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Market Quarterly
CIO Reports
Q3 2016
2
The opinions expressed in this material are strictly those of the Global Wealth & Investment Management Chief Investment Office (GWIM CIO) , are made as of the date of this material and are subject to change without notice. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending, and/or commercial relationships with the companies that are mentioned here.
This material was prepared by the GWIM CIO and is not a publication of BofA Merrill Lynch Global Research. The views expressed are those of the GWIM CIO and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
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Investment products:
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ARVH46N3
3
Table of Contents
OverviewMarkets Recap 4
CIO Outlook 6
Macroeconomic Summary 8
Equity Summary 9
Fixed Income Summary 10
Alternative Investments Summary 11
Macro
Global growth slowed amid China transition and low U.S. productivity 12
Uncertainty within political, fiscal, and monetary realms 13
U.S. economic growth may be supported by better household finances 14
Inflation expectations low, but firming inflation raising expectation for
December rate hike15
U.S. labor market improving but structural shifts may weigh 16
Equities
U.S. equity returns may be lower going forward on stretched valuations 17
During uncertainty, focus on high-quality, large-cap, dividend growers 18
Neutral on international developed markets due to ineffective NIRP 19
Emerging Markets (EM): While valuations are cheap and commodity
prices have rebounded, China’s transition could again rock the boat20
Fixed Income
Bond market volatility is likely to pick up 21
Municipals look attractive for taxable investors; selective higher-quality
opportunities exist in corporate bonds22
Alternative InvestmentsCommodity prices have stabilized on EM stability and reduced oversupply 23
Currency volatility may persist on heightened political and geopolitical risks 24
Alternative Investments can provide diversification 25
Private equity firms are cash-rich 26
A Transforming World
Five macro themes 27
A Transforming World summary 28
The hunt for yield has pushed investors out on the risk curve 29
The Longevity Revolution shifts consumer spending 30
Disruptive technologies are creating new growth opportunities 31
Alternative energy: shift to renewables led by solar and wind 32
Appendix
Strategic and Tactical Asset Allocation 34
GWIM Asset Class Return Assumptions 35
Historical Asset Class Performance 36
U.S. Equity Sector Performance 37
International Equity Sector Performance 39
Fixed Income Returns 41
Glossary 42
Asset Class Proxies 43
Index Definitions 44
Disclosures 47
4
Macroeconomic Summary
Consumption buoying economic growth• U.S. gross domestic product (GDP) looks to be accelerating after a weak first half of
the year. For the third quarter, Federal Reserve (Fed) GDP trackers suggest growth of roughly 2.3% QoQ SAAR*; one tracker designed by BofAML Global Research pegs growth at about 2.9%. These figures compare to first- and second-quarter growth of 0.8% and 1.4% respectively. Firm consumption, signs of stabilization in manufacturing, and a bumpy housing recovery have been tailwinds. BofAML Global Research expects U.S. GDP of 1.6% in 2016, versus 2.6% in 2015. Inflation is expected to average 1.3% in 2016, an increase over last year’s figure of 0.1%. The Federal Reserve has remained hesitant in raising its policy rate amid global uncertainty, but we expect a move in December.
• On the global front, low inflation and sluggish economic growth have pushed central banks to do more but with a caveat. The Bank of Japan (BoJ) presented new tools in its monetary policy toolkit with its “yield curve control” program and a commitment to overshoot its target inflation rate. However, the European Central Bank disappointed investors when it did not expand its Quantitative Easing (QE) program. While the expectation is for an eventual expansion, its reticence has raised doubts on the future direction of monetary policy.
Equities
Equities saw “risk-on” activity in Q3• Global equity performance overall was higher in the third quarter, with the MSCI All
Country World Index (ACWI) closing higher (+5.3%).
• In U.S. equity markets, the S&P 500 Index was up 3.9%, with volatility decreasing throughout the quarter. Performance was driven by small caps (Russell 2000: +9.0%), while cyclical equities led defensives and growth beat value.
• International developed equities lagged Emerging Markets (EM) (+4.9% versus 9.0%). Within Developed Markets, the Pacific region was the best performer, led by New Zealand (+12.4%) and Hong Kong (+11.9%). The MSCI Europe Index rose 5.3% in the third quarter, while North America was a laggard (+4.0%).
• EMs’ solid performance was led by Asia (+10.5%), with China (+13.9%), Taiwan (+11.7%) and South Korea (+11.0%) driving gains. The Philippines was the region’s worst performer (-5.3%). In LatAm, Brazil (+11.3%) continued its solid performance, offsetting negative returns in Chile (-1.7%) and Mexico (-2.2%).
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U.S. Macroeconomic Variables*
Q1’16 Q2’16 Q3’16 F Q4’16 F Q1’17 F
Real GDP (% change, QoQ, SAAR)
0.8 1.4 3.0 2.7 2.1
CPI, Consumer Prices(% change, YoY)
1.1 1.1 1.2 1.8 2.4
Unemployment Rate (civilian, %)
4.9 4.9 4.9 4.9 4.8
Industrial Production(% change, QoQ, SAAR) -1.8 -0.5 2.4 0.0 1.4
Global Equities – Index Total Returns
Source: BofAML Global Research. Bloomberg. Data as of September 30, 2016. * QoQ = quarter-over-quarter; YoY = year-over-year; SAAR = seasonally adjusted annual rate. Highlighted cells are BofAML Global Research Economic forecasts. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. See Appendix for index definitions. Past performance is no guarantee of future results.
QTD 2016
9.0 11.5
9.0 16.0
8.6 2.5
8.2 10.9
6.4 1.7
5.4 0.0
5.3 6.6
4.9 6.1
4.1 12.4
3.9 10.4
3.9 7.8
-5 0 5 10 15 20
S&P 500
Russell 3000 Value
S&P Midcap 400
Russell 3000 Growth
MSCI All Country World
MSCI Europe
MSCI EAFE
MSCI Pacific ex. Japan
MSCI Japan
MSCI Emerging Markets
Russell 2000
2016 QTD %
5
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Fixed Income
Fixed income segments were mixed in Q3• The market’s expectation for rising inflation and additional Federal Reserve
tightening rose as the third quarter drew to a close, affecting some long duration investments. The ML Global Broad Market Index was up +0.7%.
• U.S. bonds rose +0.4% in the third quarter. U.S. Treasury notes and bonds were lower on aggregate by -0.3%. The yield on the U.S. 10-year rose 12 basis points to 1.59% from 1.47% on June 30, 2016. However, it remains well below the level on December 31, 2015 of 2.27%. U.S. Corporates were up +1.4%, while U.S. Treasury Inflation-Protected Securities (TIPS) posted a +1.0% gain.
• The municipal bond market fell -0.3%, as the spread above comparable Treasury yields generally tightened. Continued concerns over select municipalities had little effect on demand for the broader asset class.
• EM sovereign debt has performed well this year. Third quarter performance was +3.7%, following first and second quarter returns of +5.2% and +5.1% respectively. The search for yield has been a tailwind for many fixed income securities.
Alternative Investments
Commodities generally fell this quarter • After a powerful bounce in the second quarter, on stabilization in China and a
reversal from extremely depressed levels, the Bloomberg Commodity Index fell -3.9% in the third quarter. WTI crude and Brent crude fell -4.9% and -2.2%, respectively, in the quarter.
• Given rising expectations for a rate hike, gold saw a consolidation throughout the third quarter, after strong rallies in the first and second quarters. The yellow metal fell -0.5%, bringing its year-to-date performance to +24.0%.
• The DXY dollar index remained in an increasingly tight range, falling -0.7% in the third quarter. The British pound was again a laggard, falling -2.6%, bringing its year to date performance to -12.0%. EM currencies were mixed versus the dollar.
• The HFRX Global Hedge Fund index rose +2.0%, while the LPX50 Private Equity Index rose +9.3%. U.S. Master Limited Partnerships (MLPs) rose +1.1%, while global Real Estate Investment Trusts (REITs) were up +0.2%
Source: Bloomberg. Data as of September 30, 2016. See Glossary and Appendix for index definitions. Past performance is no guarantee of future results.
Global Fixed Income - Index Total Returns
Alternative Investments - Index Total Returns
QTD 2016
5.5 15.3
3.7 14.7
1.4 9.1
1.0 7.7
0.7 9.6
0.4 5.9
0.1 3.7
-0.3 4.1
-0.3 5.3
-4 -2 0 2 4 6 8 10 12 14 16
ML Treasury Master
ML Muni Master
ML Agency Master
ML US Broad Market
ML Global Broad Market
ML TIPS Master
ML Corp Master
ML EM Sovereign
ML HY Master
2016 QTD %
QTD 2016
9.3 6.3
2.0 1.1
1.1 15.9
0.2 12.1
-0.2 30.2
-0.5 24.0
-0.7 -3.2
-0.8 11.4
-1.2 31.6
-3.9 8.6
-10 0 10 20 30 40
Commodities
Brent Crude Oil
U.S. REITs
DXY U.S. Dollar Index
Gold
WTI Crude Oil
Global REITs
MLPs
Global Hedge Funds
Private Equity
2016 QTD %
6
Macroeconomic Outlook
U.S. growth supported by jobs, consumer and housing. Global cyclical momentum shifting modestly to upside on passing effects of falling oil, rising dollar.• A solid jobs market, with unemployment headed toward 4%, and strong real wage
gains should keep the U.S. consumer moving forward. With inflation gradually rising, we expect the Fed to raise rates by the end of the year. Housing remains an important tailwind, with residential investment growing at a double digit pace.
• Meanwhile, the waning global momentum that developed from China’s transition, and the negative impact of the stronger dollar and lower oil prices, is now subsiding thanks to the steadier currency and commodity outlook. As these negative effects fade, global cyclical momentum is starting to shift modestly to the upside.
• The fading impact of lower energy prices and a stronger dollar is evident in first-half corporate profits. Gross domestic product profits – which are the only official seasonally adjusted statistics, unaltered by companies – show a bottom in the fourth quarter, followed by a rebound this year. Profit growth should return to a low-to-mid single-digit pace.
Equity Outlook
Equities remain at a neutral weight.• Weighing on the outlook are increasingly ineffective central bank policies (negative
interest rates) along with political risks. Valuations are full at roughly 18-20 times earnings for the S&P 500. We believe further upside from these levels would be borrowing from returns in 2017 or would need an earnings boost as a catalyst.
• We continue to expect equities to outperform fixed income as gradual U.S. and global expansions continue. While valuations are full in the absolute sense, relative valuations versus fixed income, in general, remain attractive.
In this uncertain environment, we favor quality with healthy, robust cash flow • We favor high-quality, global-brand companies with solid balance sheets and strong
cash flows allowing for the growth of dividends. Select companies in Tech and Industrials in the U.S. are candidates, while companies in Health Care should also benefit from an aging global population and innovation in biotechnology.
• We just upgraded emerging market equities. Despite challenges, including low commodity prices, gradual normalization of Fed monetary policy and the structural downshift in China’s growth rate, we believe they will benefit from the recent pickup in global cyclical momentum and, in our view, valuations are attractive. We see those less dependent on trade and commodities, like India, and more domestic support from monetary policy and internal reforms as best positioned. We reduced exposure to international developed markets to fund this overweight.
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OK
We expect stocks to continue to outperform bonds
Source: BofAML Global Economics Research, Bloomberg and GWIM Chief Investment Office. Data as of September 30, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
650
850
1050
1250
1450
1650
1850
2050
2250
2450
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Yie
ld t
o m
atu
rity
, (%
)
Ind
ex
leve
l
S&P 500 (lhs) 10-Yr Treasury (rhs)
-4
-2
0
2
4
6
8
10
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
%
Global GDP Global CPI
BofAMLForecasts
Global growth and inflation are both likely to inch higher
7
Fixed Income Outlook
We remain underweight fixed income, but we find opportunities selectively in credit. In a flattening yield curve environment, a barbell strategy may be better.• We recommend that investors maintain a neutral duration in strategies
appropriate for their risk tolerance and caution against over-allocating to long-duration assets given unfavorable risk-reward trade-offs.
• We prefer credit over Treasuries, with an emphasis on investment-grade corporate bonds and municipals. Given the upward bias of the U.S. dollar, we are generally avoiding non-dollar sovereign bonds.
