U.S. Equities Midyear Update: High and Trending Higher

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1 SITUATION ANALYSIS U.S. Equities Midyear Update: High and Trending Higher Executive summary So far, the year of 2014 is proving to be a transition year, with equity performance being driven more by earnings growth versus Federal Reserve (Fed)-driven liquidity and price-earnings multiple expansion. Importantly, the U.S. economy appears to be strengthening. Employment, manufacturing, housing, retail sales and consumer confidence, among others, have all shown varying degrees of improvement since the start of the year. Additionally, the fundamental backdrop appears favorable for equities earnings are increasing, interest rates are low, valuation is elevated but not at extremes and inflation remains restrained. Conversely, heightened geopolitical risks, an inflation scare and disappointing earnings releases are among the potential outcomes that could possibly derail the equity rally. In aggregate, we continue to believe equities will grind higher in the second half of 2014, with volatility being above what was experienced in the first half of the year. Our price target remains 2,030, based on a multiple of 17.5 times our 2014 earnings estimate of $116. Our price target bias is to the upside, based on a modestly higher earnings estimate. Review of midyear performance U.S. equities ended midyear 2014 with the S&P 500 and Dow Jones Industrial Average being near record highs. Overall, equity performance was modestly below historical levels with, generally, large-capitalization companies outperforming small caps, and defensive sectors and companies outperforming cyclicals. While performance has varied among market caps, investment styles and sectors, equities managed to power higher throughout much of the first half with a general rotation occurring within but not out of equities. Equities were a grind higher market in the first half of 2014, characterized by low volume, low volatility and improving economic conditions. We believe the second half begins in a relatively good place with the potential for advancing stock prices: Earnings are increasing Interest rates are low Valuation is elevated but not at extremes Inflation remains restrained Index ket and sector performance Price 6/30/ Q 2Q YTD * S&P 500 1, % 4.7% 6.1% Dow Jones Industrials 16, % 2.2% 1.5% Russell , % 1.7% 2.5% MSCI EAFE 1, % 2.9% 3.0% MSCI Emerging kets 1, % 5.6% 4.8% Sectors of the S&P 500 Weight Information Technology 18.8% 1.9% 6.1% 8.0% Financials 16.1% 2.2% 1.8% 4.0% Health Care 13.3% 5.4% 4.1% 9.7% Consumer Discretionary 11.9% -3.2% 3.1% -0.1% Energy 10.9% 0.2% 11.4% 11.7% Consumer Staples 9.5% -0.2% 3.9% 3.8% Industrials 10.5% -0.4% 3.3% 2.9% Materials 3.5% 2.3% 5.1% 7.5% Utilities 3.2% 9.0% 6.8% 16.4% Telecommunication Services 2.4% -0.7% 2.5% 1.8% Source: FactSet Research Systems, Inc. *through 6/30/14 Important disclosures provided on page 10.

2 ket and sector performance: The large caporiented S&P 500 outperformed the small cap-oriented Russell 2000 in the first half of 2014 by 3.6 percentage points as investors appeared to favor the predictability of large companies in the uncertain economic environment. Perhaps most noteworthy is sector performance. Up until early June, defensive sectors outperformed cyclical sectors, with Utilities, Energy and Healthcare posting the best returns, while Consumer Discretionary and Telecommunication Services lagged. Most recently, the performance of cyclical sectors and companies have begun to improve. Five of 10 S&P 500 sectors ended the second quarter with year-to-date returns of 7.5 percent or greater, setting the stage for renewed optimism in the second half of While past performance is not a guarantee of future returns, the favorable broad-based returns tend to coincide with economic improvement and may be indicative of an equity market that is poised to trend higher. In general, we find it hard to envision equities trending meaningfully higher from current levels without cyclical sectors and companies (Information Technology, Financials, Industrials and, to a degree, Consumer Discretionary) leading performance. Somewhat surprising is the improved performance of the international-oriented MSCI Emerging kets index following the lackluster performance in, particularly given that the near-term economic growth trajectory of China remains inconclusive. At a minimum, performance of the emerging markets segment may indicate that economic conditions have stabilized. Against the probabilities: The age of the current bull market remains an often-discussed topic. The S&P 500 is in its sixth consecutive year of advancing, which is above the historical average of approximately four-plus years dating back to the early 1900s. Additionally, the popular index has not experienced a 10 percent correction since August 