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CIO REPORTS
The Monthly Letter
APRIL 2017
International vs. U.S. Markets —
The Tide Could Be Turning
Chief Investment Office
John Veit
Director
Emmanuel D. Hatzakis
Director
As investors search for growth, U.S. equities have been on a relentless rise that has brought
them to extended valuations relative to their own history. While we are positive, and recommend
overweight allocations across all regions, including the U.S. large and small capitalizations,
International Developed and Emerging Markets, we believe that it would now be a good time
to look outside the U.S.,
Exhibit 1: Non-U.S. equities are trading at a relative
where plenty of relative value
discount to U.S. equities
can be found.
Non-U.S. Equities’ Valuation Discount to U.S. Equities*
12-Year Average
Non-U.S. equities are trading at
a relative discount (see Exhibit
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Charge: Synchronization Intact
5
0
Percent (%)
1) for good reasons. These
include sluggish economic
growth, indecisive policy
support and structural reforms,
and political uncertainty, which
includes the rise of populism,
predominantly in Europe. The
good thing is that these issues
have been around long enough
to be priced in, and could
mean upside as they are being
Recent Publications
-5
-10
-15
-20
3/31/2014
3/31/2015
3/31/2016
3/31/2017
Source: Chief Investment Office and Bloomberg. Data as of April 25, 2017.
Please see Appendix for index definition.
* Based on the Price-to-Earnings Ratio of MSCI All Country World ex USA and MSCI
USA Net Total Return Indices, both in USD
Past performance is no guarantee of future results.
The Wealth Allocation Framework
LIFE
PRIORITIES
The Wealth Allocation Framework helps you put your goals and aspirations at the center
of decisions about allocating your financial resources. Asset categories within the
framework include:
Personal: Individual investors have a desire for safety and personal financial
obligations they want to meet regardless of market conditions. To safeguard
essential goals, investors can hold lower-risk assets—but they have to accept lower
returns in exchange.
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access to a broadening array of asset classes and types makes diversifying beyond
stocks and bonds easier than ever before.
Aspirational: Investors seek significant wealth mobility. To pursue goals that require
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Investment products:
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Please see important disclosure information on the last page.
May Lose Value
2000
Source: Chief Investment Office and Bloomberg. Data as of April 25, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
Exhibit 3: Japanese valuations are not stretched
versus their history
MSCI Japan Net Total Return USD Index—P/E Ratio
35
30
25
20
15
Important considerations
An issue we cannot ignore is the weight of Japan’s recent
economic and market history. In a period spanning more than
1
17
16
/2
0
31
3/
31
/2
0
5
3/
4
01
/2
3/
31
31
/2
01
3
3/
31
/2
01
2
3/
01
/2
31
3/
01
1
10
3/
Finally, the progress made in structural reforms around corporate
governance should lift valuation discounts and have already started
to pay off, as evidenced by the surge in stock buybacks in 2016.
3000
/2
Fiscal policy in Japan holds the promise to prove the most
effective from among all the regions contemplating fiscal
expansion in the near future.
4000
31
Unlike some instances from its recent past, policy finally seems
to be poised to boost the Japanese economy. After some serious
investor skepticism toward the negative interest rate policy last
year, the Bank of Japan’s adjustments to its monetary policy
stance of fading negative deposit rates and targeting the yield
curve have been well received.
5000
0
Furthermore, Japan bases much of its competitive advantage
against other export-oriented countries on its culture of
excellence, which translates into products of superior quality
that are continuously improved as compared to competing
offerings in world markets.
MSCI Japan Net Total Return USD Index
6000
3/
We are accustomed to thinking of the U.S. as the foremost
country when it comes to innovation and related investment
themes, and tend to overlook Japan in this regard. Such
perception is misguided. Technologies developed by Japan are
at the heart of some of the most promising areas of innovation,
including robotics, factory automation, virtual and augmented
reality, new materials, advanced electronics and semiconductors.
