2. ► Research Goals and Motivation
► Review of Asset Class Performance
► Assessing Current Investor Sentiment
► Our Asset Class Views – Return Potential and Risks
► Multi-Asset Class Portfolio Implications
► Summary Recommendations
► Key Issues Facing Investors over the next Year
Outline
3. Help Investors with their asset allocation decisions by
providing a research-based perspective on
prospective asset class returns and risks as well as
thoroughly examining the associated portfolio
positioning implications
► Focus on broad asset classes and multi-asset class portfolios
► Assess the dynamic nature of capital market behavior and investor
risk aversion
► Provide a breakdown of the risk profile of multi-asset portfolios as well
as their key macro-economic exposures
► Evaluate the long-term return and wealth creation distribution of
multi-asset class portfolios
Research Goals and Motivation
3
4. ► Slowing global economic growth
► US remains robust, China is slowing and EM is flat-lining (but with significant across country variation)
► No inflation in sight (except if you are paying college tuition or medical bills)
► Greatest fear by policymakers is actually deflation
► Commodity bust and global labor excess supply dampen future price rises (good for corporate margins)
► Loose but divergent monetary policy with the Fed threating to tighten and the BOJ, ECB and
Bank of China providing further stimulus
► Currency market turmoil created by a rapidly strengthening USD and sinking EM currencies
► The floating of the renminbi (within bands) took the market by surprise
► The strength of the USD is exacerbating trade imbalances (hot political topic for 2016)
► Commodity bust causing serious fiscal problems in many emerging markets and tarnishing the
emerging market growth story
► Political tension - Iran nuclear deal, Russia involvement in Libya, migrant issue in Europe, US
elections in 2016, Stimulus versus Austerity
► Investor apathy to risk replaced by hyper sensitivity during the last few months as investors
become concerned about asset bubbles
Macro-Economic Backdrop
4
5. Major Asset Class Performance
► After several years
of above-average
returns, major asset
classes remain
under duress in 2015
► No asset class has
remained
unscathed YTD with
emerging market
equities and
commodities taking
the biggest hits
► US bonds have not
helped much as
rates keep
fluctuating without
clear direction and
YTD returns are
barely positive
► Currency losses
have exacerbated
the poor
performance of
international assets
-20
-16
-12
-8
-4
0
4
US LCA P US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
Asset Class Perfor mance
1 MONTH YTD
-24
-18
-12
-6
0
6
12
18
24
30
36
42
US LCA P US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
Asset Class Perfor mance
2014 2013 2012
6. ► The numbers don’t lie – its been ugly this year but long term investors have enjoyed some pretty
generous capital market returns post-Financial crisis
► 2015 is feeling very much like 2011 in terms of investor sentiment which we expect to revert back to
more normal levels in the next few months
► The root causes for the global equity downdraft this year relate more to slowing growth, higher
starting valuations which lower investor’s margin of error, and fear of living in a world without the
paternalistic oversight of the US Federal Reserve
► The rise of the US dollar in conjunction with the commodity bust have created additional uncertainty
which has destabilized global capital markets in the short term
Asset Class Performance Summary
6
Global Focus Capital US LCAP US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
RETURN 1 WK 1.10 -0.69 0.69 1.93 -0.68 1.53 0.68 1.61 0.05 0.01
RETURN 1 MO -2.47 -4.91 -5.04 -2.97 -3.42 3.03 0.68 0.98 -0.86 0.04
RETURN YTD -5.29 -7.73 -4.91 -15.22 -15.80 -4.26 1.13 -3.32 0.10 0.10
RETURN 2014 13.69 4.89 -4.48 -1.82 -17.01 30.38 5.97 -2.97 7.12 0.06
RETURN 2013 32.39 38.82 23.29 -2.27 -9.52 2.47 -2.02 -5.57 -6.34 0.10
RETURN 2012 16.00 16.35 17.90 18.63 -1.06 17.77 4.21 0.46 18.32 0.12