Stay selective within High Yield• Valuations and fundamental risks, including the acceleration in default rates, lead
us to be cautious on allocations to index-based solutions in high-yield. Investments into high-yield should be in managed solutions that overweight the higher end of the quality spectrum.
Alternative Investment Outlook
Neutral Commodities• Commodity markets are likely to remain range-bound in the near-term, weighed
down by global economic policy uncertainty but held up by stable global cyclical momentum. We believe oil prices will finish the year within the range of $45-$55 per barrel and move slightly higher next year.
U.S. dollar stable to firm• Our base case is that the dollar will likely remain generally stable with some
upside potential if, for example, wage growth in the U.S. accelerates more than expected, euro breakup sentiment picks up or relative Emerging Market cyclical momentum stalls, further narrowing the growth differential with the U.S..
Neutral in hedge funds, private equity and real estate as an asset class• We currently emphasize hedge fund strategies that have low-to-moderate levels
of market exposure, as well as those whose managers can generate a large portion of their returns from asset selection and/or market timing.
• For private equity, we see potential opportunities in special situations/opportunistic and private credit strategies.
• For real estate, we prefer opportunistic and value sectors.
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Source: Bloomberg, BofAML Global Research (Top), Bloomberg (Bottom). Data as of September 30, 2016. *Weighted interest rate spread calculated as U.S. 5-Yr Treasury yield minus weighted five-year government bond yields of Europe, Japan, U.K., Canada, Sweden and Switzerland. Respective weights are same as those in the DXY Index. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
Relatively high Treasury yields have helped push the dollar higher
Low inflation should support fixed income globally
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
20
13
20
14
20
15
20
16
20
17
Co
nsu
me
r Pric
e In
de
x -
YoY,
(%
)
United States Eurozone Japan
BofAML Forecasts
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
70
75
80
85
90
95
100
105
110
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
Sp
rea
d, (
%)
Ind
ex
DXY (lhs) Weighted Interest Rate Spread* (rhs)
8
Growth
Bounce back for U.S. growth remains intact in 3rd quarter. Eurozone and U.K growth remains meager. China policy to remain accommodative.• Encouraging survey data suggests the industrial sector is stabilizing, helping the
more notable growth drivers of consumption and housing. These and a turn in the inventory cycle leads BofAML Global Research to expect third-quarter gross domestic product growth of 3.0% QoQ at a SAAR.
• While “Brexit” has not produced acute economic malaise, longer-term its effects overhang economic performance in both the U.K. and the eurozone. BofAML Global Research expects third-quarter growth of 0.2% quarter-over-quarter for both. We expect China’s macro policies to remain accommodative amid low external demand and excess capacity reduction.
Inflation
Inflation remains subdued but downward pressure is subsiding. • Headline inflation remains weak in most countries, but the effects of a collapse in
commodity prices is passing. Meanwhile, core measures of inflation that exclude food and energy are relatively stable.
Policy
The Fed has held steady, but we expect a rate hike in December. ECB and BoE to remain in easing mode. • Despite an uncertain global environment, expectations have increased for the
Fed to raise its policy interest rate in December. This comes against a backdrop of easing from the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). The BoJ recently instituted its “yield curve control,” which we suspect may be a backdoor to helicopter money.
Risks
Global volatility expected to persist as political risk increases• There is no shortage of risk as we enter the fourth quarter of 2016. The fallout
from the Brexit vote as well as the upcoming U.S. elections are likely to foster policy uncertainty. The risk of a Chinese policy mistake is an additional notable factor. Together these concerns should promote general investor uneasiness, leading to continued bouts of episodic volatility.
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Source: BofAML Global Research, World Bank. Data as of September 30, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved.
Annual GDP Forecasts (%) Annual CPI Forecasts (%)
2016 E 2017 E 2016 E 2017 E
Global 3.0 3.5 2.6 2.8
U.S. 1.6 2.2 1.3 2.3
Global ex-US 3.3 3.8 2.9 3.0
Euro area 1.5 1.1 0.2 1.0
Japan 0.6 0.9 -0.2 1.0
EM 4.0 4.8 3.9 3.6
China 6.4 6.5 1.8 1.3
BofAML Global Research Key Economic Forecasts
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
13
20
14
20
15
20
16
20
17
Sh
ort-te
rm i
nte
rest ra
te,
(%)
United States Eurozone Japan U.K.
BofAML Forecasts
“Lower for longer”: U.S. alone in forecasted policy rate increases
9
EQ
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U.S. Equities
Cyclical stocks rising and “Search for Yield” taking a backseat = themes for Q3 • In U.S. equity markets, the S&P 500 was up 3.9% in the third quarter, with
reduced volatility. Traditionally dividend-producing sectors such as Telecom, Utilities and Consumer Staples took a backseat and were the worst performers. Uncertainty regarding monetary policy and increased expectations for fiscal stimulus were drivers.
• Consistent with a potential cyclical upturn from fiscal stimulus, technology, financials, industrial and small-cap growth equities were outperformers.
International Developed
Japan outperformed Europe • European equities rose 5.4% in the second quarter, resulting in flat year-to-date
performance. Information Technology, Material and Financial stocks were leaders, offset by Energy, Heath Care and Telecom Services.
• Japanese equities rose +8.6% in U.S. dollar terms this quarter, bringing their year –to-date return to 2.5%. Meanwhile, the yen rose +1.8% versus the U.S. dollar during the third quarter, providing some relative relief after its +9.0% appreciation in the second quarter and +18.7% rise for the year.
Emerging Markets
Emerging Markets were solid performers in the third quarter. • EM posted a solid 9.0% return during the quarter, led by MSCI EM Asia with a
return of 10.5%. Gains within Asia were driven by outperformance in China, Taiwan and South Korea.
• The MSCI EM Latin America Index was up 5.4%. Emerging Markets in Europe, the Middle East and Africa (EMEA) returned 2.4% during the quarter.
Source: BofAML Global Research. Bloomberg. Data as of September 30, 2016. Sectors represented by S&P 500 GICS sector total return indexes. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. See Appendix for index definitions. Past performance is no guarantee of future results.
Equity Index Level
September 30, 2016 December 31, 2016 E
MSCI ACWI 418 445
S&P 500 2168 2000
Stoxx 600 343 390
Shanghai Composite 3005 2600
Hang Sang 9582 9000
Key U.S. Equity Index Performance
BofAML Global Research Key Equity Forecasts
QTD 2016
12.9 12.5
9.2 7.5
9.0 11.5
8.9 15.5
4.6 6.8
4.6 1.4
4.6 6.0
4.5 10.3
4.4 13.7
4.1 10.9
4.0 7.9
3.7 11.4
3.5 10.0
2.9 3.6
2.3 18.7
0.9 1.4
-2.6 7.6
-5.6 17.9
-5.9 16.1
-10 -5 0 5 10 15 20 25
Utilities
Telecom
Cons Staples
Healthcare
Energy
Cons Disc
Large Cap Value
Materials
Russell 1000
Industrials
Mid Cap Value
Russell Midcap
Large Cap Growth
Financials
Mid Cap Growth
Small Cap Value
Russell 2000
Small Cap Growth
Info Tech
2016 QTD %
10
FIX
ED
IN
CO
ME
SU
MM
AR
Y
Source: BofAML Global Research, Bloomberg. Data as of September 30, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. See Appendix for index definitions. Past performance is no guarantee of future results.
U.S. Treasuries
Amid monetary policy uncertainty, long duration struggled. • U.S. Treasuries, as measured by the ML U.S. Treasury Index, were down 0.3% in
the third quarter and fell broadly. Amid rising expectations of a Fed rate hike before year-end, investors were more concerned with interest rate volatility and were hesitant to purchase longer-duration bonds. The 15+ year U.S. Treasury index was down 0.6%, while the 7-10-year maturities index fell 0.5% in the quarter. However, TIPS returned 1.0%, bucking the trend in Federal government paper.
U.S. Corporates
High Yield and EM sovereign debt led returns• High Yield bonds outperformed in the third quarter versus other fixed income
segments. The ML U.S. High Yield index rose 5.5% despite elevated risk of defaults in the Energy, Metals and Mining sectors, which account for a large proportion of HY credit.
• Emerging Market Sovereign debt rose 3.7% during the quarter, outperforming the broad corporate index (+1.4%).
Municipals
Municipals performed sluggishly, similar to most of the fixed income space.• The municipal bond market fell 0.3% in the third quarter, brining its year-to-date
return to 4.1%. Valuations relative to U.S. Treasuries remain attractive, and the tax-exempt status is not likely to be threatened in the near term.
International
International bonds remained strong• EM dollar-denominated debt remained a strong performer within the sovereign
space, with a return of 3.3% for the third quarter. International sovereign debt posted a 0.2% return, while international corporate bonds returned 1.9%.
Key Fixed Income Index Returns
BofAML Global Research Key Fixed Income Forecasts
Short-Term Policy Interest Rate (%)
Current 2016 E 2017 E
U.S. 0.38 0.63 1.13
Euro Area 0.00 0.00 0.00
Japan -0.10 -0.10 -0.10
Global 3.57 3.84 3.94
QTD 2016
5.5 15.3
3.2 12.5
1.9 9.0
1.6 9.4
1.0 7.7
0.2 11.6
-0.3 3.4
-0.3 4.1
-0.5 6.9
-0.6 14.8
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
15+ Yr Treasureis
7-10 Yr Treasuries
Municipals
3-5 Yr Treasuries
Int'l Sovereign
TIPs
U.S. Inv Grade
Int'l Corporate
EM Debt
U.S. High Yield
2016 QTD %
11
QTD 2016
4.1 13.0
3.8 7.0
3.1 -1.0
1.8 18.7
1.2 -0.6
1.2 3.4
0.5 3.2
0.2 27.4
-0.8 -1.1
-2.5 -12.0
-3.7 5.1
-8.2 4.0
-15 -10 -5 0 5 10 15 20 25 30
Agriculture
Energy
British Pound
HFRX Macro/CTA
Precious Metals
Swiss Franc
Euro
HFRX Relative Value
Japanese Yen
HFRX Equity Hedge
HFRX Event Driven
Base Metals
2016 QTD %
ALT
ER
NA
TIV
E I
NV
ES
TM
EN
TS
SU
MM
AR
Y
Source: Bloomberg. BofAML Global Research. Commodity subsectors represented by Bloomberg Commodity Index. Data as of September 30, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. See Appendix for index definitions. Past performance is no guarantee of future results.
Price Target
September 30, 2016 Q4 16E 2017 E
EUR/USD 1.12 1.08 1.15
USD/JPY 101.35 105.00 115.00
USD/CNY 6.67 7.00 6.80
Brent Crude($/bbl) 49.09 55.00 61.00
WTI Crude ($/bbl) 48.05 54.00 59.00
Gold ($/oz) 1316.00 1500.00 1475.00
Copper ($/t) 4825.00 4750.00 4625.00
Key Alternative Investment Index Returns
BofAML Global Research Key Currency & Commodity Forecasts
Commodities and real assets
Commodities took a breather
• Commodities took a step back during the third quarter, returning -3.9%. For the year, the asset class has returned 8.6%. Led by the oil markets, commodities produced solid returns during the 2nd quarter on signs of stabilization in China and expectations that oversupply in the oil markets would diminish on falling output.
• Within oil markets, WTI crude and Brent crude fell 0.2% and 1.2% respectively.
• Precious metals returned 0.2% in Q3 and have returned 27.4% year-to-date. After a strong first half of the year, investors have become more cautious on the outlook for monetary policy.
Mixed performance among Master Limited Partnerships and REITs in the quarter
• MLPs rose 1.1% in Q3, muted performance that tracked energy prices. Global and U.S. Real Estate Investment Trusts were down 0.8%, pausing after their solid performance in the first half of the year. REIT performance was affected by a turnaround in the search for yield.
Currencies• The DXY dollar index held steady (-0.7%) after a second-quarter performance of
+1.6%. Rising expectations of a Fed rate hike and dovish European Central Bank and Bank of Japan policies have kept the currency in demand.
• The Mexican peso has been the worst performer among EM currencies, falling 5% during the third quarter. Among the outperformers have been the South African rand and the South Korean won, with gains of 7.3% and 4.6% respectively.