Exhibit 2: Japanese equities have been trading near
the top of their 20-year range
01
Our relative favorite
This is our relative favorite among International Developed
markets. Its structural headwinds to economic growth, including
high debt levels, poor demographics, and outsized dependence on
external energy sources, are well understood. Its economy, cyclical
by nature, should benefit from rising global growth and a weaker
yen, which would in turn improve domestic demand.
3/
31
3/ /199
31 7
3/ /199
31 8
3/ /199
31 9
3/ /200
31 0
3/ /200
31 1
3/ /200
31 2
3/ /200
31 3
3/ /200
31 4
3/ /200
31 5
3/ /200
31 6
3/ /200
31 7
3/ /200
31 8
3/ /200
31 9
3/ /201
31 0
3/ /201
31 1
3/ /201
31 2
3/ /201
31 3
3/ /201
31 4
3/ /201
31 5
3/ /201
31 6
/2
01
7
Japan
/2
In this report, we are discussing the investment case for each
international region.
two decades, Japanese equities have followed the ups and
downs of the economy and traded within a range over the last
20 years (as shown in Exhibit 2). As they are now near the top
of that range, the question to be answered is whether they
are bumping against another peak, or they will break out of
the range to levels not seen since the early Nineties. Earnings
expectations in Japan are high and, should they materialize,
they could propel equities higher. The Bank of America Merrill
Lynch (BofAML) Global Research Earnings Revision Ratio
for Japan is by far the highest among regions, with analysts
there producing almost two upgrades for each downgrade.1
Meanwhile, valuations are not stretched relative to their
own history, indicating quite some room to expand before
overvaluation worries start to emerge (see Exhibit 3).
31
resolved. Going forward, improving global economic growth
could reinforce the synchronized global expansion currently
building and boost corporate earnings. Since all non-U.S. regions
are viewed as cyclically geared to global economic growth, this
could well prove to be the overriding factor.
Source: Chief Investment Office and Bloomberg. Data as of April 25, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
BofAML Global Research, “Global Earnings Revision Ratio: Upgrade Cycle Begins,” March 30, 2017.
CIO REPORTS • The Monthly Letter
2
One concern is profit margins, which seem to have peaked,
to historically high levels last seen right before the Global
Financial Crisis (see Exhibit 4). Others, in addition to the known
long-term ones of high debt and poor demographics, include
the risk of a rising yen and legislative /policy uncertainty in the
U.S., especially around international trade and tax treatment of
imports, which could challenge its export-oriented economy.
Also, at this juncture, its proximity to North Korea, one of the
world’s current geopolitical hotspots, especially with the current
U.S. administration signaling a more assertive response to the
country’s regime, could produce higher than normal uncertainty.
This may affect tourist arrivals to the country or postpone
capital investment decisions and therefore prove tailwinds to
economic growth, until some sort of resolution is achieved.
Exhibit 4: Japanese profit margins are near a peak
margins remain at the high end relative to history, whereas we
view Europe as having room for profit margin expansion. The
combination of improving earnings growth and profit margin
expansion could be particularly strong catalysts for Europe.
Global growth
In our view, there are several factors that need to come into play
for European equities to perform well. The most important of
these factors is a continued expansion of global growth. Europe
derives a larger percentage of its revenues outside the continent
than other International Developed markets. The MSCI Europe
Index derives approximately 46% of its revenues from outside of
Europe (see Exhibit 5). In comparison, the MSCI USA Index derives
only 25% of revenues from outside of the U.S. (see Exhibit 6).
