Morningstar Q32015

Morningstar Q32015
Market
Commentary Kelsey Tsai Associate Equity Analyst
David Sekera, CFA Bond Strategist

[email protected]
+1 312 384-3735

2 Sector Indexes
3 Style & Cap Indexes
5 Fixed Income
7 Commodities
7 Market Commentary Conclusion
8 Quarterly Data Review

The Third Quarter Saw The third quarter of 2015 was not for the faint- whopping 18.71% this quarter, while the basic
U.S. Equities Marred by Volatility hearted, leaving many wondering whether or not materials sector slumped by 16.93%. The only
Prompted by a Chinese the U.S. equities market has peaked. China’s sectors that managed to claw their way out of the
Slowdown and Worries at Home economic slowdown triggered a stock sell-off in red were real estate, up 0.3%, and utilities,
August and augmented uncertainty amid an up 4.75%, which could hardly offset the landslide
Q3 2015 Morningstar Market Barometer already skittish market. After energy commodities created by the other areas.
enjoyed a brief stint of recovery in the second
Value Core Growth quarter, crude oil prices plummeted to new lows, Given the bleak global picture and volatility in U.S.
Small Mid Large sending a ripple effect through the markets. markets, the Federal Reserve took the cautionary
,.–7.28–6.64–5.248Risk of deflation in the eurozone coupled withroad, voting to delay a raise in interest rates until
4 anemic economic growth compounded the adverse data showed more signs of stability. The decision
–6.88 –8.40 –8.81 0 effect of a strong dollar on profits overseas. weighed particularly on financial sector
24 Furthermore, Federal Reserve policymakers met in performance (down 7.25%). Banks and insurers
–9.92 –11.41 –11.38 28 September, ultimately deciding to postpone have struggled in the near-zero rate environment,
its first interest-rate hike from near-zero levels and the delay swept away much-needed near-term
Q3 2015 Morningstar Index Returns after economic data revealed mixed results. relief for the sector. On the other hand, utility
companies reacted favorably. Utility stock prices
Stocks –7.02 The Morningstar U.S. Market Index fell by rose following the announcement (up 4.75%),
US Market Index –9.33 7.02% this quarter, reflecting weak performance contributing to the sector’s overall positive
Global Ex-US Index –10.08 across the board. The health care sector saw performance during the third quarter. While there
Developed Ex-US Index –17.24 an abrupt end to its longtime rally, falling 11.22% was no shortage of excitement this quarter, market
Emerging Markets Index after a presidential candidate’s remarks focused turbulence and heightened uncertainty leave a
1.35 the spotlight on exorbitant drug pricing schemes sour taste for investors.
Bonds and prompted congressional investigations. While
Core Bond Index –16.11 only certain companies were called out in
the affair, and the proposed policy changes are
Commodities unlikely to go into effect anytime soon, bio-
Long-Only Commodity Index technology and pharmaceutical stocks watched
their valuations tumble. Health care stocks
were far from lonely—the energy sector fell a

