January 19, 2010
Committee members present at the January 19 th
meeting:
Ann McCorkindale John Darrah Jim Herrig
Rick Hageman
ECONOMIC REVIEW:
Dow
S&P 500
NASDAQ
3 Mo. T-Bill
10 Yr. T-Note
Mike Gasperi
1-13-10
10,681
1,146
2,308
0.06%
3.80%
Jim Siemonsma
12-8-09
10,286
1,092
2,173
0.03%
3.40%
Matt Morey
Dr. Laddie Sula
1-13-09
8,449
872
1,546
0.11%
2.33%
The Blue Chip economic consensus predicts that in the fourth quarter of 2009, real GDP likely grew at its fastest pace since 2006. Their estimates were boosted primarily from encouraging data on November wholesale inventories, which offset a disappointingly weak December jobs report. Other favorable reports were released on retail sales, trade, industrial production, housing starts, and factory orders. Real GDP for the fourth quarter is expected to have increased at an annual rate of 4.0%, up 1.2% from estimates last month. Forecasts for 2010 reflect growth of
2.8% for the year, and the consensus predicts that in 2011, real GDP will record its largest yearto-year increase since 2004 at 3.1%.
Retail sales were stronger than expected for a second straight month in November and a further, albeit smaller increase is foreseen for December. Total sales increased 1.3% in November from a month earlier and were up 1.9% over the past 12 months, the first year-to-year gain since 2008.
Helping to drive the improvement were increases in auto and light truck sales that registered a third consecutive month of improvement in December. Retail sales were a contributor to gains in real personal consumption expenditures (PCE).
The consensus still expects real PCE will increase 1.9% in 2010 after contracting in each of the past two years. Persistently high unemployment, household deleveraging and tight credit are expected to remain headwinds for consumer spending. However, the wealth effects associated with the rebound in equity markets, coupled with improving labor compensation, are expected to sustain the recovery in spending. Real PCE is predicted to expand by 2.5% in 2011.
Total housing starts rebounded 8.9% in November after falling a revised 10.1% in October. Total permits rose 6% following a drop of 4.2% in October. The recovery reinforced expectations that real residential investment increased for a second consecutive quarter, though not as fast as in the

Internal Use Only, Not to be distributed to the Public third quarter. Housing starts are expected to total 730,000 units in 2010, up from 560,000 in
2009. The consensus predicts housing starts to total 980,000 units in 2011.
Dr. Laddie Sula began the economic discussion by reporting that economists are discussing possible improvements to help predict events in the future. Financial data will bring more information to the economic models making more accurate forecasting a possibility in the future.
As a result of recent events, structural changes are likely to occur, including regulations and tax laws. The recovery is solidifying and is expected to move forward after March 31, which is the last date that the Federal Reserve will buy mortgages. If there is another drop in the stock market, it is likely to happen around the second quarter. Most economists believe that if there is no decline in government spending, we will muddle through the first half of the year and should have stronger results in the second half of the year. One of the big questions is what will be the engine of economic growth. Consumption spending is 70% of the economy, and is expected to improve partially. It will take a long time to bring the unemployment rate down. An additional
150,000-170,000 new jobs are needed each month to reduce the rate. There will not be huge increases in consumption spending until the unemployment rate declines.
STOCK MARKET:
In December, the Dow Jones Industrial Average gained 0.95%, the NASDAQ increased 5.81%, and the S&P 500 was up 1.93%.
An actual HKFS/Schwab Growth Model Portfolio increased 3.59% in December, which outperformed the 75% DJ Wilshire 5000 / 25% MSCI EAFE non-style-weighted benchmark gain of 2.51% for the month. The Northern Small Value Fund had the best absolute return with a gain of 6.89% in December. Funds that outperformed their benchmarks on the Schwab platform for the month were MFS Value, Rainier Mid Growth, William Blair
International Growth, ING Global Real Estate, and Ivy Global Natural Resources. Year-to-date through December 31, our style weighting decisions have added 8.47% vs. the Wilshire 5000 return, while our active managers have detracted by 2.53%.
An actual HKFS/SEI Growth Model Portfolio increased 3.82% in December. The SEI Small
Growth Fund had the best absolute return with a gain of 8.90%, outperforming its Dow Jones
Small Growth benchmark. Other funds that outperformed their benchmarks for the month were
SEI Tax Managed Large Cap, SEI Large Value, SEI Mid Cap, SEI International Equity, SEI
Emerging Markets Debt, SEI Emerging Markets Equity, ING Global Real Estate, and Ivy Global
Natural Resources.
