consumer Price Index (CPI) This index measures the changes in prices of goods and services purchased by urban households. Many pension and employment contracts are tied to changes in consumer prices, as protection against inflation and reduced purchasing power. Corporate Bond--General (Objective) Funds that seek income by investing in fixed-income securities. Funds with this objective may hold a variety of issues, including but not limited to government bonds, high-quality corporates, mortgages, asset-backeds, bank loans and junk bonds. Corporate Bond--High Quality (Objective) Offerings that seek income by investing at least 65% of their assets in corporate debt securities rated A or higher. They generally maintain average ratings of AA or better. Corporate Bond--High Yield (Objective) Funds that seek income by generally investing 65% or more of their assets in bonds rated below BBB. The price of these issues is generally affected more by the condition of the issuing company (similar to a stock) than by the interest-rate fluctuation that usually causes bond prices to move up and down. Current income Results when a stock pays a dividend or a bond makes an interest payment. This is the value of your investment increased. With current income, you get a fairly stable pattern of income which generally means reduced volatility. (Stock dividends must be declared, and are not predictable.) Diversification Spreading your money over many different types of investments. Contrary to putting all your eggs in one basket, diversification can help protect your savings because when one investment is doing poorly, another may be doing well. This does not guarantee against loss of value in your investments. Dividends The distribution of earnings to stockholders by a company. Dividends are usually paid out from current earnings. Domestic equity funds are placed in a category based on the style and size of the stocks they typically own. The style and size parameters are based on the divisions used in the investment style box: Value, Blend, or Growth style and Small, Medium, or Large median market capitalization. Domestic Hybrid Category Used for funds with stock holdings of greater than 20% but less than 70% of the portfolio. Dow Jones Industrial Average Computed by summing the prices of the stocks of 30 companies and then dividing that total by an adjusted value--one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. Duration A time measure of a bond s interest-rate sensitivity, based on the weighted average of the time periods over which a bond s cash flows accrue to the bondholder. Time periods are weighted by multiplying by the present value of its cash flow divided by the bond s price. (A bond s cash flows consist of coupon payments and repayment of capital). A bond s duration will almost always be shorter than its maturity, with the exception of zero-coupon bonds, for which maturity and duration are equal. Equity-Income (Objective) Funds that are expected to pursue current income by investing at least 65% of their assets in dividend-paying equity securities. G - 2

23 Glossary Equity style box is a matrix that shows a fund s investment style. Nine boxes represent two variables: the size of the companies invested in (small-cap, mid-cap, large-cap), and whether a fund is growth, value, or blend oriented. Morningstar recalculates the style of each fund on a monthly basis. The equity style box is shown below (areas are shaded according to risk the darker the area, the higher the risk associated with the investment). Value Blend Growth Large Medium Small Excess Returns A component found in Morningstar Return, Morningstar Risk, and the Morningstar Rating. This figure is calculated by subtracting the monthly returns of the three-month Treasurybill from the monthly returns of the fund during the same time period. Exchange-Traded Funds (ETFs) are not mutual funds in the traditional sense; rather, they are hybrid instruments combining aspects of common stocks and mutual funds and offering many the benefits of both. ETFs are products that trade like stocks. They mimic stock indexes and are passively managed just like an index fund. Because ETFs trade throughout the day just like a stock, investors have the ability to choose the timing and know the price of the transaction. Expense Ratio The percentage of fund assets paid for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund s NAV. Sales charges are not included in the expense ratio. FHLMC mortgages The Federal Home Loan Mortgage Commission, a federally-sponsored corporation that packages huge pools of individual mortgages and carves these pools up as mortgagebacked securities. This provides diversification, and consequently lower risk for mortgage investors. Although FHLMC securities are not directly backed by the federal government, it is implicitly recognized that the government would step in were there a likelihood that they would default. Fixed-income style box is similar to the equity style box. Fixed income style boxes represent a bond fund s investment style. A fixed-income style would be the intersection of its duration (short, intermediate, and long) and the quality of the bonds selected for the portfolio (high, medium, low). Listed below is the matrix using the fixed-income style groupings (again, the darker the shading, the higher the risk). Short Int. Long High Medium Low Flagship Fund Not to be confused with the Flagship Family of funds, a flagship fund is typically the oldest of a management company s funds, or