Exhibit 5: MSCI Europe revenue exposure by region
As of April 6, 2017
MSCI Japan Net Total Return USD Index—Operating Margin
Africa and
Middle East
10
Percent (%)
8
4
2
4.8%
25.2%
25.2%
14.5%
14.7%
54.6%
54.4%
Asia/Pacific
0
3/
1/
1
3/ 997
1/
1
3/ 998
1/
1
3/ 999
1/
2
3/ 000
1/
2
3/ 001
1/
2
3/ 002
1/
2
3/ 003
1/
2
3/ 004
1/
2
3/ 005
1/
2
3/ 006
1/
2
3/ 007
1/
2
3/ 008
1/
2
3/ 009
1/
2
3/ 010
1/
2
3/ 011
1/
20
3/ 12
1/
2
3/ 013
1/
2
3/ 014
1/
2
3/ 015
1/
20
3/ 16
1/
20
17
2017
5.0%
Americas
6
Africa and Middle East: 4.9%
Americas: 25.4%
Asia/Pacific: 14.8%
Source: Chief Investment Office and Bloomberg. Data as of April 25, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
2016
Europe: 54.9%
Europe
Source: FactSet and Chief Investment Office. Data as of April 6, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
Europe
Main drivers of performance
One region generally shunned by investors is Europe,
as investors have concerns over uncertainty and rising
populism. Despite these risks, we see opportunities in
Europe, as fundamentals are improving relative to those of
its International Developed counterparts. While Europe has
underperformed markets such as the U.S. for approximately
nine years, is the trend starting to favor growth in Europe?
We think so, as Europe looks attractive relative to its
International Developed peers. While earnings growth, or the
lack of it, in Europe explains a lot of the underperformance, the
tide in European earnings growth is starting to turn. Also, from a
relative valuation standpoint, Europe’s valuations do not look as
stretched compared to other International Developed markets,
in our opinion. In other parts of the international market, profit
CIO REPORTS • The Monthly Letter
Exhibit 6: MSCI USA revenue exposure by region
As of April 6, 2017
Africa and
Middle East
2016
2017
2.5%
2.3%
73.8%
74.8%
11.2%
10.9%
11.9%
11.5%
Americas
Africa and Middle East: 2.3%
Asia/Pacific
Americas: 75.2%
Asia/Pacific: 10.9%
Europe:11.5%
Europe
Source: FactSet and Chief Investment Office. Data as of April 6, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
3
The other factor is that historically European companies have
had higher fixed costs relative to International Developed
peers. Part of this is due to how labor laws are structured
in Europe but it is important because Europe needs strong
revenue growth to cover fixed costs.
Exhibit 8: European earnings are closely correlated
with world GDP
World GDP—Constant Prices YoY
MSCI Europe—Trailing EPS YoY % Growth (Right)
Indexed to 100
Percent (%)
100
90
80
70
2009
2010
2011
2012
2013
2014
2015
2016
10
2
0
1
-10
0
-20
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-50
2001
-40
-3
2000
-30
-2
1999
-1
Another factor contributing to weakness in EPS is sector
composition relative to the U.S. market or other International
Developed markets. Europe has a higher weighting in select
60
2008
20
3
1998
110
2007
30
Understanding historical EPS weakness
Previously, EPS growth has been weaker in Europe, driven by
several factors: slower revenue growth, lower margins and
fewer stock buybacks. The largest contributing factor is weak
revenue growth, which explains most of the weakness relative
to other International Developed markets.
STOXX Europe 600 vs S&P 500—
Sales Per Share
120
50
2006
40
4
Source: FactSet and Chief Investment Office. Data as of April 17, 2017.
Please see Appendix for index definitions.
Past performance is no guarantee of future results.
Exhibit 7: EPS and sales in Europe have lagged
STOXX Europe 600 vs S&P 500—EPS
50
5
Percent (%)
Recent comparisons of European revenue growth to U.S. revenue
growth appear to show how Europe has underperformed over
the past nine years (see Exhibit 7). Forecasts from the BofAML
Europe Equity strategy team show 2017-2018 earnings-pershare (EPS) growth of 20% for Europe, higher than for the U.S.,
where EPS growth is forecasted at a cumulative 16%. There
is also a fairly close relationship between global growth and
European EPS (see Exhibit 8). Rising manufacturing indicators
also bode positively for earnings growth in Europe.
6
2017
sectors that have had weaker profitability (Banks, Utilities and
Telecoms) and a much lower weight to Technology, which has
had stronger growth and profitability (see Exhibit 9).
