Note October 11, 2017: In the decade since the credit debacle into 2007 unleashed crisis, albeit now in a different form, complacency appears returned. Then, complacency was about emerging economy strength, smart central bank policy in advanced countries and the dispersion of capital market risk via derivatives all having resulted in strong secular growth. Currently, capital markets in aggregate appear at minimum to be momentum oriented while oozing with confidence both about easy monetary conditions and economic growth. The price of everything seems in vogue now but value is a time honored consideration.
Change is often abrupt and myriad for the markets, hence the need for risk premiums for uncertainty. The severe natural catastrophes of 2017 including hurricanes, typhoons, monsoons and earthquakes are one aspect. Amid quantitative ease, models have become even more enamored by markets but politics remain difficult to incorporate. Meta data availability has generated high frequency trading to factor focus investment tilts. They appear, nonetheless, to have not incorporated decades of real time econometrics experience on the limitations of models. Overarching remain the geopolitical stresses of relationships with Russia on its western frontiers, for China on dealings about south China seas border delineation, on terror response worldwide and not to be underestimated, effects directly on global trade and climate change policy. Internal political issues include policy execution in the United States ahead of 2018 elections, fragility in Europe exposed over Brexit but also fault lines like Catalonia and in Asia, issues including those within major countries like Japan, China and India.
Beneath surface complacency, internal market contradictions do exist. Global GDP growth has improved, illustrated by IMF World Economic Outlook for 3.6% for 2017 and 3.7% for 2018. The fixed income markets appear to reflect enough economic stability to service large increases in debt with central banks constrained in raising administered interest rates. By contrast in equity markets, expectations would appear for economies and earnings strong enough to sustain above average valuation. As classically occurs on changing conditions, we expect volatility to increase amongst advanced currencies and, as has mainly occurred so far, not be limited to emerging ones. It is likely to be partly due to twists after massive quantitative ease and due to stressful politics, including over trade. Looking forward from the Federal Reserve, there is potential for Fed Funds rates to increase towards 3.50% by 1Q/2019 and for its balance sheet to be reduced down closer to $2 trillion. We diversify by having above average cash despite low yields and via exposure to alternate assets like precious metals while underweighting real estate in that category. We are also underweight fixed income, especially in long duration and in equities, favor quality in operations and financial structure over size or momentum factors.
The risks especially seem high and have become twisted in long duration bonds. Meanwhile and including activity in new issue markets, gaining feverish acceptance have been lesser credits and even hundred year bonds that at least in part depend on support from central banks. Within underweight Fixed Income, we prefer short to medium maturities in U.S. Treasuries, corporate bonds and to include geographically, the higher yields of well-managed, commodity currencies like Australian and Canadian dollar denominations over those of highly indebted but zero-yield Japan or politically fragile Europe.
As interest rates rise amid increased leverage, with more selectivity likely to be required, our anticipated environment would be less conducive to momentum and close geographical correlation than consensus appears to incorporate. We also differ in our usage of quality and expect more emphasis on value, irrespective of the geographical location of equity or the size of the company concerned or its industry sector. In our view, more focus on quality of delivery has already commenced geographically. We expect the U.S. equity market to continue to be crucial, for emerging markets to outperform as well as, for the value from restructuring of the commodity segments to offer opportunity from Australia and Canada.
As central bank policy and the financial markets themselves evolve, among industry sectors, it is clear that the Financials remain critical with advantages accruing to those earliest into extensive restructuring. While consumer sectors may also be crucial within economies as well as worldwide, consumer preferences appear changed. In both the discretionary and staples segments, there seems a resultant requirement for deep business restructuring only grudgingly recognized and we are underweight both. Instead, we prefer Industrials steeped into restructuring amid urgent need for capital investment by companies and countries alike. Balancing growth and the risks of political intervention, we prefer Information Technology over Healthcare. With potential for administered interest rates to increase and for fixed income markets to become more volatile, we see the already elevated real estate prices as constraining REITs and the cost of financing needs as constraining Utilities and so have underweight both, while overweighting strong Telecommunication Services. For several years in Materials and for at least two years since a precipitous drop in crude oil prices for Energy, both have been extensively restructuring and we see opportunity based on value as well as diversification.
