July 2018, Issue 72. Emerging Opportunities (p7) A volatile 2018 has created opportunities in emerging market assets.

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1 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: St. Louis Fed Source: MSCI Source: Baseline and St. Louis Fed Source: St. Louis Fed E c o n o m i c M e m o r a n d u m July 2018, Issue 72 The Tails To Heads Flip In U.S. Stocks (p2) After performing better than all other asset classes over the last 10 years, U.S. stocks are poised to underperform due to a number of previous tailwinds flipping to headwinds. Emerging Opportunities (p7) A volatile 2018 has created opportunities in emerging market assets. Credit Markets: A More Transparent Fed (p10) Monthly Fed press conferences should provide greater transparency about the future course of Fed actions. Financial Wellness For Kids! (p12) There are many benefits of starting a foundation of financial wellness education early % MSCI World Unemployment Rate 3% 2% 1% Treasury Yield Curve 0% 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y The Federal Reserve s tightening cycle has nearly completely flattened the yield curve between 2 years and 10 years. 5% Real Gross Domestic Product (GDP) 8% 6% 4% 0% -5% -10% Unemployment is at a multi-decade low, as GDP continues to steadily climb.

2 Page 2 Economic Memorandum The Tails To Heads Flip In U.S. Stocks We are pleased that a number of new clients have chosen to work with OPCM in As we analyze new client and prospective client portfolios, a common theme appears in these portfolios the combination of very high exposure to U.S. stocks, and an overall lack of diversity. It is easy to understand why many investors are highly overweight to U.S. stocks. Not only is the U.S. their home country, but for the last decade, U.S. stocks have been the only asset class to post a return anywhere near its long-term average. By: Justin W. McNichols, CFA In this article: After performing better than all other asset classes over the last 10 years, U.S. stocks are poised to underperform due to a number of previous tailwinds flipping to headwinds. The table below shows how extreme the return difference has been between U.S. stocks and every other asset class. Over the last decade, U.S. stocks have returned 9% per year, which is relatively close to its 40+ year average annual return. However, the second best performing asset class, real estate, has returned less than 4% per year. Other asset classes such as foreign stocks and natural resources have delivered returns over the last decade that are close to the worst decade on record, and up to 14% per year below long-term averages. For example, natural resources are up 6.5% per year on average over the last 40+ years. However, over the last ten-years, natural resources are down 8% per year or 14.5% below the long-term average per year for ten-years truly astounding. Asset Class Return Divergence From The Long-Term Average 4/30/2018 Last 10 Years Since 1977 Return Annual Return Annual Return Difference Domestic Equities (2.4) Foreign Equities (8.0) Natural Resources (8.0) 6.5 (14.5) Real Estate (7.2) Alternatives (2.2) Fixed Income (4.2) Equal Weighted Portfolio (6.4) Source: OPCM

3 July 2018, Issue 72 Page 3 The Tails To Heads Flip In U.S. Stocks As this outperformance in U.S. stocks has continued over the past decade, recently signs have surfaced that the many tailwinds that previously helped U.S. stocks outperform are reversing. This tailwind to headwind flip, increases the probability that U.S. stocks may underperform other asset classes over the next ten-years just as investors are massively overweight U.S. stocks. So what are the tailwinds that propelled U.S. stocks over the last ten-years? The table below provides a clear view of not only why U.S. stocks previously outperformed, but why they may face difficulty continuing this outperformance. Earnings growth is the first candidate for a tails to heads flip. A few years ago, combined earnings growth for 2015 and 2016 was essentially zero in the U.S. Now fast-forward to 2018, and earnings growth is expected to be up over 20% after a solid There is also a high likelihood that the first quarter of 2018 was the peak quarter for In this article: Consumer confidence is rising, but whether it will propel spending is a question. earnings growth, up 26%. As future earnings growth rates slow, U.S. equities should experience a more difficult environment for further price gains. TAILWIND FLIPS TO ---> HEADWIND Bottoming earnings growth FLIPS TO Peaking earnings growth 0% growth in 2015 and %+ growth in 2018 Low U.S. stock valuations FLIPS TO Above average valuations Forward P/E under 12 Forward P/E over 17 Source: OPCM Accommodative Federal Reserve FLIPS TO Tightening Federal Reserve Fed Funds rate at 0% Fed Funds rate at 2% Low interest rates FLIPS TO Rising interest rates 10 Year US Treasury under 2% 10 Year US Treasury over 3% Steep Yield Curve FLIPS TO Flat Yield Curve 2/10 difference over 2.0% 2/10 difference under 0.50% Low inflation FLIPS TO Rising inflation Core CPI 1.50% Core CPI over 2.0% Low volatility FLIPS TO Rising volatility 2017 VIX high = VIX high = 50 A second key tailwind was valuation. As we entered 2012, most countries throughout the globe were trading in the general range of 10 to 12 times forward earnings. The valuation differential was fairly narrow all over the world. Today we see a much different story. While developed countries

