Yukon Wealth Management, Inc. Private Wealth Management

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1 Asset Class Review Value vs. Growth Large-Cap Value: 3 Small-Cap Value: 4 Large-Cap Growth: 3 Small-Cap Growth: 3 1 is extremely undervalued, 5 is extremely overvalued This summary reflects our views as of 6/30/07 (S&P 500 at TK) Executive Summary Growth outpaced value during the first half of 2007, after a multi-year run of outperformance for value. Differences between the large-cap and small-cap growth and value ratings do not by themselves imply the existence of a fat-pitch opportunity. On average, growth stocks appear to be somewhat undervalued relative to value stocks and as our ratings indicate, small-cap value appears particularly pricey as compared to smallcap growth. However, we do not see enough of a differential to justify an overweighting to growth and we remain neutral in our growth-value weighting for now. It is quite possible that the value-stock universe may continue outperforming the growth-stock universe until value is significantly overvalued on a relative basis. This has happened in the past after growth stock overexuberance has been unwound. However, there have not been many such periods to study and we are not willing to speculate the degree to which value stocks might become overvalued relative to growth. And based on recent performance, it is possible that this trend has already begun to reverse. Stock pickers who are eclectic and not driven by the style box have the flexibility to find good opportunities even when their category benchmarks appear overvalued. Funds like Clipper and Selected American Shares (Chris Davis and Ken Feinberg), Legg Mason Value Institutional (Bill Miller), Oakmark Select/Oakmark (Bill Nygren), and Oakmark Global (Rob Taylor and Clyde McGregor) are good examples of funds run by managers whose discipline is not influenced by "style box" concerns. For more thoughts on this topic see our article "Style Police Force Managers To Stay In Their Cells But Does It Add Or Detract Value?" Some value managers have commented that the best stock-picking opportunities right now are in names that are more traditionally associated with the growth universe, which adds to the argument that growth is becoming attractive relative to value. For now, we prefer to leave this decision up to our managers. Recent Performance In a reversal of value s dominance over growth in previous years, growth outpaced value for the first five months of 2007 with a wider range of outperformance among small-caps. The Russell 3000 Growth index returned 9.8% for the five months ended May 31, 2007 compared to 8.5% for the Russell 3000 Value index. In the small-cap universe, the Russell 2000 Growth index beat the Russell 2000 Value index by over three percentage points, returning 9.9% compared to 6.3%. Still, on a longer-term basis, value s outpacing of growth has been dramatic since the bursting of the tech bubble in early In five out of the past seven calendar years, the Russell 3000 Value has massively outperformed the Russell 3000 Growth. In the other two years, 2003 and 2005, value still beat growth, but by narrower margins (16 bps and 170 bps, respectively.) In fact, value has beaten growth by almost 13 percentage points annually for the seven years ended December 31, 2006.

2 RELATED CHARTS Russell 1000 Growth vs. Value

3 Russell 2000 Growth vs. Value Key Factors Sentiment: During the market s nadir in early 2003, we mentioned the possibility of a long-term sentiment shift away from growth because of the magnitude of the growth-stock collapse. Looking back over market history it has not been uncommon for bubble asset classes to become undervalued relative to other asset classes after they experience a devastating bear market. The fact that growth stocks generally held their own during the 2003 bull market (and did okay in absolute terms in 2004, 2005 and 2006) suggests that investors may have recovered from the shell-shock of the bubble bursting. Sentiment, however, is a factor that can change with little or no notice, resulting in divergent performance for different segments of the market. Earnings Growth: Long-term earnings forecasts have declined (as we expected they would) from the overly optimistic levels they reached during the bubble and are now back around their long-term averages. It is worth pointing out that even at average historical levels for earnings-growth forecasts, these forecasts are unrealistically high based on actual historical growth rates. We believe comparing long-term forecasted growth rates to past periods can give us some insight into how realistic analysts are with respect to their earnings expectations, especially during periods of excessive optimism or pessimism. (Note: the chart below is updated every three months.)

4 RELATED CHART Forecasted Five-Year Earnings Growth Rates for Market Cap Segments Valuations We have said in the past that it wouldn t surprise us to see value overshoot and our current valuation work tells us that growth stocks seem slightly more attractive. While growth stocks always trade at a higher average price-toearnings ratio as compared to value stocks, the P/E premium for growth stocks has shrunk significantly in the smallcap space (both on a trailing and a forward P/E basis) as compared to its historical average. A similar reduction in the growth stock P/E premium has also occurred among large-cap stocks but not to the same degree as with small-caps. A number of other data points suggest to us that growth stocks are at the cheap end of the fair-value range, with the valuation differential appearing greater among small-cap stocks than in the large-cap arena. The logical corollary to this is that small-cap value stocks appear particularly pricey. However, our discipline requires a clear valuation advantage before making a tactical bet and right now the valuation differences between growth and value are not great enough to justify an overweighting to growth. Some value managers have commented that the best stockpicking opportunities right now are in names that are more traditionally associated with the growth universe, which adds to the argument that growth is becoming attractive relative to value. For now, we prefer to leave this decision up to our managers, many of whom have the flexibility to buy these stocks. However, if growth underperforms going forward, it may reach fat-pitch status at some point.

5 RELATED CHARTS Valuations Russell 1000 Growth vs. Russell 1000 Value

6 Large-Cap Stocks: High P/E Divided by Low P/E