Asset Mix
In the decade since the credit debacle into 2007unleashed crisis, albeit now in a different form, complacency appears returned. Then, complacency was about emerging economy strength, smart central bank policy in advanced countries and the dispersion of capital market risk via derivatives having resulted in strong secular growth. Currently, capital markets in aggregate appear at minimum to be momentum oriented and in moving in unison arguably since 2009 to late 2017, while oozing with confidence both about easy monetary conditions and economic growth. Still, the very size and length of quantitative ease during this cycle may be tacit acknowledgement by the central banks that their myriad models have left much to be desired especially about risk in dark corners, as classically last experienced with credit. Rather than being eschewed, reasons exist to build risk premium cushions for uncertainty. We diversify by having above average cash despite low yields and via exposure to alternate assets like precious metals while underweighting real estate in that category. We are also underweight fixed income, especially in long duration and in equities, favor quality in operations and financial structure over size or momentum factors.
In this era of quantitative ease, models have become even more enamored in markets but politics remain difficult to incorporate. The adulation for models has partly been due to quantitative ease but also is a result of an explosion in meta data. Meta data availability has generated strategies ranged from high frequency trading to factor focus investment tilts that appear, nonetheless, to have not incorporated the lessons of four decades of real time econometrics on the limitations of models, however complex. Change is often abrupt and myriad for the markets, hence the need for risk premiums for uncertainty. The severe natural catastrophes of 2017 including hurricanes, typhoons, monsoons and earthquakes are one aspect. In another, Europe has to deal not just with the ramifications of a political decision in Britain to trigger Brexit negotiations with a two year time frame but also fracture therein including Ireland and eastern Europe on policy. Tense fragility pressures emerge in Europe as the Catalonia referendum in Spain as well as its eastern and northern borders with Russia demonstrate. In the Middle East and Levant, terrorism and war abound. New risks appear from the Kurdish independence referendum in Iraq that could induce rupture into century old structures from Turkey to Iran. Japan may appear cohesive internally ahead of a snap election but has experienced intercontinental ballistic missiles being launched over its territory by nuclear armed North Korea. Despite a Congressional election due in November 2018 on lightening rod political issues in the United States, execution has been less than stellar on changes to the Affordable Care Act in Healthcare, on tax reform and on deficit management. Overarching these domestic political issues remain the geopolitical stresses of relationships with Russia on its western frontiers, for China on dealings about south China seas border delineation, on terror response and not to be underestimated, directly on global trade and climate change policy.
Complacency is apparent in the low volatility of futures, in sovereign issues well beyond U.S. Treasuries and in the corporate arena, including junk bonds. Still and beneath its surface of complacency, contradictions do exist within the markets. The fixed income markets would appear to reflect not only economic stability being good enough to service large increases in debt but also to reflect expectations that it would be moderate enough that central banks would be constrained in raising administered interest rates. By contrast in equity markets, expectations would appear that economic growth and that of earnings in particular would be above average and hence buttress expanded valuation. Equity complacency appears in momentum behavior including that in concept equities, sector rotation including that in individual equities as well as in defensive equities which have dividend yield attributes. We believe that these internal market contradictions are likely to be to be reconciled, accompanied by sharply higher volatility.
As classically occurs as markets come up against changing conditions, we expect currency volatility to increase amongst advanced currencies and not as has mainly occurred so far, be limited to emerging ones. Volatility faring up is likely to be partly due to twists in quantitative ease after its momentous increases and due to increasingly stressful politics, including about trade. It would likely mark a facet that is different from that of present consensus. After all, while still well below 2006-7 levels, global GDP growth has increased, as demonstrated by the October 2017 IMF World Economic Outlook to potentially 3.6% for 2017 and 3.7% for 2018. For several years since 2009 and arguably even well before that, central banks have been remarkably consistent in emphasis on monetary theory. Looking forward and taking into account the actions and observations already made by the Federal Reserve, we believe there is potential for Fed Funds rates to increase towards 3.50% by 1Q/2019 and for its balance sheet to be reduced from $4.5 trillion currently and down to closer to $2 trillion.
Even in the present economic environment of several years of growth and U.S. unemployment moving closer to 4%, such U.S. monetary conditions would be less onerous even than in 2007 but much less so than the easy conditions about which markets appear to be complacent today. With the arguable exception of the Bank of Japan, other advanced country central banks also appear to be evolving in policy execution. It includes rate increases by those central banks that did not engage in quantitative ease, such as the Bank of Canada. In Europe, both the European Central Bank (despite still existent credit stress ranged from German financials to that in countries like Italy) and the Bank of England (despite the stresses emerging from ongoing Brexit negotiations) appear to be signaling potential for reducing their quantitative ease policies. Many emerging country central banks, including in China and India, have domestic credit quality issues that also require tighter policy.
