Quarterly Report To Clients

FOURTH QUARTER | 2011
Quarterly Report To Clients

TO OUR CLIENTS:
INSIDE THIS ISSUE The market today is faced with the age old conundrum of whether to believe what it sees or what it fears. Corporate protability has remained robust, yet the market is giving these prots a below average valuation. The reason for this anomaly seems clear; the nancial crisis in the Eurozone and the fear that its effects will spill over and infect the global economy. The near death experience in the developed economies that started almost 5 years ago is still fresh in the markets mind. This persistent fear is keeping overall equity valuations low, and in many good cyclical businesses the valuations are extremely low. As investors try to make sense of the current environment, they are also questioning whether value investing identifying good, but undervalued companies still works in a world that has reacted to global macro events more than company fundamentals this year. In our Commentary section starting on page 2, we look at the cycles of value investing, and observe that despite all the day-to-day noise in the market, the underlying cycles of value investing are as relevant as ever. In fact, 58 months since the peak of the last cycle, values performance relative to the broad market is right in line with the historical averages. Furthermore, the wealth of attractively valued, cyclical companies available today has resulted in our portfolios being among the cheapest in our history. Illustrative of these opportunities is Staples, Inc., our Highlighted Holding on page 14. Staples was one of the pioneers in the ofce supply superstore concept, and, along with its internet and delivery channels, is now the largest supplier of ofce products worldwide (not to mention the worlds second largest on-line retailer). Investors penalized Staples in 2011 as sentiment toward economic growth dimmed, driving the stock down by over 40%. Despite these cyclical concerns, we see a business that has industry leading protability, a strong balance sheet, and a free cash ow yield in excess of 10%. Staples has captured market share from its weaker competitors during the downturn, and, we believe, is well positioned to benet from an eventual upturn in employment. As we start 2012, we acknowledge the pain investors have endured. Yet as disciplined value investors we are mindful that history teaches that the real investment opportunities are often hidden among the weeds of deepest fear. Warren Buffets wisdom on this point seems particularly timely; Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others FOURTH QUARTER 2011 VALUATION SUMMARY are greedy and greedy when others are Portfolio Universe fearful. P/N* P/N** From time to time the market deliv11.3x 6.5x U.S. Large Cap Value ers the message that valuations do not 11.7x 6.8x U.S. Value matter. This happens when greed is at a 12.9x 8.5x U.S. Mid Cap Value fervor pitch, and it happens when fear is 12.3x 7.4x U.S. Small Cap Value at its most severe. Value investors thrive 10.4x 6.2x Global Value when fear dominates. While we can never 10.1x 6.1x EAFE Value know exactly when the fear will ease, or 8.7x 5.4x European Value what the precise triggers are that cause 11.2x 7.1x Emerging Markets Value the shift in sentiment, human behavior is encouragingly consistent and we remain poised to benet.
*Price-to-Normalized Earnings ratio. **Reflects the investment universe price-to-normalized earnings ratio for the related strategy.
2 4 6
Commentary
The cycles of value investing appear rmly intact, and the current cycle is on-par with where we might expect to be since the prior peak.
Global Research Review
Good cyclical businesses continue to dominate our research this quarter.
Portfolio Strategies
We focused mainly on building positions initiated during the third quarter. Portfolios are among the cheapest in our history.
14
Highlighted Holding
Staples, Inc., the worlds largest ofce supplies company, is a prime example of an industry leader left behind in investors ight to safety.
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Pzena Commentary
Although no two cycles are exactly alike, the current cycle is remarkably consistent with the four prior. If history is a guide, there should continue to be signicant opportunity in the deep value space.
Is Value Investing Dead?
Equity investors have been shaken to the core. The cumulative pain of the last ve years is palpable, and has been compounded by the market decline and incessant volatility of the last six months. Add to that the proliferation of high-frequency trading, ETFs and other new market participants, and investors are questioning the very foundation of value investing: the notion that, over the long term, the value of a good, but undervalued, business will ultimately be recognized by the market. We are hearing echoes of 1999, the last time the death knell of value investing gained currency. Investors are asking whether there is a new paradigm, one in which the long term view is overwhelmed by short term traders reacting to macro events half way around the world. Will value investing ever work again? There is no denying that an obsession with macroeconomic events dominated market activity during 2011. The correlation of stock returns is the highest it has ever been, an indication that markets are being driven by broad, unspecied fears. Volatility has also spiked, with the MSCI ACWI moving by more than 1% on 28 trading days in the July December period. The risk-on, risk-off trade has come to dominate market activity, driving cash ows into sectors considered safe on days when fears spike, merely to reverse back into economically sensitive sectors when fears abate. Taking a step back from the day-to-day market noise, however, provides a useful perspective in which to assess recent market activity, and possibly even identify hidden opportunities otherwise obscured. We studied the performance of a nave deep value benchmark (referred to as value in this article and dened as the cheapest quintile of the 1000 largest U.S. listed companies on a price-to-book basis) versus the S&P 500 index over the last 42 years, and have a number of key observations: - Recent experience is highly consistent with the historical ebbs and ows of the cycles of value investing; - The most recent period of value outperformance, which started in December 2008, was interrupted in mid-2011 for six months, as investor sentiment shifted from optimism to uncertainty on concerns over sovereign debt, Eurozone stability, and slowing global economic growth; - We experienced similar interruptions in almost all value cycles over the last 42 years, and both the magnitude and duration of the mid-2011 interruption are consistent with prior cycles (Figure 1); - The last peak in the value cycle was 58 months ago a seeming eternity in the investment world. Since then, value has underperformed the S&P 500 by a cumulative 11.8%. As it turns out, this cycle-to-date relative performance for value versus the broad market is almost exactly the average of the last four full value cycles (Figure 2); - If history is a guide, there is signicant pent-up opportunity in the value category (Figure 2); - The ight to safety and across-the-board, indiscriminate selling of cyclical businesses has left a wealth of deeply undervalued, industry leading companies with solid business franchises, high free cash ows, and solid balance sheets. Conversely, businesses considered safe (i.e., stable earnings or high dividend paying such as utilities and consumer staples) are at record high valuations rela-
Figure 1: Interruptions Are Common During Cycles of Value Outperformance*

# of Months of Value Outperformance Jul 73 - Jul 79 Dec 80 - Aug 88 Nov 90 - Aug 95 Mar 00 - Feb 07 A Prior Cycles Average P i C l Dec 08 - Present 73 93 58 84 77 37 (so far) Interruptions of Greater than 5% in Relative Underperformance During Value Outperformance Cycle Cumulative Outperformance 176.4% 254.1% 134.6% 171.9% 184 3% 184.3% 51.5% so far Number 4 2 0 2 2 1 Magnitude -7.2% -7.8% -8.2% -5.8% -6.0% -5.9% N/A** -6.2% -10.4% 7 2% -7.2% -8.8% Duration ( # of months ) 3, 3, 3, 9 6, 6 N/A** 1, 5 4.5 6
*Cheapest quintile price-to-book of 1,000 largest U.S. stocks; Measured from the start of value outperformance vs. S&P 500. Data through 12/31/11 **The Nov 90 - Aug 95 cycle had three relatively short, mild interruptions of 2.7%, 2.7% and 2.0% lasting two months each Source: Sanford C. Bernstein & Co., Pzena Analysis
PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011
tive to cyclical businesses. - Because these undervalued companies have the nancial strength and market position to make it through a range of economic scenarios, share price volatility provides opportunity without outsized risk of permanent loss relative to the market. - To a large extent, the macro outcomes are not knowable, so it is prudent to place signicant emphasis on balance sheets and competitive position, with a conservative view of future growth. Even with these conservative assumptions, many attractively valued opportunities exist.
Value Cycles Repeat