The Investment Committee discussed the international allocation in the HKFS Growth
Model . The Committee discussed the international developed, emerging markets bond, and emerging markets equity allocations of the Growth Model. The Committee decided the current allocations are appropriate at this time based on the current international and emerging market allocation to world GDP and market cap, as well as economic and market conditions both domestically and internationally. Growth rates in emerging markets are expected to continue to be higher than those of domestic and other developed economies. The emerging markets equity allocation is represented by the Lazard Emerging Markets Fund and totals 10% of the Growth
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
Model. It was suggested that this position could be further diversified by adding another emerging markets fund to complement Lazard’s investment strategy (which usually underweights China), and the allocation could possibly be split between the two funds.
Discussion on this topic will continue at the next meeting.
Ann McCorkindale and Russ Mills participated in a call with Fred Sturm, manager of the
Ivy Global Natural Resources Fund, on January 14.
He believes that natural resources are in the 2 nd
stage of a 3-stage run, with stage 3 consisting of supply levels well below demand. That stage is expected in approximately 5 years. Currently, the fund is seeking a mix of international exposure and US dollar diversification. They are increasing their allocation to energy as they feel it outperforms both prior to and immediately following economic tightening. While there are no strong inflationary pressures yet, Mr. Sturm has indicated that he will be keeping one eye on inflation over the next 5 years. The fund is prepared to trade around core positions and use more derivatives to hedge positions if the market has another rally of 10-15%.
The Investment Committee reviewed model growth funds currently on ‘watch’ status. The
Committee continues to review the original version of the watch list and a new list using 3-year statistics. Both watch lists will be used to gain added insight on disparities between the two lists.
The following stock funds are on ‘watch list’ status: Current Status
Original 3-Year
Name Reason
William Blair Int’l Growth 3-Yr Performance, Rank & Alpha
List List
Pass Hold
Ivy Global Natural Resources 3-Yr Performance & Rank Pass Hold
Rainier Mid Cap Growth High 12-mo & 3-year Rank & Standard Deviation Hold Hold
Columbia Mid Cap Value High 12-mo & 3-year Rank
Amer Funds Growth Fund High 12-mo & 3-year Rank
JP Morgan Mid Cap Value High 12-mo & 3-year Rank
Hold Hold
Hold Hold
Hold Pass
Northern Small Cap Value High 12-mo & 3-year Rank
PIMCO Emerging Bond Standard Deviation
MUTUAL FUND WATCH LISTS:
Hold Pass
Hold Pass
The following criteria set by the Investment Committee places funds used on the Schwab platform on ‘watch list’ status:

Significant news event concerning fund family, fund or manager (i.e.: scandal, buyout, etc.)

Change in fund management that affects over 33% of the management team.

Change in fund investment style at the prospectus level

% Rank Category over last 12 month and 3 year period at or above 33% (i.e.: not performing in at least top 33% of peer group)

Combination of standard deviation and 12-month return both below peer benchmark

Additional items at discretion of Committee
(SEI Fund managers are monitored by SEI Trust)
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
Rainier Small/Mid Cap: (added to watch list 11/19/08)
The Rainier Small/Mid Cap Fund’s performance is in the bottom two-thirds of it peers over the past 12-month and 3-year time periods. The fund is also on the watch list due to the combination of 12-month performance and standard deviation below peer benchmark. Management states that after providing significant positive performance in 2007 (outperforming its benchmark by 10%) and through June of 2008, the rapid decline in energy, materials and durable goods in the second half of the year had the biggest negative impact on performance. During the first half of 2009, the healthcare sector was weak after the Obama administration outlined its plan to curtail healthcare costs. The fund had also moved away from the lower-performing energy stocks, which then rebounded this year. As the year drew to a close, performance had improved due to an underweighting to financials and positive performance from the energy, technology, and producer durables sectors. The healthcare and consumer discretionary sectors that challenged performance in the beginning of the year have also improved and stabilized in the fourth quarter.
The fund performed in line with its Russell Mid Cap Growth benchmark for the third and fourth quarters, and ranked in the top 30 th
percentile versus peers for the three-month period as of
9/30/09 and in the top 42 nd percentile for the three-month period ending 12/31/09.
Moving forward the fund (which invests in both mid and small cap stocks) is concentrating on mid-cap stocks which are trading at a lower multiple than small-caps and offer more liquidity.