Hedge Funds
Hedge fund performance was mixed among different strategies• The HFRX Global Hedge Fund index rose 2.0% in the third quarter, resulting in a
year-to-date gain of 1.1%. Event-driven strategies were the best-performing segment for the second consecutive quarter, with third-quarter performance of 3.8%, following a prior-quarter gain of 4.5%. Weighing on the aggregate were macro strategies, at -0.8% for the quarter.
12
Global growth has slowed, amid China transition and low productivity in the U.S.
China transition has dragged on Emerging Markets, while rebound in eurozone and steady US growth have buoyed Developed Markets.
U.S. productivity growth has been sluggish, keeping GDP growth muted.
MA
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O
Consensus growth estimates have been revised downward.
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. IMF, Markit, San Francisco Fed. Data updated September 26, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
Slowing EM growth and low commodity prices have narrowed growth gap.
48
49
50
51
52
53
54
55
56
2011
2012
2013
2014
2015
PMI In
dex
(12-
M a
vera
ge)
Emerging Markets (EM) Composite Developed Markets (DM): Composite
China begins transition,Dampening EM outperformance.
Draghi turns Europe around.DM begins to outperform.
-4
-2
0
2
4
6
8
10
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6E
201
7E
Re
al G
DP
Gro
wth
, (%
)
Growth gap Developed Markets Emerging Markets
BofAMLForecast
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
Mar
-16
Jun-
16
YoY,
(%
)
2016 Global GDP 2016 US GDP
95
1947
1954
1961
1968
1975
1982
1989
1996
2003
2010
Business Sector Utilization-adjusted
125 –
100 –
150 –
200 –
175 –
250 –
225 –
Pro
duct
ivity
inde
x
13
Uncertainty within political, fiscal and monetary realms
However, the S&P 500 has been pricing in fiscal stimulus.
As presidential election nears, policy uncertainty and volatility set to rise. Rising political risk is likely to bring focus to upcoming, notable electoral events.
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Data updated September 27, 2016. Bottom left chart collected from BoAML research dated September 13, 2016. Past performance is no guarantee of future results.
MA
CR
O
G-7 10-year yields remain on a downtrend, but yields may creep higher on monetary policy uncertainty and transition to fiscal-led stimulus regime.
10
12
14
16
18
20
22
24
26
80
90
100
110
120
130
140
150
160
170
-12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2
Avg
. VIX
Avg
. lev
el o
f Pol
icy
Unc
erta
inty
Inde
x
# months before or after Presidential Election
Avg. uncertainty based on # months before election
Current year - Uncertainty index level
Avg. VIX (RHS)
12%
8%
3%
4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Stimulus list S&P 500 ex-stimulus list
Pe
rform
ance
bre
akd
ow
n: C
hg in
%
Chg in P/E Chg in EPS
15%
12%
= Total performance
Date Country Event
Oct-2016 Austria Presidential election (rerun)
Dec-2016 Italy Referendum on Constitutional reform
Mar-2017 Netherlands General parlimentary election
Apr-May 2017 France Presidential election
Aug-Oct 2017 Germany Federal election (Bundestag)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Yiel
d, (
%)
G-7 10-year yield (USD nominal GDP-weighted)
14
89.1
0
10
20
30
40
50
60
70
80
90
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
US
D T
In the U.S., better finances among households should help support economic growth.
Households’ debt service ratios are at historic lows*
Household net worth has increased to new highs**
Falling delinquencies in loans support the strong consumer backdrop
Source: GWIM Chief Investment Office; Federal Reserve; Bloomberg; Census Bureau. Data updated September 27, 2016. *The household debt service ratio is the ratio of total required household debt payments to total disposable income. The financial obligations ratio is the ratio of mortgage payments, credit cards, property tax, lease payments, homeowner’s insurance and rental payments to total disposable income. **Household net worth is the value of all assets less all liabilities for households and nonprofit organizations, including hedge funds, private equity funds and personal trusts.
MA
CR
O
The housing market has picked up but remains well below pre-crisis highs
9.0
9.5
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
%%
Financial Obligations Ratio (lhs)Debt Service Ratio (rhs)
0
2
4
6
8
10
12
14
Jan-
06
Oct
-06
Jul-0
7
Apr
-08
Jan-
09
Oct
-09
Jul-1
0
Apr
-11
Jan-
12
Oct
-12
Jul-1
3
Apr
-14
Jan-
15
Oct
-15
Jul-1
6
% o
f tot
al b
alan
ce 9
0+ d
ays
delin
quen
t Mortgage Credit card Student loan
0
2000
4000
6000
8000
10000
12000
14000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(000
s)
Building permits Housing startsPending home sales Existing home salesNew home sales
15
Inflation expectations are low, but firming inflation is raising expectations for a hike in December.
Consumers are expecting lower future inflation. Market-based inflation expectations remain below the Fed’s target.
MA
CR
O
But, headline measures of inflation have trended higher, while core inflation has been at or slightly below target, depending on the indicator.
Market expectations of a December rate hike have increased since mid-year.
Source: GWIM Chief Investment Office; BofAML Global Research; Bloomberg; Federal Reserve. The economic and market forecasts presented are for informational purposes as of the date of this report. Data updated September 27, 2016. Past performance is no guarantee of future results.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Exp
ect
ed
infla
tion
, (%
)
US 10-year breakeven rate US 5-year breakeven rate
2.2
2.4
2.6
2.8
3.0
3.2
3.4
Au
g-0
3
Ma
y-0
4
Feb
-05
No
v-05
Au
g-0
6
Ma
y-0
7
Feb
-08
No
v-08
Au
g-0
9
Ma
y-1
0
Feb
-11
No
v-11
Au
g-1
2
Ma
y-1
3
Feb
-14
No
v-14
Au
g-1
5
Ma
y-1
6
6-m
on
th r
olli
ng
ave
rag
e,
(%)
University of Michigan 5-year inflation expectations
-2
-1
0
1
2
3
4
5
6
Mar
-05
Dec
-05
Sep
-06
Jun-
07
Mar
-08
Dec
-08
Sep
-09
Jun-
10
Mar
-11
Dec
-11
Sep
-12
Jun-
13
Mar
-14
Dec
-14
Sep
-15
Jun-
16
YoY,
(%
)
CPI Core CPI PCE Core PCE
0
10
20
30
40
50
60
70
80
90
100
5-Ju
l
12-J
ul
19-J
ul
26-J
ul
2-Au
g
9-Au
g
16-A
ug
23-A
ug
30-A
ug
6-Se
p
13-S
ep
20-S
ep
27-S
ep
Prob
abilit
y (%
)
No rate hike Rate hike
16
MA
CR
O
Improvement of US labor market is ongoing, but structural shifts may drag on performance.
In addition to retiring baby boomers, we’ve also seen the loss of manufacturing jobs due to high labor costs and automation.
Job openings at record highs suggest there’s plenty of demand. But the labor participation rate has been steadily falling since 1999.
62.0
62.6
63.2
63.8
64.4
65.0
65.6
66.2
66.8
67.4
68.0
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
(%)
Labor force participation rate Average
Average: 65.7%
Baby boomers and womenjoin labor force en masse.
Youth returning to school and Boomers retiring. Longer life-spans and fewer births are also effects.
-100
-50
0
50
100
150
200
250
300
350
400
20
10
20
11
20
12
20
13
20
14
20
15
20
16
(00
0s)
Private payrolls MoM change 6-month average
The result is developing drag in job growth: The six-month average of monthly private job creation is approaching lows of recovery and expansion.
-10
-5
0
5
10
15
20
25
30
35
40
45
1992
1993
1994
1996
1997
1998
2000
2001
2002
2004
2005
2006
2008
2009
2010
2012
2013
2014
2016
Cum
ulat
ive g
ains
/loss
es, (
milli
ons)
Manufacturing Services
Source: GWIM Chief Investment Office. Bureau of Labor Statistics. Data updated September 27, 2016. Past performance is no guarantee of future results.
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
Dec
-04
Jul-0
5
Feb-
06
Sep
-06
Apr
-07
Nov
-07
Jun-
08
Jan-
09
Aug
-09
Mar
-10
Oct
-10
May
-11
Dec
-11
Jul-1
2
Feb-
13
Sep
-13
Apr
-14
Nov
-14
Jun-
15
Jan-
16
Aug
-16
(000
s)
Job Openings and Labor Turnover Survey (JOLTS) - private job openings
17
US equity returns may be lower on stretched valuations, though earnings growth may recover.
…while sales growth has fallen amid a global growth slowdown
And S&P 500 EPS is expected to resume an uptrend in 2017
U.S equity valuations appear stretched versus history…
EQ
UIT
IES
However, U.S. profit margins remain robust
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Data updated September 27, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
0
1
2
3
4
5
6
7
8
9
10
U.S. Europe Japan EM
Pro
fit m
arg
in,
(%)
Current 10-yr Average
-15
-10
-5
0
5
10
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Sep-
12
Mar
-13
Sep-
13
Mar
-14
Sep-
14
Mar
-15
Sep-
15
Mar
-16
YoY,
(%
)
S&P 500 TTM Sales per share growth
10
12
14
16
18
20
22
24
26
28
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
P/E
ratio
10-year average: 16.8x
0
20
40
60
80
100
120
140
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
US
D
$117
BofAML Forecast
$125
18
0.0
1.5
1.9
5.7
5.9
7.8
8.7
10.2
10.9
15.4
17.6
0 5 10 15 20
Financials
Heath Care
Consumer Discretionary
Consumer Staples
S&P 500
Industrials
Materials
Technology
Energy
Telecom
Utilities
YTD returns (%)
In an uncertain environment, high quality, large-cap dividend growers should be a focus.
Dividend payers have been winners thus far...
Health Care has taken off since the U.S. Affordable Care ActEQ
UIT
IES
Defensive companies are outperforming cyclical ones.
… and have been outperforming companies focused on stock buybacks.
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Data updated on September 23, 2016. Past performance is no guarantee of future results.
80
85
90
95
100
105
110
115
120
De
c-1
4
Jan
-15
Fe
b-1
5
Mar
-15
Ap
r-15
May
-15
Jun
-15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct
-15
No
v-1
5
De
c-1
5
Jan
-16
Fe
b-1
6
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Au
g-1
6
Ind
exe
d a
t 10
0 (o
n D
ec.
31
, 20
14
)
NASDAQ Buyback AchieversS&P 500 Buyback IndexS&P 500 Dividend Aristocrats
90
100
110
120
130
140
150
160
170
180
Feb-
13
May
-13
Aug
-13
Nov
-13
Feb-
14
May
-14
Aug
-14
Nov
-14
Feb-
15
May
-15
Aug
-15
Nov
-15
Feb-
16
May
-16
Aug
-16
Inde
xed
at 1
00 (o
n F
eb. 1
, 201
3)
FTSE USA Cyclical Index FTSE USA Defensive Index
50
70
90
110
130
150
170
190
210
230
250
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Inde
xed
at 1
00 (o
n Ja
n. 6
, 200
6)
S&P 500 S&P 500 - Health Care
19
International Developed Markets: Negative interest ratepolicy (NIRP) has been ineffective so far.
Negative rates have hit financials, potentially squeezing profit margins. Japan (right) has recently engaged in “yield curve control” to alleviate this.
While the European Central Bank buys assets, markets haven’t responded...
EQ
UIT
IES
… furthermore, inflation remains below targets.
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Data updated on September 27, 2016. Past performance is no guarantee of future results.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Dec
-13
Feb-
14
Apr-1
4
Jun-
14
Aug-
14
Oct
-14
Dec
-14
Feb-
15
Apr-1
5
Jun-
15
Aug-
15
Oct
-15
Dec
-15
Feb-
16
Apr-1
6
Jun-
16
Aug-
16
YoY,
(%
)
Japan CPI Eurozone CPI
Both central banks have been unable to move inflation to 2%.
60
70
80
90
100
110
120
130
140
150
30-J
un-1
5
31-J
ul-1
5
31-A
ug-1
5
30-S
ep-1
5
31-O
ct-1
5
30-N
ov-1
5
31-D
ec-1
5
31-J
an-1
6
29-F
eb-1
6
31-M
ar-1
6
30-A
pr-1
6
31-M
ay-1
6
30-J
un-1
6
31-J
ul-1
6
31-A
ug-1
6
Inde
xed
at 1
00 (o
n Ja
n. 2
9, 2
016)
Japan - TOPIX Japan - TOPIX Banks Index
Bank of Japan (BoJ) instituted NIRP on January 29, 2016. Since then Banks have underperformed.