The risks seem high and have become twisted in long duration bonds. Meanwhile and including activity in new issue markets, gaining feverish acceptance have been lesser credits and even hundred year bonds that at least in part depend on support from central banks. We have underweight Fixed Income albeit within it, preferring short to medium maturities in U.S. Treasuries, corporate bonds and to include geographically, the higher yields of well-managed, commodity currencies like Australian and Canadian dollar denominations over those of highly indebted but zero-yield Japan or politically fragile Europe.
Since 2009, equity markets have been driven by earnings recovery. Tactics based on ETFs have been major beneficiaries of the momentum markets experienced. Equity price gains has received succor from the beating of near term consensus expectations for earnings per share over other aspects like aggregate revenue growth. For several quarters since 2014 especially, equity price gains have been seen without the corrections that are essential to assaying business progress, even when such earnings expectations had been cut drastically. Lately more fervent. equity valuation expansion has appeared to reflect complacent expectations of long term above average future earnings growth. Global GDP growth does appear to become broader and more dispersed, as illustrated by IMF World Economic Outlook of October 2017 for 3.6% for 2017 and 3.7% for 2018. Still, as interest rates rise amid increased leverage, we assess there to be an investment requirement to give momentum less emphasis. With more selectivity likely to be required, our anticipated environment would be less conducive than consensus appears to incorporate. We expect more emphasis on value, irrespective of the geographical location of equity or the size of the company concerned or its industry sector.
Even more so if our expectations of 3.50% Fed Funds rate by Q1/2019 were to occur, the worldwide capital market environment is likely to be very different from the one just passed or that seemingly favored by the consensus of today. From its inception to now, only a handful of companies in the Dow Jones Industrials Average (DJIA) have actually managed to survive let alone thrive. Common usage appears to see quality and small/large capitalization company performance rotation as currently being a function of large size, old line industries and dividend yield. In this cycle of momentum and high frequency trading replete with slogans like risk on/off, geographical correlations have appeared stronger. We differ from our usage of favoring a quality tilt compared to that commonly used in the markets. By several central banks and not least the Federal Reserve, the interest rate environment appears being signaled as moving up from the prolonged minimalism that has buttressed the leveraged. Greater investment emphasis will probably be needed on value and quality both with respect to business operations and about the financial structure adopted by the company concerned.
Into 2017 so far, performance expectations by geographical segmentation have also been only partly driven by growth and expanding quantitative ease. Even as the European Central Bank and the Bank of Japan continued quantitative ease expansion while the Federal Reserve paused, consensus appeared to indicate favor for Europe and Japan, ostensibly on potential for lagging valuation to gain. Yet with stronger growth and less emphasis on quantitative ease, FTSE data would indicate that U.S. equities outperformed global averages as did emerging markets. Meanwhile. Japan with more moderate valuation underperformed not just Asia but also advanced markets. In Europe its largest country market by far, the U.K., underperformed not least on domestic political turmoil and notwithstanding its multiples. In our view, more focus on quality of delivery has already commenced geographically. We expect the U.S. equity market to continue to be crucial, for emerging markets to outperform as well as, for the value from restructuring of the commodity segments to offer opportunity from Australia and Canada.
As central bank policy and the financial markets themselves evolve, among industry sectors it is clear that the Financials remain critical. Even a decade since the eruption of credit crisis in 2007, the restructuring of Financials remains ongoing. We anticipate those being earliest and most persistent in restructuring as accruing advantages over their competitors and hence to be used to overweight the Financials. While consumer sectors may also be crucial within economies as well as worldwide, the current business reality is that consumer preferences have changed. In both the discretionary and staples segments, there seems to be a resultant requirement for business restructuring that has only lately been grudgingly recognized even by several erstwhile well regarded companies – so we are underweight. After a surfeit not least driven by concept activity and amid political wrangling such as about the Affordable Care Act in the United States, actual operating delivery from merger activity is needed and M&A historically demonstrates it not to be easy, so we have underweight Healthcare. Instead we favor Information Technology and Industrials for growth exposure as well as for cyclical gain from the consumer, from business and indeed from infrastructure needs. With potential for administered interest rates to increase and for fixed income markets to become more volatile, we see the already elevated real estate prices as constraining REITs and the cost of financing needs as constraining Utilities and so have underweight both, while overweighting strong Telecommunication Services. For several years in the case of Materials and for at least two years since a precipitous drop in crude oil prices for the Energy industry, both have been extensively restructuring and we see opportunity based on value as well as diversification.