4 Page 4 Economic Memorandum The Tails To Heads Flip In U.S. Stocks like Germany and Japan trade below 13 times forward earnings, and emerging markets as a whole trade close to 11 times earnings, the U.S. trades near 17 times earnings. The chart below shows emerging markets trading toward the lower end of an 8-16x range, and at a 25% discount to the rest of the world. Source: MSCI, Yardeni When the Federal Reserve quickly lowered the Fed Funds rate from over 5% to 0% during the recession, easy monetary policy enabled the economy to bottom, while providing inexpensive financing to feed the next economic expansion. The European Central Bank (ECB) followed suit by taking their overnight rate to less than 0%. While the two have moved in tandem over much of the past twenty years, you can see a divergence over the past couple of years when the U.S. Fed started to increase interest rates while the ECB kept their extreme accommodative policy in place. A chart of this phenomenon is shown below.

5 July 2018, Issue 72 Page 5 The Tails To Heads Flip In U.S. Stocks The shape of the yield curve has experienced a noticeable change over the past five years or so as well. As seen below, the difference in yield between ten-year U.S. Treasury yields and two-year U.S. Treasury yields was over 2.5% at the end of Since then, although ten-year yields have barely moved, the two-year yield has increased by over 2.0%. This increase has caused the yield differential to fall to under 0.4%. The flattening of the yield curve is important because history reveals that once a yield curve inverts, a recession is likely six to eighteen months later. Although not a major worry at the moment, the recent rise in inflation off of low levels, and the volatility spike earlier in the year are two additional variables that are potentially flipping from tails to heads. While core CPI and the Federal Reserve s preferred PCE measurements are on the rise, they have not entered meaningful danger zones. Meanwhile volatility spent the entire 2017 at multidecade lows, and shocked many when the VIX briefly spiked to 50 in February. Finally, when comparing stock valuations and interest rates within different regions, also known as the Equity Risk Premium (ERP), another divergence is seen. In late 2011, the global economy was bottoming, and markets had just completed a frightening 20% correction. At this time, the Equity Risk Premium, simply calculated as the Earnings divided by Price for stocks minus interest rates, was both quite high and equal in the U.S. versus the rest-of-the-world. The ERP for both was over 7%. Today, while the ERP outside the U.S. is a fairly high 5.5%, the ERP for the U.S. has fallen to only 2.5%. This means the earnings yield for stocks is only a few percent above interest rates, even though stocks are inherently riskier.

6 Page 6 Economic Memorandum The Tails To Heads Flip In U.S. Stocks Equity Risk Premiums are far higher outside the U.S., equating to higher potential future upside for foreign stocks. Source: Pantheon Economics While we do not believe U.S. stocks are headed for an inevitable 50%-style or 2008 bear market, we do believe investors who are heavily overweight U.S. stocks will eventually underperform versus an allocation that includes other asset classes with higher potential returns with less downside risk.

7 July 2018, Issue 72 Page 7 Emerging Opportunities By: Ben T. Viemeister, CFA In this article: A volatile 2018 has created opportunities in emerging market assets. Times change, but thankfully for longer term investors, short-sighted fear and greed in the financial markets remain the same was the best year for emerging market (EM) equity returns since EM was up 37%, beating domestic equities for the first time in five years. During 2017, the worst peak-to-trough decline was 5%, the shallowest decline since Extrapolating the strong returns and low volatility, investors piled money into diversified EM funds, placing the most money since Yet to the dismay of many of these allocators, EM ended the first half of 2018 down almost 20% from its 2018 high. Predictably, investors spent the final five weeks of the first half pulling money from diversified EM funds s decline may seem especially painful after a calm But it is important to remember that EM is volatile: over the last 30 years, on average, EM has experienced a 19% intra-year peak-totrough decline. This creates investment opportunity for OPCM s unique multi-asset strategy. What s Driving the Volatility A cocktail of political and financial conditions has left investors nauseous. Financially, the US dollar has appreciated, in part due to rising US interest rates. Countries with weaker financial conditions are especially at risk of getting pressured in this environment. Often their currencies depreciate, funding gets more expensive, inflation risk rises, and growth concerns intensify. This is exacerbated when investors have shown complacency. Early in 2018, the risk premium to hold EM debt instead of US Treasuries was at the lowest level in over a decade. This investor positioning began to get reversed, pressuring EM asset prices in the process. Examples of markets facing these dynamics include Argentina, Turkey, Indonesia, and South Africa. Politically, two main issues have afflicted EM: elections and trade wars. Elections have created uncertainty about whether new leaders will support economic policy that enhances or restrains growth. Examples include Mexico, which held elections in the second quarter, as well as Brazil, which will have its election in October. Meanwhile, a tit-for-tat tariff battle between the US and China has raised the specter of wider trade battles and disruptions. This has raised risk premiums across EM countries that rely more on global trade, like South Korea and China.