2011, fueling speculation that the mere probabilities suggest a pullback is increasingly likely. While history would suggest the probabilities for a market downturn are elevated, the fundamentals appear to indicate that a significant period of weakness or pullback is not imminent. Bull market advance (%) 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% S&P 500 historical bull markets Average months = 57 Average months = 165% /9/09 to 6/16/14 63 months, 183% Average 57 months, 165% Bull market duration (in months) ; data period /16/ Bolstered by a favorable macro environment Despite the S&P 500 and Dow Jones Industrial Average being near all-time highs, in our view, the fundamental backdrop for equities remains favorable. To a large degree, equities appear to be in a good place at the start of the second half as many factors that may warrant higher equity prices remain in place. Earnings are rising: Consensus expectations are for S&P 500 earnings to increase approximately 9 percent in 2014 over levels. Earnings are key. With 2014 proving to be a transition year, where price appreciation is arguably being driven more by earnings growth and less by Fed-driven liquidity (such as asset or bond-buying programs designed to keep rates low in order to help stimulate economic growth) and price-earnings multiple expansion. An improving global economy is needed to drive earnings and accelerating earnings are needed to drive equity prices still higher. Relatedly, while the S&P 500 is near record levels, so, too, and equally important, are earnings. While new highs for the Dow Jones Industrial Average and S&P 500 are psychological positives and make for compelling headlines, earnings growth is of primary importance in supporting equities at current levels and providing fuel for further appreciation. Important disclosures provided on page 10. Page 2

3 S&P 500 price and earnings indexed to 100 as of 3Q 2007 $ in trillions S&P 500 and earnings near all-time highs S&P 500 operating EPS S&P 500 Index level Dec Source: Bloomberg Interest rates are low: The Fed remains accommodative. Clearly, equities have advanced in conjunction with Fed-driven liquidity (low interest rates) leaving investors wondering what will happen when the Fed no longer provides the same level of support. While quantitative easing (QE), the Fed s bond-buying asset purchase stimulus program, is winding down, interest rates are expected to remain relatively low for the foreseeable future as the pace of economic growth both home and abroad remains modest. We believe this suggests that the trajectory of Federal Reserve rate increases is likely to be measured, methodical and extend over a prolonged period. $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $ Total assets and S&P 500 index level 2010 Source: Bloomberg 5/15/ S&P 500 Index level U.S. Federal Reserve Bank s total assets Valuation is elevated but not at extremes: The S&P 500 ended the first half of the year with the popular index trading at 17.9 and 16.6 times respective consensus trailing 12-month and 2014 earnings estimates, consistent with the 50-year median priceearnings multiple of Valuation levels closer to the 18.5 times trailing 12-month estimate range would S&P 500 Index level 30x 25x 20x 15x 10x arguably represent more extreme levels, implying there remains room for modest multiple expansion. In general, sectors that appear somewhat rich include Healthcare, Energy and Consumer Staples. S&P 500 price-earnings valuations Average 5x (data through 3/25/14, trailing 12-month basis) Sentiment is mostly favorable: Increasing home prices and the wealth effect associated with higher stock prices have contributed to favorable consumer sentiment. Housing remains a wildcard as higher mortgage rates are a modest headwind. Also, isolated bubble characteristics are beginning to surface, primarily in larger metropolitan cities such as San Francisco. On average, housing remains in recovery mode, which has helped bolster consumer confidence. Housing is an important component of the economy as it impacts employment, consumer net worth, bank activity and consumer spending. Inflation remains restrained: Inflation is among the greatest risks for the equity market as inflation tends to result in price-earnings multiple compression. According to Strategas Research Partners, an independent research firm, the average S&P 500 priceearnings ratio on the last 12-month estimates when inflation has trended between 0 to 4 percent ranges from 17.2 to 17.9 times. At present, while signs of inflation are beginning to creep into the marketplace, on average, inflation remains within acceptable levels. In fact, some modest inflation would be consistent with a slow-growth economy, resulting in higher earnings that are required to drive equity prices higher. Important disclosures provided on page 10. Page 3

