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10am PDT

October 28, 2014

QUARTERLY RESEARCH CONFERENCE CALL

September 2014 Quarterly Research Conference Call

Dial in: (888) 290-7503 US(862) 255- 5354 International

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Introduction by: Jeffrey MacLean, Chief Executive Officer

Presented by: Scott Day, CFA, Managing DirectorIan Toner, CFA, Managing Director

Jeffrey J. MacLeanChief Executive Officer

Scott Day, CFAManaging Director

Ian Toner, CFAManaging Director

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‐65

‐55

‐45

‐35

‐25

‐15

500

700

900

1100

1300

1500

1700

1900

2100

2007 2008 2009 2010 2011 2012 2013 2014

S&P 500 (Left) AAII Investor Bearish Sentiment (Inverted) (Right)

N O T W H A T Y O U W E R E E X P E C T I N G ?

2

S&P 500 – Bullish at Top, Bearish at Bottoms Rates Will Go Higher… Eventually

Source: Federal Reserve, Bloomberg, Wurts

Source: S&P, AAII, Bloomberg, Wurts Source: Bloomberg, Wurts

Federal Reserve Forecast of U.S. GDP

1%

2%

3%

4%

Mar‐10 Oct‐10 May‐11 Dec‐11 Jul‐12 Feb‐13 Sep‐13 Apr‐14

2013

20142010 2011

2012

Actual

0%

25%

50%

75%

100%

1%

2%

3%

4%

5%

6%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

10 Yr Rates (Left) % of Economists Bearish Rates (Right)

Bullish

Bearish

T H E N O I S E O F T H E E C O N O M I C C H E E R L E A D E R S

3

ISM – Not What It Used to Be

Source: BLS, Bloomberg, Wurts

Source: NAPM, Bloomberg, Wurts

The Labor Market – Growing But Not Enough

A R E Y O U S E E I N G W H A T I ’ M S E E I N G

4

Source: US Census Bureau, National Assoc. of Realtors, Bloomberg, Wurts

Source: Citigroup, Bloomberg, Wurts

Home Prices vs. Volume

Home Inventory

I ’ L L H A V E W H A T T H E Y ’ R E H A V I N G

5

Sources: WSJ, Realtor.com

Growth by State

Sources: BEA, Federal Reserve, Wurts Sources: BLS, Federal Reserve, Bloomberg, Wurts

Change in Income by State

Sources: Economics Policy Institute, Wurts

‐0.6%

‐0.9%

‐0.6%

‐0.4%

0.1%0.2%

‐1.0%

‐0.8%

‐0.6%

‐0.4%

‐0.2%

0.0%

0.2%

0.4%

Bottom 10% 20% 30% 40 ‐60% 70 ‐ 80% Top 10%

Annual % Change in Hourly Real Earning(2007 – 2014)

E U R O P E : F A L L E N O F F T H E H O R S E

6

Sources: Eurostat, ECB, Bloomberg, Wurts Sources: ECB, Eurostat, Wurts

Growth – I’ve Fallen & Can’t Get Up

Inflation or the Lack Thereof

Sources: European Commission Eurostat, Bloomberg, Wurts

0

200

400

600

800

1,000

1,200

1999 2001 2003 2005 2007 2009 2011 2013Auto Consumer Credit Cards Other ABS

CDO CMBS RMBS Small Business

“We will certainly not be in a position to buy all of it…so we’ll only buy part.”

Europe ABS Issuance

J A P A N : D É J À V U A L L O V E R A G A I N

7

Sources: Bank of Japan, TSE, Bloomberg, WurtsSources: TSE, Bloomberg, Wurts

Sources: Ministry of Internal Affairs & Communication, Bloomberg, Wurts

History Doesn’t Repeat, But It Rhymes

GDP & Consumption

Inflation –The Good & The Bad

10750

11750

12750

13750

14750

15750

16750

13000

14000

15000

16000

17000

18000

19000

20000

21000

22000

Nikkei (1997 ‐ 1998) (Left) Nikkei (Present) (Right)

Abe Elected

A B U L L I N T H E C H I N A S H O P

8

Sources: Shanghai Index, Bloomberg, WurtsSources: National Bureau of Statistics of China, Bloomberg, Wurts

Sources: National Bureau of Statistics of China, Citigroup, Bloomberg, Wurts

Consumer

GDP

Equity Market – A Light on the Horizon

A L L H A T , N O C O W B O Y

9

Source: Dow Jones, Russell, MSCI, TSX, Barclays, DJ UBS, Bloomberg, Wurts

Source: New York Federal Reserve, Bloomberg, WurtsSource: Dow Jones, Bloomberg, Wurts