On September 21, 2016, the BoJ engaged in "yield curve control" to help expand their profit margins.
0
20
40
60
80
100
120
140
31-D
ec-1
2
31-M
ar-1
3
30-J
un-1
3
30-S
ep-1
3
31-D
ec-1
3
31-M
ar-1
4
30-J
un-1
4
30-S
ep-1
4
31-D
ec-1
4
31-M
ar-1
5
30-J
un-1
5
30-S
ep-1
5
31-D
ec-1
5
31-M
ar-1
6
30-J
un-1
6
Inde
xed
at 1
00 (o
n Ju
n 11
, 201
4)
EuroStoxx 50 Index EuroStoxx 50 Banks
European Central Bank instituted NIRP on June 11, 2014. Since then Banks have steadily underperformed.
80
90
100
110
120
130
140
150
160
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep-
14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep-
15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Inde
xed
at 1
00 (o
n Ja
n. 3
, 201
4)
ECB Balance Sheet assets MSCI Europe Index
20
Valuations for Emerging Markets are cheap, while commodityprices have rebounded. But, China’s transition could again rock the boat.
Emerging Markets look attractive in terms of valuations.
EQ
UIT
IES
However, China’s transition remains fragile… …which can be seen in renewed weakening of the yuan.
Additionally, currencies have weakened, making them more competitive.
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Top left data as of August 31, 2016. All other charts: Data updated on September 27, 2016. Past performance is no guarantee of future results.
-14.6
-0.7
1.7 2.0 2.0
22.5
-20
-15
-10
-5
0
5
10
15
20
25
30
MexicanPeso
IndianRupee
SouthAfricanRand
RussianRuble Turkish Lira
BrazilianReal
(%)
12M Performance vs. the US Dollar
0
5
10
15
20
25
30
35
40
45
50
55
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YoY,
(%)
Retail sales Fixed asset investment
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
U.S. Europe Japan EM
Pric
e to
Bo
ok
ratio
Current 10-yr Average
6.2
6.3
6.4
6.5
6.6
6.7
6.8
Sep-
15
Oct
-15
Nov
-15
Dec
-15
Jan-
16
Feb-
16
Mar
-16
Apr-1
6
May
-16
Jun-
16
Jul-1
6
Aug-
16
Yuan
per
USD
21
Bond market volatility is likely to pick up on liquidityconcerns and uncertainty around timing of policy rate changes
FIX
ED
IN
CO
ME
…couple this with growth of the credit market and falling dealer inventories and you have conditions for diminished liquidity and more volatility.
Bond yields globally are expected to remain lower for longer
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Federal Reserve. Left and right chart data as of 2Q 2016. Bottom chart updated on September 23, 2016. Past performance is no guarantee of future results.
Funds have become a larger portion of the market for corporate bonds…
200
300
400
500
600
700
800
900
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Billio
ns, U
SD
Billio
ns, U
SD
Credit Market Debt Outstanding Dealer Inventory (RHS)
0
2
4
6
8
10
12
14
16
18
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
% o
f tot
al m
arke
t
Corporate Bonds held in: MF, ETFs & Closed End Funds
-1
0
1
2
3
4
5
6
7
8
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Yield
, (%)
U.S. U.K Canada Sweden France Germany Japan Switzerland Italy Spain
U.S.
22
Municipals look attractive for taxable investors, while selective higher-quality opportunities exist in corporate bonds
Muni yields look attractive relative to Treasuries given healthy state finances Investment Grade spreads are trading near recession-like levels
FIX
ED
IN
CO
ME
U.S. High Yield default rates are driven by commodity-related sectors
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. MPI. Top left chart data: as of 2Q2015; Rest of data as of June 30, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
Municipals and investment grade have traditionally been good diversifiers.
-55
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
Jun-90 toOct-90
Jul-98 toAug-98
Sep-00 toSep-02
Nov-07 toFeb-09
May-11 toSep-11
Perc
ent C
hang
e
S&P 500 Index Drawdown ML Municipal Index Total Return U.S. Investment Grade
0
500
1000
1500
2000
2500
0
100
200
300
400
500
600
700
Dec
-99
Oct
-00
Jul-0
1A
pr-0
2Ja
n-03
Oct
-03
Aug
-04
May
-05
Feb-
06N
ov-0
6A
ug-0
7Ju
n-08
Mar
-09
Dec
-09
Sep
-10
Jul-1
1A
pr-1
2Ja
n-13
Oct
-13
Jul-1
4M
ay-1
5Fe
b-16
Opt
ion
Adj
uste
d S
prea
d
Opt
ion
Adj
uste
d S
prea
d
Recession periods
Investment Grade (lhs)
High Yield (rhs)
-30
-20
-10
0
10
20
30
Mar
-01
Feb-
02
Jan-
03
Dec
-03
Nov
-04
Oct
-05
Sep
-06
Aug
-07
Jul-0
8
Jun-
09
May
-10
Apr
-11
Mar
-12
Feb-
13
Jan-
14
Dec
-14
Nov
-15
YoY,
(%
)
Total State Tax RevenuePersonal Income TaxSales Tax Revenue
0
5
10
15
20
25
30
1999
2001
2003
2005
2007
2009
2011
2013
2015
LTM
Issu
er D
efau
lt R
ate,
Pct
BofA-ML US HY Default Rate Energy
23
Commodity prices have stabilized on signs of reduced oversupply and stability in Emerging Markets.
OPEC is the main contributor to oil supply growth
ALT
ER
NA
TIV
E I
NV
ES
TM
EN
TS
Stabilization in China has helped commodities and other risk assets.
Oil prices remain pressured from supply/demand imbalances MLPs face higher costs driven by increased risk of low commodity prices
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Data updated on September 28, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
88
90
92
94
96
98
100
102
104
106
-80
-60
-40
-20
0
20
40
60
80
Apr-0
3
Mar
-04
Feb-
05
Jan-
06
Dec-0
6
Nov-0
7
Oct-0
8
Sep-
09
Aug-
10
Jul-1
1
Jun-
12
May
-13
Apr-1
4
Mar
-15
Feb-
16
Index
Rollin
g 12
-mon
th re
turn,
(%)
MSCI ACWI (lhs)
Commodities (lhs)
China Coincident Index (rhs)
4
5
6
7
8
9
10
11
12
Mar
-10
Aug-
10
Jan-
11
Jun-
11
Nov
-11
Apr-1
2
Sep-
12
Feb-
13
Jul-1
3
Dec
-13
May
-14
Oct
-14
Mar
-15
Aug-
15
Jan-
16
Jun-
16
%
Alerian MLP Index - Equity Cost of Capital
40
50
60
70
80
90
100
110
120
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
F
2017
F
US
D p
er b
arre
l (en
d of
per
iod)
Thou
sand
s of
bar
rels
per
day
global deficit (supply-demand) WTI crude oil price (rhs)
BofAMLf'casts
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
Milli
ons
of b
arre
ls pe
r day
OPEC crude supply (rhs) non-OPEC oil supply total world oil supply
Global oil supply growth:(Year-over-year)
BofAML f'casts
24
0
1
2
3
4
5
6
Jun-
84
Jun-
88
Jun-
92
Jun-
96
Jun-
00
Jun-
04
Jun-
08
Jun-
12
Jun-
16
#sigma move across G102008 Financial Crisis Brexit
Currency volatility may persist on heightened political and geopolitical risks disrupting a fragile global economy.
Emerging Market currencies have been tethered to China’s economic performance.
ALT
ER
NA
TIV
E I
NV
ES
TM
EN
TS
Brexit resulted in the most volatile currency markets in modern history.
Volatility and uncertainty have driven more interest in gold. During times of turmoil, gold has served as a good hedge.
-60%
-40%
-20%
0%
20%
40%
1/5/73 - 10/4/74 8/21/87 - 12/4/87 3/24/00 - 10/4/02 10/12/07 - 3/6/09
Per
form
ance
S&P 500 Gold
Source: GWIM Chief Investment Office. BofAML Global Research. Bloomberg. Top left chart data as of June 24, 2016; Other charts updated on September 28, 2016. Past performance is no guarantee of future results.
600
800
1000
1200
1400
1600
1800
2000
4
5
6
7
8
9
10
11
12
13
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Aug
-14
Dec
-14
Apr
-15
Aug
-15
Dec
-15
Apr
-16
Aug
-16
US
D /
Troy
Oun
ce
Milli
ons
of T
roy
Oun
ces
Comex Gold inventory (lhs) Gold spot price (rhs)
86
88
90
92
94
96
98
100
102
104
106
40
50
60
70
80
90
100
110
120
Dec-
10
May
-11
Oct
-11
Mar
-12
Aug-
12
Jan-
13
Jun-
13
Nov-
13
Apr-1
4
Sep-
14
Feb-
15
Jul-1
5
Dec-
15
May
-16
Inde
x
USD
per s
hare
JPM Emerging Market Currency Index (lhs)
China Coincident Index (rhs)
Sta
ndar
d de
viat
ion
25
For qualified investors, Alternative Investments can provide diversification and may help lower volatility
Alternative Investments (AI) can complement portfolios by potentially lowering volatility and/or enhancing returns
Source: (Left) Bloomberg. Strategies represented by respective Credit Suisse indexes, and Cambridge Associates Private Equity Index. (Top right) S&P. Ares Capital Corporation. Data as of Jun 30, 2016. (Bottom right) Cambridge Associates. Bloomberg. with data as of December 31, 2015. Asset allocation does not assure a profit or protect against a loss in declining markets. Results shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and do not constitute a portfolio recommendation. They do not represent benchmarks or proxies for the return of any particular investable hedge fund product. Past performance is no guarantee of future results. The prerequisite for funds to be included in the components of the indices interjects a significant element of “survivor bias” into the reported levels of the indices, as generally only successful funds will continue to report results for the minimum time period required by the index. There can be no assurance that such funds will continue to be successful in the future. There is a “risk of ruin” in these strategies which has historically had a material effect on long-term performance but which is not reflected in performance volatility. From time to time, extremely low volatility alternative investments have incurred sudden and material losses. Alternative Investments are not appropriate for all investors based on factors such as risk tolerance and liquidity preferences. See appendix for more details.
Private credit looks to benefit on banks paring back exposure to complex credit markets
Long-term private equity returns have been superior to equities.Global Hedge Funds
Fixed Income
Arbitrage
Equity Market Neutral
Event-Driven
Global Macro
Managed Futures
S&P 500
Private Equity
4%
6%
8%
10%
12%
14%
16%
5% 7% 9% 11% 13% 15% 17%
Ann
ualiz
ed R
etur
n (1
995-
2015
)
Average Volatility (1995-2015)
ALT
ER
NA
TIV
E I
NV
ES
TM
EN
TS
-4
-2
0
2
4
6
8
10
12
14
16
18
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Annu
aliz
ed R
etur
n, (%
)
Trailing 10-year Returns
Cambridge Associates U.S. Private Equity Index S&P 500 TR Index
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q16 2Q16
Yiel
d, (%
)
12-month average yield of traded loans
Weighted average yield or originated senior term debt
26
$0
$100
$200
$300
$400
$500
$600
$700
$800
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Buy
out D
eal V
olum
e ($
Bill
ions
)
Average
Private equity firms are cash-rich and deal volume is improving, but manager selection is important
Global buyout deal volume continues to slowly increase
Source: (Bottom) Golding Capital Partners, HEC (Private Equity Study: Finding Alpha 2.0). *Alpha calculated as excess return of a private equity investment relative to a comparable investment in shares, adjusted for size, leverage and timing. Data as of November 7, 2011. (Top Right) Bain 2014 Global Private Equity Report. Data as of March 2015. (Top left): Preqin. Data as of June 30, 2016. Past performance is no guarantee of future results.
Global private equity firms have high levels of undeployed cash.
Alpha* across private equity managers has been historically wide
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Bottom 5% Bottom 10% Bottom 25% Bottom 50% Top 50% Top 25% Top 10% Top 5%
Exc
ess
Ret
urn
Private Equity Alpha according to Fund Manager
Reported alpha* for fund managers, weighted by investment volume (minimum 10 realized transactions)
ALT
ER
NA
TIV
E I
NV
ES
TM
EN
TS
0
100
200
300
400
500
600
700
800
900
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H2016
USD
billi
ons
Buyout Venture Capital Growth Other
27
A T
RA
NS
FO
RM
ING
WO
RLD
Cyclical and secular trends are transforming our world at a fast and meaningful pace. We’ve developed a framework to help you understand the new investment landscape through a lens of five investment themes:
Source: BofAML Global Research, GWIM Chief Investment Office.
