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Finding Opportunities — Tackling today’s uncertain financial environment Backed by more than 100 years of experience, Columbia Management is one of the nation’s largest asset managers. At the heart of our success — and, most importantly, that of our investors — are highly talented industry professionals, brought together by a unique way of working. It starts with carefully selected, specialized investment teams. While each team brings a diverse and innovative range of skills, all are grounded by a common set of core beliefs. All possess a solid conviction in the power of proprietary, bottomup research. All look not only at generating returns but also at the likely consistency of those returns and the risks required to achieve them. And while our culture encourages teams to operate independently and question established thinking, a rigorous investment oversight process ensures that each team stays true to its clearly articulated investment process. At Columbia Management, reaching our performance goals matters, but the way we reach them matters just as much. Columbia Management outlook: Low, slow growth Our view is that low, slow growth will remain the defining trait of the global economic and financial market outlook for the foreseeable future. The fiscal and debt crises in the U.S., Japan and the eurozone remain unresolved, with outcomes uncertain. While investors need to be defensive in this challenging environment, that doesn’t mean piling into cash or T-Bills. At Columbia Management, we offer a research-driven approach, a focus on maximizing riskadjusted returns and a broad array of investment solutions. We can help you uncover opportunities to help meet your goals and take charge of your financial future: > Redefining income > Uncovering growth > Navigating volatile markets > Managing interest rate risk > Maximizing after-tax returns The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. Investment theme Redefining income Market conditions this theme addresses: > Uncertainty > Volatility > Historically low fixed-income yields > Corporate balance sheets are strong: cash rich, low leverage In a low-growth economy, income-producing assets can not only be a steady source of cash, they can also be a significant component of a portfolio’s total return while helping reduce price and return volatility. Investors remain conservative. Investors, still leery of stock market volatility, continue to be risk-averse. Uncertain, low-growth economy. While there are some encouraging signs, the overall economy continues to face significant structural issues. The result has been a prolonged period of low-and-slow growth, volatile equity markets and historically low fixed-income yields. Strong corporate balance sheets. Companies have responded to the financial crisis by cutting costs and deleveraging. Broadly, corporate balance sheets are healthy and conservatively positioned, with historically high cash levels. Weak government balance sheets. Unlike companies, governments have added to already high debt levels, paving the way for challenging times and fiscal belt-tightening. The next stage of the deleveraging cycle will be in the government sector, making Treasury bond investing less appealing. Opportunities for now Income opportunities lie in corporate balance sheets.1 Investors can access the strong balance sheets of cash-rich corporations by investing across the full spectrum of the capital structure: from floating rate loans, corporate and convertible bonds to preferred and dividend-paying stocks. Dividends often indicate quality, and quality matters. Consistently paying dividends has long been a reliable indicator of financial strength. Paying a dividend — or potentially even increasing the amount of dividends paid to shareholders — sends a message that even in tough times the dividend payer is able to maintain a healthy business that returns value to shareholders.2 And healthy businesses are better able to weather market downturns.3 Today’s dividends are likely to be maintained and even increased. Because companies remain conservatively positioned, dividend payouts are historically low. But present cash levels are historically high, which increases the likelihood that companies will be able to afford to maintain their dividend payouts if the economy worsens or raise their dividends if the economy improves. 1 Identifying entities as having “better balance sheets” or possessing the characteristics mentioned does not assure a profit or protect against loss. 2 Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer. 3 Equity investments are affected by stock market fluctuations that occur in response to economic and business developments. 