Global Investment Committee Allocation Views

Transcription

1 Investment Team Update 10 October 2017 Global Investment Committee Allocation Views PERSPECTIVE FROM FRANKLIN TEMPLETON MULTI-ASSET SOLUTIONS This investment team update describes the views of the Franklin Templeton (FT) Multi-Asset Solutions Global Investment Committee (GIC) an experienced team of investment professionals who specialize in equities, fixed income, cross asset and absolute return investments. The committee meets regularly to share multiple viewpoints, debate implications and assess risks. This process generates key investment themes, which can be expressed in a variety of portfolios that FT Multi-Asset Solutions offers to clients. The text below describes the views of the FT Multi-Asset Solutions GIC as at the date of this publication. These views are for general information only, are subject to change, apply solely to FT Multi-Asset Solutions strategies and are not representative of the views or strategies of other Franklin Templeton investment groups. Executive Summary as at 10 October 2017 From our perspective, growth has been modest and broad based, liquidity has still been ample (even with select central banks normalizing policy), sentiment has been optimistic but not euphoric, and valuations in general continued to be fairly expensive. Such a backdrop has tended to support the performance of risk assets, based on our experience. On a main asset class level, we held a favorable view of global equities and commodities, albeit with lower conviction. We have a negative view of developed-market (DM) government bonds. Our preference is for assets, such as non-us equities, we believe should benefit from investors shifting their focus from regional concerns to improving economic conditions and attractive relative valuations. The persistent momentum for equity markets and the business cycles globally suggest to us muted bond performance potential, and we prefer short duration in global bond markets, particularly outside the United States. We prefer emerging-market (EM) bonds relative to the broader universe of bonds, given historical and relative valuations, the yield advantage of EM debt, more flexible EM central bank policy and fewer headwinds from potential US policy. Asset Class Preference* Major Themes That Frame Our Tactical Asset Allocation 1. Continued Global Growth: Many macro indicators have suggested a positive growth outlook. Composite leading indicators (CLIs) have been trending higher across most countries. 2. Low Inflationary Pressures: Inflationary pressures in DMs remain moderate despite accommodative central bank policies. DM central banks are departing from unconventional operational tools and, in some cases, have reduced support. Financial conditions remain easy across DMs, in our view, supporting risk assets. *Based on our analysis of market factors. 3. Business Cycle Remains Positive: Broad-based growth combined with low inflation, a narrowing but still negative output gap, a still positive-sloping US Treasury yield curve, negative real short-term interest rates and mild recession risk (especially in the United States) suggest to us that the business cycle, even in its late stage, should remain positive in the near term. All information presented herein represents solely the general views of the FT Multi-Asset Solutions GIC as at the date of this publication and is for illustrative purposes only. Any statements about strategy positioning are as at 10 October 2017 and are subject to change without notice. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. Not intended as investment advice or an investment recommendation. There is no assurance any forecast, projection or estimate will be realized.