As Mark Twain once said, History does not repeat itself, but it rhymes. We can see this in Figure 3, where we detail the cycles of value investing over the last 42 years. Although each cycle is different, there is a distinct pattern, driven by the common denominators of economic cycles and investor behavior. The value cycle tends to peak at the end of an economic cycle, as investors see impending signs of economic slowdown or recession. It may be the bursting of a bubble that is the precursor (commercial real estate in the late 80s, internet in the 90s, housing in 2007). Regardless of the trigger, expectations of an economic slowdown cause investors to re-price equities downward, as they ee to safer havens. Although this is a time where value tends to underperform the broad market, it sets the stage for a long run of outperformance, as valuations become compelling when investors give up on equities, providing a wealth of undervalued businesses. It is usually during recessions where value starts to outperform, when valuations fully reect recessionary expectations, and investors start looking forward to an eventual recovery. Value outperformance tends to abate as the economy is
Figure 2: The Current Value Cycle Looks Very Familiar Cumulative Relative Performance of Value* vs. S&P 500
150% 125% 100% 75% 50% 25% 0% -25%
12 24 36 48 60 72 84 96 108 120 132
peaking and investors throw valuation to the wind to chase the momentum of hot areas. The refrain but this time its different gains widespread currency. Remember the internet in 1999? But eventually, traditional forces that drive the economic cycles reappear, and the cycle starts all over again. Periods of value outperformance in these cycles have been long and rewarding. Since 1969 these periods lasted 7 years on average, and delivered 184% of cumulative out-performance versus the broad market (Figure 1). As a result, over four entire cycles lasting a total of 38 years, value outperformed the broad market by 4.8% per annum. All of these periods of value outperformance, however, have experienced, on average, two temporary interruptions, each lasting 4 months, with value underperforming the broad market by 7.2%. The 2011 interruption was quite similar, lasting six months and producing relative performance of -8.8%. The last value cycle peaked in early 2007, as cracks in the housing market appeared. This ultimately triggered the global nancial crisis, and deep recession that lasted 18 months from late 2007 through March, 2009. As is typical, value strategies suffered as the market underwent a massive re-valuation. But as the U.S. bank stress tests and subsequent capital raises started to stabilize the market in March 2009, value was poised for a strong rebound. This in fact occurred, actually starting right after the U.S. presidential election in November, 2008. From that point through December, 2011, deep value outperformed the broad market by a cumulative 51.5%. Although we have been buffeted by massive volatility during the last half of 2011, the downward re-valuation of global equities occurred mainly during the third (continued on page 16)
Figure 3: Value Investing Cycles over the Last 42 Years
Performance Low P/B* Feb 69 - Jun 73 -8.3% Jul 73 - Jul 79 206.9% Full Cycle (Annualized) 10.4% Aug 79 - Nov 80 17.4% Dec 80 - Aug 88 414.7% Full Cycle (Annualized) 21.9% Sep 88 - Oct 90 -16.2% Nov 90 - Aug 95 247.9% Full Cycle (Annualized) 16.5% Sep 95 - Feb 00 71.8% Mar 00 - Feb 07 187.5% Full Cycle (Annualized) 14.9% Feb 69 - Feb 07 15.5% Mar 07 - Nov 08 -56.3% Dec 08 102.2% Cycle-to-Date (Annualized) -2.5% S&P 500** 19.3% 30.4% 4.3% 45.6% 160.7% 15.8% 25.1% 113.2% 15.1% 163.0% 15.5% 10.1% 10.7% -33.4% 50.6% 0.1% Low P/B vs. S&P 500 -27.6% 176.4% 6.1% -28.3% 254.1% 6.1% -41.3% 134.6% 1.5% -91.2% 171.9% 4.8% 4.8% -22.8% 51.5% -2.6% # Months 53 73 126 16 93 109 26 58 84 54 84 138 457 21 37 58
Current Cycle Average of Last 4 Cycles
Months From Prior Peak

Source: Sanford C. Bernstein & Co., Pzena Analysis *Cheapest quntile price-to-book of 1000 largest U.S. stocks Source: Sanford C. Bernstein & Co., Pzena Analysis *Value cumulative **Capitalization weighted
FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS
Pzena Global Research Review

Our research continues to focus on good businesses that are deeply undervalued cyclical companies left behind by investors in their ight to stability.
underway. Mohawk has three principal operating divisions: carpets, ceramic tiles and laminates. Carpets, 53% of revenues, is dominated by two companies in the U.S., Mohawk and Shaw Industries, the latter owned by Berkshire Hathaway. There are several competitive advantages which give protection to the incumbents, including the ownership of distribution channels and the low labor component in the nished item, thus shielding them from the threat of cheap carpet imports. Ceramic tiles represent a quarter of sales and here we have factored in some concerns about import competition in this more fragmented sector. In laminates, the balance of sales, the company has a strong position at the premium end of its markets with some patent protection out to 2017 on Mohawks glue-less installation techniques. Selling at just 7.8x our normal earnings estimate, this leading, cyclically depressed company offers excellent leverage to recovery in construction and refurbishment activity. In Japan, Shin-Etsu Chemical is a cyclical company that we have added to this quarter. Its core businesses are semiconductor silicon and PVC manufacturing, the latter of which is a business with signicant construction industry exposure (pipes, etc.). Shin-Etsu has come through a recent heavy period of capital investment, from which it now stands to benet as it reaps the returns and builds its margins. In silicon wafers, used by its customers for the manufacture of semiconductors, it has built capacity in the widely used 300mm wafers. Although the industry remains in oversupply, Shin-Etsu is protable at these demand levels with upside potential as the supply-demand equation moves towards equilibrium. Its shares trade at 7.5x our normal earnings estimate.
Fear has created a valuation opportunity in numerous cyclical stocks. This situation is remarkable given that corporate protability has proven to be so resilient in the face of changing economic fortunes. We are taking advantage of deep discounts available today among cyclical stocks with sustainable business franchises, strong balance sheets, and a demonstrated ability to adapt to whatever the economy has to offer. This is exactly what would be expected of value investors at this point in the cycle - buying cyclical companies, with a particular focus on strong franchises and balance sheets. This was how we concluded the Commentary in our September Newsletter and, a strong rally in the markets in October notwithstanding, three months later it feels like not too much has changed. Overall, portfolio turnover was lower than average this quarter, as the signicant revaluation occurred during the third quarter, at which time we initiated a number of new positions in attractively valued cyclical businesses.
The Markets are Shunning Volatility A Source of Longer Term Alpha

The valuation disparity between defensive, generally low beta sectors of the market (e.g., health care, utilities and consumer staples) and higher beta, more economically sensitive companies, remains near historical highs (page 16, Figure 4). Financials also high beta, these days have remained weak with investors fearing the consequences of the European sovereign debt crisis. We have added to a number of economically sensitive names trading at compelling valuations, and made selective switches within some sectors. Sales or reductions to outperforming names which are now approaching our sell discipline - the median valuation in our respective investment universes - have included J.C. Penney and Johnson & Johnson, across several of our larger capitalization strategies.
Compelling Valuations In Europe

Today we are nding some heavily discounted opportunities for inclusion in our Global and EAFE portfolios on the European bourses. A European discount has opened up, reecting current macroeconomic concerns for the region. However, the emphasis in our portfolios is on companies with a global footprint that merely happen to be headquartered in Europe. A ne example of this is the global auto manufacturer Volkswagen, where we have been rebuilding a position this quarter. We originally bought VW shares in mid-2010 when they were weighed down by fears about consumption of large ticket consumer discretionary items. Over the ensuing eight months the share price approximately doubled as the feared collapse in demand failed to materialize and the company produced several quarterly earnings reports that signicantly exceeded investors expectations. Increased penetration of key markets, internal efciencies in their manufacturing processes and ongoing success with their Chinese joint ventures all coalesced to deliver
Cyclical Names Remain Attractive

We continued to build a position initiated during the third quarter in the worlds largest oor coverings company, Mohawk Industries. Weak demand has seen sales and operating income depressed from their 2006 peak levels. Management has been proactive on the cost side and margin recovery is already
better than expected results. We began to exit our position as the share price reected this success after an unusually short period of ownership. In recent months, VW shares have weakened again on macro concerns. We have rebuilt exposure in our Global, EAFE and European strategies at 7.9x our normal earnings estimate.
Some Portfolio Changes in Emerging Markets

In our Emerging Markets Value strategy, we completed our sale of the Brazilian steel equipment and pipe maker Confab Industrial as it had run up after becoming subject of a takeover offer from fellow steel maker Tenaris. We trimmed several holdings where valuation improved, including the Turkish manufacturer/ assembler of Ford cars and commercial vehicles, Ford Otosan. We added to Oriame Cosmetics whose shares fell sharply on a disappointing earnings announcement during the quarter. Oriame has a substantial business in Russia, where consumer spending has been weak, and it also lost share in the third quarter due to a failed sales representative recruitment campaign. We think both are temporary issues. At 5.4x our normal earnings estimates, the shares are attractively valued.
Intra-Sector Activity
Within nancials, we have rebalanced some positions this quarter, but generally maintained our overall level of exposure. There is plenty of unrealized excess return potential in our deeply undervalued positions without the need to materially increase the exposure. Within the information technology sector we added to Computer Sciences Corporation, which reacted poorly this quarter to a disappointing earnings report, and Hewlett Packard, which seems to have started to gain some equilibrium under new CEO Meg Whitman. Microsoft and Capgemini have been added to while Dell, Ingram Micro and Avnet have been pared in certain U.S. strategies on improved valuations. Capgemini, is a French-based IT consultancy. Europe dominates its business, but it sources around 20% of billings from the U.S. The public sector accounts for more than a quarter of revenues, which makes for some uncertainty in the current scal environment. This area has recently been a source of disappointment to some of its competitors. IT consulting is perceived to be notoriously cyclical, which in part explains the 50% drop in the companys share price from its mid-year high. However, a high proportion of their business is either ongoing, outsourced IT work or long-tail (3- to 5-year) projects. Capgemini has a very exible cost structure which it manages proactively, a robust franchise which is growing as outsourcing increases, and a strong balance sheet. Its shares are unlikely to prove immune from the prevailing short-term headwinds for the sector, but its shares trade attractively at 6x our normal earnings estimate.
Exploiting the Opportunities

Our portfolios today trade at very attractive valuations, near the lowest in our entire 16-year history as a manager. We acknowledge that this is a painful phase in the value investing cycle, but believe this has enabled us to construct portfolios which are populated with companies that represent leading franchises with outstanding nancial characteristics at very attractive valuations.
Even Beer Sales Are ImpactedCats And Dogs Too

Consumer staples companies have generally not been screening in the cheapest quintile of value in the current, risk-averse environment. An exception is the leading brewer, Molson Coors, and we have been building up positions in portfolios. We review the issues and opportunities for Molson Coors on page 10. In our Small Cap Value strategy, we have bought into the animal health care business VCA Antech, the dominant operator of animal hospital and diagnostic laboratories in the U.S. (see page 9).
PORTFOLIO STRATEGIES
Pzena Large Cap Value