Source: Chief Investment Office and FactSet. Data as of April 17, 2017.
Please see Appendix for index definitions.
Past performance is no guarantee of future results.
Exhibit 9: Sector composition doesn’t alter the valuation conclusion
MSCI USA
Consumer Discretionary
Consumer Staples
3%
3% 3%
Energy
4%
3%
3% 1%
7%
9%
4%
10%
Financials
Healthcare
7%
MSCI Europe
21%
Industrials
13%
21%
Information Technology
13%
Materials
Real Estate
Telecommunication Services
Utilities
14%
11%
9%
13%
14%
14%
Source: BofA Merrill Lynch Global Research, Datastream, MSCI. Data as of February 2017. Please see Appendix for index definitions. Past performance is no guarantee of future results.
CIO REPORTS • The Monthly Letter
4
Another factor is that European margins remain low relative to
those of the U.S. and other International Developed markets.
Overall margins in Europe are below historical averages
compared to those of the U.S., where margins are at the upper
end of historical averages (see Exhibit 10).
Exhibit 10: Profit margins are near a peak in the U.S.
but sub-trend in Europe with room to expand
MSCI US Net Margin 12m Trail
MSCI Europe Net Margin 12m Trail
11.0
10.0
9.0
8.0
7.0
6.0
5.0
01/04
01/07
01/10
01/13
01/16
to a greater or lesser extent. Relative performance between the
U.S. and Europe tracks the trend in relative EPS very closely (see
Exhibit 11). Currently, European earning revisions are at their
strongest since 2010. The improvement in EPS, in our opinion,
suggests opportunity in Europe.
Importance of the Banking sector
Uncertainty in Europe has taken several forms, mainly
reflecting concerns in the Banking sector as well as political
and institutional uncertainty. We see opportunities in European
Banks, as lending has improved and capital concerns have
begun to be addressed. Interest rates globally, including in
Europe, are more likely to rise than fall and the banking sector
is significantly geared to higher rates. The BofAML European
Bank Strategy team believes there is a potential 25% uplift to
sector profits from a move back to zero in European Central
Bank (ECB) rates (see Exhibit 12). There is still a long wait;
however, we do not expect the ECB to raise rates until 2019.
Political uncertainty still has the ability to impact markets and
we expect any opportunities in Europe to be derailed in the
event of further acts of populism.
Source: BofA Merrill Lynch Global Research, Datastream, MSCI, IBES.
Data as of February 2017.
Please see Appendix for index definitions.
Past performance is no guarantee of future results.
Exhibit 12: A 25% potential uplift to sector profits
from an ECB move to a zero rate (eventually), € million
Exhibit 11: Relative performance tracks relative EPS,
which is now rising
140,000
120,000
MSCI Europe vs. U.S. Relative EPS
MSCI Europe vs. U.S. Relative Price
180
100,000
80,000
160
Indexed to 100
60,000
140
40,000
120
20,000
100
0
Sector profits
2018E
80
60
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
40
Source: FactSet and Chief Investment Office. Data as of April 17, 2017. Please see
Appendix for index definitions.
Past performance is no guarantee of future results.
Earnings cycle — momentum building
Europe looks attractive relative to other International Developed
markets from a valuation perspective. Just because a region,
country, or stock is attractive on a relative basis does not always
mean there is sustainable recovery in profits. European EPS,
Return on Equity (ROE), and profit margins are all below trend
CIO REPORTS • The Monthly Letter
Uplift from
ECB to zero
Source: BofA Merrill Lynch Global Research estimates.
Data as of March 17, 2017.
Past performance is no guarantee of future results.