2 Current Convictions from the FT Multi-Asset Solutions GIC Asset Class (-) N (+) Our Viewpoint MAIN ASSET CLASSES EQUITY REGIONS FIXED INCOME SECTORS Equities Corporate Bonds Government Bonds Commodities Hedge Funds Cash Developed (DM) United States Europe Japan Canada Emerging (EM) US Treasuries Ex-US Govt. Bonds High Yield Investment Grade (IG) EM Debt Represents month-over-month change Broad-based, modest global growth, corporate earnings increasing and financial conditions accommodative across DMs led us to maintain a favorable view. Labor markets, consumer and business sectors supportive. Sentiment optimistic, but not euphoric. Valuations relative to history present risks to our favorable view. Geopolitical tensions and 11 straight months of positive total returns led to reduced conviction. Healthy interest-rate coverage ratios and low recession risk supportive of corporate credit. Low yields and tight spreads relative to history temper return expectations. Bank loans offer desirable yield relative to interest rate exposure, in our view. Given notably low yields for US Treasuries and other DM government bonds and improved global growth, DM government bond performance expectations muted. Central bank policy also a headwind for government bonds as unconventional policy support is gradually removed. Expected increases in capital expenditures, an uptick in global manufacturing, attractive CLIs in China, fundamentals support commodities. Valuations attractive to us, given fairly negative sentiment. Supply/demand dynamics in the energy sector have become more balanced. 1 Sector-level dispersion among US equities continued to widen and correlations among stocks declined, both conducive to improved hedge fund risk-adjusted performance potential. Low volatility and low interest rates remain headwinds. Hedge fund universe sentiment notably optimistic on equity, which suggests caution. Broad-based global growth, ample liquidity despite central banks normalizing policy, and optimistic but not euphoric sentiment supportive of risk assets. However, heightened geopolitical tensions and uninterrupted equity market gains merit cash exposure to potentially deploy should equities pull back. Economic indicators positive relative to history, driven by upside economic surprises, purchasing managers indexes (PMIs), industrial production and retail sales. Monetary policy mixed, with the US Federal Reserve (Fed) tightening relative to dovish conditions elsewhere. Corporate fundamentals have remained upbeat as earnings revisions improve and margins trend upward. Valuations elevated, with most metrics over one standard deviation higher relative to history.. Economic growth prospects remain solid. Revenue, profit margins and earnings momentum remained strong. Valuations elevated, with most metrics over one standard deviation above 10-year history. Economic indicators and corporate fundamentals favorable. Most metrics higher, including industrial production, PMIs and gross domestic product (GDP) forecasts. Earnings momentum and revisions have remained positive as European profit margins converge with US levels. Eurozone economic sentiment at 10-year high. Valuations expensive, but still attractive compared to DM peers. Economic indicators continue to remain strong, with the Citi Surprise Index improving and OECD leading indicators, industrial production maintaining higher levels. Six consecutive quarters of positive GDP growth for the first time since 2006 implies sustained economic momentum. Central bank policy supportive, money growth strong and attractive relative to history. Relative valuations attractive compared to DM peers. Positive economic surprises, CLIs, industrial production and PMIs supportive. With accelerated domestic growth, the Bank of Canada raised interest rates for a second time in Revenue and earnings growth at 10-year historical averages. Valuations moderately expensive relative to history, and attractive relative to DM peers. Economic indicators continue to improve, having hit a trough earlier in Corporate earnings revisions and earnings momentum positive as margins and return on equity (ROE) improve. Valuations moderately expensive, but more attractive than DMs. Weak US dollar has provided earnings tailwind moving into this quarter s reporting season. Tightening labor market, normalized economic fundamentals and potentially reduced Fed balance sheet may place upward pressure on yields. Comments from key FOMC members continue to indicate that they may raise interest rates more than what the market is pricing in. Historically low yields, low term premiums, broadly improving economic growth imply a negatively skewed risk/return tradeoff and led to unfavorable view of DM sovereign debt. Strong economic fundamentals and expanding CLIs have historically supported high yield. Corporate leverage is high; however, interest coverage is more moderate. Our fair value model indicates high-yield valuations elevated relative to history. Bank loans are generally preferred by us due to highest yield for least amount of duration. Similar to high yield, leverage has increased well above post-gfc average, while interest coverage is less concerning. Low absolute yields and tight spreads imply muted return expectations. Relative yields attractive compared to other fixed income sectors. EM growth and economic fundamentals improving and vulnerabilities lower than in the past. With falling inflation in EMs, central banks have more flexibility compared to DM peers. No arrow = No change from the previous month The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. All viewpoints reflect solely the views and opinions of the GIC. Equity regions and fixed income sector totals roll up to the main asset classes. Global Investment Committee Allocation Views 2