Performance Summary
Annualized as of December 31, 2011
Top 10 Holdings
Since Inception 10/1/00 3.7% 3.2% 3.3%
(Representative Portfolio - See Portfolio Notes on page 18)
4Q 2011 Large Cap - Gross Large Cap - Net 12.5% 12.4%
YTD 2011 -5.3% -5.8% 0.4%
One Year
Three Year
Five Year -5.7% -6.1% -2.6%
Ten Year 3.4% 2.9% 3.9%
-5.3% 15.1% -5.8% 14.6% 0.4% 11.6%
Russell 1000 Value 13.1%
All returns through December 31, 2011; see Performance/Portfolio notes on page 18
Hewlett-Packard Co. Royal Dutch Shell plc Staples Inc. Allstate Corp. Northrop Grumman Corp. BP plc Entergy Corp. Exxon Mobil Corp. Molson Coors Brewing Co. Abbott Laboratories
4.9% 4.5% 4.2% 4.1% 3.9% 3.8% 3.6% 3.6% 3.3% 3.3%
Portfolio Characteristics
Pzena Large Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 1000 Value) Standard Deviation (5-Year) Number of Stocks (model portfolio)
Source: Russell 1000 Value, Pzena Analysis
Sector Weights
Russell 1000 Value 11.3x* 11.7x 1.4x $4.6 $71.4 1.0 20.1% 656 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities
0% 10% 20% 30% 40%
Pzena Large Russell Cap Value* 1000 Value 14% 3% 12% 33% 3% 7% 7% 17% 4% 10% 8% 12% 25% 13% 3% 9% 7% 13%
6.5x 10.1x 1.1x $13.7 $54.4 0.97 25.5% 37

*Large Cap Universe Median
* Pzena Large Cap Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes We did not add any new positions to the portfolio this quarter, as we view our current holdings as superior to any of the new opportunities that we investigated. We continue to nd value in a number of cyclical sectors such as consumer discretionary, nancials, materials, and technology. Our largest holdings continue to be companies we believe have an ability to adapt to adverse macro environments based on business exibility and sound balance sheets.
Quarterly Performance Drivers

CONTRIBUTORS: Masco, J.C. Penney Co. Inc., Hewlett-Packard Co. DETRACTORS: Computer Sciences Corp., Bank of America Corp., Goldman Sachs Group Inc.
Notable Portfolio Actions

PURCHASES/ADDITIONS: Staples Inc., Franklin Resources Inc., MetLife Inc. SALES/TRIMS: Beam Inc., Edison International, J.C. Penney Co. Inc.
Highlighted Holding
Royal Dutch Shell plc is a leading global integrated oil and gas company. Over the last half decade, the company has invested heavily in a number of projects (several of which are quite large), that are just now starting to ramp up. Many of these investments are expected to have long and stable production lives, and together they position the company to have one the highest rates of growth in production and free cash ow among the majors over the next few years. Additionally, the companys rening assets currently are under-earning, representing the potential for a rebound. Meanwhile, the company as a whole is earning an attractive return on equity and pays a dividend yield of just under 5%. The company is nancially sound with net debt representing less than 10% of total operating capital. We view Royal Dutch as attractively valued, trading at just under 7x our estimate of normalized earnings.
Pzena Value
Performance Summary
Top 10 Holdings
Since Ten Inception Year 1/1/96 9.3% 8.5% 7.2%
4Q 2011 Value - Gross Value - Net 13.9% 13.7%
YTD 2011 -3.7% -4.4% 0.4%
One Year -3.7% -4.4% 0.4%
Three Year
Five Year
16.0% -5.1% 4.7% 15.2% -5.7% 3.9% 11.6% -2.6% 3.9%
Russell 1000 Value 13.1%
Hewlett-Packard Co. Exxon Mobil Corp. Avnet Inc. Staples Inc. Abbott Laboratories Allstate Corp. Royal Dutch Shell plc Northrop Grumman Corp. Hospitality Properties Trust RenaissanceRe Holdings Ltd.
4.8% 4.7% 4.1% 3.8% 3.6% 3.5% 3.4% 3.3% 3.2% 3.2%
Pzena Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 1000 Value) Standard Deviation (5-Year) Number of Stocks (model portfolio)
Source: Russell 1000 Value, Pzena Analysis
Sector Weights
Russell 1000 Value 11.7x* 11.7x 1.4x $4.6 $71.4 1.0 20.1% 656 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities
0% 10% 20% 30% 40%
Pzena Value* 18% 2% 9% 31% 3% 6% 7% 21% 3%
Russell 1000 Value 10% 8% 12% 25% 13% 3% 9% 7% 13%
6.8x 10.4x 1.2x $13.5 $51.6 0.97 25.5% 39

*Value Universe Median
* Pzena Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes The portfolio continues to have signicant exposure to cyclical businesses with sound balance sheets and solid business franchises which are among the cheapest in our investment universe. We added to existing housing-related exposure (Fortune Brands Home & Security), initiated a new position in MetLife, and added to Molson Coors, a rare opportunity in consumer staples. Our largest exposures continue to be in technology, consumer discretionary and insurance names.

CONTRIBUTORS: Mohawk Industries Inc., Avnet Inc., Exxon Mobil Corp. DETRACTORS: Computer Sciences Corp., Bank of America Corp., Goldman Sachs Group Inc.

PURCHASES/ADDITIONS: MetLife Inc., Fortune Brands Home & Security, Molson Coors Brewing Co. SALES/TRIMS: ACE Ltd., Sherwin-Williams Co., J.C. Penney Co. Inc.
Highlighted Holding
MetLife Inc. is a global life insurer with a market leading position in the U.S. and also strong positions in Japan, Latin America, and other international geographies. The company is very well capitalized and should be able to increase its protability as it deploys excess capital and integrates its acquisition of ALICO (formerly AIGs international life insurance operations). After acquiring ALICO, MetLife is now more globally diversied with more than 40% of prots coming internationally, increasingly earns prots based on mortality rather than capital markets risks, and is better positioned for growth. The stock has fallen on overblown concerns regarding the macro economy and declining interest rates. MetLifes investment exposure to peripheral Europe is very limited, and while low interest rates are a drag on earnings, MetLife has interest rate hedges to help mitigate against lower investment income. At 5.4x our estimate of normalized earnings and 0.6x book value, we believe the stock is very attractive.
Pzena Mid Cap Value

Performance Summary
Top 10 Holdings
Since Ten Inception Year 9/1/98 7.8% 11.5% 7.0% 10.8% 7.7% 8.8%
4Q 2011 Mid Cap Value - Gross Mid Cap Value - Net Russell Midcap Value 20.4% 20.2% 13.4%
YTD 2011 4.1% 3.3% -1.4%
One Year
Three Year
Five Year 1.1% 0.3% 0.0%
4.1% 23.6% 3.3% 22.7% -1.4% 18.2%
Avnet Inc. Entergy Corp. L-3 Communications Curtiss-Wright Corp. Staples Inc. Brady Corp. Omnicom Group Hospitality Properties Trust Mohawk Industries Inc. Allstate Corp.
4.6% 4.0% 3.9% 3.7% 3.7% 3.5% 3.4% 3.4% 3.3% 3.1%
Pzena Mid Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell Midcap Value) Standard Deviation (5-Year) Number of Stocks (model portfolio)
Source: Russell Midcap Value, Pzena Analysis
Sector Weights
Russell Midcap Value 12.9x* 13.2x 1.3x $3.7 $7.8 1.0 23.2% 528 Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities
0% 10% 20% 30% 40%
Pzena Russell Mid Cap Value* Mid Cap Value 22% 3% 0% 32% 0% 7% 17% 13% 6% 12% 7% 6% 32% 6% 5% 10% 6% 16%
8.5x 12.1x 1.2x $4.3 $6.0 0.97 26.9% 37

*Midcap Universe Median
* Pzena Mid Cap Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes There was not a signicant shift among sectors during the quarter, as we maintained our positioning in cyclical businesses. Our largest exposures are in nancials, consumer discretionary, producer durables and technology and small weights in utilities and energy. We added positions in life insurance and housing products, and sold our position in Rent-A-Center (rent-to-own) as it reached fair value. We continue to see opportunities in good businesses exposed to the economic cycle trading at attractive valuations.

CONTRIBUTORS: Delphi Financial Group Inc., Mohawk Industries Inc., Protective Life Corp. DETRACTORS: Computer Sciences Corp., Avon Products Inc.