Equities: Volume = Conviction?! Fixed Income Dealer Inventory

Cumulative Total Return Since 2009

2

3

6

12

 $‐

 $50,000

 $100,000

 $150,000

 $200,000

 $250,000

 $300,000

 $350,000

2001 2003 2005 2007 2009 2011 2013Agencies (L) MBS (Agency & Non‐Agency) (L)Corporate (IG & HY) (L) HY Spread (Inverted( (R)

M I R A C L E G R O W F O R E Q U I T I E S

10

Source: Federal Reserve, S&P, Bloomberg, Wurts

Source: S&P, Federal Reserve, BEA, Bloomberg, Wurts

Growth Since 2009

Can’t Spell Equities Without QE

600

1100

1600

2100

2600

3100

3600

4100

4600

500

700

900

1100

1300

1500

1700

1900

Nov‐08 Nov‐09 Nov‐10 Nov‐11 Nov‐12 Nov‐13

S&P 500 (Left) Fed Balance Sheet (Right)

Overall Gain = 125%All QEs Together = 153%Without QE = ‐ 28%

QE 1‐9%

QE 1 Expanded

50%

QE 223%

OperationTwist19%

QE Infinity13%

‐17% ‐22% ‐11%

Market figures out that QE has become a 

permanent Fed policy tool

Correlation = 96%

‐20%0%20%40%60%80%100%120%140%160%180%

Mar‐09 Nov‐09 Jul‐10 Mar‐11 Nov‐11 Jul‐12 Mar‐13 Nov‐13

S&P 500 GDP Sales Earnings Fed Balance Sheet

S&P 500 Drawdown – Driver of Fed Policy

‐15.99%

‐19.39%

‐7.52% ‐7.40%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

Mar‐09 Dec‐09 Sep‐10 Jun‐11 Mar‐12 Dec‐12 Sep‐13 Jun‐14

QE2 Operation Twist

QE InfinityQE1

Extended Operation Twist

Source: Federal Reserve, S&P, Bloomberg, Wurts

E N G I N E E R E D E A R N I N G S

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Source: Bloomberg, WurtsSource: S&P, Bloomberg, Wurts

To Buy Back or Not Case in Point - IBM

S&P 500 Buybacks & Earnings

Source: S&P, Bloomberg, Wurts

Buy high, sell low…

The market rewards companies that buyback

0%

50%

100%

150%

200%

250%

300%

‐10‐8‐5‐30358101315

Dec‐09 Jun‐10 Dec‐10 Jun‐11 Dec‐11 Jun‐12 Dec‐12 Jun‐13 Dec‐13 Jun‐14

Debt/Equ

ity

Billion

s

Buyback (L) New Debt (L) Earnings (L) Debt/Equity ®

P L A Y I N G T H E E A R N I N G S G A M E

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Source: S&P, Bloomberg, WurtsSource: S&P, Bloomberg, Wurts

Q3 Earnings Expectations Quarterly Earnings Beat – Playing the Game

Operating Earnings Growth YoY

Source: S&P, Bloomberg, Wurts

0

10

20

30

40

50

60

70

80

Dec‐10 Jun‐11 Dec‐11 Jun‐12 Dec‐12 Jun‐13 Dec‐13 Jun‐14

S&P 500 Non‐Financial S&P 500 Financial S&P 500 Operating Income YoY

Q2 2014[VALUE]

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

1992 1994 1996 1997 1999 2001 2003 2005 2007 2009 2011 2013

Fair Disclosure Regulation enacted Corporations have mastered the earnings game

R I D I N G T H E B U L L U N T I L I T B U C K S

13

Source: Russell, Bloomberg, Wurts

1968

Large Caps vs. Small Caps

Total Return YTD

Source: S&P, Bloomberg, Wurts

The Trend is Your Friend (S&P 500)

Bearish BearishBullish Bullish

The trend has changed

Source: Dow Jones, Russell, MSCI, TSX, Barclays, DJ UBS, Bloomberg, Wurts

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10 11 12

Year To Da

te Total Return

Number of Months Since Start of Year

T H E H A P P Y B U L L ( N O L O N G E R L O N E L Y )

14

Sources: JP Morgan Sources: MPI, Bloomberg, Wurts

JP Morgan Client Survey Underweight Tsy 30-Year Treasury Total Returns by Year

19861995

1982 2008

2013

2009

The rate rise the 2014 bears are looking for

Capitulation

Sources: Bloomberg, Wurts

U.S. 10-Year Rates

G L O B A L M A C R O & C A P I T A L M A R K E T S U M M A R Y

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The Federal Reserve and economists have told us to expect 3‐4% GDP growth, but the actual result has been 2‐2.5%. The economic cheerleaders on CNBC excitedly discuss the latest payroll report, but they have been little more than average with very uneven growth. 

European growth remains anemic with historically high unemployment rates and deflation becoming a greater threat. We have our doubts over the ECB’s ability to fully implement their promised stimulus.

After an initial positive response to QE, the recent tax hike in Japan has raised growth concerns once again. Will we see a repeat of 1997?