3 Cross Asset Many of the core themes supporting risk assets in the first half of 2017 have persisted as we approached October. Although we continue to have a favorable view of risk assets, several short-term factors led us to maintain our low level of conviction during September. Some risks from the first half of 2017 remain, including elevated equity valuations relative to history, along with low equity volatility and the equity risk premium suggesting market complacency and the potential impact of Fed balance sheet normalization. First, the S&P 500 Index has risen for 11 straight months through September, the first time since 1995, and has not seen a five percent correction in over 300 trading days. Both events have not happened in more than 20 years (1995) thus we remain vigilant for a potential, healthy pullback as a buying opportunity. Geopolitical worries remain and, in the case of North Korea, appear to have accelerated, an investigation into collusion between US President Donald Trump s campaign staff and Moscow continued to cast a shadow over the current administration, and the Fed chair appointment scheduled for the end of 2017 appears uncertain. Despite these near-term risks, global economic and corporate profit growth are positives, based on our analysis. The pace of global growth has remained on track for continued improvement for the calendar year, and leading economic indicators strengthened in September, led by EMs (see Chart 1). Positive and accelerating composite, manufacturing and services PMIs globally suggest favorable global equity performance potential in the near term, following healthy performance in the first half of Stronger income statement corporate fundamentals, robust global liquidity and potential inflows into global equities also represented tailwinds. Corporate performance and tailwinds for capital expenditure spending also supported risk assets, in our assessment. Measures of corporate profit margins and earnings momentum have trended upward recently. A survey of expected capital expenditure spending over the next six months for US firms showed plans for increased spending. Recent upticks in global profit margins, revenues and business confidence also bode well for capital expenditures, and for global equities. Furthermore, US companies (outside the financials sector) have decreased share buyback activity in 2017 as markets seemed to have rewarded capital expenditure and research and development spending. Confidence has been a common theme supporting equity markets. The Fed has expressed continued confidence in the improving US economy, and global financial conditions remained accommodative following the Fed s interest-rate hike in June, which also suggests healthy performance potential. A measure of sentiment, the IFO Economic Climate Survey, found in the past few months that optimism among national and global organizations improved considerably from GIC Asset Class Views Equities Corporate Bonds Government Bonds Commodities Hedge Funds Cash The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month N + earlier in Manufacturing and consumer confidence have also trended up in recent months. Although the potential for robust US fiscal policy remains somewhat uncertain, the possible upside surprise of successful policy implementation would support risk assets, in our estimation. We also see the possibility for gains in US productivity, should proposed tax changes take effect. We balance these equity tailwinds with sentiment, valuations and seasonal factors, as these factors appeared less favorable to us. The global equity risk premium was below its rolling five-year average and falling as at mid-september, although our analysis indicated the risk premium had room to decline further (a bullish indicator for equities). Given the continued uncertainty surrounding political and legislative events, the risk premium did not sufficiently compensate investors for these risks, in our opinion. Another cautious indicator for global equities was an environment of high priceto-earnings (P/E) ratios and low volatility (see Chart 2), which suggests to us a level of investor complacency. From a tactical perspective, equity performance relative to fixed income has historically been the weakest in August and September. Nonetheless, we see more supportive factors than possible hurdles for global equities. With the Fed signaling a slow, steady pace of interest-rate hikes and the Bank of Canada unexpectedly raising rates in September, we see the potential for less accommodative central bank policy during the remainder of 2017 as DM economies continue to expand. Even with less accommodative central bank policy in select DMs, financial conditions remain supportive. With expectations for slightly higher interest rates moving forward, investor cash flows have started to tilt more toward equities as opposed to bonds. This trend may signal a pivotal investor shift away from government bonds following a 30-year period of inflows. Although European Central Bank (ECB) President Mario Draghi and fellow ECB members kept a dovish tone on monetary policy during September, positive economic reports and low unemployment in Europe may lead to an eventual taper. Global Investment Committee Allocation Views 3

