MOR Investing — Winter 2010

Beyond Traditional Asset Classes: Exploring Alternatives

Stocks, bonds, and cash are fundamental components of an investment portfolio. However, many other investments can be used to try to enhance returns and/or reduce overall portfolio risk. So-called alternative assets have become popular in recent years as a way to provide greater diversification.

What is an alternative asset?
The term "alternative asset" is highly flexible; it can mean almost anything whose investment performance is not correlated with that of stocks and bonds. It may include physical assets, such as precious metals and real estate. In some cases, geographic regions, such as emerging global markets, are considered alternative assets. Complex or novel investing methods also qualify. For example, hedge funds use techniques that are off-limits for most mutual funds, while private equity investments rely on skill in selecting and managing specific businesses.

Each alternative asset type involves its own unique risks and may not be suitable for all investors. Because of the complexities of these various investments, you should discuss with your Morgan Keegan financial advisor whether they make sense in your portfolio.

Hedge funds
Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, fees based on performance, or both.

Private equity/venture capital
Like stock shares, private equity and venture capital represent an ownership interest in one or more companies. However, unlike stocks, private equity investments are not listed or traded on a public market or exchange, and private equity firms often are involved directly with management of the businesses in which they invest.

Private equity often requires a long-term focus. Investments may take years to produce any meaningful cash flow (if indeed they ever do); many funds have 10-year time horizons. Like hedge funds, private equity also typically requires a large investment and is available only to investors who meet high SEC net worth and income requirements.

Real estate
You may make either direct or indirect investments in buildings — either commercial or residential — and/or land. Direct investment involves the purchase, improvement, and/or rental of property; indirect investments are made through an entity that invests in property, such as a real estate investment trust (REIT). Real estate not only has a relatively low correlation with the behavior of the stock market, but also is often viewed as a hedge against inflation.

Precious metals
Investors have traditionally purchased precious metals because they believe that gold, silver, and platinum provide security in times of economic and social upheaval. Gold, for instance, has historically been seen as an alternative to paper currency and therefore may help hedge against inflation and currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is losing value, though prices can fall just as quickly.

Natural resources
Direct investments in natural resources, such as timber, oil, or natural gas, can be done through limited partnerships that provide income from the resources produced. In some cases, such as timber, the resource replenishes itself; in other cases, such as oil or natural gas, it may be depleted over time. Timberland also may be converted for use as a real estate development.

Why invest in alternative asset classes?
Part of sound portfolio management is diversifying investments so that if one type of investment is performing poorly, another may be doing well. As previously indicated, returns on some alternative investments are based on factors unique to a specific investment. Also, the asset class as a whole may behave differently from stocks or bonds.

An alternative asset's lack of correlation with other types of investments gives it potential to increase or stabilize a portfolio's return. As a result, alternative assets can complement more traditional asset classes and provide an additional layer of diversification, though diversification cannot guarantee a profit or ensure against a loss.

Tradeoffs you need to understand
Alternative assets can be less liquid than stock or bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or may not be able to find a buyer. Performance, values, and risks may be difficult to research and assess accurately. Also, you may not be eligible for direct investment in hedge funds or private equity.

The unique properties of alternative asset classes also mean that they can involve a high degree of risk. Because some are subject to less regulation than other investments, there may be fewer constraints to prevent potential manipulation or to limit risk from highly concentrated positions in a single investment. Finally, hard assets, such as gold bullion, may involve special concerns, such as storage and insurance, while natural resources and commodities can suffer from unusual weather or natural disasters.

You can access the benefit of alternative investments, like the reduction in risk and enhanced revenues, in a variety of ways including exchange traded funds (ETFs), funds of funds, non-traditional mutual funds and hedge funds. Your Morgan Keegan financial advisor can help you decide whether alternative assets have a role in your portfolio, and which types might be appropriate for you.

Prepared by Forefield Inc. Copyright 2009 Forefield Inc.

College Board Releases New College Cost Numbers

College cost trends
Every year, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.

Here are highlights from its latest report:

• At four-year public colleges for in-state students, tuition, fees, and room and board increased by 5.9% from last year, with the total cost for 2009/2010 averaging $19,388
• At four-year public colleges for out-of-state students, tuition, fees, and room and board increased by 6.0% from last year, with the total cost for 2009/2010 averaging $30,196
• At four-year private colleges, tuition, fees, and room and board increased by 4.3% from last year, with the total cost for 2009/2010 averaging $39,028

“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.