4 S&P 500 P/E % change (year-over-year) 20x 18x 16x 14x 12x 10x 8x 6x 4x S&P 500 price-earnings vs. inflation -2-0% 0-2% 2-4% 4-6% 6-8% Inflation rate (CPI) ; data as of 6/16/ % 10-12% 12-14% As illustrated below, U.S. core CPI (Consumer Price Index) at midyear is roughly 2 percent. Looking toward year-end and into 2015, it is hard to envision escalating inflation given modest wage pressures, a still relatively high unemployment rate, generally weak emerging markets growth holding down commodity prices, the abundance of energy due to domestic oil and gas production and restrained consumer debt growth. This implies that current price-earnings ratios seem warranted, and inflation is unlikely to put meaningful pressure on price-earnings multiples during the remainder of Inflation U.S. Core CPI Source: Cornerstone Macro; data as of 5/31/14 Forging through uncertainty While equities continue to forge higher, there are ample reasons for investor angst, concern and cautiousness, which may help explain the low volume and low volatility heading into midyear. ket internals are mixed: While anecdotal evidence of an improving economy is beginning to surface, the visibility remains inconclusive. Performance among the S&P 500 sectors appears to be broadening out. That said, the outperformance of Utilities and underperformance of Industrials and Financials are inconsistent with periods of economic growth and sustained increases in equity prices. Further, while small caps appear to outperform during periods of economic expansion, at midyear 2014, the small cap-oriented Russell 2000 index lagged the large cap-oriented S&P 500 index by nearly 4 percentage points. This suggests that investors have favored the relative predictability and liquidity of larger cap companies year to date. Bond market suggests anemic growth: The 10-year Treasury yield entered midyear largely in a trading pattern between 2.5 and 2.7 percent. Typically, bond yields inch up as the economy improves and in anticipation of Fed rate hikes. While technical factors appear to be at work putting downward pressure on rates (foreign buying of U.S. Treasuries, relatively high demand by pension funds and insurance companies, reduced supply due to deficit reduction, etc.), the low yields may be pointing towards below-consensus economic growth. If the pace of economic growth lags expectations, it is plausible for earnings growth to also come under pressure, serving as a possible catalyst for equities to trend downward. Rising energy prices weigh on sentiment: The price of oil remains a wildcard. While U.S. energy production has contributed to overall global supply resulting in fewer imports by the United States, escalating tensions in the Middle East have resulted in an upward bias to energy prices. A further rise in both tensions and energy prices may have a negative impact on consumer sentiment and overall spending, thus weighing on the pace of global economic growth. Few compelling alternatives: The lack of compelling alternatives has also helped propel equities to record Political wranglings are in motion: Public faith in levels and serves as a basis for the potential for Congress is at an all-time low, according to a Gallup equity prices to trend still higher. This trend is likely to poll as published by Strategas Research Partners. continue until evidence of inflation and expectations for Well-funded House Majority Leader Eric Cantor s higher interest rates become more pervasive. surprise primary election loss is perhaps best symbolic of the increasing frustration with policymakers. Among the topics leading to investor disenchantment are Important disclosures provided on page 10. Page 4

5 continued uncertainty surrounding the implications of the Affordable Care Act, lack of clarity surrounding U.S. refineries and pipelines to handle the growing levels of U.S. energy production, global corporate tax inequality causing U.S. companies that receive a significant proportion of their income from foreign sources to merge with competing foreign companies and reincorporate themselves in a lower-tax foreign country, flaring conflicts in Iraq, etc. For investors, this presumably means increased political brinksmanship and gridlock leading up to and following the midterm elections. While these wranglings are likely to be coincidental to increased market volatility, the associated gridlock has resulted in advancing equity prices. According to Strategas Research Partners, in 2014 the S&P 500 has advanced commensurate with the direction of Congressional gridlock. 