Macroeconomic news (for example, recent ISM manufacturing and non-manufacturing survey data, regional business surveys and retail sales) and the initial positive Q1 EPS releases do suggest that the economy continues to recover in a sustainable manner. Moreover, the prospects of a near term double-dip recession are lower today given the positive wealth effect of rising equity markets and ongoing stabilization in the housing markets. Global growth rates and EPS estimates continue to be increased by market analysts for both 2010 and 2011. Current consensus 2010 EPS estimates for the MSCI ACWI indicate a 30% year over year growth expectation. However, the fragility of the economic recovery and capital markets was made quite clear during the equity market drawdown realized late January to February due to tightening measures in China, ongoing regulatory overhang in the US and profit taking given the strong rally in risk assets since the March 2009 lows. More recently, the creditworthiness of Greece (more broadly, the "PIGS" – Portugal, Italy, Greece and Spain and overall stability of the EuroZone in the future) has roiled global credit markets and the Euro. Additionally, weak regional bank balance sheets, the SEC suit against Goldman Sachs and impending financial regulatory overhaul may impair much needed private capital credit formation which has led some market participants to ask whether we have now witnessed the first domino to fall in the much anticipated equity market correction.

Positive economic news during Q1 2010 provided a supportive backdrop to the continued outperformance of risk assets globally. Below, we highlight some of the key developments that factor into our assessment of asset classes and investment themes in building portfolios:

Despite the above sources of tailwind for risk assets, we continue to analyze those factors that reinforce, in our mind, continued caution and careful diligence and portfolio construction across asset classes. We summarize the most critical components below:

1. De-leveraging process is far from complete: Recent Credit Suisse research states that the G4 countries (US, UK, Japan and Germany) have $6.5 trillion in excess leverage, of which $1.5 trillion is the US household sector or 10% of US GDP. There has been a significant reduction in US household sector leverage from the approximate $2.3 trillion of two years ago; however, this will remain a considerable drag on consumption and be one of the major challenges to the successful "passing of the baton" in coming quarters.
2. Sticky unemployment: Despite the positive March payroll number mentioned above, the 8.4 million jobs lost since December 2008 will require considerable and sustained payroll growth in the US, and it remains unclear how fast companies will rebuild headcount.
3. Composition of GDP growth: Q4 2009 GDP was strong at 5.6%; however, 3.8% of that was from inventories and this contribution should be expected to wane over time as the

1. Equities are currently trading at or near the high end of historical valuations.
2. In an expected, future rising rate environment, there will most likely be P/E multiple compression not expansion, as was realized from the mid-March 2009 lows.
3. As a result, analysts will be relying on sustained profit margin expansion in order to attain the fairly high, consensus EPS estimates for 2010 and 2011.
4. In a scenario where there is simply no more cost cutting to be realized and/or there is eventual adding to payrolls and expenses; this may likely not be realistic.
5. Thus, the driver of continued EPS growth will need to be material top line (revenues) growth in order to meet the ever increasing EPS growth estimates of market analysts.
6. As fiscal stimulus and public sector demand is eventually withdrawn in the face of record public debt levels, aggregate private sector demand (read: the consumer) will need to significantly increase to drive this expected corporate revenue growth.

We do not know what the first domino will be nor are we explicitly calling for a near term, major (in excess of 15%) equity market correction. However, we believe markets will remain quite vulnerable to shocks that support our prior viewpoint of risk being skewed to the downside for equities. Such shocks could include any of the following over the next two quarters:

1. Evidence of revenue growth "stalling out" after the initial re-stocking phenomenon
2. Premature and unannounced end to accommodative monetary and fiscal policy measures
3. Increased sovereign credit risk perception led by PIGS degradation
4. Further unexpected Chinese credit tightening