8 Average Age Page 8 Economic Memorandum Emerging Opportunities Why Invest in EM Short-term volatility allows OPCM to invest in long-term structural trends and cyclical recoveries at attractive valuations. Structural trends driving long-term opportunities include population growth underpinned by favorable demographics and productivity growth supported by increasing use of technology. Demographically, India and Mexico, for example, have an average population age of 28, while Brazil and China have average ages of 31 and 37, respectively, compared to 42 for the majority of the developed world. Meanwhile, internet penetration is a proxy for technological development. Major EM countries trail the developed world in terms of internet penetration, where rates run in the mid-80% to low-90% range, compared with rates at 73% in Mexico, 66% in Brazil, 55% in China, and 34% in India. But these rates continue to matriculate higher, providing a structural tailwind to economic productivity via technological tools for businesses to grow and for consumers to demand goods and services. India and China, supported by structural factors like demographics and technological adoption, have growth that stands out from the developed world, as the chart below shows. Brazil and Mexico have these structural factors supporting them, too, but also have cyclical recovery potential as they both implement new policies to support economic growth and Brazil exits the worst recession in its history. Demographics and Growth 45 Developed World 40 China Brazil Mexico India % 2.0% 4.0% 6.0% 8.0% 2018 Estimated Real GDP Growth Source: IMF, CIA

9 July 2018, Issue 72 Page 9 Emerging Opportunities The 2018 EM decline has led to more attractive valuations. The MSCI EM Index has traded to less than 12x earnings, putting it at around a 30% discount to the S&P 500. Importantly, currency valuations for many EM countries have become relatively inexpensive, with some major currencies like the Brazilian Real trading off more this year than during the 2013 Taper Tantrum. OPCM s Advantage OPCM is well-positioned to capitalize on opportunities created by EM volatility. A stable client base, partnered with an investment team unemotionally applying a disciplined process focused on the long-term, allows for OPCM to take advantage of forced selling by other investors in times of volatility. This was shown in the second quarter when OPCM initiated an EM position with a multi-year outlook as investors panicked out, spooked by seemingly short-term issues. This has been seen consistently as OPCM cash balances rise as markets get expensive and then fall as the cash is deployed into assets that are on sale. The flexibility of a multi-asset strategy empowers OPCM to find the best way to take advantage of EM volatility. A positive view on EM can get expressed via investment in a country s overall equity market or a specific industry within Foreign Equity, a currency basket within Alternatives, local currency or US-dollar-denominated debt within Fixed Income, or individual companies traded in the US levered to EM within Domestic Equity, to name a few examples. Resilience from OPCM s construction of multi-asset portfolios supports opportunistic risk-taking in times of EM volatility. Consider the first half of 2018 when the US dollar strengthened and US interest rates rose, hurting EM assets. Within Alternatives, OPCM has often partially hedged other parts of the portfolio; for example, an investment in the US dollar helps partially hedge Foreign Equities, including EM, while an investment going long interest rates helps offset assets that face pressure from rising interest rates, including EM and Fixed Income. Within Fixed Income, rising interest rates, which may hurt EM in some cases, is mitigated by managing duration, quality, and fixed vs floating rate exposures. Rising interest rates driven by increased inflation expectations and a rising dollar triggered by risk premium due to geopolitical conflict in the Middle East, for example, can help Natural Resources. OPCM s resilient portfolio construction, flexibility, and unemotional, disciplined temperament enable investment during volatile times in emerging opportunities, taking advantage of other s shortsighted fear.

