Conrad Herrmann
SVP and Director of Portfolio Management - U.S. Growth

While still significantly below levels seen in 2007 and 2008, the rise of global equity markets from March lows has provided investors with a degree of hope that the worst has passed. However, market advances during 2009 were marked by low-to-moderate trading volumes. This and other market trading data indicated to us that many investors remained on the sidelines, likely awaiting greater economic clarity.

We are reasonably sanguine about 2010 and believe it may be more of a stock picker's market, which plays into the strengths of our investment selection process, which relies on bottom-up, fundamental research. We are seeing the market beginning to broaden out a bit toward higher-quality segment names versus lower-quality, highly levered companies that were a major part of the early 2009 market rally. At this point, we think the market may become more selective in terms of winners and losers.

Continued uncertainty in the markets, which we expect to prevail in 2010, potentially favors companies with better predictability, strong balance sheets, sustainable growth and an edge in this new economic environment.

We are currently finding companies with these qualities in the technology sector, where we have been seeing attractive valuations along with cash-rich balance sheets. In addition, we expect a pick-up in corporate spending as many American businesses have had a great degree of cost-cutting, leaving them now ready to spend money to upgrade personal computers and other equipment to keep a downsized workforce productive. We believe there is also growth potential for technology companies that are generally tied to strong growth in emerging markets, which are seeing very fast-paced economic improvements. A few tech sector companies we like are Oracle, Cisco, Qualcomm and HP.

The health care sector is an interesting sector to us in that it has been under a cloud this past year with all of the uncertainties surrounding possible reform. We believe there are some attractive valuations and favorable growth potential for many health care names out there. These are companies that have continued to deliver revenue earnings and cash flow growth, yet their valuation multiples have been compressed given the uncertain outlook for the sector.

In health care, we like the medical technology industry, with companies such as medical devices manufacturer C. R. Bard, along with some of the large-cap pharmaceutical companies. Merck, for example, is well-positioned with an attractive dividend yield, and it has been trading at a relatively low earnings multiple. Merck has growth potential with its November 2009 Schering-Plough acquisition, given the very complementary synergies and products both companies have combined. We believe that it is a good example of a company that could potentially do well in the current environment.

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