A Transforming World: Five Macro Themes
28
The Hunt for Yield
• Given the current low-rate environment, certain sources of income have become quite expensive and may not yield enough to meet spending needs. However, by drawing income from many sources at a sustainable rate and in a tax-efficient way, investors may be able to meet their goals while balancing risks.
• By adopting a total return approach, investors can optimize their spending rate from a portfolio across market cycles to align cheap and expensive investments to their goals.
• Investors should consider multiple sources of portfolio income: bond coupons, stock dividends, financial strategies and capital growth.
Longevity and Aging Demographics
• The global population is aging, driven by increased life expectancy and lower birth rates.
• Companies are repositioning strategies to cater to this growing demographic.
• Potential beneficiaries include retail pharmacies and drug stores, home improvement, long-term care services, senior housing and health care properties and insurance companies.
Disruptive Technology
• Robotics is an area that is rapidly changing industries such as manufacturing and health care. In the past 10 years, the number of global industrial robots has grown 72%, while the number of U.S. manufacturing jobs has fallen 16%, according to BofAML Global Research.
• Crime in the form of cyberattacks and data breaches is on the rise globally. Costs to companies of attacks and investment in cybersecurity are large and expected to grow.
• Within Disruptive Technologies, we see attractive growth potential in companies with innovative, low-cost, secure and disruptive products.
A T
RA
NS
FO
RM
ING
WO
RLD
Robots are taking over manufacturing
The global population aged 50 and older is expected to rise
Source: (Top) BofAML Global Research, Bloomberg. * International Federation of Robots Forecasts. (Bottom) BofAML Global Research estimates. U.S. Census Bureau. Data as of December 2015. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved. Past performance is no guarantee of future results.
18%20%
29%
34%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000 2009 2030 2050
% o
f Glo
bal P
opul
atio
n A
ge 5
0+
U.S. Census Forecast
0.0
0.5
1.0
1.5
2.0
2.5
10
11
12
13
14
15
16
17
18
19
20
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
Mill
ions
Mill
ions
Global Industrial Robots (RHS)2015-2018 estimatesUS Manufacturing Jobs (LHS)
29Source: (Left, Bottom Right) Bloomberg. Data as of June 30, 2015. (Top Right) BofAML Global Research. Data as of July 3, 2015. *Current dividend yield measured from trailing 12-month dividends. Past performance is no guarantee of future results.
The hunt for yield has pushed investors out on the risk curve
Negative-yielding government debt is becoming its own asset class
10
12
14
16
18
20
Tril
lion
Eur
os
Positive and Negative-Yielding Government Debt
Positive Negative
Declining bond yields have pushed investors to take on more risk
Intl Govt Bonds
U.S. Treasuries
S&P 500
U.S. Investment
Grade Credit
European Equities
Global REITs
EM Sovereign Debt (USD)
MLPsU.S. High
Yield
0%
1%
2%
3%
4%
5%
6%
7%
0% 20% 40% 60% 80%
Cur
rent
Yie
ld*
10yr Maximum Drawdown
More Risk
Hig
herY
ield
Equity sectors vary greatly based on dividend growth and yield
A T
RA
NS
FO
RM
ING
WO
RLD
S&P 500
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Technology
MaterialsTelecomUtilities
0%
5%
10%
15%
20%
25%
30%
1% 2% 3% 4% 5% 6%
3yr A
nnua
lized
Div
iden
d G
row
th
Dividend Yield
30
The Longevity Revolution: an aging global population should create opportunities in health care, travel and financials.
The Elderly-Dependency Ratio is forecast to rise globally…
Source: (Top left) United Nations. Data as of December 31, 2015. (Top right and bottom left) United Nations. BofAML Global Research report published May 9, 2016 respectively. (Bottom Right) AgeWave. Data as of May 2013. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved.
Consumer spending habits shift with age
0%
2%
4%
6%
8%
10%
12%
14%
25 years to 34years
35 years to 44years
45 years to 54years
55 years to 64years
65 years andover
% o
f Tot
al E
xpen
ditu
res
Apparel and services Health careEntertainment Personal care products and servicesInsurance
A T
RA
NS
FO
RM
ING
WO
RLD
Rise of global elderly (60+) population to come from developing regions
…with children making up less of the global population.
0%
10%
20%
30%
40%
50%
60%
70%
80%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Age
s 65
+ a
s %
of O
vera
ll P
opul
atio
n
China Euro area Japan United States World
United Nations Forecast
0
2
4
6
8
10
12
14
16
18
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Per
cent
of g
loba
l pop
ulat
ion
under 5 age 65+
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Less developed regions More developed regions
31
10
9
9
8
8
77
6
36
Medical
MapReduce
Natural Language Processing
Ads
Enterprise Resource Planning
Robotics
Shopping
Computer Vision
Others
Figures in %
32
24
15
8
5
5
38
Voice recognition
Machine learning
Vitual personal assistants
Decision support systems
Automated written reporting orcommunicationsAnalytics-focused applications
Robotics
All of the above
Figures in %
Source: (Top Left) Boston Consulting Group. Published November 2015 on BofAML Global Research. (Bottom Left) Narrative Science. Published November 2015 on BofAML Global Research. (Top Right): IBM. Published September 2015 on BofAML Global Research. (Bottom Right) Capital IQ. Quid. Iftf. Published November 2015 on BofAML Global Research. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved.
Medical applications have seen the most investment within a broad arrayUse of Artificial Intelligence is focused on voice recognition, machine learning and virtual personal assistants.
A T
RA
NS
FO
RM
ING
WO
RLD
Disruptive technologies are creating new growth opportunities
Cybersecurity is urgently needed to plug many holes.Robots for personal use forecast to grow quickly
17.4
12.3
7.6
8.1
0
10
20
30
40
50
60
70
80
2000 2005 2010 2015 2020 2025 CAGR(2000-2025)
US
D B
lns
Personal Commercial Industrial Military
7.4
66.9
42.9
26.9
15.1
10.8
9.2
Figures in U.S. billions CAGR figures below in (%)
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
2012 2013 2014
Mill
ion
s
Total records leaked by year
25% higher than 2013
populationof India
populationof the EU
populationof the US
More than trebled vs. 2012
populationof China
32
Source: (Top and bottom left) International Energy Agency. BofAML Global Research approximations. “A Call to Action: Climate Change Solutions Primer. November, 2015. (Bottom Right) Global Wind Energy Council, REN21, “Renewables 2016 Global Status Report” on June, 2016. The economic and market forecasts presented are for informational purposes as of the date of this report. There can be no assurance that the forecasts will be achieved.
… similar to the trend in global wind capacity. Incremental demand for solar power is projected to grow steadily…
A T
RA
NS
FO
RM
ING
WO
RLD
Alternative energy: shift to renewables led by solar and wind
The world’s energy generation mix is predicted to continue shifting to renewables, led by solar and wind.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2011
2012
2013
2014
E
2015
E
2016
E
2017
E
2018
E
Meg
awat
ts
Other China USA Japan
0
50
100
150
200
250
300
350
400
450
500
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
Gig
aw
atts
Global cumulative installed wind capacity
Fossil67%
Hydro19%
Nuclear9%
Wind1%
Solar0%
Other4%
2003
Fossil61%
Hydro17%
Nuclear6%
Wind6%
Solar3%
Other7%
2014
Fossil38%
Hydro16%
Nuclear5%
Wind18%
Solar20%
Other3%
2030
Life’s better when we’re connected®
Appendix
34
Strategic and Tactical Asset Allocation
Source: BofAML Global Research Investment Committee (RIC) Report: “The three “E”’s, GWIM Chief Investment Office. Data as of September 13, 2016.
AP
PE
ND
IX
Strategic RIC Strategic RIC Strategic RIC Strategic RIC Strategic RIC
Stocks 20% 21% 40% 41% 60% 62% 70% 73% 80% 82%
Bonds 55% 54% 50% 48% 35% 32% 25% 21% 15% 13%
Cash (USD) 25% 25% 10% 11% 5% 6% 5% 6% 5% 5%
Moderately Aggressive Aggressive Moderately Conservative Conservative Moderate
Sector Allocations and Research Investment Committee (RIC) 12-month Tactical Asset Allocation for Tier 0 Investors (highest liquidity)
Strategic RIC
Stocks 60% 62%
Lg. Cap Growth 23% 21%
Lg. Cap Value 23% 25%
Small Growth 2% 1%
Small Value 2% 2%
Intl: Developed 8% 10%
Intl: Emerging 2% 3%
Bonds 35% 32%
Tsy, CDs, &GSEs 13% 12%
Mortgage Backed 9% 6%
IG Corp & Preferred 9% 9%
High Yield 2% 1%
International 2% 4%
Cash 5% 6%
Sector Allocations for a moderate U.S. Tier 0 Investor (highest liquidity)
Strategic RIC
Global Equities 60% 62%
North America 28% 28%
Europe (ex U.K) 11% 11%
UK 5% 4%
Japan 5% 6%
Pacific Rim (ex Japan) 3% 4%
Emerging Markets 8% 9%
Global Fixed Income 38% 33%
Government Bonds 24% 19%
Inv. Grade Credit 6% 7%
High Yield Credit 1% 0%
Collateralized Debt 7% 7%
Cash (USD) 2% 5%
Sector Allocations for a moderate global Tier 0 Investor (highest liquidity)
35
GWIM Current Capital Market Return Assumptions
Source: ML CIO Investment Analytics. *(55%) FTSE-NAREIT Global TR; (35%) DJUBS TR Index; (10%) ML US Treasury Inflation Linked TR Please note that the foregoing expected returns and volatility are based on GWM’s assumptions only and there is no guarantee that these projections will prove accurate. Of course, wide variations in this expected performance is possible over the course of the 20-30-year time horizon. Data as of December 31, 2015. Past performance is no guarantee of future results.
Asset Class Index ProxiesAnnualized
Expected Return
AnnualizedExpected Volatility U
.S. L
arge
Cap
Gro
wth
U.S
. Lar
ge C
ap V
alu
e
U.S
. Sm
all C
ap G
row
th
U.S
. Sm
all C
ap V
alu
e
Inte
rnat
ion
al E
qu
ity
Emer
gin
g M
arke
ts
Taxa
ble
FI S
ho
rt T
erm
(1-
3 Y
ear)
Taxa
ble
FI I
nt.