Consumer Discretionary: Consensus has appeared chronically confusing the size of the consumer sector in many markets with its investment value. Initially experienced in the United States, consumer preferences appear changing markedly. Core expenditures on items even like food and clothing appear being directed in sustained fashion not only to brick and mortar locations such as malls but increasingly into internet activity. In turn, competition from cyber vendors has ramped up while shopping malls have suffered the debacles of overcapacity. It also would appear that consumers increasingly consider expenditures on electronic devices to be higher up on their demand scale than say fashion clothing. In addition, even during prosaic shopping trips, higher priorities appear being placed on the experience of entertainment. These business realities lie behind a tsunami of restructuring for the consumer discretionary space, including not just department stores but extending into restaurants. In an interconnected information age, such restructuring is being finally highlighted in corporate reports emerging about business pressures currently depressing results. The effects are likely to be prolonged in advanced and emerging countries alike. Within Consumer Discretionary which is otherwise underweight, we favor entertainment providers.
Consumer Staples: In investment parlance, defensive attributes due to dividend payments have been attributed to Consumer Staples but as businesses, such has not been accurate. In the 1990s for instance, many global Consumer Staples companies mistook emerging economies as offering the potential for cloned strategy extensions from advanced economies or even as repositories for obsolete products. Instead the realities proved to be different, not least due to local market attuned domestic competitors on even basics like packaging size and cost in addition to the modern realities of product knowledge of the digital age. Similar such challenges loom currently even for large companies over the number of brands and business lines that can be supported amid extreme revenue competition. As a result, instead of staples companies being able to use their corporate heft to determine product positioning within storefronts, several virtual and real forward looking purveyors have been pruning the number brands being carried and /or their pricing. Corporate activism has increased into Consumer Staples worldwide and not least by private equity starting in the United States and lately into Europe and Japan. In the stretch for yield that has accompanied quantitative ease in capital markets, valuations have been stretched enough amid business restructuring pressures that Consumer Staples offer less defensive appeal. We are underweight Consumer Staples, expecting their businesses to subject to prolonged consumer change overflow amid stretched valuation.
Energy: For several years now, a classical restructuring scenario has been unfolding in Energy. Excess euphoria about so-called shortage of supply drove crude oil prices up towards $145/Bbl. WTI only to classically have alternate suppliers, such as U.S. shale oil, seize opportunity. Such cycles have been well known for instance in hydrocarbons early in its use for energy, in the shift of production from Canada to Texas then to the Middle East to the North Sea, as well as being replete with failures like that into the Arctic in the 1970s/1980s that served to underscore business risk. Currently, Energy has had severe restructuring. Energy assets continue to change ownership, including the opening up of erstwhile closed provinces in oil producing countries. After back and forth, there have been cutback agreements among OPEC and non-OPEC producers like Russia. The seriousness of more stringent production agreements is underscored by, for the first time, and after years of tensions, the King of Saudi Arabia has visited Russia. From recent lows closer to $25/Bbl. WTI , crude oil prices have risen to close to $50/Bbl. WTI. Even as in the longer term, alternate energy rises in importance, we anticipate hydrocarbon demand to be crucial as global growth expands. We also stress that hydrocarbons remain as a crucial material source from packaging to medicines. Our target remains for stability to be in the $60-70/Bbl. WTI range for crude oil. Natural gas appears similarly depressed and offering opportunity. It is likely that restructuring and risk assessment will part of the opportunity to overweight Energy via strong companies.
Financials: As the extent was exposed of excess followed by illiquidity on credit crisis into 2007, restructuring of the Financials ensued. Arguably among the tardiest in addressing Financials restructuring, Europe has had to again allow state aid in several countries including Italy and Spain. Restructuring needs to shore up finance in Europe further emerges in the form of Catalonia separatism in Spain and the Brexit sequence with impact of banking in less dependence on London as financial center. Further operational change radiating from the United States is derived potentially from the emphasis of the Federal Reserve on both sequential rate increases and a path of reduction of its balance sheet to, we believe , $2 trillion by Q1/2019. As well, other central banks like the European Central Bank and the Bank of England now appear comfortable in suggesting lessened positioning in quantitative ease as being the next step. Amid central banking in flux, the Bank of Japan appears as outlier on maintaining and expanding ease. Credit quality remains an issue in emerging countries including China and India. Using short term funding with abandon in order to fund long term commitments has meant debacle in several cycles. It has been so even for sophisticated financiers like those in the United States engaged in leveraged buyouts three decades ago or for the less so like individual Hungarians financing houses using Swiss franc debt in the past. It certainly was so in the credit debacle of only a decade ago that was not limited to subprime mortgages in the United States. We see the advantages in Financial as still accruing for strong balance sheets, irrespective of the easy money deluge of recent years. We overweight those Financials that both espoused restructuring early and continue to do so.