Gains in the capital markets since 2009 have been spectacular, but they are not supported by conviction as volumes have steadily declined even as prices moved higher. If volume = conviction, investors do not have much faith in the rally.

There is no doubt that equity prices have moved higher as a result of Fed QE policy. While the correlation might not be as high, it has had an obvious impact on equities. With top line revenue growth performing more like GDP, corporations have been able to grow EPS through share buybacks.

We remain neutral in our overall equity allocation, however, given the rich valuation and trend changing from neutral to slightly bearish, we remain cautious in our outlook.

Our outlook for interest rates has moved from bullish to neutral.

We continue to be cautious on the credit markets and prefer a slight underweight in credit in favor of similar risk in equities for better liquidity.

R E S E A R C H T O P I C S

16

R E C E N T R E S E A R C H T O P I C S

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Are Unconstrained Bonds A Substitute For Core Bonds In The Portfolio? (August) The primary role of fixed income in most portfolios is as a 

diversifier for equity risk

Most unconstrained bond strategies act as fixed income portfolios with a significant added equity risk component

Unconstrained bonds make a poor replacement for the typical core fixed allocation, although may make sense in a total portfolio if added for their own characteristics

Bank Loans: Keeping A Watchful Eye On The Ball (September) There have been rapid inflows into bank loan portfolios, 

with tight spreads relative to history

While this might raise concerns over possible overheating, other metrics in the marketplace provide comfort

Continued exposure to this space remains sensible, although conservative portfolio management strategies may be appropriate

Figure 6:  Performance of Core and Nontraditional Bond Manager Universe

Financial Market Crisis

Greek Financial Crisis

Emerging Market Debt Sell‐off

Rising Interest Rates

Rising Interest Rates

Rising Interest Rates

05/2008 ‐ 01/2009 05/2011 ‐ 10/2011 03/2013 ‐ 07/2013 12/08‐6/09 10/10‐2/11 7/12‐12/13

BC Aggregate Bond 2.3 5 ‐2.1 5.7 ‐0.9 ‐0.2S&P 500 TR USD ‐39.2 ‐7.1 12.2 ‐30.4 17.3 25.3

Core Bond Manager UniverseTop 5% 5.5 6.1 ‐0.8 24.9 4.3 7.6Top Quartile 3.5 5 ‐1.8 14 1.6 3.9Median 1.6 4.4 ‐2.1 10.8 0.7 2.3Third Quartile  ‐1.8 3.8 ‐2.3 8.2 0 1.395th Percentile ‐8 1.9 ‐2.8 5.5 ‐0.9 0.3

Nontraditional Bond Manager UniverseTop 5% 2.7 2.2 1.7 35.5 5.9 15.1Top Quartile ‐4.3 ‐0.2 0.2 19.2 3.8 9.3Median ‐12.7 ‐1.7 ‐0.6 15.3 2.3 5Third Quartile  ‐15.5 ‐3 ‐1.8 9.6 1.1 1.795th Percentile ‐26.5 ‐5.4 ‐3.2 2.5 ‐1.3 ‐2.2

R E C E N T R E S E A R C H T O P I C S

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The Role Of Core Bonds In A Rising Rate Environment (September) With interest rates at historic lows, investors remain 

concerned about the effect on bond exposures of a rising rate environment

Fixed Income plays a diversifying role in the portfolio and in itself that role is valuable

The effect of rate rises is more nuanced than expected.  Reinvestment in a higher rate environment can make up for immediate capital loss within a relatively short timeframe

Annual Hedge Fund Outlook (October) Relatively poor returns from hedge fund strategies may be 

partially explained by the market environment and behavior

Decreasing value added is also closely related to asset inflow into the hedge fund space

The underlying betas that hedge funds access are increasingly available in efficient formats

Understanding the role the hedge fund allocation plays in the portfolio and the sensitivities that each exposure represents is vital to success

High fees should be paid only where there is a reasonable expectation of significant value‐added

‐6%

‐3.75%

0.48%

2.90%

‐8.0%

‐6.0%

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

End of Year 1 End of Year 2 End of Year 3

Figure 3Total Returns Following a 1% Increase in Interest Rates*

Barclays U.S. Aggregate Bond Index

Price change Total Cumulative Returns*Assumes 1% increase in rates at end of year 1 

0

500

1000

1500

2000

2500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Billion

s, $

Hedge Fund Assets

Source: HFRI

Source: Barclays Hedge

‐20%

0%

20%

40%

Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14

HFRI Fund Weighted Composite Index vs. S&P 500(3‐year rolling)

Q & A Session

Thank you for participating in our 3Q 2014 Quarterly Research Conference Call. We are now open for questions. Questions can be asked through the chat feature or by pressing *1 if you are dialed into the conference.

Dial in:

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Participant code:

41467822

19