PURCHASES/ADDITIONS: Fortune Brands, Primerica, MI Developments Inc., Staples Inc. SALES/TRIMS: Rent-A-Center, Delphi Financial Group, Beam Inc.
Highlighted Holding
Avnet is the worlds largest distributor of electronic components and value added reseller of enterprise computer and storage products with annual revenue of $26 billion. The company sells semiconductors and electronic components to customers in a wide variety of industries including: automotive, communications, computer hardware, medical, defense and aerospace. Avnet is facing cyclical pressures due to weakness in the semiconductor industry, but we believe long term Avnet will remain a leading company in an industry that will continue to consolidate and deploy capital efciently (the company recently announced its rst stock buyback ever). Avnet also has strong downside protection through a counter-cyclical balance sheet that generates cash from working capital when revenue falls. We assume revenues will grow a modest 2.5% per annum, and margins will normalize at their long-term historical levels of 3.6%. Based on these assumptions, Avnet is currently trading at 5.7x our estimate of normalized earnings, making it one of the cheapest stocks in the portfolio.
Pzena Small Cap Value

Performance Summary
Top 10 Holdings
Since Three Five Ten Inception Year Year Year 1/1/96
4Q 2011 Small Cap Value - Gross Small Cap Value - Net Russell 2000 Value 17.3% 17.0% 16.0%
YTD 2011 -8.7% -9.6% -5.5%
One Year
-8.7% 21.1% 1.7% 8.5% 12.9% -9.6% 19.9% 0.7% 7.5% 11.7% -5.5% 12.4% -1.9% 6.4% 8.8%
Harte-Hanks Inc. Con-way Inc. Diodes Inc. Brady Corp. National Penn Bancshares Inc. Primerica Inc. Webster Financial Corp. Argo Group International BBCN Bancorp Inc. Huntington Ingalls Industrie
4.1% 3.8% 3.7% 3.3% 3.2% 3.1% 3.0% 2.9% 2.9% 2.9%
Pzena Small Cap Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to Russell 2000 Value) Standard Deviation (5-Year) Number of Stocks (model portfolio) 7.4x 12.0x 1.0x $1.1 $1.2 0.96 29.3% 43 Russell 2000 Value 12.3x* 14.0x 1.2x $0.4 $1.1 1.0 24.9% 1354
Sector Weights
Sector Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing Producer Durables Technology Utilities
0% 10% 20% 30% 40%
Pzena Small Cap Value* 23% 0% 2% 36% 2% 5% 22% 6% 4%
Russell 2000 Value 12% 3% 4% 37% 5% 7% 14% 10% 8%
Source: Russell 2000 Value, Pzena Analysis *Small Cap Universe Median
* Pzena Small Cap Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes We continue to nd cheap and interesting opportunities in the small cap universe and established several new positions in home building and industrial batteries. In addition, we added to Skechers USA, PHH Corp. and TCF Financial on weakness. We funded our buys from Delphi Financial Group (buyout offer by Tokyo Marine at a 70% premium) as well as ConMed Corp. and MTS Systems Corp., which have appreciated close to fair value.

CONTRIBUTORS: Delphi Financial Group Inc., BBCN Bancorp Inc., Con-Way Inc. DETRACTORS: PHH Corp., JAKKS Pacic Inc., Skechers USA Inc.

PURCHASES/ADDITIONS: Aspen Insurance Holdings Ltd., Protective Life Corp., Interline Brands Inc., PHH Corp. SALES/TRIMS: Delphi Financial Group Inc., ConMed Corp., Plantronics Inc., MTS Systems Corp.
Highlighted Holding
Besides the cyclical opportunities that abound in the market today, we also continue to nd stocks with more unique characteristics. VCA Antech operates in two businesses, veterinary hospitals and laboratory testing for domestic animals (dogs and cats). The laboratory business operates in a duopoly with large barriers to entry due to scale and distribution density, and, similar to human medicine, with increasing volumes. In the hospital business, volumes declined over the last decade, as some ea and other medications that were traditionally sold by hospitals now can be purchased through pet and other retail stores. As a result, veterinary hospital visits now mostly result in medical procedures. The volume declines accelerated in the current weak environment as pet owners deferred treatment for their pets. With an eventual return to normal volumes we project normal earnings of $2.25. Although the stock has increased in price from the $14 where we initiated our position, it is still reasonably priced at 9x our estimate of normalized earnings.
Pzena Global Value

Performance Summary
Top 10 Holdings
YTD 2011 -12.8% -13.3% -5.5% One Year -12.8% -13.3% -5.5% Three Year 11.0% 10.2% 11.1% Five Year -8.7% -9.4% -2.4% Since Inception 1/1/04 0.9% 0.1% 3.7%
4Q 2011 Global Value - Gross Global Value - Net MSCI World Index 7.8% 7.7% 7.6%
Hewlett-Packard Co. Royal Dutch Shell plc Akzo Nobel Shin-Etsu Chemical Co. Ltd. BAE Systems plc Northrop Grumman Corp. Microsoft Corp. BP plc Travis Perkins plc Philips Electronics NV
4.6% 3.8% 3.4% 3.3% 3.2% 3.1% 3.1% 2.9% 2.9% 2.7%
Pzena Global Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to MSCI World Index) Standard Deviation (5-Year) Number of Stocks (model portfolio) 6.2x 9.0x 0.9x $25.7 $52.2 0.95 27.1% 44 MSCI World Index 10.4x* 11.8x 1.6x $7.7 $69.2 1.0 20.5% 1615
Sector Weights
Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities
0% 10% 20%
Pzena Global Value* 10% 4% 14% 24% 3% 14% 18% 9% 2% 2%

30%
MSCI World Index 10% 11% 12% 18% 11% 11% 12% 7% 4% 4%
Source: MSCI World Index, Pzena Analysis *Global Universe Median
* Pzena Global Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes Global stock markets recovered some of the losses suffered in the previous quarter. Overall valuations remain at very attractive levels despite the modest recovery. During the quarter, we added to exposure in areas such as consumer, technology and industrials and reduced our exposure to health care, where valuation has become less attractive given relative outperformance.
Region Concentration
Region Concentration North America United Kingdom Europe ex-UK Japan Dev.Asia ex-Japan Australia / New Zealand Emerging Markets
0% 10% 20% 30% 40%
Country weights adjusted for cash - may appear higher than actual
Pzena Global Value 39% 19% 29% 8% 0% 0% 5%

50%
MSCI World Index 57% 10% 18% 9% 2% 4% 0%

CONTRIBUTORS: Hewlett-Packard Co., Royal Dutch Shell plc, Omnicom Group Inc. DETRACTORS: MS&AD Insurance Group Holdings Inc., Capgemini, Credit Agricole SA, Enel SpA

PURCHASES/ADDITIONS: Molson Coors Brewing Co., Microsoft Corp., Capgemini, Deutsche Boerse AG SALES/TRIMS: JC Penney Co. Inc., Johnson & Johnson, Abbott Laboratories, Royal Dutch Shell plc
Highlighted Holding
Molson Coors Brewing Co. is a leading beer producer with 30% market share in the U.S. and 40% in Canada. It has strong brands such as Molson Canadian and Coors Light. Beer consumption volume has been under pressure during the economic downturn as the core consumer of beer tends to be younger and more negatively impacted by the economic downturn versus the general population. Raw material cost increases have been an additional drag on the protability of the industry. We believe that the companys earnings will benet during an economic recovery. Trading at 8.3x our estimate of normalized earnings, its an attractive addition to the portfolio.
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Pzena EAFE Value

Performance Summary
Top 10 Holdings
YTD 2011 One Year -13.4% -14.1% -12.1% Three Year 13.3% 12.3% 7.7% Five Year -5.9% -6.7% -4.7% Since Inception 1/1/04 3.3% 2.4% 3.9%
4Q 2011 EAFE Value - Gross EAFE Value - Net MSCI EAFE Index
4.3% -13.4% 4.1% -14.1% 3.3% -12.1%
BAE Systems plc Philips Electronics NV Azko Nobel Travis Perkins plc Cap Gemini Royal Dutch Shell plc Lagardere SCA Enel SpA Deutsche Boerse AG Shin-Etsu Chemical Co. Ltd.
3.0% 2.7% 2.6% 2.6% 2.6% 2.6% 2.3% 2.3% 2.2% 2.2%
Pzena EAFE Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Correlation (to MSCI EAFE Index) Standard Deviation (5-Year) Number of Stocks (model portfolio) 6.1x 9.0x 0.9x $13.6 $33.5 0.95 27.8% 43 MSCI EAFE Index 10.1x* 10.7x 1.2x $6.3 $48.6 1.0 22.6% 925
Sector Weights
0% 10% 20%
Pzena EAFE Value* 15% 1% 13% 22% 2% 22% 9% 9% 4% 3%

30%
MSCI EAFE Index 10% 12% 9% 21% 10% 12% 5% 10% 6% 5%
Source: MSCI EAFE Index, Pzena Analysis *EAFE Universe Median
* Pzena EAFE Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes The MSCI EAFE index rose in the quarter as investor sentiment regarding global growth became less negative. Sectors such as energy, consumer and industrial led performance while nancials and utilities detracted from performance. We added to our exposure in European companies, where valuation is particularly low, and reduced our exposure to Japan, where the opportunity is less compelling.
Region Concentration North America United Kingdom Europe ex-UK Japan Dev.Asia ex-Japan Australia / New Zealand Emerging Markets & Other 0% 10% 20% 30% 40% 50%
Pzena EAFE Value 2% 33% 43% 13% 0% 0% 9%
MSCI EAFE Index 0% 23% 42% 22% 4% 9% 0%

CONTRIBUTORS: Royal Dutch Shell plc, Koninklijke Philips Electronics, BP plc DETRACTORS: KBC Group NV, MS&AD Insurance Group Holdings Inc., GAM Holding AG