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Sector Indexes 2

Sector Indexes Q3 2015 Morningstar Sector Delta and Return %

No Morningstar super sector was spared this Cyclical Sector Quarter 1-Year 3-Year
quarter, in line with the overall gloomy
performance of U.S. equity markets. The –6.25 h Cyclical –6.25 2.97 14.65
Defensive Super Sector performed the best out r Basic Materials –16.93 –18.97 2.44
of the sorry bunch, falling 6.19% and edging out Market t Consumer Cyclical –4.08 10.36 17.41
the Morningstar U.S. Market Index. The Cyclical y Financial Services –7.25 16.91
Super Sector also narrowly outperformed –7.02 u Real Estate 1.65 8.14
the U.S. market, at a 6.25% decline this period. 0.30 7.35
Meanwhile, the Sensitive Super Sector took the Defensive –6.19 –8.22 j Sensitive 8.69
brunt of the downturn, finishing with an 8.22% i Communication Svs –8.22 –7.38 10.36
decrease this stanza and continuing its reign as < –8 –4 0 Sensitive o Energy –5.43 0.32 –4.05
the relative laggard among the sector indexes. 4 8 > p Industrials –18.71 –31.66 13.88
Year-to-date returns for all Morningstar Super a Technology –7.43 –2.53 11.64
Sector indexes are now in the red. –5.21 0.14
k Defensive 16.38
j Defensive Super Sector –6.19% s Consumer Defensive –6.19 6.82 13.11
The Defensive Super Sector somewhat sheltered d Health Care –0.76 7.41 20.90
investors from the U.S. market downturn. Top f Utilities –11.22 6.80 10.07
contributors Gilead Sciences, Biogen, AbbVie, and 4.75 5.97
Merck & Co. experienced declines in the latter half
of September, prompted by recent headlines on Morningstar Super Sectors P/E P/B Yield % Earnings Growth Sales Growth
egregious drug pricing from democratic
presidential candidates. The increased scrutiny on h Cyclical Super Sector 16.93 1.93 2.15 6.57 3.14
drug companies and congressional investigations j Sensitive Super Sector 18.41
spooked the market, sending pharma and biotech k Defensive Super Sector 21.57 2.89 2.42 4.04 3.90
stocks on a downward spiral. However, the health
care sector was not all despair this quarter. IDEXX 3.41 2.07 5.91 5.83
Laboratories gained 15.8%, thwarting currency
exchange headwinds with impressive underlying materials sector. E I du Pont de Nemours & including Con-Way (up 24.2%), which is likely to
growth in its product lines. Company was a top contributor to the slide, be acquired by XPO Logistics this October pending
delivering a 20.1% decline after struggling with shareholder and regulatory approval.
The utility sector helped smooth the volatility from low crop prices and foreign exchange woes.
the big pharma and biotech names. TECO Energy The energy sector weighed on results and
(up 50.21%) rallied after Emera’s acquisition offer Within the consumer space, Amazon and Nike experienced a whopping 18.7% decrease on the
that provides an attractive premium to partially offset negative results, up 17.9% and whole. U.S. oil production is on the decline as a
shareholders. Southern Co (up 7.9%), Consolidated 14.1%, respectively. Amazon remains a growth reaction to the glut of crude oil worldwide.
Edison (up 16.6%), and Edison International (up story success, leveraging its innovation, customer ConocoPhillips (down 20.8%) and Schlumberger
14.3%) were also top utility contributors that service, and low-cost operations. Despite the (down 19.5%) bore the strain of the oil industry
marginally buoyed results. tough macroeconomic environment plaguing most contraction. Plunging commodity prices and
multinational companies, Nike continues to deliver looming interest rate hikes also took a hit on
solid results, driven by its universally recognized Kinder Morgan (down 26.9%) after an extremely
brand and immense scale. Banks—including volatile third quarter.
JPMorgan Chase, Morgan Stanley, and Wells
Fargo—fared relatively worse, hampered by
low-interest rates and the Federal Reserve
decision to delay hikes.

h Cyclical Super Sector –6.25% k Sensitive Super Sector –8.22%
The Cyclical Super Sector outperformed the U.S. The Sensitive Super Sector stayed true to its
equity market but still came out in the red. This name, with an exaggerated decline of the overall
quarter weighed heavily on results, as one-year U.S. equity market. Choice industrial companies
returns slumped to 2.97% no thanks to the basic were among the top performers in the index,

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Style & Cap Indexes 3

Style & Cap Indexes Trailing Returns

The Morningstar style and cap indexes 1-Year 3-Year 5-Year
mirrored the slump in the U.S. equity markets,
although some fared far worse than others. Value Core Growth Value Core Growth Value Core Growth
Among the style indexes, U.S. Growth faced a
6.32% decline, while the Value and Core Small Mid Large–5.77 –0.72 4.358.87 13.53 13.82 10.43 14.26 15.29
returns shrunk by 7.38% each. The U.S. Growth Small Mid Large
year-to-date performance now amounts to a Small Mid Large
marginal loss at 0.83%, the frontrunner amid the –2.04 0.81 2.07 15.62 14.78 12.96 13.48 14.81 13.02
style and cap indexes. The size indexes saw
greater fluctuation in performance. The U.S. –2.68 –0.51 2.65 11.31 12.12 11.65 11.91 11.96 13.00
Large Cap Index dropped by 6.36%, as the Small
Cap faltered even more at a staggering 10.94% < –8 –4 0 4 8 >
decrease this quarter. The Mid Cap Index split
the middle, squeezing out an 8.05% decline. Morningstar Style & Cap Indexes

