MARKET OUTLOOK2nd QUARTER 2016

WELCOME TO THE QUARTERLY MARKET OUTLOOK FOR THE SECOND QUARTER OF 2016.In this report, we will review CLS portfolio and market performance over the first quarter of

2016, as well as a brief stock and bond market outlook. We will also review and provide an

update on the CLS Investment Themes, which are expressed through every CLS portfolio.

Despite an early quarter

correction, the global markets

rebounded strongly in the back

half of the quarter, and in the end

finished with gains. Domestic

stocks (Russell 3000) gained 1%,

which left the one-year return

at just under 0%. The three-year

annualized return, however, is

still an impressive 11% a year, as is

the five-year annualized return.

The bull market in stocks is still

officially alive!

Not all segments of the stock

market performed the same

though. U.S. large-cap stocks

(S&P 500) gained over 1%, and

for the last year, it gained over

2%. The three-year and five-

year annualized returns are both

12%. It was domestic small-cap

stocks (Russell 2000), however,

that notably underperformed –

again. For the quarter, small-caps

lost 2%, finishing with a one-year

return of -10%. The three-year

and five-year annualized returns

were both 7%.

International stocks (MSCI ACWI

ex-U.S.) meanwhile, which

includes both developed (MSCI

EAFE) and emerging markets

(MSCI Emerging Markets),

finished with a small loss of just

under 0%. The ACWI ex-U.S. has

lost 9% over the last year, though

the three-year and five-year

annualized returns were slightly

positive at just over 0%.

There was a big difference

between developed and

emerging markets (EM) though.

While developed international

lost 3% for the quarter, emerging

markets gained 6%. EM is still

lagging in the one-, three- and

five-year returns though. EM is

down 4-5% a year over the last

three- and five-years. There is

still a lot of performance for EM

to catch up to.

The bond market had another

great quarter, both in absolute

and relative terms. The Barclay’s

Capital Aggregate Index, the best

(though imperfect) proxy for the

over-all bond market gained

3%. It is only up 2% over the last

year, with three- and five-year

annualized returns at 3% to 4%.

CLS Portfolio Performance

CLS portfolios performed

relatively well in the first quarter.

Our belief in building Risk-

Budgeted, globally balanced

ETF portfolios to help investors

succeed was rewarded in the first

three months of the year. Risk

Budgeting worked. Being global

worked. Being balanced worked.

Risk BudgetingRisk Budgeting proved its worth in

the first quarter as CLS portfolios’

risk characteristics should have

met, or surpassed, investor

expectations. CLS’s overall portfolio

risk management, primarily driven

by our proprietary, disciplined Risk

Budgeting Methodology fortified

by additional portfolio-, returns-,

STOCK MARKET QTD YTD 1 Year 3 Year 5 YearTotal U.S. MarketRussell 3000

0.97% 0.97% -0.34% 11.15% 11.01%

Domestic Large-Cap EquityS&P 500 Index

1.35% 1.35% 1.78% 11.82% 11.58%

Domestic Small-Cap EquityRussell 2000 Index

-1.52% -1.52% -9.76% 6.84% 7.20%

International EquityMSCI ACWI ex-U.S. Index

-0.38% -0.38% -9.19% 0.32% 0.31%

Developed International EquityMSCI EAFE Index

-3.01% -3.01% -8.27% 2.23% 2.29%

Emerging Market EquityiShares MSCI Emerging Markets Index

5.71% 5.71% -12.03% -4.50% -4.13%

FIXED INCOMEU.S. BondsBarclays Capital U.S. Aggregate Bond Index

3.03% 3.03% 1.96% 2.50% 3.78%

Cash EquivalentBarclays Capital 1-3 Month U.S. Treasury Bill Index

0.06% 0.06% 0.09% 0.05% 0.05%

Source: Morningstar Direct Performance as of 3/31/2016

and factor-based risk analysis,

contributed to CLS portfolios losing

less than the overall market during

the correction early in the quarter.

Over the last 15 years, we have been

using Risk Budgeting to build our

multi-asset, balanced portfolios,

which are constructed around

risk allocations to strategically

provide a disciplined risk profile.