Emerging Markets
Favored group
We look favorably upon Emerging Markets, and recommend
overweighting Emerging Market equities. In 2016, Emerging
Market economies grew as a whole as commodity markets
were recovering from a trough early in the year. They should
build upon last year’s momentum, despite a number of known
challenges, including a renewed softening in commodity
prices, continuing normalization of U.S. monetary policy, and
5
Individual markets
We view India as the best positioned at this point. Its reformminded government, its lighter dependence on trade and
commodities, and more significant reliance on its domestic
market immunizes it to a certain extent from what is
happening in the world, especially policies around trade and
taxation now forming in the U.S., in addition to the gradually
tightening monetary policy in that country. Brazil and Russia
should continue to recover with the commodities markets.
Strong rebound
After recovering from their plunge during the Global Financial
Crisis, Emerging Market equities traded in a range for many
years. They finally sold off and reached a trough in early 2016.
They then recovered and produced a double-digit total return
for that calendar year, on account of multiple expansion, better
earnings estimates and, for the U.S. investor, appreciation
of their currencies (see Exhibit 13). Despite the advance in
2016, they are still seen as attractively valued compared to
developed markets (see Exhibit 14).
Exhibit 13: Emerging Market equities have strongly
rebounded from their early-2016 trough
MSCI Emerging Markets Net Total Return USD Index
500
450
400
350
300
250
200
3/
31
/2
00
8
3/
31
/2
00
9
3/
31
/2
01
0
3/
31
/2
01
1
3/
31
/2
01
2
3/
31
/2
01
3
3/
31
/2
01
4
3/
31
/2
01
5
3/
31
/2
01
6
3/
31
/2
01
7
150
Source: Chief Investment Office and Bloomberg.
Data as of April 25, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
CIO REPORTS • The Monthly Letter
Exhibit 14: Emerging Market equities are still
reasonably priced relative to Developed Market equities
Emerging Market Equities’ Valuation Discount to Developed Market Equities*
15-Year Average
-18
Percent (%)
China’s transition from an export-oriented and investmentled economic model toward a domestic-focused and
consumption-based one, which could mean lower, but stable,
growth rates in the years to come. Emerging Markets should
get a boost from improving developed market economies, as
that would help their exports.
-24
-30
-36
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Source: Chief Investment Office and Bloomberg.
* Based on the Price-to-Earnings Ratio of MSCI Emerging Markets and MSCI World
Net Total Return Indices, both in USD.
Data as of April 25, 2017.
Please see Appendix for index definition.
Past performance is no guarantee of future results.
A look ahead
We expect Emerging Markets to continue performing well
collectively in 2017 amidst a robust global expansion, as
indicated by BofAML Global Research’s Global Wave. However,
we do not expect them to rise drastically, since valuations,
although not at extreme levels, are at their highest since the
Global Financial Crisis, which should not have been an issue
if it were not for the global environment of rising rates and
elevated geopolitical and policy risks. Indeed, the final shape of
the policy framework realized by the administration in the U.S.
has the potential to affect both economic growth and equity
performance in Emerging Markets. Pro-growth policies that deemphasize protectionism would bolster imports from Emerging
Markets and support corporate earnings and stock prices
in these countries. Conversely, more draconian U.S. policies
regarding trade could depress Emerging Market exports, and
thus corporate profits. This, together with the potential for
multiple contractions and deteriorating investor sentiment,
would, in our opinion, hurt equity prices.
International Developed Equities over the longer term
International Developed Equities versus U.S. Equities historically
follow a cyclical pattern with periods of outperformance (see
Exhibit 15). The U.S. has outperformed International Developed
equities for the past 86 months using three-year rolling
returns. Due to European EPS improvement, attractive relative
valuations, and our view that margins have room to expand, we
believe there is opportunity for International Developed equities
6
to start to outperform the U.S.
To be clear, this is not to say that we have changed our call
on U.S. equities, but rather that relative to U.S. equities,
International Developed equities look to have greater upside
potential as long as political uncertainty does not trump the
fundamental picture.