RETURN 2011 2.11 -4.18 -11.73 -18.17 -13.32 8.69 7.84 5.98 8.80 0.15
RETURN 2010 15.06 26.85 8.21 19.20 16.83 28.48 6.54 7.02 12.12 0.22
CURRENT VOLATILITY 11.60 13.82 12.08 14.60 10.39 13.34 3.17 6.91 4.72 0.03
RELATIVE STRENGTH 49.20 41.22 44.31 49.74 46.60 55.78 60.44 64.04 44.48 76.95
TECHNICAL STAGE
DOWN
TREND
DOWN
TREND
DOWN
TREND
DOWN
TREND
DOWN
TREND IMPROVING IMPROVING BREAK OUT
DOWN
TREND BREAK OUT
INCOME (YIELD) 2.11 1.50 3.30 2.80 0.00 0.04 2.31 0.77 5.86 0.04
LONG-TERM RETURN 7.00% 8.00% 8.00% 8.00% 2.00% 6.00% 4.00% 3.50% 6.50% 1.50%
LONG-TERM VOLATILITY 16.00% 19.00% 17.00% 20.00% 18.00% 14.00% 6.00% 7.00% 9.00% 0.50%
7. Equity Performance – Region and Sector
Influences
7
► Regional/country and sector performance
are key dimensions of equity market
behavior
► Emerging markets and commodity sensitive
sectors have taken the biggest hit YTD
► Growth sectors such as health care and
tech have weathered the storm better
► Emerging and Developed Europe have held
up relatively well despite the perception of
high risk
► Low valuations are supportive
► Expectations for growth were low to begin
with
-24
-20
-16
-12
-8
-4
0
4
8
CD CS EN FN HC IN IT MA TS UT
S&P 500 Sector Perfor mance
1 MONTH YTD
-32
-30
-28
-26
-24
-22
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
NA EU ASIA EM EM LA EM EU EM ASIA WORLD
Global Region Perfor mance
1 MONTH YTD
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
Global Sector Perfor mance
1 MONTH YTD
8. Fixed Income Performance
8
► Higher quality, shorter maturity
bonds outperformed last month
as well providing superior returns
YTD
► With no clear sign of re-
emerging inflation TIPS globally
have offered disappointing
returns
► As expected the worst fixed
income sector has been YTD
high yield
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
CREDIT GOV MBS HYLD TIPS MUNI
US Fixed Income Perfor mance
1 MONTH YTD
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
GLOBAL G1-3 G3-5 G5-7 G7-10 G10+ CREDIT GOV
Global Fixed Income Performance
1 MONTH YTD
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
GLOBAL CA EU FR GE SW UK US
Global TIPS Perfor mance
1 MONTH YTD
9. Alternative Asset Class Performance
9
► While Reits in Germany have been standout
performers this year, the rest of the liquid real
estate market has suffered along with risky
assets
► The commodity bust continues unabated
with no relief in sight even for more risk-
sensitive sectors such as gold and silver
► The US dollar and the Swiss Franc have been
the standout winners this year. Resource
sensitive currencies have experienced the
largest depreciation
► EM currencies have in a significant down
trend despite interest rate hikes in several of
the key markets-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
24
28
AU CA FR GE HK JP LATAM UK US WORLD
Global Real Estate Performance
1 MONTH YTD
-24
-22
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
BROAD AG ENE X-ENE GRAINS IND MET LIVE OIL PREC
MET
Commodity Performance
1 MONTH YTD
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
Cur rency (USD) Perfor mance
1 MONTH YTD
10. Asset Class Volatility
10
► While market participants lament the recent spike in volatility, all asset classes except for real estate
and international bonds currently exhibit lower than normal levels of volatility
► Capital market volatility has been suppressed by expansionary monetary policies around the globe,
but the low levels of volatility are, in our opinion, transitory and likely to revert as policy rates are
gradually hiked
► Investors have become overly sensitized to short-term capital market volatility and risk as a concept
has been significantly under-prized in the last few years
► Investors will need to extend their time horizons and accept more normalized levels of asset class
volatility over the next decade
► A greater focus on proper portfolio “balance” (risk/return tradeoffs over short, intermediate and
long-term horizons) will necessitate a complete asset allocation perspective and less of an emphasis