Given that risk levels constantly

change in asset class segments

and strategies, this allows for us

to take an active, or more flexible,

approach to asset allocation. This

allows us the ability to properly

adjust and manage portfolios to

our Risk Budget mandates. We

believe this is a better way to build

multi-asset portfolios.

We not only believe Risk

Budgeting provides a better way to

build balanced portfolios, but we

also view it as an excellent means

to manage client expectations and

emotions. For instance, if we take

70% of the risk of a diversified global

equity portfolio, a base expectation

for an investor is that our portfolios

should gain approximately 70% (or

more) of the return over time.

Global and Balanced

It’s been difficult to remain a

dedicated global investor in

recent years, but our global focus

in the first quarter served us well.

International markets, especially

emerging markets, performed

better than domestic. We don’t

think it’s a short-term commitment

to be a global investor. Over

time, we believe diversification

across domestic and international

markets will provide better risk-

adjusted performance when

compared to domestic-only

portfolios. This could especially be

the case in the years ahead given

the current market backdrop,

which includes more attractive

valuations overseas.

Our flexible asset allocation

approach, which helps create

appropriately balanced portfolios

for over 35,000 investors, also

performed relatively well at

the start of the year. The bond

market, for instance, posted

impressive gains in the first

quarter, surprising many (again).

Other diversifying asset classes,

including commodities and

alternative asset class segments

and strategies, also outperformed

the overall global stock market

during the first three months

of the year. It is worth noting that commodities, after getting hammered recently staged a nice rebound into quarter-end.

Bottom line, as asset allocators, we believe in balancing risk and return requirements through balanced multi-asset portfolios to help investors attain desired results. We believe such globally balanced portfolios are more likely to behave as expected and achieve smoother returns over time. Both considerations should encourage investors to remain invested and help them stay the course by staying invested.

Economic EnvironmentIn our Quarterly Market Outlook presentation, we’re introducing a new chart that we’ll continue to use in future presentations (see next page). In short, it captures the current economic environment, namely economic growth and inflation, for domestic and global

economies.

Why introduce this now,

especially since we present this

information on a fairly regular

Rusty Vanneman, CFA, CMT Chief Investment Officer

Rusty Vanneman joined CLS in September 2012 as Chief Investment Officer. Previously,

Mr. Vanneman was Chief Investment Officer and Portfolio Manager at Kobren Insight

Management (KIM) in the greater Boston area. His 11-year tenure at KIM included a 5-year

span during which the firm was owned by E*TRADE Financial. During this time, Mr.

Vanneman was the Senior Market Strategist for E*TRADE Capital. Prior to working at KIM,

he was a Senior Analyst at Fidelity Management and Research (FMR Co) in Boston. He

was also a Managing Analyst at Thomson Financial. Mr. Vanneman received a Bachelor of

Science in Management from Babson College, where he graduated with high distinction.

He holds the Chartered Financial Analyst (CFA) designation and is a member of the CFA

Institute. He is also a Chartered Market Technician (CMT) and a member of the Market

Technician’s Association (MTA).

basis? To explain the timing, and

why we’re excited to launch it

as part of our internal decision-

making and external messaging,

let me take a step back and

describe an important part of

CLS’s overall investment process.

Each quarter, we hold a CLS

Investment Committee (IC)

meeting. The IC has two

mandates:

1. It is the official keeper of the

CLS Risk Budgeting White

Paper, our foundational

investment management

document.

2. It manages the CLS

Investment Themes (more

on our current themes later),

which every CLS portfolio is

built around.

During this half-day meeting, we

discuss the recent quarter, both

in terms of performance and

positioning. This information

is discussed every day, so it

doesn’t take long, but given the

formal meeting and preparation

involved, it can uncover and

foster good discussion and new

insights.

The second part of the meeting,

which we introduced over the last

year, is the CLS Forum. During

the CLS Forum, we bring in

outside experts to discuss topics

that will either introduce new CLS

investment themes, as well as

fortify or destroy existing ones.

Last quarter, Raman Subramanian

from MSCI visited us to discuss a

variety of topics, primarily factor

investing and its potential impact on

our X-Factor Investment Theme.

The material he presented was

indeed important and influenced

our thinking and positioning.

He also introduced material

regarding Environmental, Social,

and Governance (ESG) investing.