^ Morningstar US Growth –6.32% P/E P/B Yield % Earnings Growth Sales Growth
The Morningstar U.S. Growth index posted results
that weathered the current market conditions Morningstar Value 14.53 1.64 3.51 0.72 0.35
slightly better than other style indexes, reflective Morningstar Core 19.10 2.66 2.28 3.84 5.45
of the more stable nature of the large cap names. Morningstar Growth 22.64 4.22 1.21 18.31 12.60
Google’s outperformance (up 18.2% and 16.9% for
Class A and C shares, respectively) bolstered index Morningstar Large Cap 17.86 2.61 2.42 4.83 3.80
results following positive second quarter results. Morningstar Mid Cap 19.20 2.31 1.92 8.64 5.58
Management also announced its plan to restruc- Morningstar Small Cap 18.94 1.95 2.06 2.17 3.07
ture its business in August, creating a new entity
called Alphabet. The move was met with general Chevron Corp, key contributors to the value of the pack this quarter, reporting paltry perform-
investor enthusiasm and separates Google’s more portfolio, sank by 9.8% and 17.2%, respectively. ance. Healthcare names, notably Gilead Sciences
risky and nascent endeavors from the company’s Persistently low oil prices are to blame for and AbbVie, were responsible for a good part
core online search and advertising business. the current slump. However, the companies both of the subpar performance. However, industrial,
managed well this stanza compared to their technology, basic materials, and industrial names
Other top contributors included media stocks Walt energy peers. Chevron focuses on upstream were also top contributors nudging the index
Disney Company (down 9.9%) and Time Warner operations, adding value through integration and into the red. In particular, Caterpillar (down 22.2%)
(down 20%), which both suffered major losses this its expertise in deep-water exploration. Mean- made a splash this quarter, after reporting revenue
quarter. The industry continues to be rocked while, Exxon Mobil benefits from large economies declines and plans to aggressively cut costs
by disruptive streaming technology and bundling. of scale and enjoys high margins relative to the through a 10,000-person workforce reduction and
Anticipated subscriber losses at ESPN, Disney’s industry due to its low-cost business. manufacturing facility closures during the next
sports-television segment, spurred a flurry of panic few years.
among the market and created an upheaval among Similarly, IBM endured from the same
media stocks. Time Warner echoed Disney’s downtrodden fate this quarter, dropping 10.1%. Altria Group was the lone top contributor this
sentiment, noting that the company also foresees The company faced a choppy currency environment quarter with positive results, delivering a return of
a long-term decline in subscribers. that has yet to show signs of subsiding. The 12.4%. Despite an August decline prompted by
company is also amidst a transition to a software- the company’s exposure to the sun-setting tobacco
$ Morningstar US Value –7.38% and cloud-led model, augmenting the associated industry, Altria stock was boosted by Anheuser-
The Morningstar U.S. Value index struggled to risk with the company and scaring away Busch InBev’s September bid for SABMiller. Altria
keep performance from slipping further into the investors. Other significant contributors this period holds a 27% stake in SABMiller, and the merger
abyss this quarter. Exxon Mobil Corporation and include Citigroup (down 10.1%) and Goldman of the world’s two largest brewers could bode well
Sachs Group (down 16.5%). for shareholders, which was reflected in the
stock price’s surge following Anheuser-Busch
% Morningstar US Core –7.38% InBev’s announcement.
The Morningstar U.S. Core index followed the rest