10 Page 10 Economic Memorandum Credit Markets: A More Transparent Fed By: Charles J. Else In this article: Monthly Fed press conferences should provide greater transparency about the future course of Fed actions. The Federal Reserve raised interest rates again in June, marking the seventh rate hike since the Fed began its tightening campaign in late The Federal Funds rate now stands at %, with the Fed indicating they intend to raise rates two more times in Notably, Fed Chairman Jerome Powell stated that, beginning in January 2019, the Fed would begin to hold monthly press conferences following each of its meetings, rather than its previous quarterly updates. This news was welcomed by investors as it should provide even greater transparency about the course of future Fed actions going forward. It also provides the Fed more flexibility in adjusting their economic outlook and interest rate policy without adding greater uncertainty overall to credit markets. For the quarter, bond market averages continued to fall, with the steepest price drops in the corporate bond market. There has been a lot of press focused on how indebted corporate America has become during the past nine years of historically low interest rate policy. As we ve discussed over the past several years, with interest rates at all-time lows, one of the most common practices in corporate America has been to borrow at very low rates, using the proceeds to buy back stock (therefore helping to drive earnings-per-share growth). The concern is that as rates continue to move higher and those loans come due, companies will need to issue new debt at higher rates, potentially crimping corporate profits. It remains to be seen to what magnitude this may impact corporate America, although it s something that has been widely discussed over the past few years. Regardless, we still believe a cautious stance is the prudent approach in the fixed income arena at this time. As a result, we continue to target high-quality bonds with maturities in the 3-6 year range.

11 Total Return July 2018, Issue 72 Page 11 Credit Markets: A More Transparent Fed Source: Wall Street Journal Average Money Market Fund 1.25% 10 Yr. AAA Muni Bond 2.47% 5 Yr. AAA Muni Bond 2.00% 5 Yr. AA Corporate Bond Intermediate Bo nd Market Yields 6/30/ Yr. AA Corporate Bond Long Term 3.74% 3.28% 10 Yr. U.S. Treasury 2.86% 30 Yr. Fixed Rate Mortgage (Conforming) 4.40% Source: Bankrate.com

12 Page 12 Economic Memorandum Financial Wellness for Kids! By: Lia Whisler, CFP, AIF In this article: There are many benefits of starting a foundation of financial wellness education early. The best gift I ever received from my parents growing up was my very own checking account when I was 12 years old. This may sound a bit dull at first, but the gift was much more than the physical checkbook and debit card I was so excited to use back then. That was the year I started my financial education. It may not have been the easiest lesson to learn how to save my allowance for the exorbitant number of new music CDs I wanted, but it set the stage for both long-lasting good money habits as well as for the career I love so much. As my daughter turns 3 this month, I have been thinking a lot about how, and when, I should begin her own financial education. Starting a foundation of financial wellness can help teach life-long skills, some of which aren t even about money, and these concepts will stick over the long-term as they are consistently and continually repeated over time. It s never too early to get started, nor is it ever too late! After all, every journey begins with a single step, and each lesson is a step in the right direction. So with kids and grandkids home for the summer, here are some ways to help get the children in your life started with their own good money habits: Pre-school: Pre-money concepts Many of the basic money terms we use today are built from a foundational non-money concept that kids already have a surprisingly intuitive understanding of. Here are a few examples of common money terms that can be translated into non-money ideas pre-schoolers will understand: Saving When we talk about saving, we are really talking about delayed gratification. How many times do we find ourselves telling our kids or grandchildren who try to snack all day that they have to save room for dinner? Or that they have to wait for the holidays to get that one special toy they are eyeing? Kids catch on surprisingly quickly to this idea that sometimes they can't have everything they want right now if they want something better later on, so chances are you are already teaching your kids about saving without even knowing it! Diversification A good way to think about diversification is to remember the adage, don t put all your eggs in one basket, which is a lesson you can teach quite literally. Uh-oh, what happens if all my daughter's favorite crayons are in one bag and then the monster under the

13 July 2018, Issue 72 Page 13 Financial Wellness for Kids! bed comes and takes them away? Guess it's a good thing the monster felt bad and gave them back so we could diversify them into a few different bags this time. Currency We use money because it is a currency that allows us to trade the things people value differently. And anyone who has witnessed a classic Terrible Twos Tantrum is quite familiar with the fact that toddlers do indeed place a high value on certain things and that their laser-focused minds will do almost anything to have those things. Fruit snacks are the currency of choice in my home. However, they are only exchanged after a fuss-free buckling of the car seat! Elementary school: Money basics As children start to enter school, this is a good time to start translating these foundational concepts into real money language. Taking a few minutes to intentionally teach kids about the real currency of dollars and cents with something like an allowance as a reward for chores gives them the opportunity to then put the lessons of savings and diversification into practice. Fruit snacks may still be a valued item, but how much actual money will they need to trade to get some? And how long will they need to save to get there? And what happens if they spend all their money only on Paw Patrol fruit snacks but then later wish they had diversified because now they want Hello Kitty fruit snacks? Children at this age can start to tolerate the basic hard lessons for the consequences of not having good money habits, and they start to value the benefits of being money-savvy too. Middle school: Putting it together At this age, kids now have the capability to start putting the puzzle pieces together. They can handle the cognitive load of saving for multiple highly-coveted items and they understand the basic math needed for creating and tracking budgets. As individuation begins, they also enjoy the sense of independence and control they get from having some ownership for the things they buy. Moreover, this is also a good age to teach kids that not everything has monetary value. For example, introducing philanthropy shows kids that sometimes giving away some of their hard-earned money not only helps others, but actually makes them feel good too!