on return expectations exclusively
0%
5%
10%
15%
20%
25%
30%
US LCAP US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
Asset Class Volatility
Current Normalized
11. Key Asset Class Correlations
11
► The biggest problem
faced currently by
investors is the lack of
adequate
diversification
opportunities
► At the moment only
high quality bonds
offer significant
diversification
potential to equity
investors
► Real estate has
recently become
more correlated with
interest rates offering
potential
diversification relief to
equity holders
► The role of fixed
income in a multi-
asset class portfolio
has shifted almost
entirely to volatility
reduction as
opposed to income
generation
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
US LCA P US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
Asset Class Cor relation to US Stocks
Current Normalized
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
US LCA P US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
Asset Class Cor relation to US Bonds
Current Normalized
12. ► Our investor risk aversion is currently firmly in the Extreme Aversion (Fear) Zone
► Investors remain petrified but, in our view, the fundamental picture does not
merit such levels of fear and we would expect to revert back to our Normal
Zone in the fourth quarter
► Valuations are above average for all major asset classes, but growth remains
positive and monetary stimulus and a lack of inflation are likely to keep the cost
of money low
► While the debacle in commodity prices is clearly detrimental to exporting
nations (many in emerging markets) global economic activity in the
developed world should benefit from this form of cost reduction
Investor Risk Aversion
12
13. ► Investor risk aversion readings show a form of complacency in late
2014 with a slight re-awakening to potential capital market risks thus
far in 2015
► The implicit “put” option engineered by central banks around the
world may not be as firm of a commitment as once believed
► As the US Federal Reserve starts moving away from “rescue” mode to
operating procedures more in line with its mandate of price stability,
maximum employment and moderate long-term rates investors will
need to accept more normal (and higher) rates of capital market
volatility
► Offsetting the actions of the Fed are the ECB, BOJ and the People’s
Bank of China who remain in “rescue” mode thus providing excess
global liquidity
► We believe that while capital liquidity will remain abundant, the
implicit “put” story has lost credibility and investors are no longer
betting on the ability of central banks to protect capital markets
Investor Risk Aversion
13
15. ► Multi-Asset Class Models covering 10 asset classes
► Equities (US Large Caps, US Small Caps, Developed International,
Emerging Markets)
► Fixed Income (US Bonds, Developed Market Bonds, Emerging Market
Bonds)
► Alternatives (US Real Estate, Commodities)
► Cash
► Intermediate (6-12 month out) expected returns driven by Valuation,
Income Generation and Investor Sentiment/Momentum factors
► Long-term (10 years out) expected returns given as a function of
assumed asset class Income Potential, Growth and Valuation
changes
Asset Allocation Methodology – Assessing
Return Potential
16. Asset Allocation Model Current Breakdown
by Conceptual Category
16
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
1.8
CURRENT PROFILE - VALUATION
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
1.8
CURRENT PROFILE - INCOME
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
CURRENT PROFILE - ST REVERSAL
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
1.8
CURRENT PROFILE - RISK ADJUSTED
MOMENTUM
Higher factor readings correspond to higher return potential
17. ► Our intermediate term multi-asset class model currently favors riskier assets
such as equities over short-term safer assets such as bonds
► Within equities the model rates US small cap and Developed Markets best
in terms of return potential