Given these views, we retain our conviction in our fixed income allocation and the underlying managers given the macro backdrop, opportunity set for these managers and their demonstrated bond management skills. For example, in the Investment Grade segment, the PIMCO Investment Grade Bond Fund returned 3.73% and the Loomis Sayles Investment Grade Bond Fund returned 4.06% during Q1 2010. The PIMCO Global High Yield Fund returned 4.97%, and the SEIX/Ridgeworth High Yield Fund returned 4.04% during Q1 2010. Within the Emerging Markets, we have in prior letters discussed the opportunity in higher local rates in emerging Asian countries versus the US, select sovereign credit and opportunities in currencies outside of the USD. Our managers were able to capture compelling returns across each of these three segments: PIMCO Developing Local Markets Fund realized 5.82% during Q1 2010 and the Franklin Templeton Global Bond Fund produced 6.36% during Q1 2010.

As we have legged back into markets, we have been rewarded with outperformance by several of our equity managers who are capturing a diversified set of global opportunities. Aston/Tamaro, a small cap specialist manager, realized a 7.98% return during Q1 2010. Viking and Maverick, both world class hedge fund managers who have „carved‟ out their long books, produced 4.54% and 7.03% returns respectively during Q1 2010. Our pipeline of equity managers is quite robust,

and we expect to add a leading global, opportunistic equity manager May 1. Moreover, we continue to diligence several interesting EM focused managers and expect to add 1 to 2 managers during the second half of this year.

As we discussed in our last quarterly letter, we recently added a world class bond manager who is running a short duration portfolio. However, given the current steepness of the yield curve and our view that interest rates will not spike in the near to medium term (consistent with our view that the FED is likely on hold until at least year end if not into 2011), we are not aggressively shortening the duration of the fixed income portfolios. However, the current construction of our fixed income allocation does reflect a view toward managing bonds in a rising rate environment. We have allocated to managers who invest in floating rate instruments which by their very nature will realize higher interest income payments as rates rise. In addition, we have a relative overweight to high yield managers who invest in the most creditworthy parts of the high yield universe given our view that such higher yield will more than offset potential mark to market losses as rates rise. Lastly, as discussed above, a component of our fixed income portfolio construction is designed to exploit opportunities on relative local rates not the absolute level of rates; moreover, such funds are also able to capture currency opportunities (emerging Asian currencies v. USD, for example) that will not be duration sensitive. We are currently researching several fixed income managers who offer "strategic income funds" that will provide further diversification and opportunity to realize compelling returns in a rising rate environment relative to a more traditional, benchmark-focused investment grade bond fund.

We continue to originate compelling investment ideas as a consequence of the Great Recession. The massive dislocation across markets and economies has indeed created many superior risk-adjusted return opportunities for our clients, and our investment team has been focused on completing due diligence on those ideas and managers which we believe present the most attractive risk-adjusted return profiles. We have been analyzing various event driven managers

given we believe corporate activity will increase as the likelihood of a "double dip" recession decreases and companies deploy the record amount of cash on corporate balance sheets. Specifically, merger arbitrage may provide compelling risk adjusted returns. What we find appealing is that this strategy generally has a lower net equity exposure and lower beta to equity markets than many strategies, both important characteristics given our concern regarding equity market downside risk. Moreover, given that "cash deals" continue to represent the majority of announced deals and use of leverage has moderated post the Great Recession, we would expect this strategy to exhibit lower volatility than long short hedge fund strategies.

Below, we would like to provide an update on two of our main themes by discussing prospective managers, their strategies and how we expect them to make money given our broad themes: Dearth of Capital and Distressed Securities.

Given the fall out of the Great Recession, many private equity investors now find themselves over-committed to private equity due to the lack of distributions. Furthermore, private equity funds are expected to call additional capital in order to support existing portfolio companies as the IPO window remains only slightly cracked open. Private equity funds will also be expected to call capital to complete new transactions given the favorable valuation environment post the recession. This valuation effect will also serve to dampen the realization of portfolio companies; hence, aggregate expected distributions back to limited partner investors will be muted for the foreseeable future. While we believe the current environment will provide compelling returns in private equity, as a result of the above, the current liquidity profile of many private equity investors will remain weak to poor, and for many it will deteriorate considerably. The risk of default on future capital commitments by such investors will provide considerable investment opportunity for an investment fund that we are currently assessing given it is a provider of capital to forced sellers of private equity limited partnership interests.