He introduced additional

material, including the

chart below, which we feel

accomplishes a few things for

us:

1. It’s a great frame of

reference for thinking about

the domestic and global

economies, both currently

and historically (going back to

1976).

2. It provides a template

for meaningful internal

discussions.

3. It is a valuable tool to explain

the current economic

environment in one chart to

investors.

4. The implications of the chart

will influence how we build

portfolios.

So, what is this chart trying to

capture in the current economic

environment? First, change

in economic growth through

leading composite indicators

(LCI); second, change in

inflation. This data, sourced from

the Organization for Economic

Co-Operation and Development

(OECD), reflects both the U.S. and

overall global economies.

Using the growth and inflation

data, we can create four economic

environment quadrants:

1. Rising inflation and rising

economic growth is

“Heating Up”

2. Rising growth and falling

inflation is “Goldilocks”

3. Falling growth and falling

inflation – like we have now

– is “Slow Growth”

4. Rising inflation and falling

growth is “Stagflation”

Each box has a percentage,

which represents the amount

of time the economy has spent

in the quadrant since 1976. For

example, Slow Growth, what

we’re in now, has occurred 32%

of the time.

ECONOMIC ENVIRONMENT4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

-4.0%

LCI DIFF

INF

LA

TIO

N R

AT

IO

Current data as of 1/31/16. Figures under quadrant titles represent percent of time Global has spent in each quadrant since 1976. LCI Di� - Leading Composite Indicators di�erence - measured month over month change. Inflation Ratio - ratio of 3 month average inflation divided by 36 month average. Economic data obtained from OECD (https://data.oecd.org/)

-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0.10.0 0.2 0.3 0.4 0.5 0.6 0.7

SLOWGROWTH

32%

GOLDILOCKS40%

STAGFLATION17%

HEATING UP11%

U.S.-0.21%-0.20

Global-0.36%-0.10

Slowing / Weak Growth

Strong Growth

High / Increasing Inflation

Low / Falling Inflation

The current environment is

consistent with our economic

outlook in recent years, and it

impacts how we position some

portfolios and how we look at

factor investing. However, our

in-house discussions are starting

to lean toward an uptick in

economic growth and inflation.

Enough to get into “Stagflation”

or “Heating Up?” Stay tuned.

Stock and Bond Market Outlook

In our stock market outlook,

we affirm our commitment to

global investing. Given current

valuations, we expect below-

average returns from U.S. equities

in the coming years and better

returns from international equities.

In our bond market outlook, we

recognize the importance of

flexibility. Return expectations

are tempered given the low

level of interest rates, but bonds

will still play a role. They have

outperformed stocks over the

last quarter and, for that matter,

last year. Nonetheless, investors,

need to be tactical with bond

positioning. Investors should

expect bond returns to be positive,

but below historical averages.

Interest rates may be low by

historical standards, but the

bond market typically provides a

positive return even when rates

start off from low levels.

Short-term rates are expected

to rise gradually in 2016 as the

Federal Reserve has begun to

raise interest rates. Longer-term

rates are likely range bound and

won’t move dramatically higher,

which should allow coupon

payments to cover any price

decline. Investors should also

consider an increased use of

alternative investments. Expect

to see more alternatives in CLS-

managed portfolios.

CLS Investment Themes

X-Factor

Broadly speaking, our X-Factor

Theme means we like and are

emphasizing smart beta ETFs

in CLS portfolios. Currently, we

have approximately one-third

of our assets invested in smart

beta ETFs. This compares to the

industry average of 20%. Expect this

emphasis to continue, if not expand.

What are smart beta ETFs? Simply

put, they are ETFs whose holdings

aim to intentionally diverge from

a broad, market-cap-weighted

index. They mimic commonly

known investment strategies,

or risk factors, typically pursued

by most professional active

managers. In other words, smart

beta ETFs capture the essence

of active management (some

say factors capture about 90%

of active management) but at a

fraction of the cost (about half the

price). Over time, while factors

are cyclical like everything in

investing, they have historically

added value above and beyond

benchmark returns.

Smart beta ETFs not only enhance

returns, but also offer institution-

quality tools for managing

Risk-Budgeted portfolios. In

fact, we have fortified our Risk

Budgeting with factor-based risk

management. It is interesting to

note that while factor investing

has added value over time, it

typically adds even more when

stock market prices are falling.

