January 2010 Issue: Key Points

This month's economic update summarizes the factors behind the feeling of foreboding with which we are entering 2010. We continue to believe that the market is underestimating the probability that we will re-enter the high uncertainty regime, and is instead placing too much emphasis on hopes that normal times will return and worries that the high inflation regime is just around the corner. Closely related to this debate is the question of the proper role of gold from an investor's point of view For years, we have taken the position that while gold coins have a role to play in an investor's cash reserve, gold itself should not be treated as a separate asset class in an investor’s strategic asset allocation policy. We have based this reasoning on two key points: first, it is not easy to invest in gold, and second, it is not possible to establish the fundamental value of gold. With the advent of gold-based ETFs, the first assumption has been invalidated. Thus this month we return to the issue of gold's potential role in a portfolio, paying particular emphasis to the challenge of establishing its fundamental value. While our analysis produced a number of interesting findings, the best we could do on the valuation front was a methodology that we believe is likely to be directionally correct, but not wholly satisfactory. We do not deny the role of gold as a hedge against a decline in the value of short-term U.S. Treasury securities. This makes gold a potentially important asset for non-USD based investors wishing to hedge their exposure to the high uncertainty regime. However, lacking a satisfactory valuation methodology, we are not yet prepared to fully accept gold as just another asset class. That said, in 2010 we will include a new section on gold in our regular monthly asset class valuation analyses.

This month's product and strategy notes summarize a range of interesting new research, including the shortcomings of analysts' forecasts, linkages between directly held and securitized commercial property, the contribution of a liquidity risk premium to private equity returns, use of the certainty equivalent technique in investment discussions and why, as many of us have long suspected, the "beta equals one" approach is just as good, if not better, than much more laborious corporate cost of capital analyses. Finally, this month we also introduce a new column, the Financial Advisors' Corner, where we will present research that is particularly relevant to this large and fast growing segment of our global subscriber base.

| Feature Article: What is the Proper Role of Gold | Investor Herding Risk Analysis | January 2010 Economic Update | Global Asset Class Valuation Updates Detail through December 31 2009 | This Month's Letters to the Editor: Investing for Different Time Horizons; Uncorrelated Alpha Strategies- Beneficial?; Why Didn't the Three-Year Return Forecast Change?; Equally Weighted vs Model Portfolios; Why Don't You Include Emerging Bonds as an Asset Class? | Table: Fundamental Asset Class Valuation and Recent Return Momentum | January 2010 Issue: Key Points | Global Asset Class Valuation Updates Detail through February 26, 2010 | Global Asset Class Returns | Table: Market Implied Regime Expectations and Three Year Return Forecast | Financial Advisors' Corner | Overview of Our Valuation Methodology | Uncorrelated Alpha Strategies Detail | Product and Strategy Notes: New Research Papers; Analysts' Recommendations |