6% 5% 4% 3% 2% 1% The favorable fundamental backdrop (rising earnings, low interest rates, generally fair valuation and restrained inflation) remains intact The broad equity market is not overly extended from beginning-of-year levels S&P 500 average performance November-April vs. May-October 5.1% 1.9% Congressional gridlock index and S&P 500 performance Congressional gridlock index +5.4% YTD 0% Nov thru Apr May thru Oct Source: Strategas Research Partner; data period S&P 500: percentage of positive monthly returns 80% Indexed to Dec 31 Feb S&P % YTD May % 70% 65% 60% 55% 50% 45% 62% 55% 66% 69% 56% 52% 55% 55% 45% 59% 66% 77% Seasonal tendencies point toward summer underperformance: Typically, equity performance lags during the summer months. Dating back to 1928, the performance of the S&P 500 from November through April has significantly outperformed the broader market from May through October, with the market rallying in the fourth quarter. While the probabilities point toward a slowing in the rate of price appreciation during the summer months, perhaps somewhat of a contrarian call, the prospects seem more favorable for a potential summer rally than not. Indicators include such things as: ket expectations are low so the surprise could be to the upside A growth scare was already received following the weather-impacted first quarter results Consensus 2014 earnings estimates have been inching up 40% Jan Feb Apr May Jun Jul Aug Oct Nov Dec ; data Second-half catalysts The equity market in the first half of 2014 is generally considered to have been a grind higher market, characterized by low volume, low volatility and improving economic conditions. In the second half, there are several catalysts that may warrant still higher equity prices as well as increased volatility. Awaiting accelerating earnings growth: Earnings growth is key to higher equity prices. To a large degree, equities seem to be priced to perfection the margin of error is narrow given current valuation levels and expectations are for accelerating earnings growth. Following weather-impacted first quarter results, expectations are relatively high for second, third and fourth quarter earnings results. As of midyear, second Important disclosures provided on page 10. Page 5

6 quarter results are estimated to increase roughly 9 percent over year-ago levels and third quarter results are estimated to increase approximately 10 percent year-over-year. Second quarter results that are in line to above expectations, complemented by generally sanguine management guidance about the prospects for growth, would be a potential catalyst to push equity prices higher. Getting paid while waiting: The historical dividend profile of U.S. equities may represent a compelling reason to own equities for the second half of 2014 and perhaps longer. The number of S&P 500 companies paying a dividend has increased from recent lows to 421, or 84 percent of the index. Perhaps more telling, as of June 30, 27 percent of the S&P 500 companies offer dividends that have yields above the 10-year Treasury yield of 2.6 percent. This affords investors with a potentially attractive alternative to Treasuries, all things considered equal, offering the possibility for both income and appreciation. Additionally, the prospects for dividend increases are relatively high for select companies given that dividend payout ratios remain near historical lows. This attractive dividend income profile helps increase the appeal of equities and can provide support at current levels Number of S&P 500 stocks paying a dividend Dec S&P 500 dividend payout ratio Average ; data Merger & acquisition activity: Merger and acquisition (M&A) activity has picked up in 2014, in part due to favorable tax benefits, mounting cash levels and relatively low-capacity utilization. Although rising, merger and acquisition deal value is still not near previous bull market peaks, implying it is plausible to expect the robust pace of acquisitions to continue into the second half of the year, thus driving equity prices higher and contributing to overall favorable sentiment. Additionally, increasing cash levels may present a favorable backdrop for share buybacks and dividend increases. M&A deal value (shown in billions) $120 $100 $80 $60 $40 $20 Monthly U.S. merger and acquisition deal value 2000 ket peak M&A deal value 2007 ket peak M&A value as % S&P 500 market cap 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% $0 0.0% Dec M&A value as % S&P 500 market cap Important disclosures provided on page 10. Page 6

