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INVESTMENT POLICY COMMITTEE MARCH ASSET ALLOCATION BULLETIN April 12, 2016 Summary At its March 22, 2016 meeting, the Asset Allocation Subcommittee of the Capital One Asset Management (“COAM” or “Firm”) Investment Policy Committee made no changes to the tactical stance adopted at the February 2, 2016 meeting, however the Committee met subsequently and lowered allocations to U.S. High Yield Fixed Income and Equities, particularly eliminating our overweight to U.S. Small Cap stocks. Guidance A broad-based rally in equity markets since mid-February has brought valuations back to more elevated levels, while the yield premium available in corporate bonds has narrowed meaningfully. Meanwhile, we see signs that the sluggish growth trend in which the US economy has been mired will continue, underscoring concerns we have expressed in the past. As such, on April 4, we moved to reduce exposure to U.S. High Yield Fixed Income and on April 12 to lower our overall Equity exposure with an emphasis on removing our overweight to U.S. Small Cap. In both cases, proceeds from the liquidations were directed to U.S. Investment Grade Fixed Income. Discussion After one of the worst January performances on record, equity markets have enjoyed a broad rally in recent weeks, erasing most, if not all, of their dramatic losses from the beginning of the year. In a scenario that has proven doggedly repetitive in the last couple of years, these gains were made in lockstep with crude oil and related energy commodities as West Texas Intermediate Crude (the benchmark for U.S. crude oil) has seen more than a 65% increase off its February low of about $26 per barrel (though of course, this still leaves it at a small fraction of its price only a couple of years ago). Fixed income, too, has proven remarkably responsive to the oil markets with U.S. Treasury yields over those two years, and recent weeks have been no exception. U.S. Treasury yields rose (meaning bond prices dropped) as investors bid up equities, oil and other “risk” assets. At the same time, the spread in yield between U.S. Government Bonds and Corporate Bonds narrowed, reflecting a more complacent view in markets toward the risk of default. Despite the general strengthening of animal spirits in the market, economic fundamentals appear to be at best chugging along and possibly weakening, making heightened valuations particularly perilous. As we have previously noted, the U.S. manufacturing sector slipped into contraction in the latter part of 2015. While manufacturing is now a much smaller part of the economy than it once was, it remains a major component in SNo part of this document may be reproduced in any manner without written permission from Capital One Wealth and Asset Management. For full disclosures, see last page of document. APRIL 12, 2016 ASSET ALLOCATION 1 S&P 500 profits, an important economic driver and bellwether for the nation’s financial health. We view this as a worrisome sign for both corporate markets and the broader economy. This contraction happens, of course, in the context of the collapse in oil and natural gas prices that began in 2014. In the preceding years, the U.S. energy sector, benefitting from a cluster of technological advances, had expanded markedly, acting as a primary driver of growth in the country’s economy. Collapsing prices led to a dramatic pull back in the sector. Absent the capital spending and employment provided by the energy sector, the economy as a whole has struggled. Earnings for the companies in the S&P 500 declined in the fourth quarter of 2015 and are on course for further decline in the now reporting first quarter of 2016, the fourth consecutive quarter of negative year-to-year earnings comparisons. After an extended stretch of expansion, profit margins for these companies have also begun to recede from peak levels, a development we have been anticipating as unemployment rates continued to fall. Internationally, the outlook is even more troubled. Central banks in Europe and Japan are aggressively loosening monetary policies with muted effect thus far, while European political leaders struggle to cope with a refugee crisis. Much of the emerging world is weighed down by the collapse in commodity prices and the headwind of higher short-term yields in the United States. China, whose growth has powered world economic expansion and supported commodity prices, continues to labor with a decelerating economy and its own debt crisis. There is, of course, hope that lower energy prices will lead to more vigorous consumer spending in other areas of the economy, and we continue to believe the U.S. will likely continue to muddle forward with slow but sustained growth in gross domestic product (GDP). However, the energy dividend has yet to emerge in a significant fashion and uncertainties from political and economic sources continue to mount. As such, we believe the balance of risk and reward favors a somewhat more conservative stance, and so we are lowering our overall Equity allocation by 5% in all of our balanced ojectives and, as part of the rebalance, removing our overweight to U.S. Small Cap stocks, which we feel are particularly vulnerable to any further slowing in the economy and any correction in the equity markets that may emerge. Similar concerns affect our view of the U.S. High Yield Bond asset class. High yield bonds share many characteristics in common with equities, particularly a vulnerability to economic headwinds (as companies with lower income struggle to meet debt obligations) and market dislocations (as investors flee in herd-like fashion or simply remove access to further credit necessary for ongoing business operation), and the prices of these bonds have increased along with stocks in the last several weeks (and, of course, the yield investors receive has dropped as a result). Here, too, we see some fundamental difficulties in the same economic backdrop. Default rates have begun ticking up in the high yield space, thanks in part to the troubled energy sector, with the strong possibility of further defaults likely concentrated in energy related companies. At the same time, issuance of new bonds fell by 71% year over year, meaning lower supply available to investors. As a result, investors have bid the bonds up so that there is limited advantage versus more creditworthy issues while at the same time allowing