The HKFS Investment Committee held a call with Mike Emery, Senior Portfolio Manager of the
Rainier Fund on November 24, 2009, who reported the recent ‘low quality rally’ in stocks hurt their comparative performance. They look for companies that have an inherent earnings growth rate better than the benchmark; their companies beat benchmarks on earnings surprises, but (as we have heard from other managers) the past 3-6 months has been a low quality, low price rally.
They feel their portfolio looks ‘as good as it ever has’. They are not deviating from their style, which has a good track record coming out of downturns. One of the components that has hurt them is the fact that they are a small/midcap fund, and small caps have underperformed midcaps this year.
Morningstar analysts reviewed this fund on December 2, 2009, and stated the fund “is much better than its recent results would suggest” and call it “one of the better offerings in its group.”
They describe the fund as having broader sector exposure and smaller positions in its top holdings than most of its peers. They also stated: “The fund has gained significantly more than both the mid-growth and small-growth norms since its 1994 inception and suffered less volatility than both groups along the way.” This fund is also recommended by Advisor Intelligence.
Recommendation: Hold - the Committee will continue to monitor peer group ranking and performance and standard deviation combination.
Columbia Mid Cap Value: (added to watch list 12/17/08) (used on NextStep 401(k) platform)
The Columbia Mid Cap Value Fund is utilized in place of JP Morgan Mid Value on the NextStep
401(k) as the mid value component. The fund was added to the watch list due to performance in the bottom two-thirds of it competitors over the past 12-month and 3-year time periods. As of
12/31/09, the fund maintains a 5-year peer rank in the top 37 th
percentile. The fund finished the year by outperforming the Russell Midcap Value Index for the 4 th
quarter and ranking in the top
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
42 nd
percentile for the three-month period ending 12/31/09. Performance in 2008 was hurt by the fund’s sizable stake in financials and industrial materials. Management continues to hold some of these stocks as they believe they were unduly punished by indiscriminate selling. Positive performance for the fourth quarter came from energy selections like Williams, Peabody Energy and Cabot Oil & Gas. A large portion of the portfolio is in cyclical businesses, which management feel offers the best investment opportunities at the moment. In a May 2009 report,
Morningstar analysts believe management has the correct strategy for this fund, and they also stress the fund’s strong historical long-term performance.
Recommendation: Hold - the Committee will continue to monitor peer group ranking.
American Funds Growth Fund of America: (added to watch list 4/15/09)
The American Funds Growth Fund of America was added to the watch list due to performance in the bottom two-thirds of it competitors over the past 12-month and 3-year time periods.
However, the fund’s 5-year peer rank is in the top 20 th
percentile of it peers as of 12/31/09. For the year ending 12/31/09, the fund ranks in the top half of its peer group. Information
Technology continues to be the fund’s largest industry sector at 25.8% of the portfolio’s assets as of December 31, contributing to performance as the top performing sector for the quarter. The fund has an overweight to software and metals and mining, two of the top performing industries.
The fund has substantial cash holdings of 10.2%, down from 12.1%. Cash represents the aggregate views of the 10 portfolio counselors and is not a top-down decision.
This fund currently has a 4-star Morningstar rating. Morningstar analysts report that the fund’s
11 managers are able to maneuver assets into cheap stocks positioned for recovery and call the fund “a long term winner.” Also, this fund is an approved fund by Advisor Intelligence.
Recommendation: Hold - the Committee will continue to monitor peer group ranking.
JP Morgan Mid Cap Value: (added to watch list 6/17/09)
The JP Morgan Mid Cap Value Fund was added to the watch list due to performance in the bottom two-thirds of it competitors over the past 12-month and 3-year time periods. This fund’s peer rank was in the top 23 rd
percentile for 2008, as it outperformed its Russell Midcap Value
Index benchmark by 5.21% for that year.
Peer rankings for the 3-year and 5-year time periods continue to be in the top 43 th
percentile as of 12/31/09. Performance has been hurt by stock selection in the utility and healthcare sectors toward the end of 2008. For the first quarter, performance was hurt by Williams Co., Helix Energy Solutions Group, and KIMCO Realty. For the second quarter, the fund’s underperformance was due primarily to stock selection in the consumer discretionary and material sectors, specifically Burger King Holdings and People’s
United Financial. During the third quarter, stock selection was weak in the consumer discretionary and financial sectors, specifically Burger King, which has since been sold, and TCF
Financial, which is expected to recover. Performance was also hurt to the overweight in retail, insurance, and banking industries. The fund showed improvement in the fourth quarter, with a peer rank in the top 43 rd
percentile as of 12/31/09. Stock selection in utilities, with companies like CMS Energy, and consumer discretionary contributed to outperforming the benchmark for the fourth quarter. Consumer discretionary remains the largest overweighting in the portfolio.