Ter
m (3
-10
Ye
ar)
Taxa
ble
FI L
on
g Te
rm
(10
+)
Hig
h Y
ield
Inte
rnat
ion
al F
ixed
In
com
e
Cas
h/N
ear
Cas
h
Hed
ge F
un
ds
Pri
vate
Eq
uit
y
Rea
l Ass
ets
U.S. Large Cap Growth Russell 1000 Growth TR 9.9% 20.5% 1.00 0.84 0.83 0.71 0.58 0.59 0.10 0.10 0.15 0.51 0.14 -0.01 0.41 0.48 0.45
U.S. Large Cap Value Russell 1000 Value TR 9.2% 16.5% 0.84 1.00 0.70 0.81 0.59 0.60 0.14 0.15 0.19 0.55 0.16 0.00 0.41 0.44 0.56
U.S. Small Cap Growth Russell 2000 Growth TR 11.5% 28.8% 0.83 0.70 1.00 0.87 0.52 0.62 0.00 -0.01 0.04 0.49 0.06 -0.04 0.46 0.55 0.48
U.S. Small Cap Value Russell 2000 Value TR 9.8% 20.4% 0.71 0.81 0.87 1.00 0.51 0.61 0.06 0.05 0.09 0.56 0.06 -0.03 0.44 0.51 0.57
International Equity MSCI Daily TR Net EAFE USD* 10.0% 21.2% 0.58 0.59 0.52 0.51 1.00 0.59 0.07 0.06 0.09 0.45 0.45 -0.03 0.46 0.60 0.66
Emerging Markets MSCI Daily TR Net EM USD* 12.2% 31.5% 0.59 0.60 0.62 0.61 0.59 1.00 -0.01 -0.04 0.01 0.48 0.10 -0.03 0.58 0.43 0.62
Taxable FI Short Term (1-3 Year)
ML U.S. Treasuries TR 1-3yr 4.2% 3.6% 0.10 0.14 0.00 0.06 0.07 -0.01 1.00 0.91 0.76 0.35 0.50 0.33 0.19 -0.25 0.20
Taxable FI Int. Term (3-10 Year)
ML U.S. Treasuries TR 3-10yr 5.3% 6.1% 0.10 0.15 -0.01 0.05 0.06 -0.04 0.91 1.00 0.92 0.33 0.55 0.14 0.18 -0.26 0.21
Taxable FI Long Term (10+) ML U.S. Treasuries TR 10yr+ 5.6% 12.2% 0.15 0.19 0.04 0.09 0.09 0.01 0.76 0.92 1.00 0.36 0.50 0.06 0.19 -0.22 0.20
High YieldML High Yield Master (Cash Pay) TR
6.9% 10.4% 0.51 0.55 0.49 0.56 0.45 0.48 0.35 0.33 0.36 1.00 0.29 -0.06 0.41 0.28 0.56
International Fixed IncomeML Global Broad Market TR ex USD
5.0% 11.3% 0.14 0.16 0.06 0.06 0.45 0.10 0.50 0.55 0.50 0.29 1.00 -0.10 0.06 0.05 0.42
Cash/Near Cash Ibbotson’s 30–Day T-Bill TR Index 3.0% 0.9% -0.01 0.00 -0.04 -0.03 -0.03 -0.03 0.33 0.14 0.06 -0.06 -0.10 1.00 0.13 -0.06 -0.09
Hedge Funds CS-Tremont Hedge Funds 7.2% 9.7% 0.41 0.41 0.46 0.44 0.46 0.58 0.19 0.18 0.19 0.41 0.06 0.13 1.00 0.38 0.51
Private Equity LPX 50 (USD) TR 11.0% 23.0% 0.48 0.44 0.55 0.51 0.60 0.43 -0.25 -0.26 -0.22 0.28 0.05 -0.06 0.38 1.00 0.56
Real Assets Real Assets Composite* 6.2% 14.1% 0.45 0.56 0.48 0.57 0.66 0.62 0.20 0.21 0.20 0.56 0.42 -0.09 0.51 0.56 1.00
AP
PE
ND
IX
36
Source: Bloomberg. Cash, Commodities, Gold, Hedge Funds, Reits, U.S. Fixed Income, and U.S. Treasuries represented by the BofAML 3-Month Treasury Bills Index, DJUBS Commodity Total Return Index, GOLDS Index, HFRX Global Hedge Fund Index, UNGL Index, BofAML Broad Market Bond Index, and BofAML Treasury Master Index, respectively. Moderate Portfolio represents GWM Strategic Asset Allocation for Tier 0 (Highest Liquidity) Moderate Global Investor. Data as of December 31, 2015. Past performance is no guarantee of future results. Results shown are based on an index and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Indexes are unmanaged. Direct investment cannot be made in an index. Diversification does not ensure a profit or protect against a loss in declining markets.
Historical Asset Class Performance
AP
PE
ND
IX
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Commodities 31.8%
US Fixed Inc 8.3%
Commodities 25.9%
MSCI EM 56.3%
REITS 32.0%
MSCI EM 34.5%
REITS 37.5%
MSCI EM 39.8%
US Treasuries
14.0%
MSCI EM 79.0%
Gold 29.2%
US Treasuries
9.8%
REITS 23.8%
S&P 500 32.4%
S&P 500 13.7%
S&P 500 1.4%
US Treasuries
13.4%
US Treasuries
6.7%
Gold 25.6%
MSCI EAFE 39.2%
MSCI EM 26.0%
Commodities 21.4%
MSCI EM 32.6%
Gold 31.9%
US Fixed Inc 4.5%
MSCI EAFE 32.5%
MSCI EM 19.2%
Gold 8.9%
MSCI EM 18.6%
MSCI World 27.4%
REITS 11.7%
US Treasuries
0.8%
US Fixed Inc 11.7%
Cash 4.4%
US Treasuries
11.6%
MSCI World 33.8%
MSCI EAFE 20.7%
Gold 17.8%
MSCI EAFE 26.9%
Commodities 16.2%
Gold 4.3%
REITS 31.7%
Commodities 16.8%
US Fixed Inc 7.8%
MSCI EAFE 17.9%
MSCI EAFE 23.3%
US Fixed Inc 6.3%
US Fixed Inc 0.6%
REITS 8.5%
Hedge funds 2.8%
US Fixed Inc 10.3%
REITS 33.5%
MSCI World 15.2%
MSCI EAFE 14.0%
Gold 23.2%
MSCI EAFE 11.6%
Cash 2.1%
MSCI World 30.8%
REITS 15.9%
S&P 500 2.1%
MSCI World 16.5%
Moderate Portfolio
11.9%
US Treasuries
6.0%
Cash 0.1%
Cash 6.2%
Gold 0.7%
Cash 1.8%
S&P 500 28.7%
Moderate Portfolio
11.8%
REITS 10.7%
MSCI World 20.7%
Moderate Portfolio
10.9%
Hedge funds -20.9%
S&P 500 26.5%
S&P 500 15.1%
Cash 0.1%
S&P 500 16.0%
Hedge funds 9.0%
MSCI World 5.5%
MSCI EAFE -0.8%
Hedge funds 2.5%
MSCI EM -2.4%
Hedge funds 1.2%
Commodities 23.9%
S&P 500 10.9%
MSCI World 10.0%
S&P 500 15.8%
Hedge funds 9.7%
Moderate Portfolio -25.4%
Gold 25.0%
MSCI World 12.3%
Moderate Portfolio
-0.9%
Moderate Portfolio
11.0%
REITS 0.7%
Moderate Portfolio
4.3%
MSCI World -0.9%
Moderate Portfolio
-4.3%
Moderate Portfolio
-5.4%
REITS -2.4%
Moderate Portfolio
22.3%
Commodities 9.1%
Moderate Portfolio
9.1%
Moderate Portfolio
14.7%
MSCI World 9.6%
Commodities -35.6%
Moderate Portfolio
21.8%
Moderate Portfolio
11.0%
Hedge funds -5.0%
Gold 8.3%
Cash 0.1%
Hedge funds 3.4%
Moderate Portfolio
-1.6%
Gold -5.4%
REITS -7.8%
Moderate Portfolio
-5.8%
Gold 19.9%
Hedge funds 7.2%
Hedge funds 7.5%
Hedge funds 10.2%
US Treasuries
9.1%
S&P 500 -37.0%
Commodities 18.9%
MSCI EAFE 8.2%
MSCI World -5.0%
Hedge funds 4.8%
US Fixed Inc -2.2%
Gold 0.1%
REITS -3.4%
S&P 500 -9.1%
S&P 500 -11.9%
MSCI EM -6.0%
Hedge funds 11.4%
Gold 4.6%
S&P 500 4.9%
Cash 4.9%
US Fixed Inc 7.0%
MSCI World -40.3%
Hedge funds 11.5%
US Fixed Inc 6.8%
REITS -9.4%
US Fixed Inc 4.5%
MSCI EM -2.3%
Cash 0.0%
Hedge funds -3.5%
MSCI World -12.9%
MSCI World -16.5%
MSCI EAFE -15.7%
US Fixed Inc 4.1%
US Fixed Inc 4.3%
Cash 3.1%
US Fixed Inc 4.4%
S&P 500 5.5%
MSCI EAFE -43.1%
US Fixed Inc 6.1%
US Treasuries
5.9%
MSCI EAFE -11.7%
US Treasuries
2.2%
US Treasuries
-3.3%
MSCI EM -1.8%
Gold -10.4%
MSCI EAFE -14.0%
Commodities -19.5%
MSCI World -19.5%
US Treasuries
2.3%
US Treasuries
3.5%
US Treasuries
2.8%
US Treasuries
3.1%
Cash 5.0%
REITS -50.2%
Cash 0.2%
Hedge funds 5.5%
Commodities -13.3%
Cash 0.1%
Commodities -9.5%
MSCI EAFE -4.5%
MSCI EM -14.9%
MSCI EM -30.6%
MSCI EAFE -21.2%
S&P 500 -22.1%
Cash 1.1%
Cash 1.3%
US Fixed Inc 2.6%
Commodities 2.1%
REITS -10.0%
MSCI EM -53.2%
US Treasuries
-3.7%
Cash 0.1%
MSCI EM -18.2%
Commodities -1.1%
Gold -27.3%
Commodities -17.0%
Commodities
-24.7%
37
U.S. Equity Sector Performance (S&P 500)
Source: Bloomberg. U.S. equities represented by the S&P 500 Index. Returns calculated are total returns. Data as of September 30, 2016. Past performance is no guarantee of future results.
Q3 2016 2015
2014 2013
AP
PE
ND
IX
-21.1%
-8.4%
-4.8%
-2.5%
-1.5%
3.4%
5.9%
6.6%
6.9%
10.1%
-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Energy
Materials
Utilities
Industrials
Financials
Telecom
Technology
Consumer Staples
Health Care
Cons Disc
-7.8%
3.0%
6.9%
9.7%
9.8%
15.2%
16.0%
20.1%
25.3%
29.0%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Energy
Telecom
Materials
Cons Disc
Industrials
Financials
Consumer Staples
Technology
Health Care
Utilities
11.5%
13.2%
25.1%
25.6%
26.1%
28.4%
35.6%
40.7%
41.5%
43.1%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Telecom
Utilities
Energy
Materials
Consumer Staples
Technology
Financials
Industrials
Health Care
Cons Disc
-5.9%
-5.6%
-2.6%
0.9%
2.3%
2.9%
3.7%
4.1%
4.6%
12.9%
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
Utilities
Telecom
Consumer Staples
Health Care
Energy
Cons Disc
Materials
Industrials
Financials
Technology
38
Source: Bloomberg. U.S. equities represented by the S&P 500 Index. Returns calculated are total returns. Data as of December 31, 2015. Past performance is no guarantee of future results. Results shown are based on an index and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Indexes are unmanaged. Direct investment cannot be made in an index.
U.S. Equities: Historical Sector Performance
AP
PE
ND
IX
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Utilities57.2%
Materials3.5%
Cons Staples-4.3%
Technology47.2%
Energy31.5%
Energy31.4%
Telecom36.8%
Energy34.4%
Cons Staples-15.4%
Technology61.7%
Cons Disc27.7%
Utilities19.9%
Financials28.8%
Cons Disc43.1%
Utilities29.0%
Cons Disc10.1%
Heath Care37.1%
Cons Disc2.8%
Materials-5.5%
Materials38.2%
Utilities24.3%
Utilities16.8%
Energy24.2%
Materials22.5%
Heath Care-22.8%
Materials48.6%
Industrials26.7%
Cons Staples14.0%
Cons Disc23.9%
Heath Care41.5%
Heath Care25.3%
Health Care6.9%
Financials 25.7%
Industrials-5.7%
Energy-11.1%
Cons Disc37.4%
Telecom19.9%
Financials6.5%
Utilities21.0%
Utilities19.4%
Utilities-29.0%
Cons Disc41.3%
Materials22.2%
Heath Care12.7%
Telecom18.3%
Industrials40.7%
Technology20.1%
Cons Staples6.6%
Cons Staples 16.8%
Cons Staples-6.4%
Financials-14.6%
Industrials32.2%
Industrials18.0%
Heath Care6.5%
Financials19.2%
Technology16.3%
Telecom-30.5%
Industrials20.9%
Energy20.5%
Telecom6.3%
Heath Care17.9%
Financials35.6%
Cons Staples16.0%
Technology5.9%
Energy15.7%
Financials-9.0%
Heath Care-18.8%
Financials31.0%
Cons Disc13.2%
Materials4.4%
Cons Disc18.6%
Cons Staples14.2%
Cons Disc -33.5%
Heath Care19.7%
Telecom19.0%
Cons Disc6.1%
Industrials15.3%
Technology28.4%
Financials15.2%
Telecom3.4%
Industrials5.9%
Energy-10.4%
Cons Disc-23.8%
Utilities26.3%
Materials13.2%
Cons Staples3.6%
Materials18.6%
Industrials12.0%
Energy-34.9%
Financials17.2%
Cons Staples14.1%
Energy4.7%
Materials15.0%
Cons Staples26.1%
Industrials9.8%
Financials-1.5%
Materials-15.7%
Heath Care-11.9%
Industrials-26.3%
Energy25.6%
Financials10.9%
Industrials2.3%
Cons Staples14.4%
Telecom11.9%
Industrials-39.9%
Cons Staples14.9%
Financials12.1%
Technology2.4%
Technology14.8%
Materials25.6%
Cons Disc9.7%
Industrials-2.5%
Cons Disc-20.0%
Telecom-12.2%
Utilities-30.0
Heath Care15.1%
Cons Staples8.2%
Technology1.0%
Industrials13.3%
Heath Care7.2%
Technology-43.1%
Energy13.8%
Technology10.2%
Industrials-0.6%
Cons Staples10.8%
Energy25.1%
Materials6.9%
Utilities-4.8%
Telecom-38.8%
Technology-25.9%
Telecom-34.1%
Cons Staples11.6%
Technology2.6%
Telecom-5.6%
Technology8.4%
Cons Disc-13.2%
Materials-45.7%
Utilities11.9%
Utilities5.5%
Materials-9.8%
Energy4.6%
Utilities13.2%
Telecom3.0%
Materials-8.4%
Technology-40.9%
Utilities-30.4%
Technology-37.4%
Telecom7.1%
Heath Care1.7%
Cons Disc-6.4%
Heath Care7.5%
Financials-18.6%
Financials-55.3%
Telecom8.9%
Heath Care2.9%
Financials-17.1%
Utilities1.3%
Telecom11.5%
Energy-7.8%
Energy-21.1%
39
International Equity Sector Performance (MSCI ACWI ex U.S.)