7 1,600 1,400 1,200 1, S&P 500 uses of cash Buybacks Dividends Capital expenditures % of total assets 6% 5% 4% 3% 2% U.S. non-financial corporations cash Average Influenced by the Fed: The Fed has four remaining Federal Open ket Committee (FOMC) meetings scheduled for 2014 (July 29-30, tember 16-17, October 28-29, December 16-17). With QE tapering likely to end in October, clearly the Fed will impact equity prices in some fashion in the second half of Perhaps most telling will be the Fed s assessment of the pace of economic growth and any related comments that investors may use to gauge when the first Fed funds rate hike will likely occur. Don t fear the first Fed rate hike: Following Feddriven liquidity that has helped propel equities to alltime highs, of concern to investors is what happens to equity prices leading up to and following the first Fed rate hike. We believe that at a minimum, the conclusion of QE tapering and talk of an eventual fed funds rate hike is likely to cause some market volatility. To that end, studies of the S&P 500 returns since 1980 conducted by Cornerstone Macro indicate the market has historically risen prior to the Fed s first rate hike and, while plateauing shortly after the announcement, S&P 500 Index composite* continued to trend upwards 60 days thereafter. Strategas Research Partners offers similar conclusions, noting that on average the S&P 500 has trended upwards both six months before and 12 months after the initial rate hike, with the broad equity market becoming more concerned after subsequent rate hikes over fears that economic expansion is about to end. We believe that in the absence of runaway inflation and in a slow-growing world economy where central banks around the globe are lowering rates, U.S. equities may grind still higher, even after the first Fed rate hike. At present, we project the first uptick in the fed funds rate to occur sometime in the second quarter of 2015, contingent on the pace of economic growth during the second half of Historically, markets typically rise prior to the Fed s first rate hike S&P months before and after first Fed rate hike Rate hike # of trading days before and after the Fed s first rate hike Source: Cornerstone Macro; 5/07/14; *1983, 1988, 1994, 1999, 2004 Past performance is not a guarantee of future results. S&P 500 performance before and after first Fed tightening Date of first raise -6 mos. -3 mos. +3 mos. +6 mos. +12 mos % 8.8% 9.9% 8.6% 4.1% Jan % 7.9% 19.1% 21.2% 2.6% % 4.1% 6.0% 5.4% 13.3% Feb % 2.7% -3.9% -2.4% 1.9% Jun % 6.7% -6.6% 7.0% 6.0% Jun % 1.3% -2.3% 6.2% 4.4% Average 4.4% 5.2% 3.7% 7.7% 5.4% Fund flows have yet to accelerate: Fund flows from bonds to stocks have yet to accelerate, suggesting that future fund flows to equities may have the potential to help push stock prices higher. Additionally, fund flows typically slow during the summer months. Thus, it could be misguided to conclude that equities are significantly overbought without witnessing more meaningful inflows from investors. Important disclosures provided on page 10. Page 7

8 Retail participation in market hard to detect thus far Net flows into mutual funds (in billions) Equity Money Bond Year Domestic International market 2008 (148.5) (80.6) (29.4) (583.6) 2010 (81.2) (529.0) (132.5) (16.6) 2012 (158.6) (0.3) (80.5) 15.1 Total (532.2) (469.5) Jan (1.3) (9.4) Feb (46.7) (29.2) Apr NA Total (85.3) ; 5/12/14 Shown in billions $14 $12 $10 $8 $6 $4 $2 $0 Seasonal effects of fund flows Jan Feb Apr May Jun Jul Aug Oct Nov Dec Equity Bond ; monthly average net fund flows Midterm elections: House Majority Leader Eric Cantor s primary election loss seemingly puts policy risk back in play. While the loss is not likely to put entitlement spending or budget/deficit spending agendas back on the table, it does elevate the potential for renewed Washington-related brinksmanship leading up to the November elections, which may negatively impact investor sentiment. Following the technical trends: U.S. equities began the second half of the year modestly overbought, with the S&P 500 being approximately 2.5 percent above its 50-day moving average. To that end, in our view, a modest pullback of a couple of percentage points would be constructive and part of a normal consolidation phase within a bull market rally. Inflation scare: A potential negative catalyst for the second half of 2014 that would impact equity prices is an inflation scare. While we do not expect widespread inflation to surface in 2014, higher-than-expected inflation would undoubtedly result in price-earnings multiple contraction forcing equity prices lower. Among items that would indicate escalating inflation include rising oil prices, strengthening global manufacturing activity, escalating geopolitical tensions, increasing wages, and a steadily improving unemployment rate. Conclusion Equity prices are likely to presage the pace of economic growth. To that end, in our view, conditions remain favorable for equities to trend higher in the second half of In particular, we continue to favor the risk/reward profile of cyclical sectors and companies that benefit from a slowly improving global economy. The fundamental backdrop suggests that we are entering the second half in a good place. Sector performance is broadening out, earnings are increasing, interest rates remain low, valuation is elevated but not at extremes, sentiment is mostly favorable and inflation remains restrained. Importantly, while the broad indices are near all-time highs, so. too, are earnings, which may help provide fundamental support