► Within fixed income, the lack of any significant income potential for
Developed Market bonds detracts from their return potential
► Emerging Market Debt (sovereign debt denominated in USD) has enough
of a yield advantage to enjoy favorable return prospects despite clear
macro-economic headwinds
Forward Looking Return Model Summary
17
-1.5
-1.2
-0.9
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
1.5
CURRENT PROFILE - MODEL ALPHA
18. ► Our Multi-Asset Class Volatility and Correlation Models covering 10
asset classes complement our expected return models
► The intermediate-term expected volatility and correlation structure of
asset class returns is modelled as a function of the current reading of
our proprietary Risk Aversion Index and the likely near-term change in
investor sentiment
► Additional risk perspectives are gained by estimating the exposure of
asset classes to a variety of macro-economic factors
► Conceptually, our macro-economic factors correspond to growth, cost of
money, economic and financial distress, and inflation
► The long-term (10 years out) expected volatility and correlation
structure assumes a reversion to long-term historical norms
Asset Allocation Methodology – Assessing
Potential Risks
19. ► We estimate the volatility and correlation structure of key asset classes using a combination of
methods weighting alternative capital market risk scenarios and macro-economic risk factors
► We use our Risk Aversion Index to identify three distinct zones – Extreme Risk Aversion (Fear), Normal
and Extreme Apathy (Greed)
► Each risk zone has very distinct volatility and correlation implications
► Based on the current risk zone classification we assign different weights to each risk zone scenario
► We are currently in the Extreme Risk Aversion Zone associated with higher risky asset volatilities and
higher within-asset class correlations
Classifying Asset Class Risk by Investor Risk
Aversion Zone
19
VOL (ANN) 23.1% 28.3% 24.3% 28.7% 20.1% 33.8% 4.0% 9.2% 11.5% 0.4%
US LCAP US SCAP INTL EQ EM EQ COMM RE US BD INTL BD EM BD CASH
US LCAP 1 0.91 0.81 0.69 0.35 0.68 -0.21 -0.14 0.40 -0.17
US SCAP 0.91 1 0.76 0.70 0.36 0.75 -0.22 -0.11 0.41 -0.15
INTL EQ 0.81 0.76 1 0.84 0.50 0.57 -0.06 0.13 0.50 -0.15
EM EQ 0.69 0.70 0.84 1 0.52 0.54 -0.07 0.03 0.61 -0.12
COMM 0.35 0.36 0.50 0.52 1 0.27 -0.06 0.17 0.34 -0.04
RE 0.68 0.75 0.57 0.54 0.27 1 -0.08 -0.04 0.40 -0.03
US BD -0.21 -0.22 -0.06 -0.07 -0.06 -0.08 1 0.51 0.21 0.17
INTL BD -0.14 -0.11 0.13 0.03 0.17 -0.04 0.51 1 0.10 0.13
EM BD 0.40 0.41 0.50 0.61 0.34 0.40 0.21 0.10 1 -0.02
CASH -0.17 -0.15 -0.15 -0.12 -0.04 -0.03 0.17 0.13 -0.02 1
Current Short-Term Volatility and Correlation Forecasts
20. Macro-Economic Risk Exposures – Major
Asset Class Factors
20
► Equities exhibit minimal sensitivity to
the global bond market
► Correspondingly, the beta of fixed
income to the global equity factor
is close to zero
► Commodities and International
Debt exhibit the highest exposure
to the FX (USD) factor
► All equity categories exhibit betas
to the equity factor close to zero
highlighting very similar behavior
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Equity Market Factor
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Bond Market Factor
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to USD FX Factor
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to USD FX Factor
21. Macro-Economic Risk Exposures – Growth
Factors
21
► Equity asset classes are
significantly positively exposed
to “growth” factors
► Commodities, in particular, have
high betas to our growth factors
► Our estimates indicate that
higher inflationary expectations
would be beneficial to all asset
classes except high quality
bonds-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Term Spread Factor
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Industrial Metals
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Inflationary Expectations
22. Macro-Economic Risk Exposures –
Uncertainty Factors
22
► The beta of equity-like
assets to “uncertainty”
