Thursday, March 25, 2010

STEP Commentary Changes to the US Model Portfolio $MSFT

Increasing the portfolio's position in MSFT to 3% from 2%. We agree with Adam Holt that the risk/reward
profile is attractive and believe that the stock can outperform as earnings estimates get revised upwards,
the multiple expands, and the stock benefits from product cycle momentum. Indeed, each of the key
positive drivers that we cited when we initiated a 2% position in Microsoft on 11/4/09 either remain intact or
have become more compelling. Note that while we do our best to minimize incremental 1% changes to the
Model (this is the first such change since last June), there are times when we believe such changes are
necessary to better reflect our conviction level both on individual stocks and relative to ever-changing sector

Increasing the portfolio's position in NSC to 3% from 2%. We continue to view Norfolk Southern as a
high quality rail operator that has consistently received best in class service marks. Bill Greene has become
increasingly bullish on the rails since we initially added NSC on 11/12/09, as he expects strong volume growth
in 2010, solid operating leverage, and continued momentum on pricing initiatives.

Increasing the portfolio's position in MSFT to 3_

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