PURCHASES/ADDITIONS: Total SA, Lagardere SCA, Deutsche Boerse, Inchcape plc, Volkswagen AG SALES/TRIMS: Imperial Tobacco Group plc, LG Electronics Inc., Royal Dutch Shell plc, BP plc
Highlighted Holding
Lagardere S.C.A. is a French conglomerate with interests ranging from book publishing, magazine printing, travel retailing to sports marketing. In addition, the company is a shareholder in EADS (the parent company of Airbus) and Canal+ (TV & lm studio and distributor). Lagarderes share price declined sharply following a series of earnings warning. While serious challenges exist for some of Lagarderes divisions, we believe that current share price offers signicant upside potential thru a combination of corporate restructuring and earnings improvement driven by both economic recovery and operational improvement. Trading at 5x our estimate of normalized earnings, Lagardere is a very attractive holding for the portfolio.
11
Pzena European Value

Performance Summary
Top 10 Holdings
4Q 2011 YTD 2011 -16.1% -16.4% -11.1% One Year -16.1% -16.4% -11.1% Three Year 11.5% 11.0% 7.9% Since Inception 8/1/08 -3.8% -4.2% -6.7%
European Value - Gross European Value - Net MSCI Europe Index
3.6% 3.5% 5.4%
BAE Systems plc Akzo Nobel Teleperformance Royal Dutch Shell plc Aegis Group plc Travis Perkins plc Philips Electronics Cap Gemini Gazprom OAO Lagardere SCA
4.3% 4.1% 4.0% 3.9% 3.7% 3.6% 3.5% 3.3% 3.2% 3.2%
Pzena European Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Number of Stocks (model portfolio) 5.4x 8.1x 0.8x $11.9 $32.5 39 MSCI Europe Index 8.7x* 10.4x 1.3x $8.0 $58.5 450
Sector Weights
0% 10% 20%
Pzena MSCI European Value* Europe Index 8% 21% 14% 0% 13% 14% 22% 18% 1% 12% 25% 10% 8% 3% 4% 10% 2% 7% 3% 5%
30%
Source: MSCI Europe Index, Pzena Analysis *European Universe Median
* Pzena European Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes European equities, being at the center of current macro anxiety, are exceptionally attractive at the moment. This is particularly true for companies that have global footprints but trade at substantial discounts to their global peers given their European domicile. In the quarter, we added to some of our existing positions where the valuations are compelling.
Region Concentration United Kingdom France Germany Switzerland Emerging Markets Rest of Europe
0% 10%
Pzena European Value 40% 16% 5% 9% 3% 27%

20% 30% 40% 50%
MSCI Europe Index 36% 14% 12% 13% 0% 25%

CONTRIBUTORS: Royal Dutch Shell plc, Aegis Group plc, Koninklijke Philips Electronics NV DETRACTORS: KBC Group NV, Indra Sistemas S.A., Carillion plc

PURCHASES/ADDITIONS: Total SA, Capgemini, Teleperformance SALES/TRIMS: Imperial Tobacco Group plc, ACE Ltd., Eni SpA
Highlighted Holding
BAE Systems plc is a U.K.-based defense contractor. With U.K. and U.S. governments accounting for the majority of its revenues, concerns over defense budget cuts are weighing on BAEs share price. The company has managed the challenge on the revenue front through aggressive cost cutting and restructuring and has maintained protability in the process. While we see severe challenges on the revenue front for all defense contractors, we believe BAEs share price adequately reects the downside risk. Trading at 6.9x our estimate of normalized earnings and 6.1% free cash ow yield, we believe BAE is an attractive holding.
12
Pzena Emerging Markets Value

Performance Summary
Top 10 Holdings
4Q 2011 YTD 2011 One Year -21.9% -22.3% -18.4% Three Year 19.1% 18.1% 20.1% Since Inception 1/1/08 -3.1% -4.1% -5.2%
Emerging Markets Value - Gross Emerging Markets Value - Net MSCI Emerging Markets Index
3.2% -21.9% 3.1% -22.3% 4.4% -18.4%
Gazprom OAO China Mobile Ltd. Usiminas Hon Hai Precision Industry Taiwan Semiconductor Mfg. Co. Petrobras Sasol Ltd. Oriflame Cosmetics Samsung Electronics Co. Ltd. LG Electronics Inc.
3.5% 3.2% 3.0% 3.0% 2.9% 2.9% 2.9% 2.9% 2.8% 2.7%
Pzena Emerging Markets Value Price to Normal Earnings Price / Earnings (1-Year Forecast) Price / Book Median Market Cap ($B) Weighted Average Market Cap ($B) Number of Stocks (model portfolio) 7.1x 7.9x 1.0x $5.0 $29.9 52 MSCI Emerging Markets Index 11.2x* 9.7x 1.6x $3.8 $31.2 820
Sector Weights
0% 10% 20%
Pzena Emerging MSCI Emerging Markets Value* Markets Index 14% 3% 14% 22% 0% 9% 18% 7% 8% 5%
30%
8% 8% 14% 24% 1% 6% 13% 13% 9% 4%
Source: MSCI Emerging Markets Index, Pzena Analysis *Emerging Markets Universe Median
* Pzena Emerging Markets Value Composite. Sector weights adjusted for cash - may appear higher than actual
Quarterly Portfolio Notes This quarter, emerging and global markets staged a sharp rebound in October before again succumbing to renewed fears later in the quarter. We continue to see increasing opportunity in selected cyclicals, and, as such, added to our industrial and technology exposures. In addition, the relative underperformance of India this year allowed us to slightly raise our weight in that market.
Region Concentration Africa / Middle East Asia/Pacific (ex Japan) Europe Latin America
Pzena MSCI Emerging Emerging Markets Value Markets Index 11% 55% 18% 16%
0% 10% 20% 30% 40% 50% 60%
10% 59% 8% 23%

CONTRIBUTORS: Samsung Electronics Co. Ltd., Hon Hai Precision Industry, LG Electronics Inc. DETRACTORS: Turkiye Vakiar Bankasi, Chaoda Modern Agriculture Ltd., Aldar Properties

PURCHASES/ADDITIONS: Bangkok Bank, Grand Korea Leisure Co. Ltd., HCL Technologies Ltd., Hyundai Mipo Dockyard Co. Ltd. SALES/TRIMS: LG Electronics Inc., Samsung Electronics
Highlighted Holding
Huadian Power and China Power International are mainland China-based independent power producers (IPPs). Both companies have struggled due to high priced coal feedstock and an inability to pass pricing through to power consumers as a result of regulated tariffs. The authorities have been reticent to raise tariffs, fearing the effect on Chinas already high ination rate. Recently, ination has begun to slow; as such, regulators are offering the IPPs tariff relief. In addition, coal price pressure has started to abate. These two factors should lead to an improvement in returns for the IPPs over time. The companies currently trade attractively at about 6x our estimate of normalized earnings.
13
HIGHLIGHTED HOLDING
Staples, Inc. (SPLS)

Staples, Inc. is an industry leader with superior protability, a strong balance sheet, and a free cash ow yield in excess of 10% that is well positioned to benet from an eventual upturn in employment.
Staples, the worlds largest ofce supplies company with estimated 2011 revenues of $25 billion, is an exceptional business franchise that helped invent the ofce supply superstore concept over twenty ve years ago. The company has a dominant and growing market position, a balance sheet that has little net debt, and a free cash ow yield of over 10%. Yet investors have punished Staples for two reasons: cyclical exposure to white collar employment and business formation, and secular concerns about on-line competition and a slow decline in paper consumption. The words are familiar, particularly to a value investor: timing is uncertain; near-term macro catalyst not visible; not enough growth. As a result, Staples stock price fell by over 40% in 2011, from $23.75 earlier in the year to $13.89, and now trades for less than 11x current earnings and 6.3x our estimate of normalized earnings. Despite these concerns, we see a company that is well positioned to meet its short and long term challenges. We nd the stock a compelling investment case even under conservative assumptions, due to Staples numerous competitive strengths: - Dominant market position with a demonstrated ability to gain share; - Advantaged customer mix with scale efciencies resulting in industry-leading protability; - Superior business model over on-line retailers for its core customers; - Stable, experienced management team that has successfully managed protability during the downturn, and introduced new products and services to address both cyclical and secular challenges; and - A highly cash generative business model, giving the company ample resources to fund investment, maintain a low level of debt, and repurchase meaningful amounts of stock. SPLS Earnings and Valuation Data
Price/Earnings Price Staples, Inc. $13.89 2010 $1.16 2011(E) Normal $1.30 $2.20 2010 12.0x 2011(E) Normal 10.7x 6.3x
As of December 31, 2011 Source: Company Reports, Pzena Analysis
nia to Maine compared to 116 stores for OfceMax and Ofce Depot combined. Strong nancial performance combined with a much better balance sheet and dominant market presence allowed Staples to gain share from its competitors in the last two downturns. Overall, we believe that Staples is well positioned for an economic upturn. But even if the environment weakens in the near term, Staples is positioned to be a net beneciary by gaining share from its relatively weaker competitors, further strengthening its market dominance.
Scale Advantages and Superior Protability