Exhibit 15: U.S. Stocks versus International Developed Stocks: A cyclical story continues
40

International
Stocks Outpaced
U.S. Stocks
Rolling 3-Year Annualized Returns (%)
30
20
21
10
Months
51
Months
50
Months
74
Months
13
Months
86
Months
0
-10
-20

-30
International
Stocks Trailed
U.S. Stocks
1972
1982
1992
2002
2012
Source: Chief Investment Office, MSCI and FactSet. Data represents rolling three-year returns of MSCI EAFE vs. S&P 500 in USD.
Data as of April 11, 2017. Please see Appendix for index definition. Past performance is no guarantee of future results.
Portfolio Positioning: We recommend a slight overweight
in International Developed equities with a preference for
Japan. We acknowledge that Japan’s economy has structural
impediments to growth such as high debt levels and
demographics. However, cyclically, growth there should
accelerate on rising global activity, improving domestic demand
and a weaker currency. The Bank of Japan’s recent monetary
policy stance of fading negative deposit rates and targeting
the yield curve has been well received by investors. Along with
monetary policy, fiscal policy will be supportive of growth.
We believe there is opportunity in Europe for upside surprises
relative to the rest of the International Developed markets.
However, the wildcard is populism and political uncertainty
in the European region. In our view, these risks are likely to
remain but it is not our base case of greater political
CIO REPORTS • The Monthly Letter
uncertainty in Europe. We will be closely monitoring the impact
of Brexit on the rest of Europe but we hope many of the
current trade agreements with the U.K. and Europe will remain.
We maintain Emerging Market equities at overweight.
They continue to face a range of challenges, including low
commodity prices, gradual normalization of Federal Reserve
interest rate policy and the structural downshift in China’s
growth rate. However, we believe they will benefit from the
recent pick-up in global cyclical momentum, and valuations are
attractive. We still view markets such as India—that are less
trade- and commodity-dependent, and have more domestic
support from internal reform—as the best positioned. On a
structural basis, we continue to expect strength in demand
from the Emerging Market consumer, as incomes and
spending power increase over the longer term.
7
When assessing your portfolio in light of our current guidance, consider the tactical positioning around asset allocation in reference to
your own individual risk tolerance, time horizon, objectives and liquidity needs. Certain investments may not be appropriate, given your
specific circumstances and investment plan. Certain security types, like hedged strategies and private equity investments, are subject to
eligibility and suitability criteria. Your financial advisor can help you customize your portfolio in light of your specific circumstances.
ASSET CLASS
CHIEF INVESTMENT
OFFICE VIEW
COMMENTS
Negative Neutral Positive
Global Equities
Maintaining our overweight to global equities versus fixed income based on expectations for higher
nominal growth and improving corporate profits.
U.S. Large Cap
Positive based on higher nominal growth, improving sales and earnings growth for S&P 500 companies,
despite extended valuations. Favor cyclical sectors such as consumer discretionary, financials, energy,
select industrials and factors like dividend growth, high quality. Prefer Value over Growth based on
improving earnings and higher exposure to financials and energy.
U.S. Mid &
Small Cap
Benefits from the potential for domestic focused fiscal stimulus, lower corporate taxes and easier regulatory
environment, given Republican controlled white house and Congress agenda. Neutral mid cap equities.
International
Developed
Prefer Japan over Europe. Cautious on Europe on busy election calendar in 2017 and rise of populist
parties. Positive on Japan on fiscal and monetary stimulus, weaker Yen and potential for improving
domestic demand.
Moderately positive given attractive valuations, improving economic activity, rising commodity prices.
Republican sweep and prospect for rising interest rates and U.S. dollar, anti-trade measures have reduced our
earlier conviction. Longer-term, reform-oriented countries and consumer spending exposures are preferred.
Bonds provide portfolio diversification, income and stability, but low rates skew down-side risk.
Slightly short duration is warranted balancing higher short term rates in the U.S and expectations
for inflation with overwhelming demand for fixed income globally.
Emerging
Markets
Global Fixed Income
U.S. Treasuries
U.S. Municipals
U.S. Investment
Grade
U.S. High Yield
U.S. Collateralized
Non-U.S. Corporates
Non-U.S. Sovereigns
Emerging
Market Debt
Alternatives*
Current valuations stretched. Some allocation for liquidity and safety is advised. We expect the Fed will
be raising short rates and longer rates will be impacted by impending fiscal stimulus.