one that boasts the largest number of assets. Such funds often bear the management company s name. Foreign Stock Category An international fund having no more than 10% of stocks invested in the United States. Fund of Funds A fund that specializes in buying shares in other mutual funds rather than individual securities. Quite often this type of fund is not discernible from its name alone, but rather through prospectus wording (i.e.: the fund s charter). Geometric Mean Return A compounded and annualized rate of return. GNMA mortgages These are mortgage pass-through securities issued by the Government National Mortgage Association. These bonds are backed by the full faith and credit of the U.S. government. Government Bond--General (Objective) Offerings that pursue income by investing in a combination of mortgage-backed securities, Treasuries, and agency securities. G - 3

24 Glossary Government Bond--Mortgage (Objective) Funds that seek income by generally investing at least 65% of their assets in securities backed by mortgages, such as securities issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC). Government Bond--Treasury (Objective) Treasury funds that seek income by generally investing at least 80% of their assets in U.S. Treasury securities. Growth (Objective) Funds that pursue capital appreciation by investing primarily in equity securities. Current income, if considered at all, is a secondary concern. Growth and Income (Objective) Growth of capital and current income are near-equal objectives for these funds. Investments are typically selected for both appreciation potential and dividendpaying ability. Guaranteed Certificate Fund All money deposited into a certificate during a "deposit period" earns a guaranteed rate of return, credited daily until maturity. Backed by the general assets of the certificate issuer. High-Yield Bond Category A fund with at least 65% or more of bond assets in bonds rated below BBB. Index Fund A fund that tracks a particular index and attempts to match returns. While an index typically has a much larger portfolio than a mutual fund, the fund s management may study the index s movements to develop a representative sampling, and match sectors proportionately. Individual Retirement Account (IRA) A personal retirement plan. Taxes on earnings are deferred until money from the account is withdrawn. Industrial Cyclicals Sector Includes aerospace and aerospace industries, building supplies, industrial-building products, business equipment, chemicals, machinery (both light and industrial), metals fabrication (iron, steel, coal, and rare metals), paper and packaging, and photo equipment. Some examples of companies in this sector include Boeing, Canon, Caterpillar, Eastman Kodak, Georgia Pacific, Potash, and Sherwin-Williams. Information Ratio The information ratio is a measure of the consistency of excess return. This value is determined by taking the annualized excess return over a benchmark (style benchmark by default) and dividing it by the standard deviation of excess return. Institutional Fund Any fund that meets one of the following qualifications: a) has the word "institutional" in its name. b) has a minimum initial purchase of $100,000 or more. c) states in its prospectus that it is designed for institutional investors or those purchasing on a fiduciary basis. International Equity Funds with 40% or more of their equity holdings in foreign stocks (on average over three years) are placed in the international equity class. These categories include Europe, Japan, International Hybrid, Latin America, Diversified Pacific, Pacific ex. Japan, Specialty Precious Metals, Diversified Emerging Markets, World Stock, and Foreign Stock. Foreign investments involve special risks, including currency fluctuations and political developments. Lehman Brothers 1-3 Year Government Bond Comprised of both the Treasury Bond index (all public obligations of the U.S. Treasury, excluding flower bonds and foreign-targeted issues) and the Agency Bond Index (all publicly issued debt of U.S. Government agencies and quasi-federal corporations and corporate-debt guaranteed by the U.S. Government). These bonds also must have maturities of one to three years. The returns published for the index are total returns, which include reinvestment of dividends. Lehman Brothers Aggregate Index Composed of the Lehman Brothers Govt/Credit Index, the Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. The returns published for the index are total returns, which include reinvestment of dividends. Lehman Brothers Credit Listed for corporate bond-general and high-quality funds. This index tracks the returns of all publicly issued, fixed-rate, nonconvertible, dollar-denominated, SECregistered, investment-grade corporate debt. The returns published for the index are total returns, which include reinvestment of dividends. Lehman Brothers Government Bond Index Listed for government-bond general and Treasury funds. Because it tracks the returns of U.S. Treasuries, agency bonds, and one- to three-year U.S. government obligations, this index is effective for tracking portfolios holding non-mortgage government securities. The returns published for the index are total returns, which include reinvestment of dividends. Lehman Brothers Govt/Credit Represents a combination of the Government and Corporate Bond indices. The returns published for the index are total returns, which include reinvestment of dividends. For more information, view the Lehman Brothers Web site or call G - 4