factors is large and
negative
► Clearly fixed income acts
as a distress
counterbalance to equities
-0.2
-0.2
-0.1
-0.1
0.0
0.1
0.1
0.2
0.2
0.3
0.3
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to Precious Metals
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to US Default Factor
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
US
LCAP
US SCAP INTL
EQ
EM EQ COMM RE US BD INTL
BD
EM BD CASH
Beta to TED Spread
23. ► Based on conceptual building blocks of income potential, growth and
valuation changes -10 year time horizon
► Current expected returns are below historical averages for all asset classes
► Primarily a function of starting point valuations
► The volatility of individual asset classes is expected to revert back to historical
norms
► Within-asset class correlations are expected to remain close to historical
averages
► The greatest diversification potential will continue to be between equity and
long-maturity government debt
Long-Term Expected Returns, Volatility and
Correlations
23
GF Capital SP500 R2000 EAFE EME COM RE US BD INTL BD EM BD CASH
SP500 1 0.9 0.95 0.85 0.2 0.6 0.2 0.2 0.3 0.01
R2000 0.9 1 0.8 0.8 0.2 0.6 0.2 0.1 0.3 0.01
EAFE 0.95 0.8 1 0.85 0.3 0.4 0.2 0.3 0.3 0.01
EME 0.85 0.8 0.85 1 0.5 0.4 0.2 0.3 0.6 0.01
COM 0.2 0.2 0.3 0.5 1 0.2 0.1 0.1 0.3 0.01
RE 0.6 0.6 0.4 0.4 0.2 1 0.2 0.2 0.4 0.01
US BD 0.2 0.2 0.2 0.2 0.1 0.2 1 0.6 0.2 0.01
INTL BD 0.2 0.1 0.3 0.3 0.1 0.2 0.6 1 0.2 0.01
EM BD 0.3 0.3 0.3 0.6 0.3 0.4 0.2 0.2 1 0.01
CASH 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 1
GF Capital SP500 R2000 EAFE EME COM RE US BD INTL BD EM BD CASH
LT EXPT RETURNS 7.00% 8.00% 8.00% 8.00% 2.00% 6.00% 4.00% 3.50% 6.50% 1.50%
LT EXPT VOLAT 16.00% 19.00% 17.00% 20.00% 18.00% 14.00% 6.00% 7.00% 9.00% 0.50%
26. ► Three Multi-Asset Strategies with distinct risk/return tradeoffs
► Traditional 60/40 (S&P 500 / Barclays Aggregate)
► One All Global Equity Strategy
► One All Global Fixed Income Strategy
Menu of Constant Mix Asset Allocation
Strategies
26
SP500
40%
R2000
15%
EAFE
30%
EME
15%
All Equity Portfolio
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
US BD
65%
INTL BD
20%
EM BD
10%
CASH
5%
All Fixed Income Portfolio
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
All Strategies are
rebalanced monthly to a
pre-determined mix of asset
class weights
27. Constant Mix Allocation Strategies
27
SP500
30%
R2000
15%
EAFE
20%
EME
10%
COM
5%
RE
5%
US BD
10%INTL BD
2%
EM BD
3%
Portfolio 1
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
SP500
25%
R2000
12%
EAFE
15%
EME
8%
COM
3%
RE
7%
US BD
18%
INTL BD
7%
EM BD
5%
Portfolio 2
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
SP500
22%
R2000
5%
EAFE
10%EME
3%
COM
2%
RE
8%
US BD
25%
INTL BD
10%
EM BD
10%
CASH
Portfolio 3
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
SP500
60%
US BD
40%
60/40 Portfolio
SP500 R2000 EAFE EME COM
RE US BD INTL BD EM BD CASH
All Strategies are
rebalanced monthly to a
pre-determined mix of
asset class weights
28. Our Constant Mix Portfolios on the Efficient
Frontier
28
Expected Return
Expected
Risk
All Fixed
Income
Portfolio
All Equities
Portfolio
Portfolio 3
Portfolio 2
60/40
Portfolio
Portfolio 1
29. The Constant Mix Strategies – Current
Performance Summary
29
Global Focus Capital PORT 1 PORT 2 PORT 3 60/40
ALL
EQUITY
ALL FIXED
INC
LAST MONTH 0.92% 1.11% 1.23% 1.31% 0.81% 0.71%
LAST 3 MONTHS -6.86% -5.02% -2.66% -2.56% -8.60% 1.83%
LAST 12 MONTHS -3.32% -2.26% -1.02% 0.85% -3.81% 0.25%
YEAR TO DATE -5.51% -4.58% -3.01% -1.95% -6.02% -0.13%
RETURN 2014 6.03% 6.72% 7.22% 11.83% 5.78% 3.74%
RETURN 2013 18.89% 14.45% 9.16% 18.36% 25.62% -3.21%
RETURN 2012 13.75% 12.45% 10.57% 10.30% 16.09% 4.71%
RETURN 2011 -2.90% -0.22% 3.01% 5.07% -6.02% 7.24%
RETURN 2010 15.90% 15.03% 12.71% 12.03% 15.50% 6.94%
INCOME - CURRENT 2.22% 2.19% 2.20% 2.19% 2.48% 2.24%
VOLATILITY - CURRENT 8.89% 7.33% 5.38% 6.72% 11.16% 3.26%
VOL - 3 MO AGO 8.07% 6.74% 5.11% 6.12% 10.09% 3.42%
VOL - 12 MO AGO 8.39% 7.09% 5.43% 6.07% 10.24% 3.39%
EXPOSURES (BETAS)