Currently cheap vs taxable bonds, based on historical valuations. This provides an opportunity for
the intermediate-to-long term. However, we are cautious over the near term until discussions on
tax reform bring greater clarity as to the eventual treatment of tax-exempt munis.
Technical backdrop remains supportive of credit spreads given highly accommodative central bank
policies which overshadow the continued softening in corporate fundamentals. Overweight to
investment grade credit is biased towards U.S. banks.
Valuations are rich. Expect a high degree of volatility. Prefer actively-managed solutions that are
higher in credit quality. Fundamentals remain soft. Allocation to floating rate, secured bank loan
strategies is advised.
Higher rates have extended durations in MBS and continued volatility should continue to weigh
on market. Cap rates in CMBS have become less appealing. Select opportunities exist in properly
structured CMBS and ABS.
Select opportunities in European credit, including financials; however, any yield pickup likely to be
hampered by a stronger dollar.
Yields are unattractive after the current run-up in performance; prefer active management.
Vulnerable to less accommodative Federal Reserve policy and lower global liquidity; prefer U.S. dollardenominated Emerging Market debt. Local Emerging Market debt likely to remain volatile due to foreign
exchange component; prefer active management.
Select Alternative Investments help broaden the investment toolkit to diversify traditional stock and
bond portfolios.
Hedged Strategies
We currently emphasize hedge fund strategies that have low to moderate levels of market exposure
and those managers that can generate a large portion of their return from asset selection and/or
market timing.
Private Equity
We see potential opportunities in special situations/opportunistic and private credit strategies.
Real Estate
We prefer opportunistic and value sectors.
Commodities
U.S. Dollar
Medium-/long-term potential upside on stabilizing oil prices; near-term opportunities in energy
equities /credits.
Stronger domestic growth and a less dovish Federal Reserve policy (relative to the monetary policies
of other Developed Market central banks) support a stronger dollar going forward.
Cash
We have a small cash position awaiting deployment when opportunities arise.
* Many products that pursue Alternative Investment strategies, specifically Private Equity and Hedge Funds, are available only to pre-qualified clients.
CIO REPORTS • The Monthly Letter
8
Appendix
Index Definitions
S&P 500 Index is a market-capitalization weighted index that measures the market value of 500 large U.S. companies having common stock listed on the
NYSE or NASDAQ. The S&P 500 index components and weightings are determined by S&P Dow Jones Indices.
The MSCI All Country World Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of developed
markets.
The MSCI All Country World Index ex USA is a free float-adjusted market capitalization index that is designed to measure equity market performance of
developed markets excluding the United States.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging
markets.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 318 constituents, the index
covers approximately 85% of the free float-adjusted market capitalization in Japan.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the U.S. market. With 636 constituents, the index covers
approximately 85% of the free float-adjusted market capitalization in the U.S.
The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 449 constituents, the index
covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the
US and Canada. With 929 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries. With 1,650 constituents, the index covers
approximately 85% of the free float-adjusted market capitalization in each country.
The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number
of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria,
Belgium, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the
United Kingdom.
CIO REPORTS • The Monthly Letter
9
CHIEF INVESTMENT OFFICE
Christopher Hyzy
Chief Investment Officer
Bank of America Global Wealth & Investment Management
Mary Ann Bartels
Karin Kimbrough
Niladri Mukherjee
Head of Merrill Lynch Wealth
Management Portfolio Strategy
Head of Investment Strategy
Merrill Lynch Wealth Management
Director of Portfolio Strategy,
Private Banking & Investment Group (PBIG)
and International
Nicholas Giorgi
Tony Golden
Emmanuel D. Hatzakis
Marci McGregor
Rodrigo C. Serrano
John Veit
Vice President
Director
Director
Director
Vice President
Director
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