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Style & Cap Indexes 4

! Morningstar Large Cap – 6.36% subject to sector-specific volatility during the past respectively, which was hardly surprising given
On a whole, the Morningstar U.S. Large Cap index couple of months. that the basic materials sector fell a miserable
was pulled down by weak performance in the 16.93% this quarter.
energy space, with little help from companies in @ Morningstar Mid Cap –8.05%
other sectors. Despite the overall pessimism of the The Morningstar U.S. Mid Cap index was relent- # Morningstar Small Cap –10.94%
quarter, there were some bright spots for lessly battered by the anemic results from the The Morningstar U.S. Small Cap index features the
investors. Among the top performers was Chubb energy, basic materials, and health care sectors, worst performing year-to-date returns among
Corp., a multiline insurance company whose stock a common theme across many of the indexes the size indexes, at a current 7.74% loss. There
rose a generous 29.5% this period. As another this quarter. Mallinckrodt stock plummeted by were two notable standout stocks, Anacor
acquisition target, the company’s stock jumped 45.7%, as the firm was sucked into the specialty Pharmaceuticals (up 52%) and StanCorp Financial
significantly following ACE’s announcement in pharma volatility. While some wide-moat Group (up 51%) that buoyed the index during the
July. The deal is expected to close in the beginning health care firms are likely to ride out the storm period. However, the rest of the top contributors
of 2016 and is considered attractive for Chubb’s successfully, Mallinckrodt competes in the suffered heavy losses. Allegheny Technologies
stockholders. Chipotle was another beacon of highly competitive and price-sensitive generics was in the hot seat this quarter, faltering under a
hope, up 19.1% and maintaining its position as the and active pharmaceutical ingredient markets, weak stainless steel market and defective
top fast-casual Mexican chain. The firm’s powerful where economic moats are hard to come by. equipment, which amounted to a 52.6% drop.
brand identity continues to fuel consumer demand Biomarin, another top contributor this quarter with United States Steep Corp. also experienced a
at Chipotle, boosting investor confidence. a 23% slide, took a particularly hard hit compared 49.3% loss as a result of less-than-optimal global
with its narrow moat peers. Unlike Mallinckrodt, capacity utilization.
Meanwhile, Freeport-McMoRan ran at the bottom Biomarin possesses an attractive pipeline that
of the group, down 47.5%, taking the title as worst well-positions the firm for the future, however, its
performer for the Large Cap index this quarter. high-priced drugs are under fire from the current
As a basic materials company, Freeport-McMoRan public sentiment.
was at the mercy of weak commodity pricing.
Mylan, a specialty pharma firm, took second-to- Mosaic Co, CF Industries Holdings, and Newmont
last place with declines of 40.7% and was also Mining Corp fell 33.1%, 29.8%, and 31.1%,

Fund Categories and Benchmarks Active vs. Passive

The Active vs. Passive chart shows the Value Core Growth
percentage of actively managed open-end mutual
funds that were able to outperform their Small Mid Large 28.06 29.10 21.85 Actively managed mutual funds outperforming their
corresponding Morningstar Indexes benchmark. –7.28 –6.64 –5.24 respective benchmark (%)1
In the most recent quarter, Small Core
managers were the most successful in beating 15.38 42.37 43.38 Index Returns (%), Q3 2015
their benchmark, with 65% outperforming –6.88 –8.40 –8.81
the Morningstar Index. Small Value and Small 1Includes the oldest share class for all U.S. diversified mutual funds with
Growth managers were the next highest at at least a one-year history. As of September 30, 2015 there were 2,238
48% and 45%, respectively, but were both below eligible funds. Morningstar classifies funds into style categories based
the 50% threshold in beating their benchmarks. on the average style score (using the same 10-factor methodology
The three groups of Large managers were only as underlying benchmarks) of all available portfolio holdings over a three-
between 20%-30% in beating their corresponding year period.
Indexes, despite having the lowest thresholds to
outperform in the Style Box. Mid Value managers 48.82 65.04 44.89
performed the poorest, with only 15% of –9.92 –11.41 –11.38
managers beating the -6.88% benchmark return.

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Fixed-Income 5

Fixed-Income Indexes Treasury Yield Curve

Declining oil and commodity prices portend Yield September 30, 2015 June 30, 2015 September 30, 2014
well for economic growth, yet rising
default risk in the energy and metals and mining %