The company generates about 25-40% higher sales per square foot versus its peers, and generates operating prot of $19 per square foot versus its peers which are close to breakeven (Figure 1). Further, its large buying scale provides it with cheaper cost of goods sold, and it generates about one-third of its business through higher margin small and medium business customers. As a result, Staples has historically generated returns on invested capital averaging 12% versus peers in the 3-6% range. Staples strengths are complemented by a management team that has historically managed its margins exceptionally well in challenging economic times, including that of 2008-09. Its operating margins declined by only 150-200 basis points in each of the last two recessions in spite of multiple years of negative same store sales growth (Figure 2). Management moved to quickly cut costs and focus on business improvements as volumes declined. Staples has stabilized its margin structure at 6.5-7% at current revenue levels and will likely improve its margins should white collar employment strengthen. In addition, the company has more than 50% of its leases coming due in the next three years, providing additional rental cost reduction opportunity through lease renegotiations. Competitors also have signicant lease renewals on the horizon, which could result in additional closures of marginal stores.
Strong Market Position; Gaining Share

Over the years, Staples has grown from a single-store outside of Boston to the dominant player in its industry. Staples has increased its U.S. share among ofce superstores from 30% in 1997 to almost 60% today, through both organic growth as well as acquisitions. Staples has monopolistic presence in Northeast U.S., with 494 stores stretching from Pennsylva-
Limited threat from On-Line Competitors

As for every retail or supplies company, no discussion is complete without discussion of threat of online competitors like Amazon. Staples generates more than 80% of its revenue and
14
prots in North America from ofces and small businesses a segment that Amazons business model is not geared to serve effectively. Businesses need one-stop ordering, a clear ofce products catalog, and single delivery of their items supported by a sales and account service team. Amazons business-to-consumer model relies heavily on third-party sellers that results in multiple shipments and requires effort to nd, order and track deliveries, since Amazon provides limited dedicated sales support infrastructure. While Amazons prices are sometimes lower than ofce supplies stores, adjusted for next day delivery promised by ofce superstores, Amazon is generally more expensive. While it is possible for an online competitor like Amazon to develop a robust business-to-business model with a sales force to service businesses, Staples is already the second largest internet retailer worldwide and should be able to effectively address that challenge.
company took on about $2.7 billion of debt in connection with its acquisition of Corporate Express in 2008, but has managed to pay off most of it in the last two years. As a result, net debt today stands at fairly conservative 0.4x earnings before interest, taxes, depreciation and amortization. The company has generated more than $5 billion of free cash ow in last ve years, and at this time, company is focused on returning cash to shareholders. The company bought back approximately $600 million of stock in 2011, and recently announced a $1.5 billion stock buy-back program, which is signicant in relation to the companys market capitalization of approximately $10 billion.
Summary
Staples has a leading and structurally advantaged franchise in the North American ofce products retail and delivery business. The company has a history of generating high returns on capital, industry-leading margins, and strong cash ows. We believe Staples will be able to sustain its margins going forward owing to its local market dominance, scale advantages, and proven track record for identifying prot-enhancing opportunities on both the product and cost sides of the business. Even using conservative assumptions for white collar employment recovery, we believe Staples can generate 11-12% return on invested capital going forward. We expect that when white collar employment ultimately turns up, Staples, should be positioned to fully participate in the recovery. Meanwhile, the company offers a 10% free cash ow yield and, should the economy struggle further, is well positioned to take share as its competitors continue to close marginal stores. Overall, we believe Staples, currently trading at 6.3x our estimate of normalized earnings, ts the description of a good business trading at an unusually attractive valuation.
Paper Decline Manageable

Although a secular decline in paper consumption is cited as a negative for Staples, this is not a new phenomenon. Over the last ten years, shipments of uncoated free sheet paper have declined about 3% per annum, yet Staples has replaced these sales with other services like printing and technology services, coupled with growth in new categories. For example, janitorial and sanitary supplies generate $800 million in revenue today, up from an immaterial amount 5 years ago.
Cash Generative and Modest Debt

Staples business model generates substantial cash ow (currently more than 10% free cash ow yield), fueled by a consistently high return on capital. Further, with limited growth in the market, we expect its capital needs for new stores will be at or below depreciation, further bolstering cash ow. The
Figure 1: Leading Operating Profit Per Square Foot of Retail Space
Figure 2: Staples Superior Operating Margins
$30 $25 $20 $15 $10 $5 $0

Dec-98 Oct-99 Aug-00
Staples Office Depot OfficeMax
Jun-01
Apr-02
Dec-03
Oct-04
Aug-05
Jun-06
Apr-07
Dec-08
Oct-09
Aug-10
Feb-98
Feb-03
Feb-08
Apr-02
Dec-98
Aug-00
Jun-01
Dec-03
Aug-05
Jun-06
Apr-07
Oct-99
Oct-04
Dec-08
Oct-09
Source: Company Reports, Pzena Analysis
Source: Company Reports, Pzena Analysis
Aug-10
Feb-98
Feb-03
Feb-08
-$5
9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1%
Staples Office Depot OfficeMax
15
Commentary
(Continued from page 3) quarter. Investors ed cyclical stocks, seeking the safe havens in the likes of U.S. Treasuries and German Bunds, as well as dividend paying equities and companies with more stable earnings proles. This has driven the valuation of cyclical (or high beta) stocks to record lows versus stable, or low beta, stocks (Figure 4). demand weakens, protability would likely fall from current levels over the short term. However, since this recovery has been relatively short, companies are generally not experiencing the robust demand that they would after a long period of economic expansion. In other words, they would not be coming off of a peak, as is typical heading into a recession, mitigating the downside. In addition, managements learned in this latest cycle how to restore protability in a very weak demand environment, and have not had the opportunity to forget those lessons quite yet. So if faced with a deteriorating environment, they will likely react quickly once again to cut costs and restructure their processes to gain efciencies. And in the event a downturn is avoided and growth ticks up even modestly, we are likely to experience continued strong prots and cash ows.
Solid Value Opportunities

Only hindsight will allow us to make a pronouncement on the ultimate length and magnitude of the current value cycle. But one thing is clear: as a result of investor uncertainties, we have been left with a wealth of deeply discounted, cyclical businesses with sustainable business franchises, strong balance sheets, and a demonstrated ability to adapt to a wide range of economic scenarios. Many of these businesses have global footprints, are industry leaders, and have demonstrated their ability to restore protability quickly during the severe recession of 07-09. Investors are not rewarding the strong cash ow being generated by these businesses, driving cash ow yields to near peak levels (Figure 5). What we nd unusual in todays environment is that valuations reect a deep sense of pessimism, yet earnings have continued to hold up well and corporate cash ows are robust. In addition, consensus global GDP forecasts remain a healthy 3%. It would not be unreasonable to see high prot margins and cash ow yields lasting until much later in this economic cycle, as managements take a wait-and-see approach to hiring, investing and making acquisitions until the prospects for sustained growth become much more visible. A question on every investors mind, however, is how sustainable is the current level of protability? The honest answer is no one really knows. If the economy enters a recession and
Figure 4: Extreme Opportunity Globally for High Beta Stocks
Conclusion
When posed the question, will value ever work again? we look to history as our guide, and make a judgment as to whether economic cycles are still relevant, and if we can nd similarities in investor reaction to both fear and greed. There is no shortage of evidence that these primal instincts continue to drive the markets; perhaps technology has aided and abetted market participants in their ability to react even more quickly to these forces. But despite massive stock price volatility and what feels like ve years of uninterrupted pain, the cycles of value investing appear to be rmly intact, with this cycle rhyming with the others.
Figure 5: Free Cash Flow Yields Near Peak Levels Developed Markets Nominal Free Cash Flow Yields* 1986 Through Early-January 2012
7% 6% 5% 4% 3% 2% Period Average
Relative Price-to-Book Valuation to Universe
1.4 1.2 1.0 0.8 0.6

80
Low Beta
High Beta Less Attractively Valued
More Attractively Valued 83 86 89 92 95 98 01 04 07 10
1% 0
86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Sanford C. Bernstein & Co., FactSet
*Capitalization-weighted data; Data excludes financials Source: Empirical Research Partners Analysis, Pzena Analysis
16
Pzena Investment Strategies

U.S. Strategies Large Cap Value Value Small Cap Value Mid Cap Value Approximate Holdings 30 - 40 30 - 40 40 - 50 30 - 40 Universe1 500 Largest U.S. Companies 1000 Largest U.S. Companies 2000 U.S. Company Universe (Ranked 1001 - 3000) 1000 U.S. Company Universe (Ranked 201 - 1200) Strategy Inception Date 10/2000 1/1996 1/1996 9/1998
Global Strategies Global Value2 EAFE Value2 Emerging Markets Value European Value 40 - 60 30 - 50 40 - 80 40 - 60 500 Largest U.S., 1500 Largest Non-U.S. Companies 1500 Largest Non-U.S. Companies 1500 Largest Emerging Markets Companies 750 Largest European Companies 1/2004 1/2004 1/2008 8/2008
All our strategies follow the same value investment process and philosophy; the primary difference lies in the universe considered for investment.
1
While our investment process includes ongoing review of the companies in the listed universes, our ultimate investment decisions may include companies outside of these ranges at the time of purchase. 2More diversied versions also available.
17
Portfolio / Performance Notes