14 Page 14 Economic Memorandum Financial Wellness for Kids! High school: Real-life application As kids grow into teenagers who are staring at the gates of real-life, it is time to show them that all these bite-sized lessons over the years were actually part of a much bigger picture. Earning income at a real job may replace an allowance, and teaching kids the longer-term saving concept of retirement, as well as retirement-savings tools such as IRAs and 401(k)s, will help provide context when they come across these terms later, as will teaching them investing basics. Talk with your Osborne Partners team to explore other needs that might be appropriate to discuss with the younger members of your family. Most importantly though, it is imperative to teach the power of money at this age before it s too late. Credit cards, student or auto loans, and mortgages can all be good things. But credit scores are real and can be insidious if debt is not managed efficiently! As with all these money lessons, they are better learned from you instead of risking they aren t learned at all. I mean, you wouldn t give your teenager the keys to your Aston Martin before teaching them to drive first, right? Additional commentary from our Investment Team can be found on the Shared Documents sub-tab on the client portal as well as the Our Publications page on our website. On the website you will also find five pre-recorded webinars that cover our 2018 Investment Outlook.

15 July 2018, Issue 72 Page 15 OPCM Profile: Lia Whisler, CFP, AIF Portfolio Counselor Lia is a Portfolio Counselor at OPCM with over 10 years of experience in the financial services industry. She built her career working for some of the largest investment management and advisory firms in the country including Dodge & Cox, Vanguard, and Merrill Lynch and her background spans leadership and client service in both the institutional and private wealth management spheres. Lia s passion has always been using her extensive knowledge regarding asset allocation and multi-asset class investing to create financial plans that help individuals and families achieve their life-long goals. This is what Lia enjoys doing most in her role at OPCM and she feels privileged to be able to spend her time building relationships with such wonderful clients as she helps empower them financially. While Lia was born and raised in the Bay Area, she considers herself lucky to have had the opportunity to experience various states across the country. She lived in Cambridge, MA while attending Harvard University where she graduated with a Bachelor of Arts degree in Psychology and a minor in Spanish. She also spent time in Scottsdale, AZ and Denver, CO before returning to California last summer to attend the Haas School of Business at UC Berkeley part-time in pursuit of her MBA. Lia is a CERTIFIED FINANCIAL PLANNER TM practitioner, holds the Accredited Investment Fiduciary designation, and is a CFA Level II Candidate. In her spare time, Lia enjoys spending time in Tahoe with her family in addition to travelling abroad and has been to over 50 countries. She also enjoys staying active through hot yoga, running, and hiking as well as by keeping up with her fierce 3 year-old daughter who is always on the move seeking new adventures. Lia is a verified foodie and is still in search of the best tacos the Bay has to offer since settling back home. Lia and her daughter live in the East Bay with their Shih Tzu, Sofie, and their tabby cat, Savannah.

16 Page 16 Economic Memorandum Referrals of your friends and family are the greatest compliments we can receive. If you know of anyone who can benefit from our unique combination of investment management and active financial planning, please do not hesitate to contact us. 580 California Street, Suite 1900 Locations: 535 Middlefield Road, Suite 160 San Francisco, CA Phone: (415) Fax: (415) Menlo Park, CA Phone: (650) Fax: (650) Contact Us: Phone: (800) Our updated ADV is available upon request and on the online OPCM client portal. The opinions expressed herein are strictly those of Osborne Partners Capital Management, LLC as of the date of the material and is subject to change without notice. None of the data presented herein constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an investment decision. There is no guarantee that the investment strategies presented herein will work under all market conditions and investors should evaluate their ability to invest for the long-term. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance. The information contained in this report is for information purposes only and should not be deemed investment advice. Although information has been obtained from and is based upon sources Osborne Partners Capital Management, LLC believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. Past performance is not indicative of future results. Inherent in any investment is the possibility of loss. Osborne Partners Capital Management, LLC does not provide tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board s initial and ongoing certification requirements.