for current prices. Among catalysts that could cause increased volatility as the year unfolds include rising geopolitical tensions, disappointing company earnings results, surprising FOMC rate decisions, seasonal factors, an inflation scare, slowing in the pace of global growth and a Europe that slumps back into a recession. Beyond 2014, there are compelling secular themes that may drive equity prices higher. For instance, a global and rising middle class Asia Pacific consumer may favorably impact equity prices. As illustrated, the majority of the world s population lives in the Eastern Hemisphere with a disproportionate estimated spending ramp by the middle class consumer anticipated to evolve over the next decade. This potentially bodes well for many sectors and companies with a global footprint with operations tied to Asia. Important disclosures provided on page 10. Page 8

9 SITUATION ANALYSIS U.S. Equities Midyear Update: High and Trending Higher Financials: Beneficiaries of an improving economy; an eventual steepening yield curve, attractive valuations and improved credit quality/balance sheets are all positives. Rise of emerging-market middle class Energy: Direct beneficiary of U.S. energy production; favor Canadian and natural gas energy and exploration, oil field service, pipeline, storage and transportation companies. More people live inside this circle than outside it Source: Twisted Sifter; Visualizing Global Population Density; 8/29/13 Dividend-paying equities: Companies with attractive dividend profiles appear appealing. Mounting company cash levels, low payout ratios and an ample number of companies with dividends yielding at or above the 10-year Treasury yield are among catalysts. We prefer dividend growth versus high-dividend-yield companies, thus affording investors both income and appreciation potential. Global middle class consumption Spending by the global middle class 2009 vs estimate 60% 50% % Spending Healthcare: A sector for all seasons with both defensive and cyclical companies; caters to an aging global population; cost containment pressures are a headwind to growth. 40% 30% Our published 2014 price target for the S&P 500 remains 2,030, based on a price-earnings multiple of 17.5 times our below-consensus earnings estimate of $116. We see upside to our price target based on a higher earnings estimate. 20% 10% 0% Middle East & North America North Africa 2009 Europe Central & South Asia Pacific America Sub-Saharan Africa 2030 Estimate We continue to favor sectors and companies that appear well-positioned to benefit from an improving but slow-growing economic environment both home and abroad. Technology: A pro-growth sector with strong free cash flow, mounting cash levels and above-average dividend growth potential; beneficiary of increased capital expenditure (capex) spending. Industrials: Also a pro-growth sector with a favorable risk/reward profile in face of better economic data; many industrial companies have recurring revenue streams, strong cash flows and attractive dividend profiles. Important disclosures provided on page 10. Page 9

10 Contributed by: Terry D. Sandven Chief Equity Strategist U.S. Bank Wealth Management reserve.usbank.com Investments are: Not a Deposit Not FDIC Insured May Lose Value Not Bank Guaranteed Not Insured by Any Federal Government Agency This commentary was prepared July 10, 2014 and the views are subject to change at any time based on market or other conditions. This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank in any way. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Dow Jones Industrial Average (DJIA) is the price-weighted average of 30 actively traded blue chip stocks. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, and is representative of the U.S. small capitalization securities market. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East. The MSCI Emerging kets Index is designed to measure equity market performance in global emerging markets. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. The value of large-cap stocks will rise and fall in response to the activities of the company that issued them, general market conditions, and/or economic conditions. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies and may be expected to do so in the future. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Mutual fund investing involves risk; principal loss is possible. Investing in certain funds involves special risks, such as those related to investments in small- and mid-capitalization stocks, foreign, debt, and high-yield securities, and funds that focus their investments in a particular industry, or employ a long-short strategy. Please refer to the fund prospectus for additional details pertaining to these risks. Investing in fixed income debt securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities U.S. Bank N.A. (7/14)