companies to issue bonds with much lighter investor protections. With heightened risk and limited advantage, we are shifting more assets toward the higher quality Intermediate Investment Grade Fixed Income No part of this document may be reproduced in any manner without written permission from Capital One Wealth and Asset Management. For full disclosures, see last page of document. APRIL 12, 2016 ASSET ALLOCATION 2 Income strategies, which are structured to shelter portfolios from deflation risks and emphasize a tilt to quality and strong balance sheets in security selection. These two moves further our efforts to dampen volatility in client portfolios and to shift toward more conservative positioning as the risk-reward ratio skews more toward present risks. In some cases, we believe these risks may be short-lived as markets correct to more reasonable prices or economic activity accelerates to catch up with prices. We remain alert to opportunities that may present themselves to reposition back into equities and other sensitive assets if valuations return to more reasonable levels, subject to an improved outlook for U.S. growth and earnings potential. About Us For more than 80 years, Capital One Wealth and Asset Management has provided comprehensive solutions to high net worth individuals, businesses, families, endowments, foundations, and other organizations. Our locally based teams deliver personal service and access to our comprehensive suite of planning tools and investment products. Long Island: Alan Cohen – 631.531.2184 Louisiana: Richard Bouchner – 504.533.5547 Henriette Harris – 504.533.6418 New York: Lauren Kramer – 646.836.5196 Contact Information To learn more, contact your local Private Banking and Wealth and Asset Management Specialist. Mid-Atlantic: Jeff Hearle – 703.720.6706 Sherry Koontz – 703.720.6795 New Jersey: Ken Iselhart – 732.321.4734 Texas: Joel Diaz – 713.212.5186 Patrick Doyle – 214.855.1657 No part of this document may be reproduced in any manner without written permission from Capital One Wealth and Asset Management. For full disclosures, see last page of document. APRIL 12, 2016 ASSET ALLOCATION 6 Unless otherwise noted, all performance and return data sourced from Bloomberg, LP, March 31, 2016. Disclosures Capital One, N.A., its affiliates and subsidiaries are not acting as an advisor to you and do not owe a fiduciary duty to you with respect to the information and material contained in this communication. This communication is not intended as tax or legal advice; consult with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material. Wealth and Asset Management products and services are offered by Capital One, N.A. (“Bank”). All investment management clients are clients of the Bank, who has delegated the investment management services to Capital One Asset Management (COAM) via a master services agreement. Investment management services provided by Capital One Asset Management, LLC, a SEC registered investment advisor and wholly-owned subsidiary of Capital One, N.A. © 2015 Capital One. All rights reserved. COAM registered with the SEC in 2001 as a Registered Investment Adviser as a Separately Identifiable Division or Department (“SIDD”). In 2005, COAM changed its registration to a wholly owned subsidiary when it filed with the State of Louisiana as a Limited Liability Company. Please refer to COAM’s ADV Part 2, which is available upon request, for additional information on the Adviser. Recipients of this report will not be treated as a client by virtue of having received this report. No part of this report may be redistributed to others or replicated in any form without the prior consent of Capital One. All charts and graphs are shown for illustrative purposes only. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The information has been obtained from sources believed to be reliable but we do not warrant its completeness, timeliness, or accuracy, except with respect to any disclosures relative to Capital One. The information contained herein is as of the date referenced, and we do not undertake any obligation to update such information. Any opinions and recommendations expressed herein do not take into account an investor’s financial circumstances, investment objectives, or financial needs and are not intended for advice regarding or recommendations of particular investments and/or trading strategies, including investments that reference a particular derivative index or benchmark. Past performance is not indicative of future results. The securities described herein may be complex, may involve significant risk and volatility, may involve the complete loss of principal, and may only be appropriate for highly sophisticated investors who are capable of understanding and assuming the risks involved. The securities discussed may fluctuate in price or value and could be adversely affected by changes in interest rates, exchange rates, or other factors. Asset allocation and diversification do not assure or guarantee better performance, and cannot eliminate the risk of investment losses. Investors must make their own decisions regarding any securities or financial instruments mentioned or discussed herein, and must not rely upon this report in evaluating the merits of investing in any instruments or pursuing investment strategies described herein. In no event should Capital One be liable for any use by any party, or for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or for any omissions from, the information contained herein. Fixed Income securities are subject to availability and market fluctuations. These securities may be worth less than the original cost upon redemption. Corporate bonds generally provide higher yields than U.S. treasuries while incurring higher risks. Certain high yield/high-risk bonds carry particular market risks and may experience greater volatility in market value than investment-grade corporate bonds. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in some circumstances, the alternative minimum tax. Unlike U.S. Treasuries, municipal bonds are subject to credit risk. Quality varies widely depending on the specific issuer. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. This is only an opinion and not a prediction or promise of events to come. Not FDIC Insured Not a Deposit Not Bank Guaranteed May Lose Value Not Insured by any Federal Government Agency APRIL 12, 2016 ASSET ALLOCATION 7