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
Management has stated that not owning commodity-driven businesses has negatively impacted results in the past. The fund tends not to invest in business whose revenues and earnings strongly correlate with commodity prices as it is believed that the earnings and cash flow streams are too volatile for management's investment criteria.
This fund won the 2009 Lipper Fund Award for the best three-year and five-year performance,
Mid-Cap Value Funds category; Institutional Shares. The fund was described as “a consistent philosophy - - looking for companies with good cash flows, defendable franchises and strong management teams - - coupled with a stable team of strong analysts has helped to generate good returns over the longer term. In any given short time period results may lag, but over the long term the philosophy has driven good results.”
This fund passes the criteria of the 3-year quantitative evaluation watch list.
Recommendation: Hold - the Committee will continue to monitor peer group ranking.
Northern Small Cap Value: (added to watch list 6/17/09)
The Northern Small Cap Value Fund was added to the watch list due to performance in the bottom two-thirds of it competitors over the past 12-month and 3-year time periods. This fund’s peer rank was in the top 3% of its peers for 2008, and it outperformed its Russell 2000 Value
Index benchmark by 5.49% for that year.
Northern’s 5-year peer rank is now in the top 41 st percentile as of 12/31/09, and the fund outperformed its benchmark index for the period as well.
For the first quarter 2009, the fund’s weakest performing stocks were their highest-ranked stocks in the financials sector. During the second quarter, stock selection detracted in the financials and technology sectors as the smallest, most volatile stocks were the best performers. The fund has shown improvement in the third and fourth quarters, with peer ranks in the top 50 th
percentile for the three months ending 9/30/09 and a peer rank in the top 57 th
percentile, performing in line with its benchmark. Stock selection in the areas of consumer discretionary and information technology, as well as underweighting to financials, contributed to performance for the fourth quarter. It is the opinion of the fund that as the “junk rally” subsides those companies with greater financial strength and market position, which had previously lagged, will once again drive performance.
Morningstar analysts continue to compliment management’s proprietary quantitative stockselection model, showcased by the fund’s exemplary 2008 performance. In a report dated
12/16/09, they state “Shareholders should not be concerned. The piece of its quantitative model that protected it so well in 2008…explains this year’s performance too. Lower-quality companies, as judged by this measure, have simply been on a tear. Overall, we remain confident in the fund.”
This fund passes the criteria of the 3-year quantitative evaluation watch list.
Recommendation: Hold - the Committee will continue to monitor peer group ranking.
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
PIMCO Emerging Local Bond : (added to watch list 1/19/10)
The PIMCO Emerging Local Bond Fund is on the watch list due to the combination of 12-month performance and standard deviation below peer benchmark.
The fund’s 12-month return versus the benchmark (28.71% compared to 32.49%) and standard deviation relative to the benchmark (17.09 to 13.38) as of 12/31/09 triggered placement on the watchlist. However, this fund continues to outperform its peers and ranks in the top 5 th
percentile for the three-year period, beating its Morningstar Emerging Bond Index benchmark by 2.23% for that period. The fund also outperformed its benchmark by 1.15% for the fourth quarter, and has a peer rank in the top 8 th
percentile for the quarter. Overweighting Brazil local rates and the
Mexican Peso, along with underweighting Hungary and the Russian Ruble, helped performance.
Going forward, near term the fund plans to underweight areas of Asia they feel are susceptible to monetary tightening while keeping a currency overweight to Asia. Smaller European economies that remain vulnerable will be underweighted.
This fund is an approved fund by Advisor Intelligence.
Recommendation: Hold - the Committee will continue to monitor standard deviation.
BOND MARKET:
At market close on January 13 th
, the 3-month T-Bill was yielding 0.06%, up from 0.03% last month. The 10-year T-Note was yielding 3.80%, up from 3.40% at this time last month. The spread between the 3-month and 10-year notes increased 0.40%.
The weighted duration of the taxable bond fund portfolio on the HKFS/Schwab platform declined to 4.6 years in December, down from 4.7 years last month. The duration of the muni bond fund portfolio (consisting solely of the DWS Managed Muni Fund) on the HKFS/Schwab platform declined to 6.3 years, down from 6.7 years last month. The weighted duration of the taxable bond fund portfolio on the HKFS/SEI platform decreased to 4.5 years, down from 4.75 years last month. The SEI Intermediate Municipal Bond Fund duration was not available this month.