Healthcare: After a whirlwind of M&A, it is likely to be management execution and operating delivery that determines performance in Healthcare. The classical merger and acquisition (M&A) sequence in Healthcare started with restructuring including divestments in individual companies, then consolidation including mega sized mergers to be followed by acquisitions of new businesses at great cost in areas like biotechnology that included products that appear concept driven. As populations age in advanced countries and become wealthier in emerging ones, additional business challenges in the Healthcare include fast changing regulations of delivery and the costs involved thereof. These challenges are perhaps epitomized but not limited to the political iterations in 2017 about the Affordable Care Act (also known as Obamacare) under the new U.S. administration. Business execution and delivery tends to be more intensive and take longer in duration to come to fruition than is the case of expectations in the rush of M&A under fever pitch. Valuation may be lagging but seem to us not low enough for Healthcare to be classified as being as defensive as in the past. Additionally, drug approvals are demonstrating potholes, as in the past, related to efficacy. We have underweight Healthcare pending further evidence of strong operational execution.
Industrials: Partly cyclical alongside capital spending but also with country and company competitive imperatives requiring long postponed infrastructure expenditures now, Industrials offer hybrid overweight opportunities. Trade and political tensions have increased during a period of slower global growth and populist angst but it is also due to a more robust attitude towards trade agreements by the U.S administration. It has withdrawn from the Trans Pacific Partnership (TPP) Trade Agreement and signaled the same from the Paris Climate Change understandings while adopting an acerbic attitude in North America Free Trade Agreement (NAFTA) renegotiation talks. Also, in the aerospace industry that globally has been fraught with real and imagined cross subsidies including from defense budgets, the United States has assessed preliminary punitive tariffs and duties closer to 300% on narrow body new generation aircraft manufactured primarily in Canada and Britain. By 2019 and incorporating Brexit as well as stress from Ireland to Spain, myriad manufacturing and labor logistics in Europe will need to be managed. Trade and tariff wars have not been consigned to the history of the 1930s, as often imagined. The painful gains over decades accrued for global trade may be at risk. It means to us that while we find Industrials to be more attractive in restructuring than consumer sectors but that rather than the broad brush often epitomized in ETFs, the imperative focus is more likely to be on strong operational execution and strongly financed companies. We do stress that notwithstanding domestic politics using the familiar refrain of fair trade, increased expenditure worldwide is required and is related to climate change including lessons learnt from recent natural catastrophes, to investing in capital goods that improve corporate competitiveness and to infrastructure renewal.
Information Technology: Not least in 1999/2000 but also at the latter stages of cycles, Information Technology has been playing a primary role as investment momentum vehicles, with concept appeal. In the present cycle, other aspects also appear to be at work. Corporate spending activity and consumer spending preferences have been changing rapidly in favor of communications, not least via wireless and the internet for several years. Technological advances moving into business logistics, the automobile industry and home appliances are just some such examples. These dynamics have growth potential for Information Technology to continue to have less exposure to political machinations than exists for other growth sectors like Healthcare. Separately and as a result of the lessons learnt from the 1999/2000 euphoria debacle, marque Information Technology companies have actively pursued strong financial structures and engaged in more focus in their business models. Business segments have been acquired and others shed. Rapidly changing technology has led to a new Darwinian renewal cycle within many Information Technology businesses from software to semiconductors to the purveyors of aggregate hardware technologies as well as in social media. This crucible of technological growth, customer preference change and not least balance sheet strength offers opportunities to overweight Information Technology.
Materials: We anticipate greater volatility in capital markets to occur as a result of central banks moving away from quantitative ease at differing speeds with the Federal Reserve being most determined, as a result of more tension in geopolitics, and as a result of more fracture in domestic politics within many countries. A stoking of volatility seems likely to develop among major currencies and not just for emerging country ones. Precious metals seem to us to be one aspect of diversification along with cash, despite low yields in many countries. As well, industrial commodities had their height of concept excess several years ago on secular emerging country fervor, especially about China, several years ago. Industrial commodity companies have been restructuring ever since and global growth seems expanding, albeit from moderate levels. In our view, the trimming back of quantitative ease already underway by the Federal Reserve potentially to Fed Funds rates of 3.50%, 10 year U.S Treasury Note yields above 4% and a cumulative reduction of its balance sheets by $2.5 trillion by 1Q/2019 could all add up to substantive reductions in momentum., Even without quantitative ease, other major central banks like the Bank of Canada have engaged in rate increases. The Bank of England and the European Central Bank also signal potential change. Large emerging economies such as China and India need to address credit quality stress. With potential for stress, we see business and value reasons to favor Materials.
