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Exhibit 11: Pillars of the Investment Strategy Group’s Investment Philosophy INVESTMENT STRATEGY GROUP History is a Appropriate Value Appropriate 4 Useful Guide Diversification Orientation Horizon mesistency ANALYTICAL RIGOR ASSET ALLOCATION PROCESS IS CLIENT-TAILORED AND INDEPENDENT OF IMPLEMENTATION VEHICLES series, movies). Combined with some smaller improvements, these changes added $560 billion to the level of 2012 GDP, a 3.6% increase relative to the prior estimate. The more immediate—and important— question is whether we have entered a new phase in productivity growth trends that will keep productivity growth at the low levels seen since 2004. We believe that the answer is unknowable with any degree of certainty; historically, productivity forecasts have been notoriously wrong. In The Age of Diminished Expectations,** first published in 1990, Paul Krugman, Nobel laureate in economics and professor at City University of New York, wrote that the lower pace of productivity growth experienced since the early 1970s would most likely persist in the future. In 1995, however, productivity growth rates increased and were more than double the rate of the prior 12-year period. Similarly, in 1997, the Congressional Budget Office estimated that the long-run average annual growth rate of labor productivity would be 1.1%. Between 1995 and 2004, the actual average annual growth rate of labor productivity was 3.2%.’ As many of our clients know, one of the pillars of our investment philosophy is that history is a useful guide (see Exhibit 11). And history tells us that labor productivity has moved in cycles, with periods of low productivity growth followed by periods of high productivity growth. In a forthcoming and comprehensive paper titled “Seven Reasons to Be Optimistic About Productivity,”?* Professors Lee Branstetter of Carnegie Mellon University and Daniel Sichel of Wellesley College show that periods of low productivity growth have been followed by periods of high productivity growth since 1889, as seen in Exhibit 12. There is no reason to believe that “this time is different”; as many of you also know, we believe that those words are among the most dangerous and misused words in our industry. Olivier Blanchard, senior fellow at the Peterson Institute for International Economics and former chief economist at the IMF, has also shown that the current period of low productivity growth does not tell us much about future productivity trends. He states that the correlation of “successive pairs of five-year averages of total factor productivity growth is only 0.20” since the mid-1970s.” Outlook | Investment Strategy Group 13 HOUSE_OVERSIGHT_014546