GLOBAL EQUITY 0.79 0.64 0.44 0.57 1.00 -0.04
GLOBAL BOND -0.06 0.11 0.25 -0.12 -0.27 0.64
DEFAULT SPREAD US -0.74 -0.59 -0.40 -0.53 -0.90 0.05
TED SPREAD -0.45 -0.37 -0.27 -0.31 -0.52 -0.04
PRECIOUS METALS -0.02 0.01 0.04 -0.05 -0.07 0.10
INDUSTRIAL METALS 0.22 0.17 0.12 0.12 0.27 -0.01
TERM HORIZON SPREAD 0.32 0.31 0.31 0.33 0.28 0.20
INFLATIONARY 0.46 0.38 0.29 0.41 0.55 0.03
USD FX 0.05 0.14 0.21 -0.11 -0.07 0.43
60/40 PORTFOLIO 1.25 1.03 0.73 1.00 1.56 -0.03
LONG-TERM RETURN 6.77% 6.32% 5.58% 5.80% 7.60% 4.03%
LONG-TERM VOLATILITY 13.41% 11.31% 8.45% 10.35% 16.57% 5.14%
30. ► All constant mix strategies currently reside in negative territory for 2015
► Greater exposure to equities this year has hurt performance but equity
heavy strategies have had above-average performance since the end
of the Financial crisis
► The volatility of all strategies is currently below our ten-year forward
expectations, but we would expect overall capital market volatility to
revert back to higher levels as the paternalistic hand of the Fed is
withdrawn
► More equity oriented portfolios (1 and 2) exhibit a clear growth bias and
aversion to further market and economic uncertainty
► The income potential of the All Fixed Income Strategy lags that of some
of our more equity heavy multi-asset class portfolios
► International Equity offers attractive yield opportunities at the moment
The Constant Mix Strategies – Further Risk &
Return Thoughts
30
31. ► These estimates are a function of our
10 year-ahead fundamentally-based
asset class projections
► Returns for all portfolios are expected
to fall short of historical norms
► Starting valuations will be a long-
term drag on performance
► The low rates of yield on fixed
income are a huge headwind for
risk averse multi-asset class investors
► Investors will need to get out of their
comfort zone and extend holding
periods in order to achieve target
returns in the 6-8% range
► The current low volatility environment
is not expected to last with asset class
volatility reverting back to more
normalized conditions
Long-Term Risk and Return Expectations for
the Constant Mix Asset Allocation Strategies
31
3%
5%
7%
9%
11%
13%
15%
17%
19%
PORT 1 PORT 2 PORT 3 60/40 ALL
EQUITIES
ALL BONDS
Portfolio Expected Volatility - Long Term
Projections
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
PORT 1 PORT 2 PORT 3 60/40 ALL
EQUITIES
ALL BONDS
Portfolio Expected Returns - Long Term
Projections
32. ► The traditional 60/40 portfolio is
inherently a lot riskier than
previously presumed with all of
its volatility emanating from its
equity exposure
► Given the current slight negative
correlation between stocks and
bonds, adding fixed income
significantly lowers overall
portfolio volatility
► The 60/40 portfolio is positively
exposed to the equity market
and growth expectations
(inflation and the business cycle)
and negatively influenced by
factors generally associated
with distress
► The long-term return to the 60/40
portfolio is expected to lie south
of 6% with a yearly volatility of
about 10%
The 60/40 Portfolio – Still the Standard Bearer
32
33. Return and Wealth Patterns of the 60/40
Portfolio
33
► The expected distribution
of annualized
compounded strategy
returns implies a fairly wide
range of potential returns
over the short holding
periods
► In year 1 we would, for
example, expect returns to
lie between 24 and -10%
given the assumed 10%
volatility of the strategy
► Over longer holding
periods the expectation
would be for compound
returns to average out
within the range of
potential outcomes shown
in the chart
► Assuming returns in the
lower 5th percentile the
cumulative wealth
generated by this strategy
over 10 years would fall
between $1.01 and $2.78
(with a $1investment)
Equivalent charts for our other multi-asset class strategies are available upon
request
34. Asset Class Risk Contributions of the
Constant Mix Strategies
34
► For all of these strategies the
proportion of total portfolio risk
originating from equity exposures is
significant.