During the last six calendar years,

when the global stock market

was down, factor investing added

value every year.

Our Quarterly Market Outlook

presentation includes excellent

slides that explain factor

investing and show how it has

worked each year since 1995. It’s

powerful information, here are

some key takeaways:

� Factor investing has added

value over time going back

to 1995.

� Despite its cyclical nature,

factor investing usually wins

in calendar year performance

returns. For instance, the

average factor has a positive

excess return nearly 60% of

the time. An equal-weighted

average of the six factors,

however, has a positive

excess return more than 70%

of the time.

� Historically, factor investing

does well in all environments,

but particularly so in down

markets.

In addition, in this quarter’s market

outlook video, we show some of

the highlights of our interview

with Raman Subramanian from

MSCI. One of CLS’s several in-

house experts on factor investing

(but perhaps our most passionate

and accomplished on the topic),

Joe Smith, interviewed Raman.

Give it a look.

International Opportunities International markets are on sale and

expected returns are substantially

higher. Our own proprietary

in-house expected return tool

suggests international ETFs should

outperform by 5%-10% or more per

year over the next 10 years.

In a low-growth world, valuations,

yields, and monetary policies play

greater roles, and international

markets are more likely to

benefit from these factors than

U.S. markets going forward.

Currently in international markets,

valuations are lower, dividend

yields are higher, and central banks

are providing greater support.

Over the last quarter, CLS

published a new white paper,

Global and Balanced, written by

Portfolio Manager Kostya Etus.

The main thrust of the paper is

to show why we believe Risk-

Budgeted, globally balanced ETF

portfolios help investors succeed

over time and why one should

“strategically” (i.e., always own

a certain amount) allocate to

international securities. But the

paper also persuasively illustrates

why CLS is actively or “tactically,”

(meaning a deviation in strategic

weight) emphasizing higher

allocations to international.

Creative Diversification Given the low level of interest

rates, we continue to be creative

in how we diversify our equity-

dominated portfolios. We can

do this in two ways. First, we

can be tactical in our fixed

income exposures, which we

have been. We have actively

managed our duration (i.e.,

interest rate sensitivity), credit,

and sector exposures. We have

also significantly increased our

exposure to actively managed,

fixed income ETFs (more on this

a bit later).

Currently, our portfolios are less

interest-rate sensitive than the

overall bond market. Though

we have made tweaks in recent

quarters – some helpful and some

not – this has been our consistent

view in recent years given low

overall interest rates.

Our fixed income credit quality

exposure (i.e., lower quality

means higher probability of

defaulting) has notably changed

over the last quarter. While

last quarter we wrote that our

overall credit quality was higher

than in years past, we changed

course and were active buyers of

corporate bonds last quarter, both

investment grade (higher quality)

and high yield (lower quality).

In short, we believe yields had

moved high enough (making

high yield appear more attractive)

to offset the anticipated uptick in

default risk.

Second, in our Creative

Diversification Theme, we

can use alternative asset class

segments and strategies, which

can include managed futures,

hedge fund strategies, and

currencies. We continue to

slowly build positions in various

alternative areas.

This could also mean increased

exposure to commodities,

which have been beaten down

over the last several years, with

many individual commodities

reaching multi-year price lows.

Commodities are a diverse asset

class, and we can utilize the broad

array of ETF offerings to tailor our

exposure. We were in fact “better

buyers” last quarter; we bought

more than we sold and, on balance,

increased our positioning.

Lastly, as mentioned above,

a key part of our Creative

Diversification Theme is our

significant (perhaps aggressive

compared to many other ETF

strategists) use of actively

managed, fixed income ETFs. We

use three of the top global fixed

income shops: PIMCO, Fidelity,

and DoubleLine. Each firm has

talented investment teams that

have historically proven to add

value over market benchmarks.

Thus, we believe this is another

way to manage our fixed income

holdings to beat what many

consider to be the bond market

benchmark – the Barclays U.S.

Aggregate (Agg).

The Agg is indeed the most

common proxy for the U.S.

investment-grade bond market,

and the primary benchmark

We believe risk-budgeted, globally balanced ETF portfolios help investors succeed over time.

for most bond index funds.