4 Bond investing poses special risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop and vice versa. Dividends can play a central role in today’s uncertain times. To meet return goals in previous markets, many investors relied on price appreciation and/or higher fixedincome yields. However, today’s stock market volatility and historically low interest rates have discouraged these approaches. Here, dividend investments — with yields that allow investors to realize some return on their investment now rather than later — can be a prudent solution, providing current income that contributes to total return and offers welcome reassurance in uncertain times. The benefits of dividend investing isn’t just today’s story. Dividends have historically comprised a significant part of total return, and now is no different. As corporate management teams seek to return value to shareholders from today’s cash-rich businesses, we expect dividends will become an even larger part of total return. Today’s corporate bonds offer reliable income with low default risk. Corporate bonds are another way to take advantage of the income opportunities from companies with healthy balance sheets.4 In contrast to government bonds, corporate bonds (both high and low quality) currently provide a yield above inflation. Furthermore, corporate bond default risk remains below average across the quality spectrum. Bond yield spreads remain fairly valued. While bond yields are historically low, yield spreads are fairly valued. Investors are being adequately compensated for moving down the quality spectrum given the solid fundamentals underlying corporate issuers. Access to capital is strong, pending maturities are low and defaults are expected to continue to be below long-term averages. We believe the greatest value lies in lower-quality investment-grade bonds, higher quality high-yield bonds (BB- to B-rated credit) and bank loans. 2 Investment theme Redefining income (continued) 5 International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets. Investing in emerging markets may involve more risk than investing in developed countries. In addition, concentration of investments in a single region may result in greater volatility. Uncovering growth Market conditions this theme addresses: > Low overall growth > Growth opportunities scarce > Superior emerging market economies > Within developed markets, exceptions buck low-growth trend Equity Class A Class C Class Z Columbia Convertible Securities Fund Columbia Dividend Income Fund2 Columbia Dividend Opportunity Fund2 Columbia Flexible Capital Income Fund Columbia Global Dividend Opportunity Fund (formerly Strategic Investor Fund)2, 5 PACIX LBSAX INUTX CFIAX PHIKX LBSCX ACUIX CFIGX NCIAX GSFTX CDOZX CFIZX CSVAX CSRCX CSVFX Fixed income4 Class A Class C Class Z Columbia Corporate Income Fund Columbia Floating Rate Fund Columbia Income Builder Fund Columbia Intermediate Bond Fund Columbia Limited Duration Credit Fund Columbia Strategic Income Fund LIIAX RFRAX RBBAX LIBAX ALDAX COSIX CIOCX RFRCX RBBCX LIBCX RDCLX CLSCX SRINX CFRZX CBUZX SRBFX CLDZX LSIZX In a world of tepid economic growth, companies and countries that can fund their own growth rather than relying on capital markets have a decided advantage over those that cannot. Equity growth opportunities are scarce. The overall economy is experiencing a prolonged period of low-and-slow growth combined with heightened uncertainty. Therefore, most companies have stayed on the defensive, keeping costs down and staying clear of the risks associated with expansion. Consequently, opportunities to fuel the growth component of investment portfolios are in short supply. Emerging market economies are stronger today and have excellent prospects for tomorrow. Today’s emerging market economies boast better overall balance sheets than their developed peers. These countries largely avoided the financial crisis that continues to plague developed economies. And while the developed world struggles with costly social programs, mounting debt and aging populations, emerging market nations run leaner, have vast rainy day funds and much more favorable demographics. Select developed market sectors and companies are growing. While the overall economy proceeds at a sluggish pace, there are exceptions. Certain sectors and individual companies are defying the dominant macroeconomic trend and creating shareholder value by offering products and services that are in high demand regardless of the environment. Opportunities for now Embrace the new global economy. With their impressive balance sheets, sound fundamentals and bright prospects, emerging market countries should no longer be viewed as a “speculative play.”5 Growth and quality can be found here in both equities and fixed income, and it is time for investors to consider the implications of this paradigm shift for their asset allocation strategy. In today’s economy, some industries are prospering. While few sectors are spared from the global economic slowdown, the near-to-long-term outlook remains unshakably positive for certain industries (e.g., within health care and technology). There is always room to grow for great companies. While most companies rely on secular (i.e., broad and lasting) economic expansion for growth, a select few companies are able to capture or even create market share through a superior business model and/ or innovation despite macroeconomic headwinds. 