4.00

sectors led to widening credit spreads 3.00

in the corporate bond markets. Between the 2.00
rising risk in corporate bonds and the Federal 1.00
Reserve continuing to hold off on raising

interest rates, demand for Treasury bonds drove 0

interest rates lower. 1 Year(s) 6 11 16 21 26

Declining Interest Rates Boost Morningstar Bond Indexes Returns Statistics
Treasury Returns; Risk Aversion Hits Corporate Market Value
Bond Market QTR YTD ($Mil) Credit Yield to Average
The Morningstar Core Bond Index, our broadest Quality Maturity Duration
measure of the fixed-income universe, rose 1.35 1.43 15658.00
1.35% in the third quarter, bringing its return up to Broad Market Core Bond AA 2.17 5.16
1.43% for the year. As interest rates declined, Sector 1.78 1.81 6789.00
the long-duration indexes registered the greatest Maturity US Government 0.49 –0.09 4102.00 AAA 1.35 5.57
gains. For the third quarter, Morningstar’s Inflation Prot. Secs. Corporate 1.49 2.18 4842.00 A– 3.47 6.56
Short Term Core Bond Index rose 0.38%, the Global Sovereign Mortgage AAA 2.20 3.33
Intermediate Core Bond Index rose 1.46%, and the 0.38 1.19 4409.00
Long Term Core Bond Index rose 2.35%. The Europe Short–Term Core 1.46 2.29 7752.00 AA 1.10 2.20
return was predominantly generated by declining Intermediate Core 2.35 –0.72 3470.00 AA+ 2.13 3.88
interest rates in the U.S. Treasury market as Emerging Market Long–Term Core AA– 3.61 11.74
widening credit spreads pressured returns in the –1.14 –0.95 881.00
corporate bond market. For example, the TIPS AAA 0.54 7.70
Morningstar US Government Bond Index rose 2.00 –2.10 20461.00
1.78% in the third quarter, but the Morningstar Global Govt USD AA– 0.99 7.30
Corporate Bond Index rose only 0.49%. Corporate 2.13 –3.70 13757.00
credit spreads widened significantly in the Global Govt ex–US USD 2.81 1.23 6402.00 A+ 0.82 8.06
third quarter as plummeting commodity and oil Eurozone EUR 1.49 3.05 A+ 0.83 7.08
prices weighed on the energy and metals Swiss CHF 3.44 1.79 94.00 AAA –0.17 9.85
and mining sectors. Overall, the average credit UK GBP –5.74 –11.79 1827.00 AA+ 1.73 10.88
spread of our corporate bond index widened Australasian USD 0.99 2.94 289.00 AAA 2.37 5.66
35 basis points to +188 bps. This is the widest Canadian CAD 0.93 0.19 306.00 AAA 1.14 7.04
spread the index has registered since mid- Japanese JPY 4839.00 A 0.36 8.47
2012, when the markets were still in recovery –0.09 –1.72
mode after the Greek sovereign debt crisis. Eurobond Corp EUR 0.43 –0.63 1373.00 A– 1.37 4.95
The worst-performing sector was metals and European Bank Capital EUR 0.75 0.47 467.00 BBB+ 1.86 3.98
mining, which widened out 183 basis points European Covered EUR 0.67 –0.77 751.00 AA 0.43 4.48
to +412 bps. This was followed by energy, which UK Eurobond Corp GBP 0.49 1.27 249.00 A– 3.43 8.44
widened 91 basis points to +285 bps. While UK Bank Capital GBP 55.00 BBB+ 3.71 6.77
consumers will benefit from lower oil prices and –2.62 –0.26
cheaper commodities, investors in Treasury Composite USD –1.19 –0.16 121751.00 BBB 5.79 5.69
Inflation-Protected Securities suffered as inflation Sovereign USD –3.80 –0.54 44556.00 BBB– 5.60 6.97
and inflation expectations dwindled. As demand Corporate USD 76580.00 BBB 6.36 4.95

Data as of 9-30-2015

for TIPS waned, Morningstar’s TIPS Index fell which helped to push the Morningstar Eurozone
1.14%, resulting in a 0.95% loss year to date. Government Bond Index up 2.81% in the third
quarter. That return more than offset losses earlier
The story was similar in Europe, where sovereign this year and led to a gain of 1.23% year
bonds registered gains as interest rates to date. However, as investors looked to reduce
declined, but widening credit spreads pressured exposure in corporate bonds, the average credit
corporate bonds. The yield on Germany’s spread of the Morningstar Eurobond Corporate
10-year bund declined 17 basis points to 0.59%, Index widened 26 basis points during the third