The index is a representation

of U.S. dollar-denominated,

investment-grade, fixed-rate,

taxable bonds. But it’s not the

entire bond market. It represents

about half the U.S. bond market

and does not include Treasury

Inflation-Protected Securities

(TIPS), high yield, municipals,

and much more.

The next problem for the Agg

(though all benchmarks have

this problem to some degree, but

the Agg has it even worse), is it

changes all the time, sometimes

dramatically. For instance, since

the financial crisis of 2008, due to

government policy and increased

direct issuance of U.S. Treasuries,

the Agg has increased duration

and lowered yields. Usually, it

works the other way around

– more duration means more

yield. In this case, however, credit

quality improved so much due

to increased Treasury holdings

that yields decreased. As can be

seen on the chart below, the yield

and duration metrics for the Agg

tend to change over time and the

period over the last 5 years has

deviated from historic trends.

So, if an investor used only a

bond index fund and hasn’t

changed that holding since 2008,

risks have gone up considerably

due to heightened interest-rate

risk, but yields have dropped

considerably. This isn’t desirable.

At CLS, we don’t want our overall

bond exposure to just equal

the Agg’s exposure. We want a

larger investment universe for

our bond exposure. Why? First,

a larger universe means more

opportunities to enhance returns

and diversify risks. Second,

while Risk Budgeting provides a

tool for adjusting to changes in

underlying asset class risk, we’re

still not big fans of changes in the

risk and asset class segments of

the Agg. Third, by outsourcing

some of the active decision-

making on fixed income, we now

have some great fixed income

minds working on our behalves

to add value above and beyond a

simple benchmark return. They

won’t always get it right in the

short term, nobody does, but

given their deep and talented

organizations and proven track

records, we think utilizing them

is a prudent investment decision.

Thanks for reading. Stay balanced.

Barclays U.S. Aggregate Bond Index Historical Averages: Yield to Worst vs. Duration

8

7

6

5

4

3

2

1

03 3.5 4 4.5 5 5.5 6

Duration (Years)

Yie

ld t

o W

ors

t

Source: Wisdom Tree; Data sources: Barclays, Bloomberg, as of 12/31/2015. Past performance is not indicative of future results. You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may di�er significantly from the securities included in the index. Yield to worst: The rate of return generated assuming a bond is redeemed by the issuer on the least desirable date for the investor.

1995-2000

2000-2005

2005-2010

2010-2015

12/31/2015

12/31/2015

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. CLS portfolios may contain specific securities that have been mentioned herein. CLS makes no claim as to the suitability of these securities. Past performance is not a guide to future performance. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recom¬mended in this report and should understand that statements regarding fu¬ture prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

CLS is not affiliated with any of the companies listed above. While some CLS portfolios may contain one or more of the specific funds mentioned, CLS is not making any comment as to the suitability of these, or any investment product for use in any portfolio. A client’s risk budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio.

The S&P 500® Index is an unmanaged composite of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The index is composed of the 3,000 largest U.S. stocks. The Russell 2000 is an index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small-cap companies. It is a widely recognized indicator of small capitalization company performance. The MSCI EAFE International Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The Barclay’s Capital U.S. Aggregate Bond® Index measures the performance of the total United States investment-grade bond market. The Barclay’s Capital 1-3 Month U.S. Treasury Bill® Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities and represents 20 commodities that are weighted to account for economic significant and market liquidity. The Morningstar Diversified Alternatives Index is designed to provide diversified exposure to alternative asset classes while enhancing risk-adjusted portfolio returns when combined with a range of traditional investments. It allocates among a comprehensive set of alternative underlying ETFs that employ alternative and non-traditional strategies such as long/short, market neutral, managed futures, hedge fund replication, private equity, infrastructure or inflation-related investments. The Equity Baseline Portfolio (EBP) is a blended index comprised of 60% domestic equity (represented by the Russell 3000 Index) and 40% international equity (represented by the MSCI ACWI ex US Index), rebalanced daily. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index.

An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket. ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in. Bonds are a type of debt instrument issued by a government or corporate entity for a defined period of time at a fixed interest rate. Bonds may be subject to unsystematic risks including, but are not limited to, call risk and reinvestment risk. High yield bonds, or junk bonds, will be subject to an even greater degree of these risks as well as subject to the credit risk.

1421-CLS-4/1/2016

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