Portfolio Notes
The specic portfolio securities discussed in the current portfolio strategy sections of this report were selected for inclusion based on their ability to help you understand our investment model for that particular product strategy. They do not represent all of the securities purchased or sold or recommended for our client accounts during the quarter, and it should not be assumed that investments in such securities were or will be protable. Notable Portfolio Actions are selected from representative portfolios based on the most signicant portfolio purchases and sales. Quarterly Performance Drivers are selected from composite performance based on the most signicant contributors and detractors to performance. The specic portfolio securities discussed in the Highlighted Holdings section of this report were held in our Large Cap, Value, Mid Cap, All Cap and Global strategies during the fourth quarter of 2011. Highlighted Holdings are selected randomly from a rotation of our product strategies and are not selected based on performance. Top 10 holdings for our strategies have been derived from a representative portfolio that best represents the implementation of the strategy. Holdings will vary among client accounts as a result of different product strategies having been selected thereby. Holdings also may vary among client accounts as a result of opening dates, cash ows, tax strategies, etc. There is no assurance that any securities discussed herein remain in your portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an accounts entire portfolio and in the aggregate may represent only a small percentage of an accounts portfolio holdings. The information in this document is for informational purposes only, and highlights certain investment products that Pzena Investment Management, LLC (PIM) offers. It does not constitute an offer to sell, or a solicitation of an offer to buy, any products referenced herein. Any such offering will be made only in accordance with the terms and conditions set forth in the respective offering memoranda for the products. 82 accounts with total assets of $1,568.4 million and represented 99.9% of our assets in this style. At 12/31/11, the Mid Cap Value composite included 6 accounts with total assets of $293.3 million and represented 100% of our assets in this style. At 12/31/11, the Large Cap Value composite included 56 accounts with total assets of $4,858.2 million and represented 97.5% of our assets in this style. The Value and Small Cap Value composites were each created on 12/31/95. The Large Cap Value composite was created on 10/1/2000. The Mid Cap Value composite was created on 9/1/02. For the period 9/1/98 (inception) through 12/31/01, Mid Cap Value returns are also included in our Value composite. No accounts with any signicant client-imposed investment restrictions are included in any composite. All domestic product returns in this report have been presented both gross and net of investment management fees. From 1996 through 2004, the returns are calculated on a time weighted, total return basis (i.e., include all dividends, interest, accrued income, realized and unrealized gains or losses and are after brokerage transaction charges) and are linked monthly. During that same period, cash ows of 10% or greater prompt a locking of market values on the day prior to the cash ow, creating sub-periods of performance which are then linked. From 2005 forward, returns are presented based on daily unit values (day weighted, total return which includes all dividends, interest, accrued income, realized and unrealized gains or losses and are after brokerage transactions charges) which are linked. As a result of the change to daily unit values, the need to lock values for large cash ows is no longer required. Net of fees returns reect deductions of all management fees paid by the accounts in the relevant domestic product composite. Asset-based fees (which generally range from 0.5% to 1.5% of managed assets depending on account size) are recorded against such accounts monthly or quarterly depending on the fee arrangement applicable to the account. Such fees generally are recorded against accounts with quarterly fee arrangements in the rst month of the applicable quarter. Fees for partial periods, such as those created when an account opens or closes during the middle of a month or quarter or when signicant additional cash is added to an account, are recorded in the month of occurrence. A substantial performance fee was deducted in each of January 2002, January 2003, October 2003, October 2004 and October 2005 from a large account in the Value composite. The standard annual fee payable by all PIM Small Cap accounts is 1%, except that from inception through 4/1/2002, the annual fee payable by the founding Small Cap account was 1.5%. Small Cap accounts with assets less than $10 million are charged 1.5% per annum with a $100,000 per annum maximum fee. The founding Small Cap account was opened 12/31/95, and was the sole account managed by PIM in the Small Cap style until 5/31/2000. The current standard fee schedule for both our Value and Mid Cap Value strategies is as follows: for accounts under $10 million, the fees are 1.5% per annum, with a maximum annual fee of $100,000; for accounts of $10 million or more, the fees are 1% per annum on the rst $10 million; 0.75% per annum on the next $40 million; 0.60% per annum on the next $50 million; and 0.50% per annum thereafter. The current standard fee schedule for the Large Cap Value strategy is as follows: for accounts of $10 million or more, the fees are 0.70% per annum on the rst $25 million of assets, 0.50% per annum on the next $75 million of assets, 0.40% per annum on the next $200 million of assets, and 0.35% thereafter; for accounts under $10 million, the fees are 1.00% per annum with a maximum annual fee of $70,000. All fees are recorded against each account in the composite monthly or quarterly (in the rst month or quarter the account is under management) depending upon the fee schedule applicable to the account. To illustrate the compounded effect of the deduction of a 1% annual fee on a hypothetical investment of $1,000 in an account where the average annual return before fees was 10% for a 10-year period, and assuming reinvestment of all dividends and interest, the initial investment would have grown to $1,100 after one year before fees and $1,089 after fees; to $1,611 after ve years before fees and $1,532 after fees; and to $2,594 at the end of ten years before fees and $2,346 after fees. Further discussion regarding our advisory fees is contained in our Form ADV, Part 2A. The Russell 2000 Value Index is used as a benchmark for our Small Cap Value strategy; the Russell 1000 Value Index is used as a benchmark for our Value and Large Cap Value strategies; and the Russell Midcap Value Index is used as a benchmark for our Mid Cap Value strategy. Each of these benchmarks, as well as the S&P 500 Index, is used to indicate the investment environment existing during the time periods shown in this report. Each Russell Index is a registered trademark or trade name of The Frank Russell Company. The Frank Russell Company is the owner of all copyrights relating to the Russell Indexes and is the source of certain performance statistics cited herein. The S&P 500 Index and all Russell Indexes are unmanaged and cannot be invested in directly.
Performance Notes
PIM is a registered investment adviser that follows a classic value investment approach. PIM is the operating company of Pzena Investment Management, Inc. Pzena Investment Management, Inc. is a publicly traded company whose shares are listed on the New York Stock Exchange under the ticker symbol PZN. As of 12/31/11, PIM managed $13,519 million in assets under various U.S., international and global value investment strategies. PIM has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS). Past performance is no guarantee of future results, and the past performance of any accounts or commingled funds managed by PIM should not be considered indicative of the future performance of any accounts or commingled funds managed by PIM. Investment return and principal value of an investment will uctuate over time. Additional information is available upon request regarding policies for calculating and reporting returns. To receive a complete list and description of PIMs composites and/or a full presentation that adheres to the GIPS standards, contact Joan Berger at (212) 583-1291, or write to PIM, 120 West 45th Street, 20th Floor, New York, NY 10036 or [email protected].
Performance Notes Specic to Domestic Products

The domestic product returns presented in this report are for our Large Cap Value, Value, Mid Cap Value, and Small Cap Value Services composites. The Large Cap Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 500 largest U.S.-traded companies at time of initial purchase; the Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 1,000 largest U.S.-traded companies at time of initial purchase; the Mid Cap Value Service is a portfolio generally consisting of 30-40 stocks taken from a universe generally consisting of the 201st - 1200th largest U.S.-traded companies at the time of initial purchase; the Small Cap Value Service is a portfolio generally consisting of 40-50 stocks taken from a universe generally consisting of the 1,001-3,000 largest U.S. stocks. Each domestic product composite is size weighted, includes cash and cash equivalents, includes all fee-paying and non fee-paying; discretionary, non-wrap fee accounts managed in the particular style represented by such composite, and is in U.S. dollars. As of 12/31/11, 0.3% of the Value Service Composite was represented by non-fee paying accounts. No leverage was employed in the accounts in any of the domestic product composites. Accounts enter the relevant domestic product composite at the beginning of the rst full month under management. Closed accounts are included for each full month prior to closing. At 12/31/11, the Small Cap Value composite included 45 accounts with total assets of $1,018.8 million and represented 100% of our assets in this style. At 12/31/11, the Value composite included
18
Performance Notes Specic to International and Global Products