4 The Pickup in Composite Leading Indicators Has Been Broad-Based and Was in an Environment That Historically Has Supported Equities Chart 1: OECD Composite Leading Indicators September 2012 July Divergence between DMs and EMs Global Equity Statistics PORI POFA NERI NEFA Regime Agnostic Avg. 3M Fwd. Return 5.2% 2.5% 6.5% 0.0% 2.7% Median 3M Fwd. Return 5.0% 3.0% 6.2% 0.9% 3.1% Std. Dev. of Return 6.3% 6.9% 10.6% 10.6% 8.1% Level of Confidence 100% 25% 100% 100% N/A Count % of Time in Regime 24% 24% 21% 30% 100% Global G7 BRIC Source: Thomson Reuters Datastream. Data as at 15/9/17. Data reflects two-month lag. OECD is the Organisation for Economic Co-operation and Development. PORI = positive and rising. POFA = positive and falling. NERI = negative and rising. NEFA = negative and falling. All statistics calculated using monthly data (MSCI World Index and MSCI All Country World Index). Past performance does not guarantee future results. We remain in an environment with a positive business cycle, normalizing global growth, improving corporate earnings and accommodative financial conditions across DMs. We maintain a favorable view of global equities. However, in light of seasonality factors and short-term risks, we favor a tactical approach that involves potentially buying on market weakness. In comparison to global equities, we held a less favorable view of DM global bonds. Our analysis of relative valuations between the two asset classes found equities more attractive to us. We also evaluated global bond markets by employing a model that considers factors such as the business cycle, the slope of the yield curve across markets, momentum for 10-year government bonds and price momentum in equity markets (which we view as a contrarian indicator for bonds). We evaluate these indicators to assess the performance potential for global bonds over the next one to two months. While bond price momentum appeared supportive to us in most major markets, other areas suggested caution with regard to duration. The combination of low term premiums for global government bonds and the persistent momentum for global equity markets also has suggested to us caution with regard to bond performance potential. Furthermore, our base case scenarios for monetary policy from major central banks were generally supportive for global equities, and neutral or slightly bearish for global government bonds. The significant asset purchases in recent years from central banks in the United States and the eurozone should shift to tapered levels and a focus on balance sheet normalization, in our estimation. The potential for expansionary fiscal policy in the United States and Europe, which could bolster interest rates, represents another headwind. After evaluating these factors and weighing related considerations, we maintained a preference for short duration in global bond markets. High P/E Ratios and Low Volatility Suggest Investor Complacency Chart 2: MSCI All Country World Index (ACWI) Trailing P/E Ratio Divided by VIX October 1995 September Global Equity Statistics Above Threshold Below Threshold Regime Agnostic Avg. 3M Fwd. Return 0.4% 2.6% 2.0% Median 3M Fwd. Return 1.1% 4.9% 3.0% Std. Dev. of Return 6.4% 12.0% 8.6% % of Time in Regime 20% 32% 100% MSCI ACWI Trailing P/E Divided by VIX (3MMA) Upper and Lower Bounds (0.75 Std. Dev. from Median) Source: Thomson Reuters Datastream. Data as at 29/9/17. Statistics calculated using monthly return data (MSCI ACWI). Past performance does not guarantee future results. Global Investment Committee Allocation Views 4

5 Equities We continue to see encouraging economic data in the eurozone. Corporate performance in the region was particularly strong over the past few months, as demonstrated by healthy levels of positive surprises for earnings, as well as for revenue growth. Retail sales in the eurozone showed marked improvement on a year-over-year basis. Expectations for higher loan demand, according to a survey of senior loan officers at euro area banks, further enhances the appeal of eurozone stocks (see Chart 3). The overall favorable trends appeared more impressive to us when compared to other DMs. Leading economic indicators for many eurozone countries strengthened in September, particularly on a year-over-year basis. Additionally, the rising and positive trend for indicators in Germany and France has historically proved beneficial for equity market results. Manufacturing activity has trended upward in both countries, while the United Kingdom has seen activity weaken. Similarly, consumer sentiment and retail sales have improved in the eurozone in recent months, compared to lower levels in the United Kingdom. We also see continued growth in corporate performance. Profit margins of European firms have begun to converge with those of their US peers. Historically, an improving trend for profit margins in Europe has been followed by solid performance for European equities. Eurozone earnings-pershare (EPS) growth has also demonstrated improvement. From a valuation perspective, European equities were attractive to us on the basis of price-to-book, last 12-month and next-12-month earnings ratios, particularly when compared to DM peers such as the United