The prospective manager seeks to acquire mature private equity limited partnership interests in leveraged buyout, growth equity, mezzanine, and venture capital partnerships at significant discounts to the intrinsic value of the underlying portfolio companies. The niche of the market that this manager focuses on is the small and mid-sized transaction that typically is $1 million to $50 million in deal size. This segment of the market remains relatively underserved and more

inefficient than the $100 million and greater deal size that is most often characterized by auctions. Lastly, the manager‟s deep relationships and superior reputation within the potential seller community allows it to successfully meet the critical non-monetary factors (for example, confidentiality, speed of transaction consummation and certainty of execution) which further enhances the investable opportunity set for the investment team and likelihood of completing compelling risk-adjusted investment transactions. We believe this may be a compelling opportunity to produce equity and equity-like returns without the downside risk given the deep valuation discount and information asymmetries the manager is able to capture in completing transactions and building a diversified portfolio of limited partnership interests.

In the years leading up to the credit bubble bursting, the residential mortgage industry experienced an unprecedented expansion of loan availability and mortgage products. The combination of "loose credit" from the global investment community and aggressive lending practices resulted in a highly overvalued residential real estate market in the U.S., financial institution balance sheets with unsustainable concentrations of higher-risk or limited liquidity loans and securities, and a significant number of borrowers with unmanageable debt and debt service obligations. DCM believes that continued weakness in real estate prices will pressure financial institutions to sell mortgage assets. We are currently assessing a manager that may be well positioned to produce compelling returns given it has the required attributes to be successful investing in this environment: access to significant committed capital, a long-term investment horizon, the ability to properly analyze the inherent risk of the underlying credits, and the experience and operational ability to actively service the assets.

The objective of this fund is to invest primarily in residential and commercial whole loans, mortgage-backed securities and other credit-sensitive financial instruments. The manager expects to focus on the acquisition, management and servicing of credit-sensitive loans and real estate owned, asset-backed securities and related derivative instruments. The manager will seek to invest in assets that can be acquired at what it believes to be significant discounts to their inherent or intrinsic value due to credit impairment, liquidity or other factors resulting from the Great Recession that significantly affected capital markets, financial institution stability and consumers‟ balance sheets.

Specifically, the fund‟s investment strategy involves buying loans at attractive unlevered yields, with the prospect of future yield enhancement through: (1) loss mitigation capability; (2) captive refinance program; (3) loan sales; and to a much lesser extent (4) modest leverage (typically non-recourse, seller financing) or (5) securitization. We expect the fund to acquire loans or securities at prices where the potential yield to maturity would motivate the investment to produce compelling investment returns. The primary exit strategies for whole loans include (1) selling the loans to depository institutions or (2) working with the borrower to refinance into a new loan or to pay off their loan balance. In addition, the fund may create exits for loan portfolios by facilitating borrower refinances into agency or FHA programs. In valuing the underlying credit worthiness of each borrower and also being able to service loans, this manager has the potential to realize compelling returns that serve as suitable equity replacements within an asset allocation.

Against the backdrop of continued, broad positive macroeconomic news and corporate profit growth, we have been rewarded across asset classes and strategies for the "risk" that we have deployed over the past two quarters. As explained above, we are not fully convinced that the "baton has been passed" so we remain cautious regarding the sustainability of the economic recovery at hand. We continue to originate and diligence compelling investment opportunities that provide equity and equity-like return characteristics without direct equity potential downside risk. Given our defensive posture and relatively lower equity allocations, we are positioned should a material correction take place in the equity markets; however, the particular return characteristics of our investment themes and the resulting portfolio construction will allow us to meaningfully participate should the markets continue to grind higher. We look forward to discussing with you in more detail your particular strategic asset allocation objectives.