3 Investment theme Uncovering growth (continued) 6 Funds whose investments are concentrated in a specific industry, sector or geographic area may be subject to a higher degree of market risk than funds whose investments are diversified. Thorough research identifies quality opportunities. Today’s especially challenging environment demands especially careful scrutiny when sorting through markets to find issuers poised for organic growth. Investors should rely on deep, high-quality fundamental research to help uncover these opportunities. Equity Class A Class C Class Z Columbia Acorn Fund Columbia Acorn International5 Columbia Select Large Cap Growth Fund6 LACAX LAIAX ELGAX LIACX LAICX ELGCX ACRNX ACINX UMLGX Fixed income Class A Class C Class Z REBAX REBCX CMBZX Columbia Emerging Markets Bond Fund 4, 5 Navigating volatile markets In today’s global environment, investments that can tap into the opportunities that do exist are especially valuable. Market conditions this theme addresses: Uncertain, low-growth economy. While there are encouraging signs of improvement, both the global and domestic economy continue to be challenged by major unresolved issues. This has resulted in a prolonged period of low-and-slow growth. > Uncertainty > Low overall growth > Volatility > Range-bound trading A recovery marked by volatile, range-bound markets. The recovery that came on the heels of The Great Recession has been anything but assured. While confidence has improved, businesses, consumers and investors remain wary, as numerous macro issues remain. This uncertainty has been manifested in markets as volatility and range-bound trading — prolonged periods of movement between “floors” and “ceilings” with no dominant trend. Opportunities for now Avoid trying to time the market. Investors have been notoriously bad at buying low and selling high in normal markets — range-bound markets are even more challenging. Look to strategies designed to perform in today’s market conditions. There are some investments that employ strategies that can be particularly effective during lengthy periods of volatility and range-bound markets. These strategies fall into two categories: disciplined and diversified. Disciplined strategies can succeed when investor intuition fails.7 Taking emotion and guesswork out of the equation, disciplined strategies maintain strict rules when it comes to buying and selling, which can succeed when human instinct fails. Diversified strategies are free to go where the opportunities are.7 Diversified strategies — including those that employ tactical asset allocation — have the latitude to choose from a wide spectrum of investment options. These strategies can react dynamically to changing markets by taking advantage of relative value opportunities where they find them. This can mean not being limited by conventional benchmark-driven approaches to investing. 7 Equity3 Class A Class C Class Z Columbia Contrarian Core Fund Columbia Thermostat Fund LCCAX CTFAX LCCCX CTFDX SMGIX COTZX Fixed income4 Class A Class C Class Z Columbia Income Builder Fund Columbia Strategic Income Fund RBBAX COSIX RBBCX CLSCX CBUZX LSIZX Application of a disciplined and/or diversified strategy does not assure a profit or protect against loss. 4 Investment theme Managing interest rate risk Market conditions this theme addresses: > Macroeconomic picture showing signs of improvement > The Fed’s guidance on monetary policy has shifted > Treasuries offer little protection from rising rates and inflation Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. 9 Diversification does not assure a profit or guarantee against a loss. 10 The fund is designed for investors with an above-average risk tolerance. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. Due to its active management, the fund could underperform other mutual funds with similar investment objectives. The fund invests primarily in floating rate loans, the market value of which may fluctuate, sometimes rapidly and unpredictably. Risks of investing in the fund include but are not limited to liquidity risk, interest rate risk, credit risk, counterparty risk, highly leveraged transactions risk, derivatives risk, confidential information access risk, impairment of collateral risk, and prepayment and extension risk. Generally, when interest rates rise, the prices of fixed-income securities fall; however, securities or loans with floating interest rates can be less sensitive to interest rate changes, but they may decline in value if their interest rates do not rise as much as interest rates in general. Limited liquidity will affect the ability of the fund to purchase or sell floating rate loans and have a negative impact on fund performance. The floating rate loans and securities in which the fund invests are lower rated (non-investment grade) and are more likely to experience a default, which results in more volatile prices and more risk to principal and income than investment-grade loans or securities. 