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Fixed-Income 6

quarter (a total of 48 basis points this year) and Credit Spread Change by Sector and Quality
currently stands at a spread of +131 bps. Wider
credit spreads led to losses in the Morningstar Basis Credit spread is the yield difference between the US Treasury Index and Corporate Bonds by Index.
Eurobond Corporate Index, which declined 0.09% Pts %
and year to date has declined 1.72%.
60
In our second-quarter outlook published in June, 50
we highlighted that the Chinese stock market 40
bubble appeared to be just beginning to pop and 30
that contagion from China would probably 20
ripple throughout the emerging markets. Since 10
then, the Shanghai Index has continued to drop, 0
falling more than 41% from its peak June 12.
In addition, the Chinese government has allowed Financial Industrial Utilities AAA AA A BBB
the yuan to depreciate versus the dollar.
Between declining equity prices and weakening US Bond Indexes: Average Yields
foreign exchange rates, capital has been
fleeing the emerging markets for the developed Yield Corporate MBS Treasury TIPS
markets. As we warned previously, emerging- %
market bonds are known for being an extremely 4
volatile asset class in a “risk off” scenario. 3
The Morningstar Emerging Market Composite 2
Bond Index fell 2.62% in the third quarter as the 1
Morningstar Emerging Market Sovereign Bond 0
Index decreased 1.19% and the Morningstar -1
Emerging Market Corporate Bond Index declined Oct 2014 Nov Dec Jan 2015 Feb Mar April May June July Aug Sept
3.80%. Year to date, these indexes are registering
losses of 0.26%, 0.16%, and 0.54%, respectively. underutilization of labor resources has existing year-to-date growth, GDP growth over the
diminished.” Inflation continues to run below the next two quarters will need to average 2.9% to
Federal Reserve Holds Off on Raising Federal FOMC’s target, but this is due to low energy meet his expectations.
Funds Rate prices and imports, which should equalize next
The Federal Reserve held the federal funds rate year. Based on the statement, it seems that
steady at its targeted range of 0%-0.25%. The Fed the main development holding the FOMC back has
has long averred that its decision to begin been economic weakness abroad.
raising interest rates and normalizing monetary
policy is “data dependent,” and recent U.S. Boosting 2015 GDP Expectations
economic data has been neither strong enough The Bureau of Economic Analysis revised its
to warrant raising rates nor weak enough to second-quarter GDP estimate upward to
dictate loosening monetary policy further. The tone 3.9% from 3.7%. Robert Johnson, Morningstar’s
of the Federal Open Market Committee’s director of economic analysis, noted that
statement was generally positive regarding the the revision is what economists call a high-quality
economic situation in the United States. The revision, meaning that the underlying contributing
FOMC opined that economic activity “is expanding factors indicate the positive economic momentum
at a moderate pace,” highlighting that “house- will continue into the following quarter. As such,
hold spending and business fixed investment have Johnson increased his forecast for full-year
been increasing moderately” and “the housing GDP to 2.2%-2.6% from 2.0%-2.5%. While this
sector has improved further.” The Fed even said may not be much of an increase, Johnson thinks
the “labor market indicators show that the most likely outcome for GDP growth will be at
the top end of his forecast range. Based on

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Commodities / Markey Commentary Conclusion 7