The international value returns presented in this report are for the Pzena EAFE Value Service. The Pzena EAFE Value Service is a portfolio generally consisting of 30-50 stocks taken from a universe generally consisting of the 1,500 largest non-U.S. companies at time of initial purchase, which generally have market capitalizations above $2 billion. The global value returns presented in this report are for the Pzena Global Value Service. The Pzena Global Value Service is a portfolio generally consisting of 40-60 stocks taken from a universe generally consisting of the 500 largest U.S.-traded securities and the 1,500 largest non-U.S. companies at time of initial purchase, which generally have market capitalizations above $3.4 billion. The European value returns presented in this report are for the Pzena European Value Service. The Pzena European Value Service is a portfolio generally consisting of 40-60 stocks taken from a universe generally consisting of the 750 largest European companies globally at time of initial purchase, which generally have market capitalizations above $1.0 billion. The emerging markets returns presented in this report are for the Pzena Emerging Markets Value Service. The Pzena Emerging Markets Value Service is a portfolio consisting of 40-80 stocks taken from a universe generally consisting of the 1500 largest companies in non-developed markets at time of initial purchase, which generally have market capitalizations around $1.0 billion. As of 12/31/11, PIMs EAFE Value Service Composite included 3 accounts with total assets of $77.8 million and represented 100.0% of our assets in this style. As of 12/31/11, PIMs Global Value Service Composite included 24 accounts with total assets of $3,552.4 million and represented 100% of our assets in this style. As of 12/31/11, PIMs European Value Service Composite included 2 accounts with total assets of $58.1 million and represented 100% of our assets in this style. As of 12/31/11, PIMs Emerging Markets Value Service Composite included 3 accounts with total assets of $193.1 million and represented 100% of our assets in this style. Each of PIMs EAFE Value, Global Value, European Value and Emerging Markets Value composites is calculated on a time-weighted, total return basis and includes all dividends, interest, accrued income and realized and unrealized gains or losses. Returns are calculated in U.S. dollars (USD). The Composites are size weighted, includes cash and cash equivalents, includes all fee-paying and non fee paying; non wrap fee portfolios which are managed on a fully discretionary basis by PIM. As of 12/31/11, 0.2% of the Global Value Composite was represented by non-fee paying accounts. Eligible new portfolios are added to the Composites at the beginning of the rst full month under management. Terminated portfolios are removed from the Composites after the last full month that the portfolio is under rm management. No accounts with any signicant client imposed investment restrictions are included. No leverage was employed in the accounts in the composite. FX currency transactions were used to transact in equity securities only, where applicable. The EAFE Value and Global Value Composites were created on 6/1/08. Composites include all Pzena Global Value Service and Pzena EAFE Value Service porfolios managed according to the respective service since product inceptions of January 2004. The European Value composite was created in 8/1/08. The Emerging Markets Value composite was created in 1/1/08. All international, global, european and emerging markets returns have been presented both gross and net of investment management fees. Asset-based fees (which generally range from 0.5% to 1.0% of managed assets depending on account size) are recorded against such accounts monthly or quarterly depending on the fee arrangement applicable to the account. Such fees generally are recorded against accounts with quarterly fee arrangements in the rst month of the applicable quarter. Fees for partial periods, such as those created when an account opens or closes during the middle of a month or quarter or when signicant additional cash is added to an account, are recorded in the month of occurrence. The standard fee schedule for the EAFE Value and Global Value Composites is currently: 1.00% per annum on the rst $10 million, 0.80% per annum on the next $40 million, 0.70% per annum on the next $50 million, 0.60% on the next $200 million and 0.55% per annum on assets above $300 million. The standard fee schedule for European Value is currently: 0.75% per annum on the rst 20 million, 0.55% per annum on the next 80 million, 0.45% per annum on the next 150 million, and 0.40% on assets above 250 million. The standard fee schedule for Emerging Markets Value is currently: 1.25% per annum on the rst $10 million, 1.00% per annum on the next $40 million, 0.90% per annum on the next $50 million, 0.80% on the next $200 million and 0.75% per annum on assets above $300 million. For the time period of 1/1/04 to 1/31/06 the fee schedule for the EAFE Value Composite was 1.25% per annum on all assets. For the time period of 1/1/04 to 4/30/06 the fee schedule for the Global Value Composite was 1.25% per annum on all assets. To illustrate the compounded effect of the deduction of a 1% annual fee on a hypothetical investment
of $1,000 in an account where the average annual return before fees was 10% for a 10-year period, and assuming reinvestment of all dividends and interest, the initial investment would have grown to $1,100 after one year before fees and $1,089 after fees; to $1,611 after ve years before fees and $1,532 after fees; and to $2,594 at the end of ten years before fees and $2,346 after fees. Further discussion regarding our advisory fees is contained in our Form ADV, Part 2A. Composite returns for the EAFE Value Service Composite are benchmarked to the MSCI EAFE Index (the Index). The benchmark is used for comparative purposes only and generally reects the risk or investment style of the investments reported on the schedule of investment performance. The MSCI EAFE Index is a free oat-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada, and is net of withholding tax on dividends from a Luxembourg tax perspective. The Index cannot be invested in directly. Investments made by the Firm for the portfolios it manages in the Pzena EAFE Value Service Composite may differ from those of the MSCI EAFE Index. Composite returns for the Global Value Service Composite are benchmarked to the MSCI World Index (the Index). The benchmark is used for comparative purposes only and generally reects the risk or investment style of the investments reported on the schedule of investment performance. The MSCI World Index is a free oat-adjusted market capitalization index that is designed to measure developed market equity performance, including the U.S. and Canada, and is net of withholding tax on dividends from a Luxembourg tax perspective. The Index cannot be invested in directly. Investments made by the Firm for the portfolios it manages in the Pzena Global Value Service Composite may differ from those of the MSCI World Index. Investment results for the Composites will differ from those of the benchmark. Composite returns for the European Value Service Composite are benchmarked to the MSCI Europe Index (the Index). The benchmark is used for comparative purposes only and generally reects the risk or investment style of the investments reported on the schedule of investment performance. The MSCI Europe Index is a free oat-adjusted market capitalization index that is designed to measure the equity market performance of the developed markets in Europe, and is net of withholding tax on dividends from a Luxembourg tax perspective. The Index cannot be invested in directly. Investments made by the Firm for the portfolios it manages in the Pzena European Value Service Composite may differ from those of the MSCI Europe Index. Accordingly, investment results will differ from those of the benchmark. Composite returns for the Emerging Markets Value Service Composite are benchmarked to the MSCI Emerging Markets Index (the Index). The benchmark is used for comparative purposes only and generally reects the risk or investment style of the investments reported on the schedule of investment performance. The MSCI Emerging Markets Index is a free oat-adjusted market capitalization index that is designed to measure equity market performance of emerging markets, and is net of withholding tax on dividends from a Luxembourg tax perspective. The Index cannot be invested in directly. Investments made by the Firm for the portfolios it manages in the Pzena Emerging Markets Value Service Composite may differ from those of the MSCI Emerging Markets Index. Accordingly, investment results will differ from those of the benchmark. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby disclaim all warranties of originality, accuracy, completeness, merchantability or tness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its afliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost prots) even if notied of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCIs express consent. Please note that PIM, LLC has presented a new composite for performance as of 6/30/08 for both the EAFE Value and Global Value Services. The new composite includes all portfolios within each respective product that are not mutual funds. Previously, PIM presented two separate composites for performance that had been linked. The historical returns have also been updated to reect the new, more complete composites. However, for the time period of 1/1/04 to 1/31/06 for the EAFE Value Service, and the time period of 1/1/04 to 4/30/06 for the Global Value Service, there was only one portfolio for each product. These portfolios represented PIMs original funds which consisted of rm and employee capital.
19
PZENA INVESTMENT MANAGEMENT

120 WEST 45TH STREET | NEW YORK, NY 10036 | TEL: (212) 355-1600 | FAX: (212) 308-0010 | WWW.PZENA.COM Pzena Investment Management, 2012. All rights reserved.

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FOURTH QUARTER | 2011

Quarterly Report To Clients

Global Research Review

Good cyclical businesses continue to dominate our research this quarter.

Figure 1: Interruptions Are Common During Cycles of Value Outperformance*

PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011

Value Cycles Repeat

Current Cycle Average of Last 4 Cycles

Months From Prior Peak

FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS

Pzena Global Research Review

The Markets are Shunning Volatility A Source of Longer Term Alpha

Compelling Valuations In Europe

Cyclical Names Remain Attractive

PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011

Some Portfolio Changes in Emerging Markets

Exploiting the Opportunities

Even Beer Sales Are ImpactedCats And Dogs Too

FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS

Pzena Large Cap Value

(Representative Portfolio - See Portfolio Notes on page 18)

4Q 2011 Large Cap - Gross Large Cap - Net 12.5% 12.4%

YTD 2011 -5.3% -5.8% 0.4%

Five Year -5.7% -6.1% -2.6%

Ten Year 3.4% 2.9% 3.9%

-5.3% 15.1% -5.8% 14.6% 0.4% 11.6%

Russell 1000 Value 13.1%

6.5x 10.1x 1.1x $13.7 $54.4 0.97 25.5% 37

Quarterly Performance Drivers

Notable Portfolio Actions

PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011

(Representative Portfolio - See Portfolio Notes on page 18)

4Q 2011 Value - Gross Value - Net 13.9% 13.7%

YTD 2011 -3.7% -4.4% 0.4%

One Year -3.7% -4.4% 0.4%

16.0% -5.1% 4.7% 15.2% -5.7% 3.9% 11.6% -2.6% 3.9%

Russell 1000 Value 13.1%

Pzena Value* 18% 2% 9% 31% 3% 6% 7% 21% 3%

Russell 1000 Value 10% 8% 12% 25% 13% 3% 9% 7% 13%

6.8x 10.4x 1.2x $13.5 $51.6 0.97 25.5% 39

Quarterly Performance Drivers

Notable Portfolio Actions

FOURTH QUARTER 2011 | PZENA QUARTERLY REPORT TO CLIENTS

Pzena Mid Cap Value

(Representative Portfolio - See Portfolio Notes on page 18)

YTD 2011 4.1% 3.3% -1.4%

Five Year 1.1% 0.3% 0.0%

4.1% 23.6% 3.3% 22.7% -1.4% 18.2%

8.5x 12.1x 1.2x $4.3 $6.0 0.97 26.9% 37

Quarterly Performance Drivers

Notable Portfolio Actions

PZENA QUARTERLY REPORT TO CLIENTS | FOURTH QUARTER 2011

Pzena Small Cap Value

(Representative Portfolio - See Portfolio Notes on page 18)

YTD 2011 -8.7% -9.6% -5.5%

Pzena Small Cap Value* 23% 0% 2% 36% 2% 5% 22% 6% 4%

Russell 2000 Value 12% 3% 4% 37% 5% 7% 14% 10% 8%

Quarterly Performance Drivers

Notable Portfolio Actions