Source: Bloomberg. Global equities represented by MSCI ACWI ex US. Returns calculated are total returns. Data as of September 30, 2016. Past performance is no guarantee of future results.
Q3 2016
2014
2015
2013
AP
PE
ND
IX
-24.9%
-22.0%
-12.0%
-11.0%
-7.3%
-5.4%
-3.2%
-3.0%
2.7%
3.9%
-30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
Energy
Materials
Utilities
Financials
Telecom
Industrials
Info Tech
Cons Disc
Cons Staples
Healthcare
-22.1%
-15.2%
-7.8%
-6.4%
-5.2%
-5.0%
-4.3%
0.1%
3.2%
4.9%
-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%
Energy
Materials
Industrials
Telecom
Financials
Cons Disc
Cons Staples
Utilities
Info Tech
Healthcare
-9.7%
0.2%
5.1%
10.0%
13.1%
18.1%
18.5%
23.3%
25.2%
26.8%
-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Materials
Energy
Utilities
Cons Staples
Financials
Info Tech
Industrials
Telecom
Healthcare
Cons Disc
-2.3%
-0.4%
-0.3%
0.9%
1.4%
7.8%
8.4%
10.0%
12.0%
15.0%
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Healthcare
Telecom
Utilities
Energy
Cons Staples
Industrials
Financials
Cons Disc
Materials
Info Tech
40
International Equities: Historical Sector Performance
Source: Bloomberg. Global equities represented by MSCI ACWI ex US. Returns calculated are total returns. Data as of December 31, 2015. Past performance is no guarantee of future results. Results shown are based on an index and are illustrative; they assume reinvestment of income and no transaction costs or taxes. Indexes are unmanaged. Direct investment cannot be made in an index.
AP
PE
ND
IX
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Heath Care
14.8%
Energy -4.9%
Materials 3.5%
Materials 52.7%
Utilities 32.0%
Energy 31.5%
Utilities 49.5%
Materials 40.9%
Heath Care
-18.6%
Materials 76.3%
Cons Disc 22.1%
Heath Care 5.7%
Financials 30.1%
Cons Disc 29.9%
Heath Care 7.8%
Health Care 3.9%
Cons Staples
3.8%
Materials -7.5%
Energy 0.8%
Industrials 50.0%
Energy 26.5%
Materials 27.4%
Materials 35.1%
Telecom 41.0%
Utilities -29.7%
Technology
51.4%Industrials
22.0%
Cons Staples
4.1%
Cons Disc 23.2%
Telecom 29.0%
Technology
5.0%
Cons Staples
2.7%
Financials -1.5%
Cons Staples -10.0%
Utilities -0.2%
Technology
49.5%Financials
25.8%Industrials
25.3%Telecom
33.0%Energy 32.3%
Cons Staples -31.2%
Energy 51.2%
Materials 21.9%
Telecom -0.9%
Cons Staples 19.5%
Heath Care
29.0%
Utilities 4.6%
Cons Disc -3.0%
Utilities -1.6%
Utilities -12.8%
Cons Staples -0.8%
Financials 48.9%
Industrials 22.9%
Financials 18.3%
Cons Staples 30.2%
Utilities 25.6%
Telecom -35.7%
Financials 48.6%
Cons Staples 16.0%
Energy -7.7%
Heath Care
18.8%
Industrials 21.4%
Cons Staples -1.4%
Technology
-3.2%
Energy -4.7%
Heath Care
-15.1%
Financials -12.6%
Telecom 40.4%
Materials 20.8%
Technology
13.9%Financials
29.8%
Cons Staples 24.4%
Cons Disc -46.0%
Cons Disc 45.4%
Technology
14.7%Cons Disc
-13.5%Technology
18.1%Technology
20.0%Financials
-1.7%Industrials
-5.4%
Industrials -11.3%
Cons Disc -17.2%
Heath Care
-14.4%
Cons Disc 39.1%
Telecom 20.6%
Heath Care
13.8%
Industrials 26.5%
Industrials 23.7%
Industrials -46.9%
Cons Staples 36.4%
Telecom 10.4%
Industrials -16.3%
Industrials 17.1%
Financials 17.3%
Telecom -2.7%
Telecom -7.3%
Materials -16.5%
Financials -21.9%
Cons Disc -14.8%
Utilities 35.4%
Cons Staples 19.3%
Utilities 13.7%
Cons Disc 23.9%
Technology
8.3%Energy -46.9%
Industrials 35.6%
Energy 6.7%
Utilities -16.5%
Materials 10.6%
Cons Staples 13.1%
Cons Disc -2.8%
Financials -11.0%
Cons Disc -23.7%
Industrials -24.0%
Industrials -17.8%
Energy 34.0%
Cons Disc 18.9%
Cons Disc 12.5%
Energy 20.3%
Cons Disc 6.2%
Technology
-47.9%
Heath Care
19.9%
Financials 4.5%
Technology
-17.8%Telecom
5.2%Utilities 10.3%
Industrials -5.6%
Utilities -12.0%
Technology
-37.6%Telecom -30.1%
Telecom -21.1%
Heath Care
28.9%
Heath Care
14.0%
Cons Staples 11.4%
Heath Care
17.0%
Financials 3.8%
Materials -52.6%
Telecom 19.4%
Heath Care 3.8%
Financials -19.4%
Utilities 4.7%
Energy 4.5%
Materials -12.8%
Materials -22.0%
Telecom -41.3%
Technology
-38.9%Technology
-22.5%
Cons Staples 24.7%
Technology
6.8%Telecom
-5.0%Technology
13.0%
Heath Care 2.6%
Financials -54.0%
Utilities 10.9%
Utilities -1.4%
Materials -23.9%
Energy 2.4%
Materials -7.2%
Energy -18.6%
Energy -24.9%
41
Fixed Income Returns
Source: Bloomberg, BofAML Global Research. All indexes represented by BofA Merrill Lynch Global Bond Indexes and calculated using total returns. Data as of September 30, 2016. Past performance is no guarantee of future results.
Q3 2016 2015
2014 2013
AP
PE
ND
IX
-4.6%
-3.8%
-1.7%
-0.6%
0.6%
0.6%
0.8%
1.5%
3.6%
4.9%
7.6%
-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
High Yield
Non-US IG
TIPS
Corporates
US Broad Market
Emerging Markets
Treasury
Mortgage
Municipal
IG Preferreds - Floating
IG Preferreds - Fixed
2.5%
3.1%
4.5%
6.0%
6.1%
6.3%
7.3%
7.5%
9.8%
13.5%
15.4%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
High Yield
Non-US IG
TIPS
Treasury
Mortgage
US Broad Market
Emerging Markets
Corporates
Municipal
IG Preferreds - Floating
IG Preferreds - Fixed
-9.4%
-7.9%
-5.8%
-3.7%
-3.3%
-2.9%
-2.2%
-1.5%
-1.4%
0.1%
7.4%
-12.0%-10.0%-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
TIPS
IG Preferreds - Floating
Emerging Markets
IG Preferreds - Fixed
Treasury
Municipal
US Broad Market
Corporates
Mortgage
Non-US IG
High Yield
-0.3%
-0.3%
0.4%
0.6%
1.0%
1.2%
1.4%
1.9%
2.8%
3.7%
5.5%
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Treasury
Municipal
US Broad Market
Mortgage
TIPS
IG Preferreds - Fixed
Corporates
Non-US IG
IG Preferreds - Floating
Emerging Markets
High Yield
42
Consumer Price Index (CPI) Level: Base Year 1982-84: 100. The CPI represents changes in prices of all good and services purchased for consumption by urban households.User fees and sales and excise taxes paid by the consumer are also included. Income taxes and investment items are not included.
CPI Core Index Level: Base year 1982-84; it excludes food and energy items from the Consumer Price Index Level.
Current Account Deficit: Occurs when a country's total import of goods, services and transfers is greater than the country's total export of goods, services and transfers;this situation makes a country a net debtor to the rest of the world.
Developed Market: A country that is most developed in terms of its economy and capital markets. The country must be high-income, but this also includes openness toforeign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Market: A country that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some formof market exchange and regulatory body.
GDP - Nominal: Gross Domestic Product (GDP) equals the total income of everyone in the economy or the total expenditure on the economy’s good and services. GDPincludes only the value of final goods and services. Nominal GDP measures the value of goods and services at current dollar prices.
GDP - Real: The chain-weighted GDP measure of goods and services at constant dollar prices. The base year changes continuously over time (e.g., 1995, process measuresreal growth from 1995 to 1996). The figures are then linked to a chain that can compare goods and services in any two years. Chain-weighted figures never let prices gettoo far out of date.
Jobless Claims: Average weekly initial claims for unemployment insurance: measures the average number of new claims for unemployment compensation per week.
U.S. Employees Non-Farm Private Payrolls: A statistic that represents the total number of paid U.S. workers except for farm workers, general government employees,employees of nonprofit organizations that provide assistance to individuals and private household employees. The Non-Farm Private Payroll represents about 80% of theworkers who produce the U.S. Gross Domestic Product.
Glossary
AP
PE
ND
IX
43
Asset Class Index Proxy
Cash BofAML 3 month T-Bill Index
U.S. Large Cap Equities S&P 500 Index
U.S. Small Cap Equities Russell 2000 Index
U.S. Large Cap Growth Russell 1000 Growth Index
U.S. Large Cap Value Russell 1000 Value Index
U.S. Mid Cap Growth Russell Midcap Growth Index
U.S. Mid Cap Value Russell Midcap Value Index
U.S. Small Cap Growth Russell 2000 Growth Index
U.S. Small Cap Value Russell 2000 Value Index
Developed International Equities MSCI EAFE
Emerging Markets Equities MSCI EM
Global Equities MSCI ACWI
U.S. Corporates BofAML U.S. Corporate Master
U.S. IG Fixed Income Barclays U.S. Aggregate Bond Index
U.S. High Yield BofAML High Yield Master
U.S. Munis BofAML Municipal Master
Global Fixed Income BofAML Global Fixed Income Markets Index
Hedge Fund Strategies HFRX Global Hedge Fund Index
Global REITs FTSE NAREIT Global REITs Total Return
U.S. REITs FTSE NAREIT U.S. REITs Total Return
Commodities Bloomberg Commodity
Gold Gold Spot Price
Private Equity LPX 50 TR USD Index
Asset Class Proxies
AP
PE
ND
IX
44
Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships and is calculated by Standard & Poor’s using a float-adjusted, marketcapitalization-weighted methodology. The total return index is calculated on an end-of-day basis and is disseminated daily through its ticker symbol, AMZX, on the New YorkStock Exchange.
Barclays Capital U.S. Aggregate Index is a broad-based benchmark that measures the Investment Grade, U.S. dollar-denominated, fixed-rate taxable bond market, includingTreasuries, government-related and corporate securities, MBS (agency fixed rate and hybrid ARM pass-throughs), ABS and CMBS.
Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities, which are weighted to account for economic significance and marketliquidity.
Cambridge Associates Private Equity U.S. Total Return: Performance data is calculated quarterly by Cambridge Associates and published by Thomson Reuters VentureEconomics’ Private Equity Performance Database, which tracks the performance of thousands of U.S. and European venture capital and buyout funds formed since 1969.Sources are financial documents and schedules from Limited Partners investors and General Partners. All returns are calculated net to investors (net of fees and carriedinterest) by Thomson Venture Economics from the underlying financial cash flows using both cash on cash returns (distributions and capital calls) and the unrealized netasset value of funds as reported by private equity fund managers. The “U.S.” category includes only U.S. funds.
DJ Credit Suisse AllHedge Index is an asset-weighted hedge fund index derived from the market leading Dow Jones Credit Suisse Hedge Fund Index. The Dow Jones CreditSuisse AllHedge Index provides a rules-based measure of an investable portfolio. Index performance data is published monthly and constituents are rebalanced semi-annually according to the sector weights of the Dow Jones Credit Suisse Hedge Fund Index.
DJ Credit Suisse AllHedge Convertible Arbitrage Index measures the aggregate performance of convertible arbitrage funds. Convertible arbitrage funds typically aim toprofit from the purchase of convertible securities and the subsequent shorting of the corresponding stock when there is a pricing error made in the conversion factor of thesecurity.
DJ Credit Suisse AllHedge Equity Market Neutral Index measures the aggregate performance of equity market neutral funds. Equity market neutral funds typically take bothlong and short positions in stocks while seeking to reduce exposure to the systemic risk of the market (i.e., a beta of zero is desired).
DJ Credit Suisse AllHedge Event Driven Index measures the aggregate performance of event-driven funds. Event-driven funds typically invest in various asset classes andseek to profit from potential mispricing of securities related to a specific corporate or market event. Such events can include mergers, bankruptcies, financial or operationalstress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes, and other types of corporate events.
DJ Credit Suisse AllHedge Emerging Markets Index measures the aggregate performance of Emerging Market funds. Emerging Market funds typically invest in currencies,debt instruments, equities and other instruments of countries with “emerging” or developing markets (typically measured by GDP per capita). Such countries are consideredto be in a transitional phase between developing and developed status.
DJ Credit Suisse AllHedge Fixed Income Arbitrage Index measures the aggregate performance of fixed income arbitrage funds. Fixed income arbitrage funds typicallyattempt to generate profits by exploiting inefficiencies and price anomalies between related fixed income securities. Fixed income arbitrage funds seek to limit volatility byhedging out exposure to the market and interest rate risk.
DJ Credit Suisse AllHedge Long Short Equity Index measures the aggregate performance of long/short equity funds. Long/short equity funds typically invest in both long andshort sides of equity markets, generally focusing on diversifying or hedging across particular sectors, regions or market capitalizations.
DJ Credit Suisse AllHedge Global Macro Index measures the aggregate performance of global macro funds. Global macro funds typically focus on identifying extreme pricevaluations and leverage is often applied on the anticipated price movements in equity, currency, interest rate and commodity markets.
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DJ Credit Suisse AllHedge Managed Futures Index measures the aggregate performance of managed futures funds. Managed futures funds (often referred to as CTAs orCommodity Trading Advisors) typically focus on investing in listed bond, equity, commodity futures and currency markets globally.
Dow Jones Industrial Average (DJIA) measures the performance of 30 leading U.S. blue-chip companies.
DXY Index indicates the general international value of the U.S. dollar. The Index does this by averaging the exchange rates between the dollar and major world currencies.
FTSE NAREIT U.S. Real Estate Index is a performance index based on publicly traded real estate investment trusts (REITs) that span commercial real estate space across theU.S. economy. The index series provides investors with exposure to all investment and property sectors. A REIT is a company that owns and, in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. To qualify as a REIT, a companymust distribute at least 90% of its taxable income to its shareholders annually. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholdersfrom its corporate taxable income. As a result, most REITs remit at least 100% of their taxable income to their shareholders and therefore owe no corporate tax.
FTSE®EPRA®/NAREIT® Global Index is a free float, market capitalization-weighted real estate index designed to represent publicly traded equity REITs and listed propertycompanies globally.
Gold reflects the gold spot price and is quoted in U.S. dollars per Troy Ounce.
HFRX Global Hedge Fund Index is an asset-weighted index that includes over 55 constituent funds. All funds must be open to new investments, have at least $50 millionunder management and have a 24-month track record. The index is rebalanced quarterly. The index is designed to be representative of the overall composition of the hedgefund universe.
JPMorgan Global FX Volatility Index tracks the implied volatility on three-month options on G7 and Emerging Market economy currencies, with individual weightings basedon Bank of International Settlements (BIS) daily turnover percentages.
BofAML U.S. Broad Market Index tracks the performance of U.S. dollar-denominated Investment Grade government and corporate public debt issued in the U.S. domesticbond market, including collateralized products such as mortgage pass-through and asset-backed securities.
BofAML U.S. Corporate Master Index tracks the performance of U.S. dollar-denominated Investment Grade corporate public debt issued in the U.S. domestic bond market.Qualifying bonds must have at least one year remaining term to maturity, a fixed coupon schedule and a minimum amount outstanding of $150 million. Bonds must be ratedInvestment Grade based on a composite of Moody’s and S&P.
BofAML Municipal Masters Index tracks the performance of the Investment Grade U.S. tax-exempt bond market.
BofAML Global Sovereign Broad Market Index tracks the performance of local currency-denominated debt of Investment Grade-rated sovereign issuers.
BofAML Global Emerging Markets Sovereign Index tracks the performance of U.S. dollar-denominated debt of sovereign issuers domiciled in countries with a BB or lowerforeign currency long-term sovereign debt rating.
BofAML High Yield Master Index tracks the performance of below Investment Grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.“Yankee” bonds (debt of foreign issuers issued in the U.S. domestic market) are included in the index provided the issuer is domiciled in a country having an InvestmentGrade foreign currency long-term debt rating (based on a composite of Moody’s and S&P).
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BofAML Mortgage Master Index tracks the performance of U.S. dollar-denominated 30-year, 15-year and balloon pass-through mortgage securities having at least $150million outstanding per generic production year.
MSCI® World Index is a free float-adjusted market capitalization index that is designed to measure global Developed Market equity performance. As of July 2009, the indexconsisted of 23 Developed Market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.
MSCI® EAFE (Europe, Australasia, and Far East) Index comprises 21 MSCI country indices, representing the Developed Markets outside of North America.
MSCI® Emerging Markets Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global Emerging Markets. As ofJuly 2009, the index consisted of 25 Emerging Market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea,Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
MSCI® Europe non-U.K. Index is a free float-adjusted market capitalization index designed to measure Developed Market equity performance in Europe. As of July 2009, theindex consisted of 15 Developed Market country indexes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal,Spain, Sweden, and Switzerland.
Muni Yields uses the Moody’s Municipal Bond Yield Average AAA 10 Year. Derived from pricing data on unenhanced newly issued general obligation bonds each observationis an unweighted average.
WTI crude oil reflects the Bloomberg West Texas Intermediate Crushing Crude Oil Spot Price. The price is derived by adding spot market spreads to the NYMEX contract.Units are in U.S. dollars per barrel and is traded intraday.
Russell 1000 Growth Index® measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Value Index® measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2000 Index® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
Russell 2000 Growth Index. The index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000 Value Index. The index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
Silver reflects the silver spot price and is quoted in U.S. dollars per Troy Ounce.
S&P 500 Index, widely regarded as the best single gauge of the U.S. equities market, includes a representative sample of 500 leading companies in leading industries of theU.S. economy. Although the index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the totalmarket. An investor cannot invest directly in an index.
S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market, representing all major industries.
Ten-Year Treasury relates the yield on a security to its time to maturity and is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
VIX Index, the Chicago Board Options Exchange Standard and Poor’s Volatility Index, reflects a market estimate of future volatility, based on the weighted average of theimplied volatilities for a wide range of strikes.
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Reference to indices, or other measures of relative market performance over a specified period of time (each, an “index”) are provided for illustrative purposes only, do not represent a benchmark or proxy for the return or volatility of any particular product, portfolio, security holding, or AI. Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. We strongly recommend that these factors be taken into consideration before an investment decision is made. Neither Merrill Lynch nor the index sponsor can verify the validity or accuracy of the self reported returns of the managers used to calculate the index returns. Merrill Lynch does not guarantee the accuracy of the index returns and does not recommend any investment or other decision based on the results presented. The indices referred in the presentation do not reflect the performance of any account or fund managed by Merrill Lynch or its affiliates, or of any other specific fund or account, and do not reflect the deduction of any management or performance fees or expenses. The hedge fund universe from which the components of the indices are selected is based on funds which have continued to report results for a minimum period of time. This prerequisite for fund selection interjects a significant element of “survivor bias” into the reported levels of the indices, as generally only successful funds will continue to report for the required period, so that the funds from which the statistical analysis or the performance of the indices to date is derived necessarily tend to have been successful. There can, however, be no assurance that such funds will continue to be successful in the future. Indices are unmanaged and results shown are not reduced by taxes or transaction costs such as fees. It is not possible to invest directly in an Index.
Alternative Investments are speculative and subject to a high degree of risk. Although risk management policies and procedures can be effective in reducing or mitigating the effects of certain risks, no risk management policy can completely eliminate the possibility of sudden and severe losses, illiquidity and the occurrence of other material adverse effects. Some or all alternative investment programs may not be suitable for certain investors. Many alternative investment products, specifically private equity and most hedge funds, require purchasers to be “qualified purchasers” within the meaning of the federal securities laws (generally, individuals who own at least $5 million in “investments” and institutional investors who own at least $25 million in “investments,” as such term is defined in the federal securities laws). No assurance can be given that any alternative investment’s investment objectives will be achieved. In addition to certain general risks, each product will be subject to its own specific risks, including strategy and market risk.
Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.
Investors should bear in mind that the global financial markets are subject to periods of extraordinary disruption and distress. During the financial crisis of 2008-2009, many private investment funds incurred significant or even total losses, suspended redemptions or otherwise severely restricted investor liquidity, including increasing the notice period required for redemptions, instituting gates on the percentage of fund interests that could be redeemed in any given period and creating side-pockets and special purpose vehicles to hold illiquid securities as they are liquidated. Other funds may take similar steps in the future to prevent forced liquidation of their portfolios into a distressed market. In addition, investment funds implementing alternative investment strategies are subject to the risk of ruin and may become illiquid under a variety of circumstances, irrespective of general market conditions.
There may be conflicts of interest relating to the alternative investment and its service providers, including Bank of America, and its affiliates, who are engaged in businesses and have clear interests other than that of managing, distributing and otherwise providing services to the alternative investment. These activities and interests include potential multiple advisory, transactional and financial and other interests in securities and instruments that may purchase or sell such securities and instruments. These are considerations of which investors in the alternative investments should be aware. Additional information relating to these conflicts is set forth in the offering materials for the alternative investment.
The opinions expressed herein are those of the GWIM Chief Investment Office as of the date of this material and are subject to change. It is provided as general market commentary only, and it does not consider the specific investment objectives, financial situation or particular needs of any one client. It should not be considered a recommendation or solicitation to purchase or sell any security. There is no guarantee that any future event discussed herein will come to pass. When reading this commentary, you should consider that investments in securities involve risk and you could lose some or all of the amounts you have invested. The information herein was obtained from various sources, which we believe to be reliable, but we do not guarantee its accuracy or completeness. The indexes referenced herein are unmanaged and are not available for direct investment; returns assume no management, transaction or other expenses and also assume reinvestment of dividends, interest and/or capital gains. Past performance does not guarantee or indicate future results.
Merrill Lynch assumes no responsibility for any of the foregoing performance information, which has been provided by the index sponsor. Neither Merrill Lynch nor the index sponsor can verify the validity or accuracy of the self-reported returns of the managers used to calculate the index returns. Merrill Lynch does not guarantee the accuracy of the index returns and does not recommend any investment or other decision based on the results presented.
The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in high-yield bonds may be subject to greater market fluctuations and risk of loss of income and principal than securities in higher rated categories. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.
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