States. Furthermore, we believe investors are likely to focus more on the eurozone s economic growth and emergent inflation as the economic backdrop continues to improve. They also may take a more measured assessment of potential ECB policy moves. Following an extended period of political uncertainty weighing on European stocks, investor concerns surrounding populist politics in the region have largely faded. European equities enjoyed a healthy rally following French run-off election results in May and parliamentary election results in June, as well as encouraging economic data. We find many more tailwinds than headwinds for the region s bourses, and believe the improving business cycle and economy will trump politics, which led us to maintain a favorable view of European stocks. GIC Views of Equity Regions Developed United States Europe Japan Canada Emerging N + The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month In Japan, corporate EPS revisions, along with ROE and profit margin momentum, have all been robust in recent months. Japanese profit margins have continued to climb and reach a multi-decade high, which supported the convergence of the country s ROE with that of other DMs. Furthermore, ROE momentum was higher than in most DMs. Additionally, a tight labor market has been supporting wage growth and lowered deflation concerns. Significant central bank support in Japan and a large rebound in global trade have also served as notable tailwinds. Industrial production in Japan has demonstrated significant expansion over the past two years. Money growth was robust in Japan, providing what we see as further support for Japanese equity performance potential. September economic reports provided further evidence of the country s health. Japan s economy has expanded for six consecutive quarters the first time since Consistent with this growth, capital expenditures increased in the second quarter at the fastest pace since the first quarter of The wide breadth of favorable economic data also included industrial production, which benefited from a pickup in global activity, and retail sales, which recovered to normalized levels. We view the higher levels of retail sales in Japan as particularly favorable, as EPS sensitivity to retail sales has historically been acute in Japan relative to its DM peers (see Chart 4). Despite these strengths, our analysis indicated to us that analyst expectations and guidance from Japanese corporations have continued to underestimate EPS growth. Valuations also seemed to us to underestimate improved corporate profitability in Japan. As at mid-september, Japanese equities offered lower valuations compared to other Global Investment Committee Allocation Views 5

6 Demand Expectations Supportive of European Equities Chart 3: Loan Demand Proxy, ECB Bank Lending Survey January 2003 September European Equity Statistics Agnostic Increasing Decreasing Increasing Decreasing Signal Bullish Bearish Average 2.2% 3.1% 0.5% Median 3.4% 3.7% 2.3% Standard Deviation 8.1% 6.3% 10.7% Count % of Time in Regime 66% 34% Source: IBES, Thomson Reuters Datastream, Goldman Sachs. Data as at 30/9/17. Past performance does not guarantee future results. DM equities across most measures, including P/E, despite less political risk in Japan. Although we find the supportive factors for Japanese equities far outweigh the risks, regional geopolitical risks concerning North Korea also remain. However, the broad strength across Japan s economy, including tailwinds from the labor market and central bank support, and broadly attractive valuation metrics relative to DM peers led us to hold a favorable view of Japanese equities. Japan Has Historically Provided Higher Leverage to Sales Growth Chart 4: Next-12-Month EPS Growth Sensitivity to Next-12-Month Sales Growth As at 31 July % 3.5% 3.0% 2.83% 3.62% 2.5% 2.0% 1.85% 1.5% 1.0% 0.5% 0.0% United States Europe ex United Japan Kingdom Source: IBES, Thomson Reuters Datastream, Goldman Sachs. Data as at 31/7/17. Past performance does not guarantee future results. Global Investment Committee Allocation Views 6

7 Fixed Income Despite higher expectations for growth and future interest-rate increases, the US Treasury market appears to us to be pricing in sluggish growth and a conservative path of interest-rate hikes, particularly past Strong US economic data across the labor market, as well as business and consumer sectors, and financial conditions broadly easing suggest the case for interest-rate tightening has strengthened modestly. Headline employment in the United States has continued to improve, even with a step back in September related to the effect of severe hurricanes, and has remained strong for some time. The rise in US nonfarm payrolls prior to September and the US economy adding a healthy amount of jobs have also started to benefit wage gains. We expect further improvement in wage gains over the next six to 12 months. In addition, the gap between the unemployment rate and the nonaccelerating inflation rate of unemployment appears to us to have closed. Outside of the United States, overall economic data in the eurozone have demonstrated broad and, in many cases, substantial improvement recently. Both manufacturing and services PMIs notably improved during the past few months. Healthy and improved levels of both capital expenditures and capacity utilization in the eurozone also indicated strength. With wage growth