► As the allocation to bonds
increases (from Port 1 to 3) the
contribution to risk from equities
diminishes to some extent
► From a total risk perspective and
given the high correlations among
asset classes it is likely that most
multi-asset portfolios will remain
heavily exposed to equities
35. Asset Class Risk Contributions of the
Constant Mix Strategies
35
► The 60/40 portfolio risk profile
is emanating exclusively
from its equity exposure. In
fact, bond exposure
reduces portfolio volatility
► While within-asset class
correlations are high, there is
a diversification benefit from
spreading allocations to
“similar” investments
36. ► Despite the recent spike in capital market volatility our research still favors holding
riskier assets such as equities and real estate
► Investors have grown too accustomed to low levels of volatility which are
unsustainable and likely to revert back to more normal levels
► The greatest concern to equity holders should be slowing growth
► While valuations are on the expensive side we do not see valuations being the
catalyst for a market correction
► In the short-term fixed income investments provide less downside, but tilting toward
safer assets is unlikely to provide enough comfort to offset the lack of sufficient
long-term return potential
► As long as the cost of money is low, riskier assets are expected to offer more
compelling benefits over intermediate and especially longer-term time horizons
► Within equities we prefer developed markets in large part due to lower commodity
exposure and diminished currency risk
► The competitive benefits of currency devaluation will not be felt immediately and
many commodities remain in net excess supply
► In the US we prefer large caps over small caps due to lower valuations, higher
levels of firm profitability and the most important reason lower volatility
► Among fixed income investments, we prefer (with some trepidation) emerging
market debt (priced in USD) over high quality US and developed market fixed
income alternatives
► Removing the currency risk from the equation leaves us with a bet on the credit
worthiness of emerging market issuers which we believe is worth taking
Global Focus Capital Summary Views
36
37. ► Will the USD keep appreciating at this rate?
► NO and non-USD denominated investments will receive some relief along with commodities
► Will bonds continue to be superior diversifiers to equity risk?
► YES, but the effect will diminish as the US yield curve starts normalizing
► Will global earnings keep growing?
► YES, but slowly and various regions will be impacted differently. A strong USD will dampen the growth of many US
domiciled export-driven companies. Corporate margins will likely drift lower but we do not see an implosion given the
low cost of money, excess labor and cratering commodity markets
► Is the commodity rout finally over?
► NO. Markets are still saturated with excess supply and slowing global growth is making matters worse. Excess supply
conditions are expected to remain in force for the foreseeable future
► Will we continue to see risk on/off markets?
► YES. In fact the biggest surprise over the last few years has been the almost uninterrupted low level of volatility until
August of this year. But investors should view periods of market stress as attractive tactical rebalancing opportunities
but must be willing to also trim winners as investors as a whole become too complacent about risk
► Will the Federal Reserve raise rates in 2015?
► NO, but they will do next year. But, whatever negative effects are seen initially will soon dissipate as global liquidity
remains abundant.
► Investors obsessed with Fed actions are focused on the wrong metric – raising rates is an admission that the global
economy is better able to handle the inevitable random shocks to growth and should be interpreted as a vote of
confidence for growth-oriented assets
Key Questions Facing Global Capital Market
Investors
37
38. For further information on our research
subscriptions or asset management products
please contact us at:
eweigel@gf-cap.com
Phone 617-529-2913
or visit our website at http:gf-cap.com
38