REITs: Real Estate prices worldwide have been prime beneficiaries of the massive quantitative ease undertaken in the cycle since 2009. It has been especially so in the major centers in advanced and emerging countries alike. The inherent risk in real estate has been the highly leveraged funding of long term assets via short term financing. Liquidity is and has been a major risk in relying on concurrent real estate prices in order to determine value and as a result, discount rate premiums are required. Whether due to interest rates increases or business duress among lessees for instance, any adverse change in free cash flow has tended to have had magnified impact. It was true for example in the large scale Canary Wharf developments in London of the 1990s vintage that were eventually successful after changed ownership, or subprime mortgage lending in the last credit crisis into 2007 and in Hungary for home ownership financed ostensibly on low cost Swiss Franc denominated debt. Current business risks have appeared for once popular shopping centers that lately have been losing their ability to deliver stable cash flow without massive restructuring. Real estate risks are likely to expand as quantitative ease is reduced in the form of higher administered interest rates and central bank balance sheet reductions. We have underweight REITs which have had a tremendous upward price cycle but may again face dark risks linked to illiquidity. Within Real Estate and REITs, we favor their industrial and commercial segments.
Telecommunication Services: After a surfeit of concept driven euphoria leading to its 1999/2000 debacle, Telecommunications Services as businesses have experienced bankruptcy among both large and small entities that were also highly leveraged. Restructuring has been replete with scandal, with divestments undertaken to reduce geographical footprints, , with massive horizontal mergers including wireless services and lately with equally massive expansion into content. Reflecting changes in technology and in consumer demand, the close to two decade long restructuring of Telecommunication Services is not yet complete. The required future business model structure is not yet robust but compared to other capital intensive investment alternates like Utilities, the stronger Telecommunication Services companies seem to be gaining advantage and offer opportunities to overweight them.
Utilities: As administered interest rates rise towards potentially towards Fed Funds at 3.50% by 1Q/2019 and as reduction is executed in the Federal Reserve balance sheet by $2.5 trillion, we believe the worldwide capital cost risk to Utilities should not be minimized. From typhoons to hurricanes to earthquakes in 2017 alone, the recent spate of natural catastrophes underscores that aging infrastructure urgently needs to both be modernized and expanded. In Utilities, it means strong dependence on external debt financial needs. Currency volatility would also be a risk in Utilities debt financing that has, due to the size of its requirements, often been undertaken in several currencies. While Utilities are classically considered as defensive as economies slow, a rising interest rate environment has been far less benign. Under our scenario of potential for rising interest rates and the need across capital markets for less complacency about central bank policy and more reliance on building up risk premiums, we have underweight Utilities. Despite our Utilities underweight, we do favor the energy transmission companies ranged from electricity to hydrocarbons as being likely beneficiaries of rising global growth with less political uncertainty than for example water facilities.
Asset Mix
Global U.S.
Equities-cash 52% 57%
-priv. 6 6
Fixed Income 25 20
Cash 12 12
Other 5 5
Total-% 100 100
Geographic Mix
Currency/ Equities Fixed Inc. Cash
Real
Americas 61% 65% 67% 55%
Europe 22 20 26 37
Asia 9 13 6 3
Other 8 2 1 5
Total -% 100 100 100 100
Global. U.S. Stance
Cons. Disc. 6.5% 5.5% Under-weight but favor entertainment
Cons. Stap. 5.0 5.0 Under-weight on valuation excess
Energy 12.0 13.0 Over-weight via strong companies
Financials 19.0 16.0 Over-weight restructuring leaders
Healthcare 9.0 12.0 Under-weight as M&A needs delivery
Industrials 13.0 13.0 Over-weight for infra./inv. spend
Info. Tech. 19.0 23.0 Over-weight for cloud growth
Materials 8.0 5.0 Over-weight inc. prec. mat. as hedge
REITS 2.0 2.0 Under-weight espec. retail space
Telecomm. 4.5 3.5 Over-weight on refocus delivery
Utilities 2.0 2.0 Under-weight but favor pipelines
Total-% 100.0 100.0 () prior weight