The composite HKFS/SEI taxable income fund portfolio decreased 0.41% for December, which outperformed the average bond fund manager loss of 0.83%. An actual
HKFS/Schwab taxable income fund portfolio declined 0.48% for the month . The
Oppenheimer Strategic Income Fund had the best absolute return with a gain of 0.32%.
The SEI intermediate-term municipal income fund gain of 0.12% underperformed the average municipal manager gain of 0.22% for the month. An actual HKFS/Schwab municipal income portfolio (consisting solely of the DWS Managed Muni Fund) was up
1.18% in December.
The HKFS Investment Committee approved a change to the current bond policy relating to the purchase constraints for individual Government Agency bonds.
The former policy allowed for purchases of agency bonds with a maximum maturity of 10 years PLUS our current
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public duration target of 4-6 years. This limit placed a constraint of no longer than 16 years out on the maturity ladder for agency bond purchases. The new policy has been changed to reflect a 10 year final maturity cap on new purchases. The Committee believes that shortening the duration target of our individual taxable bond portfolios through this final maturity amendment is prudent given the expectations of a rising interest rate environment later this year, and will be reviewing other alternatives that might be available to shorten the duration of our individual taxable bond portfolios.
Matt Morey reviewed the list of individual bonds trading under $85, indicating distressed pricing. No new bonds were added to the list over the past 30 days.
The Investment Committee reviewed model bond funds currently on ‘watch’ status. The
Committee continues to review the original version of the watch list and a new list using 3-year statistics. Both watch lists will be used to gain added insight on disparities between the two lists.
The following bond funds are on ‘watch list’ status:
Name Reason
Oppenheimer Strategic Inc High 12-mo & 3-year Rank
Current Status
Current New
Hold Hold
Oppenheimer Strategic Income: (added to watch list 10/15/08)
The Oppenheimer Strategic Income Fund is on the watch list due to performance in the bottom two-thirds of its multisector bond managers peer group over the past 12-month and 3-year time periods. The fund has year-to-date performance of 22.09% through 12/31/09, outperforming the
BarCap Aggregate Index by more than 16% and outperforming the BarCap Credit Index by more than 6%.
The international portion of the portfolio continued to be overweight for the fourth quarter, at
46%, and the majority of that was invested in emerging market debt. The fund maintains an overweight to U.S credit exposure also, at 49%, and that is split evenly between investmentgrade and below investment-grade credits. The portfolio remains underweight for U.S.
Government securities, with a weighting of 8%, within which the fund is underweight U.S.
Treasuries and overweight agency mortgages. Management plans to maintain the overweight exposure to U.S. credit but will shift more toward high yield.
Morningstar analysts reviewed this fund on November 16, 2009, and declared that the reasons for the fund lagging its peers was due to big exposures to commercial mortgage-backed securities in 2008 and because the steps were taken to reduce risk within the portfolio. The investment team was realigned earlier this year under a new chief investment officer, which is expected to produce a more coordinated and cohesive effort. Morningstar analysts believe that the CIO has good sensibilities and “could quite plausibly again make this fund one of the category’s more attractive options.”
Recommendation: Hold - the Committee will continue to monitor peer group ranking .
HKFS Investment Committee Summary, January 19, 2010

Internal Use Only, Not to be distributed to the Public
INVESTMENT OPERATION ISSUES:
The Investment Committee reviewed 25 non-modeled accounts in December. Accounts were analyzed for non-compliance under the following criteria: actual allocation vs. target allocation, individual stock or bond position above 10%, and cash positions above 10%. Also, accounts with individual stock positions that are not on the HKFS Monitored List are noted and require a follow-up with advisors. Three accounts from this month will require a follow-up communication.
Assets Under Management ($ thousands):
12-31-09
Schwab (billable)
SEI (billable)
Commerce
Other (NT, Wells, etc)
NextStep
$759,360
$ 69,684
$ 57,718
$ 2,917
$ 40,339
12-31-08
$644,521
$ 58,851
$ 53,118
$ 6,328
$ 25,210
Total $930,018 $788,029
The Investment Committee will host an advisor webcast on January 25 th , and a client webcast on
January 26 th
. The next Investment Committee meeting is scheduled for Wednesday, February
17 th at 10:00.
HKFS Investment Committee:
Ann McCorkindale, Chair John Darrah Jim Herrig
Roy Lines Mike Gasperi Rick Hageman
Jim Siemonsma Matt Morey Dr. Laddie Sula
HKFS Investment Committee Summary, January 19, 2010