To read the Trends in College Pricing report, visit www.trends-collegeboard.com.

Student aid trends
The College Board is quick to point out that the average "sticker price" cost figure is not necessarily representative of what most students pay. That's because almost two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments.

For the 2009/2010 year, the College Board estimates that students at public colleges will receive an average of $5,400 in grant aid from all sources and federal tax benefits, and students at private colleges will receive an average of $14,400 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.

Every year, the College Board also releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.

Your Morgan Keegan financial advisor has information on investment options to help you save for your children’s education, including 529 plans, Coverdell ESAs and custodial accounts. Contact your Morgan Keegan financial advisor today to learn more.

Prepared by Forefield Inc. Copyright 2009 Forefield Inc.

Important Messages for Account Holders

Order Flow Information
In compliance with industry regulations, the following disclosure regarding order flow is provided for your information: Client securities orders may be executed with Morgan Keegan itself, with other broker dealer market makers or through the exchanges on which the securities are listed. Several of these market facilities offer automated execution services. Morgan Keegan’s order routing among the execution facilities depends upon various factors such as the identity of the security and the size of the order. Participants to whom Morgan Keegan directs orders execute such orders at the displayed national best bid or offer (NBBO) subject to order size and liquidity of the markets and also provide the opportunity for execution of limit orders at prices superior to the NBBO. Morgan Keegan may receive additional cash remuneration, known as order flow payment, in these transactions.

Routing Practices of Non-Directed Orders
U.S. Securities and Exchange Commission Rule 11Ac1-6 requires all brokerage firms, including Morgan Keegan, to make publicly available quarterly reports on the routing practices of non-directed orders. A non-directed order is an order the customer has not specifically directed Morgan Keegan to route to a particular venue for execution. Morgan Keegan is pleased to provide these reports to its clients in an electronic format accessible at www.morgankeegan.com or www.tagaudit.com. Should you be unable to access this report electronically, a hard copy may be obtained by contacting your Morgan Keegan financial advisor. Rule 11Ac1-6 also requires all brokerage firms, including Morgan Keegan, upon customer request, to disclose the identity of the execution venue and the execution time for any order during the six months prior to the request. This information may be obtained by contacting your financial advisor.

Option Contracts Assignments/Exercises
Assignments/exercises for option contracts are being allocated using Random Computer Selection. This is the accepted industry standard. The Random Computer Selection will be derived from a computerized formula that will generate option assignments to customers’ accounts with short option positions. After the position is randomly selected, then the corresponding stock or cash settlement is transacted and the position is automatically delivered from the assigned customer account.

Investors in Auction Rate Securities
For anyone with an investment in auction rate securities or for anyone interested in investing in auction rate securities, we would direct your attention to the Morgan Keegan Web site for a description of Morgan Keegan's material practices and procedures regarding these auctions. A written description of these material practices and procedures is available upon request. If you have any questions regarding these securities or these procedures, please feel free to contact your financial advisor.

Important Tax Notice:

When to Look for Your Form 1099
As we have done the past six years in an effort to maintain the high degree of accuracy of our tax reporting, Morgan Keegan has asked the Internal Revenue Service for an extended deadline to distribute 1099 tax forms. At this time, we are waiting for the IRS response to our request. While we cannot guarantee that the extension will completely eliminate the need for any corrections, the extra time significantly reduces the necessity to issue subsequent 1099 corrections.

As a convenience to those accounts that have a low probability of having to go through income reallocations and other tax adjustments to their 1099s, Morgan Keegan will mail those 1099s around the end of January or beginning of February. Accounts with a medium to high probability of reallocations and adjustments will be processed and mailed around the middle of February.

This request for extension does not affect 1099-R forms for IRA accounts, which will be mailed by the regular deadline of January 31.

Updated information on the anticipated mailing date for your 1099 will be posted to our Web site in January and available through your Morgan Keegan financial advisor.

We thank you for choosing Morgan Keegan for all your financial needs and wish you and your family all the best in the New Year.

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