Commodities Indexes Quarterly Commodity Sector Returns

Following a promising uptick in the second % Metals Agriculture Energy Livestock
quarter, Morningstar commodity indexes
once again plunged back into negative territory 10
with a renewed fervor. The rapid turn for the 0
worse did not discriminate—all commodities –10
saw a sharp decrease in performance. The –20
Morningstar Energy Commodity index fluctuated –30
widely from the previous quarter, resulting –40
in a 24.11% loss. The Morningstar Agriculture
Commodity index saw similar, though slightly Q3-2015 Q2-2015 Q1-2015 Q4-2014
more muted swings, ending in a 12.44%
decline. The Morningstar Livestock Commodity Morningstar Commodity Index Returns %
index fell more than 9% this quarter, while
the Morningstar Metals Commodity index slid Long-Only Quarter 1–Year 3–Year 5–Year 10–Year YTD
by just a little less than 7%. Long/Flat
Long/Short –16.11 –31.29 –16.51 –6.45 –2.70 –15.51
Precious metals remained extremely volatile this Short/Flat –2.31 –2.84 –4.97 –0.14 2.17 –2.38
quarter, thanks to the anticipation of interest Short-Only 0.41 –1.32 –1.05 1.16 1.89 0.97
rate hikes by the Fed, as well as the subsequent 2.66 1.28 3.80 1.25 0.96 3.32
delay that resulted from policymakers’ September 16.22 35.89 15.59 3.40 1.70 11.43
meeting. After dropping to a 2015 low in late
July, gold half-heartedly rallied back up to $1,115 Agriculture –12.44 –7.87 –12.61 –1.66 3.18 –13.78
per ounce by the end of the third quarter. Silver Energy –24.21 –52.03 –22.28 –12.13 –14.43 –22.44
and copper prices followed a similar trend, sliding Livestock –9.66 –21.31 –0.86 –3.19 –18.29
aggressively with a temporary pick-up in Metals –6.81 –13.04 0.38 –5.29 –9.26
September. The recent market volatility provides –17.07 8.65
encouragement for investors to park their money
in safe havens like precious metals. fourth quarter typically picks up last-minute steam, interest rate hikes are postponed indefinitely,
however, and 2016 will help uncover whether while financial sector results are likely to suffer.
The modest oil price recovery found in the second some of the recent market swings are a new
quarter was quickly erased. The WTI crude oil normal or temporary phenomenon. Several key The global arena will remain a major concern
price continued on its downward trajectory, ending Federal Reserve and Organization of the Petroleum in the upcoming months. Despite subpar domestic
the quarter at $44 per barrel. WTI actually dipped Exporting Countries meetings are expected employment results from September, other
as low as $38 per barrel in late August, wreaking to take place in the last stretch of the year, which economic data point to a more optimistic outlook
havoc on stocks with particular sensitivity to the will provide more data and decisions on future of the U.S. economy, chalking up to mixed
commodity’s pricing. directions of the U.S. market and oil prices. results. However, questions linger as to how
Ongoing presidential campaigns are also likely to contractions in other markets, especially
Conclusion keep the markets lively, as candidates battle out China and Europe, will spill into the U.S. economy
their policies. and at what magnitude.
Following a dismal third-quarter performance, the
future is starting to look a little more uncertain. Disappointing employment data in September
After a drawn-out rally, health care firms took a validated the Fed’s decision to delay interest rate
steep correction, as other sectors were battered hikes in the third quarter and prompted
by a combination of a strong U.S. dollar and some belief that the first raise in rates could be
effects from Chinese and European markets. The extended as far as early 2016. Non-farm payroll
numbers fell short of expectations, signaling
unexpected weakness in the private sector.
Precious metals and utility firms seek to benefit if

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

Morningstar Market Commentary Q32015 indexes.morningstar.com Quarterly Data Overview 8

Q3 2015 Style Indexes Total Returns %

US Market Value Core Growth 3–Month 1–Year 3–Year 5–Year 10–Year Price/ Price/ 5–Yr Earn
Earnings Book Yield % Growth
. Morningstar US Market –7.02 –0.43 12.51 13.38 7.12
18.18 2.49 2.30 10.43

–7.02 –7.38 –7.38 –6.35 8 Large Cap –6.36 –0.64 12.06 13.34 6.78 17.86 2.61 2.42 10.31
–8.05 0.30 14.42 13.78 7.99 19.20 2.31 1.92 10.41
Small Mid Large Mid Cap –10.94 –0.25 11.69 12.29 7.49 18.94 1.95 2.06 12.09
4 Small Cap

–6.36 –7.28 –6.64 –5.24 US Value –7.38 –4.82 10.40 11.16 5.27 14.53 1.64 3.51 8.17
0 US Core –7.38 –0.43 13.65 14.22 8.07 19.10 2.66 2.28 9.78
–8.05 –6.88 –8.40 –8.81 –6.35 3.79 13.51 14.72 7.81 22.64 4.22 1.21 14.59
US Growth
–10.94 –9.92 –11.41 –11.38 –7.28 –5.77 8.87 10.43 4.44 14.65 1.75 3.69 8.10
24 –6.64 –0.72 13.53 14.26 7.93 18.52 2.72 2.31 9.51
–5.24 4.35 13.82 15.29 7.71 21.70 4.33 1.39 14.32
Large Value
28 Large Core