8 It’s time to start seriously thinking about duration risk in portfolios.8 Short duration bonds offer a higher yield than Treasuries, with less duration risk than mid- and long-term bonds. Interest rates are low because the Fed wants them low. The single most important factor depressing interest rates over last 2–3 years has been the evolving Federal Reserve (the Fed) response to weak economic growth. Interest rates could currently be at an inflection point, as recent data suggest that both inflation and unemployment — the two parts of the Fed’s dual mandate — have made progress back to their respective targets. As such, interest rates should be more sensitive to improving economic data and at greater risk of rising going forward. Longer duration does not offer compelling relative value. The Fed has abandoned datebased guidance in terms of holding the federal funds rate near zero; it has also signaled that short-term interest rates will remain unchanged at least until the unemployment rate reaches 6.5% and inflation remains muted. This shift in guidance sets the stage for increased interest rate volatility as longer-term interest rates in particular could be at risk on any change in growth or monetary policy expectations. Opportunities for now Conservative investments no longer generate enough yield to preserve capital. At historically low yield levels, U.S. Treasury bonds carry additional risks. First, shorter and intermediate-maturity U.S. Treasury bonds do not offer enough yield to pace inflation. Second, U.S. Treasury securities are perhaps the most interest-rate-sensitive assets, an effect exacerbated by low yields. As such, U.S. Treasury bonds are likely to be heavily affected by price volatility when interest rates begin to rise. Spread products provide cushion against interest rate increases. Investments that offer a yield premium, or spread, over U.S. Treasuries compensate investors for assuming credit risk. This spread can help neutralize some of the price depreciation that often occurs as interest rates rise. Short-term corporate bonds. In a low interest rate environment, corporate bonds can offer investors a higher yielding alternative. Short-term corporate bonds are less sensitive to price volatility when interest rates change. Floating rate loans. Bank loans uniquely feature a coupon tied to a market rate of interest, such as LIBOR. Because floating rate loans reset frequently, they have virtually no duration risk. This enables investors to reduce interest rate risk without sacrificing income. Mortgage-backed securities (MBS). Agency MBS are a high-quality asset with minimal credit risk but unlike Treasuries offer a yield premium. Additionally, the low interest rate environment affords investors a short duration profile. These investments can help diversify a portfolio because they typically perform independently of the stock market.9 Fixed income Columbia Floating Rate Fund Columbia Limited Duration Credit Fund4 Columbia U.S. Government Mortgage Fund4, 11 (see next page) 10 5 Class A Class C Class Z RFRAX ALDAX AUGAX RFRCX RDCLX AUGCX CFRZX CLDZX CUGZX Investment theme Maximizing after-tax returns Tax-free municipal bonds can help investors keep more of their hard-earned income. Market conditions this theme addresses: An increasing tax burden for taxpayers. Local and federal governments continue to pursue revenue increases to address unsustainable budgets deficits. Higher taxes are already a part of the solution, as a series of new taxes and tax rate increases go into effect in 2013. In addition, further tax hikes are possible. > Increasing tax rates > After-tax yields remain attractive > Low-default environment with improving financial conditions > Low-growth economy supports fixed-income investments Municipal defaults remain low. Municipal defaults in 2012 were lower than 2011, which were lower than 2010 (and defaults are expected to remain low). Keep in mind that credit downgrades are expected to remain elevated at the local municipality level — the result of stress caused by contractual obligations, pensions and slow property tax growth. Attractive market technicals. Net new supply is expected to remain low, as municipalities continue to refinance (replace) existing debt with lower cost debt. Meanwhile, demand is expected to remain strong. This combination should provide a price support for the bonds. Low-growth environment. In a low-growth environment, we expect that inflation will remain subdued and interest rates will likely remain anchored at low levels. Opportunities for now Municipal bonds remain exempt from federal taxation, and it’s what investors keep that counts. Assets that produce income exempt from taxes are attractive in any scenario. But while we are mired in today’s global low-yield environment, the after-tax yields of municipal bonds relative to Treasury and corporate bonds remain compelling. Furthermore, in an increasing-tax-rate environment, tax-exempt income becomes even more attractive. 