rising and a generally lower unemployment rate in the past few months, consumer confidence has climbed, accompanied by higher demand, including rising retail sales, housing starts and new car registrations. Many of these economic measures were coming off of low levels, which suggests to us room for further growth. Easier credit standards in the eurozone (based on surveys of consumer, business and housing credit markets) appeared to us as supportive of economic growth over the next few quarters (see Chart 5). The strengthening economic picture in the eurozone should dampen demand for eurozone government bonds. In addition, rising consumer demand in the eurozone should support inflation, which could curtail real interest rates and, therefore, the appeal of government bonds. Given our assessment of improved growth in Europe, low term premiums for US Treasuries and other DM government bonds, and the increased potential for major central banks to curtail stimulus, we have an unfavorable view of DM government bonds broadly, especially those outside the United States. Increasing uncertainty over President Trump s ability to enact proposed trade restriction policies has resulted in less of a headwind for EM debt in recent months, in our opinion. EM debt also offered a yield which we have regarded as attractive relative to US investment-grade (IG) bonds. This healthy yield has also supported investor inflows into EM debt year-to-date. GIC Views of Fixed Income Sectors US Treasuries Ex-US Govt. Bonds High Yield Investment Grade EM Debt N + The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month Although some investors expressed concern for a substantial slowdown in China, the country s growth indicator suggests real GDP is likely to improve in the medium term. China s PMIs remained in expansion in recent months. Leading economic indicators were also positive and strengthening in China and India, and this PORI regime highlights improving economic fundamentals. In Latin America, the headwinds of high inflation have lessened over the past 18 months. The combination of positive interest rates and positive-but-falling inflation led us to conclude that EM central banks have more flexibility in monetary policy than many DM peers. Easier Credit Standards in the Eurozone Supportive of Economic Growth Chart 5: Net Percentage of Banks Reporting Tightening Credit Standards July 2012 September % 15% 10% 5% 0% -5% -10% Improving -15% Net % of Firms Tightening Standards for Business Loans Net % of Firms Tightening Standards for Business Loans to Large Companies Net % of Firms Tightening Standards for Business Loans to Small Companies Source: Thomson Reuters Datastream. Data as at 30/9/17. Global Investment Committee Allocation Views 7

8 Our analysis also weighed considerations such as absolute valuations and spreads for EM debt, which were near their historical average. Yields for the EM bond sector were more attractive to us relative to IG credit, and we held a favorable view of EM debt. Another area of concentrated focus for us is evaluating what stage credit markets have entered. In the US credit market, we found spreads tight across bond sectors, particularly option-adjusted spreads for IG bonds. Our analysis of consumption expenditures and demand levels led us to conclude US credit markets were a bit extended, as leverage has trended higher over the past several years though interest coverage ratios are more middling. Despite the possibility that continued economic and corporate profit growth in the United States could extend the credit cycle, our analysis concluded US credit markets lie in the later stage of the credit cycle. We also favor bank loans within the corporate bond sector, since they currently offer the highest yield in this sector for the least amount of duration, or sensitivity to interest rates. Alternatives In alternatives, we continued to observe areas of support for commodities. Global capital expenditure spending has risen in recent months, based on its six-month moving average. Furthermore, several fundamental indicators remained supportive of commodities. Relative and long-term valuations and China s CLIs appeared to provide tailwinds for commodities, according to our analysis. In addition, global manufacturing showed improvement in September. With regard to oil, the supply/demand outlook reflects more normalized conditions, in our opinion. Additionally, the crude oil rig count has been slowing over the past 12 months and shale production, which has been prolific, has been facing rising production costs. Combining these attractive macro growth fundamentals against mixed signals from technical indicators led us to a slightly favorable view of commodities. We balance these favorable factors with a negative roll return. 1 WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. Investments in smaller-company securities that may have limited liquidity involves additional risks, such as relatively small revenues, limited product lines and small market share. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector prices of such securities can be volatile, particularly over the short term. Investments in hedge funds are speculative investments, entail significant risk and are suitable only for persons who can afford to lose the entire amount of their investment. Global Investment Committee Allocation Views 8

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