Large Growth

., Mid Value –6.88 –2.04 15.62 13.48 7.33 14.45 1.45 2.93 8.39
Mid Core –8.40 0.81 14.78 14.81 8.49 21.03 2.68 2.22 10.43
Mid Growth –8.81 2.07 12.96 13.02 7.99 25.48 4.08 0.61 13.88

Small Value –9.92 –2.68 11.31 11.91 7.51 13.51 1.27 3.29 8.22
Small Core –11.41 –0.51 12.12 11.96 7.27 20.19 2.09 2.10 10.77
Small Growth –11.38 2.65 11.65 13.00 7.51 29.43 3.54 0.82 22.02

Q3 2015 Sector Indexes Total Returns %

Price/ Price/ 5–Yr Earn

Cyclical Index 3–Month 1–Year 3–Year 5–Year 10–Year Earnings Book Yield % Growth

8 h Cyclical –6.25 2.97 14.65 13.61 3.20 16.93 1.93 2.15 10.84
r Basic Materials –16.93 –18.97 2.44 4.97 5.03 18.28 2.74 2.66 10.26
–6.25 –4.08 10.36 17.41 18.38 9.42 19.25 4.19 1.47 13.52
4 t Consumer Cyclical –7.25 1.65 16.91 12.76 0.53 14.22 1.29 1.97 10.01
y Financial Services
0.30 7.35 8.14 11.14 5.93 28.38 2.04 4.67 6.84
0 u Real Estate

Market j Sensitive –8.22 –7.38 8.69 11.20 6.50 18.41 2.89 2.42 10.93

–7.02 24 i Communication Svs –5.43 0.32 10.36 14.44 9.77 23.26 2.81 4.31 8.57

Defensive –6.19 –8.22 o Energy –18.71 –31.66 –4.05 4.01 4.25 15.51 1.52 3.58 9.50
28 p Industrials –7.43 –2.53 13.88 12.74 7.47 19.01 3.40 2.19 10.35
Sensitive
, a Technology –5.21 0.14 11.64 13.00 8.79 18.26 3.65 1.87 12.04

k Defensive –6.19 6.82 16.38 16.34 8.54 21.57 3.41 2.07 8.50

s Consumer Defensive –0.76 7.41 13.11 14.35 10.30 21.20 4.35 2.73 8.20

d Health Care –11.22 6.80 20.90 19.85 10.43 23.25 3.80 1.39 9.67

f Utilities 4.75 5.97 10.07 11.06 6.70 16.49 1.63 3.88 5.08

Bond Indexes Commodity Indexes

Core 3–Month 1–Year 3–Year 5–Year Long-Only 3–Month 1–Year 3–Year 5–Year 10–Year 15–Year
US Government Long/Flat
Corporate 1.35 3.35 1.90 3.26 Long/Short –16.11 –31.29 –16.51 –6.45 –2.70 3.28
Mortgage Short/Flat –2.31 –2.84 –4.97 –0.14 2.17 5.93
Short-Term 1.78 3.77 1.31 2.51 Short-Only 0.41 –1.32 –1.05 1.16 1.89 5.58
Intermediate Term 0.49 1.43 2.21 4.24 2.66 1.28 3.80 1.25 0.96 1.09
Long-Term 1.49 4.12 2.56 3.56 16.22 35.89 15.59 3.40 1.70 –2.91
Global Government ex. US
Emerging Markets Composite 0.38 1.46 0.99 1.30 Agriculture –12.44 –7.87 –12.61 –1.66 3.18 3.00
1.46 3.99 2.27 3.46 Energy –24.21 –52.03 –22.28 –12.13 –14.43 –2.53
2.35 3.89 2.27 5.34 Livestock –9.66 –21.31 –0.86 –3.19 1.71
Metals –6.81 –13.04 0.38 –5.29 10.06
2.13 –6.32 –3.76 –1.01 –17.07 8.65
–2.62 –1.70 1.01 4.29

All data in this issue as of 9-30-2015

©2015 Morningstar, Inc. All rights reserved. The information, data, analyses and opinions contained herein (1) include the confidential and proprietary information of Morningstar, Inc., (2) may not be copied or redistributed,
(3) do not constitute investment advice offered by Morningstar, Inc., (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or
accurate. Morningstar, Inc. shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.