11 There are risks associated with an investment in a municipal bond fund, including credit risk, interest rate risk, prepayment and extension risk, and geographic concentration risk. In general, bond prices rise when interest rates fall and vice versa. This effect is more pronounced for longer term securities. Municipal finances remain stressed, but signs of stability are emerging. The municipal budget landscape continues to improve through a combination of revenue increases and expense reductions via service reductions, layoffs and renegotiation of employee contracts and benefits. Municipal defaults — currently near historically low levels — are expected to remain low as the economy improves. “Tax diversification” may enhance portfolios.9 Just as asset allocation is considered prudent, tax allocation — spreading assets between taxable and tax-exempt assets — may also enhance an investment portfolio’s risk/return profile. Non-investment-grade securities, commonly called “high-yield” or “junk” bonds, have more volatile prices and carry more risk to principal and income than investment-grade securities. See the fund’s prospectus for information on these and other risks associated with the fund. Income from tax-exempt funds may be subject to state and local taxes, and a portion of income may be subject to the federal and/or state alternative minimum tax for certain investors. Federal and state income tax rules will apply to any capital gain distributions and any gains or losses on sales. 12 Because the fund concentrates its investments in municipal securities issued by a single state and its municipalities, specific events or factors affecting a particular state can cause more volatility in the fund than a fund that is more geographically diversified. 6 Investment theme Maximizing after-tax returns (continued) National tax-exempt funds11 Class A Class C Class Z Columbia AMT-Free Tax-Exempt Bond Fund Columbia Intermediate Municipal Bond Fund Columbia High Yield Municipal Fund Columbia Short Term Municipal Bond Fund Columbia Tax-Exempt Fund INTAX LITAX LHIAX NSMMX COLTX RTCEX LITCX CHMCX NSMUX COLCX CATZX SETMX SRHMX NSMIX CTEZX State tax-exempt funds11, 12 Class A Class C Class Z Columbia CA Intermediate Municipal Bond Fund Columbia CA Tax-Exempt Fund Columbia CT Intermediate Municipal Bond Fund Columbia CT Tax-Exempt Fund Columbia GA Intermediate Municipal Bond Fund Columbia MA Intermediate Municipal Bond Fund Columbia MA Tax-Exempt Fund Columbia MD Intermediate Municipal Bond Fund Columbia MN Tax-Exempt Fund Columbia NC Intermediate Municipal Bond Fund Columbia NY Intermediate Municipal Bond Fund Columbia NY Tax-Exempt Fund Columbia OR Intermediate Municipal Bond Fund Columbia SC Intermediate Municipal Bond Fund Columbia VA Intermediate Municipal Bond Fund NACMX CLMPX LCTAX COCTX NGIMX LMIAX COMAX NMDMX IMNTX NNCIX LNYAX COLNX COEAX NSCIX NVAFX CCICX CCAOX LCTCX CCTCX NGINX LMICX COMCX NMINX RMTCX NNINX LNYCX CNYCX CORCX NSICX NVRCX NCMAX CCAZX SCTEX CCTZX NGAMX SEMAX CMSZX NMDBX CMNZX NNIBX GNYTX CNYZX CMBFX NSCMX NVABX 7 Keep pace with today’s market environment Market Insights from Columbia Management Today’s investing trends thoughtfully considered. Economic and market events contextually analyzed. Uncommon points of view. Unvarnished outlooks. Find this and more in Market Insights: columbiamanagement.com/market-insights Visit the Market Insights section on columbiamanagement.com to access our current white papers, blog, videos and market commentaries. To learn more about Columbia Funds available to you, visit columbiamanagement.com or ask your financial advisor to contact a Columbia Management representative at 800.426.3750. Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. For a free prospectus, which contains this and other important information about the funds, visit columbiamanagement.com. The prospectus should be read carefully before investing. 225 Franklin Street Boston, MA 02110 -2804 columbiamanagement.com 800.426.3750 Investment products involve risks, including possible loss of principal and fluctuation in value. Past performance does not guarantee future results. Class Z shares sold at NAV have limited eligibility and the investment minimum requirement may vary. Only eligible investors may purchase Class Z shares of the fund, directly or by exchange. Please see the fund’s prospectus for eligibility and other details. Performance results for other share classes will vary. Not all products are available at all firms. Columbia Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA, and managed by Columbia Management Investment Advisers, LLC. © 2013 Columbia Management Investment Advisers, LLC. All rights reserved. CM-MK/246903 C (01/13) 3639/148660